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FORM 10-K/A (Amendement #1)
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended July 31, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
Commission file number 1-13580
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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)
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Registrant's telephone number, including area code (516) 232-2323
Securities registered pursuant to Section 12(b) of the Act:
Name of exchange on
Title of each class which registered
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Common Stock American Stock Exchange
Class A Redeemable Common Stock Purchase Warrants American Stock Exchange
Class B Redeemable Common Stock Purchase Warrants American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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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 _ _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of October 21, 1997, 13,619,644 shares of the registrant's common stock were
outstanding and the aggregate market value of common stock held by
non-affiliates of the registrant, computed by reference to the closing price for
the registrant's common stock on the American Stock Exchange at that date was
$12,266,824.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
Item 1. Business
Allied Digital Technologies Corp., a Delaware corporation (the
"Company"), is engaged primarily in the duplication and replication of
multimedia software products. Through its subsidiary, Allied Digital, Inc.
(formerly known as Hauppauge Records Manufacturing, Ltd.), a New York
corporation ("Allied"), the Company duplicates and replicates film and video
products for the corporate communications, educational, religious and special
interest video markets, as well as analog audiocassettes for the recorded music
and spoken word industries and compact discs with a primary focus on the
recorded music industry. The Company's principal executive office is located at
140 Fell Court, Hauppauge, New York 11788 and its telephone number is (516)
232-2323.
Corporate Organization
The Company was incorporated in 1994 to acquire Allied Film Laboratory,
Inc., a Michigan corporation engaged in the duplication of multimedia software
products since 1960 ("AFL"), and HMG Digital Technologies Corp. ("HMG"), a
Delaware corporation of which Allied is a wholly-owned subsidiary. See "-The
Reorganization". As of November 1, 1996, AFL was merged with and into Allied
(the "Allied Merger") and, commencing as of that date, all operations of the
Company are conducted through Allied. References in this Form 10-K to the
Company as of any date refer to the Company and its subsidiaries on a
consolidated basis.
The portion of the Company's business previously conducted by AFL
consists of duplication of various film and video products for the corporate
communications and educational, religious and special interest (e.g.,
children's, exercise, travel) video markets. The portion of the Company's
business conducted by Allied prior to and following the Allied Merger consists
of the duplication and replication of analog audiocassettes, videocassettes and
compact discs, with a primary focus on the recorded music industry. As part of
its business, the Company also provides various related services, such as dealer
and consumer order fulfillment, film-to-tape and tape-to-film transfers, video
editing and videocassette duplication in all popular formats.
The Reorganization. On January 12, 1995, the Company acquired all of
the outstanding capital stock of each of AFL and HMG. As a result, each of HMG,
HRM Holdings Corp., a wholly-owned subsidiary of HMG, Allied and AFL became a
direct or indirect wholly-owned subsidiary of the Company (the
"Reorganization").
The Allied Merger. Pursuant to the Allied Merger, which was consummated
on November 1, 1996, AFL merged with and into Allied and each issued share of
AFL was converted into one share of Allied. In connection with the Allied
Merger, the credit facility between AFL and its senior lender, American National
Bank & Trust Company of Chicago ("ANB"), was terminated and the credit facility
between Allied and ANB was restructured in numerous material respects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation".
Forward-Looking Statements
Certain statements contained in this Item 1 and elsewhere in this
Annual Report regarding matters that are not historical facts, such as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities, the Company's
sales and marketing program and similar matters, may be deemed to be
"forward-looking" statements under the Private Securities Litigation Reform Act
of 1995, which provides a safe harbor for making such statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business include competition, technological change, dependence on significant
customers and the recorded music industry, future capital requirements, reliance
on key personnel and competitive pricing pressures.
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Multimedia Software Industry
General. The multimedia software industry is fragmented and seasonal.
Although the types and sizes of the businesses in the industry vary greatly, the
industry is generally categorized into specific sub-markets, including
theatrical (i.e., primarily movies), prerecorded music, spoken word, foreign
language, corporate communications, premium promotional, religious, educational,
instructional "How To" and special interest.
Demand for Primary Products and Services.
Compact Discs - Audio. Consumer demand for audio compact discs ("CDs")
has been increasing steadily since their introduction to the marketplace in the
mid-1980's. Industry analysts estimate that the current U.S. installed CD-audio
player base is approximately 67%, up from approximately 60% last year. Based on
information supplied by the Recording Industry Association of America ("RIAA"),
total shipments in the United States net of returns ("Shipments") of audio CDs
increased by 10% between 1995 and 1996 from 745 million units to approximately
822 million units.
CD-ROM. CD-ROM drives were introduced to the marketplace in 1991.
Industry analysts estimate that in 1993, the year that CDs surpassed
audiocassettes in unit volume, U.S. household penetration of CD-ROM drives was
approximately 2.5 million or 8% of the 29 million home computers in the United
States. By the end of 1997, industry experts expect the number of CD-ROM drives
to grow to 36 million out of approximately 42 million United States home
computers, or 86%.
Various industry sources estimate that Shipments of CD-ROM software
products were approximately 338 million units in 1996, up from approximately 280
million units in 1995. These products were concentrated in three major
categories: educational, entertainment and games. The Company believes there is
a growing use for CD-ROM products in the corporate communications and
premium/promotional market sectors, and this belief is reflected in the
Company's sales and marketing plans for the fiscal year ending July 31, 1998
("Fiscal 1998"). See "Sales and Marketing" below.
Audiocassettes. Audiocassettes were the music market's most popular
audio medium until 1993 when they were surpassed in unit volume by CDs. Industry
analysts predict that because of the high existing penetration of the
audiocassette player in United States households and automobiles, Shipments of
audiocassettes in 1997 will remain stable as compared with 1996 with only a mild
decline over the next several years, despite the increasing demand for CDs.
According to the RIAA, aggregate Shipments of pre-recorded music cassettes
declined by 17% in 1996 versus 1995. This decline was due in large part to the
continuing growth in the CD-audio configuration as well as an overall slowing of
growth in the pre-recorded music industry. This decline has been offset in part
by the dramatic growth in the spoken word audiocassette business.
Videocassettes. Veronis, Suhler and Associates, a market analyst firm
specializing in media ("VS&A"), estimates that over 78% of households in the
United States own at least one videocassette recorder ("VCR"), with many
households owning multiple VCRs. According to VS&A and the RIAA, although
theatrical video software comprises over 40% of video software sales, there is
significant growth being demonstrated in the corporate communications,
premium/promotional and special interest sub-markets.
There are two primary videocassette formats: standard play and extended
play. Standard play is used for virtually all movies, music videos and certain
other specialty applications. Extended play is used for many applications in
non-theatrical and non-music sub-markets where the superior playback quality of
standard play is not required. In these non-critical applications, the extended
play format is desirable because it uses one third of the tape required for
standard play and can utilize high speed duplication technology. These
characteristics make extended play less costly to produce than standard play.
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Sales and Marketing
The Company markets its products and services nationally through the
use of its own internal staff of approximately 55 sales and marketing employees
located throughout the United States in key markets. In March 1997, the Company
opened a regional sales office in Los Angeles, California to coordinate sales
efforts in the western region of the United States. This office is staffed with
sales personnel specializing in the theatrical home video, music and CD-ROM
markets and complements the national sales and marketing office in New York
City. The Company also operates sales facilities in Landover (MD), Orlando, Elk
Grove (IL), Detroit, Dallas, Houston, Nashville and San Francisco. Remote sales
coverage exists in Philadelphia, Atlanta, Miami, Austin, Seattle, Boston,
Charlotte, Copley (OH) and Tampa.
Approximately 60% of the Company's business is repeat business
resulting from ongoing relationships with its customers. The remainder of the
Company's business comes from new customers, one time orders and occasional
orders from other industry duplicators and replicators.
The Company's manufacturing facilities are geographically distributed
throughout the United States. See "Manufacturing". The Company believes that
this geographic distribution of manufacturing facilities enhances its sales and
marketing efforts by giving the Company a regional and local presence, which
facilitates direct contact with customers.
Due to the highly competitive nature of the Company's core
duplication/replication business, the Company has developed additional
"value-added" services in an effort to gain a competitive advantage over its
competitors. These services include graphic design and special packaging,
component security and inventory management, retail order distribution and
direct-to-customer fulfillment.
In addition to the core duplication/replication and value-added
services described above, the Company also offers motion picture film
processing, film-to-tape transfer, video post-production services and recordable
laser video disc services.
The following sets forth the Company's market share and sales
performance for each of its primary product categories:
CD and CD-ROM. The Company replicates CDs and CD-ROMs (collectively,
"CD Products") for which its most significant customers are the domestic music
recording companies. For the fiscal year ended July 31, 1997 ("Fiscal 1997"),
the Company produced approximately 41,800,000 units of CD Products which
generated revenues of approximately $31,905,000, or approximately 20.0% of the
Company's sales revenues. These units consisted of approximately 10,500,000
CD-ROM units and approximately 31,300,000 CD units, which generated revenues of
approximately $7,240,000 and $24,665,000, respectively. Based upon these results
and externally generated market data, the Company estimates that, on a
consolidated basis, it currently holds a 3% market share of all domestic
production of CDs. The Company believes that there is significant growth
opportunity in CD Products, especially as CD-ROM drive penetration into American
households increases and new applications such as DVD (Digital Versatile Disc),
a new high-density compact disc format which allows for significantly greater
data storage than existing disc formats, are introduced to the marketplace.
Audiocassettes. The Company duplicates audiocassettes, for which its
most significant customers are the domestic music recording companies. In Fiscal
1997, the Company produced approximately 56,000,000 audiocassette units
(consisting of approximately 43,000,000 music audiocassette units and 13,000,000
spoken word audiocassette units), which generated revenues of approximately
$27,520,000, or approximately 17.3% of the Company's aggregate revenues. Based
on internal sales statistics and externally-generated market data, the Company
believes it has a music audiocassette market share of approximately 12%, the
largest of any independent replicator. The Company believes that despite the
long-term trend toward replacing audiocassettes with CDs, there remain
opportunities for growth in this market, especially in the non-music and special
interest sectors.
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In Fiscal 1997, the Company's spoken word audiocassettes production
included books-on-tape and corporate communications, as well as products for the
foreign language and religious submarkets. The Company's most significant spoken
word audiocassette customers in Fiscal 1997 were domestic publishing companies.
Reliable external market data is not readily available for the spoken
word audiocassette submarket. Consequently, the Company's market share is
difficult to estimate. The Company believes there is significant growth
opportunity in spoken word audiocassettes because of the deep penetration of the
audiocassette player and the relatively low cost of duplicating audiocassettes.
Videocassettes. Based on a combination of industry data and data
generated by its own management, the Company believes it is one of the two
largest duplicators of music videos in the United States with an estimated
current market share of approximately 25%, and the largest independent
duplicator of videocassettes for non-theatrical, non-music video applications,
which include corporate communications, premium/promotional, educational,
instructional "How-To", special interest and religious. In total, the Company
believes its current share of the overall videocassette duplication market in
the United States is approximately 7%. This belief is based upon the fact that
in Fiscal 1997, the Company's domestic sales of videocassettes were
approximately 56 million units compared to approximately 800 million total
domestic unit sales reported by the entire industry for calendar 1996. In Fiscal
1997, the Company had total sales of videocassettes of approximately
$97,080,000, which represented approximately 61.0% of the Company's total
revenues. The Company believes that there is significant growth opportunity in
videocassettes because of the deep penetration of the videocassette player into
American households and the extensive use of videocassettes for entertainment
and information software.
Other Services. Motion picture film processing, film-to-tape transfer,
video pre and post-production and recordable laser disc services represented
approximately 1.7% of the Company's sales revenues during Fiscal 1997.
Marketing Strategy. The Company has allocated approximately $700,000 of
its operating budget for Fiscal 1998 to support an aggressive and diversified
series of marketing initiatives designed to broaden the Company's customer base.
The Company's sales and marketing program is targeting the counter-seasonal
consumption patterns typical of industry and business. The purpose of this
strategy is to build counter-seasonal flow in the Company's manufacturing
facilities, and to take advantage of the increase in demand by many industries
and businesses for multimedia products for all types of corporate applications,
including internal communications, training, marketing and sales. The
initiatives include mailings to companies in specific industry segments
identified by a variety of standard industry codes (SICs) within which the
Company's business has been historically successful, and promoting the use of
video and CD-ROM applications for direct-mail marketing.
Although the Company will continue to focus on the entertainment
industry, the Company believes that the pre-recorded music industry may offer
diminishing returns to the Company in the future as the industry matures due to
(i) new technologies developing for delivery of pre-recorded music media to
consumers and (ii) proprietary manufacturing capabilities of the major recording
companies. For this reason, many of the Company's new sales and marketing plans
involve the non-entertainment sector, where the Company believes there are many
opportunities to develop new, profitable and continuing relationships. There has
been a growing use of CD-ROM drives by the corporate community due to the
transition of many consumers from video media to CD-ROM. CD-ROM offers consumers
a cheaper and faster way to communicate with employees, shareholders and outside
consumers. The Company believes that the development of the corporate CD-ROM
market will provide many opportunities to develop new business relationships.
The Company has installed new sophisticated sales lead management
software, which has significantly improved tracking and management of sales
leads and has made possible the distribution of such leads for prompt review and
follow-up to the appropriate sales facility.
The Company has expended resources and capital of approximately $75,000
during Fiscal 1996, and approximately $100,000 during Fiscal 1997, for
development of a prototype technology to be marketed under the name "CD Online."
The product is designed to link the multimedia capability and capacity of a
CD-Rom disc with real-time communications capability of network dial-up services
to yield a versatile and interactive medium for consumer products companies,
corporate communications and other commercial applications. In addition to its
involvement in the authoring process for the CD-Rom's content, the Company
proposes to manufacture the disc for customers and supply, via joint venture or
other relationship, the network service required to support the real-time
communications component of the technology. The Company anticipates that
marketing and promotion of CD-Online will commence in mid-Fiscal 1998 pending
its integration into the Company's overall strategic focus on value added
services.
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Significant Customers. The Company has more than 2,000 accounts in its
current customer base. Approximately 50% of the Company's sales come from
approximately 40 customers. During Fiscal 1997, PolyGram Group Distribution,
Inc. ("PGD") and Bertelsmann Music Group, Inc. ("BMG") each accounted for more
than 10% of the Company's net sales.
Most of the Company's customers operate without contractual obligations
except for commitments to purchase a certain percentage of their needs from the
Company. The commitments typically last one year or less. However, there are no
adverse consequences to customers with this type of commitment who do not
ultimately place orders with the Company or whose orders do not reach the
committed percentage.
In June 1995, the Company entered into a five year agreement with
Anchor Bay Entertainment ("Anchor Bay") to provide videocassette duplication and
order fulfillment services. Under this agreement, as modified in September 1997,
the Company is Anchor Bay's exclusive videocassette duplicator. While it is not
assured, it is expected that this contract will provide significant annual
revenues for the Company over its term without material impact on liquidity or
capital expenditures.
In September 1997, the Company entered into a three year agreement with
Sofsource, Inc. ("Sofsource") to provide CD replication and order fulfillment
services. Under this agreement, the Company is Sofsource's exclusive duplicator.
While it is not assured, it is expected that this contract will provide
significant annual revenues for the Company over its term without material
impact on liquidity or capital expenditures.
Seasonality. Although demand for the Company's products exists
throughout the year, there is an increase in demand from August through November
due to the extra requirements of customers for the holiday selling season,
particularly sales of theatrical videocassettes and pre-recorded musical CDs and
audiocassettes. During Fiscal 1996 and Fiscal 1997, approximately 38% of the
Company's revenues were generated during these months.
Backlog. As of July 31, 1997 and 1996, the Company had open orders on a
consolidated basis of approximately $3.3 million and $1.9 million, respectively.
As of September 30, 1997, the Company had open orders on a consolidated basis of
approximately $6.4 million. The Company expects that the open orders as of
September 30, 1997 will be filled within a 60 day period.
Typically, the Company's customers demand turnaround times (the time
from which a duplicating/replicating order is received until that order is
shipped) of seven days or less. Because of this characteristic of the industry,
the Company does not believe that the size of the backlog at any given time in
and of itself is an effective indication of its ongoing revenues going forward.
Manufacturing
General. The Company's manufacturing facilities are geographically
distributed throughout the United States so that high volume manufacturing can
be accomplished in three facilities: Hauppauge (NY) (videocassettes,
audiocassettes and CDs), Clinton (TN) (videocassettes) and Elk Grove (IL)
(videocassettes). The Company has six other facilities for smaller volume video
manufacturing: Landover (MD), Orlando, Detroit and San Francisco, as well as
Dallas and Houston where film, in addition to video, is duplicated.
CD Products. The Company's production of CD Products begins with
pre-mastering and mastering in controlled "clean room" environments that are
designed to eliminate airborne particles from the manufacturing process. Using
lasers and computer-based photo resist technology, the Company creates exact
digital replicas of the customer's original disc. These glass replicas, or
"masters," are used in the replication process to manufacture duplicates through
an injection molding process using high grade, optical quality polycarbonate.
The polycarbonate is pressed against a metal stamper to create a replica of the
CD Master at a rate of approximately one every four seconds. The clear
polycarbonate disc containing all of the data is then covered with a metallic
coating to provide for reflection of the
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reading laser beam in the CD player. A thin layer of lacquer is applied over the
metal to protect it and to serve as a base for printing on the disc. The
finished CD Products are then checked to ensure they conform to strict standards
established by the Company and the industry. The finished CD Products are then
released to the packaging department where they are inserted into sleeves or
boxes and processed through high speed shrink-wrapping machines for distribution
to the Company's customers.
As a result of the recent expansion of the Company's Hauppauge, New
York facility and the installation at such facility of production and
multi-media packaging equipment, the Company has increased its maximum annual
capacity of CD Products to approximately 62 million units in Fiscal 1997 from 54
million units per year capacity in Fiscal 1996.
Audiocassettes. The manufacturing process for audiocassettes utilizes
machines that duplicate a tape 80 times faster than normal listening speed.
Master transports are used to download master recordings through the use of
electronic signals to duplicating machines, which allow multiple copies of the
same recording to be duplicated simultaneously. At various points in the
manufacturing process, the tape goes through both a statistical quality control
procedure, to ensure that it meets the technical standards established by RIAA,
and the Company's quality control procedure, which includes a random sampling of
audio levels, physical characteristics, program content, signals and other
characteristics of the tape. The finished audiocassette products are then
released to the packaging department where they are inserted into sleeves or
boxes and processed through high speed shrink-wrapping machines for distribution
to the Company's customers.
The Company's audiocassette plant production capacity is between
250,000 and 275,000 audio tapes per 24 hour day, depending upon the length of
the tapes. The expansion of the Company's Hauppauge, New York manufacturing
facility in 1995 provided the Company with the capability for multimedia
packaging for audiobook and other spoken word audiocassettes. When necessary,
the Company is able to deliver finished product to its customers approximately
48 to 72 hours after receipt of the sales order.
Videocassettes. The manufacturing process for videocassettes generally
utilizes duplicating machines that copy from a master in "real time" speed,
i.e., the regular speed of the videocassette being duplicated. In this process,
high speed tape winders are used to wind blank tape loaded to specific program
lengths into video shells. The video shells are then loaded into the duplicating
machines which receive the program being copied from a master transport. In
addition, the Company utilizes high speed machines, which allow it to duplicate
a master 150 times faster than in "real time" speed. Real time duplicating
machines are used to duplicate videocassettes in standard play mode. High speed
duplicating machines are capable of duplicating videocassettes in either the
extended play mode or the standard play mode. The extended play format utilizes
less tape than regular speed machines require for the same program content.
The entire video duplicating and winding process takes place in an
environment that is designed to eliminate airborne particles from the
duplicating process. These areas are air conditioned and pressurized to filter
out such particles. The Company believes that its use of these areas prolongs
the head life on videocassette recorders and results in a higher quality
product.
Once a videocassette is loaded with tape and duplicated, the finished
product is checked to ensure that it conforms to strict audio and visual
standards established by the Company and the industry. The videocassettes are
then released to the packaging department where they are labeled, inserted into
sleeves or boxes and processed through high speed shrink-wrapping machines for
distribution to the Company's customers.
In Fiscal 1997, the Company increased the production capacity of its
facilities in Clinton, Tennessee and Hauppauge, New York by a combined nine
million annual videocassette unit capacity. The Company's total videocassette
capacity is the equivalent of approximately 67 million 90-minute programs
annually. When necessary, the Company is able to deliver finished product to its
customers approximately 24 to 48 hours after receipt of the sales order.
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Raw Materials; Supplies. Although the Company's practice is to seek
cost savings and enhanced quality by purchasing from a limited number of
suppliers, all raw materials and components necessary to manufacture CD Products
are readily available from several sources of supply at competitive prices.
Blank audiocassettes, videocassettes, cartridges, magnetic tape and
other component parts utilized by the Company in the duplication/replication
process generally are readily available in the marketplace at prices that are
generally stable. The Company purchases its components from a variety of
manufacturers, most of which are located in China, South Korea, Mexico and the
United States. The Company does not believe the loss of any one of its current
suppliers would have a material adverse effect on its business because
alternative sources of supply are generally readily available at competitive
prices. However, a significant change in the Company's ability to obtain
components at comparable prices from suppliers located in China, South Korea,
Mexico and the United States, whether through the imposition of tariffs or other
trade barriers or from any foreign or U.S. supplier for any other reason, could
have a material adverse effect on the Company. The Company does not have long
term contracts with any such suppliers. The Company's customers generally supply
the printed components used in the packaging of the videocassettes.
Licenses
CD Products. The Company, like most other CD Product manufacturers,
uses patented technology primarily under nonexclusive licenses from the holders
of patents which generally provide for the payment of royalties based upon the
number of CD Products sold. For Fiscal 1997, fees for these licenses of
approximately $2,261,000 were charged against earnings, related primarily to the
licenses with U.S. Philips Corporation and Discovision Associates.
Audiocassettes. The Company does not require any licenses for the
duplication of audiocassettes.
Videocassettes. The industry does not have established quality
standards for the duplication of videocassettes, although the Victor Company of
Japan, Ltd. ("JVC"), which owns the "VHS" logo, has established standards for
the physical characteristics of the videocassette. Compliance with the JVC
standards ensures that the videocassette will be compatible with any VHS
machine. Duplicators whose product conforms to the JVC standards are permitted
to apply the "VHS" logo to such product and pay JVC a license fee for such
privilege. The Company ensures that all of its video product conforms to the JVC
standards and pays JVC a license fee for the privilege of applying the "VHS"
logo to its video product. For Fiscal 1997, fees for this license of
approximately $523,000 were charged against earnings.
Since 1986, the Company has had a license with Macrovision Corporation
to encode videocassettes with anti-piracy protection. The license is for a
one-year term, renewable annually by agreement of both parties. The Company pays
a license fee to Macrovision Corporation equal to a portion of the sublicense
fees received by the Company from its customers. For Fiscal 1997, the license
fees paid by the Company to Macrovision under this arrangement were
approximately $240,000, all of which was billed to the Company's customers.
Competition
The Company's core business of replication/duplication is highly
competitive. Although the Company believes that it is the largest independent
manufacturer of pre-recorded multi-media products-audiocassettes,
videocassettes, audio CDs and CD ROMs, it is in competition with approximately
50 audiocassette duplicators, approximately 100 videocassette duplicators and
approximately seven compact disc replicators. The Company believes it is one of
only three companies in the domestic replication/duplication industry in North
America that manufactures audiocassette, videocassette and CD Products for the
prerecorded music industry.
The Company believes that the principal competitive factors in the
replication/duplication business are: price, terms of sale, quality of service,
range of pre-and post-production services, scope of graphics and packaging
capabilities, order turnaround time, large order capability, order fulfillment
capability, ability to customize small orders to customer specifications, and
certain other value-added service offerings.
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Virtually all raw materials, machinery and equipment are readily
available on the open market, and no industry competitor holds proprietary
rights or positions with respect to these factors. Although this fact results in
low barriers to entry, the Company believes that the relatively low margins
offered by the core business and the number of competitors (including the
Company) who offer an array of value-added services, serve as deterrents to
entry by most potential competitors.
The Company also believes that the goodwill and loyalty of many of its
established relationships combined with the excellent reputation which the
Company believes it has in the marketplace give the Company a significant
competitive advantage. The Company further believes that its geographic
diversity, fulfillment capabilities, and national/regional/market-specific sales
and marketing and its geographically dispersed manufacturing and fulfillment
capabilities add to its competitive advantage.
The Company budgets for price erosion which occurs as competition for
market share increases and competitors lower prices to gain that market share.
The Company attempts to limit margin erosion by lowering its material costs and
by achieving unit volume sales increases. While there can be no assurance that
such a margin protection strategy will be successful in the future, the
Company's efforts to reduce operating costs and its new series of marketing and
sales initiatives are intended to forestall and curtail such erosion of margins.
The Company believes that its principal competitors in each of its
product offerings are as follows:
CD Products. In music CD replication, the Company's competitors are
major independent replicators such as Cinram and Nimbus, and the in-house
capacity of five of the six major domestic pre-recorded music companies: SONY
Music Entertainment, PGD, Warner-Elektra-Atlantic, BMG, and EMI, each of which
has CD manufacturing capacity to meet all its production needs except in times
of unusually high output. Additionally, there are approximately 70 small to
medium-sized (i.e., having an annual capacity of approximately five million to
75 million units, as compared to an average annual capacity of 100-200 million
units for the major domestic pre-recorded music companies) CD Products
manufacturers in the marketplace. The Company believes it is among the larger of
the medium-sized companies in the CD Products replication industry segment.
Audiocassettes. In audiocassettes, the Company believes that it is the
largest independent duplicator of prerecorded audiocassette products in the
United States. The Company's principal competitors are Cinram, Ltd., a
publicly-traded Canadian-based company with operations in the United States, and
Sonopress Audio, a division of BMG.
Videocassettes. Based on 120-minute (feature film) lengths, the Company
believes that its primary competitor is Technicolor, Inc., a division of Carlton
Communications PLC, followed by Rank Organization PLC. Both of these companies
concentrate their efforts on the feature film business and other
entertainment-related videocassette products. While the Company does a
significant amount of entertainment (i.e., music and feature film) videocassette
duplication, it has concentrated its efforts in the non-entertainment sectors,
focusing those efforts within businesses and industries that make extensive use
of multimedia products for all types of corporate and consumer communications.
Employees
At October 29, 1997, the Company had approximately 1,372 full-time
employees of whom approximately 459 (representing those employees employed at
the Hauppauge location) are covered by a collective bargaining agreement between
Allied and Local 810, Steel, Metals, Alloys and Hardware Fabricators and
Warehousemen affiliated with the International Brotherhood of Teamsters,
Chauffeurs, Warehousemen and Helpers of America. This agreement was renewed in
January 1997 and expires in January 2000. Management, supervisors and clerical
workers are not covered by the collective bargaining agreement. The Company has
never experienced a strike and believes its relationship with its employees is
satisfactory. The Company provides paid vacations, sick leave, group life,
disability, hospitalization and medical insurance for its employees. During
Fiscal 1997, eligible employees were able to participate in Allied's
401(k)/profit-sharing plan.
8
<PAGE>
Item 2. Properties
The Company's headquarters are located at 140 Fell Court, Hauppauge,
New York, where the Company leases approximately 7,165 square feet of office
space from Shivom Enterprises LLC for a term expiring October 31, 2001 at an
annual rate of approximately $127,000 in 1997.
The Company's Long Island CD products replication and audiocassette and
videocassette duplication operations are conducted at two locations. The first
location is at 15 Gilpin Avenue, Hauppauge, New York, where 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, at an annual rental rate of
approximately $1,058,000 for a term expiring November 1, 2015. Future cumulative
rentals under this agreement are approximately $19,389,000. The second location
is at 30 Gilpin Avenue, Hauppauge, New York, where the Company leases
approximately 78,000 square feet of manufacturing warehouse and office space for
a term expiring January 31, 2008, at an annual rental rate of approximately
$591,000 in 1997.
The Company leases various facilities from Greenfield Land Company, a
Michigan co-partnership ("Greenfield Land") 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. The
office and warehouse space for all locations leased from Greenfield Land
aggregates approximately 284,000 square feet. The 1997 annual rental payments
from the Company to Greenfield Land were approximately $1,548,000. Future
cumulative rentals due under existing leases with Greenfield Land for 1998 and
thereafter are approximately $11,700,000. The existing leases are for properties
located at: 7375 Woodward Avenue (office, warehouse, and manufacturing),
Detroit, Michigan; 7411 and 7371 Woodward Avenue (parking lots), Detroit,
Michigan; 35 W. Bethune (parking lot), Detroit, Michigan; 4364 35th Street
(office, warehouse and manufacturing facility), Orlando, Florida; 370 JD Yarnell
Industrial Parkway (office, warehouse, and manufacturing facility), Clinton,
Tennessee; Clinton, Tennessee Warehouse (warehouse facility).
The Company subleases approximately 22,160 square feet of
manufacturing, warehouse and office space located at 480 Valley Drive, Brisbane,
California, from Frase Enterprises Inc. for a term expiring June 30, 2008 at an
annual rental rate of approximately $166,200.
The Company also leases manufacturing, warehouse and office space from
Dallas Communications Complex at 6301 and 6305 N. O'Connor Road, Irving, Texas,
representing 18,712 square feet (manufacturing and office facilities), 11,936
square feet (warehouse facility) and 18,900 square feet (manufacturing and
office facilities), respectively. The aggregate annual rent payable under these
leases in 1997 is approximately $380,000. The current leases expire December 31,
1999, January 1, 2000, and December 31, 1999, respectively.
The Company leases approximately 17,614 square feet of manufacturing
and office space located at 819 Brightseat Road, Landover, Maryland, from Centre
Pointe Business Park, L.P. for a term expiring October 24, 2001 at an annual
rental rate of approximately $100,000 in 1997.
On a month-to-month basis, the Company leases approximately 25,000
square feet of warehouse space located at Highway 25 West, Clinton, Tennessee,
from HomeCrest Corporation for $5,000 per month.
The Company leases approximately 51,000 square feet of warehouse space
located at 108 Centre Stage Business Park, Clinton, Tennessee from Joseph A.
Hollingsworth, Jr. for a term expiring July 2, 2000 at a rental rate of $13,750
per month.
The Company leases approximately 3,600 square feet of manufacturing,
warehouse and office space located at 4140B Directors Row, Houston, Texas, from
Weingarten Realty Investors for a term expiring December 31, 1999 at an annual
rate of approximately $22,000 in 1997.
9
<PAGE>
The Company leases 97,888 square feet of manufacturing, warehouse and
office space located at Elk Grove Industrial Park #33, Elk Grove Village,
DePage, Illinois, from Elk Grove Village Industrial Park Ltd. for a term
expiring May 31, 1999 at an annual rental rate of approximately $649,000.
The Company subleases approximately 4,832 square feet of office space
at 1301 Avenue of the Americas, New York, New York from The Bibb Company for a
term expiring December 30, 2000 at an annual rental rate of approximately
$149,000 per year.
In addition, from time to time, the Company leases temporary warehouse
space on a month-to-month basis for the storage of customer components and
finished goods.
The Company believes its facilities are adequate for the conduct of its
existing business, including anticipated growth of its CD Products replication
business in Fiscal 1998.
Substantially all of the Company's property is encumbered by security
interests in favor of American National Bank and Trust Company of Chicago
("ANB"), in connection with the credit facility extended by ANB to Allied. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" below. Allied's property also
is subject to landlord liens filed by landlords in Texas and Illinois (Irving,
Texas, and Elk Grove, Illinois).
Item 3. Legal Proceedings
The Company is involved in various legal proceedings which are
incidental to the conduct of its business. The Company does not believe that the
outcome of these matters, even if unfavorable to the Company, will have a
material adverse effect on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information. The Company's Common Stock is traded on the
American Stock Exchange, Inc. ("AMEX") under the symbol "ADK".
