<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, 1998.
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 13, 1998, 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, 1998
and July 31, 1997 2
Condensed Consolidated Statements of Earnings for the three-and
six-month periods ended January 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended January 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6 - 13
Item 2 - Management's Discussion and Analysis of Financial Condition 14 - 16
and Results of Operations
</TABLE>
PART II - OTHER INFORMATION 17
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
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
January 31, July 31,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,566,000 $ 1,193,000
Accounts receivable, net 26,012,000 25,516,000
Inventories 5,133,000 4,380,000
Prepaid expenses 1,105,000 786,000
Deferred income taxes 2,207,000 3,422,000
------------ ------------
Total current assets 37,023,000 35,297,000
PROPERTY AND EQUIPMENT, net 27,218,000 26,783,000
OTHER ASSETS
Excess of cost over fair value of net assets
acquired, net of accumulated amortization of
$8,598,000 and $7,204,000 at January 31,
1998 and July 31, 1997, respectively 42,657,000 43,064,000
Deferred charges and other 3,007,000 2,737,000
------------ ------------
45,664,000 45,801,000
------------ ------------
$109,905,000 $107,881,000
============ ============
</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 1998 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt and
capitalized lease obligations $ 12,727,000 $ 9,837,000
Current maturities of subordinated notes payable
to stockholders 2,881,000
Accounts payable 17,820,000 14,781,000
Accrued liabilities 6,783,000 6,735,000
Income taxes payable 475,000
------------- -------------
Total current liabilities 40,686,000 31,353,000
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, less current maturities 20,564,000 26,711,000
SUBORDINATED NOTES PAYABLE TO
STOCKHOLDERS, less current maturities 7,171,000 10,061,000
DEFERRED INCOME TAXES 1,112,000 1,112,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 1,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $0.01 par value; 25,000,000
shares authorized; 13,619,644 shares issued
and outstanding 136,000 136,000
Additional paid-in capital 44,892,000 44,742,000
Accumulated deficit (4,656,000) (6,234,000)
------------- -------------
40,372,000 38,644,000
------------- -------------
$ 109,905,000 $ 107,881,000
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
-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,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 39,554,000 $ 38,785,000 $ 88,592,000 $ 81,511,000
Cost of sales 30,992,000 31,191,000 69,820,000 65,318,000
------------ ------------ ------------ ------------
Gross profit 8,562,000 7,594,000 18,772,000 16,193,000
------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative 5,448,000 5,413,000 11,474,000 10,946,000
Amortization of excess of cost over fair
value of net assets acquired 648,000 595,000 1,294,000 1,240,000
------------ ------------ ------------ ------------
Total operating expenses 6,096,000 6,008,000 12,768,000 12,186,000
------------ ------------ ------------ ------------
Income from operations 2,466,000 1,586,000 6,004,000 4,007,000
------------ ------------ ------------ ------------
Other income (expense)
Interest expense (1,263,000) (1,182,000) (2,561,000) (2,456,000)
Other, net 90,000 36,000 85,000 79,000
------------ ------------ ------------ ------------
Total other expense (1,173,000) (1,146,000) (2,476,000) (2,377,000)
------------ ------------ ------------ ------------
Income before income taxes 1,293,000 440,000 3,528,000 1,630,000
Provision for income taxes 805,000 397,000 1,950,000 1,099,000
------------ ------------ ------------ ------------
NET INCOME $ 488,000 $ 43,000 $ 1,578,000 $ 531,000
============ ============ ============ ============
Earnings per common share -
basic and diluted $ 0.04 $ -- $ 0.12 $ 0.04
============ ============ ============ ============
Average common shares outstanding
Basic 13,619,644 13,619,644 13,619,644 13,619,644
============ ============ ============ ============
Diluted 13,693,632 13,619,644 13,672,604 13,619,644
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six-month periods ended January 31,
-----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows provided by operating activities $ 9,021,000 $ 1,583,000
Cash flows used in investing activities
Purchases of property and equipment (3,875,000) (577,000)
----------- -----------
Net cash used in investing activities (3,875,000) (577,000)
----------- -----------
Cash flows from financing activities
Net borrowings under revolving notes 1,306,000 8,477,000
Repayment of long-term debt (6,668,000) (9,043,000)
Borrowings of long-term debt 1,589,000 --
----------- -----------
Net cash used in financing activities (3,773,000) (566,000)
----------- -----------
Net increase in cash 1,373,000 440,000
Cash at beginning of period 1,193,000 831,000
----------- -----------
Cash at end of period $ 2,566,000 $ 1,271,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
January 31, 1998
(unaudited)
NOTE A - BASIS OF PRESENTATION
The condensed consolidated balance sheet as of January 31, 1998 and the
related condensed consolidated statements of earnings for the three- and
six-month periods ended January 31, 1998 and 1997 and the condensed
consolidated statements of cash flows for the six-month periods ended
January 31, 1998 and 1997 have been prepared by Allied Digital
Technologies Corp. ("Allied Digital"), including the accounts of its
wholly-owned subsidiaries, HMG Digital Technologies Corp. ("HMG") and
subsidiary, HRM Holdings Corp. ("Holdings"), and its wholly-owned
subsidiary, Allied Digital, Inc. (formerly known as Hauppauge Record
Manufacturing, Ltd.) ("Allied") (hereinafter referred to collectively as
the "Company") without audit. In the opinion of management, all
adjustments necessary to present fairly the financial position as of
January 31, 1998 and for all periods presented, consisting of normal
recurring adjustments, have been made. Results of operations for the
six-month period ended January 31, 1998 are not necessarily indicative of
the operating results expected for the full year.
