ALLIED DIGITAL TECHNOLOGIES CORP, DEF 14A, 1997-01-17

ALLIED DIGITAL TECHNOLOGIES CORP
DEF 14A, 1997-01-17
PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS

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<PAGE>
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )

Filed by the Registrant /X/

Filed by a Party other than the Registrant / /

check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section14a-11(c) or Section14a-12

ALLIED DIGITAL TECHNOLOGIES CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------

/ / Fee paid previously with preliminary materials.

/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

1) Amount previously paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
140 FELL COURT
HAUPPAUGE, NEW YORK 11788

Dear Shareholder,

You are cordially invited to attend the Annual Meeting of Shareholders of
Allied Digital Technologies Corp. The meeting will be held at 2:00 p.m. on
Thursday, February 13, 1997 at the New York Friars Club, 57 East 55th Street,
New York, New York. Registration will begin at 1:30 p.m.

The accompanying Notice of Annual Meeting, Proxy Statement and Proxy Card
provide information on matters that will be considered and acted upon at the
meeting. The Company's Annual Report for the fiscal year ended July 31, 1996 has
previously been mailed to you.

Your continuing interest in the Company is appreciated and I hope you will
attend the annual meeting in person. I believe this meeting provides an
excellent opportunity for shareholders to become better acquainted with the
Company and its directors and officers.

It is important that your shares be represented at the meeting even if you
are not able to attend in person. Whether or not you plan to attend the meeting,
please complete and mail the enclosed Proxy Card promptly. IF YOU WISH TO VOTE
IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS, IT IS NOT
NECESSARY TO SPECIFY YOUR CHOICES. YOU MAY MERELY SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD.

Sincerely,

George N. Fishman
CO-CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
140 FELL COURT
HAUPPAUGE, NEW YORK 11788

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
FEBRUARY 13, 1997

The Annual Meeting of Shareholders (the "1997 Annual Meeting") of Allied
Digital Technologies Corp. (the "Company") will be held at the New York Friars
Club, 57 East 55th Street, New York, New York, on Thursday, February 13, 1997 at
2:00 p.m., local time, for the following purposes:

1. To elect three Class II directors for three-year terms expiring at the
Annual Meeting of Shareholders to be held in 2000 upon the election and
qualification of their successors or upon their earlier resignation or
removal;

2. To ratify the selection of Grant Thornton, LLP as the Company's
independent accountants for the fiscal year ending July 31, 1997; and

3. To transact any other business that may properly come before the 1997
Annual Meeting or any adjournments of the meeting.

The Company has fixed the close of business on January 3, 1997 as the record
date for determining shareholders entitled to notice of, and to vote at, the
1997 Annual Meeting.

A list of shareholders who will be entitled to vote at the 1997 Annual
Meeting will be available for inspection by shareholders at the meeting and for
ten days prior to the meeting during regular business hours at the offices of
the Company, 140 Fell Court, Hauppauge, New York 11788.

You are cordially invited to attend the 1997 Annual Meeting. Whether or not
you plan to attend the Annual Meeting and whether you own a few or many shares
of stock, the Board of Directors urges you to sign, date and return the enclosed
Proxy Card promptly in the accompanying envelope. This will assist us in
preparing for the 1997 Annual Meeting and obtaining the greatest possible
representation of shareholders.

By Order of the Board of Directors,
CHARLES P. KAVANAGH
SECRETARY
January 17, 1997
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
140 FELL COURT
HAUPPAUGE, NEW YORK 11788
1997 PROXY STATEMENT

This Proxy Statement is furnished to shareholders of Allied Digital
Technologies Corp., a Delaware corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors for use at the Annual
Meeting of Shareholders of the Company (the "1997 Annual Meeting") to be held at
2:00 p.m. on Thursday, February 13, 1997 at the New York Friars Club, 57 East
55th Street, New York, New York, and at any adjournments thereof, for the
purposes set forth in the accompanying Notice of Annual Meeting. This Proxy
Statement, the attached Notice of Annual Meeting and Proxy Card are first being
mailed to shareholders on or about January 17, 1997.

Only shareholders of record at the close of business on January 3, 1997 (the
"Record Date") are entitled to notice of, and to vote at, the 1997 Annual
Meeting or any adjournment thereof. On the Record Date, there were issued and
outstanding 13,619,644 shares of the Company's common stock, par value $.01 per
share (the "Common Stock"). All of such shares are of one class, with equal
voting rights, and each holder thereof is entitled to one vote on all matters
voted on at the 1997 Annual Meeting for each share registered in such holder's
name.

Presence in person or by proxy of holders of 6,809,823 shares of Common
Stock will constitute a quorum at the 1997 Annual Meeting. Assuming a quorum is
present (i) the affirmative vote by the holders of a plurality of the shares
represented at the 1997 Annual Meeting and entitled to vote will be required to
act on the election of directors, and (ii) the affirmative vote by the holders
of a majority of the shares represented at the 1997 Annual Meeting and entitled
to vote will be required to act on all other matters to come before the 1997
Annual Meeting, including ratification of the selection of Grant Thornton, LLP
as independent accountants for the current fiscal year.

If a shareholder, present in person or by proxy, abstains on any matter, the
shareholder's shares will not be voted on such matter. Abstentions may be
specified on all proposals submitted to a shareholder vote other than the
election of directors. Abstentions will be counted as present for purposes of
determining the existence of a quorum regarding the proposal on which the
abstention is noted. Thus, an abstention from voting on a matter has the same
legal effect as a vote "against" the matter, even though a shareholder may
interpret such action differently. A proxy submitted by a shareholder also may
indicate that all or a portion of the shares represented by such proxy are not
being voted by such shareholder with respect to a particular matter. This could
occur, for example, when a broker is not permitted to vote shares held in street
name on certain matters in the absence of instructions from the beneficial owner
of the shares.

A proxy, in the accompanying form, which is properly executed, duly returned
to the Company and not revoked will be voted in accordance with the instructions
contained thereon. If no specific instructions are indicated on the proxy, the
shares represented thereby will be voted FOR the election of the persons
nominated herein as Class II Directors, FOR the ratification of the selection of
Grant Thornton, LLP as the Company's independent accountants for the current
fiscal year, and in the discretion of the proxies named on the proxy card with
respect to the transaction of such other business as properly may come before
the 1997 Annual Meeting.

Each proxy granted may be revoked by the person granting it at any time (i)
by giving written notice to such effect to the Secretary of the Company, (ii) by
execution and delivery of a proxy bearing a later date, or (iii) by attendance
and voting in person at the 1997 Annual Meeting; except as to any matter upon
which, prior to such revocation, a vote shall have been cast at the 1997 Annual
Meeting pursuant to the authority conferred by such proxy. The mere presence at
the 1997 Annual Meeting of a person appointing a proxy does not revoke the
appointment.

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<PAGE>
Brokers who hold shares in street name have the authority to vote on certain
routine matters on which they have not received instructions from their
beneficial owners. Brokers holding shares in street name, who do not receive
instructions, are entitled to vote on the election of directors and ratification
of the selection of the independent auditors, since such matters are considered
to be routine.

ELECTION OF DIRECTORS
(ITEM 1 ON THE PROXY CARD)

NOMINEES FOR ELECTION

The Certificate of Incorporation and Bylaws of the Company provide for a
Board of Directors of not more than 12 directors with the number of directors to
be determined from time to time by the Board of Directors. Pursuant to an
Amendment dated as of January 15, 1997 to the Allied Digital Technologies Corp.
Shareholders Agreement discussed below under "Security Ownership of Certain
Beneficial Owners and Management--Allied Digital Shareholders Agreement", the
Board of Directors as of January 16, 1997 fixed the number of directors at
eight. The Board of Directors is divided into three classes with each class of
directors elected to a three-year term of office on a rotating basis. Two
classes of directors (Classes I and II) consist of three directors each, and one
class of directors (Class III) consists of two directors. At each annual meeting
of shareholders, a class of directors is elected to succeed the class of
directors whose term of office expires at that meeting.

The term of office of three Class II Directors expires at the 1997 Annual
Meeting. The individuals who are elected as Class II Directors at the 1997
Annual Meeting will hold office for a term expiring at the Annual Meeting of
Shareholders to be held in 2000, upon the election and qualification of their
respective successors or upon their earlier resignation or removal. The Board of
Directors has nominated Eugene A. Gargaro, Jr., Seymour Leslie and John A.
Morgan for election as Class II Directors of the Company at the 1997 Annual
Meeting. All the nominees have consented to their nominations and have agreed to
serve as directors of the Company if elected. The persons named in the
accompanying Proxy Card, unless otherwise instructed, intend to vote the shares
of Common Stock covered by valid proxies FOR the election of the three nominees
named above. In the event that any of such persons does not continue to be
available for election, the persons named in the accompanying form will have
discretionary power to vote for a substitute and will have discretionary power
to vote or withhold their vote for any additional nominees named by
shareholders. There are no circumstances presently known to the Board of
Directors which would render any of the persons named below unavailable to
continue to serve as a director, if elected. The Board of Directors is not aware
of any other individual who will be nominated for election as a Class II
Director at the meeting.