The Company's Class A Redeemable Warrants and the Company's Class B
Redeemable Warrants are traded on AMEX under the symbols "ADK.WS.A." and
"ADK.WS.B." The Company's Class C Warrants are privately held and no trading
market for the Company's Class C Warrants currently exists.
The following table sets forth for the periods indicated the high and
low sales prices per share for the Common Stock and the high and low sales
prices per warrant of the Redeemable Warrants on the AMEX. The information with
respect to AMEX quotations was obtained from AMEX.
<TABLE>
<CAPTION>
Allied Digital Allied Digital
Class A Class B
Allied Digital Redeemable Redeemable
Common Stock Warrants Warrants
------------------ ------------------ -------------------
High Low High Low High Low
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1996:
First Quarter (quarter ended October 31, 1995)............ $6 3/8 $5 1/8 $1 $ 7/8 $ 5/8 $ 1/2
Second Quarter (quarter ended January 31, 1996)........... $4 1/8 $3 3/4 $ 3/4 $ 5/16 $ 3/8 $ 1/4
Third Quarter (quarter ended April 30, 1996).............. $4 1/8 $3 3/8 $ 5/8 $ 3/8 $3/16 $ 1/4
Fourth Quarter (quarter ended July 31, 1996).............. $3 1/4 $2 5/8 $ 3/8 $ 1/4 $ 1/8 $ 1/8
Fiscal 1997:
First Quarter (quarter ended October 31, 1996)............ $3 1/8 $2 9/16 $ 5/16 $ 1/16 $1/8 $ 1/8
Second Quarter (quarter ended January 31, 1997)........... $3 3/8 $2 $ 1/8 $ 1/64 $1/8 $ 1/16
Third Quarter (quarter ended April 30, 1997).............. $2 5/8 $1 7/8 $ 1/32 $ 1/64 $1/8 $ 1/16
Fourth Quarter (quarter ended July 31, 1997).............. $2 1/8 $1 1/2 $ 1/32 $ 1/32 $1/16 $ 1/16
</TABLE>
As of October 21, 1997, the last sales price reported on AMEX for the
Common Stock was $2.4375. The last sales prices reported on AMEX for the Class A
Redeemable Warrants and the Class B Redeemable Warrants were $.078 on October
21, 1997 and $.0625 on October 21, 1997, respectively.
Holders. As of October 14, 1997, there were approximately 525 record
holders of Common Stock, 156 record holders of Class A Redeemable Warrants, 82
record holders of Class B Redeemable Warrants, and 15 record holders of Class C
Warrants.
Dividends. The Company has not paid any dividends on the 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 Company's Board, in view of
the Company's contemplated financial requirements, to retain all earnings, if
any, for use in the Company's business operations.
In July 1997, the Board of Directors voted to extend the expiration
date of the Class A Redeemable Warrants and the Class B Redeemable Warrants one
year to July 28, 1998.
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 subsidiaries, borrowings and sales of equity. The right of
the Company, and consequently its shareholders, to participate in any
distribution of assets of any of its subsidiaries is subject to prior claims of
creditors of such subsidiary (except to the extent claims of the Company in its
capacity as a creditor are recognized). Restrictions contained in Allied's
credit agreement of impose limitations on the amount of distributions that the
Company's subsidiaries may make to the Company and prohibit the Company from
using any such distributions to pay dividends to its shareholders.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Form 10-K. The consolidated financial
statements of the Company as of July 31, 1997 and 1996 and for the fiscal years
ended July 31, 1997, 1996 and 1995, together with the reports thereon of Grant
Thornton LLP and Arthur Andersen LLP, appear elsewhere in this Report on Form
10-K.
11
<PAGE>
Statement of Operations Data
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, July 31, July 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales .............................. $ 159,147,638 $ 160,941,632 $ 116,564,144
Cost of Sales .......................... 127,034,302 132,261,644 89,442,592
Nonrecurring charge .................... -- 1,250,000(1) --
------------- ------------- -------------
Gross Profit ........................... 32,113,336 27,429,988 27,121,552
Operating Expenses(2) .................. 24,829,835 30,029,406(1) 23,814,608
------------- ------------- -------------
Income (loss) from Operations .......... 7,283,501 (2,599,418) 3,306,944
Interest Expense ....................... (5,024,905) (6,186,049) (3,816,376)
Other Income, Net ...................... 168,328 665,160 762,331
------------- ------------- -------------
Income (loss) before Income
Taxes .................................. 2,426,924 (8,120,307) 252,899
Income Tax Provision (Credit) .......... 1,760,000 (2,534,847) (2,575,618)
-------------
Net Income (Loss) 666,924 (5,585,460) 2,828,517
Pro forma data (unaudited)
AFL as a C Corporation
subject to Federal Income
taxes for all periods presented
Adjustment to income tax
provision (benefit) -- -- 2,529,900
Pro forma net income (loss) $ 666,924 $ (5,585,460) $ 298,617
Basic and Diluted
Earnings (loss) per share (3) $ .05 (.41) $ .21
Pro forma Basic and Diluted
Earnings per share (3) $ .02
Cash Dividends(4) ...................... -- -- --
</TABLE>
See page 14 for footnotes.
Statement of Operations Data
<TABLE>
<CAPTION>
Seven Months Ended Year Ended
July 31, December 31,
----------------------------------- --------------------------------
1994 1993 1993 1992
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales .............................. $ 40,939,224 $ 54,898,361 $ 93,191,029 $ 69,133,860
Cost of Sales .......................... 28,998,070 38,328,802 63,862,188 46,552,980
Nonrecurring charge .................... -- -- -- --
------------- ------------- ------------- -------------
Gross Profit ........................... 11,941,154 16,569,559 29,328,841 22,580,880
Operating Expenses(2) .................. 11,074,704(2) 11,986,078 20,873,006 16,376,061
------------- ------------- ------------- -------------
Income (loss) from Operations .......... 866,450 4,583,481 8,455,835 6,204,819
Interest Expense ....................... (1,136,736) (564,652) (983,694) (283,937)
Other Income, Net ...................... 238,382 123,780 230,436 537,147
------------- ------------- ------------- -------------
Income (loss) before Income
Taxes ................................ (31,904) 4,142,609 7,702,577 6,458,029
Income Tax Provision (Credit) .......... 85,218 159,675 375,400 322,800
------------- ------------- ------------- -------------
Net Income (Loss) ...................... (117,122) 3,982,934 7,327,177 6,135,229
Pro forma data (unaudited)
AFL as a C Corporation
subject to Federal income
taxes for all periods presented
Adjustments to income tax
Provision (benefit) (11,000) 1,354,000 2,491,000 2,086,000
Pro Forma net income (loss) $ (106,122) $ 2,628,934 $ 4,836,177 $ 4,049,229
Basic and Diluted
Earnings (loss) per share (3) $ (1.69) $ 58.56 $ 106.19 $ 91.57
Pro forma Basic and Diluted
Earnings (loss) per share (3) $ (1.53) $ 38.65 $ 70.09 $ 60.43
Cash Dividends(4) ...................... -- -- -- --
</TABLE>
See page 14 for footnotes.
12
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data
As of July 31,
-------------------------------
1997 1996 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Excess of Cost over Fair Value of
Net Assets Acquired ...................... $ 43,064,233 $ 45,537,736 $ 48,118,050 $ 4,066,899
Total Assets ................................ 107,880,392 113,877,633 125,867,285 38,603,511
Long-Term Debt and Capitalized Lease
Obligations, Including Current
Maturities................................ 36,548,206 39,386,050 46,170,133 16,897,702
Subordinated Notes Payable to
Stockholders ............................. 10,060,366 10,996,386 8,416,659 14,000,000
Total Liabilities ........................... 69,236,614 75,900,779 82,304,971 38,136,459
Retained Earnings (Accumulated
Deficit) ................................. (6,234,491) (6,901,415) (1,315,955) (1,452,254)
Working Capital (deficiency) ................ 3,944,039 (491,026) 9,690,774 13,998,752
Stockholders' Equity ........................ 38,643,778 37,976,854 43,562,314 467,052
<CAPTION>
As of December 31,
------------------------------
1993 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Balance Sheet Data
Excess of Cost over Fair Value of
Net Assets Acquired ...................... $ 4,370,022 $ 4,243,719 $ --
Total Assets ................................ 49,848,926 41,095,847 31,809,884
Long-Term Debt and Capitalized Lease
Obligations, Including Current
Maturities ............................... 12,546,539 12,154,219 3,640,565
Subordinated Notes Payable to
Stockholders ............................. -- -- --
Total Liabilities ........................... 32,827,419 23,468,087 17,290,729
Retained Earnings (Accumulated
Deficit) ................................. 16,142,436 16,748,689 13,953,542
Working Capital (deficiency) ................ 9,344,272 10,673,332 9,493,276
Stockholders' Equity ........................ 17,021,507 17,627,760 14,519,155
</TABLE>
See page 14 for footnotes.
13
<PAGE>
- -----------
(1) The Fiscal 1996 results of operations were adversely impacted by a
$1,250,000 nonrecurring charge associated with a customer allowance and
a restructuring charge of $3,077,295 included in operating expenses.
See Notes 9 and 10, respectively, to the Consolidated Financial
Statements.
(2) Prior to the Reorganization, AFL had a book value stock plan whereby
certain employees of AFL could utilize bonus payments to purchase AFL
Common Stock at a price based on a book value formula. Upon termination
of employment, the employees were required to resell the AFL Common
Stock to AFL at a price based on the book value formula. In connection
with the Reorganization, AFL presumed that the 2,108 shares issued
during the seven month period ended July 31, 1994 were issued in
contemplation of the Reorganization. Accordingly, AFL recognized
non-cash, nonrecurring, compensation expense of $500,000, which is the
difference between the book value price paid and the estimated fair
market value of the AFL Common Stock.
(3) For all periods prior to the year ended July 31, 1995, basic and
diluted earnings per share are based on the weighted average number of
AFL shares outstanding.
(4) Prior to the Reorganization, AFL had elected to be treated as an S
corporation under the Code. Historically, AFL has not paid cash
dividends other than distributions of approximately 45% to 55% of its
taxable income for each year. These distributions totaled $666,878 for
the year ended July 31, 1995, $18,083,822 and $1,794,041 for the seven
month periods ended July 31, 1994 and 1993, and $4,532,030 and
$4,473,969 for the years ended December 31, 1993 and 1992,
respectively. The $18,083,022 distribution made during the seven
months ended July 31, 1994 distributed the Company's prior years,
previously taxed S Corporation income accumulated through July 31,
1994.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Effective January 12, 1995, the Company acquired all of the outstanding
common stock of AFL and HMG in exchange for approximately 55% and 45% of the
outstanding common shares of the Company, respectively. Subsequently, on March
10, 1995, the Company changed its fiscal year end from December 31 to July 31.
Consequently, the results of operations (i) for the twelve months ended July 31,
1996 (and thereafter) include the consolidated operations of AFL and HMG for
such period, and (ii) for the twelve month period ended July 31, 1995 include
the earnings of AFL for the twelve months ended July 31, 1995 and the earnings
of HMG for the period January 12, 1995 through July 31, 1995. Therefore, the
results of operations for the twelve month period ended July 31, 1995 are not
necessarily indicative of the performance of AFL and HMG expected for a full (12
month) year.
Results of Operations - Year Ended July 31, 1997 compared to Year Ended
July 31, 1996
Net sales for the twelve month period ended July 31, 1997 ("Fiscal
1997") were $159.1 million, a decrease of $1.8 million or 1% as compared to the
twelve month period ended July 31, 1996 ("Fiscal 1996"). The sales decrease
attributable to volume was $8.8 million which was partially offset by increases
in unit pricing of approximately $7.0 million. The decrease in sales due to
volume and the increase in sales due to unit price in Fiscal 1997 as compared to
Fiscal 1996 were primarily the result of a large promotional video sale to one
customer which was recognized during Fiscal 1996.
Gross profit for Fiscal 1997 increased $4.7 million to $32.1 million or
20% of net sales, from $27.4 million, or 17% of net sales for Fiscal 1996. The
increase in gross margin dollars and percentage, despite decreased sales, was
primarily attributable to the favorable (declining) trend in material costs, a
reduction in the direct labor force, and a
14
<PAGE>
$1.3 million non-recurring charge in Fiscal 1996 resulting from a sales contract
signing allowance with a large customer and increased costs in Fiscal 1996
associated with the start-up efforts in preparing to process orders for this
large customer in the Company's Tennessee manufacturing plant.
Operating expenses for Fiscal 1997 were $24.8 million, or 16% of net
sales, compared to $30.0 million, or 19% of net sales for Fiscal 1996. The $5.2
million decrease was primarily a result of a $3.1 million restructuring charge
recorded in Fiscal 1996 in connection with the Company's June 1996 plan to
streamline and reduce resources utilized in the business, $1.3 million decrease
in administrative costs realized in Fiscal 1997 as a result of this
restructuring and a $0.5 million of capitalized employee work force expenditures
associated with the implementation phase of a computer software system developed
for internal use.
The Company's interest expense decreased to $5.0 million for Fiscal
1997 from $6.2 million for Fiscal 1996. This decrease was primarily a result of
a reduction in interest expense attributable to a rate reduction and a reduction
in the principal amount of interest bearing debt.
Other income net of other expenses for Fiscal 1997 was $0.2 million
compared to $0.7 million in Fiscal 1996. The decrease of $0.5 million was
primarily attributable to a reduction in finance charges collected from the
Company's customers on past due invoices and a reduction in scrap material
sales.
For Fiscal 1997, the Company reported a pre-tax profit of $2.4 million,
compared to a pre-tax loss of $8.1 million for Fiscal 1996. The increase in
income of $10.5 million occurred for the reasons noted above.
A provision for income taxes of $1.8 million was recognized for Fiscal
1997 compared to a net tax credit of $2.5 million for Fiscal 1996. The
Company's effective tax rate of 72.5% for Fiscal 1997 is attributable to the
non-deductibility for tax purposes of a significant portion of the
amortization of excess of costs over fair value of net assets acquired.
Allied's effective tax rate will vary from year to year, in part, given
the relationship the annual recurring amortization of the excess of cost over
fair value of assets acquired ($2.6 million) has to reported pre-tax income.
Allied has state investment tax credit carryforwards at July 31, 1997
and 1996 of $2,035,000 and $1,590,000, respectively. The valuation allowance of
July 31, 1997 and 1996 of $890,000 and $732,000, respectively, is attributable
to Allied's ability to utilize investment tax credit carryovers prior to their
expiration. Changes in the deferred tax asset valuation is based on projections
of future taxable income.
After recognition of applicable income taxes, the Company reported net
income in Fiscal 1997 of $0.7 million as compared to a net loss of $5.6 million
in Fiscal 1996 for the reasons noted above.
Results of Operations - Year Ended July 31, 1996 compared to Year Ended
July 31, 1995
Net sales for Fiscal 1996 were $160.9 million, an increase of $44.3
million compared to the twelve month period ended July 31, 1995 ("Fiscal 1995").
Such increase was attributable primarily to the full year inclusion of HMG's
operations in the Fiscal 1996 results ($36.2 million) and increased sales volume
in Fiscal 1996 resulting primarily from the commencement of videocassette
duplication and order fulfillment services under a five-year sales contract
entered into with a customer in June 1995 partially offset by unit pricing
reductions and sales mix changes. Net sales for fiscal 1996 of $160.9 million as
compared to pro forma net sales for fiscal 1995 of $158.1 million (as though HMG
had been acquired at the beginning of fiscal 1995) increased by $2.8 million.
The $2.8 million pro forma sales increase in fiscal 1996 is attributable to
approximately $19.6 million in volume increases and offset in part by
approximately $16.6 million in unit price reductions and a change in sales mix.
Gross margin for Fiscal 1996 increased $0.3 million to $27.4 million,
or 17% of net sales, from $27.1 million, or 23% of net sales for Fiscal 1995.
The increase in gross margin dollars was primarily due to the full year
inclusion of HMG margin of $12.0 million in the Fiscal 1996 results as compared
to a margin contribution in Fiscal 1995 by HMG of $8.7 million for the period
January 12, 1995 through July 31, 1995. This net $3.3 million gross margin
increase was partially offset by a $1.3 million non-recurring charge in Fiscal
1996 resulting from a sales contract signing allowance with a large customer.
The gross margin was further reduced by the start-up efforts commencing in June
1995 in preparing to process orders for this large customer in the Company's
Tennessee manufacturing plant. Moreover, declining unit prices to customers due
to continuing price pressures and a change in the Company's sales mix which
includes the adverse impact on average margins caused by a production and
fulfillment sales contract with a large customer further contributed to the 6%
gross margin decline in Fiscal 1996.
Operating expenses for Fiscal 1996 were $30.0 million, or 18% of net
sales, compared to $23.8 million, or 20% of net sales for Fiscal 1995. Of the
$6.2 million increase, $3.1 million resulted from a current year restructuring
charge in connection with the Company's June 1996 plan to streamline and reduce
resources utilized in the business. The restructuring charge comprised of work
force related expense of $1,126,385, idle plant lease costs of $863,000,
abandoned asset write-off of $837,935 and other related costs of $250,000. The
plan encompassed (i) the merger and integration of the Company's two operating
subsidiaries, (ii) the closure of the Company's Detroit manufacturing facility
and (iii) the consolidation of the Company's corporate and administrative
offices from Detroit to New York. Further, the full year inclusion of HMG
operations in Fiscal 1996 resulted in an incremental increase of approximately
15
<PAGE>
$2.3 million in operating expenses over Fiscal 1995 of which $1.0 million
results from the full year inclusion of the amortization of the excess cost over
fair value of the net assets acquired associated with the Reorganization.
Operating expenses for Fiscal 1996 also included a $0.4 million increase in bad
debt expense over the prior year.
The Company's non-operating expenses increased to $5.5 million for
Fiscal 1996 from $3.1 million for Fiscal 1995. This $2.4 million increase was
due to increased interest expense primarily associated with the full year
inclusion of HMG in Fiscal 1996 results together with increased average
borrowings for the Company related to the additional debt required to finance
capital expenditures.
For Fiscal 1996, the Company reported a pre-tax loss of $8.1 million,
compared to pre-tax earnings of $0.3 million for Fiscal 1995. The decrease in
income of $8.4 million occurred for the reasons noted above.
A net credit for federal, state and local income taxes of $2.5 million
was recognized for Fiscal 1996 compared to a net credit for federal, state and
local income taxes of $2.6 million for Fiscal 1995. This $2.5 million net credit
relates primarily to a net operating loss, restructuring costs and a
non-recurring charge which will be deductible in future periods, as well as
state investment tax credits realized during this period. The effective tax rate
was approximately 31%. Non deductible expenses related to the amortization of
excess of cost over fair value of net assets acquired arising from the
Reorganization were offset in part during the period by state income tax
benefits and investment tax credits resulting from purchase of equipment in the
State of New York. The effective tax rate is expected to be higher in future
periods due to the non deductible amortization of costs in excess of net assets
acquired, net of non-recurring benefits from investment tax credits. Allied's
effective tax rate will vary from year to year, in part, given the relationship
the annual recurring amortization of the excess of cost over fair value of
assets acquired ($2.6 million) has to reported pre-tax income.
Allied has state investment tax credit carryforwards at July 31, 1996
and 1995 of $1,590,000 and $937,000, respectively. The valuation allowance at
July 31, 1996 and 1995 of $732,000 and $519,000, respectively, is attributable
to Allied's ability to utilize investment tax credit carryovers prior to their
expiration. Changes in the deferred tax asset valuation are based on projections
of future taxable income.
After recognition of applicable income taxes, the Company reported a
net loss in Fiscal 1996 of $5.6 million as compared to net income of $2.8
million in Fiscal 1995 for the reasons noted above.
Liquidity and Capital Resources
Net cash provided by operating activities for the year ended July 31,
1997 was $8.5 million as compared to $14.3 million for the year ended July 31,
1996. The decrease was primarily attributable to a $14.6 million increase in
working capital offset by a $6.3 million increase in net income and a $4.2
million increase from income taxes.
Net cash provided by operating acvitities for the year ended July 31,
1996 was $14.3 million as compared to $9.1 million for the year ended July 31,
1995. The increase was primarily attributable to reductions in accounts
receivable of $5.1 million and reductions in inventories of $4.0 million. In
addition, the 1996 period reflects a higher depreciation and amortization
expense as compared with the 1995 period, which was principally a result of the
HMG merger.
Cash used in investing activities for the years ended July 31, 1997,
1996 and 1995 was $2.6 million. $9.3 million and $9.1 million, respectively. The
use of cash for all periods was primarily for the purchase of property and
equipment.
Cash used for financing activities for the years ended July 31, 1997,
1996 and 1995 was $5.5 million, $4.8 million and $.2 million, respectively, and
consisted primarily of repayment of long term debt offset principally, in part,
by borrowings from a bank under long term credit facilities and from
stockholders of the Company under subordinated note agreements.
In conjunction with the Company's restructuring plan and merger of AFL
into Allied, the separate senior loan credit facilities previously maintained by
AFL and Allied with American National Bank & Trust Company of Chicago ("ANB")
were combined under an amended and restated loan and security agreement dated as
of October 30, 1996 between Allied and ANB and effectuated November 1, 1996 (the
"ANB Loan Agreement"). The ANB Loan Agreement provides for (i) a revolving loan
(the "ANB Revolving Loan") of $22 million (subject to certain borrowing base
limitations based on 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 millon, and
(iii) an additional loan (the "ANB Additional Loan") in the original principal
amount of $1.5 million. As of 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 $3,450,000 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
July 31, 1997, 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 July 31, 1997, the aggregate amount of total indebtedness
outstanding of $46.6 million was as follows: (i) under the ANB Term Loan, $18.8
million, (ii) under the ANB Revolving Loan, $14.4 million, (iii) under the ANB
Additional Loan, $1.0 million, (iv) the 10% Notes Payable to Stockholders, $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,
(vii) the Note Payable to VCA (related to the VCA acquisition), $1.2 million,
(viii) capitalized lease obligations, $1.0 million and (ix) other debt of $0.1
million.
The ANB Term Loan is payable in an initial installment aggregating
$1,695,462 on October 31, 1996 (of which $1,179,000 was paid on November 8,
1996), 30 consecutive monthly installments of $548,054 thereafter through April
30, 1999 and a final installment of $293,098 on May 30, 1999, together with
additional prepayments of principal of $2,000,000 on October 31, 1997 and
$5,000,000, on October 31, 1998. No prepayment fees result from these scheduled
prepayments.
The ANB Additional Loan is payable in 25 consecutive monthly
installments of $60,000 each, which commenced on December 31, 1996.
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<PAGE>
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. As of October 24, 1997, no amounts were
outstanding under this capital expenditure credit facility.
The 10% Notes Payable to Stockholders (the "10% Notes") are unsecured
obligations which bear interest at 10% per annum. Interest accrues only on the
original principal sum of $6.0 million and is payable quarterly. Upon default,
the interest rate increases to 12% per annum. To the extent interest is not
permitted to be paid pursuant to the terms of the ANB Loan Agreement, such
accrued and unpaid interest becomes payable on January 1, 2001. Payment of these
notes is subordinated to the payment of the obligations under the ANB Loan
Agreement. The notes mature on January 1, 2001.
In connection with the Company's restructuring and merger referred to
above, the Subordinated 12% Series A Note Payable to Stockholder was repaid in
full on November 8, 1996 with the $1.5 million proceeds of the Additional Loan
and $2.0 million advanced by certain other stockholders in the form of
additional subordinated notes dated October 30, 1996. Additionally, the payment
terms of the 10% Notes having an original principal sum of $6.0 million, plus
unpaid interest thereon were extended.
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 notes mature on January 1, 1999.
The note payable to VCA is unsecured and is payable in annual
installments beginning January 31, 1995 through January 1, 2001, including
annual interest of 12%.
Proceeds from the ordinary operations of 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.
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 July 31, 1997, the Company had working capital of $3.9 million
and $7.3 million unused and available under the ANB Revolving Loan. Net cash
provided by operating activities during Fiscal 1997 was $8.5 million, consisting
of net income of $0.7 million increased by depreciation and amortization of
$10.4 million, a provision for doubtful accounts of $1.2 million, a charge for
noncash accrued interest to a stockholder of $0.6 million and a change in
deferred income taxes of $1.7 million, and decreased by net changes in operating
assets and liabilities of $6.1 million. Net cash used in investing activities
during Fiscal 1997 totaled $2.6 million. Of this amount, $1.3 million was used
for the purchase of replication equipment and leasehold improvements and $1.3
million was used for expenditures associated with the computer software system
developed for internal use.
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
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<PAGE>
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.
Impact of Inflation
During recent years, the Company has experienced decreasing margins as
a result of competitive pressures in its market segment. The Company believes
that, historically, the decline in its margins has been partially offset by
increases in volume as well as decreases in the cost of components.
The Company from time to time experiences increases in the costs of
material and labor, as well as other manufacturing and operating expenses. The
Company's ability, consistent with that of its competitors, to pass along such
increased costs through increased prices has been difficult due to competitive
pressures. By attempting to control costs, the Company attempts to minimize any
effects of inflation on its operations.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Company, on a consolidated basis,
together with notes, supplemental schedules and the Independent Auditors'
Reports, are set forth immediately following Item 14 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
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. Currently, the
Board of Directors has 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 (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 William H. Smith, George N.
Fishman and Donald L. Olesen, the three Class I Directors, will expire at the
annual meeting of shareholders to be held in 1999, the term of office of Eugene
A. Gargaro, Jr., Seymour Leslie and John A. Morgan, the three Class II Directors
will expire at the annual meeting of shareholders to be held in 2000, and the
term of office of Werner H. Jean and H. Sean Mathis, the two Class III Directors
will expire at the annual meeting of shareholders to be held in 1998, and, in
each case, until the election and qualification of their respective successors
or upon their earlier resignation or removal. The executive officers of the
Company are appointed by, and serve at the discretion of the Board of Directors.
There are no family relationships among the directors and executive officers of
the Company.
Name Age Position with the Company
- ---- --- -------------------------
William H. Smith 72 Co-Chairman of the Board, President and a
director of the Company; director of HMG and
Allied.
George N. Fishman 73 Co-Chairman of the Board, Chief Executive
Officer and a director of the Company;
Chairman of the Board, Chief Executive
Officer and a director of HMG; Chairman of
the Board, Chief Executive Officer and a
director of Allied.
Donald L. Olesen 55 President - National Sales and Marketing
Division and a director of the Company;
President of HMG; President of Allied.
John K. Mangini 54 Chief Operating Officer of the Company.
Charles P. Kavanagh 48 Executive Vice President and Secretary of
the Company; Vice President - Finance and
Administration of Allied.
Charles A. Mantione 57 Vice President - Finance of the Company.
Eugene A. Gargaro, Jr. 55 Director of the Company.
Werner H. Jean 73 Director of the Company.
Seymour Leslie 74 Director of the Company.
H. Sean Mathis 50 Director of the Company.
John A. Morgan 67 Director of the Company.
The business experience of each of the foregoing persons, during the
past five years, is as follows:
Mr. Smith has been Co-Chairman of the Board and a director of the
Company since January 1995 and President of the Company since November 1995 and
a director of HMG and Allied since January 1995. Mr. Smith also was Co-Chief
Executive Officer of the Company from November 1995 until March 1996. Mr. Smith
founded AFL in 1960, was President and a director of AFL from 1960 until 1993,
and its Chairman of the Board from 1990 until November 1996. Mr. Smith has been
active in many business and industry organizations, including the American Video
Duplication Association and the International Tape and Disc Association, where
he currently serves on the Board. Mr. Smith holds a business degree from the
University of Colorado.
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<PAGE>
Mr. Fishman has been Co-Chairman of the Board and a director of 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 Allied
since 1981 and the Chief Executive Officer of Allied since 1991. Mr. Fishman has
been active in the music industry since 1946. He was the former owner of a
predecessor corporation to Allied prior to the acquisition of that company in
1973 by Pickwick International Inc. ("Pickwick"). In 1981, Mr. Fishman led the
management buyout of the record manufacturing business of American Can Company,
the successor to Pickwick, whereupon Allied was formed as a New York
corporation. Mr. Fishman is a former physicist and holds a master of science
degree.
Mr. Olesen has been President - National Sales and Marketing Division
and a director of the Company since January 1995. Mr. Olesen also has been the
President of HMG since 1993 and President of Allied since July 1991. He also was
a director of HMG and Allied until January 1995. Mr. Olesen has been Allied's
primary sales executive since 1981. Mr. Olesen has 32 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.
Mr. Mangini has been Chief Operating Officer of the Company since
January 15, 1996. Prior to his joining the Company, he spent five years with
PolyGram Group Distribution, Inc. as Senior Vice President of Operations. Mr.
Mangini's experience in the entertainment field includes 14 years with RCA
Corporation (1973-1987) beginning as Director of Strategic Planning for the
Entertainment Companies (NBC, Random House and RCA Records) and then becoming
Worldwide Chief Financial Officer of RCA Records, then Vice President - General
Manager of the International Subsidiaries and Senior Vice President - Operations
- - Worldwide. In the non-entertainment area, Mr. Mangini was Executive Vice
President -U.S. Operations for Adidas USA (1988-1989), Project Manager for Grace
Corporation (1969-1973), specializing in acquisitions and mergers. He had
similar experience with Olin Chemical Corporation (1966-1969). In 1995, Mr.
Mangini plead guilty to an information alleging tax evasion, paid a $7,500 fine
and was placed on probation for a period of five years. Mr. Mangini has 34 years
of business experience and for the past 16 years has concentrated on various
turnaround situations.
Mr. Kavanagh has been Executive Vice President of the Company since
June 1997 and Secretary of the Company since January 1995. Mr. Kavanagh also has
been the Chief Financial Officer of HMG since 1993 and the Vice President -
Finance and Administration of Allied since 1990. Mr. Kavanagh also was a
director of Allied until January 1995.
Mr. Mantione has been Vice President - Finance of the Company since
June 1997. Mr. Mantione had been a financial consultant to the Company from June
1996 to June 1997. Mr. Mantione, who is a certified public accountant, was
founder and partner in Mantione and Rogan, CPA's from July 1969 until November
1983, and a partner in Arthur Yorkes & Co., CPA's from January 1988 to October
1989. From November 1989 to May 1997, Mr. Mantione was self-employed rendering
accounting and management consulting services.
Mr. Gargaro has been a director of the Company since January 1995. Mr.
Gargaro has been Vice President and Secretary of Masco Corporation, a
manufacturer of products for the home, 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,
Inc., a transportation and automotive after-market manufacturing firm, and
TriMas Corporation, an industrial components manufacturing firm.
Mr. Jean has been a director of the Company since January 1995. Mr.
Jean has been a consultant in operations management since 1983. Mr. Jean was a
director of AFL from 1983 until January 1995. Prior to 1983, Mr. Jean held
positions at American Motors Corporation as Vice President of Operations, and at
AM General as Corporate Director of Manufacturing, General Plant Manager for
Car and Jeep Operations, Controller and Corporate Director of Budgets and
Facilities Planning. Mr. Jean holds a degree in electrical engineering from New
York University.
Mr. Leslie has been a director of the Company since January 1995. Mr.
Leslie has been Chairman of Leslie Group, 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
20
<PAGE>
packaging company. He was a director of HMG from 1993 until January 1995. Mr.
Leslie has been active in the music industry since 1953, when he founded
Pickwick International, Inc. Mr. Leslie was Chairman of the Board of Pickwick
until 1977. During his 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. Since 1977, Mr. Leslie has been Chairman of Leslie Group,
Inc., a diversified investment company. 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.
Mr. Mathis has been a director of the Company since January 1995. Mr.
Mathis is Chairman of the Board of Allis Chalmers, Inc. an industrial
manufacturer, whose main asset is a net operating loss tax carryforward. From
July 1996 to September 1997, Mr. Mathis was Chairman of the Board of
Universal Gym Equipment Inc., a privately owned company. In July 1997, Universal
filed for protection under the Federal Bankruptcy Laws. In September 1997, Mr.