The Company (i) provides videocassette duplication and fulfillment
services in addition to processing and duplicating commercial film and
offering post-production services, and (ii) replicates cassette tapes,
VHS videotapes and compact discs under production contracts with
companies primarily in the recorded music industry.
These statements have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations.
These condensed consolidated financial statements should be read in
conjunction with the annual audited consolidated financial statements and
the accompanying notes included in the Company's Form 10-K for the fiscal
year ended July 31, 1997.
Certain amounts for the six-month period ended January 31, 1997 have been
reclassified to conform to the current year presentation.
-6-
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE B - INVENTORIES
Inventories consist of the following classifications:
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 4,250,000 $ 3,416,000
Work-in-process 391,000 674,000
Finished goods 492,000 290,000
------------ ------------
$ 5,133,000 $ 4,380,000
============ ============
</TABLE>
NOTE C - LONG-TERM DEBT, SUBORDINATED NOTES PAYABLE
AND CAPITALIZED LEASE OBLIGATIONS
Long-term debt, subordinated notes payable and capitalized lease
obligations consist of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
------------ ------------
<S> <C> <C>
Loan and Security Agreement
Term loan $ 14,042,000 $ 18,782,000
Revolving loan 15,787,000 14,481,000
Additional term loan 1,020,000
Capital expenditure loan 1,456,000
Subordinated 10% Notes Payable to Stockholder 7,171,000 7,180,000
Additional Subordinated 10% Notes Payable to Stockholders 2,000,000 2,000,000
Subordinated 11% Series B Notes Payable to Stockholders 881,000 881,000
Note Payable to VCA 926,000 1,171,000
Capitalized lease obligations 995,000 995,000
Other 85,000 99,000
------------ ------------
43,343,000 46,609,000
Less current maturities (15,608,000) (9,837,000)
------------ ------------
$ 27,735,000 $ 36,772,000
============ ============
</TABLE>
-7-
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE C (continued)
Loan and Security Agreement
The October 30, 1996 loan and security agreement provided the Company
with borrowings of up to $48,910,169 under credit facilities consisting
of a (i) $25,410,169 term loan, (ii) $22,000,000 revolving loan facility
(combined with a $1,500,000 letter of credit facility) and (iii)
$1,500,000 additional loan. On August 19, 1997, the Company entered into
an amendment to the October 30, 1996 loan and security agreement with the
bank which provides the Company with a $3,450,000 capital expenditure
credit facility.
The loan and security agreement (as amended) is collateralized by
substantially all of the assets of the Company. The agreement contains
covenants which, among other matters, (1) require the Company to (i)
maintain increasing levels of net worth, (ii) maintain a minimum debt
service ratio and (iii) limit its annual capital expenditures, and (2)
place limitations on (i) additional indebtedness, encumbrances and
guarantees, (ii) consolidations, mergers or acquisitions, (iii)
investments or loans, (iv) disposal of property, (v) compensation to
officers and others, (vi) dividends and stock redemptions, (vii) issuance
of stock, and (viii) transactions with affiliates, all as defined in the
agreement. As of January 31, 1998, there is no equity available for the
payment of dividends to stockholders. The agreement also contains
provisions for fees payable to the bank upon prepayment and an increased
rate of interest during periods of default. The term of this agreement
extends to November 30, 2000.
a. Term Loan
The $25,410,169 term loan dated October 30, 1996 is payable in an
initial scheduled installment aggregating $1,695,462 on October 31,
1996 (of which $1,179,000 was repaid on November 8, 1996), 30
consecutive monthly installments of $548,054 thereafter through April
30, 1999 and a final installment on May 30, 1999 of $273,098 together
with additional prepayments of principal of $2,000,000 on October 31,
1997 and $5,000,000 on October 31, 1998. No prepayment fees result
from these scheduled prepayments. In addition, interest is payable
monthly at 1.5% over the bank's base rate (8.5% at January 31, 1998).