INFORMATION ABOUT NOMINEES AND INCUMBENT DIRECTORS

The following information is provided for each nominee for election as a
Class II Director at the 1997 Annual Meeting and for each of the Class I and
Class III Directors whose term of office will continue after the 1997 Annual
Meeting.

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<PAGE>
NOMINEES FOR DIRECTORS--TERMS EXPIRING AT THE ANNUAL MEETING TO BE HELD IN 2000
(CLASS II DIRECTORS)

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE DIRECTOR
NOMINEE NAME AGE DURING PAST 5 YEARS AND OTHER DIRECTORSHIPS SINCE
- ------------------------------------ --- ------------------------------------------------- ------------------
<S> <C> <C> <C>

Seymour Leslie...................... 74 Mr. Leslie has been Chairman of Leslie Group, January 1995
Inc., a diversified investment company, since
1977 and Co-Chairman of Leslie/Linton
Entertainment, Inc., a diversified investment
company, since 1989. Mr. Leslie is a director of
Shorewood Packaging Corporation, a packaging
company, and Gametek, Inc., a producer and
marketer of video/interactive games. He was a
director of HMG Digital Technologies Corp., a
wholly-owned subsidiary of the Company ("HMG"),
from 1993 until January 1995. Mr. Leslie has been
active in the music industry since 1953, when he
founded Pickwick International Inc. ("Pickwick").
Mr. Leslie was Chairman of the Board of Pickwick
until 1977. During Mr. Leslie's tenure, Pickwick
became a dominant force in the industry which
included the development of the Musicland chain
into the largest record retailer in the world.
Mr. Leslie was named President of CBS Video
Enterprises ("CBSVE") in 1980. In 1982, Mr.
Leslie left CBSVE to form the MGM/UA Home
Entertainment Group, Inc. where he served as
Chairman until 1987.

John A. Morgan...................... 66 Mr. Morgan has been a Managing Director of Morgan November 1995
Lewis Githens and Ahn, Inc., an investment
banking firm, since 1982. Mr. Morgan is a
director of Masco Corporation, a manufacturer of
products for the home ("Masco"), MascoTech, Inc.,
an industrial components manufacturing firm
("MascoTech"), and TriMas Corporation, an
industrial components manufacturing firm
("TriMas").

Eugene A. Gargaro, Jr............... 54 Mr. Gargaro has been Vice President and Secretary January 1995
of Masco since 1993. For more than five years
prior to 1993, Mr. Gargaro was a partner with the
law firm of Dykema Gossett PLLC in Detroit,
Michigan. Mr. Gargaro is a director and Secretary
of MascoTech and of TriMas.
</TABLE>

3
<PAGE>
INCUMBENT DIRECTORS--TERMS EXPIRING AT THE ANNUAL MEETING TO BE HELD IN 1999
(CLASS I DIRECTORS)

George N. Fishman................... 72 Mr. Fishman has been Co-Chairman of the Board of January 1995
the Company since January 1995 and Chief
Executive Officer since March 1996. Mr. Fishman
also has been the Chairman of the Board, Chief
Executive Officer and a director of HMG since
1993, the Chairman of the Board and a director of
Hauppauge Records Manufacturing, Ltd., a
wholly-owned subsidiary of HMG ("Hauppauge
Records"), since 1981 and the Chief Executive
Officer of Hauppauge Records since 1991. Mr.
Fishman has been active in the music industry
since 1946. He was the former owner of a
predecessor corporation to Hauppauge Records
prior to the acquisition of that company in 1973
by Pickwick. In 1981, Mr. Fishman led the
management buyout of the record manufacturing
business of American Can Company, the successor
to Pickwick, whereupon Hauppauge Records was
formed as a New York corporation. Mr. Fishman is
a former physicist and holds a master of science
degree.

Donald L. Olesen.................... 54 Mr. Olesen has been President--National Sales and January 1995
Marketing Division of the Company since January
1995. Mr. Olesen also has been the President of
HMG since 1993 and President of Hauppauge Records
since July 1991. He also was a director of HMG
and Hauppauge Records until January 1995. Mr.
Olesen has been Hauppauge Records' primary sales
executive since 1981. Mr. Olesen has 27 years of
pre-recorded music experience beginning in 1965
with RCA Records as a management trainee. In
1968, Mr. Olesen joined CBS Records where he
spent 13 years in a variety of positions. From
1971 to 1981, Mr. Olesen served as the East Coast
Regional Sales Manager of CBS Records.
</TABLE>

4
<PAGE>

William H. Smith.................... 71 Mr. Smith has been Co-Chairman of the Board of January 1994
the Company since January 1995, President of the
Company since November 1995 and a director of HMG
and Hauppauge Records since January 1995. Mr.
Smith also was Co-Chief Executive Officer of the
Company from November 1995 until March 1996. In
1960, Mr. Smith founded Allied Film Laboratory,
Inc., a wholly-owned subsidiary of the Company
from January 11, 1995 until it was merged with
and into Hauppauge Records as of November 1, 1996
("AFL"). Mr. Smith was President and a director
of AFL from 1960 until 1993, and was its Chairman
of the Board from 1990 until November 1996. Prior
to organizing AFL, Mr. Smith worked for nine
years at Lakeside Laboratory, a film processing
company in Gary, Indiana. Mr. Smith is active in
many business and industry organizations.
Currently, Mr. Smith serves on the boards of the
American Video Duplicators Association and the
International Tape and Disc Association. Mr.
Smith holds a business degree from the University
of Colorado.
</TABLE>

INCUMBENT DIRECTORS--TERMS EXPIRING AT ANNUAL MEETING TO BE HELD IN 1998
(CLASS III DIRECTORS)

Werner H. Jean...................... 72 Mr. Jean has been a consultant to clients with January 1995
respect to operational matters since 1983. Mr.
Jean was a director of AFL from 1983 until
January 1995. Prior to 1980, Mr. Jean held
positions at American Motors as Corporate
Director of Manufacturing, General Plant Manager,
Passenger Cars-- Jeep, Divisional Controller,
Corporate Director of Budgets and Facilities
Planning Manager. Mr. Jean is a graduate from New
York University and holds a degree in electrical
engineering.
</TABLE>

5
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE DIRECTOR
NOMINEE NAME AGE DURING PAST 5 YEARS AND OTHER DIRECTORSHIPS SINCE
- ------------------------------------ --- ------------------------------------------------- ------------------
<S> <C> <C> <C>
H. Sean Mathis...................... 49 Mr. Mathis is Chairman and Chief Executive January 1995
Officer of Universal Gym Equipment Inc., a
manufacturing company. He is also Chairman and
Chief Executive Officer of Allis Chalmers, Inc.,
an industrial manufacturer whose main asset is a
net operating loss tax carryforward. From 1993 to
1995 Mr. Mathis was president and a director of
RCL Capital Corporation, which was merged into
DISC Graphics in November 1995. From 1988 to
October 1993, Mr. Mathis was a Director and Chief
Operating Officer of Ameriscribe Corporation
("Ameriscribe"), a national provider of
reprographic and related facilities management
services whose stock was traded on the New York
Stock Exchange. From August 1992 to May 1994, Mr.
Mathis acted as the Federal Court Appointed
Trustee for International Wire News Service
Liquidation Corp., formerly United Press
International ("UPI"). From November 1991 through
July 1992, Mr. Mathis was Vice Chairman and a
Director of UPI (then a news syndication
service). In August 1991, as part of a
restructuring program, UPI filed for protection
under the Federal Bankruptcy laws.
</TABLE>

ADDITIONAL INFORMATION WITH RESPECT TO THE BOARD OF DIRECTORS AND ITS COMMITTEES

The Board of Directors of the Company has an Executive Committee, an Audit
Committee and a Compensation Committee, the members of all of which serve at the
discretion of the Board. See "Security Ownership of Certain Beneficial Owners
and Management--Allied Digital Shareholders Agreement."

The members of the Executive Committee currently are Mr. Smith, Mr. Fishman,
Mr. Leslie and Mr. Jean. The Executive Committee is authorized to exercise the
powers and authority of the Board of Directors in the management and affairs of
the Company to the extent permitted by Delaware law, except as limited by the
Bylaws of the Company. The Executive Committee met twice during the fiscal year
ended July 31, 1996 ("Fiscal 1996").