Mathis resigned as Chairman of the Board of Universal. From 1991 to 1993, Mr.
Mathis was President of RCL, the predecessor firm of HMG, and from 1993 to
present a Director of the Company. 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 a part of a
restructuring program, UPI filed for protection under the Federal Bankruptcy
laws. Mr. Mathis is also a director of Thousand Trails, Inc., an operator of
recreational parks.
Mr. Morgan has been a director of the Company since November 1995. Mr.
Morgan has been a Managing Director of Morgan 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, MascoTech, Inc., a
transportation and automotive after-market manufacturing firm, and TriMas
Corporation, an industrial components manufacturing firm.
Certain shareholders of the Company, including William H. Smith, Donald
L. Olesen and George N. Fishman, are parties to the Allied Digital Shareholders
Agreement, which, among other things, contains agreements with respect to the
disposition and voting of shares of Common Stock. See "Certain Relationships and
Related Transactions - Allied Digital Shareholders Agreement."
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 1997 and Forms 5 and amendments thereto furnished
to the Company with respect to Fiscal 1997 and a review of written
representations received by the Company, no person who at any time during Fiscal
1997 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 (i) Mr. Mathis, a director of the Company, filed Forms 5 reporting
an aggregate of seven transactions effected during the months of August and
September, 1996 involving the disposition of Common Stock and (ii) Mr. Mangini,
the Company's Chief Operating Officer, who failed to file a Form 4 to report his
acquisition of options in August 1996.
Item 11. 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 the Chief
Executive Officer and each of the four other most highly compensated
21
<PAGE>
executive officers of the Company who received compensation from the Company
aggregating at least $100,000 during Fiscal 1997 (collectively, the "Named
Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Fiscal Shares Underlying
Principal Position Year Salary($) Bonus ($)(1) Options (#)(3)
- ------------------ ------ --------- ------------ --------------
Long-Term
Annual Compensation(2) Compensation
---------------------- ------------
<S> <C> <C> <C> <C>
William H. Smith(4).............................. 1997 $166,074 -- --
Co-Chairman and President 1996 190,151(5) $1,229(6) --
1995 244,376(6) 154,013(6) --
George N. Fishman(4)............................. 1997 173,153 -- --
Co-Chairman and Chief Executive Officer 1996 188,880 -- --
1995 204,451 -- --
Donald L. Olesen................................. 1997 323,245 -- --
President-National Sales and Marketing 1996 312,760 -- --
Division 1995 323,686 -- 30,000
Charles P. Kavanagh.............................. 1997 157,251 -- --
Executive Vice President and Secretary 1996 141,970 -- --
1995 142,263 20,000 20,000
John K. Mangini(7)............................... 1997 215,523 -- 25,000
Chief Operating Officer 1996 107,692 -- --
1995 -- -- --
</TABLE>
- -----------
(1) Amounts shown include (i) discretionary cash bonuses and (ii) profit
sharing contributions.
(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) Represents incentive stock options granted under the Incentive Plan.
(4) 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.
(5) During Fiscal 1996 and Fiscal 1995 compensation for Mr. Smith was paid
by AFL.
(6) Consists of (i) distributions 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.
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<PAGE>
(7) Mr. Mangini joined the Company as Chief Operating Officer on January
15, 1996.
Stock Options
Stock Options Granted In Fiscal 1997
No stock options were granted in Fiscal 1997 to the Named Executive
Officers other than 25,000 incentive stock options granted in August 1996 to Mr.
Mangini in connection with his employment arrangement. See "Executive
Compensation - Employment Agreements."
Stock Options Held at the End of Fiscal 1997
The following table sets forth the total number of exercisable and
unexercisable stock options held by each of the Named Executive Officers named
who held any stock options as of July 31, 1997. No options to purchase Common
Stock were exercised during Fiscal 1997 and no stock appreciation rights were
outstanding during Fiscal 1997.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the
unexercised Options at July 31, 1997 Money Options at July 31, 1997
------------------------------------ ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William H. Smith ....................... -- -- -- --
George N. Fishman ...................... -- -- -- --
Donald L. Olesen ....................... 15,000 15,000 0 0
Charles P. Kavanagh .................... 10,000 5,000 0 0
John K. Mangini ........................ 0 25,000 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 upon Common Stock ("Dividend Equivalents"), and (e) other
types of awards 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.
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<PAGE>
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 Award, and the effect of termination of employment and/or
consulting relationships upon any outstanding award.
Employment Agreements
Allied has employment agreements with Messrs. Fishman and Olesen with
terms expiring December 31, 1997, and with Mr. Mangini with a term expiring
July 31, 2000.
Pursuant to such employment agreements, (i) Mr. Fishman continues to
serve as the Chairman of the Board and Chief Executive Officer of Allied 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 Allied and
serves as President-National Sales and Marketing Division of the Company at a
base salary of $298,700 per annum and (iii) Mr. Mangini continues to serve as
the Chief Operating Officer of the Company at a base salary of $275,000 per
annum. In Fiscal 1997, Mr. Fishman, upon his own initiative, accepted a reduced
base salary of $173,153. Each of
24
<PAGE>
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 Mangini 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 connection with his employment agreement, Mr. Mangini was granted an
option under the Incentive Plan to acquire 200,000 Shares of Common Stock at an
exercise price of $2.00 per share.
In November 1995, the Company and Mr. James 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. See "Certain Relationships and Related
Transactions."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of October 21, 1997, 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
(11 persons):
Percentage of
Beneficial
Name and Address(1) Number of Shares Ownership
- ------------------- ---------------- ---------
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
25
<PAGE>
Donald L. Olesen(5) .................... 909,000 6.7%
1301 Avenue of the Americas
New York, New York 11109
George N. Fishman(6) ................... 894,022 6.6%
140 Fell Court
Hauppauge, New York 11788
Seymour Leslie(7) ...................... 352,327 2.6%
1370 Avenue of the Americas
New York, New York 10019
Charles P. Kavanagh(8) ................. 160,275 1.2%
140 Fell Court
Hauppauge, New York 11788
H. Sean Mathis(9) ...................... 88,050 *
1301 Avenue of the Americas
New York, New York 10019
Eugene A. Gargaro, Jr. (10) ............ 30,000 *
21001 Van Born Road
Taylor, Michigan 48180
John K. Mangini(11) .................... 6,250 *
140 Fell Court
New York, New York 11788
Werner H. Jean(12) ..................... 4,000 *
16288 Barryknoll Way
Granger, Indiana 46530
John A. Morgan ......................... 0 --
767 Fifth Avenue
New York, New York 10153
All directors and executive
officers as a group (13) ............... 9,751,686 66.0%
- -----------
* 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
26
<PAGE>
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 "Certain
Relationships and Related Transactions - 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 "Certain Relationships and Related Transactions - Allied
Digital Shareholders Agreement." Mrs. Smith is the spouse of William H.
Smith.
(4) All of the shares of Common Stock owned by Venture Partners are subject
to the Allied Digital Shareholders Agreement. See "Certain
Relationships and Related Transactions - Allied Digital Shareholders
Agreement."
(5) Consists of (i) 894,000 shares of Common Stock owned by Mr. Olesen and
(ii) 15,000 shares of Common Stock issuable upon the exercise of
presently exercisable options granted to Mr. Olesen under the Incentive
Plan. See "Executive Compensation - Stock Options." All of the shares
owned by Mr. Olesen are subject to the Allied Digital Shareholders
Agreement. See "Certain Relationships and Related Transactions - 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 "Certain Relationships
and Related Transactions - Allied Digital Shareholders Agreement."
(7) 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 the exercise of Substituted Options granted to Mr. Leslie
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 "Certain
Relationships and Related Transactions - Allied Digital Shareholders
Agreement." Number of shares does not include shares of Common Stock
owned by Mr. Leslie's children, as to all of which he disclaims
beneficial ownership.
(8) Consists of (i) 150,275 shares of Common Stock owned by Mr. Kavanagh
and (ii) 10,000 shares of Common Stock issuable upon the exercise of
presently exercisable options granted to Mr. Kavanagh under the
Incentive Plan. See "Executive Compensation - Stock Options."
(9) Consists of (i) 38,050 shares of Common Stock owned by Mr. Mathis and
(ii) 50,000 shares of Common Stock issuable upon the exercise of
presently exercisable options granted to Mr. Mathis under the Incentive
Plan. See "Executive Compensation - Stock Options."
(10) Consists of (i) 15,000 shares of Common Stock 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.
(11) Consists of 6,250 shares of Common Stock issuable upon the exercise of
presently excisable options granted to Mr. Mangini under the Incentive
Plan. See "Executive Compensation - Stock Options".
(12) Consists of 4,000 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) and
(5)-(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.
27
<PAGE>
Item 13. Certain Relationships and Related 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 Allied Merger and
the restructuring of the AFL and Allied's 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 Allied 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. During Fiscal 1997, no interest was paid in respect of the
Smith Notes.
In connection with the Allied Merger and the restructuring of the
credit facilities of AFL and Allied, HMG prepaid certain indebtedness owed to
399 Venture Partners, Inc., then 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 Allied's indebtedness to its senior lender, bear interest at the rate
of 10% per annum, and are due December 31, 1998. The payment of interest and
principal on the HMG Notes is conditional upon Allied 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.
During Fiscal 1997, interest payments made to Messrs. Smith, Fishman and Olesen
in respect of the HMG Notes aggregated $107,555, $13,445 and $13,445,
respectively. No principal payments were made in respect of the HMG Notes
during Fiscal 1997.
HMG is indebted to certain shareholders of the Company, including Mr.
Fishman, Mr. Olesen, Mr. Kavanagh and Venture Partners in the aggregate
principal amount of $880,640 (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 Allied's indebtedness to its senior lender, bear
interest at the rate of 11% per annum, and are due January 1, 1999. The payment
of interest and principal on the HMG Notes is conditional upon Allied achieving
certain financial benchmarks. During Fiscal 1997, interest payments made to the
holders of the Series B Notes aggregated $86,870. No principal payments were
made during Fiscal 1997 in respect of the Series B Notes other than $36,020
which was paid to a holder as a final payment in respect of his note upon his
termination as an employee of the Company.
Guarantee of Certain Obligations of Greenfield Land
The Company has unconditionally guaranteed certain obligations of
Greenfield Land Company ("Greenfield Land") 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 July 31, 1997, the aggregate amount of debt of
Greenfield Land which the Company has guaranteed under the bank financing for
Greenfield Land was $527,050 and the largest amount which the Company had
guaranteed since the beginning of
28
<PAGE>
Fiscal 1997 was $1,513,437. Greenfield Land has unconditionally guaranteed
certain obligations of the Company as part of such bank financing.
Leases
The Company leases certain of its manufacturing, warehouse and office
space from affiliates. See "Properties." The Company believes that the terms of
such leases 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"), Allied (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 Allied by the beneficiaries (where caused by Allied or a
predecessor occupier of the premises), or (ii) the violation of any
"environmental law" by Allied. 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.
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 at the Annual
Meeting held in 1996), 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
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 the Class II Directors resulting
from Mr. Olesen's appointment as a Class I Director.
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,
29
<PAGE>
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 the 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 the 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 clauses (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, 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 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
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
30
<PAGE>
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) or 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.
Other Transactions
H. Sean Mathis, a director of the Company, provides strategic advisory
services to Allied 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 which ended in December 1996.
31
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements and Schedules
<TABLE>
<CAPTION>
<S> <C> <C>
1. List of Financial Statements Included in this Report
Reports of Independent Certified Public Accountants F-2 - F-3
Consolidated Balance Sheets - July 31, 1997 and 1996 F-4
Consolidated Statements of Earnings for the years ended
July 31, 1997, 1996 and 1995 F-6
Consolidated Statement of Stockholders' Equity for the years
ended July 31, 1997, 1996 and 1995 F-7
Consolidated Statements of Cash Flows for the years ended
July 31, 1997, 1996 and 1995 F-8
Notes to Consolidated Financial Statements F-10 - F- 39
2. Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts F-40
</TABLE>
All other schedules have been omitted because they are
inapplicable, not required, or the information is included
elsewhere in the consolidated financial statements or notes
thereto.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
(c) Exhibits
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Allied Digital Technologies Corp.
We have audited the accompanying consolidated balance sheets of Allied Digital
Technologies Corp. and subsidiaries (the "Company") as of July 31, 1997 and
1996, and the related consolidated statements of earnings, stockholders'
equity and cash flows for the years then ended. These financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Allied Digital
Technologies Corp. and subsidiaries as of July 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
We have also audited Schedule II of Allied Digital Technologies Corp. and
subsidiaries as of and for the years ended July 31, 1997 and 1996. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Melville, New York
October 24, 1997 (except for
Note 14, as to which the
date is May 12, 1998)
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To Allied Digital Technologies Corp.
We have audited the accompanying consolidated statements of earnings,
stockholders' equity and cash flows of Allied Digital Technologies Corp. (a
Delaware corporation) and subsidiaries for the year ended July 31, 1995. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
of Allied Digital Technologies Corp. and subsidiaries for the year ended July
31, 1995 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule, as of and for the year ended July 31,
1995 has been subjected to the auditing procedures applied in the audit of the
basic financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan
November 9, 1995
F-3
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
July 31,
<TABLE>
<CAPTION>
ASSETS 1997 1996
--------------- --------
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,192,827 $ 830,723
Accounts receivable, less allowance for doubtful
accounts of $1,650,000 and $1,515,000
at July 31, 1997 and 1996, respectively 25,516,385 23,906,859
Inventories 4,380,126 5,374,498
Prepaid expenses 785,737 756,009
Deferred income taxes 3,422,006 3,312,869
------------- -------------
Total current assets 35,297,081 34,180,958
PROPERTY AND EQUIPMENT, AT COST
Manufacturing equipment 63,182,825 62,266,718
Leasehold improvements 10,728,648 10,408,703
Furniture and fixtures 8,154,766 8,072,625
Capitalized leased equipment 4,000,922 2,900,312
Automobiles 197,499 197,499
-------------- --------------
86,264,660 83,845,857
Less accumulated depreciation and amortization (59,481,974) (51,620,715)
------------ ------------
26,782,686 32,225,142
OTHER ASSETS
Excess of cost over fair value of net assets acquired, net of accumulated
amortization of $7,203,805 and $4,620,134 at July 31,
1997 and 1996, respectively 43,064,233 45,537,736
Deferred income taxes 708,173
Deferred charges and other 2,736,392 1,225,624
------------- -------------
45,800,625 47,471,533
------------ ------------
$107,880,392 $113,877,633
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
July 31,
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
--------------- ---------
CURRENT LIABILITIES
<S> <C> <C>
Current maturities of long-term debt
and capitalized lease obligations $ 9,836,946 $ 9,153,641
Accounts payable 14,780,703 16,805,887
Accrued liabilities 6,735,393 8,712,456
------------- -------------
Total current liabilities 31,353,042 34,671,984
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, less current portion above 26,711,260 30,232,409
SUBORDINATED NOTES PAYABLE TO
STOCKHOLDERS 10,060,366 10,996,386
DEFERRED INCOME TAXES 1,111,946 -
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 136,196 136,196
Additional paid-in capital 44,742,073 44,742,073
Accumulated deficit (6,234,491) (6,901,415)
------------- -------------
38,643,778 37,976,854
------------ ------------
$107,880,392 $113,877,633
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended July 31,
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- ---------
<S> <C> <C> <C>
Net sales $159,147,638 $160,941,632 $116,564,144
Cost of sales 127,034,302 132,261,644 89,442,592
Nonrecurring charge 1,250,000
------------------- -------------
Gross profit 32,113,336 27,429,988 27,121,552
------------ ------------ ------------
Operating expenses
Selling, general and administrative 22,246,164 24,371,797 22,254,730
Amortization of excess of cost over fair value
of net assets acquired 2,583,671 2,580,314 1,559,878
Restructuring charge 3,077,295
------------------- -------------
Total operating expenses 24,829,835 30,029,406 23,814,608
------------ ------------ ------------
Income (loss) from operations 7,283,501 (2,599,418) 3,306,944
Other income (expense)
Interest expense (5,024,905) (6,186,049) (3,816,376)
Other, net 168,328 665,160 762,331
-------------- -------------- --------------
Total other income (expense) (4,856,577) (5,520,889) (3,054,045)
------------- ------------- -------------
Income (loss) before income taxes 2,426,924 (8,120,307) 252,899
Provision (credit) for income taxes 1,760,000 (2,534,847) (2,575,618)
------------- ------------- -------------
NET INCOME (LOSS) 666,924 (5,585,460) 2,828,517
Pro forma data (unaudited)
AFL as a C Corporation subject to
Federal income tax (Note 8)
Adjustment to income tax credit 2,529,990
Net income (loss) $ 666,924 $ (5,585,460) $ 298,527
============== ============= ==============
Historical earnings (loss) per common share - basic
and diluted $.05 $(.41) $.21
=== ==== ===
Pro forma earnings per common share - basic and diluted $.02
===
Weighted average common shares outstanding
Basic 13,619,644 13,619,644 13,619,644
========== ========== ==========
Diluted 13,619,644 13,619,644 13,621,113
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Allied Film Laboratory, Inc.
<TABLE>
<CAPTION>
Allied Digital Technologies Corp.
Common Paid-in (Accumulated Common Paid-in
stock capital deficit) stock capital
-------- ----------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Balance as of August 1, 1994 $ 2 $ 1,998 $ 23,715 $ 1,893,591
Net income (loss) $(1,315,955)
Distributions to stockholders
ADT organization costs (500,000)
Recapitalization and pooling of AFL
and ADT 74,907 3,867,739 (23,715) (1,893,591)
Stock issued to purchase HMG 61,287 41,372,336
-------- ---------- ---------------- ------------ --------------
Balance as of July 31, 1995 136,196 44,742,073 (1,315,955) - -
Net loss (5,585,460)
------------ ----------------- ---------- ------------ --------------
Balance as of July 31, 1996 136,196 44,742,073 (6,901,415) - -
Net income 666,924
------------ ----------------- ----------- ------------ --------------
Balance as of July 31, 1997 $136,196 $44,742,073 $(6,234,491) $ - $ -
======= ========== ========== =========== =============
<CAPTION>
Retained
earnings
(accumulated
deficit) Total
------------ --------
<S> <C> <C>
Balance as of August 1, 1994 $(1,452,254) $ 467,052
Net income (loss) 4,144,472 2,828,517
Distributions to stockholders (666,878) (666,878)
ADT organization costs (500,000)
Recapitalization and pooling of AFL
and ADT (2,025,340)
Stock issued to purchase HMG 41,433,623
---------------- ----------
Balance as of July 31, 1995 - 43,562,314
Net loss (5,585,460)
---------------- -----------
Balance as of July 31, 1996 - 37,976,854
Net income 666,924
---------------- ------------
Balance as of July 31, 1997 $ - $38,643,778
=============== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended July 31,
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 666,924 $ (5,585,460) $ 2,828,517
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Noncash accrued interest to stockholder 600,000 579,726
Write-off of capitalized software costs 837,935
Depreciation and amortization of property and
equipment 7,861,259 8,716,315 6,871,693
Amortization of excess of cost over fair value
of net assets acquired 2,583,671 2,580,314 1,559,878
Deferred income taxes 1,710,982 (2,534,847) (2,575,618)
Gain on sale of property and equipment (19,662) (35,502)
Provision for doubtful accounts 1,242,860 1,297,294 937,504
Changes in operating assets and liabilities, net
of effect of acquisitions and mergers
Accounts receivable (2,852,386) 5,048,617 (4,177,330)
Inventories 994,372 4,037,751 2,595,669
Prepaid expenses (29,728) (1,437) 41,009
Other assets (317,183) 1,403,582 (1,474,849)
Accounts payable and accrued liabilities (4,002,247) (2,042,770) 2,496,259
------------ ----------- ------------
Net cash provided by operating activities 8,458,524 14,317,358 9,067,230
------------ ---------- ------------
Cash flows from investing activities
Purchases of property and equipment (1,312,361) (9,304,407) (7,887,612)
Costs of HMG acquisition (1,520,856)
Proceeds from sale of property and equipment 42,443 150,792
Proceeds from cash surrender value of life insurance 754,648
Internally developed software (1,303,753) (643,723)
------------ ------------------ -------------
Net cash used in investing activities (2,616,114) (9,261,964) (9,146,751)
------------ ------------- -------------
</TABLE>
F-8
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended July 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Cash flows from financing activities
Net borrowings (payments) under revolving loan $ 3,922,348 $ (6,764,383) $ 6,023,372
ADT organization costs (500,000)
Repayment of long-term debt and subordinated notes payable (12,588,107) (7,335,188) (27,472,086)
Borrowing of long-term debt and subordinated notes
payable to stockholders 3,500,000 9,470,620 23,174,729
Principal payments under capitalized lease obligations (314,547) (155,131)
Payment of deferred financing fees (731,672)
Distributions to stockholders (666,878)
------------------ ----------------- -------------
Net cash used in financing activities (5,480,306) (4,784,082) (172,535)
------------- ----------- -------------
NET INCREASE (DECREASE) IN CASH 362,104 271,312 (252,056)
Cash at beginning of year 830,723 559,411 811,467
------------- ------------- --------------
Cash at end of year $ 1,192,827 $ 830,723 $ 559,411
============ ============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 4,421,026 $ 5,671,786 $ 4,459,248
============ ========== ============
Income taxes $ 117,836 $ 8,978 $ 1,144,500
============== ============= ============
Supplemental schedule of noncash financing and investing activities:
Equipment under capitalized lease $ 1,106,442 $ 105,784
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997 and 1996
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements 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"), and Allied Film Laboratories Inc.
("AFL"), hereinafter referred to collectively as the "Company." Allied
Digital is a holding company; all assets, liabilities and operating
activities are related to its wholly-owned subsidiaries. The consolidated
statements of earnings include the operations of Allied Digital and AFL
(entities under common control through January 12, 1995) for all periods
presented. The results of operations of HMG, Holdings and Allied have
been included in the consolidated results of operations since the date of
merger (Note 2). In conjunction with the Company's restructuring plan
(Note 10), AFL merged with and into Allied on November 1, 1996 as a
condition to the Company's debt refinancings described in Note 4 below.
The Company (i) provides video cassette duplication and fulfillment
services in addition to processing and duplicating commercial film and
offering post-production services, and (ii) replicates cassette tapes,
VHS video tapes and compact discs under production contracts with
companies primarily in the recorded music industry.
NOTE 2 - MERGERS AND ACQUISITIONS
HMG Merger
Effective January 12, 1995, Allied Digital (a shell company formed for
the sole purpose of acquiring AFL and HMG), acquired all of the
outstanding common stock of AFL and HMG in exchange for approximately 55%
and 45%, respectively, of the then outstanding common shares of Allied
Digital representing approximately 7,490,700 and 6,127,000 shares,
respectively. The value assigned to the shares issued in connection with
the acquisition of HMG of approximately $6.76 per share was based on an
independent valuation determination. In addition, AFL stockholders were
issued Class C warrants to purchase an additional 1,250,000 shares of
Allied Digital common stock (Note 7). Upon consummation of the merger,
existing HMG warrants totalling 3,067,500 shares, were converted into
Allied Digital warrants on similar terms. In addition, options to acquire
up to 400,000 shares of common stock were issued in substitution for
outstanding options of HMG. The acquisition of AFL
F-10
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 2 (continued)
stock was accounted for as a merger under the pooling of interests method
of accounting as the companies were under common control. The merger of
HMG was accounted for under the purchase method of accounting as a
reverse acquisition of HMG by AFL for financial reporting purposes
because, among other factors, the shareholders of AFL controlled Allied
Digital. Accordingly, the assets acquired and liabilities assumed of HMG
were recorded at their estimated fair values of approximately $88,666,000
and $45,776,000, respectively. The excess of fair value of HMG over the
estimated fair value of the net assets acquired was approximately
$45,611,000. This asset has been recorded as excess of cost over fair
value of net assets acquired and is being amortized on a straight-line
basis over 20 years.
The unaudited consolidated results of operations on a pro forma basis for
the year ended July 31, 1995 as though HMG had been acquired as of August
1, 1994 are presented below. The pro forma information does not purport
to be indicative of what would have occurred had the acquisition been
made as of that date or of results which may occur in the future.
<TABLE>
<CAPTION>
Year ended
July 31,
1995
------------
(unaudited)
<S> <C>
Net sales $158,079,000
Loss before extraordinary item (220,000)
Net loss (220,000)
Loss per common share before extraordinary item (.02)
Net loss per common share - basic and diluted (.02)
Weighted average common shares - basic 13,619,644
Weighted average common shares - diluted 13,621,113
</TABLE>
In preparing the pro forma data, adjustments have been made for: (i) the
amortization of the excess of cost over fair value of net assets acquired
and stepped-up property and equipment; (ii) the interest expense related
to the borrowings to finance the shareholder distributions of previously
taxed income and the conversion of preferred stock into subordinated
debt; (iii) the elimination of intercompany sales; and (iv) the related
tax impacts including the revocation of the Subchapter S election. A
component of this merger transaction included the conversion of preferred
stock into
F-11
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 2 (continued)
subordinated debt. The acquisition transaction was structured to be a
one-step transaction whereby the conversion of the preferred stock into
debt was accomplished as part of the merger of HMG and AFL into the
Company.
The following is a reconciliation from reported net income for Allied
Digital to pro forma consolidated operations of HMG and AFL:
<TABLE>
<CAPTION>
Year ended
July 31,
1995
-----------
(unaudited)
<S> <C>
Net income as reported $ 2,829,000
HMG net earnings, pre-acquisition 768,000
Amortization of cost in excess of fair value
of net assets acquired (1,013,000)
Interest expense (231,000)
Reversal of tax credit arising from
revoking S election (1,625,000)
Pro forma tax provision (736,000)
Depreciation of excess of fair value over
book for acquired assets (212,000)
$ (220,000)
Pro forma loss per share reflecting consolidated operations
of AFL and HMG - basic and diluted $(.02)
====
</TABLE>
AFL provided certain video replication services to HMG. For the period from
August 1, 1994 through January 11, 1995, sales to HMG amounted to
approximately $4,000,000.
VCA Acquisition
Effective January 12, 1993, the Company acquired certain assets and
assumed certain liabilities of VCA/Teletronics, Inc. ("VCA") for cash of
$1,000,000 and a long-term note payable of $1,570,315 (Note 4). Also,
under the purchase agreement, the Company is contingently liable to VCA
for certain royalty payments payable for each of the calendar years
ending December 31, 1996 through
F-12
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 2 (continued)
and including December 31, 2000 in an amount based on the number of
videotape duplication units sold during those years. As the amount of
videotape duplication units to be sold during those open years is not
reasonably estimable, a liability has not been reflected in the
accompanying financial statements. The purchase agreement also contained
a covenant not-to-compete for a period of three years.
The Company accounted for the acquisition as a purchase. The initial
excess of consideration paid over the estimated fair value of the net
assets acquired in the amount of $4,546,842 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. Contingent purchase price
consideration paid during fiscal 1997 of approximately $119,000
pertaining to calendar year ended December 31, 1996 is being amortized on
a straight-line basis over the remaining amortization period.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Allied
Digital and its wholly-owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated.
Inventories
Inventories utilized in the manufacturing and loading of videocassettes,
audiocassettes and manufacturing of compact discs are valued at the lower
of cost or market, using the first-in, first-out (FIFO) method. Elements
included in the determination of cost include direct materials, direct
labor and certain other manufacturing labor and overhead costs.
F-13
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 3 (continued)
Inventories consist of the following classifications:
<TABLE>
<CAPTION>
July 31,
-----------------------------
1997 1996
---------- -------------
<S> <C> <C>
Raw materials $3,415,970 $3,882,455
Work-in-process 674,125 827,142
Finished goods 290,031 664,901
---------- ----------
$4,380,126 $5,374,498
</TABLE>
Property and Equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are provided for over the estimated service lives of the
assets. Leasehold improvements are amortized over the lives of the
respective leases or the service lives of the improvements, whichever is
shorter. Straight-line and accelerated methods are used for reporting
purposes. Accelerated methods are used for income tax purposes.
Accumulated amortization on capitalized leased equipment amounted to
$3,006,637 and $2,685,744 as of July 31, 1997 and 1996, respectively.
Long-Lived Assets
Management reviews and evaluates its long-lived assets (including the
excess of cost over fair value of net assets acquired and property and
equipment) for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
As part of this review and evaluation, the Company considers the value of
anticipated undiscounted cash flow attributable to such long-lived assets
in assessing potential impairment.
Deferred Charges and Other
Deferred charges and other consist principally of customer allowances
under long-term contracts, internally developed software costs, and loan
origination fees associated with the Company's financing transactions.
Customer allowances are amortized over the term of the contract provided
recoverability is assured (Note 9). Internally developed software is
being amortized on a straight-line basis over a five-year expected useful
life; however, internally developed software costs incurred prior to
fiscal 1997 were written off in fiscal 1996 as an abandoned asset in
connection with the Company's restructuring plan (Note 10). Loan
origination fees are being amortized over the term of the underlying
credit agreement.
F-14
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 3 (continued)
Revenue Recognition
Revenue from substantially all production contracts is generally
recognized upon shipment of the finished goods. In addition, for certain
contracts, where risk and rewards of ownership have passed to the
customer, the Company recognizes revenue when production is complete.
Under the terms of these contracts, the customer requests the Company to
bill and hold completed finished goods until it is convenient for the
customer to take physical possession. Further, title to such finished
goods transfers to the customer upon completion of manufacturing, the
customer's goods are segregated in a separate section of the Company's
warehouse and the payment terms are comparable to customers that take
delivery.
Significant Customers
During the year ended July 31, 1997, sales to two customers accounted for
17% and 14% of net sales with corresponding accounts receivable from
these customers totaling 11% and 9% of accounts receivable as of July 31,
1997, respectively. During the year ended July 31, 1996, sales to two
customers accounted for 16% and 13% of net sales with corresponding
accounts receivable from these customers totaling 13% and 8% of accounts
receivable as of July 31, 1996, respectively. During the year ended July
31, 1995, sales to one customer accounted for 15% of net sales with
corresponding accounts receivable from this customer totaling 12% of
accounts receivable as of July 31, 1995.
Other Income
Other income, net includes interest income, recovery of accounts receivable
previously written off as uncollectible and scrap material sales.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for stock-based compensation awards.
Accordingly, no compensation cost has been recognized for the awards
granted under the Plan.
F-15
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 3 (continued)
Income Taxes
The Company follows the asset and liability method of accounting for
income taxes by applying statutory tax rates in effect at the balance
sheet date to differences among the book and tax bases of assets and
liabilities. The resulting deferred tax liabilities or assets are
adjusted to reflect changes in tax laws or rates by means of charges or
credits to income tax expense. A valuation allowance is recognized to the
extent a portion or all of a deferred tax asset may not be realizable.
Earnings (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS No. 128"), "Earnings Per Share," which supersedes Accounting
Principles Board Opinion No. 15. Under SFAS No. 128, earnings (loss) 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 (loss) per share reflect 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.
Financial Instruments
The Company's principal financial instruments consist of accounts
receivable, accounts payable and debt. Because of their short maturity,
the carrying value of accounts receivable, accounts payable and
short-term debt approximates fair value. The fair value of long-term debt
is estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the
same remaining maturities.
Use of Estimates in the Preparation of Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F-16
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 3 (continued)
Reclassifications
Certain reclassifications have been made to the prior years' amounts to
conform with the current year's presentation.