-8-
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE C (continued)
b. Revolving Loan
Under the revolving loan facility combined with a $1,500,000 letter
of credit facility, the Company may borrow up to a maximum of
$22,000,000 based upon a percentage of accounts receivable and
inventory, as defined, less the sum of the undrawn face amount of any
letters of credit outstanding. Interest is payable monthly at 1.25%
over the bank's base rate. In addition, the Company is required to
pay, on a monthly basis, an unused facility fee of 0.5% per annum. At
January 31, 1998, the Company had approximately $6,213,000 unused and
available under the revolving loan facility.
c. Additional Term Loan
The $1,500,000 additional loan dated October 30, 1996 was payable in
25 consecutive monthly installments commencing December 31, 1996 of
$60,000 each plus interest at 1.5% over the bank's base rate. In the
event the additional loan was repaid in full on or before December
31, 1997 and the loan and security agreement had not been terminated
on or before such date, the Company would not be required to pay a
$100,000 fee to the bank on December 31, 1998. On December 31, 1997,
the Company repaid in full the remaining outstanding balance of
$720,000 on this additional loan to the bank.
d. Capital Expenditure Credit Facility
The $3,450,000 capital expenditure credit facility provides the
Company with a credit line through July 31, 1998 to finance up to 80%
of the value of capital equipment purchases (as defined). Such loans
under the facility are payable based on a 36-month amortization
schedule with a final payment of the entire unpaid principal balance
on July 31, 2000. These loans bear interest at 1.5% over the bank's
base rate. In addition, the Company is required to pay a $103,500 fee
to the bank, payable at a rate of 3% of each advance with a final
payment for any unpaid amount of the fee payable on July 31, 1998.
Through January 31, 1998, the Company borrowed $1,589,000 from this
credit facility. As of January 31, 1998, $1,456,000 was outstanding
under this facility.
-9-
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE C (continued)
Subordinated 10% Notes Payable to Stockholder
The subordinated 10% notes payable to stockholder are uncollateralized
and payable in full on January 1, 2001. Interest accrues only on the
original principal sum of $6,000,000 and is payable quarterly at 10% per
annum (12% upon default); however, through January 31, 1998, certain
interest payments were postponed pursuant to the terms of the loan and
security agreement with the bank. Partial payment of such accrued and
unpaid interest becomes periodically payable to the stockholder and is
limited to a stipulated percentage as defined in the loan and security
agreement, provided no default or event of default has occurred. The
remaining portion of the unpaid interest subject to this payment
postponement becomes payable on January 1, 2001. In accordance with the
periodic interest payment limitation provisions of the loan and security
agreement, the Company paid on December 5, 1997 approximately $316,000 of
the accrued interest payable on these notes.
Additional Subordinated 10% Notes Payable to Stockholders
The additional subordinated 10% notes payable to stockholders are
uncollateralized and payable in full on December 31, 1998 with interest
payable quarterly; however, payment of principal and interest may be
extended in full or in part to January 1, 2001 to the extent not
permitted to be paid pursuant to the terms of the loan and security
agreement with the bank.
Subordinated 11% Series B Notes Payable to Stockholders
These uncollateralized notes mature on January 1, 1999 with interest
payable quarterly.
Note Payable to VCA
This uncollateralized note is payable in annual installments of $385,374
beginning January 1995 through January 2001, including interest at 12%.
-10-
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE C (continued)
Capitalized Lease Obligations
The Company leases certain equipment under agreements accounted for as
capital leases. The obligations for the equipment require the Company to
make monthly payments through December 2001 with implicit interest rates
from 5.27% to 19.48%.