The members of the Audit Committee currently are Mr. Mathis, Mr. Leslie and
Mr. Gargaro. The Audit Committee is authorized to confer with the auditors and
financial officers of the Company and its subsidiaries, review reports submitted
by the auditors, establish or review, and monitor compliance with, codes of
conduct of the Company and its subsidiaries, inquire about procedures for
compliance with laws and regulations relating to the management of the Company
and its subsidiaries, and report and make recommendations to the Board of
Directors. The Audit Committee met three times during Fiscal 1996.

The members of the Compensation Committee currently are Mr. Jean, Mr.
Leslie, and Mr. Morgan. The Compensation Committee is responsible for
recommending to the Board of Directors policies and levels of compensation with
respect to compensation and benefits of the Co-Chairmen of the Board, the

6
<PAGE>
President, the Chief Executive Officer, and each other executive officer of the
Company and all significant employees of the Company and its subsidiaries. The
Compensation Committee also administers the Company's Amended and Restated 1994
Long Term Stock Incentive Plan (the "Incentive Plan"). The Compensation
Committee did not meet during Fiscal 1996.

The Company does not have a standing nominating committee or committee
performing similar functions.

During Fiscal 1996, there were five meetings of the Board of Directors.
During this period, each director attended at least 75% of the total number of
all meetings of the Board of Directors, and of the committees thereof on which
he served, that were held during the period that he was a director.

There is no family relationship between any directors or executive officers
of the Company. Certain shareholders of the Company, including William H. Smith,
Donald L. Olesen and George N. Fishman, are parties to a shareholders agreement
which, among other things, contains agreements with respect to the disposition
and voting of shares of Common Stock. See "Security Ownership of Certain
Beneficial Owners and Management--Allied Digital Shareholders Agreement".

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee for Fiscal 1996 were Mr. Jean, Mr.
Leslie and Mr. Morgan, each of whom is an outside director.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished
to the Company under the Securities Exchange Act of 1934 (the "Exchange Act")
during Fiscal 1996 and Forms 5 and amendments thereto furnished to the Company
with respect to Fiscal 1996 and a review of written representations received by
the Company, no person who at any time during Fiscal 1996 was a director,
executive officer or beneficial owner of 10% or more of the outstanding shares
of Common Stock failed to file, on a timely basis, reports required by Section
16(a) of the Exchange Act during the most recent fiscal year except that Mr.
Mathis, a director of the Company, filed Forms 5 reporting an aggregate of five
transactions effected during the months of June and July, 1996 involving the
disposition of Common Stock.

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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of December 31, 1996, information with
respect to the beneficial ownership of Common Stock by (i) each person known by
the Company to be the beneficial owner of more than 5% of the outstanding shares
of Common Stock, (ii) each director of the Company, (iii) each executive officer
of the Company named in the Summary Compensation Table and (iv) all directors
and current executive officers of the Company as a group (10 persons):

<TABLE>
<CAPTION>
PERCENTAGE OF
BENEFICIAL
NAME AND ADDRESS(1) NUMBER OF SHARES OWNERSHIP
- -------------------------------------------------------------------------- ----------------- -------------------
<S> <C> <C>
William H. Smith(2)....................................................... 7,307,762 49.8%
7375 Woodward Avenue
Detroit, Michigan 48202
Patricia M. Smith(3)...................................................... 1,491,533 10.8%
7375 Woodward Avenue
Detroit, Michigan 48202
399 Venture Partners Inc.(4).............................................. 1,100,110 8.1%
399 Park Avenue
6th Floor, Zone 11
New York, New York 10043
Donald L. Olesen(5)....................................................... 901,500 6.6%
140 Fell Court
Hauppauge, New York 11788
George N. Fishman(6)...................................................... 894,022 6.6%
140 Fell Court
Hauppauge, New York 11788
James A. Merkle(7)........................................................ 577,223 4.2%
921 Woods Road
Ypsilanti, Michigan 48197
Seymour Leslie(8)......................................................... 352,327 2.6%
1370 Avenue of the Americas
New York, New York 10019
Charles P. Kavanagh(9).................................................... 155,275 1.1%
140 Fell Court
Hauppauge, New York 11788
H. Sean Mathis(10)........................................................ 86,800 *
2613 North Ocean Boulevard
Gulfstream, Florida 33483
Eugene A. Gargaro, Jr.(11)................................................ 30,000 *
21001 Van Born Road
Taylor, Michigan 48180
Jerry E. Stone............................................................ 9,000 *
15 Anthracite
Mt. Crested Butte, Colorado 81225
Werner H. Jean(12)........................................................ 4,000 *
16288 Barryknoll Way
Granger, Indiana 46530
John A. Morgan............................................................ -0- --
767 Fifth Avenue
New York, New York 10153
</TABLE>

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<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
BENEFICIAL
NAME AND ADDRESS(1) NUMBER OF SHARES OWNERSHIP
- -------------------------------------------------------------------------- ----------------- -------------------
<S> <C> <C>
John K. Mangini........................................................... -0- --
140 Fell Court
Hauppauge, New York 11788
All directors and executive officers as a group(13)....................... 9,735,686 65.9%
</TABLE>

- ------------------------

* Less than 1%

(1) Unless otherwise noted, the Company believes that all persons named in the
table have (i) sole voting and investment power with respect to all shares
of Common Stock owned by them, except to the extent that authority is shared
by spouses under applicable law, and (ii) record and beneficial ownership of
such shares. All information in the table is based upon reports filed by
such persons with the Securities and Exchange Commission and the Company and
upon questionnaires submitted by such persons to the Company in connection
with the preparation of this Proxy Statement.

(2) Consists of (i) 3,302,507 shares of Common Stock owned by the William H.
Smith Trust, of which Mr. Smith is the trustee, (ii) 550,235 shares of
Common Stock issuable upon exercise of the Class C Warrants owned by the
William H. Smith Trust, (iii) 5,000 shares of Common Stock owned jointly
with his wife, Patricia M. Smith, (iv) 1,273,945 shares of Common Stock
owned by the Patricia M. Smith Trust and 212,588 shares of Common Stock
issuable upon exercise of the Class C Warrants owned by the Patricia M.
Smith Trust (see note (3) below), and (v) 1,682,975 shares owned by Mr.
Smith's children and 280,512 shares of Common Stock issuable upon exercise
of Class C Warrants owned by Mr. Smith's children. All the shares of Common
Stock owned by Mrs. Smith and Mr. Smith's children will be voted as directed
by Mr. Smith or his successor as provided in a ten year shareholder voting
agreement, dated as of January 11, 1995, among the Company and each of the
above persons and trusts (the "Smith Family Shareholders Agreement"). The
3,302,507 shares of Common Stock owned by the William H. Smith Trust, the
5,000 shares jointly owned by Mr. and Mrs. Smith and the 550,235 shares of
Common Stock issuable upon exercise of the Class C Warrants owned by the
William H. Smith Trust are subject to the Allied Digital Shareholders
Agreement. See "Security Ownership of Certain Beneficial Owners and
Management--Allied Digital Shareholders Agreement."

(3) Consists of (i) 1,273,945 shares of Common Stock owned by the Patricia M.
Smith Trust, of which Mrs. Smith is the trustee, (ii) 5,000 shares of Common
Stock owned jointly with Mr. Smith, and (iii) 212,588 shares of Common Stock
issuable upon exercise of the Class C Warrants owned by the Patricia M.
Smith Trust. All such shares are subject to the Smith Family Shareholders
Agreement and the Allied Digital Shareholders Agreement. See "Security
Ownership of Certain Beneficial Owners and Management--Allied Digital
Shareholders Agreement." Mrs. Smith is the spouse of William H. Smith.

(4) All of the shares owned by 399 Venture Partners Inc. ("Venture Partners")
are subject to the Allied Digital Shareholders Agreement. See "Security
Ownership of Certain Beneficial Owners and Management--Allied Digital
Shareholders Agreement."

(5) Consists of (i) 894,000 shares of Common Stock owned by Mr. Olesen and (ii)
7,500 shares of Common Stock issuable upon presently exercisable options
granted under the Incentive Plan. See "Executive Compensation--Stock
Options." All the shares owned by Mr. Olesen are subject to the Allied
Digital Shareholders Agreement. See "Security Ownership of Certain
Beneficial Owners and Management--Allied Digital Shareholders Agreement."

(6) All of the shares of Common Stock owned by Mr. Fishman are subject to the
Allied Digital Shareholders Agreement. See "Security Ownership of Certain
Beneficial Owners and Management-- Allied Digital Shareholders Agreement."