NOTE 4 - 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>
July 31,
------------------------------------
1997 1996
----------- -------------
<S> <C> <C>
Loan and Security Agreement
Term loan $18,782,232 $27,112,055
Revolving loan 14,480,840 10,558,492
Additional loan 1,020,000
Subordinated 10% Notes Payable to Stockholders 7,179,726 6,579,726
Additional Subordinated 10% Notes Payable to Stockholders 2,000,000
Subordinated 12% Series A Note Payable to Stockholder 3,500,000
Subordinated 11% Series B Notes Payable to Stockholders 880,640 916,660
Note Payable to VCA 1,170,514 1,389,186
Capitalized lease obligations 995,137 203,252
Other 99,483 123,065
------------- ------------
46,608,572 50,382,436
Less current portion (9,836,946) (9,153,641)
----------- -----------
$36,771,626 $41,228,795
========== ==========
</TABLE>
Debt Refinancings
In conjunction with the Company's restructuring plan and merger of AFL
into Allied referred to in Note 1 above, (i) the separate senior loan
credit facilities previously maintained by AFL and Allied with a bank
were combined under an amended and restated loan and security agreement
between
F-17
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 4 (continued)
Allied and such bank dated as of October 30, 1996 and effectuated as of
November 1, 1996, (ii) the Subordinated 12% Series A Note Payable to
Stockholder was repaid in full on November 8, 1996 with funds of (a) $1.5
million available as an additional loan under the October 30, 1996
amended and restated loan and security agreement and (b) $2 million
advanced by certain other stockholders in the form of additional
subordinated notes dated October 30, 1996 and (iii) the payment terms of
the Subordinated 10% Notes Payable to Stockholders having an original
principal sum of $6,000,000, plus unpaid interest thereon of $1,179,726
through July 31, 1997 ($579,726 as of July 31, 1996) were extended.
Loan and Security Agreement
The October 30, 1996 loan and security agreement provided the Company
with borrowings of up to $48,910,169 under credit facilities consisting
of a (i) $25,410,169 term loan, (ii) $22,000,000 revolving loan facility
(combined with a $1,500,000 letter of credit facility) and (iii)
$1,500,000 additional loan. As of August 19, 1997, Allied 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 July 31, 1997, there is no equity available for the
payment of dividends to stockholders. The agreement also contains
provisions for fees payable to the bank upon prepayment and an increased
rate of interest during periods of default.
The term of this agreement extends to November 30, 2000.
a. Term Loan
The $25,410,169 term loan dated October 30, 1996 ($27,112,055 at July
31, 1996) is payable in an initial scheduled installment aggregating
$1,695,462 on October 31, 1996 (of which $1,179,000 was paid on
November 8, 1996), 30 consecutive monthly installments of $548,054
F-18
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 4 (continued)
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 (10% at July 31, 1997). In the event the loan and security
agreement has not been terminated prior to October 31, 1997, a
$125,000 fee due on such date to the bank will not be required to be
paid by the Company if on and as of such date no default or event of
default has occurred and is continuing and the Company has made all
principal and interest payments required to be paid on the term loan
when due.
b. Revolving Loan
Under the revolving loan facility combined with a $1,500,000 letter
of credit facility, the Company may borrow up to a maximum of
$22,000,000 based upon a percentage of accounts receivable and
inventory, as defined, less the sum of the undrawn face amount of any
letters of credit outstanding. Interest is payable monthly at 1.25%
over the bank's base rate. In addition, the Company is required to
pay, on a monthly basis, an unused facility fee of .5% per annum. At
July 31, 1997, the Company had approximately $7,270,000 unused and
available under the revolving loan facility.
c. Additional Term Loan
The $1,500,000 additional loan dated October 30, 1996 is payable in
25 consecutive monthly installments which commenced December 31, 1996
of $60,000 each plus interest at 1.5% over the bank's base rate (10%
at July 31, 1997). In the event the additional loan is paid in full
on or before December 31, 1997 and the loan and security agreement
has not been terminated on or before such date, the Company will not
be required to pay a $100,000 fee to the bank on December 31, 1998.
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
F-19
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 4 (continued)
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. As
of October 24, 1997, no amounts were outstanding under this capital
expenditure credit facility.
Subordinated 10% Notes Payable to Stockholders
The subordinated 10% notes payable to stockholders are uncollateralized
and payable in full on January 1, 2001. Interest accrues only on the
original principal sum of $6,000,000 and is payable quarterly at 10% per
annum (12% upon default); however, to date, interest is not permitted to
be paid pursuant to the terms of the amended and restated loan and
security agreement with the bank, and, accordingly, such accrued and
unpaid interest becomes payable on January 1, 2001.
Additional 10% Subordinated Notes Payable to Stockholders
The additional 10% subordinated notes payable to stockholders are
uncollateralized and payable in full on December 31, 1998 with interest
payable quarterly; however, payment of principal and interest may be
extended in full or in part to January 1, 2001 to the extent not
permitted to be paid pursuant to the terms of the amended and restated
loan and security agreement with the bank.
Subordinated 11% Series B Notes Payable to Stockholders
These uncollateralized notes mature on January 1, 1999 with interest
payable quarterly.
Note Payable to VCA
This uncollateralized note is payable in annual installments of $385,374
beginning January 1995 through January 2001, including interest at 12%.
Capitalized Lease Obligations
The Company leases certain equipment under agreements accounted for as
capital leases. During fiscal 1997, the Company leased approximately
$1,100,000 of equipment which were accounted for
F-20
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 4 (continued)
as capital leases. The obligations for the equipment require the Company to
make monthly payments through December 2002, with implicit interest rates
from 5.27% to 19.48%.
Interest Expense on Related Party Debt
Amounts charged to interest expense on all of the subordinated notes
payable to stockholders amounted to approximately $989,000, $1,101,000
and $1,182,000 for the years ended July 31, 1997, 1996 and 1995,
respectively.
The following is a summary of the aggregate annual maturities of
long-term debt, subordinated notes payable and capitalized lease obligations
as of July 31, 1997:
Year ending July 31,
1998 $ 9,836,946
1999 13,955,946
2000 579,547
2001 22,231,494
2002 4,639
--------------
$46,608,572
============
NOTE 5 - EMPLOYEE BENEFIT PLANS
401(k)/Profit-sharing Plan
The Company has a 401(k)/profit-sharing plan. Contributions to the plan
are discretionary and are determined annually by the Board of Directors.
No contributions were made for the years ended July 31, 1997, 1996 and
1995.
Retirement Plan
Allied participates in a defined benefit multi-employer pension plan
covering union employees. Contributions for the years ended July 31, 1997
and 1996, and for the period from January 12, 1995 to July 31, 1995
totaled $306,000, $308,000 and $153,000, respectively.
F-21
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Related Party and Other Leases
The Company leases certain of its processing and administrative
facilities from affiliated companies under noncancellable operating
leases which expire at various dates between 1997 and 2015. Rent expense
under these leases amounted to approximately $2,594,000, $2,369,000 and
$1,706,000 for the years ended July 31, 1997, 1996 and 1995,
respectively. The Company has guaranteed certain mortgage debt on these
facilities totalling approximately $527,000 and $1,514,000 for the years
ended July 31, 1997 and 1996, respectively.
The Company also leases other processing facilities from various
nonrelated parties under noncancellable operating leases which expire at
various dates between 1997 and 2008 and provide for renewals at various
rates and terms. Amounts charged to operations for these facilities
amounted to approximately $2,448,000, $2,237,000 and $2,547,000 for the
years ended July 31, 1997, 1996 and 1995, respectively.
The minimum annual rental commitments required under all facility leases
are as follows:
<TABLE>
<CAPTION>
Related Nonrelated
parties parties Total
------- ----------- -----
<S> <C> <C> <C> <C>
Year ending July 31,
1998 $ 2,522,000 $1,993,000 $ 4,515,000
1999 2,422,000 2,007,000 4,429,000
2000 2,022,000 1,172,000 3,194,000
2001 2,022,000 800,000 2,822,000
2002 2,022,000 609,000 2,631,000
Thereafter 20,079,000 3,417,000 23,496,000
---------- --------- ----------
$31,089,000 $9,998,000 $41,087,000
========== ========= ==========
</TABLE>
F-22
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 6 (continued)
Other Leases
The Company also leases various office equipment and automobiles under
noncancellable operating leases expiring through fiscal 2001. The minimum
rent commitments required under these leases are as follows:
Year ending July 31,
1998 $ 395,000
1999 356,000
2000 261,000
2001 164,000
----------
$1,176,000
==========
Employment Agreements
The Company maintains employment agreements with certain executive
officers. Salary continuation is provided for any executive who is
terminated without cause, as defined. Effective August 1, 1997, the
Company entered into an employment agreement with an executive officer
expiring July 31, 2000.
As of July 31, 1997, the aggregate minimum compensation obligation under
active employment agreements is as follows (taking into effect the August
1, 1997 agreement described above):
Year ending July 31,
1998 $ 614,000
1999 275,000
2000 275,000
----------
$1,164,000
==========
F-23
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 6 (continued)
Global Indemnification Agreement
On June 17, 1994, the Company entered into a Global Indemnification
Agreement with affiliates from whom it rents property. The Agreement
indemnifies the affiliates and holds them harmless for liabilities, if
any, related to environmental law and hazardous substance utilization on
the leased properties. This indemnification excludes any hazardous
substance that may be placed on the leased properties by someone other
than the Company, after the Company ceases to occupy the applicable
property. In exchange for indemnifying the affiliates, the Company
received $25,000 from the affiliates.
Consulting Agreement
A director of the Company provides strategic advisory services to the
Company pursuant to a five-year consulting agreement expiring in January
2000. The director received a fee of $96,000 payable in twenty-four
monthly installments which ended in December 1996.
Litigation Matters
The Company is involved in various routine litigation which arise through
the normal course of business. Management believes that the resolution of
these matters will not have a material adverse effect on the consolidated
financial position or results of operations.
NOTE 7 - STOCKHOLDERS' EQUITY
The Company's issued and outstanding common stock warrants and options are
as follows:
Common Stock Warrants
The Company has 1,353,750 Class A redeemable warrants and 1,353,750 Class
B redeemable warrants outstanding as of July 31, 1997. Each Class A and
Class B redeemable warrant entitles the registered holder thereof to
purchase one share of common stock at a price of $6.75 and $7.50 per
share, respectively, subject to certain adjustment, until July 28, 1998
(originally July 28, 1997). The Company, at its own option, may redeem
the Class A redeemable warrants and the Class B
F-24
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 7 (continued)
redeemable warrants, in each case as a class and not in part, at a price
of $.05 per warrant provided the reported closing bid price of the common
stock equals or exceeds $8.50 per share for a length of time as specified
in the agreements. The warrant holders have exercise rights until the
close of business on the date fixed for redemption.
The Company had 120,000 units exercisable through July 28, 1997 at an
exercise price of $9.90 per unit. Each unit consisted of one share of
common stock, one Class A redeemable warrant and one Class B redeemable
warrant. The exercise price of the Class A and the Class B redeemable
warrants, in accordance with these units, was $9.79 and $10.88,
respectively. All of these units expired on July 28, 1997.
The Company also has 1,250,000 Class C warrants outstanding as of July
31, 1997. Each Class C warrant entitles the registered holder thereof to
purchase one share of common stock at a price of $9.00 per share,
beginning two years after the date of the HMG merger (January 12, 1997)
and expiring three years after becoming exercisable.
Stock Options
The Company established an Amended and Restated 1994 Long-Term Incentive
Plan (the "Plan") under which options to purchase shares of the Company's
common stock and other stock incentives may be granted to eligible
participants. The maximum number of shares available for awards under the
Plan is 2,400,000 shares, of which no more than half may be newly-issued
shares. Shares issued to holders of HMG common stock or AFL common stock
in the merger and subsequently reacquired by Allied Digital, as well as
any other shares acquired by Allied Digital after the merger, in the
public market or otherwise, would not be considered newly-issued shares
for this purpose. Options granted under the Plan may be either incentive
stock options or nonqualified 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
F-25
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 7 (continued)
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 nonqualified stock options.
At July 31, 1997, the Company has 522,500 options outstanding (of which
423,750 are exercisable) at prices ranging from $2.875 to $8.63, vesting
at various dates through July 1999 and expiring at various dates between
November 1998 and September 2003.
<TABLE>
<CAPTION>
Incentive Stock Options Nonqualified Stock Options Weighted
---------------------------- -------------------------
Exercise Exercise average
price Quantity price Quantity exercise price
---------- -------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding as of
August 1, 1995 $5.5625 - $6.94 349,500 $6.66 - $8.63 275,000 $6.6185
Forfeited 5.5625 (77,000) - - 5.5625
-------- --------- ------------
Outstanding as of
July 31, 1996 5.5625 - 6.94 272,500 6.66 - 8.63 275,000 6.7670
Granted 2.875 25,000 - - 2.875
Expired 5.5625 (12,500) - 5.5625
Forfeited 5.5625 (37,500) - - 5.5625
-------- ----------
Outstanding as of
July 31, 1997 $2.875 - $6.94 247,500 $6.66 - $8.63 275,000 $6.6140
=============== ======= ============ ======= ======
Amounts exercisable as of
July 31, 1997 $5.5625 - $6.94 148,750 $6.66 - $8.63 275,000 $7.5541
=============== ======= ============ ======= ======
</TABLE>
F-26
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 7 (continued)
The following table summarizes information regarding stock options at July
31, 1997:
<TABLE>
<CAPTION>
Options exercisable Options outstanding
----------------------------------------- -------------------------------------------
Weighted- Weighted-
average Weighted- average Weighted-
remaining average remaining average
Number contractual exercise Number contractual exercise
Range of exercise prices exercisable life (months) price outstanding life (months) price
------------------------ ---------- ------------- -------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$5.5625 - $6.94 298,750 37 months $6.34 397,500 37 months $6.15
$8.63 125,000 74 months $8.63 125,000 74 months $8.63
</TABLE>
The weighted-average option fair value on the grant date was $1.38 for
options issued during the year ended July 31, 1997.
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"); it applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for the Plan and does not recognize compensation expense
for such Plan. If the Company had elected to recognize compensation
expense based upon the fair value at the grant dates for awards under
these plans consistent with the methodology prescribed by SFAS No. 123,
the Company's reported net income and earnings per share would be reduced
to the pro forma amount indicated below for the year ended July 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Net income
As reported $666,924
Pro forma 658,299
Earnings per common share - basic and diluted
As reported .05
Pro forma .05
</TABLE>
F-27
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 7 (continued)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before fiscal 1996. The fair value of these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for
the fiscal year ended July 31, 1997: expected volatility of 45%;
risk-free interest rate of 6.32% and expected term of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the use of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
In connection with a June 1995 sales contract (Note 9), the Company
granted to a customer 250,000 options to acquire shares of Company common
stock at an exercise price of $5.5625, equivalent to the quoted market
price on such date. In consideration for modifying certain provisions of
the June 1995 sales contract in September 1997, the Company repriced
these options to an exercise price of $3.00 per share (equivalent to the
quoted market price on such date) for which the Company expects to
recognize a noncash pretax charge to earnings of approximately $150,000
(representing the difference between the fair values of the modified and
original options utilizing the Black-Scholes option valuation model).
These options expire in June 2000.
F-28
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 7 (continued)
The following information summarizes the Company's stock options and
warrants at July 31, 1997:
<TABLE>
<CAPTION>
Range of
exercise
Description Authorized Issued Exercisable price
----------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Class A warrants 1,353,750 1,353,750 1,353,750 $ 6.75
Class B warrants 1,353,750 1,353,750 1,353,750 7.50
Class C warrants 1,250,000 1,250,000 1,250,000 9.00
Incentive stock options/
nonqualified stock options 2,400,000 522,500 423,750 2.875 - 9.00
Options - other 250,000 250,000 250,000 5.562
---------- ---------- ---------- ----------
Balance as of July 31, 1997 6,607,500 4,730,000 4,631,250 $2.875 - $9.00
========= ========= ========= =============
</TABLE>
In connection with the August 1, 1997 employment agreement described in
Note 6, the Company granted incentive stock options to an executive
officer to acquire 200,000 shares of common stock with an exercise price
of $2.00 representing the quoted market price on such date. These options
become exercisable over a four-year period commencing August 1, 2001 at a
rate of 25% each year with possible acceleration based upon the market
performance of the Company's common stock.
On October 21, 1997, the Company: (i) repriced all outstanding incentive
stock options to an exercise price of $2.4375, representing the quoted
market price on such date and (ii) granted 27,500 incentive stock options
to employees which become exercisable equally over five years with an
exercise price of $2.4375.
NOTE 8 - INCOME TAXES
Prior to January 12, 1995, the stockholders of AFL had elected, under the
provisions of Subchapter S of the Internal Revenue Code, to have the
income and related tax benefits of AFL included in the taxable income of
the individual stockholders. As a result, no provision for Federal income
taxes has been included in the historical statements of earnings prior to
January 12, 1995.
F-29
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 8 (continued)
On January 12, 1995, AFL became disqualified, under the provisions of
Subchapter S of the Internal Revenue Code, to have the income of the
Company included in the taxable income of the individual stockholders. In
connection with this disqualification, the Company established net
deferred tax assets of approximately $1,625,000. The effect of
establishing the deferred tax assets was included in income for the year
ended July 31, 1995. Subsequent to January 12, 1995, the Company has
provided Federal income taxes in the statements of earnings based on the
effective tax rate. The unaudited pro forma adjustment to income tax
provision and net income have been presented in the consolidated
statement of earnings for the year ended July 31, 1995 as if the
Subchapter S election had been terminated prior to August 1, 1994.
The provision (credit) for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended July 31,
---------------------------------------
1997 1996 1995
----------- ----------- -------
<S> <C> <C> <C>
Federal
Current $ 40,000 $ - $ -
Deferred 1,578,500 (1,758,663) (1,556,409)
--------- ----------- ---------
1,618,500 (1,758,663) (1,556,409)
--------- ---------- ----------
State
Current 10,000
Deferred 131,500 (776,184) (1,019,209)
---------- ----------- ----------
141,500 (776,184) (1,019,209)
---------- ------------ ----------
$1,760,000 $(2,534,847) $(2,575,618)
========= ========== ==========
</TABLE>
F-30
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 8 (continued)
Deferred income tax assets (liabilities) resulting from differences between
accounting for financial statement purposes and tax purposes are as
follows:
<TABLE>
<CAPTION>
July 31,
----------------------------------------
1997 1996
------------ ---------
<S> <C> <C>
Restructuring costs $ 501,000 $ 1,115,000
Nonrecurring charge 293,000 391,000
Accounts receivable 637,000 585,000
Inventory 121,000 144,000
Accrued salaries 304,000 378,000
Net operating loss carryover 2,500,000 2,365,000
State investment tax credits 1,572,000 1,239,000
--------- ----------
5,928,000 6,217,000
---------- ----------
Property and equipment (2,747,000) (1,332,000)
Other accrued expenses 19,000 (133,000)
------------ -----------
(2,728,000) (1,465,000)
---------- ----------
Valuation allowance (890,000) (732,000)
----------- -----------
Net deferred tax asset $ 2,310,000 $ 4,020,000
========== ==========
</TABLE>
The deferred tax valuation allowance at July 31, 1997 and 1996 is
attributable to the Company's ability to utilize investment tax credit
carryovers prior to expiration. Changes in the deferred tax asset
valuation are based on projections of future taxable income.
F-31
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 8 (continued)
The Company's effective income tax rate was 72.5% in 1997, 31.2% in 1996
and (1,018)% in 1995. The components of the reconciliation of the
Company's effective tax provision (credit) to the tax provision (credit)
pursuant to the U.S. statutory rate of 34% are as follows:
<TABLE>
<CAPTION>
Year ended July 31,
-------------------------------------------------
1997 1996 1995
-------- ----------- --------------
<S> <C> <C> <C>
Federal tax provision (credit) computed at
statutory rate $ 825,154 $(2,760,904) $ 85,986
S Corporation earnings (880,464)
Amortization of costs in excess of net assets
acquired 637,989 625,949 427,582
Nondeductible entertainment expenses 45,468 47,775 32,884
State tax expense (benefit) net of Federal tax 425,738 (341,448) (202,370)
Recognition of investment tax credit (332,349) (319,219) (414,401)
Increase in valuation allowance 158,000 213,000 -
Reinstatement of deferred taxes - - (1,624,835)
--------------- ---------------- ----------
Actual tax provision (credit) $1,760,000 $(2,534,847) $(2,575,618)
========= ========== ==========
</TABLE>
HMG is in the process of undergoing an IRS tax examination. In connection
with this examination, management does not anticipate any material
adverse effect on the Company's consolidated financial position and
results of operations upon its ultimate resolution.
The Company has an NOL carryforward as of July 31, 1997 for Federal
purposes of approximately $6,585,000 which expires during the fiscal
years ending 2010 through 2012.
The Company uses the flow-through method of accounting for investment tax
credits. The Company has state investment tax credit carryforwards at
July 31, 1997 approximating $2,035,000 which expire between fiscal 2003
and 2007.
NOTE 9 - NONRECURRING CHARGE
In June 1995, the Company, in connection with consummating a five-year
production and fulfillment sales contract, agreed to, among other things,
a customer signing allowance in the amount of $1,250,000 to be amortized
over the term of the contract. Based on the fiscal 1996 financial results
F-32
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 9 (continued)
relating thereto and an assessment made in the fiscal 1996 fourth quarter
of anticipated future results of performing thereunder, the Company
determined that the unamortized balance of the deferred charge was not
recoverable and, accordingly, charged to operations the remaining
unamortized balance.
NOTE 10 - RESTRUCTURING CHARGE
As a result of certain organizational changes which occurred during
mid-fiscal 1996, management of the Company developed in April 1996 the
framework of a restructuring plan. In June 1996, the Company adopted the
plan to streamline and reduce resources utilized in the business which
resulted in recording a restructuring charge of approximately $3.1
million in the fourth quarter of fiscal 1996. The restructuring charge
comprised of work force related expenses of $1,126,385, idle plant lease
costs of $863,000, abandoned asset write-off of $837,935 and other
related costs of $250,000.
The plan encompassed: (i) the merger and integration of the Company's two
operating subsidiaries, (ii) the closure of the Company's Detroit
manufacturing facility and (iii) the consolidation of the Company's
corporate and administrative offices from Detroit to New York.
The work force related expenses resulted in the termination of 25
corporate, administrative and operational employees receiving severance;
all of which were notified of termination in fiscal 1996 with final
payments made in fiscal 1997 with the exception of one former employee
receiving scheduled payments through December 1998.
The idle plant lease costs associated with the Detroit facility under a
noncancellable lease term expiring in 2010 is an estimate of the cost for
a two-year period such facility is expected to remain idle before the
Company is able to sublease the facility.
The merger and integration of the Company's two operating subsidiaries
encompassed the consolidation of their separate information systems and
credit facilities. In this regard, the Company decided to convert AFL's
information systems which resulted in the abandoned asset write-off
representing the remaining balance of the internally developed software
costs which had been capitalized. Depreciation expense recognized in
fiscal 1996 and fiscal 1995 in connection with these capitalized software
costs aggregated approximately $242,000 and $364,000, respectively. All
other assets and related production were or will be relocated to other
facilities.
F-33
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 10 (continued)
In addition, the Company's bank had to consent to amend the separate
credit facilities into one credit facility which was essential to the
execution of the Company's restructuring plan to allow the merger of AFL
into HMG and the commingling of assets. The bank charged restructuring
fees representing the "other related costs" with scheduled payments
thereof throughout fiscal 1998.
The status of the components of the restructuring charge is as follows:
<TABLE>
<CAPTION>
Balance at Balance at
July 31, Fiscal 1997 July 31,
1996 activity 1997
------------- ------------- --------
<S> <C> <C> <C>
Work force related expenses $1,126,000 $(1,022,000) $104,000
Idle plant lease costs 863,000 (452,500) 410,500
Other related costs 250,000 (62,500) 187,500
---------- ------------ -------
$2,239,000 $(1,537,000) $702,000
========= ========== =======
</TABLE>
During fiscal 1997, the Company made payments for work force related
expenses, idle plant lease costs and other related costs of approximately
$1,022,000, $108,500 and $62,500, respectively. Idle plant costs were
reduced in fiscal 1997 by $344,000 to reflect a change in estimate of the
costs of closing the plant, as it became apparent that the Company's
exposure to the original 24-month idle plant period would be mitigated
due to changes in the conditions in the Detroit real estate market.
On a quarterly basis, the Company reviewed and reassessed the accrual
made in connection with idle plant lease costs in relation to real estate
broker activity and made changes to the accrual, reflecting periodic
improvements that were occurring in the downtown Detroit real estate
market. During the course of fiscal 1997, particularly in the latter part
of the year, it became apparent that the Company would, in fact, not have
to sustain the level of idle plant lease costs that had originally been
estimated.
The Company also incurred and paid in fiscal 1997 costs of approximately
$344,000 related to the restructure that were not contractually committed
for in fiscal 1996. These costs related principally to consulting fees
incurred by the Company during fiscal 1997 to wind down the corporate and
administrative functions of the Detroit facility. Further, these costs
were recognized in fiscal 1997 as they became reasonably estimable under
the provisions of EITP 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). At July 31, 1997, the Company
considers the remaining accrual by component and in the aggregate to be
adequate.
F-34
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 11 - QUARTERLY FINANCIAL DATA
Summarized quarterly financial data is as follows (unaudited and in
thousands, except per share data):
<TABLE>
<CAPTION>
Earnings
(loss)
per common
Gross Net income share - basic
Revenue margin (loss) and diluted
------- ------ ------ -----------
<S> <C> <C> <C> <C>
1997
First quarter $42,726 $8,599 $ 488 $ .04
Second quarter 38,132 7,594 43 -
Third quarter 38,509 7,676 98 -
Fourth quarter 39,781 8,244 38 -
1996
First quarter $46,335 $9,606 $ 851 $ .06
Second quarter 39,389 6,048 (1,465) (.11)
Third quarter 37,933 6,656 (1,012) (.07)
Fourth quarter 37,284 5,120 (3,959) (i) (.29)
---------------
</TABLE>
(i) The quarter's net loss reflects the after-tax effects of a
nonrecurring charge (Note 9) and a restructuring charge (Note 10).
NOTE 12 - EARNINGS (LOSS) PER COMMON SHARE
The number of shares used in the Company's basic and diluted earnings
(loss) per common share at July 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -------
<S> <C> <C> <C>
Weighted-average common shares outstanding
for basic earnings (loss) per share 13,619,644 13,619,644 13,619,644
Common stock equivalents for stock options
and warrants - - 1,469
------------------ ------------------ --------------
Weighted-average common shares outstanding
for diluted earnings (loss) per share 13,619,644 13,619,644 13,621,113
========== ========== ==========
</TABLE>
F-35
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 12 (continued)
Options and warrants outstanding to purchase 4,730,000, 5,115,000 and
4,642,500 shares of common stock in fiscal 1997, 1996 and 1995,
respectively, were excluded in the computation of diluted earnings per
share as their effects were antidilutive.
NOTE 13 - SHAREHOLDERS' AGREEMENT
On January 11, 1995, the Company and certain of its affiliated
stockholders entered into a shareholders' agreement, as amended in
November 1995 and January 1997, whereby, among other things, such
shareholders established parameters for the number and class of Company
directors and agreed to use their best efforts to secure the election of
certain affiliated stockholders and/or other designated individuals to
the Executive Committee of the Board of Directors of the Company. The
agreement also placed limitations on the transfer during specified
periods of any shares of common stock held by certain of the affiliated
shareholders, including the Class C warrants, unless the transferee
becomes a party to such agreement. Until January 11, 1998, certain of
these affiliated shareholders may not transfer shares of common stock
which would cause the transferee to own 30% or more of the Company's
common stock outstanding unless the transferee agrees, for a period of
eighteen months from the closing of such transfer, not to purchase or
cause the Company, directly or indirectly, to purchase stock at a price
which is less than the highest price paid by the transferee for such
common stock from such affiliated stockholders. The agreement also
prohibits the affiliated stockholders and the Company from engaging in a
"going private" transaction, as defined, prior to January 11, 1998,
unless such transaction is approved by a majority of the stockholders who
are neither parties to the agreement nor affiliates or associates to
those subject to the conditions of the agreement.
NOTE 14 - SUBSEQUENT EVENTS
The Proposed Recapitalization
Pursuant to a merger agreement (the "Merger Agreement") dated as of May
5, 1998 between the Company and Analog Acquisition Corp. ("AAC"), an
entity organized solely to effect the merger (as defined) on behalf of
399 Venture Partners Inc., ("399"), and certain members of the Company's
management, and subject to shareholder approval, AAC will merge with and
into the Company,
F-36
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 14 (continued)
with the Company as the surviving corporation (the "Merger"). Each issued
and outstanding share (or fraction thereof) of common stock of the
Company immediately prior to the effective date of the Merger will be
canceled and converted into the right to receive $5.00 in cash other than
(i) 74,998 shares of common stock held by certain members of the
Company's management, which will remain outstanding and be converted into
one share of Class A Common Stock of the Company, representing, in the
aggregate, approximately 51% of the Class A Common Stock; (ii) 1,100,110
shares of common stock of the Company owned by 399, which will be
converted into 73,999 shares of Class A Common Stock, 351,000 shares of
Class B Common Stock of the Company and 33,375.55 shares of redeemable
Series A Preferred Stock; and (iii) shares of stockholders who are
entitled to, and who have perfected, their appraisal rights. In addition,
399 will purchase 131,244.45 shares of preferred stock, par value $.01
per share, of AAC for $13,124,445 in cash. Further, (i) each share of
common stock of AAC outstanding immediately prior to the effective date
of the Merger will be canceled and converted into one share of Class A
Common Stock and (ii) each share of preferred stock of AAC outstanding
prior to the effective date of the Merger will be canceled and converted
into one share of redeemable Series A Preferred Stock of the Company.
As a result of the cancellation and conversion of the shares of AAC and
the conversion of 1,100,110 shares of Common Stock of 399 described
above, 399 will own 165,000 shares of redeemable Series A Preferred
Stock, 74,000 shares of Class A Common Stock and 351,000 shares of Class
B Common Stock. Members of management will own 75,000 shares of Class A
Common Stock. As part of the recapitalization, all of the existing
long-term debt of the Company (except for capitalized lease obligations)
aggregating, at April 30, 1998, $42.5 million, including subordinated
notes payable to the stockholders aggregating $10.1 million (of which
$9.5 million is payable to the Company's Co-Chairmen) and a termination
charge of approximately $0.7 million, will be repaid with the proceeds
from the funding described below.
The recapitalization will be funded by (i) approximately $5.3 million of
borrowings under a proposed new $25.0 million senior revolving credit
facility, (ii) approximately $75.0 million of borrowings from two
proposed senior secured term loans with a bank, (iii) approximately $20.0
million of borrowings from two proposed subordinated loans with an entity
related to 399, (iv) approximately $13.1 million from the purchase of the
AAC Series A Preferred Stock and (v) $0.2 million from the exercise of
stock options and purchase of common stock by certain members of
management.
F-37
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 14 (continued)
The 165,000 shares of Surviving Corporation Series A Preferred Stock will
have (i) a stated value of $100 per share, (ii) cumulative dividends
payable semiannually at a rate of 12% per annum and (iii) a mandatory
redemption in 2009 or earlier upon either the sale of the Company or any
qualifying offering.
At the effective time, it is anticipated that the Company will enter into
a loan agreement with Fleet National Bank or a comparable financial
institution providing for a $25 million revolving credit facility and a
$25 million Term A facility, each maturing on December 31, 2003, and a
$50 million Term B facility maturing on December 31, 2005. It is expected
that loans under the revolving credit facility and Term A facility will
bear interest for the initial six months at the applicable LIBOR rate
plus 2.50% or Prime Rate plus 1.25% and loans under the Term B facility
will bear interest for the initial six months at the applicable LIBOR
rate plus 3.00% or Prime Rate plus 1.50%, and thereafter, all loans under
the Term and revolving credit facility will bear interest at applicable
margins over the LIBOR and Prime rates determined on the basis of the
Company's ratio of total debt to twelve months trailing earnings before
interest, taxes, depreciation and amortization. It is expected that the
senior Term credit facilities will be secured by substantially all of the
assets of the Company and guaranteed by its subsidiaries. It is also
anticipated that at the effective time the Company will enter into a loan
agreement with Citicorp Mezzanine Partners, L.P. (CMP), an entity related
to 399, providing for an approximately $20 million unsecured senior
subordinated credit facility with a maturity date of ten years from the
Closing Date and an annual interest rate of 12%.
