UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-QSB/A
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to ___________________
Commission file number: 1-12572
S.O.I. INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 59-2158586
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16910 Dallas Parkway, Suite 100, Dallas, Texas 75248
(Address of principal executive offices)
(214) 248-1922
(Issuer's telephone number)
___________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) had been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
The number of shares outstanding of the common stock of the registrant on
May 8, 1995, the latest practicable date, was 14,010,828.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [ X ]
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1994 1994
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 601,928 $ 892,745
Restricted cash 500,000 500,000
Marketable securities 3,753,900 3,379,472
Accounts receivable, less allowance
for doubtful accounts of $1,007,429 at
December 31, 1994 and $775,875 at
June 30, 1994 9,845,304 7,532,560
Inventories 7,049,522 6,520,034
Loans receivable, related parties 301,876
Prepaid expenses and other 227,655 146,863
---------- -----------
Total current assets 21,978,309 19,273,550
---------- -----------
Property, plant and equipment 9,045,212 8,166,518
Goodwill, net of accumulated amortization 2,833,137 2,934,551
Deferred tax asset 1,030,671 618,677
Other assets 88,631 67,498
----------- -----------
Total assets $ 34,975,960 $ 31,060,794
=========== ===========
LIABILITIES
Current liabilities:
Revolving lines of credit $ 9,087,295 $ 6,624,896
Current portion, long-term debt 918,120 914,952
Current portion, ESOP note payable 121,745 121,745
Trade accounts payable 7,158,509 4,037,492
Accrued liabilities 371,385 2,291,596
Federal and state income taxes payable 208,033 621,377
Payable to officers 19,100 132,558
Other current liabilities 845,479
----------- -----------
Total current liabilities 18,729,666 14,744,616
----------- -----------
Long-term debt, less current maturities 3,726,509 3,246,995
ESOP note payable, less current maturities 294,216 355,089
Deferred income taxes 361,652 361,652
Minority interest 4,001,424 3,542,812
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $0.000025; 20,000,000
shares authorized, 10,934,150 and 10,901,470
shares outstanding at December 31, 1994 and
June 30, 1994, respectively 273 273
Additional paid-in capital 6,950,626 6,524,282
Retained earnings 1,976,051 3,149,640
Due from ESOP (415,962) (476,834)
Net unrealized holding loss on investment securities (648,495) (387,731)
----------- -----------
Total stockholders' equity 7,862,493 8,809,630
----------- -----------
Total liabilities and stockholders' equity $ 34,975,960 $ 31,060,794
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
1
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended
December 31,
1994 1993
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Net sales $14,132,769 $ 8,207,882
----------- -----------
Costs and Expenses:
Cost of goods sold (exclusive of depreciation
and amortization, shown separately below) 11,693,526 6,201,224
Selling expenses (exclusive of depreciation
and amortization, shown separately below) 829,443 362,959
General and administrative expenses (exclusive
of depreciation and amortization, shown
separately below) 695,280 391,756
Depreciation and amortization 540,753 273,287
----------- -----------
Total costs and expenses 13,759,002 7,229,226
----------- -----------
Operating profit 373,767 978,656
----------- -----------
Other income (expense):
Interest and other income 487,313 2,502
Interest expense (338,604) (95,418)
----------- -----------
148,709 (92,916)
----------- -----------
Income from continuing operations before
provision for income taxes and minority interest 522,476 885,740
Provision for income taxes 417,634 379,600
----------- -----------
Income from continuing operations
before minority interest 104,842 506,140
Minority interest in net income of
consolidated subsidiary 306,019 43,052
----------- -----------
(Loss) income from continuing operations before
discontinued operations (201,177) 463,088
Discontinued operations:
Loss from operations of Video Plus, Inc., net of
applicable income taxes of $41,540 (122,176)
Loss on sale of Video Plus, Inc. (257,582)
-----------
(379,758)
-----------
Net (loss) income $ (201,177)$ 83,330
=========== ===========
Weighted average shares of common
stock outstanding 10,930,944 8,970,492
(Loss) earnings per share:
Continuing operations $ (0.02) $ 0.05
Discontinued operations - (0.04)
---------- ----------
Net (loss) income $ (0.02) $ 0.01
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the six months ended
December 31,
1994 1993
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Net sales $24,749,409 $12,284,900
----------- -----------
Costs and Expenses:
Cost of goods sold (exclusive of depreciation
and amortization, shown separately below) 20,219,104 9,126,832
Research and development expenses (exclusive
of depreciation and amortization, shown
separately below) 412,000
Selling expenses (exclusive of depreciation
and amortization, shown separately below) 1,668,067 703,914
General and administrative expenses (exclusive
of depreciation and amortization, shown
separately below) 2,044,922 700,742
Depreciation and amortization 921,231 528,740
----------- -----------
Total costs and expenses 25,265,324 11,060,228
----------- -----------
Operating (loss) profit (515,915) 1,224,672
----------- -----------
Other income (expense):
Interest and other income 1,582,393 29,721
Interest expense (603,173) (142,766)
----------- -----------
979,220 (113,045)
----------- -----------
Income from continuing operations before
provision for income taxes and minority interest 463,305 1,111,627
Provision for income taxes 654,897 477,200
----------- -----------
(Loss) income from continuing operations
before minority interest (191,592) 634,427
Minority interest in net income of
consolidated subsidiary 404,717 237,196
----------- -----------
Income from continuing operations before
discontinued operations (596,309) 397,231
Discontinued operations:
Loss from operations of Video Plus, Inc., net of
applicable income taxes of $54,000 105,589
Loss on sale of Video Plus, Inc. (257,582)
-----------
(151,993)
-----------
Net (loss) income $ (596,309)$ 245,238
=========== ===========
Weighted average shares of common
stock outstanding 10,930,944 9,040,327
=========== ===========
(Loss) earnings per share:
Continuing operations $ (0.05)$ 0.04
Discontinued operations 0.00 (0.02)
----------- -----------
Net (loss) income $ (0.05)$ 0.02
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended
December 31,
1994 1993
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (596,309) $ 245,238
----------- -----------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 921,231 528,740
Increase in accounts receivable (2,312,744) (3,355,783)
Increase in inventories (529,488) (228,508)
Increase in prepaid expenses and other (80,792) (156,131)
Increase (decrease) in accounts payable 3,121,017 (117,354)
(Decrease) increase in accrued liabilities (1,235,728) 106,414
(Decrease) increase in income taxes payable (413,344) 186,378
(Decrease) increase in minority interest 458,612 313,809
----------- -----------
Net cash used in operating activities (667,545) (2,477,197)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of Video Plus, Inc. 2,634,865
Decrease in loans receivable, related parties 188,418 6,537
Change in marketable securites - available for sale (635,192)
Increase in other assets (433,127) (10,861)
Capital expenditures (1,698,511) (1,877,927)
----------- -----------
Net cash (used in) provided by
investing activities (2,578,412) 752,614
----------- -----------
Cash flows from financing activities:
Net long-term borrowings 479,514 1,328,350
Net short-term borrowings 2,465,567 403,137
Proceeds from issuance of common stock 10,060 92,273
Payments made on note due from ESOP (60,873) (51,580)
Decrease in note payable - ESOP 60,872 51,580
----------- -----------
Net cash provided by financing activities 2,955,140 1,823,760
----------- -----------
(Decrease) increase in cash and cash equivalents (290,817) 99,177
Cash and cash equivalents at beginning of period 892,745 1,109,008
----------- -----------
Cash and cash equivalents at end of period $ 601,928 $ 1,208,185
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (non-capitalized) $ 600,943 $ 142,766
=========== ===========
Income taxes $ 561,954 $ 348,175
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________
1. Summary of Significant Accounting Policies:
The accompanying consolidated financial statements include the accounts of
S.O.I. Industries, Inc. (the "Company") and its wholly-owned subsidiaries,
Digital Communications Technology Corporation and Subsidiary ("DCT"),
American Quality Manufacturing Corporation ("AQM"), Tempo Lighting, Inc.
("Tempo") and Omni Doors, Inc.
During the quarter ended December 31, 1993, Digital Communications
Technology Corporation sold its subsidiary, Video Plus, Inc.