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<PAGE>
(7) Consists of (i) 479,677 shares of Common Stock owned by the James A. Merkle
Revocable Living Trust, of which Mr. Merkle is a trustee, (ii) 5,000 shares
of Common Stock held by a trust for the benefit of Mr. Merkle's spouse,
(iii) 80,046 shares of Common Stock issuable upon exercise of the Class C
Warrants owned by Mr. Merkle and (iv) 12,500 shares of Common Stock issuable
upon presently exercisable options granted under the Incentive Plan. See
"Executive Compensation--Stock Options." Mr. Merkle was a director and the
President and Chief Executive Officer of the Company until November 5, 1995.

(8) Consists of (i) 327,327 shares of Common Stock owned by Leslie/Linton
Entertainment Inc., a company of which Seymour Leslie is Co-Chairman and a
minority shareholder and (ii) 25,000 shares of Common Stock issuable upon
exercise of Substituted Options granted under the Incentive Plan. See
"Executive Compensation--Stock Options." The shares of Common Stock owned by
Leslie/ Linton Entertainment Inc. are subject to the Allied Digital
Shareholders Agreement. See "Security Ownership of Certain Beneficial Owners
and Management--Allied Digital Shareholders Agreement." Does not include
shares of Common Stock owned by Mr. Leslie's children as to which he
disclaims beneficial ownership.

(9) Consists of (i) 150,275 shares of Common Stock owned by Mr. Kavanagh and
(ii) 5,000 shares of Common Stock issuable upon exercise of presently
exercisable options granted under the Incentive Plan. See "Executive
Compensation--Stock Options."

(10) Consists of (i) 36,800 shares of Common Stock owned by Mr. Mathis and (ii)
50,000 shares of Common Stock issuable upon exercise of presently
exercisable options granted under the Incentive Plan. See "Executive
Compensation--Stock Options."

(11) Consists of (i) 15,000 shares owned by Mr. Gargaro and (ii) 15,000 shares
of Common Stock owned by the Eugene A. Gargaro, Jr. Trust, of which Mr.
Gargaro is the trustee.

(12) Consists of shares of Common Stock owned by the Werner H. Jean Trust, of
which Mr. Jean is the trustee.

(13) Consists of the shares of Common Stock referred to in notes (2), (5), (6),
(7), (8), (9), (10), (11) and (12) above.

The Company does not know of any arrangements, including a pledge by any
person of securities of the Company, the operation of which at a subsequent date
may result in a change in control of the Company.

ALLIED DIGITAL SHAREHOLDERS AGREEMENT

In connection with the consummation of the Reorganization, the Company, Mr.
Smith, Mrs. Smith, certain trusts of which Mr. Smith or Mrs. Smith act as
trustees (the "AFL Shareholders"), Mr. Fishman, Mr. Olesen, The Donald L. Olesen
Annuity Trust, Leslie/Linton Entertainment, Inc., and Venture Partners (the "HMG
Shareholders" and, together with the AFL Shareholders, the "Shareholder
Parties"), entered into the Allied Digital Shareholders Agreement (the
"Shareholders Agreement"). Pursuant to the Shareholders Agreement, among other
things, (i) the number of directors of the Company was initially fixed at nine
members, divided into three classes of three members each, and Mr. Smith, James
A. Merkle (who resigned effective November 6, 1995), Mr. Jean, Jerry E. Stone
(who requested that the Company not nominate him for re-election), and Mr.
Gargaro (the "AFL Nominees"), and Mr. Fishman, Mr. Leslie, Mr. Mathis and Mr.
Olesen (the "HMG Nominees"), were elected to the initial Board of Directors of
the Company, (ii) Mr. Smith, Mr. Olesen and Mr. Fishman were re-elected as
directors of the Company for an additional three-year term at the Annual Meeting
held in 1996, (iii) the Shareholder Parties agreed to vote all shares of Common
Stock owned by them against, and to use their best efforts to cause the then
directors of the Company, subject to such directors' fiduciary duties, to vote
against, any proposed change in the size or rights or powers of the Board of
Directors of the Company and (iv) the Shareholder Parties

10
<PAGE>
agreed until at least the day preceding the date of the annual meeting of
shareholders of the Company held in 1998 (the "1998 Annual Meeting") to use
their best efforts to secure the election of Mr. Fishman, Mr. Smith and a person
designated by the AFL Shareholders to the Executive Committee of the Board of
Directors of the Company and the boards of directors of the Company's
subsidiaries. The Shareholders Agreement was amended in November 1995 (the "1995
Amendment") to provide that Mr. Olesen would be appointed to fill the vacancy in
the Class I Directors resulting from Mr. Merkle's resignation and that Mr.
Olesen would be nominated for election at the Annual Meeting held in 1996 and to
appoint John A. Morgan to fill the vacancy in Class II Directors resulting from
Mr. Olesen's appointment as a Class I Director. Mr. Stone is currently serving
on the boards of directors of the Company's subsidiaries and served as a member
of the Executive Committee until January 1997.

The Shareholders Agreement was further amended as of January 15, 1997, (the
"1997 Amendment"), among other things, (i) to reduce the number of directors
from nine to eight, (ii) to reduce the number of Class III directors from three
to two, and (iii) to provide that until the day preceding the annual meeting of
shareholders of the Company to be held in 2003, the Shareholder Parties will use
their best efforts to secure the election of Mr. Fishman, Mr. Smith, Mr. Jean
and Mr. Leslie (or, in the case of Mr. Jean, another person designated by the
AFL Shareholders who is reasonably acceptable to the HMG Shareholders, and in
the case of Mr. Leslie, another person designated by the HMG Shareholders who is
reasonably acceptable to the AFL Shareholders) to the Executive Committee of the
Board of Directors of the Company and the boards of directors of the Company's
subsidiaries. All references below to the Shareholders Agreement shall refer to
the Shareholders Agreement as amended by the 1995 Amendment and the 1997
Amendment.

In connection with the 1997 Amendment, the Board of Directors of the Company
voted to amend the Bylaws of the Company to require that any vacancy on the
Board of Directors of the Company be filled at a special meeting called by the
Secretary of the Company to be held within ten days following the event that
created the vacancy.

Under the Shareholders Agreement, during the period commencing on the date
of the Shareholders Agreement (January 11, 1995) and ending on the day preceding
the date of the annual meeting of shareholders of the Company to be held in 2003
(the "2003 Annual Meeting"), if a seat on the Board of Directors of the Company
or on the Executive Committee of the Board of Directors held by any AFL Nominee
or HMG Nominee becomes vacant during such director's term for any reason
(including, without limitation, such director's death, resignation or removal),
then (i) with respect to a vacant seat previously held by an AFL Nominee, the
AFL Shareholders shall have the right to designate a nominee, who shall be
reasonably acceptable to the HMG Shareholders, to fill such vacancy until the
next annual meeting of shareholders of the Company at which such director's term
would expire and the HMG Shareholders shall use their best efforts to cause the
HMG Nominees on the Board of Directors of the Company, subject to such nominees'
fiduciary duties, to vote in favor of the election and continuation in office of
such nominee designated by the AFL Shareholders, and (ii) with respect to a
vacant seat previously held by an HMG Nominee, the HMG Shareholders shall have
the right to designate a nominee, who shall be reasonably acceptable to the AFL
Shareholders, to fill such vacancy until the next annual meeting of shareholders
of the Company at which such director's term would expire and the AFL
Shareholders shall use their best efforts to cause the AFL Nominees on the Board
of Directors of the Company, subject to such nominees' fiduciary duties, to vote
in favor of the election and continuation in office of such nominee designated
by the HMG Shareholders; provided, however, that the obligations set forth in
classes (i) and (ii) above will terminate with respect to (x) a Class III
director at any time on or following the annual meeting of shareholders of the
Company to be held in 2001, (y) a Class I director at any time on or following
the annual meeting of shareholders of the Company to be held in 2002, or (z) a
Class II director at any time on or following the 2003 Annual Meeting.

The Shareholders Agreement also provides that (i) except for transfers among
themselves, to family members, to trusts for the benefit of themselves or their
families or to affiliates, prior to July 11, 1997,

11
<PAGE>
none of the AFL Shareholders may transfer any of their shares of Common Stock,
other than in compliance with the volume limitations contained in Rule 144 under
the Securities Act of 1933, (ii) except for transfers among themselves, to
family members, to trusts for the benefit of themselves or their families or to
affiliates, prior to January 11, 1998, none of the AFL Shareholders may transfer
any of their Allied Digital Class C Warrants, and (iii) until the day preceding
the date of the annual meeting of shareholders of the Company to be held in
2003, none of the AFL Shareholders may transfer any of their shares of Common
Stock among themselves, to family members, to trusts for the benefit of
themselves or their families or to affiliates of any of the foregoing unless any
such transferee becomes a party to the Shareholders Agreement and agrees in
writing to be bound by the terms thereof.