In connection with the $20 million unsecured senior subordinated credit
facility, CMP will be entitled to receive warrants to purchase up to
7-1/2% (subject to reduction by 50% in the event of a prepayment of the
unsecured senior subordinated credit facility prior to the first
anniversary of the Closing Date) of the fully diluted Surviving
Corporation Common Stock outstanding as of the Closing Date, after giving
effect to the Merger at an exercise price of $0.01 per share. These
warrants have been valued at approximately $103,000 using the minimum
value method in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation." A value of
$5.00 per share of the Company's common stock was the underlying value
used in assigning a value to the warrants derived from the application of
the minimum value method, which is justified in that the Company is
changing from a public to a nonpublic status. These deferred financing
costs of $103,000 will be amortized over 10 years, the term of the
unsecured senior subordinated credit facility.
F-38
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 31, 1997 and 1996
NOTE 14 (continued)
The Merger will be accounted for as a recapitalization for accounting
purposes as there will be a significant continuation of stockholder
ownership. Further, AAC, formed solely for the purpose of effectuating
the recapitalization, will merge with and into the Company. Accordingly,
the Merger will have no impact on the historical basis of the Company's
assets and liabilities.
The following non-recurring charges will be reflected in the Company's
statements of earnings in connection with the Transactions in the period
in which the Transactions close: (i) $1.026 million relating to the cash
settlement of unexercised stock options granted to employees, (ii) an
extraordinary charge of $1.132 million relating to a termination charge
and write-off of deferred financing costs relating to the repayment of
borrowings under the Company's existing credit agreement and (iii)
related tax effects.
In accordance with the terms of the Merger Agreement, the Company must
pay AAC $3,375,000, and reimburse AAC for its reasonable out-of-pocket
expenses up to a maximum of $1,000,000, if the Merger Agreement is
terminated for certain specified reasons (as defined).
Litigation
On May 12, 1998, a complaint purporting to state a class action was filed
in the Delaware Court of Chancery by Crandon Capital Partners, alleged to
be a stockholder of the Company, on behalf of itself and all others
similarly situated, against the Company and its directors. The plaintiffs
allege that the Merger is wrongful, unfair and harmful to holders of
Common Stock and that it has been effected with unfair dealing, that the
proposed consideration of $5.00 a share is unfair to the Company's
stockholders and that the directors of the Company have violated their
fiduciary obligations owed to the plantiffs and other members of the
class. The complaint seeks to enjoin the Merger and an unspecified amount
of damages, in addition to payment of attorney's fees and reimbursement
of expenses. Management believes that this claim is without merit and
does not believe such claim will have a material adverse effect on the
Merger or on the Company's financial position, results of operations or
liquidity; however, there can be no assurance as to the outcome of such
claim.
<PAGE>
Allied Digital Technologies Corp. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- ---------- ----------
Additions
---------------------------
(1) (2)
Charged to
Balance at Charged to other Balance at
beginning costs and accounts - Deductions - end of
of period expenses describe describe period
--------- -------- -------- -------- ------
Description
-----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
For the year ended July 31, 1997 $1,515,000 $1,242,860 $1,107,860(a) $1,650,000
========= ========= ========= =========
For the year ended July 31, 1996 $ 871,000 $1,297,294 $ 653,294(a) $1,515,000
========== ========= ========== =========
For the year ended July 31, 1995 $ 918,000 $ 937,504 $395,000(b) $1,379,504(a) $ 871,000
========== ========== ======= ========= ==========
</TABLE>
(a) Write-off of uncollectible accounts
(b) Attributable to HMG Merger
F-40
<PAGE>
Exhibit No. Description of Exhibit
----------- ----------------------
(2)(a) Amended and Restated Reorganization Agreement, dated as
of October 31, 1994, among Allied Digital Technologies
Corp., Allied Film Laboratory, Inc., EOS Acquisition
Corp., Aurora Acquisition Corp., HMG Digital
Technologies Corp., HRM Holdings Corp., and Hauppauge
Record Manufacturing Ltd. (herein incorporated by
reference to Exhibit (2)/(10)(a) filed as part of
registrant's Registration Statement on Form S-4, File
No. 33-86530).
(2)(b) Amended and Restated Agreement and Plan of Merger, dated
as of October 31, 1994, among Allied Digital
Technologies Corp., Allied Film Laboratory, Inc., and
Aurora Acquisition Corp. (herein incorporated by
reference to Annex B (pages B-1 through B-10) to the
Proxy Statement and Prospectus that formed a part of
registrant's Registration Statement on Form S-4, File
No. 33-86530).
(2)(c) Amended and Restated Agreement of Merger, dated as of
October 31, 1994, among Allied Digital Technologies
Corp., EOS Acquisition Corp., and HMG Digital
Technologies Corp. (herein incorporated by reference to
Annex C (pages C-1 through C-9) to the Proxy Statement
and Prospectus that formed a part of registrant's
Registration Statement on Form S-4, File No. 33-86530).
(3)(i) Certificate of Incorporation of Allied Digital
Technologies Corp. and all amendments thereto (herein
incorporated by reference to Exhibit (3)(a)/(4)(a) filed
as part of registrant's Registration Statement on Form
S-4, File No. 33-86530).
(3)(ii)(a) Amended and Restated By-laws of Allied Digital
Technologies Corp. (herein incorporated by reference to
Exhibit (3)(b)/(4)(b) filed as part of registrant's
Registration Statement on Form S-4, File No. 33-86530).
(3)(ii)(b) First Amendment to Allied Digital Technologies Corp.
Amended and Restated Bylaws (herein incorporated by
reference to Exhibit 3 to registrant's Form 10-Q for the
quarterly period ended January 31, 1995).
(4)(a) Specimen certificate for Allied Digital Technologies
Corp. Common Stock (herein incorporated by reference to
Exhibit (4)(f) filed as part of registrant's
Registration Statement on Form S-4, File No. 33-86530).
(4)(b) Form of specimen note for HMG 12% Series A Note (herein
incorporated by reference to Exhibit (4)(g)/(10)(b)
filed as part of registrant's Registration Statement on
Form S-4, File No. 33-86530).
(4)(c) Amendment No. 1 to the HMG 12% Series A Note (herein
incorporated by reference to Exhibit 4(i)(b) to HMG
Digital Technologies Corp. Annual Report on Form 10-K
for the year ended July 31, 1995, Commission File No.
0-20014).
(4)(d) Form of specimen note for HMG 11% Series B Subordinated
Note (herein incorporated by reference to Exhibit
(4)(h)/(10)(c) filed as part of registrant's
Registration Statement on Form S-4, File No. 33-86530).
(4)(e) Warrant Agreement, dated as of July 29, 1992, between
HMG Digital Technologies Corp. and RAS Securities Corp.
(herein incorporated by reference to Exhibit 4.4 of HMG
Digital Technologies Corp.'s Registration Statement on
Form S-1, File No. 33-44942).
(4)(f) Warrant Agreement, dated as of July 29, 1992, between
HMG Digital Technologies Corp. and American Stock
Transfer & Trust Company (herein incorporated by
reference to Exhibit 4.5 of HMG Digital Technologies
Corp.'s Registration Statement on Form S-1, File No.
33-44942).
(4)(g) Form of Supplemental Warrant Agreement among Allied
Digital Technologies Corp., HMG Digital Technologies
Corp. and RAS Securities Corp. (herein incorporated by
reference to Exhibit (4)(m) filed as part of
registrant's Registration Statement on Form S-4, File
No. 33-86530).
33
<PAGE>
(4)(h) Form of Supplemental Warrant Agreement among Allied
Digital Technologies Corp., HMG Digital Technologies
Corp. and American Stock Transfer & Trust Company
(herein incorporated by reference to Exhibit (4)(n)
filed as part of registrant's Registration Statement on
Form S-4, File No. 33-86530).
(4)(i) Form of Class C Warrant Agreement between Allied Digital
Technologies Corp. and American Stock Transfer & Trust
Company (herein incorporated by reference to Exhibit
(4)(o)(i) filed as part of registrant's Registration
Statement on Form S-4, File No. 33-86530).
(ii) Form of Class C Warrant Certificate
(herein incorporated by reference to
Exhibit (4)(o)(ii) filed as part of
registrant's Registration Statement on
Form S-4, File No. 33-86530).
(10)(a) Agreements with American National Bank and Trust Company
of Chicago ("ANB"):
(i) Amended and Restated Loan and Security
Agreement, dated as of October 30, 1996,
between Hauppauge Record Manufacturing
Ltd. and ANB (herein incorporated by
reference to Exhibit 10(a)(i) to
registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996).
(ii) Amended and Restated Revolving Loan Note,
dated October 30, 1996, made by Hauppauge
Record Manufacturing Ltd. to the order of
ANB in the principal amount of
$22,000,000 (herein incorporated by
reference to Exhibit 10(a)(ii) to
registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996).
(iii) Amended and Restated Term Note, dated
October 30, 1996, made by Hauppauge
Record Manufacturing Ltd. and payable to
Lender in the aggregate principal amount
of $25,410,168.93 (herein incorporated by
reference to Exhibit 10(a)(iii) to
registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996.
(iv) Additional Term Note, dated October 30,
1996, made by Hauppauge Record
Manufacturing Ltd. and payable to ANB in
the aggregate principal amount of
$1,500,000 (herein incorporated by
reference to Exhibit 10(a)(iv) to
registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996.
(v) Amended and Restated Guaranty Agreement,
dated as of October 30, 1996, made by HRM
Holdings Corp. in favor of ANB (herein
incorporated by reference to Exhibit
10(a)(v) to registrant's Annual Report on
Form 10-K for the fiscal year ended July
31, 1996).
(vi) Amended and Restated Guaranty Agreement
dated October 30, 1996, made by Hauppauge
Record Manufacturing Ltd. in favor of ANB
(herein incorporated by reference to
Exhibit 10(a)(vi) to registrant's Annual
Report on Form 10-K for the fiscal year
ended July 31, 1996).
(vii) Amended and Restated Subordination
Agreement, dated as of October 30, 1996,
between HRM Holdings Corp. and ANB
(herein incorporated by reference to
Exhibit 10(a)(vii) to registrant's Annual
Report on Form 10-K for the fiscal year
ended July 31, 1996).
(viii) Fee Letter, dated October 30, 1996,
between Hauppauge Record Manufacturing
Ltd. and ANB (herein incorporated by
reference to Exhibit 10(a)(viii) to
registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996).
(ix) Collateral Patent, Trademark, Copyright
and License Agreement, dated October 30,
1996, made by Hauppauge Record
Manufacturing Ltd. in favor of ANB
(herein incorporated by reference to
Exhibit 10(a)(ix) to registrant's Annual
Report on Form 10-K for the fiscal year
ended July 31, 1996).
(x) Security Agreement, dated as of October
30, 1996, made by Allied Digital
Technologies Corp., HMG Digital
Technologies Corp. and HRM Holdings Corp.
in favor of ANB (herein incorporated by
reference to Exhibit 10(a)(x) to
registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996).
34
<PAGE>
(xi) Amended and Restated Guaranty Agreement,
dated as of October 30, 1996, made by
Allied Digital Technologies Corp. in
favor of ANB (herein incorporated by
reference to Exhibit 10(a)(xi) to
registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996).
(xii) Amendment No. 1 to Amended and Restated
Loan and Security Agreement, dated as of
August 19, 1997 between Allied Digital,
Inc. (formerly known as Hauppauge Record
Manufacturing Ltd.) and ANB.
(xiii) Capex Note, dated August 19, 1997, made
by Allied Digital, Inc. (formerly known
as Hauppauge Record Manufacturing Ltd.)
to the order of ANB in the aggregate
principal amount of $3,450,000.
(10)(b)(i) Amended and Restated Promissory Note, dated October 30,
1996, made by Hauppauge Record Manufacturing Ltd. in
favor of William H. Smith, Trustee, in the principal
amount of $4,000,000 (herein incorporated by reference
to Exhibit 10(b)(i) to registrant's Annual Report on
Form 10-K for the year ended July 31, 1996).
(10)(b)(ii) Amended and Restated Promissory Note dated October 30,
1996, made by Hauppauge Record Manufacturing Ltd. in
favor of William H. Smith, in the principal amount of
$2,000,000 (herein incorporated by reference to Exhibit
10(b)(ii) to registrant's Annual Report on Form 10-K for
the year ended July 31, 1996).
(10)(c) Global Indemnification Agreement dated June 17, 1994,
among Allied Film Laboratory, Inc. and Greenfield Land
Company and William H. Smith, individually, d/b/a
William H. Smith Realty and William H. Smith, as
Trustee, under the William H. Smith Trust Agreement
dated November 13, 1978 (herein incorporated by
reference to Exhibit (99)(j) filed as part of
registrant's Registration Statement on Form S-4, File
No. 33-86530).
(10)(d) Non-Negotiable Promissory Note, dated December 29, 1992,
made by Allied Film Laboratory, Inc. to VTC, Inc.
(herein incorporated by reference to Exhibit (99)(o)
filed as part of registrant's Registration Statement on
Form S-4, File No. 33-86530).
(10)(e) Asset Purchase Agreement, dated December 29, 1992,
between Allied Film Laboratory, Inc. and VTC, Inc.
(herein incorporated by reference to Exhibit (99)(p)
filed as part of registrant's Registration Statement on
Form S-4, File No. 33-86530).
(10)(f) (i) VHS Cassette License Agreement for
Duplicators (USA), dated July 1, 1991,
between Victor Company of Japan, Limited
and Allied Digital Technologies Corp.
(and executed by the parties on November
9, 1995 and October 11, 1995,
respectively) (herein incorporated by
reference to Exhibit 10(f)(i) to
registrant's Annual Report on Form 10-K
for the year ended July 31, 1996).
(ii) Addendum, dated January 1, 1995, between
Allied Digital Technologies Corp. and
Victor Company of Japan, Limited (herein
incorporated by reference to Exhibit
10(f)(ii) to registrant's Annual Report
on Form 10-K for the year ended July 31,
1996).
(iii) License Extension Addendum, dated July 1,
1996, between Allied Digital Technologies
Corp. and Victor Company of Japan,
Limited (herein incorporated by reference
to Exhibit 10(f)(iii) to registrant's
Annual Report on Form 10-K for the year
ended July 31, 1996).
(10)(g) Licensed Duplicator Agreement for the United States and
Canada, dated June 1, 1993, between Macrovision
Corporation and Allied Film & Video (herein incorporated
by reference to Exhibit (99)(jj) filed as part of
registrant's Registration Statement on Form S-4, File
No. 33-86530).
(10)(h) CD Disc License Agreement, dated January 1, 1996,
between Hauppauge Record Manufacturing Ltd. and U.S.
Phillips Corporation (herein incorporated by reference
to Exhibit 10(h) to registrant's Annual Report on Form
10-K for the year ended July 31, 1996).
(10)(i) Patent License Agreement for Disc Products, dated June
1, 1995, between Hauppauge Record Manufacturing Ltd. and
Discovision Associates (herein incorporated by reference
to Exhibit 10(i) to registrant's Annual Report on Form
10-K for the year ended July 31, 1996).
35
<PAGE>
(10)(j) (i) Lease Agreement, dated August 9, 1983,
between Dallas Communications Complex and
Allied Film Laboratory, Inc. (for
warehouse, office and manufacturing
facilities located in Irving, Texas)
(herein incorporated by reference to
Exhibit (99)(u)(i) filed as part of
registrant's Registration Statement on
Form S-4, File No. 33-86530).
(i)(a) Supplemental Lease Agreement, dated
December 8, 1989, between Dallas
Communications Complex and Allied Film
Laboratory, Inc. (amending Lease
Agreement, dated August 9, 1983, between
Dallas Communications Complex and Allied
Film Laboratory, Inc.) (herein
incorporated by reference to Exhibit
(99)(u)(i)(a) filed as part of
registrant's Registration Statement on
Form S-4, File No. 33-86530).
(ii) Lease Agreement, dated September 7, 1989,
between Dallas Communications Complex and
Allied Film Laboratory, Inc. (for
manufacturing and office facilities
located in Irving, Texas) (herein
incorporated by reference to Exhibit
(99)(u)(ii) filed as part of registrant's
Registration Statement on Form S-4, File
No. 33-86530).
(iii) Lease Agreement, dated March 8, 1993,
between Dallas Communications Complex and
Allied Film Laboratory, Inc. (for
warehouse facilities located in Irving,
Texas) (herein incorporated by reference
to Exhibit (99)(u)(iii) filed as part of
registrant's Registration Statement on
Form S-4, File No. 33-86530).
(10)(k) (i) Lease Agreement, dated December 1, 1986,
between Greenfield Land Company and
Allied Film Laboratory, Inc. (for
warehouse, office, manufacturing
facilities located in Detroit, Michigan)
(herein incorporated by reference to
Exhibit (99)(v)(i) filed as part of
registrant's Registration Statement on
Form S-4, File No. 33-86530).
(i)(a) Amendment, dated July 1, 1994, to Lease
Agreement dated December 1, 1986, between
Greenfield Land Company and Allied Film
Laboratory, Inc. (for warehouse, office,
manufacturing facilities located in
Detroit, Michigan) (herein incorporated
by reference to Exhibit (99)(v)(i)(a)
filed as part of registrant's
Registration Statement on Form S-4, File
No. 33-86530).
(ii) Lease Agreement, dated January 2, 1987,
between Greenfield Land Company and
Allied Film Laboratory, Inc. (for parking
area facilities located in Detroit,
Michigan) (herein incorporated by
reference to Exhibit (99)(v)(ii) filed as
part of registrant's Registration
Statement on Form S-4, File No.
33-86530).
(iii) Lease Agreement, dated January 2, 1987,
between American National Bank and Trust
Company of Chicago, as Trustee, under
Trust Agreement dated February 13, 1986,
for the benefit of Greenfield Land
Company and Allied Film Laboratory, Inc.
(for manufacturing, office and warehouse
facilities located in Chicago, Illinois)
(herein incorporated by reference to
Exhibit (99)(v)(iii) filed as part of
registrant's Registration Statement on
Form S-4, File No. 33-86530).
(iv) Lease Agreement, dated November 1, 1986,
between American National Bank and Trust
Company of Chicago, as Trustee, under
Trust Agreement dated February 13, 1986,
for the benefit of Greenfield Land
Company and Allied Film Laboratory, Inc.
(for manufacturing, office and warehouse
facilities located in Chicago, Illinois)
(herein incorporated by reference to
Exhibit (99)(v)(iv) filed as part of
registrant's Registration Statement on
Form S-4, File No. 33-86530).
(v) Lease Agreement, dated November 1, 1986,
between American National Bank and Trust
Company of Chicago, as Trustee, under
Trust Agreement dated February 13, 1986,
for the benefit of Greenfield Land
Company and Allied Film Laboratory, Inc.
(for manufacturing, office and warehouse
facilities located in Chicago, Illinois)
(herein incorporated by reference to
Exhibit (99)(v)(v) filed as part of
registrant's Registration Statement on
Form S-4, File No. 33-86530).
36
<PAGE>
(vi) Lease Agreement, dated November 1, 1986,
between American National Bank and Trust
Company of Chicago, as Trustee, under
Trust Agreement dated February 13, 1986,
for the benefit of Greenfield Land
Company and Allied Film Laboratory, Inc.
(for manufacturing, office and warehouse
facilities located in Chicago, Illinois)
(herein incorporated by reference to
Exhibit (99)(v)(vi) filed as part of
registrant's Registration Statement on
Form S-4, File No. 33-86530).
(vii) Lease Agreement, dated March 1, 1989,
between Greenfield Land Company and
Allied Film Laboratory, Inc. (for
manufacturing, office and warehouse
facilities located in Orlando, Florida)
(herein incorporated by reference to
Exhibit (99)(v)(vii) filed as part of
registrant's Registration Statement on
Form S-4, File No. 33-86530).
(viii) Lease Agreement, dated January 1, 1995,
between Greenfield Land Company and
Allied Film Laboratory, Inc. (for
manufacturing, office and warehouse
facilities located in Clinton, Tennessee)
(herein incorporated by reference to
Exhibit 10(k)(viii) to registrant's
Annual Report on Form 10-K for the year
ended July 31, 1996).
(10)(1) Form of Lease Agreement, dated March 1, 1993, between
Zellerbach Family Fund and Allied Film Laboratory, Inc.
(for office and warehouse facilities located in San
Francisco, California) (herein incorporated by reference
to Exhibit (99)(w) filed as part of registrant's
Registration Statement on Form S-4, File No. 33-86530).
(10)(m) (i) Sublease Agreement, dated June 1, 1984,
between William H. Smith Living Trust
Agreement dated November 13, 1978,
William H. Smith, Trustee, and Allied
Film Laboratory, Inc. (for manufacturing,
office and warehouse facilities located
in San Francisco, California) (herein
incorporated by reference to Exhibit
(99)(x)(i) filed as part of registrant's
Registration Statement on Form S-4, File
No. 33-86530).
(ii) Sublease Agreement, dated June 1, 1984,
between William H. Smith, Trustee,
William H. Smith Living Trust dated
November 13, 1978, and Leo Diner, Inc.
(Leo Diner, Inc. merged with Allied Film
Laboratory, Inc. January 1, 1992) (for
manufacturing, office and warehouse
facilities located in San Francisco,
California) (herein incorporated by
reference to Exhibit (99)(x)(ii) filed as
part of registrant's Registration
Statement on Form S-4, File No.
33-86530).
(10)(n) Lease Agreement, dated November 29, 1994, between The
Prudential Insurance Company of America and Allied Film
Laboratory, Inc. (herein incorporated by reference to
Exhibit 10(n) to the registrant's Annual Report on Form
10-K for the year ended July 31, 1996).
(10)(o) (i) Lease Agreement, dated April 10, 1989
(assigned to Allied Film Laboratory, Inc.
1/12/93), between Elk Grove Village
Industrial Park Ltd. and VCA Teletronics,
Inc. (for warehouse facilities located in
Elk Grove Village, Illinois) (herein
incorporated by reference to Exhibit
(99)(aa)(i) filed as part of registrant's
Registration Statement on Form S-4, File
No. 33-86530).
(ii) Assignment and Assumption of Lease
Agreement, dated January 12, 1993,
between VCA/Teletronics, Inc. and Allied
Film Laboratory, Inc. (for warehouse
facilities located in Elk Grove Village,
Illinois) (herein incorporated by
reference to Exhibit (99)(aa)(ii) filed
as part of registrant's Registration
Statement on Form S-4, File No.
33-86530).
(10)(p) Lease Agreement, dated July 1, 1994, between Security
Trust Company, N.A. and Allied Film Laboratory, Inc.
(for manufacturing and office facilities located in
Landover, Maryland) (herein incorporated by reference to
Exhibit (99)(bb) filed as part of registrant's
Registration Statement on Form S-4, File No. 33-86530).
(10)(q) Form of Lease Agreement, dated June 18, 1993, between
HomeCrest Corporation and Allied Film Laboratory, Inc.
(for warehouse facilities located in Clinton, Tennessee)
(herein incorporated by reference to Exhibit (99)(dd)
filed as part of registrant's Registration Statement on
Form S-4, File No. 33-86530).
37
<PAGE>
(10)(r) (i) Agreement of Lease, dated December 15,
1994, between HMG Digital Technologies
Corp. and Keelson Associates (herein
incorporated by reference to an Exhibit
filed as part of HMG Digital Technologies
Corp. Quarterly Report on Form 10-Q for
the period ended April 30, 1995,
Commission File No. 0-20014).
(ii) Indenture of Lease, dated February 1,
1987, between Lee Halpern and Larry
Halpern and HMG (herein incorporated by
reference to an Exhibit filed as part of
Registration Statement of HMG Digital
Technologies Corp. on Form S-4, File No.
33-66486).
(10)(s) Lease Agreement, dated September 16, 1996, between
Allied Digital Technologies Corp. and Shivom Enterprises
LLC (for office facilities in Hauppauge, New York)
(herein incorporated by reference to Exhibit 10(s) to
the registrant's Annual Report on Form 10-K for the year
ended July 31, 1996).
(10)(t) Allied Film Laboratory, Inc. Employees' Profit Sharing
Plan. National Bank of Detroit -Trustee under the Allied
Film Laboratory, Inc. Amended Profit Sharing Retirement
Trust Agreement between Allied Film Laboratory, Inc. and
National Bank of Detroit, dated February 24, 1994.
(herein incorporated by reference to Exhibit (99)(ff)
filed as part of registrant's Registration Statement on
Form S-4, File No. 33-86530).
(10)(u) Allied Film Laboratory, Inc. Five Year Bonus Program for
Fiscal Year 1992 through Fiscal Year 1996 (includes
management, supervisory and stock bonus plans) (herein
incorporated by reference to Exhibit (99)(gg) filed as
part of registrant's Registration Statement on Form S-4,
File No. 33-86530).
(10)(v) Amended and Restated 1994 Long-Term Stock Incentive Plan
of Allied Digital Technologies Corp. (herein
incorporated by reference to Exhibit (4)(i) filed as
part of registrant's Registration Statement on Form S-4,
File No. 33-86530).
(10)(w) Indemnification Agreements between Allied Digital
Technologies Corp. and each of William H. Smith, James
A. Merkle, Werner Jean, Jerry Stone, Eugene Gargaro,
Jr., George N. Fishman, Seymour Leslie, H. Sean Mathis,
Donald L. Olesen, Charles Kavanagh and Judith A. Szidik
(herein incorporated by reference to Exhibit 10(y) to
registrant's Transition Report on Form 10-K for the
period from January 1, 1994 to July 31, 1994).
(10)(x) Allied Digital Stockholders Agreement, dated January 11,
1995, among Allied Digital Technologies Corp.; William
H. Smith; William H. Smith Trust, William H. Smith as
Trustee under agreement dated November 13, 1978, as
amended; Patricia M. Smith; Patricia M. Smith Trust,
Patricia M. Smith as Trustee under agreement dated
November 13, 1978, as amended; George N. Fishman; Donald
L. Olesen; The Donald L. Olesen Annuity Trust, Donald L.
Olesen, co-trustee; Leslie/Linton Entertainment, Inc.;
and Venture Partners (herein incorporated by reference
to Exhibit 3 filed as a part of a Schedule 13D filed
February 7, 1995, by William H. Smith; William H. Smith
Trust, William H. Smith as Trustee under agreement dated
November 13, 1978, as amended; Patricia M. Smith;
Patricia M. Smith Trust, Patricia M. Smith as Trustee
under agreement dated November 13, 1978, as amended;
George N. Fishman; Donald L. Olesen; The Donald L.
Olesen Annuity Trust, Donald L. Olesen, co-trustee;
Leslie/Linton Entertainment, Inc.; and Venture
Partners.)
(10)(y) Form of Employment Agreements between Hauppauge Record
Manufacturing, Ltd. and each of: (i) George Fishman,
(ii) Charles Kavanagh and (iii) Donald Olesen (herein
incorporated by reference to Exhibit (99)(hh) filed as
part of registrant's Registration Statement on Form S-4,
File No. 33-86530).
38
<PAGE>
(10)(z) Smith Family Shareholders Agreement, dated January 11,
1995, among Allied Digital Technologies Corp.; William
H. Smith; William H. Smith Trust, William H. Smith as
Trustee under agreement dated November 13, 1978, as
amended; Patricia M. Smith; Patricia M. Smith Trust,
Patricia M. Smith as Trustee under agreement dated
November 13, 1978, as amended; Kendall Allen Smith;
Scott Douglas Smith; and Wendy Allison Kubitskey (herein
incorporated by reference to Exhibit 2 filed as a part
of a Schedule 13D filed January 20, 1995, by William H.
Smith; William H. Smith Trust, William H. Smith as
Trustee under agreement dated November 13, 1978, as
amended; Patricia M. Smith; Patricia M. Smith Trust,
Patricia M. Smith as Trustee under agreement dated
November 13, 1978, as amended; Kendall Allen Smith;
Scott Douglas Smith; and Wendy Allision Kubitskey).
(10)(aa) (i) Consulting Agreement, dated June 16,
1994, between HMG Digital Technologies
Corp. and Seymour W. Zises (herein
incorporated be reference to Exhibit
10.22(i) of HMG Digital Technologies
Corp. Annual Report on Form 10-K for the
fiscal year ended July 31, 1994,
Commission File No. 0-20014).
(ii) Consulting Agreement, dated June 16,
1994, between HMG Digital Technologies
Corp. and H. Sean Mathis (herein
incorporated be reference to Exhibit
10.22(ii) of HMG Digital Technologies
Corp. Annual Report on Form 10-K for the
fiscal year ended July 31, 1994,
Commission File No. 0-20014).
(iii) Consulting Agreement, dated June 16,
1994, between HMG Digital Technologies
Corp. and Mark L. Freidman (herein
incorporated be reference to Exhibit
10.22(iii) of HMG Digital Technologies
Corp. Annual Report on Form 10-K for the
fiscal year ended July 31, 1994,
Commission File No. 0-20014).
10(bb) (i) Agreement between HTM Ltd. (a predecessor
in interest to HMG) and Local 810, Steel,
Metals, Alloys and Hardware Fabricators
and Warehousemen, affiliated with the
International Brotherhood of Teamsters,
dated as of January 22, 1994 (herein
incorporated by reference to Exhibit
10.15(i) of HMG Digital Technologies
Corp. Annual Report on Form 10-K for the
fiscal year ended July 31, 1994,
Commission File No. 0-20014).
(ii) Agreement between HVM Ltd. (a predecessor
in interest to HMG) and Local 810, Steel,
Metals, Alloys and Hardware Fabricators
and Warehousemen, affiliated with the
International Brotherhood of Teamsters,
dated as of January 22, 1994 (herein
incorporated by reference to Exhibit
10.15(ii) of HMG Digital Technologies
Corp. Annual Report on Form 10-K for the
fiscal year ended July 31, 1994,
Commission File No. 0-20014).
(iii) Agreement between HCDM Ltd. (a
predecessor in interest to HMG) and Local
810, Steel, Metals, Alloys and Hardware
Fabricators and Warehousemen, affiliated
with the International Brotherhood of
Teamsters, dated as of January 22, 1994
(herein incorporated by reference to
Exhibit 10.15(iii) of HMG Digital
Technologies Corp. Annual Report on Form
10-K for the fiscal year ended July 31,
1994, Commission File No. 0-20014).
(10)(cc) Form of Indemnification Agreements, dated July 1, 1992,
between HMG Digital Technologies Corp. and each of
Seymour Zises, Wilmer J. Thomas, Jr., Thomas E.
Constance, Alan I. Annex and Mark L. Freidman (herein
incorporated by reference to Exhibit 10.7 of HMG Digital
Technologies Corp. Registration Statement on Form S-1,
File No. 33-44942).
(10)(dd) Form of Indemnification Agreement, dated September 20,
1993, between HMG Digital Technologies Corp. and each of
Michael Delany, Brian Wilson, Philip Gouldstone, Joel
Ziegler and Frederick R. Cummings, Jr. (herein
incorporated by reference to Exhibit 10.6 of HMG Digital
Technologies Corp. Annual Report on Form 10-K for the
fiscal year ended July 25, 1993, Commission File No.
0-20014).
(10)(ee) (i) Subordinated Promissory Note dated
October 30, 1996, made by HMG Digital
Technologies Corp. in favor of George N.
Fishman in the principal amount of
$200,000 (herein incorporated by
reference to Exhibit 10(ee)(i) to
registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996).
39
<PAGE>
(ii) Subordinated Promissory Note dated
October 30, 1996, made by HMG Digital
Technologies Corp. in favor of Donald L.
Olesen in the principal amount of
$200,000 (herein incorporated by
reference to Exhibit 10(ee)(ii) to
registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996).
(iii) Subordinated Promissory Note dated
October 30, 1996, made by HMG Digital
Technologies Corp. in favor of William H.