Consequently, the operations and net assets of Video Plus, Inc. have
been segregated from the Company's financial statements and have been
presented as discontinued operations. Additionally, the financial
information related to December 31, 1993 has been restated to reflect the
sale of Video Plus, Inc.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from these
unaudited interim financial statements. These financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's annual audited financial statements.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to conform with generally accepted accounting
principles. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year.
2. Marketable Securities:
Marketable securities consist of listed common stocks with an aggregate
cost, based on specific identification, of $3,753,900 as of December 31,
1994. The net unrealized holding loss as of December 31, 1994 was
$648,495. All of the Company's securities are classified as available for
sale securities.
3. Inventories:
The inventories are valued at the lower of cost (first-in, first-out
method) or market and consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1994 1994
----------- -----------
<S> <C> <C>
Raw materials $ 5,750,922 $ 5,092,038
Work-in process 811,933 1,027,936
Finished goods 486,667 400,060
----------- -----------
$ 7,049,522 $ 6,520,034
=========== ===========
</TABLE>
5
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
_____________
4. Property, Plant and Equipment:
Property, plant and equipment and related accumulated depreciation are
summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1994 1994
----------- -----------
<S> <C> <C>
Land $ 93,000 $ 93,000
Buildings and improvements 1,398,080 1,143,181
Machinery and equipment 11,444,086 10,034,870
----------- -----------
12,935,166 11,271,051
Less: accumulated depreciation 3,889,954 3,104,533
----------- -----------
$ 9,045,212 $ 8,166,518
=========== ===========
</TABLE>
5. Revolving Lines of Credit:
The Company's subsidiaries, DCT and Tempo, have revolving line of credit
agreements which permit aggregate borrowings up to $6,100,000 based upon
certain percentages applied to eligible accounts receivable and
inventory. Interest is payable on all outstanding cash advances at the
bank's prime rate plus 1/4%. Any unpaid principal and accrued interest
is due on demand, but $700,000 is due no later than January 1, 1995 and
$5,400,000 is due no later than January 1996. The lines of credit are
secured by substantially all accounts receivable and inventories and all
equipment not being used to collateralize other equipment and mortgage
notes.
The agreements further provide that the Company and its subsidiaries must
comply with certain covenants, the most restrictive of which requires a
minimum net leverage ratio as defined by the agreement. These lines of
credit are guaranteed by the Company and its subsidiaries. As of
December 31, 1994, $4,424,800 had been drawn against DCT's and Tempo's
lines of credit.
The Company's AQM subsidiary has a $5,000,000 revolving line of credit
agreement bearing interest at the bank's prime interest rate plus 1.25%.
The line of credit is limited to a borrowing base consisting of the sum of
85% of eligible accounts receivable (as defined) and 50% of AQM's eligible
inventory of raw materials and finished goods. At any time during the
life of the loan facility, the borrowing base attributable to inventory
may not exceed the lesser of $1,500,000 or the component attributable to
accounts receivable. The loan facility is collateralized by a first
interest in all acquired goods, inventory, accounts receivable, property
and equipment, other financial instruments (if any) and all other
intangibles of AQM. This loan facility is guaranteed by the Company and
its other subsidiaries. As of December 31, 1994, approximately $4,662,000
was outstanding on this loan facility.
6
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
_____________
6. Long-Term Debt:
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1994 1994
----------- -----------
<S> <C> <C>
Long-term debt consists of various
mortgages and notes payable with
interest rates ranging from 7% to
2 percent over prime. Monthly payments
range from $274 to $29,000 and
expiration dates range from 1995
through 2007. $ 4,680,629 $ 3,586,224
Less: current portion 918,120 869,058
----------- -----------
$ 3,762,509 $ 2,717,166
=========== ===========
</TABLE>
7. Stock Option Plan:
On March 19, 1988, the Company's Board of Directors adopted the S.O.I.