The following is a summary of the aggregate annual maturities of
long-term debt, subordinated notes payable and capitalized lease
obligations as of January 31, 1998:
Twelve months ending January 31,
1999 $15,608,000
2000 3,643,000
2001 24,007,000
2002 85,000
-----------
$43,343,000
===========
NOTE D - EARNINGS PER SHARE
In the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share," which supersedes Accounting Principle Board Opinion No. 15. Under
SFAS No. 128, earnings per common share is computed by dividing net
income available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock. Prior-period amounts
have been restated, where appropriate, to conform to the requirements of
SFAS No. 128.
-11-
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE D (continued)
The number of shares used in the Company's basic and diluted earnings per
share computations are as follows:
<TABLE>
<CAPTION>
Three-month periods Six-month periods
ended January 31, ended January 31,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for basic earnings
per share 13,619,644 13,619,644 13,619,644 13,619,644
Common stock equivalents for
stock options and warrants 73,988 -- 52,960 --
---------- ---------- ---------- ----------
Weighted average common shares
outstanding for diluted earnings
per share 13,693,632 13,619,644 13,672,604 13,619,644
========== ========== ========== ==========
</TABLE>
NOTE E - ACQUISITION
On December 17, 1997, the Company acquired substantially all of the
assets and assumed certain liabilities of Denver Dubbing, Inc., a
videocassette duplicator. The purchase price was $873,000 payable in cash
of $170,000 and the assumption of net liabilities for the balance. The
purchase agreement contained a covenant not-to-compete for a period of
three years. Also, under the purchase agreement, the Company may pay
additional consideration of $270,000 in the event net sales for the
acquired company exceed certain predetermined amounts during 1998 and
1999. The Company accounted for the acquisition as a purchase and as
such, the fair values of the assets acquired and liabilities assumed have
been recorded on the date of the acquisition and the results of
operations are included in the Company's statement of earnings since the
acquisition date. The excess of consideration paid over the estimated
fair value of the net assets acquired in the amount of $773,000
-12-
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE E (continued)
has been recorded as excess of fair value over the cost of net assets
acquired and is being amortized on a straight-line basis over 15 years.
Pro forma historical results of operations are not presented, as such
results would not be materially different from the historical results of
the Company.
In connection with this acquisition, the Company entered into a two year
employment agreement with an officer of the acquired company with an
annual base salary of approximately $150,000.
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations - Three Month Period Ended January 31, 1998,
compared to Three Month Period Ended January 31, 1997.
Net sales for the three month period ended January 31, 1998 were $39.6
million, an increase of $0.8 million or 2% as compared to the three month
period ended January 31, 1997. Although sales dollars remained relatively
flat, the continuing favorable growth trends in sales to the Company's CD
Audio and CD ROM customers was offset by a decline in audiocassette sales
units of approximately 32% from the prior quarter ended January 31, 1997.
Gross profit for the three month period ended January 31, 1998 increased
$1.0 million to $8.6 million, or 22% of net sales from $7.6 million, or
20% of net sales for the three month period ended January 31, 1997. This
increase in gross profit was primarily attributable to the favorable
(declining) trend in material costs.
Operating expenses for the three month period ended January 31, 1998 were
$6.1 million, or 15% of net sales compared to $6.0 million, or 16% of net
sales for the three month period ended January 31, 1997.
Income from operations of $2.5 million for the three month period ended
January 31, 1998 compares to income from operations of $1.6 million for
the three month period ended January 31, 1997. This increase of $0.9
million primarily reflects the effect of lower material costs net of the
increased operating expenses described above.
Non-operating expenses increased to $1.2 million for the three month
period ended January 31, 1998 from $1.1 million for the three month
period ended January 31, 1997.
For the three month period ended January 31, 1998, the Company realized
income before taxes of $1.3 million, compared to income before taxes of
$0.4 million for the three month period ended January 31, 1997.
A provision for Federal, state and local income taxes of $0.8 million was
recognized for the three month period ended January 31, 1998, compared to
a tax provision of $0.4 million for the three month period ended January
31, 1997.
After recognition of applicable income taxes, Allied Digital recognized
net income for the three months ended January 31, 1998, of $0.5 million
compared to net income of $43,000 for the three months ended January 31,
1997 for the reasons noted above.
Results of Operations - Six Month Period Ended January 31, 1998, compared
to Six Month Period Ended January 31, 1997.
Net sales for the six month period ended January 31, 1998 were $88.6
million, an increase of $7.1 million or 9% as compared to the six month
period ended January 31, 1997. There were several factors contributing to
this increase. As the Company continues to penetrate its existing market,
there also continue to be additions of new customers to its expanding
customer base. The Company has entered into an exclusive CD manufacturing
agreement with a new customer, and is currently experiencing favorable
growth trends in sales to the Company's CD Audio and CD ROM customers.