Smith, Trustee, in the principal amount
of $1,600,000 (herein incorporated by
reference to Exhibit 10(ee)(iii) to
registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996).
(10)(ff) (i) Agreement between Anchor Bay
Entertainment and Allied Digital
Technologies Corp. for Videotape
Duplication and Order Fulfillment, dated
June 16, 1995 (herein incorporated by
reference to Exhibit (10)(ff) to
registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996.
(ii) Modification Agreement between Anchor Bay
Entertainment and Allied Digital
Technologies Corp. dated September 12,
1997.
(10)(gg) Employment Agreement, dated as of July 31, 1997, between
John K. Mangini, Sr. and Allied Digital Technologies
Corp.
(10)(hh) Exclusive CD Manufacturing Agreement, dated as of
September 12, 1997, between Sofsource, Inc. and Allied
Digital Technologies Corp.
(10)(ii) Sublease Agreement, dated April 21, 1997, among Ambord
Corporation, Allied Digital, Inc. and Allied Digital
Technologies Corp. (for premises in Brisbane,
California).
(11) Statement re Computation of Per Share Earnings
No statement is required to be filed because the
computations can be clearly determined from the
materials contained in the Report.
(21) Subsidiaries of registrant
(23)(a) Consent of Grant Thornton LLP
(23)(b) Consent of Arthur Andersen LLP
(27) Financial Data Schedule
40
<PAGE>
SIGNATURES
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.
Date: September 1, 1998 Allied Digital Technologies Corp.
By: /s/ George N. Fishman
---------------------------------------
George N. Fishman
Co-Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: September 1, 1998 By: /s/ Charles A. Mantione
---------------------------------------
Charles A. Mantione
Vice President - Finance
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below as of October 29, 1997, by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Date: September 1, 1998 /s/ William H. Smith
---------------------------------------
William H. Smith
Co-Chairman, President & Director
/s/ George N. Fishman
---------------------------------------
George N. Fishman
Date: September 1, 1998 Co-Chairman, Chief Executive
Officer & Director
Date: September 1, 1998 /s/ Donald L. Olesen
---------------------------------------
Donald L. Olesen,
Director
Date: September 1, 1998 /s/ Eugene L. Gargaro, Jr.
---------------------------------------
Eugene L. Gargaro, Jr.,
Director
/s/ Werner H. Jean
---------------------------------------
Date: September 1, 1998 Werner H. Jean
Director
Date: September 1, 1998 /s/ Seymour Leslie
---------------------------------------
Seymour Leslie
Director
Date: September 1, 1998 /s/ H. Sean Mathis
---------------------------------------
H. Sean Mathis
Director
/s/ John A. Morgan
---------------------------------------
Date: September 1, 1998 John A. Morgan
Director
41
<PAGE>
Exhibit (10)(a)(xii)
AMENDMENT NO. 1
TO
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Amendment No.1 to Amended and Restated Loan and Security
Agreement (the "Amendment") is entered into as of August 19, 1997 by and between
Allied Digital, Inc. (formerly known as Hauppauge Record Manufacturing Ltd.), a
New York corporation (the "Borrower"), and American National Bank and Trust
Company of Chicago (the "Lender").
WITNESSETH:
WHEREAS, the parties hereto are parties to that certain Amended and
Restated Loan and Security Agreement dated as of October 30, 1996 (the "LSA";
capitalized terms defined in the LSA which are used herein shall have the
meanings set forth in the LSA unless otherwise specified herein); and
WHEREAS, the Borrower and the Lender desire to amend the LSA on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Amendment to LSA. Effective as of the Amendment Effective
Time (as defined below), the LSA is amended as follows:
1.1 Subsection 1.1 of the LSA is amended by adding the following
definitions in their proper alphabetical sequence:
"Amendment No.1" shall mean that certain Amendment No. 1 to
the LSA dated as of August 19, 1997 between Borrower and Lender.
"CAPEX Advance" and "CAPEX Advances" shall have the meanings
set forth in subsection 2.1(C) hereof.
"CAPEX Equipment" shall mean Equipment purchased after the
date hereof which is free and clear of all Liens and shall consist of
compact disc manufacturing equipment or VHS decks.
<PAGE>
"CAPEX Loan" shall have the meaning set forth in subsection
2.1(C) hereof.
"CAPEX Loan Termination Date" shall mean the earlier of (i)
July 31, 1998, (ii) the date on which Lender receives notice from
Borrower of termination of its right to receive any further CAPEX
Advances under subsection 2.1(C) hereof or (iii) the date on which the
aggregate initial principal amounts of the CAPEX Advances made pursuant
to subsection 2.1(C) hereof equals $3,450,000.
"CAPEX Note" shall have the meaning set forth in subsection
2.1(C) hereof.
"Orderly Liquidation Value" shall mean, with respect to any
item of CAPEX Equipment, the "orderly liquidation value" of such item
of CAPEX Equipment, as determined by an appraiser satisfactory to
Lender and based on an appraisal methodology acceptable to Lender.
1.2 The definition of "Appraised FS Amount" in subsection 1.1 of
the LSA is amended by deleting therefrom "(which is other than fixtures)" and
inserting in lieu thereof "(but excluding fixtures and CAPEX Equipment)".
1.3 The definition of "Commitment Fee Base" in subsection 1.1 of
the LSA is amended and restated to read as follows:
"Commitment Fee Base" shall mean (a) the sum of the Maximum
Revolving Facility Amount, plus, beginning on August 19, 1997 and
thereafter prior to the CAPEX Loan Termination Date, $3,450,000, minus
(b) the sum of (i) the aggregate outstanding principal balance of the
Revolving Loan, (ii) the sum of the undrawn face amount of any Letters
of Credit outstanding and (iii) prior to the CAPEX Loan Termination
Date, the sum of the initial principal amounts of the CAPEX Advances
and, thereafter, zero.
1.4 The definition of "Loans" in subsection 1.1 of the LSA is
amended by inserting immediately before the words "the Term Loan" therein ", the
CAPEX Loan,".
1.5 The definition of "Notes" in subsection 1.1 of the LSA is
amended by inserting immediately before the words "the Term Note" therein ", the
CAPEX Note,".
2
<PAGE>
1.6 Subsection 2.1 of the LSA is amended by inserting immediately
after the end of subsection 2.1(B) therein a new subsection 2.1(C) to read as
follows:
(C) CAPEX Loan. Subject to the provisions of Section 4
hereof and the other terms and conditions hereof, Lender shall extend
to Borrower after August 19, 1997 and prior to the CAPEX Loan
Termination Date, upon Borrower's request therefor, a loan or loans
(each, individually, a "CAPEX Advance" and, collectively, the "CAPEX
Advances" or the "CAPEX Loan") based on CAPEX Equipment purchased by
Borrower after August 19, 1997; provided that the amount of any such
CAPEX Advance shall not exceed eighty percent (80%) of the Orderly
Liquidation Value of the item of CAPEX Equipment for which such CAPEX
Advance is requested; and provided, further that Lender shall not be
required to make any CAPEX Advance to the extent that the sum of the
initial principal amounts of the requested CAPEX Advances (including
the original initial principal amounts of any CAPEX Advances made
theretofore) would exceed $3,450,000. Each CAPEX Advance shall be in an
amount which is not less than $200,000. Lender, in its sole and
absolute discretion, may elect to make CAPEX Advances in excess of the
advance rate and other limitations set forth above. The proceeds of
each CAPEX Advance shall, on the day of such advance, be deposited in
immediately available funds, in Borrower's demand deposit account with
Lender or distributed in accordance with the applicable request
submitted in accordance with subsection 4.6. The CAPEX Loan shall be
evidenced, in part, by a promissory note (the "CAPEX Note") in the form
attached to Amendment No. 1 as Exhibit A thereto with the blanks
appropriately filled and, the provisions of the CAPEX Note
notwithstanding, shall become immediately due and payable as provided
in subsection 9.1 hereof, and, without notice or demand, upon the
termination of this Agreement pursuant to subsection 2.8 hereof or, if
earlier, July 31, 2000.
1.7 Subsection 2.3 of the LSA is amended by amending and restating
subsections (C) and (D) in their entirety to read as follows:
(C) Borrower may prepay all or any part of the Term Loan
and the CAPEX Loan upon thirty (30) Business Days' prior irrevocable
written notice to Lender of the Loan to be prepaid, the amount of the
principal prepayment and the Business Day for prepayment, provided that
upon the date for such prepayment, Borrower shall pay to Lender, a
Prepayment Fee in the amount provided under subsection 2.6(D). Any such
prepayments to the principal balance of the Term Loan or the CAPEX Loan
shall be applied to reduce the regularly scheduled principal
installments of the Note evidencing such Loan in the inverse order of
their maturity.
3
<PAGE>
(D) In the event Borrower is permitted to sell or
otherwise dispose of any Equipment pursuant to clause (ii) of
subsection 8.6 hereof, Borrower shall forthwith after consummation of
such sale or other disposition prepay, without payment of any
Prepayment Fee, the Term Loan (or if the Term Loan has been paid in
full, the CAPEX Loan or, if the CAPEX Loan has been paid in full, the
Additional Loan), by an amount equal to the proceeds from such sale,
net of reasonable expenses and taxes incurred incidental to such sale;
provided, however, that amounts used to pay any third party financing
which was incurred to purchase Third Party Financed Equipment which is
so sold and the first $25,000 of aggregate net proceeds in each Fiscal
Year from any such sales shall not be treated as proceeds in
determining the amount of any such prepayments. Any such prepayments of
the Term Loan, the Additional Loan or the CAPEX Loan shall be applied
to reduce the regularly scheduled principal installments of the Note
evidencing such Loan in the inverse order of their maturity.
1.8 Subsection 2.3 of the LSA is further amended by adding the
following to the end of subsection 2.3(I) immediately after the period appearing
at the end thereof:
If Lender determines that the amount of the CAPEX Loan at any time
exceeds the Orderly Liquidation Value of the CAPEX Equipment,
Borrower shall upon notice from Lender immediately pay to Lender
the amount of such excess for application to the principal of the
CAPEX Loan. No Prepayment Fee shall be due and payable as a
result of any such prepayment. Any such prepayments shall reduce the
regularly scheduled principal installments of the CAPEX Note
evidencing the CAPEX Loan in inverse order of their maturity.
1.9 Subsections 2.4, 2.5, 2.6(A), 2.6(D), 2.6(E), 3.1(A) and 5.1
of the LSA are amended by inserting ", the CAPEX Loan" immediately after the
words "Term Loan"appearing therein.
1.10 Subsections 2.6(D) and 2.6(E) of the LSA are amended by
inserting ", the CAPEX Note" immediately after the words "Term Note" appearing
therein.
1.11 Subsection 2.6(E) of the LSA is further amended by deleting
the dollar amount "$48,910,168.93" contained therein and inserting in lieu
thereof the dollar amount "$52,360,168.93".
1.12 Subsection 2.6 of the LSA is amended by adding thereto a new
subsection 2.6(I) to read as follows:
4
<PAGE>
(I) Borrower shall pay to Lender a non-refundable fee
(the "CAPEX Fee") of $103,500 for the provision of the CAPEX Loan
facility, such CAPEX Fee to be paid in installments of (i) three
percent (3%) of each CAPEX Advance concurrently with the making of each
such CAPEX Advance until such time as the entire CAPEX Fee has been
paid in full and (ii) a final installment equal to the unpaid amount of
the CAPEX Fee on the CAPEX Loan Termination Date (or if earlier the
termination of this Agreement) if the entire CAPEX Fee has not been
paid in full prior to such date.
1.13 Section 4 of the LSA is amended by inserting immediately after
the end of subsection 4.5 a new subsection 4.6 to read in its entirety as
follows:
4.6 CAPEX Advances. As to each CAPEX Advance, (a) at
least 5 Business Days before such CAPEX Advance is to be made Lender
shall have received a request by Borrower therefor in the form of
Exhibit B to Amendment No. 1 an appraisal identifying the proposed
CAPEX Equipment and the estimated Orderly Liquidation Value and "forced
sale value" of such Equipment; (b) the Equipment for which such CAPEX
Advance has been requested and which is the subject thereof shall be
delivered to Borrower and located on its premises, Borrower shall have
paid for such CAPEX Equipment in full (other than for any amount to be
paid directly by Lender to the seller of such CAPEX Equipment, or which
will be paid immediately by Borrower to such seller, in each case out
of the proceeds of such CAPEX Advance) and received good and marketable
title thereto, free and clear of any purchase money security interest
or other security interest, mortgage, pledge, lien or other encumbrance
(other than any purchase money security interest as shall be released
upon the Lender's direct payment of the seller of such CAPEX Equipment,
or upon the Borrower's immediate payment of such seller, in each case
out of the proceeds of the CAPEX Advance); (c) Lender shall have
received confirmation from the Borrower's insurer or an authorized
agent of such insurer to the effect that such CAPEX Equipment is fully
insured on a replacement cost basis and on a basis which is not subject
to any coinsurance penalty; and (d) Lender shall have received such
other information, certificates, instruments, lien waivers, payoff
letters, termination statements and other documents as Lender may
reasonably request. In addition, prior to making any CAPEX Advance
Lender shall have received copies of all other documents required to be
delivered to Lender under subsections 5.2 and 7.1 hereof, all Monthly
Reports and Collateral Reports required as set forth in subsection 3.1
hereof and all documents required to be delivered to Lender under
paragraph 3.A of the Holdings Guaranty.
5
<PAGE>
1.14 Subsection 8.2 of the LSA is amended by inserting in clause
(iv) thereof immediately before the words "Equipment or other Capital
Expenditures" the following:
(other than the purchase of equipment financed with the proceeds of,
or which is the subject of, a CAPEX Loan)
1.15 Subsection 8.6 of the LSA is amended by inserting immediately
before the words "Additional Loan" contained therein the following:
CAPEX Loan, or if the CAPEX Loan has been paid in full, the
1.16 Subsection 8.13(c) is amended by inserting immediately before
the period appearing at the end thereof the following:
(provided that such amount shall be $5,500,000 for the Fiscal Year
ending July 31, 1997)
2. Conditions to Amendment Effective Time. The amendments in
Section1 of this Amendment shall become effective (the "Amendment Effective
Time") when and only when each of the following conditions have been satisfied
in a manner satisfactory in form and substance to Lender (or waived by Lender):
(a) Lender shall have received this Amendment duly
executed by the Borrower;
(b) Lender shall have received a promissory note (the
"New Note") in the form of Exhibit A to this Amendment, duly executed by
Borrower;
(c) Lender shall have received (a) consent to this
Amendment from GLC in the form of Exhibit C to this Amendment, duly executed by
GLC, and (b) a consent in the form of Exhibit D to this Amendment, duly executed
by each of Holdings, HMG and Allied;
(d) Lender shall have received certificates of an
assistant secretary or secretary of each of Borrower, Holdings, HMG, and Allied
as to the resolutions of their respective boards of directors and shareholders
authorizing the execution, delivery and performance of this Amendment, the New
Note, and the other documents contemplated hereby, the nonexistence of any
amendments to their respective certificates or articles of incorporation and
bylaws since the last certification provided to the Lender and the incumbency
and specimen signatures of the officers of such Person authorized under the
resolutions referred to above;
6
<PAGE>
(e) Lender shall have received opinions of counsel to
Borrower, Holdings, HMG and Allied as to such matters as Lender and its counsel
may request and in form and substance satisfactory to Lender and its counsel;
and
(f) Lender shall have received all such other articles
and certificates of incorporation, good standing certificates, agreements,
certificates, consents, opinions or other documents as Lender may reasonably
request, in each case in form and substance satisfactory to Lender, and all
proceedings, agreements, certificates, consents, opinions and other documents
and all legal matters relating to the transactions contemplated by this
Amendment shall be in form and substance reasonably satisfactory to Lender and
its counsel.
3. Representations and Warranties. Borrower hereby represents
and warrants as follows:
(a) This Amendment, the New Note and the LSA as
previously executed, and as amended hereby, constitute legal, valid and binding
obligations of Borrower and are enforceable against Borrower in accordance with
their terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally or by general equitable principles.
(b) Upon the Amendment Effective Time, Borrower hereby
reaffirms all covenants, representations and warranties made in the LSA to the
extent the same are not amended hereby, and agrees that all such covenants,
representations and warranties shall be deemed to have been remade as of the
Amendment Effective Time and that the LSA remains in full force and effect.
4. Additional Agreements. By its execution of this Agreement,
the Borrower, and by their execution of the consents required herein, each of
Holdings, HMG and Allied authorizes and requests its counsel to render the
opinion referred to in clause (e) of Section 2 above.
5. Reference to the Effect on the LSA.
(a) Upon the Amendment Effective Time (i) each reference
in the LSA to "this Agreement," "hereunder," "hereof," "herein," or words of
like import shall mean and be a reference to the LSA as amended hereby and (ii)
each reference to the LSA in the other Financing Agreements shall mean and be a
reference to the LSA, as amended hereby.
7
<PAGE>
(b) Except as specifically amended above, the LSA and all
other documents, instruments and agreements executed and/or delivered in
connection with the LSA shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any Default or Event of Default
(including without limitation any Defaults or Events of Default existing on the
date hereof), nor operate as a waiver of any right, power or remedy of the
Lender (including without limitation any rights, powers or remedies of the
Lender with respect to the Defaults or Events of Default existing on the date
hereof), nor constitute a waiver of any other provision of the LSA or any other
Financing Agreements.
6. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
7. Governing Law. This Amendment shall be governed by and
construed in accordance with the internal laws (as opposed to the conflicts of
law provisions) of the State of Illinois.
8. Counterparts. This Amendment may be executed in any number of
counterparts each of which shall be an original with the same effect as if the
signatures thereto and hereto were on the same instrument. The delivery of an
executed counterpart of a signature page to this Amendment by telecopier shall
be effective as delivery of a manually executed counterpart of this Amendment.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
day and year first above written.
ALLIED DIGITAL, INC.
By: /s/
Title:
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/
Title:
8
<PAGE>
Exhibit (10)(a)(xiii)
CAPEX NOTE
$3,450,000 Chicago, Illinois
August 19, 1997
FOR VALUE RECEIVED, the undersigned, Allied Digital, Inc. (formerly
known as Hauppauge Record Manufacturing Ltd.), a New York corporation
("Borrower"), hereby unconditionally promises to pay to the order of American
National Bank and Trust Company of Chicago ("Lender"), at the office of Lender
at 33 North LaSalle Street, Chicago, Illinois 60690, or at such other place as
the holder of this Note may from time to time designate in writing, in lawful
money of the United States of America and in immediately available funds, the
principal sum of THREE MILLION FOUR HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS
($3,450,000.00) or, if less, the aggregate unpaid principal amount of all
advances made by Lender pursuant to subsection 2.1(C) of the Loan Agreement.
This Note is referred to in and was executed and delivered pursuant to that
certain Amended and Restated Loan and Security Agreement, dated as of October
30, 1996, between Borrower and Lender (as amended, modified or supplemented from
time to time, the "Loan Agreement"), to which reference is hereby made for a
statement of the terms and conditions under which the loan evidenced hereby was
made and is to be repaid. All terms which are capitalized and used herein (which
are not otherwise specifically defined herein) and which are defined in the Loan
Agreement shall be used in this Note as defined in the Loan Agreement.
Borrower further promises to pay interest on the unpaid principal
amount hereof from time to time outstanding at a fluctuating rate per annum
equal to the Base Rate as from time to time in effect plus one and one-half of
one percent (1.50%), provided that following the occurrence and during the
continuance of a Default, Borrower shall pay to Lender interest from the date of
such Default (or, in the event of a Default other than as described in
subsections 9.1(A), (H), or (I) of the Loan Agreement, from the date of notice
to such effect from Lender) at the rate set forth above plus an additional three
percent (3.00%) per annum. Interest shall be payable on the dates provided for
in the Loan Agreement, and shall be calculated on the basis of a 360-day year
for the actual number of days elapsed.
If any payment hereunder becomes due and payable on a day other than a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day, and interest shall be payable thereon during such extension at the
rate specified above. In no contingency or event whatsoever shall interest
charged hereunder,
<PAGE>
however such interest may be characterized or computed, exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that such a court
determines that Lender has received interest hereunder in excess of the highest
rate applicable hereto, Lender shall promptly refund such excess interest to
Borrower.
The principal indebtedness evidenced hereby shall be payable in as
follows: each CAPEX Advance made under subsection 2.1(C) of the Loan Agreement
shall be payable in thirty-six (36) consecutive monthly installments commencing
on the last day of the month in which such CAPEX Advance is made and continuing
on the last day of each calendar month thereafter, each of which monthly
installments, other than the last monthly installment, shall be equal to the
amount obtained by dividing (a) the initial principal amount of such CAPEX
Advance by (b) thirty-six (36) and rounding up to the nearest whole dollar, and
a final installment equal to the unpaid principal amount of such CAPEX Advance
on the final monthly installment date. Notwithstanding the foregoing the entire
unpaid principal balance hereof shall become immediately due and payable on July
31, 2000.
Under certain circumstances, Borrower is required by the Loan Agreement
to make prepayments on the principal balance hereof. The principal amount hereof
may not be prepaid at any time in whole or in part except as provided in the
Loan Agreement.
Except as otherwise agreed in the Loan Agreement, payments received by
Lender from Borrower on this Note shall be applied first to the payment of
interest which is due and payable and only thereafter to the outstanding
principal balance hereof, subject to Lender's rights to otherwise apply such
payments as provided in the Loan Agreement.
Upon and after the occurrence of a Default or as otherwise provided in
the Loan Agreement, this Note may, at the option of Lender, and without prior
demand, notice or legal process of any kind (except as otherwise expressly
required in the Loan Agreement), be declared, and thereupon immediately shall
become, due and payable. This Note shall also become immediately due and payable
upon termination of the Loan Agreement.
Borrower, and all endorsers and other persons obligated hereon, hereby
waive presentment, demand, protest, notice of demand, notice of protest and
notice of nonpayment and agree to pay all costs of collection, including
reasonable attorneys' fees and expenses.
2
<PAGE>
This Note has been delivered at and shall be deemed to have been made
at Chicago, Illinois and shall be interpreted and the rights and liabilities of
the parties hereto determined in accordance with the internal laws (as opposed
to conflicts of law provisions) and decisions of the State of Illinois. Whenever
possible each provision of this Note shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this Note
shall be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Note.
Whenever in this Note reference is made to Lender or Borrower, such
reference shall be deemed to include, as applicable, a reference to their
respective successors and assigns. The provisions of this Note shall be binding
upon and shall inure to the benefit of said successors and assigns. Borrower's
successors and assigns shall include, without limitation, a receiver, trustee or
debtor in possession of or for Borrower.
ALLIED DIGITAL, INC.
By: /s/
Name:
Title:
3
<PAGE>
Exhibit (10)(ff)(ii)
MODIFICATION
VIDEOTAPE DUPLICATION
MODIFICATION AGREEMENT (the "Modification Agreement") entered into as of
September 12, 1997 between ALLIED DIGITAL TECHNOLOGIES CORPORATION with offices
at 140 Fell Court, Hauppauge, New York 11788 ("ALLIED"), and ANCHOR BAY
ENTERTAINMENT [CORP.] with offices at 500 Kirts Boulevard, Troy, Michigan 48084,
("ANCHOR BAY") as set forth in this Agreement.
WHEREAS, the parties hereto entered into an agreement as of July 21,
1995 relating to the use of Allied's videotape duplication services (such
agreement, together with all Exhibits and Addendum thereto as amended to date,
being collectively referred to as the "Original Agreement"); and
WHEREAS, the parties desire to modify certain provisions of the
Original Agreement and settle certain differences and disputes arising out of or
relating to the Original Agreement or the performance or non-performance
thereof.
NOW THEREFORE, in consideration of the premises and the mutual promises
and agreements hereinafter contained, the parties hereto hereby agree as
follows:
I. Effective as of the commencement of the initial term of the Original
Agreement and for the remainder of such term and any and all renewals thereof,
unless otherwise hereafter agreed to by the parties, ANCHOR BAY shall have no
obligation to order any specific minimum number of units to be manufactured by
ALLIED during any year of the Original
<PAGE>
Agreement; provided, however, the foregoing provision of this Section I shall
not amend or modify the provisions of paragraphs a)1 and a)2 of Section 11 of
the Original Agreement.
II. Each of the parties hereto waives and releases any and all claims for
damages, loss of profits, contractual or other penalties, rescission, specific
performance or any other remedy or relief it may have against the other party,
arising out of or relating to any claim of late delivery or failure to deliver
units, any claim of failure to order any minimum number of units and other
breaches or alleged breaches of the Original Agreement by such other party
occurring prior to the date of this Modification Agreement and which breach or
alleged breach has heretofore been asserted in writing, in general or specific
terms, by the party having such claim or by its servants, agents, employees or
attorneys.
III. To the extent that the number of units shipped in any calendar month
beginning October 1, 1997 at the instructions of ANCHOR BAY shall exceed one
hundred twenty (120%) percent of the number of units duplicated by ALLIED during
such month pursuant to the instructions of ANCHOR BAY, ALLIED will be entitled
to charge ANCHOR BAY Ten ($0.10) Cents per unit only on such excess number of
units over such one hundred twenty (120%) percent. The amount due with respect
to such excess units, if any, during a calendar month, shall be invoiced by
ALLIED during the following calendar month on the same payment terms as set
forth in Section2 of the Original Agreement.
IV. Effective July 15, 1995, the following provisions of paragraph d)i of
Section 11 of the Original Agreement are hereby deleted and shall be of no force
and effect from and after such date (without, however, modifying ALLIED'S
liability for any material breach of the
2
<PAGE>
Original Agreement by reason of its non-performance subsequent to the date of
this Modification Agreement):
"Penalties will apply if the performance standards are not met as
follows:
a) Up to five duplication orders (title/units) per month can exceed the
five-day window. On the sixth and subsequent orders, a penalty of
$.50/unit will apply for all units outside of the five-day window.
Minimum order quantity is 100 units or one pancake. Orders less than
100 units or one pancake will carry a $.50 per unit surcharge.
b) Up to 10 fulfillment order/month may exceed the 48 hours service
window. On the 11th and subsequent orders in any month exceeding 48
hours, then a penalty of $.50/unit will apply.
c) Up to 10 return authorizations may be outside of the 10-day service
window in any month. On the 11th and subsequent return orders in any
month exceeding the 10-day service window, then a penalty of
$.25/unit will apply. In years two through five, the service window
will be five days.
The penalty provisions as outlined above do not supersede the
provisions of the Force Majeure (11f)."
V. ALLIED agrees to execute and deliver to ANCHOR BAY simultaneously with
the execution and delivery of this Modification Agreement an Option Agreement in
the form of Exhibit (1) attached hereto and made a part hereof. Upon delivery of
such Option Agreement to ANCHOR BAY, the option granted to ANCHOR BAY pursuant
to Section
3
<PAGE>
2 of Addendum #3 of the Original Agreement, as heretofore amended, shall be and
be deemed to be surrendered and cancelled and of no further force and effect.
ANCHOR BAY represents that it has not heretofore sold, assigned, transferred,
mortgaged, pledged or otherwise disposed or encumbered such option or any part
thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Modification
Agreement to be executed as of the date first above written.
ALLIED DIGITAL TECHNOLOGIES ANCHOR BAY ENTERTAINMENT, INC.
CORPORATION
By: /s/ By: /s/
---------------------- -----------------------
[name, title & address] [name, title & address]
4
<PAGE>
Exhibit (10)(gg)
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and
entered into as of the 31st day of July, 1997, by and between ALLIED DIGITAL
TECHNOLOGIES CORP., a Delaware corporation with its principal office and place
of business at 140 Fell Court, Hauppauge, New York 11788 (the "Company"), and
JOHN K. MANGINI, an individual currently residing at 50 Pheasant Run, Old
Tappan, New Jersey 07675 ("Executive").
In consideration of the mutual promises and agreements set
forth herein, the parties hereto, intending to be legally bound, agree as
follows:
1. Employment. The Company hereby agrees to employ
Executive, and Executive accepts such employment with the Company, as a
full-time employee of the Company, upon the terms and conditions hereinafter set
forth.
2. Term. Subject to the provisions for earlier
termination set forth in Section 7 hereof, Executive is hereby employed by the
Company for a term commencing as of August 1, 1997 and ending July 31, 2000.
Each year ending July 31 during such term, including the first year of the term
is referred to herein as a "Contract Year".
3. Duties. Executive shall serve as Chief Operating
Officer. He shall report directly to the Chief Executive Officer and shall
perform such services as the Chief Executive Officer may determine from time to
time, and as are consistent with his position as Chief Operating Officer. In
that regard, Executive shall have day-to-day responsibility over the operating
aspects of the business of the Company with substantially the same functions,
duties and responsibilities as he has as of the date hereof, together with such
other duties and responsibilities as shall be assigned to him by the Chief
Executive Officer. Executive shall perform his assigned duties to the best of
his ability, experience and talents and shall cooperate fully with the Chief
Executive Officer. Executive shall devote his full business time and attention
to the business and affairs of the Company. He shall also serve as an officer
and/or director of any subsidiary of the Company without additional compensation
as required by or the Chief Executive Officer.
<PAGE>
4. Compensation.
(a) Base Salary. For all duties to be performed
by Executive pursuant to this Agreement, Executive shall receive a Base Salary
at the initial rate of $275,000 per annum, payable at the regular pay intervals
for Company senior executives, but not less frequently than bi-weekly. The rate
of such Base Salary shall be increased with respect to the second and third
Contract Years by an amount determined by multiplying the Base Salary for the
prior Contract Year by a fraction, the numerator of which shall equal the United
States Bureau of Labor Statistics Consumer Price Index for All Urban Consumers
(all items) for the New York, New York-Northeastern New Jersey region
(seasonally adjusted) (the "CPI") for the month of August in such contract year
and the denominator of which shall equal the CPI for the month of August in the
prior Contract Year.
(b) Option. In addition to his Base Salary,
Executive hereby is granted options to purchase shares of common stock of the
Company pursuant to its 1994 Long Term Stock Incentive Plan, pursuant to the
Incentive Stock Option Agreement entered into between the Company and Executive
on the date of this Agreement, a copy of which is attached hereto as Exhibit A.
5. Vacation, Fringe Benefits, and Expenses.
(a) Vacation and Fringe Benefits. Executive
shall be entitled to participation in such medical, insurance and other plans
and receive fringe benefits as are established from time to time by the Board
for senior executive officers of the Company generally. In regard to vacation,
Executive shall be entitled to four weeks annually.
(b) Expenses. It is understood that Executive
may from time to time incur reasonable and necessary expenses in connection with
his employment. The Company shall reimburse Executive for any such expenses,
subject to review by the Board and otherwise in accordance with policies and
limits adopted by the Company from time to time and applicable to senior
executive officers of the Company generally.
(c) Automobile. The Company shall furnish
Executive with an automobile for his use during the term of this Agreement
similar to that now furnished to Executive and shall reimburse Executive for any
expenses related to his use thereof.
(d) Executive's services shall be performed and
his primary office shall be located in the Greater New York Metropolitan area
subject to temporary travel requirements from time to time.
-2-
<PAGE>
6. Covenants Not to Compete or Solicit or Hire
Employees. As a material inducement to the Company to enter into this Agreement,
Executive covenants and agrees that he shall not, without the prior written
consent of the Chief Executive Officer of the Company:
(a) at any time during the term of this Agreement
directly or indirectly enter into, participate in or engage in a business which
is competitive, or proposes to be competitive, with any line of business in
which the Company or any of its Subsidiaries or entities that are affiliates of
the Company (as defined under Rule 12(b)(2) of the Rules of the Securities and
Exchange Commission under the Securities and Exchange Act of 1934
("Affiliates")) is engaged or any line of business in which the Company or any
such Subsidiary/Affiliate has determined to engage as is evidenced by an action
of the Company's Board or the Board of Directors any such Subsidiary/Affiliate.