Industries, Inc. 1988 Employees' Stock Option Plan, reserving 2,000,000
shares of common stock for this purpose. The plan was subsequently
approved by a vote of shareholders. At December 31, 1994, there were
1,425,000 shares reserved for future issuance. No options were granted
during the three months ended December 31, 1994.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Net sales increased approximately $5,925,000 for the three months ended
December 31, 1994 as compared to the corresponding quarter of the prior year.
For the six months ended December 31, 1994, net sales increased approximately
$12,465,000. The primary reason for this large increase was due to the
acquisition of American Quality Manufacturing Corporation ("AQM") on January 1,
1994, the operations of which were not included in the corresponding period of
the prior fiscal year. However, increased sales were also experienced at all of
the Company's subsidiaries.
Despite the increased sales revenue, operating profit declined for both
the three months and six months ended December 31, 1994. This decline was due
to lower margins earned on the higher volume sales at the Company's Digital
Communications Technology Corporation ("DCT") subsidiary and to the historically
lower margin, but higher volume, earned on sales at the Company's AQM
subsidiary. In addition, approximately $412,000 was incurred in the first
quarter at AQM in developing and establishing new product lines, contributing
to the lower operating profit for the six months ended December 31, 1994.
Approximately $400,000 was also added to the allowance for doubtful accounts
at the Company's AQM subsidiary in the first quarter ended September 30, 1994.
Also, approximately $490,000 was expensed in the first quarter related to
configuring AQM's Kansas facility to be compatible with management's plans
for future production. The lower operating profit was offset somewhat by gains
on sales of the Company's marketable securities and from the settlement of a
lawsuit.
Liquidity
For the six months ended December 31, 1994, the Company used approximately
$668,000 in cash for operating activities. This is compared with approximately
$2,477,000 in cash used in operating activities for the six months ended
December 31, 1993. The improvement in overall operating cash flow position
of the Company is primarily the result of the growth in operations of the
Company. Another item that positively affected cash flows from operating
activities was an approximate $3,121,000 increase in accounts payable which
was offset by an approximate $2,313,000 increase in accounts receivable and an
approximate $1,236,000 decrease in accrued liabilities.
Accounts payable has increased largely due to the growth of the Company
with the addition of the Company's AQM subsidiary and the sales growth at DCT.
Accounts payable has significantly increased at AQM due to preparations for the
heavier shipping months expected in the upcoming third quarter. As orders are
shipped and subsequent payments are collected, the accounts payable balance
at the AQM subsidiary is expected to decline. The strong cash position of the
Company's other subsidiaries has offset the current poor cash position at AQM
8
<PAGE>
and has enabled the Company to provide funds to support AQM's temporary cash
needs. This support has been in the form of short-term intercompany loans of
approximately $789,000. The Company will continue to provide such assistance
on an as-needed basis. The increase in accounts payable was offset somewhat
by a decrease in accrued and other current liabilities. This increase, however
is not indicative of any specific event, but should be viewed in connection
with the overall change in accounts payable. Management at all of the
Company's subsidiaries closely monitor accounts payable to ensure that early
payment discounts are utilized, but also preserves cash by ensuring that
accounts are not paid before they are due.
A portion of the increased accounts receivable is due to the increase in
sales at the Company's DCT subsidiary and is also due to the addition of the
Company's AQM subsidiary, which was acquired on January 1, 1994. However,
increased sales is only part of the explanation for the growth in accounts
receivable. Throughout all the Company's subsidiaries, the demand by
customers for longer payment terms resulted in an expansion of accounts
receivable balances. These market pressures to extend longer payment terms
are reflected in the accounts receivable conversion period (measuring how
quickly the Company, on average, collects its accounts receivable). This
conversion period was 81 days at June 30, 1994 and declined to 73 days at
December 31, 1994. Additional collections efforts at some of the Company's
subsidiaries resulted in this decline, however the Company's DCT subsidiary
actually experienced an increase in the average collection period.
Management will continue to monitor and exercise close scrutiny on the credit
and collections process in order to improve collections while preserving the
Company's competitive position. Despite the demand for longer payment terms,
management does not expect any significant detriment toward its short-term
liquidity, but due to the increasing sales levels has correspondingly increased
the allowance for doubtful accounts to approximately $1,007,000 as of
December 31, 1994.