In addition, under the terms of the Shareholders Agreement, until January
11, 1998, and subject to certain limited exceptions relating to transfers among
themselves, to family members, to trusts for the benefit of themselves or their
families and to affiliates, none of the AFL Shareholders may transfer, in any
single transaction or series of related transactions to a single transferee or
to a "group," any shares of Common Stock now owned or hereafter acquired by them
if such transfer would cause the number of shares of Common Stock transferred by
all of the AFL Shareholders, individually or in the aggregate, to such
transferee or group to equal or exceed 30% of the Common Stock outstanding as of
the date of the Shareholders Agreement unless, prior to any such transfer, the
proposed transferee (whether an individual or a group) of such shares of Common
Stock executes and delivers to the Company a written agreement to the effect
that such proposed transferee will not, for a period of 18 months from the
closing of such transfer, purchase or cause the Company, directly or indirectly,
to purchase Common Stock at a price which is less than the highest price paid by
the proposed transferee for such Common Stock from any AFL Shareholder, or for a
different form of consideration.

In the event Mr. Smith dies or becomes incapacitated prior to January 11,
1998, each of the AFL Shareholders (a) is required during the period ending on
such date to vote all shares of Common Stock beneficially owned as directed by
Mr. Jean (currently a director of the Company) or his successor, and (b) is
prohibited during the period ending on January 11, 1998 from transferring any
such shares of Common Stock in a block (or series of sales) of more than 500,000
shares to a single person or group other than (i) a transfer among themselves,
to family members, to trusts for the benefit of themselves or their families or
to affiliates, (ii) in connection with or to fund the payment of federal and
state estate and inheritance taxes and administration and related expenses and
otherwise for the orderly administration of the estate of Mr. Smith or any trust
for his benefit and/or any member of his family, (iii) as any AFL Shareholder
shall reasonably determine to be necessary and ample for the support,
maintenance and education of the AFL Shareholders and family members, or (iv)
with the consent of Mr. Fishman (currently Co-Chairman of the Board) or his
successor.

The Shareholders Agreement also prohibits the Shareholder Parties and the
Company from engaging in a "going private" transaction under Rule 13d-3 under
the Exchange Act prior to January 11, 1998 unless such transaction is approved
by a majority of the votes cast by shareholders who are neither parties to the
Shareholders Agreement nor affiliates or associates of such parties.

EXECUTIVE COMPENSATION

SUMMARY OF COMPENSATION

The following table sets forth information regarding compensation for
services rendered, in all capacities, awarded or paid to or earned by each
person who served as the Chief Executive Officer at any time during Fiscal 1996
and each of the four other most highly compensated executive officers of the
Company who received compensation from the Company aggregating at least $100,000
during Fiscal 1996 (collectively, the "Named Executive Officers").

12
<PAGE>
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION(1)(2)(3) -----------------
NAME AND FISCAL ------------------------- SHARES UNDERLYING
PRINCIPAL POSITION YEAR(3) SALARY($)(1) BONUS ($)(4) OPTIONS (#)(5)
- ---------------------------------------------------------- ----------- ----------- ------------ -----------------
<S> <C> <C> <C> <C>
William H. Smith(6)....................................... 1996 $ 190,151 $ 1,229(7) --
Co-Chairman and President 1995 244,376 154,013(7) --
1994 169,310 -- --

George N. Fishman(6)...................................... 1996 188,880 -- --
Co-Chairman and Chief 1995 204,451 -- --
Executive Officer 1994 203,461 -- --

James A. Merkle(6)(8)..................................... 1996 63,999 -- --
Chief Executive Officer 1995 237,201 -- 50,000
and President 1994 126,484 218,750 --

Donald L. Olesen.......................................... 1996 321,760 -- --
President--National Sales 1995 323,686 -- 30,000
and Marketing Division 1994 298,163(9) -- --

Charles P. Kavanagh....................................... 1996 141,970 -- --
Secretary and Chief 1995 142,263 20,000 20,000
Financial Officer of HMG 1994 139,563 -- --

John K. Mangini(10)....................................... 1996 107,692 -- --
Chief Operating Officer 1995 -- -- --
1994 -- -- --

Jerry E. Stone(11)........................................ 1996 109,615 -- --
Chief Financial Officer 1995 38,942 -- 20,000
1994 -- -- --
</TABLE>

- ------------------------

(1) Compensation for Mr. Smith, Mr. Stone and Mr. Merkle was paid by AFL.
Compensation for Mr. Fishman, Mr. Olesen, Mr. Kavanagh and Mr. Mangini was
paid by Hauppauge Records.

(2) The incremental cost of providing perquisites and other personal benefits
paid to each named individual for each year aggregated less than the lesser
of (a) $50,000 and (b) 10% of the total annual salary and bonus set forth in
the columns entitled "Salary" and "Bonus" for such person. Accordingly, such
perquisites and personal benefits have been omitted from the table as
permitted by the rules of the Commission.

(3) During Fiscal 1995, the Company and AFL changed their fiscal year ending
date from December 31 to July 31. Consequently, Fiscal 1994 for the Company
and AFL (and the annual compensation reported with respect to Messrs. Smith
and Merkel during such period) consists of seven months. Fiscal 1994 for
Hauppauge Records was a 53 week period.

(4) Amounts shown include (i) discretionary cash bonuses and (ii) profit sharing
contributions.

(5) Represents incentive stock options granted under the Incentive Plan.

(6) Mr. Merkle was President and the Chief Executive Officer of the Company
until his resignation in November 1995. Mr. Smith has served as President
since November 1995, Messrs. Smith and Fishman served as Co-Chief Executive
Officers from November 1995 until March 1996 and Mr. Fishman has served as
the sole Chief Executive Officer since March 1996.

13
<PAGE>
(7) Consists of (i) distribution from the AFL profit sharing plan in Fiscal 1996
and (ii) payments in Fiscal 1995 which were used by Mr. Smith to pay life
insurance premiums.

(8) Pursuant to his severance arrangement, the number of shares issuable upon
exercise of the options was reduced to 25,000. See "Employment Agreements."

(9) Includes $10,935 of commission income earned by Mr. Olesen on the sale of
compact disc units by a third party manufacturer to HMG's customers as to
which HMG received a commission, a portion of which was rebated to Mr.
Olesen.

(10) Mr. Mangini joined the Company as Chief Operating Officer on January 16,
1996.

(11) Mr. Stone served as Vice President and Chief Financial Officer of the
Company from April 1995 until his retirement in June 1996. Upon his
retirement, the options granted to Mr. Stone terminated in accordance with
the terms of the Incentive Plan.

STOCK OPTIONS

STOCK OPTIONS GRANTED IN FISCAL 1996

No stock option(s) were granted in Fiscal 1996 to the Named Executive
Officers.

STOCK OPTIONS HELD AT THE END OF FISCAL 1996

The following table sets forth the total number of exercisable and
unexercisable stock options held by each of the Name Executive Officers named
who held any stock options as of July 31, 1996. No options to purchase Common
Stock were exercised during Fiscal 1996 and no stock appreciation rights were
outstanding during Fiscal 1996.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
JULY 31, 1996 OPTIONS AT JULY 31, 1996
-------------------------- ----------------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- ----------- ------------- --------------- -----------------
William H. Smith........................ -- -- -- --
George N. Fishman....................... -- -- -- --
James A. Merkle......................... 12,500 12,500 0 0
Donald L. Olesen........................ 7,500 22,500 0 0
Charles P. Kavanagh..................... 5,000 15,000 0 0
John K. Mangini......................... 0 0 0 0
Jerry E. Stone.......................... 0 0 0 0
</TABLE>

DESCRIPTION OF THE INCENTIVE PLAN

The Incentive Plan is designed to encourage selected employees of or
consultants to the Company or an affiliated company to acquire a proprietary
interest in the Company in order to create an increased incentive for them to
contribute to the Company's success, and to enhance the Company's ability and
that of its affiliates to attract and retain exceptionally qualified employees
and consultants, thus enhancing the value of the Company for the benefit of its
shareholders. The Incentive Plan permits the issuance of (a) options to purchase
shares of Common Stock ("Options"), (b) shares of such stock ("Restricted
Stock") or units denominated in such shares ("Restricted Stock Units") that are
nontransferable and subject to forfeiture for a designated restricted period,
(c) awards of the right to receive the excess of the fair market value at the
time of exercise of a share of Common Stock over a designated price determined
at the time of grant ("Stock Appreciation Rights" or "SARs"), (d) awards
denominated, or which may be settled in, shares of Common Stock, subject to
satisfaction of designated performance criteria during a designated performance
period ("Performance Awards"), (e) rights to receive the equivalent of dividends
or other distributions on Common Stock ("Dividend Equivalents"), and (e) other
types of awards

14
<PAGE>
denominated or payable in shares of Common Stock ("Other Stock-Based Awards").
In addition, in connection with the Reorganization, the holders of options to
purchase shares of HMG common stock were issued in substitution thereof an
equivalent number of Options (the "Substitute Options") under the Incentive
Plan.