This covenant shall apply to all of Executive's business activities, whether as
an individual for his own account, as an employee, agent, director, officer or
consultant of or to any person or entity, as a partner or joint venturer or
owner of an interest in any entity, or otherwise (except that Executive may own
not more than two (2%) percent of the outstanding shares of a corporation whose
shares are publicly traded on a national securities exchange or on the NASDAQ
system or have been registered under Section 12(g) of the Securities Exchange
Act of 1934); and
(b) at any time during the term of this Agreement
directly or indirectly (x) recruit, solicit, cause or encourage any other
employee of the Company (1) to engage in any conduct or activity which Executive
is prohibited under this Agreement from engaging in or (2) to terminate any
existing relationship with the Company or any of its Subsidiaries or Affiliates,
(y) assist any other person in engaging in any conduct or activity described in
the foregoing clause (x) or (z) offer employment or authorize or assist any
person to offer employment (other than on behalf of the Company or any of its
affiliates) to any person who is or was employed by the Company or any of its
affiliates unless such person shall have ceased to be employed by the Company or
any of its affiliates for a period of at least six months prior to the making of
such offer.
7. Termination.
(a) Death or Disability.
(i) Executive's employment shall terminate
upon the death of Executive and in such event, the Company shall pay to
Executive's estate all Base Salary, at the applicable rate, accrued but unpaid
through the date of Executive's death.
(ii) The Company shall have the option to
terminate Executive's employment in the event that Executive, during the term
hereof, becomes permanently
-3-
<PAGE>
disabled, as hereinafter defined. In such event, the Company shall pay to
Executive his Base Salary at the applicable rate for the period ending the
earlier of (1) the date which is six months after such permanent disability
commences or (2) July 31, 2000, such Base Salary to be reduced by the amount of
any disability payments paid to Executive pursuant to the any disability plan or
insurance relating thereto, whether provided by the Company or otherwise. For
purposes of this Agreement, Executive shall be deemed to have become permanently
disabled, if, during the term hereof, because of physical or mental disability
he shall have been substantially unable to perform his duties hereunder (x) for
120 consecutive days, or (y) for 180 days (irrespective of whether such days are
consecutive) occurring during any period of 365 consecutive days.
(iii) Upon any termination by reason of
death or disability, the Company shall not be obligated to make any other Base
Salary or other payments to the Executive, his estate or any other persons,
except for reimbursement of reimbursable expenses already incurred.
(b) Termination by the Company for Good Cause.
The Company may terminate Executive's employment for Good Cause in accordance
with the procedure set forth in this Section 8(b). The term Good Cause, as used
herein, shall mean: (i) any breach by Executive of the provisions of Section 6
of this Agreement or the commission by Executive of an act of willful
misconduct, fraud or dishonesty related to the performance of his duties
contemplated by this Agreement, or (ii) Executive's breach of any other material
provisions of this Agreement (other than any such failure resulting from
Executive's incapacity due to physical or mental disability) which Executive
fails to cure within a ten (10) day period following the giving of notice by the
Company to Executive, or (iii) any course of activity by Executive materially
and demonstrably injurious to the Company which Executive fails to cure within a
ten (10) day period following the giving of notice by the Company to Executive.
In addition, any voluntary termination of this Agreement by Executive, other
than as a result of his permanent disability as provided in Section 7, shall be
deemed to be a termination by the Company based on Good Cause. If Executive is
terminated for Good Cause, he shall be entitled to receive only his Base Salary,
at the applicable rate, through the date of termination. All other payments and
benefits shall thereafter cease.
(c) Termination by the Company Other than for
Good Cause. The Company may terminate Executive's employment for whatever reason
it deems appropriate; provided, however, that if such termination is not due to
permanent disability as provided in Section 7(a) or based on Good Cause as
provided in Section 7(b), Executive shall continue to receive his Base Salary at
the applicable rate for a period ending July 31, 2000, in the installments and
at the intervals as in effect pursuant to Section 4 hereof on the date of
termination.
-4-
<PAGE>
(d) Notice and Effective Date of Termination.
Except as provided in Section 7(a) above with respect to death or in Section
7(b) with respect to a voluntary termination of this Agreement by Executive,
termination hereunder shall be effective upon the giving of notice of such
termination by the Company to Executive (or his legal guardian) specifying the
reasons, if any, for such termination.
(e) Releases; Exclusive Remedy. The respective
payments and remedies provided in this Section 7 shall be (i) conditioned upon
the Company and Executive (or his legal representatives) executing mutual
releases (which releases shall exclude, as the case may be, (x) any obligations
of the Company to make payments to the Executive as required hereunder, and (y)
any continuing obligations of Executive, including, without limitation,
Executive's non-competition, cooperation and other obligations pursuant to
Sections 6, 8, and 9 hereunder) and (ii) exclusive and in lieu of any other
payments, remedies or rights which the Company or Executive may have in
connection therewith.
8. Cooperation with the Company After Termination.
Following termination or expiration of Executive's employment, regardless of
cause, Executive shall cooperate in all reasonable respects with the Company
upon reasonable prior notice in all matters relating to the winding up of work
on behalf of the Company and the orderly transfer of any pending work to other
employees of the Company.
9. Surrender of Books and Records. All files, records,
lists, books, literature, products, notes and other materials obtained by
Executive from, or through his employment by, the Company, in connection with
the performance of his duties hereunder shall at all times be and remain the
property of the Company and shall be returned to the Company upon termination or
expiration of Executive's employment, regardless of cause, or at such earlier
time as the Company may request.
10. Assignability. This Agreement may be assigned by the
Company to any entity owned or controlled by the Company, to an Affiliate of the
Company, or to a successor to the Company's business. This Agreement is not
assignable by Executive.
11. Binding Effect. This Agreement and all the terms and
provisions hereof shall be binding upon and shall inure to the benefit of the
parties, their respective legal representatives, heirs, successors and permitted
assigns.
12. Severability; Limitation of Scope. If any provision
of this Agreement, or the application of such provision to any person or
circumstance, shall be held to be invalid or unenforceable in any respect, the
validity and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a
-5-
<PAGE>
reasonable substitute for such invalid and unenforceable provision in light of
the tenor of this Agreement, and, upon so agreeing, shall incorporate such
substitute provision in this Agreement. If the courts or tribunal of any one or
more jurisdictions shall hold all or any part of the provisions contained in
this Agreement wholly unenforceable by reason of the breadth or scope thereof or
otherwise, it is the intention of the parties that such determination shall not
bar or in any way affect their right to relief in the courts or tribunals of any
other jurisdictions as to failure to observe such provisions in such other
jurisdiction, the above provisions as they relate to each jurisdiction being,
for this purpose, severable into diverse and independent provisions. If any of
the provisions contained in this Agreement is held to be unenforceable because
of the scope of such provision, including, without limitation, the duration of
such provision, or the geographical area or the nature of the business of the
Company covered thereby, the parties agree that the court or tribunal making
such determination shall have the power to reduce the scope of such provision
and in its reduced form said provision shall then be enforceable.
13. Communications. All notices and other communications
required or permitted to be made or given hereunder ("Communications") shall be
in writing, and shall be deemed to have been duly made or given when (i)
delivered personally with receipt acknowledged, (ii) sent by registered or
certified mail or equivalent, return receipt requested, or (iii) sent by
facsimile (which shall promptly be confirmed by a writing sent by mail), or (iv)
sent by recognized overnight courier for delivery within 48 hours, in each case
addressed or sent to the parties at the following addresses and facsimile
numbers or to such other or additional address or facsimile number as any party
shall hereafter specify by Communication to the other parties:
To: the Company Allied Digital Technologies Corp.
140 Fell Court
Hauppauge, NY 11788
Attn.: George N. Fishman
Fax #: (516) 232-5370
with a copy to: Warshaw Burstein Cohen
Schlesinger & Kuh, LLP
555 Fifth Avenue
New York, New York 10017
Attn.: Frederick R. Cummings, Jr., Esq.
Fax #: (212) 972-9150
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To: Executive 50 Pheasant Run
Old Tappan, New Jersey 07675
Notice of change of address shall be deemed given when actually received; all
other Communications shall be deemed to have been given, received and dated on
the earlier of: (i) on the date when delivered personally against sign receipt,
(ii) two (2) business days after mailing, as aforesaid, (iii) one (l) day after
being sent by facsimile, or (iv) one (1) day after being sent by overnight
courier.
14. Governing Law; Consent to Jurisdiction. All matters
relating to the interpretation, construction, validity and enforcement of this
Agreement shall be governed by the laws of the State of New York, without giving
effect to the principles of conflict of laws thereof. Each of the parties hereto
(a) consents and submits to the jurisdiction of the Courts of the State of New
York and of the Courts of the United States for a judicial district within the
territorial limits of the State of New York for all purposes of this Agreement,
including, without limitation, any action or proceeding instituted for the
enforcement of any right, remedy, obligation and liability arising under or by
reason of this Agreement; and (b) consents and submits to the venue of such
action or proceeding in the County of Nassau (or such judicial district of a
Court of the United States as shall include the same).
15. Deductions. All payments made to Executive hereunder
in accordance with the terms of this Agreement shall be subject to such
deductions as shall at the time of such payment be required pursuant to pursuant
to any applicable income tax or other applicable law.
16. Entire Agreement. This Agreement, together with
Exhibit A which is annexed hereto and made a part hereof, constitutes the entire
agreement among the parties and supersedes any prior agreement or understanding
among them, and it may not be modified or amended in any manner except in
writing signed by both parties. A waiver of any breach or condition of this
Agreement shall not be deemed to be a waiver of any subsequent breach or
condition of a like or different nature.
17. Captions; Word Meanings. Captions contained in this
Agreement are inserted only as a matter of convenience and in no way define,
limit or extend the scope of this Agreement or any provision hereof. The words
"hereby", "herein", "hereinabove", "hereinafter", "hereof" and "hereunder", when
used anywhere in this Agreement, refer to this Agreement as a whole and not
merely to a subdivision in which such words appear, unless the context otherwise
requires. The singular shall include the plural, the conjunctive shall include
the disjunctive and the masculine gender shall include the feminine and neuter,
and vice versa, unless the context otherwise requires.
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18. Counterparts. This Agreement may be executed in any
number of counterparts and each such duplicate counterpart shall constitute an
original, any one of which may be introduced in evidence or used for any other
purpose without the production of its duplicate counterpart. Moreover,
notwithstanding that any of the parties did not execute the same counterpart,
each counterpart shall be deemed for all purposes to be an original, and all
such counterparts shall constitute one and the same instrument, binding on all
of the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day, month and year first above written.
ALLIED DIGITAL TECHNOLOGIES CORP.
By: /s/
--------------------------------
George N. Fishman
Co-Chairman of the Board and Chief
Executive Officer
/s/
-------------------------------
John K. Mangini
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Exhibit (10)(hh)
EXCLUSIVE CD MANUFACTURING AGREEMENT
EXCLUSIVE CD MANUFACTURING AGREEMENT, made as of the 12th day
of September 1997, by and between Sofsource, Inc. with offices at 425 South
Telshor, Building C, Suite 201, Las Cruces, New Mexico 88011 ("Sofsource"), and
Allied Digital Technologies Corporation, a Delaware corporation having its
principal place of business at 140 Fell Court, Hauppauge, New York 11788
("Allied").
W I T N E S S E T H
WHEREAS, Sofsource desires to appoint Allied as the exclusive
manufacturer of Sofsource's Product Requirement for its Sofsource Division
during the Term, as such capitalized terms are defined herein, and Allied wishes
to serve as the exclusive manufacturer of Sofsource's Product Requirement during
the Term, all on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing premises and
the mutual covenants contained herein, the parties hereby agree as follows:
1. Definitions. As used herein, the following terms shall have
the respective meanings set forth below:
(a) "Affiliated Entity" shall mean any entity directly or
indirectly owned in whole or in part by Sofsource or any such Affiliated Entity,
including but not limited to Media Safari.
(b) "Allied Notice" shall have the meaning set forth in
Section 9(d).
<PAGE>
(c) "Sofsource Group" shall mean the Sofsource Division of
Sofsource and Affiliated Entities and each entity with which Sofsource
currently or during the Term enters into a joint distribution agreement for any
computer disc or for which Sofsource controls or agrees to control the
assignment of manufacturing orders for such discs. Each reference to Sofsource
in this Agreement shall be deemed to include and refer to each member of the
Sofsource Group unless the context otherwise requires.
(d) "Sofsource Notice" shall have the meaning set forth in
Section 9(c).
(e) "Assembly Order" shall have the meaning set forth in
Section 4(d).
(f) "Communications" shall have the meaning set forth in
Section 22.
(g) "Components" shall mean the following with respect to
Product manufactured hereunder, all of which components shall be delivered to
Allied by Sofsource at Sofsource's own expense, and all of which shall be
referenced at the time of delivery to the Replication Order to which such
Components relate:
(1) Mastering discs from a 1630, CD, CD-R, DAT or
8 mm. source master;
(2) Film for two (2) to five (5) color disc
printing, as required;
(3) Booklets/folders and tray liners as appropriate;
and
(4) Special Materials (e.g. stickers, tray cards,
registration cards, inserts, etc.), if applicable.
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(h) "Contract Year" shall mean any twelve-month period of
time during the Term ending on the anniversary of the date of this Agreement
first above stated.
(i) "Fulfillment" shall mean the services described in
Exhibit C attached hereto.
(j) Initial Orders" shall have the meaning set forth in
Section 4(a).
(k) "Inventory" shall have the meaning set forth in Section
11(b).
(l) "Product" shall mean a computer disc ("CD") replicated
from a source master supplied by Sofsource, with materials and services
described in Exhibit A attached hereto and packaged in one of the formats
described in Exhibit B attached hereto.
(m) "Product Requirement" shall mean the aggregate amount of
all Product required by the Sofsource Group in the Territory during the Term.
(n) "Reorders" shall have the meaning set forth in Section
4(b).
(o) "Replication Orders" shall mean an order from Sofsource to
Allied for a specified quantity of Product to be replicated and delivered to the
Warehouse (or other location specified by Sofsource) for which Allied has been
supplied by or on behalf of Sofsource with all required Components.
(p) "Shipping Orders" shall have the meaning set forth in
Section 4(e).
(q) "Standards" shall mean industry CD standards.
(r) "Term" shall have the meaning set forth in Section 3.
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(s) "Third Party Manufacturer" shall have the meaning set
forth in Section 9(c).
(t) "Third Party Offer" shall have the meaning set forth
in Section 9(c).
(u) "Transactional Documents" shall have the meaning set
forth in Section 28.
(v) "Warehouse" shall have the meaning set forth in
Section 4(a).
2. Appointment, Acceptance, Exceptions.
(a) Appointment and Acceptance. Subject to the provisions of
Section 2(b), Sofsource hereby appoints Allied as the exclusive manufacturer of
all the Product Requirement of Sofsource during the Term and Allied hereby
accepts the appointment as the exclusive manufacturer of Product Requirement of
Sofsource during the Term, on the terms and conditions herein provided.
(b) Notwithstanding the provisions of Section 2(a), it is
agreed as follows:
(i) Sofsource may utilize other entities for packaging and
Fulfillment of CD's replicated by Allied except that Allied shall exclusively
Fulfill jewel-cased Product at the Warehouse; (it is anticipated that multi-CD
sets in ROM boxes will be assembled and Fulfilled by JVC in Atlanta, Georgia for
at least the first year of this Agreement); and
(ii) with respect to Replication Orders for one-hundred
thousand (100,000) or more units of the Products, Sofsource may request Allied
in its Replication Order for such Products to notify Sofsource as to how many of
such units Allied will be able to deliver within the time specified in such
Replication Order (which time, at the minimum
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shall be within the parameters set forth in Section 4(a) hereof). Upon receipt
of any such request Allied shall promptly notify Sofsource of its delivery
capabilities and, to the extent Allied notifies Sofsource that it is not capable
of delivering all of the number of units of Products within the timeframe
designated by Sofsource, Sofsource shall be free to have such number of units
that Allied is unable to so deliver manufactured by another manufacturer and
such Replication Order shall be deemed to be a Replication Order only for the
number of units of Products which Allied notifies Sofsource that it is capable
of delivering.
3. Term. The initial term of this Agreement shall
commence as of the date hereof and shall end on July 14, 2000, unless sooner
terminated pursuant to the provisions of this Agreement. The term of this
Agreement will be renewed for additional one year terms unless either party
gives notice of non-renewal to the other party at least ninety (90) days before
the end of the initial term or the then current one-year renewal term. (The
initial term and each one year renewal term in effect are referred to as the
"Term" as applicable).
4. Orders and Delivery Schedule.
(a) Replication Orders. Sofsource shall deliver written
Replication Orders to Allied from time to time. Replication Orders for
selections of Product which have not been delivered previously by Allied to
Sofsource Group hereunder ("Initial Orders") shall be filled and delivered to
Allied's warehouse in Clinton Tennessee, to such other fulfillment facility
designated by Allied (either, a "Warehouse") or to such other location specified
by Sofsource, not later than seven (7) business days after the receipt by Allied
of all
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Components of such Replication Orders. In the event that Sofsource shall
designate a location for delivery of a Replication Order other than a Warehouse,
the time for delivery shall be extended by the difference in carrier's time
between delivery to Clinton, Tennessee and such other location.
(b) Reorders. Replication Orders for selections of Product
which have been delivered previously by Allied to Sofsource hereunder
("Reorders") shall be filled and delivered to the Warehouse, not later than five
(5) business days after the receipt by Allied of all Components of such
Replication Orders, with deliveries to other than a Warehouse to be subject to a
similar extended delivery time as provided in Section 4(a) above.
(c) Replication Order and Reorder Contents. Each Replication
Order and Reorder shall include the following:
(1) Sofsource purchase order number;
(2) the quantity and description of the Product ordered;
(3) the Sofsource applicable catalog designation, if any;
(4) the selection number of each unit of Product ordered
and the unit replication price therefor, as determined in accordance with
Section 10 hereof;
(5) shipping instructions if applicable;
(6) delivery date(s) consistent with Section 4(a) and
4(b) above; and
(7) any other special instructions applicable to such
Replication Order.
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(d) Assembly Orders. Sofsource through its authorized
personnel, shall deliver written assembly orders to Allied from time to time,
specifying in detail the assembly and packaging format to be used with specific
numbers of specific items of Product which have been Replicated and are
maintained in Inventory at a Warehouse. The designated format shall be one of
the formats described in Exhibit B hereto, at the price therein designated
("Assembly Orders"). All Assembly Orders shall be fulfilled within three (3)
business days after receipt by Allied of all Components of such Assembly Orders.
(e) Shipping Orders. All Inventory (as defined in Section
11(b) hereof) stored by Allied at the Warehouse for and on behalf of Sofsource,
shall be shipped by Allied within thirty six (36) hours of receipt of written
shipping orders ("Shipping Orders") received by Allied from Sofsource personnel
authorized to place such Shipping Orders and containing at least the following
information: Sofsource shipping order number; name and address of customer to
whom shipped; method of shipment and identity of carrier; quantity and identity
of each Product to be shipped. Except as may be required pursuant to Section
9(e) hereof, all prices described in the Exhibits hereto are F.O.B. the
Warehouse. Allied shall use its best efforts to complete and ship orders in
accordance with the priority and delivery schedules requested by Sofsource.
(f) Minimum Orders. All Initial Orders shall be for a minimum
quantity of 5,000 units and all Reorders shall be for a minimum quantity of
1,000 units.
(g) Authorized Personnel. Sofsource shall designate, from time
to time, by written notice to Allied, the names of its personnel who are
authorized to place Replication
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Orders, Assembly Orders and Shipping Orders for Product. Allied will accept
Replication Orders, Assembly Orders and Shipping Orders only from such
designated personnel. Replication Orders, Assembly Orders and Shipping Orders
shall be given in writing; provided that in cases of emergency, any of such
Orders may be given by telephone. Replication Orders given by telephone shall
include all information required by Section 4(c), Assembly Orders given by
telephone shall include all information required by Section 4(d) and Shipping
Orders given by telephone shall include all information required by Section 4(e)
and each shall be confirmed by a written Replication Order, Assembly Order
and/or Shipping Order, as the case may be, delivered to Allied within
twenty-four (24) hours thereof, by personal delivery or by telex or telecopier.
(h) Variance of Quantity. Replication Orders shall be
manufactured, delivered and billed within a variance of plus or minus ten
(plus minus 10%) percent of the quantities set forth in Sofsource's Replication
Orders, but in no event more than two thousand (2,000) units as to any
Replication Order.
5. Customer Service Representative. Allied shall employ, at
its sole cost and expense, a Customer Service Representative whose primary
responsibility shall be to facilitate Allied's performance under this Agreement
with respect to day-to-day operational matters. Such person may be given other
duties provided they do not prevent his or her ability to perform the foregoing
services. Such person shall be available to Sofsource during normal business
hours to discuss Allied's performance under this Agreement. If Sofsource, in
good faith, becomes dissatisfied with such person, Sofsource may request a
substitution
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and Allied shall comply with such request by appointing a new Customer Service
Representative within a reasonable time after such request.
6. Startup. At Sofsource's costs and expense, it will
expeditiously arrange to deliver to Allied premises at Hauppauge, New York and
to the Warehouse, its current inventory of Components and Products and Allied
shall cooperate with Sofsource in scheduling the receipt of such items at its
appropriate location.
7. Quality of Product.
The quality of Product manufactured by Allied for Sofsource,
and all of the materials supplied by Allied in connection with the manufacture
of Product hereunder, shall meet or exceed the Standards.
8. Exclusivity. Except as provided in Section 2 hereof,
Sofsource shall purchase from Allied not less than one hundred percent (100%) of
Sofsource's Product Requirement.
9. Allied's Right of First Refusal on New Products.
(a) New Media Products. During the Term, Sofsource
agrees that it will not place Replication Orders with any manufacturer other
than Allied for Sofsource's requirements of any new product requiring new media
(e.g. DVD) unless it has first complied with the provisions of this Section 9.
(b) Solicitation of Orders. If, during the Term,
Sofsource requires the manufacture of any product requiring new media, including
but not limited to DVD, then Sofsource may solicit bids from other manufacturers
of such product for the purpose of
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obtaining the lowest cost for the manufacture of such new product, consistent
with acceptable quality standards as set forth in this Agreement.
(c) Notice of Offers. If, after such solicitation
Sofsource receives and intends to accept a written bona fide offer (the "Third
Party Offer") from a reputable manufacturer of such new product (the "Third
Party Manufacturer") to manufacture such new product for Sofsource in accordance
with such quality standards, then, before accepting such Third Party Offer
Sofsource shall first give Allied written notice thereof, which notice (the
"Sofsource Notice") shall include a copy of the Third Party Offer and shall set
forth all of the material terms and conditions of such Third Party Offer,
including but not limited to all of the elements relating to the price, quantity
and delivery schedules of the new product to be manufactured pursuant to such
Third Party Offer.
(d) Right of First Refusal. Allied shall have the right
and option to manufacture for and sell to Sofsource the new product specified in
the Sofsource Notice, in the quantities and at the same price as set forth in
the Third Party Offer and otherwise on the terms and conditions set forth in
this Agreement, by so notifying Sofsource via telecopier or in writing, within
seventy-two (72) hours of Allied's receipt of the Sofsource Notice (the "Allied
Notice").
(e) Consummation of Right of First Refusal. If Allied
timely delivers the Allied Notice, then Sofsource shall provide Allied with
Replication Orders for the new product specified in the Sofsource Notice and
Allied shall, subject to the terms and
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conditions of this Agreement, manufacture such new product at the price set
forth in the Sofsource Notice.
10. Prices and Payment. The unit cost of replication for
each unit of Product replicated hereunder is set forth in Exhibit A attached
hereto and includes the services and materials therein described except to the
extent to be supplied by Sofsource. The unit cost of package assembly for each
unit, multiple unit or long box package, for Product to be sold hereunder is set
forth in Exhibit B attached hereto and includes the services and materials
therein described except registration cards and security stickers. The prices
for Allied's services related to Shipping (fulfillment) are set forth in Exhibit
C attached hereto.
(a) Reduction in Product Ordered, Failure by Sofsource to
Deliver All Components for Replication Order or Assembly Order. In the event
Sofsource reduces the quantity of a Product ordered at any time after a
Replication Order relating to such Product has been accepted by Allied, or in
the event Sofsource fails to deliver to Allied all of the Components necessary
to complete a Replication Order or Assembly Order after Allied has commenced
production of the Products required pursuant thereto and otherwise incurred
costs in connection therewith, then Sofsource shall reimburse Allied promptly
for any and all actual and documented costs incurred by Allied as a result of
such reduction or failure to deliver, which costs shall be set forth in the form
of an invoice from Allied to Sofsource therefor, payable on demand.
(b) Customer Returns and Defective Product.
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Allied agrees to receive all returns of Products made by Sofsource's customers
and all allegedly defective Product at the Warehouse and to process same as
described in Exhibit C hereof, within five (5) business days of receipt of same.
The price for such services shall be the prices set forth in Exhibit C hereof,
to be invoiced weekly. Allied shall furnish a report to Sofsource of all such
activity and its disposition of such Products at least once each calendar week.
(c) Payment. Except as otherwise expressly provided
herein, payment for all Product and any other service performed by Allied which
is invoiced hereunder shall be due and payable sixty (60) days from the date of
Allied's invoice therefor with a two percent (2%) discount for payment within
thirty (30) days after the invoice date, and shall be made by check payable to
Allied delivered to Allied at the address set forth above or at such other
address as may be designated in writing from time to time by Allied or by wire
transfer pursuant to then current wiring instructions furnished by Allied to
Sofsource. Allied shall invoice Sofsource for Product manufactured and packaged
in jewel boxes hereunder upon the delivery by Allied of such Product to the
Warehouse and shall invoice all other charges as provided in this Agreement or
as and when incurred.
(d) Credit. Should Sofsource claim that it is entitled
to an adjustment or credit on any invoice, it shall do so promptly, in writing,
but in no event later than sixty (60) days after Sofsource's receipt of such
invoice.
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11. Copyrights, Title and Inventory.
(a) Copyrights. Allied acknowledges that the copyright
in all Components delivered by Sofsource to Allied, including without
limitation, all masters, and the copyright in all completed Product manufactured
hereunder, shall at all times be owned or controlled by Sofsource. Any rights
not specifically licensed to Allied pursuant to the terms of this Agreement are
hereby expressly reserved to Sofsource except to the extent required by Allied
to perform its obligations hereunder.
(b) Title. Title to all Components furnished by
Sofsource at all times during the manufacturing process, and title to all
Product upon completion of replication thereof, (the foregoing, collectively,
"Inventory") shall at all times reside in Sofsource and, upon the execution of
this Agreement, Sofsource shall execute and deliver to Allied a letter agreement
in the form of Exhibit D hereto pursuant to which Sofsource acknowledges (i)
that title to Product passes to Sofsource upon completion of replication
thereof, notwithstanding that such Product may not yet have been shipped to the
Warehouse or to Sofsource and (ii) that each invoice sent by Allied to Sofsource
with respect to such Product represents a definitive and final sale of such
Product to Sofsource and Sofsource shall pay the same when due.
(c) Product and Component Storage and Charges. Allied
shall store Inventory at the Warehouse (except that Components may be stored at
Hauppauge, New York) at no additional charge other than as follows: commencing
with the first calendar month next following the date which is three (3) months
from the date of this Agreement,
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Allied shall be entitled to charge and Sofsource will pay upon demand, a charge
of $6.50 per calendar month per pallet or partial pallet of any Product which is
in a retail package or of any Component, in excess of an average sixty (60) day
requirement thereof, determined as follows: (i) with respect to a Product in a
retail package, Allied shall maintain a continuous rolling three (3) most recent
calendar month record of shipment of such Product and two- thirds (2/3) of the
number of such Product shipped during the latest such three (3) month period
shall be deemed to be the average sixty (60) day requirement of such Product at
the end of such period; and (ii) with respect to a Component, Allied shall
maintain a continuous rolling three (3) most recent calendar month record of
replication of Products requiring such Component and two thirds (2/3) of the
number of such Product replicated during the latest such three (3) month period
shall be deemed to be the average sixty (60) day requirement of such Component
at the end of such period.
(d) Protection, Insurance. Allied shall exercise
reasonable care and diligence to protect the Inventory and shall obtain
insurance coverage with sufficient policy limits to cover the replacement, at
cost, of any Inventory stored at the Warehouse. Such insurance coverage shall
name Sofsource as an additional insured and, upon the reasonable request of
Sofsource, Allied shall deliver to Sofsource a certificate evidencing such
coverage. In addition, Allied shall notify Sofsource of any material changes in
such coverage as it relates to Inventory stored at Allied's facilities.
Notwithstanding the foregoing, in no event shall Allied be liable to Sofsource
for incidental or consequential damages (including without limitation, lost
profits) resulting from the loss of or damage to any such Inventory.
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(e) Physical Inventory. Once during each Contract Year,
Allied shall, at the request of Sofsource, at Allied's expense, take a physical
inventory of all of Sofsource's Inventory located at Allied's premises.
Sofsource shall have the right, at its own expense, to have a designated
representative present at the taking of such physical inventory for the purpose
of verifying the accuracy thereof. Allied shall furnish a copy of the physical
inventory report to Sofsource promptly after its completion, but not later than
fifteen (15) business days after the completion of the taking of the physical
inventory. As soon as possible, but in no event later than sixty (60) days after
Sofsource's receipt of such report, Sofsource shall propose to Allied, in
writing and accompanied by appropriate documentation, any adjustments thereto
which Sofsource, in good faith, believes to be necessary. If Sofsource shall
fail to do so, then Allied's report shall be binding upon Sofsource. If Allied,
within twenty (20) days after its receipt of any such proposed adjustments,
shall not dispute the same in good faith, then such proposed adjustments shall
be binding upon Allied. If, as a result of the foregoing procedure, it shall
appear that on an overall basis there is a shortfall in physical inventory with
respect to either Sofsource's Components or Product, then Allied shall pay
Sofsource an amount equal to such overall shortfall. The amount of any shortfall
shall be calculated at Sofsource's actual out-of-pocket costs of manufacture for
each Component and unit of Product.
12. Allied's Representations and Warranties. Allied hereby
represents and warrants to Sofsource as follows:
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(a) Power and Authority. Allied has all requisite power
and authority to enter into, execute and deliver this Agreement and to perform
fully its obligations hereunder.
(b) Enforceability. Allied has taken all actions
necessary to authorize it to enter into and perform its obligations under this
Agreement and to consummate the transactions contemplated herein. This Agreement
is the legal, valid and binding obligation of Allied, enforceable in accordance
with its terms, except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or limiting
creditors' rights generally and subject to the availability of equitable
remedies.
(c) No Conflicts. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated herein
will, to the knowledge of Allied, violate, conflict with, or constitute a
default under any material contract or other agreement or instrument to which
Allied is a party or by which it or its property is bound.
(d) No Editing of Discs. Allied shall not edit, change
nor add any material to any CD manufactured hereunder pursuant to the terms of a
Replication Order except pursuant to written instructions from Sofsource.
13. Sofsource's Representations and Warranties. Sofsource
hereby represents and warrants to Allied as follows:
(a) Power and Authority. Sofsource has all requisite
power and authority to enter into, execute and deliver this Agreement and to
perform fully its obligations hereunder.
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(b) Enforceability. Sofsource has taken all actions
necessary to authorize it to enter into and perform its obligations under this
Agreement and to consummate the transactions contemplated herein. This Agreement
is the legal, valid and binding obligation of Sofsource, enforceable in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors' rights generally and subject to the availability of
equitable remedies.
(c) No Conflicts. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated herein
will, to the knowledge of Sofsource, violate, conflict with, or constitute a
default under any material contract or other agreement or instrument to which
Sofsource is a party or by which it or its property is bound.