This favorable trend was partially offset by a decline in sales to the
Company's audiocassette customers in the second quarter of fiscal 1998.
14
<PAGE>
Gross profit for the six month period ended January 31, 1998 increased
$2.6 million to $18.8 million, or 21% of net sales, from $16.2 million,
or 20% of net sales, for the six month period ended January 31, 1997.
Although the gross profit dollars increased due to increased sales, the
unpredictably strong demand for audiocassettes and the demand for CDs
exceeded the Company's internal capacity in the first quarter of fiscal
1998, which caused the Company to source additional capacity to outside
contractors at lower margins. Despite the impact of this outsourcing, the
gross profit percentage increased slightly primarily due to the favorable
(declining) trend in material costs as well as fixed costs being spread
over higher production volumes.
Operating expenses for the six month period ended January 31, 1998 were
$12.8 million or 14% of net sales compared to $12.2 million or 15% of net
sales for the six month period ended January 31, 1997. The $0.6 million
increase was primarily the result of additional costs incurred for
professional fees, bad debts and sales commissions and salaries.
Income from operations of $6.0 million for the six month period ended
January 31, 1998 compares to $4.0 million for the six month period ended
January 31, 1997.
Non-operating expenses increased to $2.5 million for the six month period
ended January 31, 1998 from $2.4 million for the six month period ended
January 31, 1997.
For the six month period ended January 31, 1998, Allied Digital realized
income before income taxes of $3.5 million compared to income before
income taxes of $1.6 million for the six month period ended January 31,
1997 for the reasons noted above.
A provision for Federal, state and local income taxes of $2.0 million was
recognized for the six months ended January 31, 1998, compared to a
provision of $1.1 million for the six months ended January 31, 1997.
After recognition of applicable income taxes, Allied Digital recognized
net income for the six months ended January 31, 1998 of $1.6 million,
compared to income of $0.5 million for the six months ended January 31,
1997.
Liquidity and Capital Resources
The Company's senior loan and credit facilities are with
American National Bank and Trust Company of Chicago ("ANB"). The October
30, 1996 ANB loan agreement provides for (i) a revolving loan (the "ANB
Revolving Loan") of $22 million (subject to certain borrowing base
limitations based on Allied'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. On August 19, 1997, the
Company entered into an amendment to the Loan and Security Agreement
dated October 30, 1996 with ANB which provides the Company with a $3.5
million capital expenditure credit facility (the "ANB CAPEX Loans"). The
ANB Revolving Loan bears interest at the base rate published by ANB plus
1.25%. The ANB Term Loan, the ANB Additional Loan and the ANB CAPEX Loans
bear interest at the base rate published by ANB plus 1.50%. At January
31, 1998, the ANB base rate was 8.50%. The Revolving Facility carries an
unused commitment fee of 0.50%. The obligations of Allied under the ANB
Loan Agreement are secured by a lien on substantially all of Allied's
assets.
At January 31, 1998, the aggregate amount of total indebtedness
outstanding of $43.3 million was as follows: (i) the ANB Term Loan, $14.0
million, (ii) the ANB Revolving Loan, $15.8 million, (iii) the ANB CAPEX
Loans, $1.5 million, (iv) the 10% Notes Payable to Stockholder, $7.2
million, (v) the Additional Subordinated 10% Notes payable to
Stockholders, $2.0 million, (vi) the 11% Series B Notes Payable to
Stockholders, $0.9 million, and (vii) the Note Payable to VCA (related to
the VCA acquisition), $0.9 million, (ix) capitalized lease obligations,
$1.0 million.
15
<PAGE>
The ANB Term Loan is payable in an initial installment
aggregating $1,695,462 on October 31, 1996 (of which $1,179,000 was
repaid on November 8, 1996), 30 consecutive monthly installments of
$548,054 thereafter through April 30, 1999 and a final installment 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 $1,500,000 ANB Additional Loan ("Additional Loan") dated
October 30, 1996 was payable in 25 consecutive monthly installments
commencing December 31, 1996 of $60,000 each plus interest at 1.5% over
ANB's base rate. In the event the Additional Loan was repaid in full on or
before December 31, 1997 and the loan and security agreement had not been
terminated on or before such date, the Company would not be required to pay a
$100,000 fee payable to ANB on December 31, 1998. On December 31, 1997, the
Company repaid in full the remaining outstanding balance of $720,000 on the
Additional Loan to ANB.