Subject to adjustment as required or permitted by the Incentive Plan, the
maximum number of shares of Common Stock available for awards under the
Incentive Plan (including Options) is 2,400,000 shares, of which no more than
half may be newly-issued shares.

In general, any employee of or consultant to the Company or an affiliate of
the Company, including any officer or officer-director of the Company, but not
including any non-employee director (unless such person also serves as a
consultant to the Company), may be selected by the Compensation Committee to
receive any type of award under the Incentive Plan; provided, however, that
Other Stock-Based Awards may not be granted to directors or executive officers.

Options granted under the Incentive Plan may be either "Incentive Stock
Options" as that term is defined in Section 422 of the Internal Revenue Code of
1986, or options which do not qualify as Incentive Stock Options ("Non-Qualified
Stock Options"). Incentive Stock Options may be granted only to employees of the
Company. An Incentive Stock Option must expire within ten years from the date it
is granted (five years in the case of such options granted to a holder of more
than 10% of the outstanding Common Stock). Incentive Stock Options are first
exercisable not earlier than one year from the date of grant. The exercise price
of an Incentive Stock Option must be at least equal to the fair market value of
the Common Stock on the date such Incentive Stock Option is granted (or 110% of
the fair market value of the Common Stock in the case of such options granted to
a holder of more than 10% of the outstanding Common Stock). To the extent that
the aggregate fair market value of the Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by an optionee during
any calendar year exceeds $100,000, such options will be treated as
Non-Qualified Stock Options. In addition, Options may include a so-called
"reload" feature under which, at the time of exercise of the Option, if the
holder continues to be eligible to be granted awards under the Incentive Plan
and if the exercise price is paid at least in part in shares of Common Stock
owned by the holder for at least six months, the holder automatically would
receive another Option.

The Incentive Plan also permits the grant of Restricted Stock, Restricted
Stock Units, Stock Appreciation Rights, Performance Awards, Dividend
Equivalents, and/or Other Stock-Based Awards to eligible individuals. Any such
award may be granted in tandem with any other such award or with any Option,
whether at the time of grant of the first award or subsequently. In addition,
subject to the terms of a given award, the Compensation Committee may permit
settlement of any award (other than an award of Restricted Stock or, without the
holder's consent, a Substituted Option) in cash, in shares of Common Stock, by
grant of another award, or in such other form of consideration as it deems
appropriate. The Compensation Committee also may permit settlement in
installments, or defer settlement of, any award (other than Restricted Stock or,
without the holder's consent, a Substituted Option) as it deems appropriate,
subject to the terms of the award, and, regardless of the terms of an award
(other than a Substituted Option), is entitled at any time to cancel the award
upon payment to the holder of its value (as determined by the Compensation
Committee) in cash or another award.

Subject to the limitations and requirements of the Incentive Plan and
applicable law and the terms and conditions of any Option or other award, the
Compensation Committee has the authority, among other things, to determine the
expiration date, any vesting schedule, and the per share exercise price for any
Option, the method and form of payment for any exercised Option (which may
include payment in cash, by delivery of shares of Common Stock already held by
the grantee valued at their fair market value or any combination thereof), the
grant price for any SAR, the restricted period for any award of Restricted Stock
or Restricted Stock Units, the performance criteria and performance period for
any Performance

15
<PAGE>
Award, and the effect of termination of employment and/or consulting
relationships upon any outstanding award.

EMPLOYMENT AGREEMENTS

The Company has employment agreements with Messrs. Fishman and Olesen with
terms expiring December 31, 1997, and with Mr. Kavanagh with a term expiring
December 31, 1996. Payment and performance of all obligations under each
employment agreement are unconditionally guaranteed by the Company.

Pursuant to such employment agreements, (i) Mr. Fishman continues to serve
as the Chairman of the Board and Chief Executive Officer of Hauppauge Records
and serves as Co-Chairman of the Board of the Company at a base salary of
$206,000 per annum, (ii) Mr. Olesen continues to serve as the President of
Hauppauge Records and serves as President-National Sales and Marketing Division
of the Company at a base salary of $298,700 per annum, and (iii) Mr. Kavanagh
continues to serve as the Chief Financial Officer of Hauppauge Records and
serves as Secretary of the Company at a base salary of $138,050 per annum. Each
of such executive officer's base salary is subject to a cost of living increase
on an annual basis based upon a percentage equal to the percentage rate of
inflation during the previous calendar year as measured by the Consumer Price
Index for urban wage earners published by the U.S. Department of Labor, Bureau
of Labor Statistics for the New York-Northern New Jersey area.

If any of Messrs.Fishman, Olesen, or Kavanagh is terminated without cause
prior to the expiration of his employment term, such executive will be entitled
to receive an amount equal to his respective base salary (as adjusted) until the
scheduled expiration of such term. In addition, each employment agreement
prohibits such executive from competing with the Company during the term of the
agreement, provided that in the case of termination by the employer without
cause, the employer continues to pay such executive his salary.

In November 1995, the Company and Mr. Merkle, the former President and Chief
Executive Officer of the Company, entered into a severance agreement pursuant to
which Mr. Merkle's employment agreement was terminated and Mr. Merkle agreed to
provide consulting services to the Company and its subsidiaries through the end
of the original term of his employment agreement (December 31, 1997) at an
annual fee equal to the base salary in the employment agreement and to refrain
from competition with the Company during such period. In addition, consistent
with the Incentive Plan, the expiration date of the option granted to Mr. Merkle
during Fiscal 1995 was changed to December 31, 1997 and the number of shares
covered by such option was reduced from 50,000 to 25,000.

COMPENSATION OF DIRECTORS

The Company pays each of its directors who is not also an officer or
employee of the Company or any subsidiary an annual retainer of $10,000 and an
additional $1,000 for each meeting of the Board of Directors or a committee
thereof attended plus reimbursement for reasonable expenses in connection with
attending meetings. In addition, Mr. Mathis provides consulting services to HMG
for which he is separately compensated.

COMPENSATION COMMITTEE REPORT

THE MATERIAL IN THIS REPORT AND IN THE PERFORMANCE GRAPH IS NOT SOLICITING
MATERIAL, IS NOT DEEMED FILED WITH THE SEC AND IS NOT INCORPORATED BY REFERENCE
IN ANY FILING OF THE COMPANY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHETHER MADE BEFORE OR AFTER
THE DATE OF THIS PROXY STATEMENT AND IRRESPECTIVE OF ANY GENERAL INCORPORATION
LANGUAGE IN SUCH FILING.

The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors. For Fiscal 1996, the members
of the Compensation Committee were Mr. Jean,

16
<PAGE>
Mr. Morgan and Mr. Leslie. The Compensation Committee's functions include (a)
recommending to the Board of Directors of the Company policies and levels of
compensation with respect to compensation and benefits of the executive officers
of the Company and all significant employees of the Company and its subsidiaries
and (b) administering the Incentive Plan.

GENERAL. The primary objectives of the Company's executive compensation
policy are to provide a competitive compensation package related to corporate
performance which also encourages and recognizes individual contributions, to
reward performance by motivating executives to achieve optimum short term
operating results and to link the long term interests of the executives and the
Company's shareholders by providing equity based incentives. The Compensation
Committee believes that the Company's executive compensation program establishes
an appropriate balance between short and long term performance objectives.

From time to time, the Compensation Committee may engage independent
executive compensation firms for the purpose of evaluating and making
recommendations regarding the Company's executive compensation policy.

ANNUAL COMPENSATION. The Company has employment agreements with Messrs.
Fishman, Olesen and Kavanagh, executive officers of the Company, and had an
employment agreement with Mr. Merkle, the former President and Chief Executive
Officer of the Company. See "Employment Agreements" above. The annual
compensation of such executive officers of the Company, including Mr. Merkle,
the former President and Chief Executive Officer, was paid pursuant to these
agreements. Since the Reorganization, Mr. Smith's compensation has been
established to be consistent with Mr. Fishman's compensation.

INCENTIVE PLAN. Under the Incentive Plan, options to purchase shares of the
Common Stock may be granted to eligible participants. An optionee under such
options will not realize any value from a stock option grant unless the value of
Common Stock increases over the exercise price during the option period.

Grants made under the Incentive Plan, which are made from time to time at
the Compensation Committee's discretion, are intended to provided key executive
employees with long term incentives designed to enhance the profitable growth of
the Company, as well as the value of the Common Stock. The number of shares
which an executive may acquire pursuant to a grant under the Incentive Plan is
determined by the Compensation Committee on a discretionary basis, giving
consideration to the relative position, compensation level and responsibilities
of the executive, previous and expected contributions to the Company by the
executive and grants made to executives holding similar positions in comparable
companies. No options were granted to executive officers during Fiscal 1996.