(d) No Infringement. Sofsource has all rights necessary
to grant Allied the rights granted herein for the replication, processing,
manufacturing and packaging of Product hereunder and the Product replicated,
processed, manufactured and packaged by Allied hereunder does not and will not
infringe upon any statutory or common law copyright, or infringe the right of
privacy of any person, or contain any obscene, slanderous or libelous material
or any material otherwise unlawful or in contravention of the rights of any
person.
14. Royalty Payments. Sofsource shall be solely
responsible for and shall pay any and all royalty payments due third parties by
Sofsource in respect of Product manufactured hereunder and Allied shall have no
responsibility or liability therefor whatsoever.
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15. Taxes. Sofsource shall be solely responsible for and
shall pay when due all sales, use and gross receipt taxes, however designated,
arising from the sale by Allied to Sofsource or by Sofsource to third parties,
of Product manufactured hereunder, other than income taxes of Allied. If any
taxing authority shall levy an assessment against Allied for such taxes, Allied
shall notify Sofsource thereof and Sofsource shall remit promptly all such
amounts to Allied, including penalties and interest, if any. Sofsource will
furnish Allied with its sales tax resale number and any other similar evidence
of its right to purchase Product from Allied free of sales taxes.
16. Indemnification.
(a) Indemnification by Sofsource. Sofsource hereby agrees
to indemnify and hold harmless Allied and each of its officers, directors,
employees, agents and affiliates, from and against any and all claims, demands,
causes of action, liabilities, actual loss or damage, costs and expenses
(including reasonable attorney's fees and disbursements and court costs)
asserted against or incurred by Allied by reason of, arising out of or in
connection with (i) a breach of any representation or warranty of Sofsource or
(ii) the failure of Sofsource to perform any obligation required by this
Agreement to be performed by it. Notwithstanding anything to the contrary
contained in this Agreement, Allied makes no warranties, express or implied, as
to the Products and all such warranties are waived, except that Allied warrants
that the Products will be free from material defects and will conform to the
masters submitted by Sofsource at the time of shipment thereof. Allied's sole
obligation and liability for defective or non-conforming Products shall be to
replace such
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defective or non-conforming Products at no additional charge to Sofsource and
Sofsource shall have no right to any damages from or any other right or remedy
whatsoever against Allied.
(b) Indemnification by Allied. Allied hereby agrees to
indemnify and hold harmless Sofsource and each of its officers, directors,
employees, agents and affiliates, from and against any and all claims, demands,
causes of action, liabilities, actual loss or damage, costs and expenses
(including reasonable attorney's fees and disbursements and court costs)
asserted against or incurred by Sofsource by reason of, arising out of or in
connection with (i) a breach of any representation or warranty of Allied as set
forth in this Agreement or (ii) the failure of Allied to perform any obligation
required by this Agreement to be performed by it.
(c) Notice; Defense of Claims. The parties shall give prompt
written notice to each other of each claim for indemnification hereunder,
specifying the amount and nature of the claim, and of any matter which in the
opinion of such party is likely to give rise to an indemnification claim. If the
party who is indemnifying the other acknowledges in writing that it is so
indemnifying the other, the indemnifying party shall have the right, at its own
expense and with counsel of its choice, to take over the defense of such matter
so long as such defense is expeditious. Notwithstanding the foregoing, (i) each
party shall have the right to participate at its own expense in the defense of
any such matter or its settlement, and (ii) no claim shall be settled without
the consent of the indemnified party if in the reasonable opinion of such party
its financial condition or business would be materially
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<PAGE>
impaired thereby. The failure by either party to notify the other of a claim for
indemnification hereunder shall not relieve the indemnifying party from any
obligation that it may have hereunder, except to the extent that it has been
prejudiced in any material respect by such failure, or from any obligation or
liability that it may otherwise have to the indemnified party.
17. Force Majeure. In the event of any act of God or force
majeure, such as strikes, lock-outs, accidents, fires, delays of carriers,
delays in delivery of materials, labor controversies, breakdowns in key
equipment, government actions, war or any other causes beyond the control of the
parties hereto, neither party shall be responsible for delay in performance
hereunder nor shall it incur liability to the other due to the resulting
inability to perform; provided that the party relying on such events of force
majeure gives notice to the other party of the cause and anticipated duration
within thirty (30) days of the occurrence. If for any of the foregoing reasons,
Allied is unable to perform its obligations hereunder, Sofsource may obtain
Product from other sources during the period Allied is unable to perform.
18. Termination. Either party hereto shall have the right,
in addition to any other rights it may have hereunder, at law or otherwise, to
terminate the Term by giving written notice to the other party with immediate
effect in any of the following events:
(a) Material Breach. The failure of the other party to
rectify a material breach of this Agreement within thirty (30) days after the
delivery of written notice from the non-breaching party specifying the nature of
such breach.
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<PAGE>
(b) Force Majeure. An event of force majeure, as described in
Section 17 above, which continues for a period of more than ninety (90) days.
(c) Insolvency. The occurrence of any of the following events
in respect of either party:
(1) the commencement against such party of an
involuntary case under the Federal Bankruptcy Code or any
similar law affecting creditors' rights which is not dismissed
within ninety (90) days, or in any such involuntary case, the
approval of the petition by such party as properly filed, or
the admission by such party of material allegations contained
in the petition; or
(2) the execution by such party of a general
assignment for the benefit of creditors; or
(3) the commencement by such party of a
voluntary case under the Federal Bankruptcy Code or any
similar law affecting creditors' rights; or
(4) the appointment of a receiver for such party
or for all or a substantial part of the assets of such party
and, in the event that such receivership proceedings were not
commenced by such party, such receivership proceedings are not
dismissed within ninety (90) days after the receiver's
appointment; or
(5) the commencement by such party of
liquidation, dissolution or winding-up proceedings, or the
commencement against such party of a
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<PAGE>
proceeding to liquidate, wind-up or dissolve such party, which
proceeding is not dismissed within ninety (90) days.
19. Allied's Obligations Upon Expiration or Termination.
Upon the expiration or termination of this Agreement, for any reason whatsoever,
Allied shall, at the option of Sofsource to be exercised in writing within sixty
(60) days following the effective date of such expiration or termination, and
upon condition that Sofsource shall have paid to Allied all sums owed to Allied,
either (a) deliver, at Sofsource's expense, all or any part of the Inventory in
Allied's possession, including, without limitation, masters, Components and
Product, to such places and parties as Sofsource shall designate, or (b) destroy
all or any part of such Inventory. Allied shall deliver to Sofsource appropriate
documentation reasonably satisfactory to Sofsource with respect to such
destruction. If Sofsource does not make an appropriate election as to all of the
Inventory within the foregoing time period, then Allied thereafter shall be
authorized to destroy all of the Inventory as to which no election was made and
shall have no further responsibility to Sofsource therefor whatsoever, other
than furnishing to Sofsource, upon Sofsource's request, reasonably acceptable
documentation of such destruction.
20. Inspection of Manufacturing Facilities. Allied agrees to
provide access, upon reasonable advance notice, to its facilities to Sofsource
personnel who shall have the right of visiting within the various facilities
where Product is being manufactured or materials or Inventory are stored. Any
confidential information relating to Allied or any of its customers, other than
Sofsource, gained as a result of such access shall be held in strict
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<PAGE>
confidence and Sofsource and any such customer shall execute such documents
evidencing such obligations as Allied's counsel may reasonably request.
21. Confidentiality. The terms of this Agreement shall
not be publicly disseminated by either party, either by oral or written
disclosure, without the written consent of both parties, except as may be
necessary to comply with applicable law, governmental regulation or judicial or
legal process. The provisions of this paragraph 22 shall survive any termination
of this Agreement and shall be binding upon the parties and their respective
agents, successors and assigns.
22. Notices. All notices, consents, statements and other
communications required or permitted hereunder (all of the foregoing hereinafter
collectively referred to as "Communications") shall be in writing and shall be
deemed to have been duly given and received: upon receipt, if delivered
personally with receipt acknowledged; three (3) business days after mailing by
registered or certified mail or equivalent, return receipt requested, postage
prepaid; one (1) business day after mailing by overnight courier for next day
delivery, in each case addressed to the parties at their respective addresses
set forth below or to such other address as either party shall hereafter specify
by Communication to the other party; or one (1) business day after telecopying
to the number set forth below or to such changed number as either party shall
hereafter specify by Communication to the other party; provided, however, that
any notice of change of address or telecopier number shall be effective only
upon receipt and a copy of any notice sent by telecopier shall also be sent by
registered or certified mail or equivalent, return receipt requested, postage
prepaid:
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<PAGE>
If to Sofsource to: Sofsource, Inc.
425 South Telshor Building
C, Suite 201
Las Cruces, New Mexico 88011
Att: Daniel R. Koch, General Manager
Telecopier No.: (505) 532-6601
with a copy to: Mr. George Stein
Sofsource, Inc.
425 South Telshor
Building C, Suite 201
Las Cruces, New Mexico 88011
If to Allied to: Allied Digital Technologies Corporation
140 Fell Court
Hauppauge, New York 11788
Attn: Chief Financial Officer
Telecopier No.: (516) 232-5370
with a copy to: Warshaw Burstein Cohen
Schlesinger & Kuh, LLP
555 Fifth Avenue
New York, New York 10017
Attn: Frederick R. Cummings, Jr., Esq.
Telecopier No.: (212) 972-9150
23. Entire Agreement and Waiver. This Agreement contains the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all previous agreements or arrangements between the parties
relating to the subject matter hereof, and cannot be modified or amended except
by written agreement signed by both parties. No purported waiver by either party
of any breach
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<PAGE>
by the other of any of its obligations, agreements or covenants hereunder, or
any part thereof, shall be effective unless made in writing signed by the party
sought to be bound thereby, and no failure to pursue or elect any remedy with
respect to any default under or breach of any provisions of this Agreement, or
any part thereof, shall be deemed to be a waiver of any other subsequent similar
or different default or breach, or any election of remedies available in
connection therewith, nor shall the acceptance or receipt by any party of any
money or other consideration due to it under this Agreement, with or without
knowledge of any breach hereunder, constitute a waiver of any provision of this
Agreement with respect to such or any other breach.
24. Assignment; Binding Effect. Neither party may assign
this Agreement, nor assign or subcontract any part thereof nor its rights
thereunder, to any person; provided, however, that nothing herein shall be
deemed to prohibit either party from assigning its rights and obligations to its
parent corporation, or to a purchaser or transferee of all or substantially all
of its business and assets, including without limitation, a successor by merger,
provided that it is demonstrated by such party to the reasonable satisfaction of
the other party that such assignee or successor shall have the financial ability
to carry on the business of the assignor or predecessor. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and permitted assigns. Nothing in this Agreement, express
or implied, is intended to or will confer on any person other than the parties,
and their respective successors and permitted assigns, any benefits, rights,
remedies,
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<PAGE>
obligations or liabilities under, or by reason of, this Agreement, or constitute
the parties partners or participants in a joint venture.
25. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of New York applicable to agreements made
and to be performed wholly within such state.
26. Severability. If one or more of the provisions
contained in this Agreement shall be determined to be invalid or unenforceable
by a court of competent jurisdiction or by any other legally constituted body
having the jurisdiction to make such determination, the validity and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby and the parties will attempt to agree upon a valid and
enforceable provision which shall be a reasonable substitute for such invalid or
unenforceable provision in light of the tenor of this Agreement, and, upon so
agreeing, shall incorporate such substitute provision in this Agreement.
27. Headings; Word Meanings. The headings preceding the text
of the various provisions of this Agreement are for convenience of reference
only and are not intended to define, limit or in any other way describe the
scope of this Agreement or the intent of the provisions hereof. The singular
shall include the plural and the masculine gender shall include the feminine and
neuter, and vice versa, unless the context otherwise requires.
28. Purchase Orders and Acknowledgements. In the event that
any purchase orders, acknowledgements or other purchasing forms or documents
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<PAGE>
("Transactional Documents") are used in connection with the purchase of Product
pursuant to the provisions of this Agreement, then, not withstanding any
provisions therein contained to the contrary, the terms of all such
Transactional Documents shall be subordinate to and governed by the provisions
of this Agreement and any terms of any Transactional Documents which are
inconsistent with the Terms hereof shall be null and void and shall have no
force or effect whatsoever.
29. Arbitration. Any controversy or claim arising out of
or relating to this Agreement, the making, interpretation or the breach thereof,
shall be settled by arbitration in Suffolk County, New York in accordance with
the commercial rules of the American Arbitration Association which are then
obtaining. Judgment upon the award rendered by the arbitrator or arbitrators may
be entered in any court having jurisdiction thereof and any party to the
arbitration may, if it so elects, institute proceedings in any court having
jurisdiction for the specific performance of any award. The powers of the
arbitrator or arbitrators shall include, but not be limited to, the awarding of
injunctive or other equitable relief but shall not include the power to modify
or amend in any respect the provisions of this Agreement. The arbitrator or
arbitrators shall include in any award the amount of the reasonable attorneys'
fees and disbursements and expenses of the arbitration incurred by the
prevailing party and a direction that it be paid by the other party within
thirty (30) days after the making of such award. In the event that the
arbitrator or arbitrators do not rule in favor of the prevailing party in
respect of all the claims alleged by such party, the arbitrator or arbitrators
shall include in any award the portion of the
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<PAGE>
amount of the reasonable attorneys' fees and disbursements and other expenses of
the arbitration incurred by the prevailing party as the arbitrator or
arbitrators deem just and equitable under the circumstances, together with a
direction that such amounts be paid by the other party within thirty (30) days
thereof. Except as provided above, each party shall bear its own attorney's
fees, disbursements and other expenses and the parties shall bear equally all
other costs and expenses of the arbitration.
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto on the date and year first above written.
SOFSOURCE, INC.
BY: /s/
-------------------------
Title:
----------------------
ALLIED DIGITAL TECHNOLOGIES CORP.
BY: /s/
-------------------------
Title:
----------------------
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<PAGE>
SUBLEASE AGREEMENT
This Sublease Agreement (the 'Sublease') is entered into by and between
Ambord Corporation, a California corporation ('Sublessor') and Hauppauge Record
Manufacturing Company, a New York corporation, and its parent company, Allied
Digital Technologies, a Delaware corporation, (hereinafter referred to jointly
and severally as 'Sublesse').
Recitals
A. Sublessor is presently the lessee of the Premises pursuant to
the Master Lease. A copy of the Master Lease is attached to this Sublease as
Exhibit A and incorporated into by this reference.
B. Sublessor desires to sublease the Premises to Sublessee and
Subleasee desires to sublease the Premises from Sublessor, subject to the terms,
covenants, and conditions set forth below.
C. Sublessor leases to Subleasee and sublessee hires from
Sublessor the following described together with the appurtenances, situated at
480 Valley Dr. in the City of Brisbane, County of San Mateo, State of
California: a free standing single story 22,160 square foot building located on
Industrially zoned Assessors Parcel Number 005-241-160 consisting of
approximately 54,896 square feet of improved land (hereafter referred to as 'the
premises').
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the parties agree as
follows:
1. Sublease. Sublessor hereby subleases to Sublessee, and Subleasee
hereby subleases from Sublessor, the Premises for the Term, and upon all of the
terms, covenants and conditions as set forth in the Master Lease and in
accordance with the entire remaining term thereof- eleven (11) years and one (1)
month. Except as provided herein, the terms and conditions of the Master Lease
shall apply to the parties hereto.
2. Condition of Premises/Inspections. Sublessor shall deliver to
Sublessee the premises with professionally cleaned carpets, restrooms sanitized
and the warehouse broom swepted. Sublessee shall be solely responsible for
conducting any inspections it may deem necessary or appropriate in determining
whether to enter this Sublease. Subleases may, prior to the Effective Date,
conduct an investigation of the Premises and the physical condition thereof,
including accessibility and location of utilities, improvements, existence of
hazardous materials, including but not limited to asbestos, asbestos containing
materials, polychlorinated biphenyls (PCB), and underground tanks which in
Sublesse's judgment might affect or influence Sublessee's use of the Premises or
Sublessee's willingness to enter into this Sublease. Except for the seismic
condition of the building, Sublessee subleases the Premises to Sublessee on an
"AS IS BASIS", and Sublessee acknowledges that except for the disclosure letter
dated March 26, 1997, Sublessor has made no representations of any kind in
connection with soils, improvements, or physical conditions on, or bearing on,
the use of the Prerm@ses, whether express or implied. Sublessee further
acknowledges and agrees that neither Sublessor nor Lewor shall be required to
perform any work of construction, alteration or maintenance of or to the
Premises.
3. Sublease Subject to Master Lease.
a. Inclusions. This Sublease shall be subject to, and
there shall be incorporated herein by reference, all of the terms, covenants and
conditions of the Master Lease, except as excluded in Section 4.b. below and
except to the extent such terms, covenants and conditions conflict with the
provisions of this Sublease, in which case the provisions of this Sublease shall
govern and control. It is understood and agreed that the term 'Lessee,' as used
in the Master Lease refers to 'Sublessee' hereunder, and, subject to Section 5
of this Sublease, the term 'Lessor' shall refer to 'Sublessor' hereunder.
Sublessee shall assume all of the obligations and perform all of the duties of
Sublessor as lessee under the Master Lease with respect to the Premises.
Sublessee shall not commit or permit to be committed any act or omission which
shall violate any terms, covenants or conditions of the Master Lease. An event
of default under the Master Lease shall constitute an event of default
hereunder, and Sublessor may exercise any or all remedies provided for in the
Master Lease against Sublessee in such an event, including, but not limited to,
termination hereof.
b. Exclusions. The terms and provisions of the
following sections and portions of the Master Lease are not incorporated into
the Sublease:
(1) Base Rent. Beginning on July 1, 1997, the
sublessee shall pay to Sublessor as provided herein and further defined in
Paragraph 4.1 of the Master Lease, the Base Rent of Thirteen Thousand Two
Hundred and Ninety Six Dollars ($13,296.00 or $.60 per square foot) for the
balance of the initial year and through to November 30, 1998. Thereafter the
Base Rent shall be increased as provided in Section 1.5.1 of the Master Lease
Addendum.
(2) Rate Adaustments. The Base Rent Adjustments
of the sublease shall be as defined Section 1.5.1 of the Master Lease Addendum,
with the additional provision at each Adjustment Date
<PAGE>
defined therein, that each adjustment shall be capped at a maximum of six
percent (6%) and a minimum of two percent (2%) annually but effective every
three (3) years.
(3) Lessees Right of First Refusal. If
Sublessor does not indicate it's agreement to purchase Premises as provided in
Section 49 of the Master Lease, Sublessor shall give notice to Sublessee of the
terms Lessor is willing to sell premises within eight (8) days of receipt of
such notice. Sublessee shall have eight (8) days of receipt of Sublessor's
notice to indicate it's agreement to purchase. Lessor shall thereafter have the
right to see the Premise as provided in the Master Lease, Section 49.
C. Time for Notice. The time limits provided for in the
provisions of Master Lease for the giving of notice, making of demands,
performance of any act, condition or covenant, or the exercise of any right,
remedy or option, are amended for the purposes of this Sublease, by lengthening
or shortening the same in each instance by five (5) days, as appropriate, so
that notices may be given, demands made, or any act, condition or covenant
performed, or any right, remedy or option hereunder exercised, by Sublessor or
Sublessee, as the case may be, within the time limit specified in the Master
Lease. If the Master Lease allows five (5) days or less for Sublessor to perform
any act, or to undertake to perform such act, or to correct any failure relating
to the Premises or this Sublease, then Sublessee shall nevertheless be allowed
three (3) days to perform such act, undertake such act and/or correct such
failure, except with respect to Section 3.b(3) hereof.
4. Use. The Premises shall be used in accordance with the Master
Lease, and for no other purpose or business.
5. Assignment and Subletting. Any assignment of this Agreement or
sublease of the Premises shall be in accordance with the provisions of the
Master Lease, and Sublessor agrees that it will not unreasonably withhold
consent as required by the Master Lease.
6. Repairs and Maintenance. Except as to any material costs or
compliance with any requirement to seismically upgrade the premises, Sublessee
shall keep the Premises in safe condition, and in good order and repair at all
times during the Term at Sublessee's sole cost and expense. Sublessee shall, at
Sublessee's sole expense, repair any area damaged by Sublessee, Sublessee's
agents, employees and visitors. Sublessee acknowledges that Sublessor is under
no duty to make repair or improvements to the Premises. At the end of the Term,
Sublessee shall surrender to Sublessor the Premises and all alterations thereto
in the same condition as when received, ordinary wear and tear and damage by
fire, earthquake, act of God or the elements excepted.
7. Insurance Policies; Indemnification.
a. Sublessee's Insurance Policies. During the Term,
Sublessee shall procure and maintain in full force and effect and at Sublessee's
sole cost and expense the following policies of insurance. All policies of
insurance required to be maintained by Sublessee hereunder shall name Sublessor
and Lessor as additional insureds and shall be issued by insurance companies
approved by Sublessor. In the event the premium for any policy required
hereunder is increased by reason of any act or omission of Sublesm or its
general partners, agents or employees, Sublessee shall be responsible to pay
when due, as Additional Rent, such increases.
(1) Liability. A policy or policies of comprehensive
general liability insurance, insuring Sublessee's activities and those of
Sublessee's employees, agents, licensees and invitees with respect to the
Premises against loss, damage or liability for personal injury or death of any
person or loss or damage to property occurring on the Premises or as a result of
occupancy of the Premises, with a limit of not less than those provided for in
the Master Lease.
(2) All Risk and Extended Coverage of
Sublessee's Improvement and Property. A policy or policies of all risk property,
and extended coverage insurance in an amount equal to one hundred percent (100%)
of the full insurance replacement value (without deduction for depreciation) of
Sublessee's leasehold improvements and any alterations thereto, trade fixtures,
equipment, merchandise, and other personal property.
(3) Workers' Compensation and Employees'
Liabilities. A policy or policies of workers compensation and employee liability
insurance in adequate amounts as required by law.
b. Fire and Extended Coverage of Building. Sublessor
shall obtain and maintain complete fire and extended coverage insurance as
required under the Master Lease.
C. Waiver of Subrogation. Any policy or policies of
fire, extended coverage or similar casualty insurance which either party obtains
in connection with the Promises, shall, to the extent the same can be obtained,
include a clause or endorsement denying the insurer any rights of subrogation
against the other party. Sublessee and Sublessor hereby waive any rights of
recovery against the other for injury or loss due to hazards covered by fire,
extended coverage or similar casualty insurance, which either party obtains in
connection with the Premises, to the extent of the injury or loss covered
thereby and so long as the aforsaid waiver of subrogation is in effect, or to
the extent such injury or loss would have been covered and such waiver of
subrogation would have been in effect if such insurance and clause had been
obtained as required hereunder.
-2-
<PAGE>
d. Insurance Certifirates. Sublessee shall fumish to Sublessor
a certificate of insurance issued by the insurance carrier of each policy of
insurance required to be obtained by Sublessee hereunder upon the Effective Date
aad thereafter within thirty (30) days prior to the expiration of any policy
required to be maintained by Section 14(a) above. Each such certificate shall
expressly provide that the policy evidenced thereby shall not be cancelled,
subject to reduction of coverage or otherwise modified except after (30) days
prior written notice to all parties named as insureds therein.
e. Indenmifiration of Sublessor. Sublessee shall
indemnify, defend by counsel acceptable to Sublessor, and hold Sublessor and
their employees, agents and any other person acting on their behalf harmless
from and against any and all liabilities, penalties, losses, damages, costs and
expenses, demands, causes of action, claims or judgments arising out of or in
connection with any injury to persons or damage to property occurring (1) in, on
or about the Premises; (2) as a result of any accident or other occurrence
occasioned by an act or omission of Sublessee, Sublessee's officers, employees,
agents, servants, subtenants, concessionaires, contractors or visitors; (3)
during Sublessee's term from the use, maintenance, occupation or operation of
the Premises, including the use, presence, disposal, storage, generation or
release of any `hazardous materials,' 'hazardous substances,' 'hazardous wastes'
or 'toxic substances' as those terms may be defined in any federal, state or
local legislation currently existing or enacted in the future; (4) any breach or
default by Sublessee of any of the terms, covenants or conditions on its part to
be observed or performed under this Sublease; and/or (5) all legal costs and
charges, including reasonable attomey's fees, in connection with such matters
and the defense of any action arising out of the same or in discharging the.
Premises from any and all liens, charges or judgments which may accrue or be
placed thereon by any reason of any act or omission of Sublessee. The provisions
of this Section 14(d) shall survive the expiration or earlier termination of
this Sublease. To the extent of any occupancy of the premises by Sublessor after
the date hereof, Sublessor agrees to hold harmless, defend and indemnify
Sublessee from and against any liability arising from such occupancy.
8. Default and Remedies. This Agreement shall be subject to the
same default and remedy provision contained in the Master Lease.
10. Miscellaneous.
a. Notices. All notices, requests, or demands or
payments of any kind required or desired to be given hereunder shall be in
writing and shall be deemed to be delivered on the date of delivery if
personally served, or forty-eight (48) hours after being deposited in the United
States mail, certified or registered, postage prepaid, return receipt requested
(unless return receipt indicates not delivered) and addressed to Sublessor at
Sublessor's Address.
b. Time. Time is of the essence of this Sublease.
c. Entire Aereement. This Sublease contains all of the
terms, covenants and conditions between the parties concerning the Premises and
shall supersede all prior correspondence, agreements and understanding
concerning the Promises, both oral and written. No addition or modification of
any term or provision of this Sublease shall be effective unless set forth in
writing and signed by both Sublessor and Sublessee.
d. Successors and Assigns. Subject to the provisions of this
Sublease and the Master relating to assigmment, mortgaging and subletting, this
Sublease shall bind the heirs. executors, administrators, successors and assigns
of any and all of the parties hereto.
e. Authority. Each individual executing this Sublease on
behalf of Sublessee represents and warrants that he or she is duly authorized to
execute and deliver this Sublease on behalf of Sublessee, and that this Sublease
is binding upon Sublessee in accordance with its terms. Sublessor, as a
condition precedent to this Sublease, may require corporate or partnership
resolutions as are reasonably necessary to establish the authority of Sublessee
to execute this Sublease.
f. Attorneys' Fees. If any party commences an action or
arbitration proceeding against the other party arising out of or in connection
with this Sublease, the prevailing party shall be entitled to re--over from the
losing party the cost and expenses of such action, including reasonable
attorneys' fees and court and arbitration costs.
g. Governing Law. This Sublease shall be governed by
and construed in accordance with the laws of the State of California.
h. Captions. All captions and headings in this Sublease
are for the purposes of reference and convenience and shall not limit or expand
the provisions of this Sublease.
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<PAGE>
i. Counterparts. This Sublease may be entered into in
counterparts. each of which shall be deemed an original but both of which
together shall be deemed a single agreement.
j. Brokers. The following real estate brokers and brokerage
relationships exist relative to this Sublease transaction and are consented to
by the parties and any commissions related to same will be paid by the
responsible parties in accordance with the terms and conditions of separate
agreements between Sublessor and Sublessee, respectively, as well as BT
Commercial, M.V.P. Management and Grubb & Ellis, as the case may be.
11. Consent of Lessor. This agreement is subject to the prior
written consent of San Bruno Associates, Lessor on the Master Lease, accordance
with the attached Consent.
Dated Dated:
Sublessor Sublessees
Ambord Corporation Hauppauge Record Manufacturing Company,
a New York corporation
By By
Address: P.O. Box 619' Address: 140 Fell Ct.
Orinda, CA 94563 Hauppauge, NY 11788
(415) 467-4500 (516) 232-2323
Allied Digital Technologies,
a Delaware corporation
By --.
Address: 140 Fell Ct.
Hauppauge, NY 11788
(516) 232-2323
4-
<PAGE>
SUBLEASE AGREEMENT
SUMMARY OF TERMS
Term: Eleven (11) years and one (1) month in
accordance with the Master Lease.
Sublessor: Ambord Corp.
Sublessor's Address: P.O. Box 619
Orinda, CA 94563
Sublessee: Hauppauge Record Manufacturing Company
Allied Digital Technologies
Sublessee's Address: 140 Fell Ct.
Hauppauge, NY 11788
Premises: Sublessor leases to Sublessee and Sublessee
hires from Sublessor the following described
together with appurtenances, situated at 480
Valley Dr. in the City of Brisbane, County
of San Mateo, State of California: a free
standing single story 22,160 square, foot
budding located on industrially zoned
Assessors Parcel Number 005-241-160
consisting of approximately 54,886 square
feet of improved land.
Permitted Uses: any lawful use
Base Rent: $13,296 plus adjustments
Occupancy Date: June 1, 1997
Rental Commmencement Date: July 1, 1997
Security Deposit: None
Master Lease: Dated December 1, 1993 by and between Ambord
Corporation and San Bruno Associates
Lessor: San Bruno Associates
Lessor's Address: 1ll Pine Street
San Francisco, CA
Effective Date: Upon mutual execution of Sublease
Expiration Date: June 30, 2008, as provided in the Master
Lease
<PAGE>
Addendum to Sublease
Dated April 21,1997
for premises at
480 Valley Dr., Brisbane California
This Addendum to Sublease dated April 21, 1997, is entered into by and between
Ambord Corporation, A California Corporation ('Sublessor') and Hauppauge Record
Manufacturing Company, a New York Corporation, and it's parent company Allied
Digital Technologies, a Delaware Corporation (hereinafter referred to jointly
and severally as "Sublessee").
3.b. (1) a. Additional Rent:
The Base Rent shall be increased by Two and One-half cents ($.02.5) per square
foot bringing the total Base Rent to Thirteen Thousand Eight Hundred and Fifty
Dollars ($13,850.00 or $.62.5 per square foot) for the term of the Sublease for
Sublessee's purchase from Sublessor of an additional 600 amp electrical power
box as required delivered a minium of six (6) weeks from the date requested, the
Steelcase panel systems with surfaces and pedestals which are completely set-up
with electrical power and phone lines, and the existent Pac-Tel Series 100 phone
system and intercom system. This increase of Base Rent will commence on January
1, 1998, and continue through the term of the Sublease subject to the provisions
in the Master Lease and 3.b.(2) of the Sublease.
SUBLESSOR SUBLEESSEES
AMBORD CORPORATION, HAUPPAUGE RECORD,
a California corporation MANUFACTURING COMPANY,
a New York corporation
By By
Name: Name:Charles Kavanagh
Title: Title: Executive Vice President
Address: P.O.Box 619 Address: 140 Fell Ct-
Orinda, Ca. 94563 Hauppauge, NY 11788
(415) 467-4500 (516) 232-2323
Date: Date:- May 29, 1997
ALLIED DIGITAL TECHNOLOGIES,
a Delaware corporation
By
Name: Charles Kavanagh
Title: Executive Vice President
Address: 140 Fell Ct.
Hauppauge, NY 11788
(516) 232-2323
Date: -May 29, 1997
LANDLORD.
SAN BRUNO ASSOCIATES,
A California General Partnership
By
Name:
Title:
<PAGE>
Address: 111 Pine St. Suite 1250
San Francisco, Ca. 94111
(415) 990-0490
Date:
<PAGE>
Exhibit 21
Subsidiaries
HMG Digital Technologies Corp.
HRM Holdings Corp.
Allied Digital, Inc.
-29-
<PAGE>
Exhibit 23(a)
Consent of Independent Certified Public Accountants
We have issued our report dated October 24, 1997 accompanying the consolidated
financial statements and schedule included in the Annual Report of Allied
Digital Technologies Corp. on Form 10-K for the year ended July 31, 1997. We
hereby consent to the incorporation by reference of said report in the
Registration Statements of Allied Digital Technologies Corp. on Form S-4 File
No. 33-86530 and on Form S-8 File No. 33-88550.
GRANT THORNTON LLP
Melville, New York
October 24, 1997
<PAGE>
Exhibit 23(b)
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
report by reference in this Form 10-K into Allied Digital Technologies Corp.'s
previously filed Registration Statements on Form S-4 File No. 33-86530 and on
Form S-8 File No. 33-88550.
/s/ Arthur Andersen LLP
Detroit, Michigan
October 24, 1997
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