The ANB capital expenditure credit facility provides the Company
with a credit line through July 31, 1998 to finance up to 80% of the
value of capital equipment purchases (as defined). The ANB CAPEX Loans
are payable based on a 36-month amortization schedule with a final
payment of the entire unpaid principal balance on July 31, 2000. In
addition, the Company is required to pay a $103,500 fee to ANB, payable
at a rate of 3% of each advance with a final payment for any unpaid
amount of the fee payable on July 31, 1998. Through January 31, 1998, the
Company borrowed $1,589,000 from this credit facility. As of January 31,
1998, $1,456,000 was outstanding under this capital expenditure credit
facility.
The 10% Notes Payable to Stockholder (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.
Through January 31, 1998, certain interest payments were postponed
pursuant to the terms of the loan and security agreement with ANB.
Partial payment of such accrued and unpaid interest is periodically
payable to the stockholder and is limited to a stipulated percentage as
defined in the loan and security agreement, provided no default or event
of default occurred. The remaining portion of the unpaid interest subject
to this payment postponement becomes payable on January 1, 2001. In
accordance with the periodic interest payment limitation provisions of
the loan and security agreement, the Company paid on December 5, 1997
approximately $316,000 of the accrued interest payable on these notes.
Payment of these notes is subordinated to the payment of the obligations
under the ANB Loan Agreement. The notes mature on January 1, 2001.
The Additional Subordinated 10% Notes Payable to Stockholders
are uncollateralized and payable in full on December 31, 1998 with
interest payable quarterly; however, payment of principal and interest
may be extended in full or in part to January 1, 2001 to the extent not
permitted to be paid pursuant to the terms of the ANB loan and security
agreement.
The Series B Notes Payable to Stockholders are unsecured
obligations which bear interest at 11% per annum, payable quarterly.
Payment of these notes is subordinated to the payment of the obligations
under the ANB Loan. The note matures on January 1, 1999.
The note payable to VCA is unsecured and is payable in annual
installments beginning January 1995 through January 2001, including
annual interest of 12%.
The capitalized lease obligations represent certain equipment
leased by the Company under agreements accounted for as capital leases.
The obligations for the equipment require the Company to make monthly
payments through December 2001 with implicit interest rates from 5.27% to
19.48%.
Proceeds from the ordinary operations of Allied are applied to
reduce the principal amount of borrowings 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.
16
<PAGE>
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. The Company's current cash requirements,
including working capital and capital expenditure requirements, are
funded from the operations and the proceeds of borrowings by Allied under
the ANB Loan Agreement.
As of January 31, 1998, the Company had a net working capital
deficiency of $3.7 million and $6.2 million unused and available under
the ANB Revolving Loan. Net cash provided by operating activities during
the six months ended January 31, 1998 was $9.0 million. Net cash used in
investing activities totaled $3.9 million, of which substantially all was
used for the purchase of replication equipment and leasehold
improvements. The net working capital deficiency is primarily a result of
the current classification of the ANB term loan $5,000,000 prepayment due
on October 31, 1998. One source of eliminating such deficit might be the
use of the $6.2 million available under the ANB Revolving Loan.
The Company currently expects that capital expenditures will be
divided primarily between maintenance capital expenditures and capital
projects. Maintenance capital expenditures include those required to
maintain production performance, while capital projects relate primarily
to extending the life of existing equipment, increasing capacity, and
decreasing production costs. The Company incurs approximately $1.5
million per year in cost of sales for maintenance and repairs.
The Company has not paid any dividends on the Company's Common
Stock since its inception. The payment of dividends, if any, will be
contingent upon the Company's revenues and earnings, if any, capital
requirements and general financial condition. It is the current policy of
the Board of the Company, in view of the Company's contemplated financial
requirements, to retain all earnings, if any, for use in the Company's
business operation.
The Company 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 Allied may make to the
Company and prohibit the Company from using any such distributions to pay
dividends to its stockholders.
The year 2000 data management issue, which has received wide
spread publicity, is not expected to have a material impact on the
Company.
17
<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.
18
<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, 1998 By: /s/ George N. Fishman
--------------------------------------
George N. Fishman
Co-Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: March 17, 1998 By: /s/ Charles A. Mantione
--------------------------------------
Charles A. Mantione
Vice President - Finance
(Principal Financial Officer and Principal
Accounting Officer)
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<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
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