SECTION 162(M) OF INTERNAL REVENUE CODE. In 1993, a new Section 162(m) was
added to the Internal Revenue Code. Subject to certain exceptions (including
exceptions relating to stock options and for "performance-based" compensation if
certain conditions are met), Section 162(m) prohibits the deduction of
compensation in excess of $1 million paid in any year beginning with 1994 by a
publicly-held corporation to any executive named in the Company's Summary
Compensation Table for the year. For Fiscal 1996, the compensation paid to each
of the Company's executive officers was well below $1 million, and the
Compensation Committee expects the same will be true for the current fiscal
year. Consequently, for the present the Compensation Committee has decided to
defer consideration of any compensation policies relating to Section 162(m).

COMPENSATION COMMITTEE
Werner H. Jean
Chairman
Seymour Leslie
John A. Morgan

17
<PAGE>
PERFORMANCE GRAPH

Set forth below is a line graph comparing the cumulative total shareholder
return on the Common Stock, based on the market price, with the cumulative total
return of companies on the Standard & Poor's 500 Stock Index and certain
companies identified below (the "Peer Group") since the date of the
Reorganization (January 11, 1995). Prior to such date, there was no established
trading market for the Common Stock. The comparisons in the graph are required
by the Securities and Exchange Commission and are not intended to forecast or be
indicative of future performance.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
Comparison of 18-Month Cumulative Total Return*
of the Company, S&P 500 and Peer Group**
RUSSELL 2000
THE COMPANY (Peer Group) S&P 500
<S> <C> <C> <C>
Jan-95 100.00 100.00 100.00
Apr-95 71.43 107.21 111.50
Jul-95 98.21 120.72 121.75
Oct-95 75.00 119.33 125.96
Jan-96 55.36 127.03 137.77
Apr-96 54.47 140.28 141.71
Jul-96 41.07 127.28 138.63
</TABLE>

- ------------------------

* Total return assumes $100 invested on the effective date of the
Reorganization, in Common Stock, the S&P 500 and the Peer Group. Dividends
were assumed reinvested in the S&P 500 and the Peer Group. The Company did
not pay dividends during the period.

** The Peer Group is the Russell 2000, an index of common stocks belonging to
corporations domiciled in the United States of America with market
capitalizations of approximately $162 million to $1 billion and an average
capitalization as of May 31, 1996 of $420.8 million. Management believes
that it cannot reasonably identify an industry or line-of-business index or
a peer group which represents the performance of companies engaged in a
similar business to that of the Company.

18
<PAGE>
CERTAIN TRANSACTIONS

LOANS FROM CERTAIN SHAREHOLDERS

On April 1, 1994, AFL distributed to its shareholders approximately
$18,000,000 consisting of its accumulated previously-taxed earnings through
December 31, 1993. Mr. Smith, Mrs. Smith and certain members of their family and
Mr. Merkle, a former executive officer of the Company, loaned to AFL an
aggregate of approximately $14,000,000 received by them, pursuant to unsecured
promissory notes (the "AFL Shareholder Notes"). The proceeds of these loans were
used to repay a portion of certain bank indebtedness incurred to fund the
distribution. The AFL Shareholder Notes had an original maturity date of January
1, 2000, bore interest at an annual rate of ten percent (10%), and were
subordinated to the payment of certain bank indebtedness of AFL. On January 24,
1995, the AFL Shareholder Notes were repaid by AFL with proceeds of new
financing provided by a lender, except for $4,000,000 of such AFL Shareholder
Notes issued to Mr. Smith (the "Smith Note"). On November 8, 1995, Mr. Smith
made an additional $2,000,000 subordinated loan to AFL (the "Additional Smith
Note") for working capital purposes. In connection with the merger of AFL with
and into Hauppauge Records as of November 1, 1996 (the "Hauppauge Merger") and
the restructuring of the AFL and Hauppauge Records' credit facilities into one
credit facility, each of the Smith Note and the Additional Smith Note (the
"Smith Notes") was amended and restated. The Smith Notes are each due January 1,
2001, are subordinated to the payment of the indebtedness to the senior lender,
and bear interest at 10% per annum. The payment of interest on the Smith Notes
is conditional upon Hauppauge Records achieving certain financial benchmarks. To
the extent that interest is not paid when due, it is due and payable on the
maturity date of the Smith Notes.

In connection with the Hauppauge Merger and the restructuring of the credit
facilities of AFL and Hauppauge Records, HMG prepaid certain indebtedness owed
to Venture Partners, the Company's principal shareholder, in the aggregate
principal amount of $3,500,000. In order to help finance such prepayment, Mr.
Smith, Mr. Fishman and Mr. Olesen loaned HMG $1,600,000, $200,000 and $200,000,
respectively, (the "HMG Loans"). The HMG Loans are evidenced by identical
promissory notes, except for the name of the payee and the principal amount (the
"HMG Notes"). The HMG Notes are subordinated to the payment of Hauppauge
Records' indebtedness to its senior lender, bear interest at the rate of 10% per
annum (payable quarterly), and are due December 31, 1998. The payment of
interest and principal on the HMG Notes is conditional upon Hauppauge Records
achieving certain financial benchmarks. To the extent that interest is not paid
when due, it is due and payable upon maturity of the HMG Notes. In all events,
principal and accrued but unpaid interest on the HMG Notes is due and payable
January 1, 2001.

HMG is indebted to certain shareholders of the Company, including Mr.
Fishman, Mr. Leslie, Mr. Olesen, Mr. Kavanagh and Venture Partners in the
aggregate principal amount currently outstanding of $844,664 (the "Series B
Debt"). The Series B Debt is evidenced by a series of identical promissory
notes, except for the name of the payee and the principal amount (the "Series B
Notes"). The Series B Notes are subordinated to the payment of Hauppauge
Records' indebtedness to its senior lender, bear interest at the rate of 11% per
annum, and are due January 1, 1999.

GUARANTEE OF CERTAIN OBLIGATIONS OF GREENFIELD LAND

The Company has unconditionally guaranteed certain obligations of Greenfield
Land Company ("Greenfield Land"), a Michigan co-partnership of which William H.
Smith (Co-chairman of the Board and a principal stockholder of the Company),
members of his family and Werner H. Jean (a Director of the Company) are
partners, under certain bank financing that was originally incurred by
Greenfield Land in connection with its acquisition and development of the
facilities in Illinois, Michigan and Tennessee that are leased to the Company.
As of November 1, 1996, the aggregate amount of debt of Greenfield Land which
the Company has guaranteed under the bank financing for Greenfield Land was
$1,421,709 and the

19
<PAGE>
largest amount which the Company had guaranteed since the beginning of Fiscal
1996 was $1,789,000. Greenfield Land has unconditionally guaranteed certain
obligations of the Company as part of such bank financing.

LEASES

The Company leases approximately 144,000 square feet of manufacturing,
warehouse and office space from Keelson Associates, a general partnership of
which George N. Fishman, Co-Chairman of the Company, is a partner, for a term
expiring November 1, 2015. Effective November 1, 1995, the annual rent at 15
Gilpin Avenue increased from $248,000 to $813,000 following completion of a
55,000 square foot expansion. Effective January 1, 1996, the rent at 15 Gilpin
Avenue increased by approximately $133,000 to $946,000 annually based on a fair
rental value adjustment and effective May 1, 1996, the rent at 15 Gilpin Avenue
increased by approximately $86,000 to $1,027,000 annually. The lease with
respect to 15 Gilpin Avenue provides for an annual rent increase based on a cost
of living adjustment on each November 1 during the term of the lease beginning
November 1, 1996. Future cumulative rentals under this agreement are
approximately $19,937,000 without taking into account any cost-of-living
adjustments. The Company believes that the terms of the lease with Keelson
Associates are at least as favorable to the Company as those it would receive
from an unaffiliated third party.

The Company leases various facilities from Greenfield Land. The office and
warehouse space for all locations leased from Greenfield Land aggregates
approximately 284,000 square feet. All leases between the Company and Greenfield
Land provide for annual cost of living adjustments. The 1996 annual rental
payments from the Company to Greenfield Land were approximately $1,260,000.
Future cumulative rentals due under existing leases with Greenfield Land for
1997 and thereafter are approximately $11,800,000. The Company believes that the
terms of the leases with Greenfield Land are at least as favorable to the
Company as those it would receive from an unaffiliated third party.

The Company subleases 16,600 square feet from William H. Smith, as Trustee
for William H. Smith Living Trust Agreement dated November 13, 1978, under two
Sublease Agreements, for property located at 630 Third Street, San Francisco,
California at an aggregate annual rental rate of approximately $314,000 for 1995
and $345,000 for 1996. Pursuant to these subleases, the Company is required to
make certain building improvements and to pay all the utilities, building
insurance and real estate taxes. Future cumulative rentals under these
agreements are approximately $895,000. The leased space is used for
manufacturing, warehouse and office space. The subleases expire in June 1999.
The Company believes that the terms of the subleases with Mr. Smith's trust are
at least as favorable to the Company as those it would receive from an
unaffiliated third party.

INDEMNIFICATION FOR ENVIRONMENTAL LIABILITIES

Pursuant to a Global Indemnification Agreement dated June 17, 1994, among
Greenfield Land, Mr. Smith, Mr. Smith's revocable living trust (collectively,
the "beneficiaries"), Hauppauge Records (as the successor to AFL), has agreed to
indemnify the beneficiaries against all liabilities, losses, costs and expenses
(including, without limitation, fines, penalties, judgments, and legal fees)
arising out of, or in anyway related to, (i) the presence, manufacturing or
processing of "hazardous substances" in, on or about the properties leased or
subleased to Hauppauge Records by the beneficiaries (where caused by Hauppauge
Records or a predecessor occupier of the premises), or (ii) the violation of any
"environmental law" by Hauppauge Records. For purposes of the foregoing:
"hazardous substances" are materials or substances regulated under any
environmental law (including, without limitation, chemical wastes, radioactive
materials, and petroleum products and byproducts); and "environmental laws" are
any laws, rules and regulations relating to the protection of human health,
safety, or the environment (including, without limitation, the Toxic Substances
Control Act, the Comprehensive Environment Response, Compensation and Liability
Act, and the Resource Conservation and Recovery Act of 1976). The beneficiaries
paid $25,000 to AFL for this indemnification.

20
<PAGE>
OTHER TRANSACTIONS

The Company agreed to pay the reasonable legal fees of Greenfield Land in
connection with the Hauppauge Merger, which amounted to $33,765.

H. Sean Mathis, a director of the Company, provides strategic advisory
services to HMG pursuant to a five-year consulting agreement expiring in January
2000. Pursuant to such agreement, Mr. Mathis received a fee of $96,000 payable
in 24 monthly installments ending in December 1996.

SELECTION OF INDEPENDENT ACCOUNTANT
(ITEM 2 ON THE PROXY CARD)

The Board of Directors has selected, subject to ratification by shareholders
at the 1997 Annual Meeting, Grant Thornton, LLP ("Grant Thornton"), an
independent accounting firm, to audit its financial statements for the fiscal
year ending July 31, 1997. Grant Thornton has served as independent accountant
for the Company since May 28, 1996 and served as independent accountant for HMG
for several years prior to the Company's acquisition of HMG in January 1995.
Representatives of Grant Thornton will have an opportunity to make a statement
at the 1997 Annual Meeting and will be available at the meeting to answer any
appropriate questions asked by shareholders.

The ratification of the selection of Grant Thornton as independent
accountants for the current fiscal year requires the affirmative vote by the
holders of a majority of the shares of Common Stock represented and entitled to
vote at the 1997 Annual Meeting.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
RATIFICATION OF THE SELECTION OF GRANT THORNTON, LLP AS THE COMPANY'S
INDEPENDENT ACCOUNTANTS.

SHAREHOLDERS' PROPOSALS FOR THE NEXT ANNUAL MEETING

A shareholder who desires to include a proposal in the proxy material
relating to the Annual Meeting of shareholders of the Company to be held in 1998
must submit the same in writing, so as to be received at the principal executive
office of the Company (to the attention of the Secretary) on or before August
27, 1997 for such proposal to be considered for inclusion in the proxy statement
for such Annual Meeting. Such proposal must also meet the other requirements of
the Securities and Exchange Commission relating to shareholder proposals
required to be included in the Company's proxy statement.

The Board of Directors will consider nominees recommended by shareholders
for election as a director at the Annual Meeting to be held in 1998, provided
that any such recommendation is submitted in writing by August 17, 1997, to the
Board of Directors, c/o the Secretary of the Company, 140 Fell Court, Hauppauge,
New York 11788, accompanied by a description of the proposed nominee's
qualifications and other relevant biographical information and the consent of
the proposed nominee to serve.

OTHER MATTERS

The Board of Directors does not know of any other business to be presented
for consideration at the 1997 Annual Meeting. If other matters properly come
before the 1997 Annual Meeting, the persons named in the accompanying form of
proxy intend to vote thereon in accordance with their best judgment.

The Company will bear the cost of the 1997 Annual Meeting and the cost of
soliciting proxies in the accompanying form, including the cost of mailing this
proxy statement. In addition to solicitation by mail, directors, officers and
regular employees of the Company (none of whom will be additionally compensated
for such services) may solicit proxies by telephone or otherwise. Arrangements
will be made with brokerage firms and other custodians, nominees and fiduciaries
to forward forms of proxy and proxy materials to their principals and the
Company will reimburse them for their reasonable expenses in connection
therewith.

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The Company will furnish, without charge, to each person whose proxy is
being solicited, upon written request, a copy of its Annual Report on Form 10-K
for the fiscal year ended July 31, 1996, as filed with the Securities and
Exchange Commission, including the financial statements, notes to the financial
statements and the financial schedules contained therein. Copies of any exhibits
thereto also will be furnished upon the payment of a reasonable duplicating
charge. Written requests for copies of any such materials should be directed to
Charles P. Kavanagh, Secretary, Allied Digital Technologies Corp., 140 Fell
Court, Hauppauge, New York 11788.

By Order of the Board of Directors,
CHARLES P. KAVANAGH
SECRETARY

Dated: January 17, 1997

22
<PAGE>

<S><C>

PROXY PROXY

ALLIED DIGITAL TECHNOLOGIES CORP.
PROXY - ANNUAL MEETING OF SHAREHOLDERS - FEBRUARY 13, 1997
(SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS)

The undersigned shareholder of Allied Digital Technologies Corp. (the "Company") hereby constitutes and appoints William
H. Smith, George Fishman and Charles P. Kavanagh, each of them, the attorneys and proxies of the undersigned, with full power of
substitution, to represent and to vote on behalf of the undersigned all of the shares of the Company's Comon Stock which the
undersigned is entitled to vote at the Annual Meeting of shareholders to be held at the New York Friars Club, 57 East 55th Street,
New York, New York on February 13, 1997 at 2:00 p.m. (the "1997 Annual Meeting"), and at any adjournments thereof, upon the
following proposals which are more fully described in the notice of, and proxy statement for, the 1997 Annual Meeting.

Said attorneys and proxies, or their substitutes (or if only one, that one) at said Annual Meeting, and any adjournments
thereof, may exercise all of the powers hereby given. Any proxy heretofore given is hereby revoked.

Receipt is acknowledged of the Notice of Annual Meeting of Shareholders, the Proxy Statement accompanying said Notice and the
Annual Report to Shareholders for the fiscal year ended July 31, 1996 (previously mailed).

(Continued and to be signed on reverse side.)

<PAGE>

/X/ Please mark your votes as in this example.

FOR all nominees listed below
(except as marked WITHHOLD AUTHORITY
to the contrary below) to vote for all nominees
(1) Election of / / / / EUGENE A. GARGARO, JR., SEYMOUR LESLIE, AND
Directors JOHN A. MORGAN (FOR A TERM EXPIRING AT THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD IN 2000)

(INSTRUCTION: TO WITHHOLD AUTHORITY
TO VOTE FOR ANY INDIVIDUAL NOMINEE,
WRITE THAT NOMINEE'S NAME IN THE SPACE
PROVIDED BELOW.)

- --------------------------------------

(2) Proposal to ratify the selection of / / FOR / / AGAINST / / ABSTAIN
Grant Thornton, LLP as the Company's
independent accountants for the
fiscal year ending July 31, 1997.
(3) In their discretion, upon such other
matters as properly may come before
the 1997 Annual Meeting.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF DIRECTORS AND EACH OF THE ABOVE PROPOSALS.

NOTE: Signature(s) of shareholder should correspond exactly with the
name(s) shown hereon. If shares are held jointly, both holders
should sign. Attorneys, executors, administrators, trustees,
guardians or others signing in a representative capacity should
give their full titles. Proxies executed in the name of a
corporation should be signed on behalf of the corporation by its
president or other authorized officer.

IN WITNESS WHEREOF, the undersigned has signed this proxy.

Signature(s) Dated:
------------------------------------------------------------------ ------------------------
NOTE: This proxy, properly filled in, dated and signed, should be returned promptly in the enclosed envelope.

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