Approximately $2,578,000 of cash was used in investing activities for the
six months ended December 31, 1994 as compared to approximately $753,000
provided from investing activities for the six months ended December 31, 1993.
Capital expenditures, discussed below in the Capital Resources section,
accounted for the major portion of the cash used during both periods. Other
uses of cash for investing activities were related to additional investments
in the Company's marketable securities portfolio (discussed in the Results of
Operations section, below) and due to the increase in other assets, primarily
caused by an increase in the Company's deferred tax asset. The positive cash
position for the six months ended December 31, 1993 was the result of the sale
of the Company's Video Plus, Inc. subsidiary, the disposition of which is
discussed in the Results of Operations section, below.
During the six months ended December 31, 1994, the Company's cash needs
were met primarily through financing activities by utilizing its readily
available credit lines and the addition of approximately $480,000 of long-
term debt to fund expansion needs. The Company's increases in long-term and
short-term borrowings were used primarily to fund the conversion of AQM's
facilities to implement a new product line. Long-term liquidity needs are
anticipated to be met through sales growth and separate financing arrangements.
Management expects that the Company will continue to meet all obligations as
they come due, and no vendor/supplier problems are expected.
9
<PAGE>
On November 17, 1994, the Board of Directors declared the payment of a
dividend to its stockholders. Stockholders of record on November 30, 1994
received 1 share of NewCare Health Corporation ("NWCA") common stock for each
85 shares of the Company's Common Stock held as of the record date. The NWCA
common stock was distributed from the Company's marketable securities portfolio
and consisted of approximately 165,000 shares of NWCA valued at approximately
$578,000.
Capital Resources
During the six months ended December 31, 1994, the Company made capital
expenditures through its various subsidiaries of approximately $1,699,000.
This compares with capital expenditures of approximately $1,878,000 for the
six months ended December 31, 1993. Of the approximate $1,699,000, $800,000
was invested in equipment and leasehold improvements at the Company's AQM
subsidiary associated with the subsidiary's conversion to a new product line.
The remaining capital expenditures were primarily concentrated at the
Company's DCT subsidiary where additional expansion of the subsidiary's high-
speed duplicating facility is underway. The AQM purchases were financed
through additional short and long-term debt as well as through operations,
and the DCT purchases were financed through operations, with a portion financed
through long-term debt. The installation of the new product line is
substantially complete at AQM, therefore further significant investments in
equipment are not anticipated at this time. However, due to DCT's expanding
customer base and because production is at near capacity at DCT's operating
locations, future expansion is being considered by management and will be
financed through operations and/or additional long-term debt.
Results of Operations
Net sales for the three months ended December 31, 1994 as compared to
the corresponding quarter of the prior year increased 72% from approximately
$8,208,000 for the three months ended December 31, 1993 to approximately
$14,133,000 for the three months ended December 31, 1994. Similarly, net
sales increased 102% from approximately $12,285,000 for the six months ended
December 31, 1993 to approximately $24,749,000 for the six months ended
December 31, 1994. The primary reason for the large increase in sales is due
to the acquisition of AQM on January 1, 1994. Approximately $4.2 million of
the increased sales in the quarter ended December 31, 1994 and approximately
$8.5 million of the increased sales for the six months ended December 31, 1994
related to AQM. Approximately $1.7 million and $3.8 million of the increases
for the three and six month periods ended December 31, 1994, respectively, is
attributable to increased sales at the Company's DCT subsidiary, with the
remaining sales increases resulting from the Company's other subsidiaries.
Sales at DCT increased for the quarter and six months ended December 31, 1994
as management continued to focus on the retail sell through market. This
market supplies video tapes for resale to retail markets which experience
their highest sales during the holiday season. Consequently, sales for DCT
were expected to be at their highest during the first and second quarters.
Operating profit declined both for the three months ended December 31,
10
<PAGE>
1994 and for the six months ended December 31, 1994 as compared to the
corresponding periods of the prior year, despite the increases in sales. This
decline is primarily attributable to increases in cost of goods sold,
resulting from higher volume sales at lower margins experienced at DCT and the
addition of AQM which generally operates at lower margins than the Company's
other subsidiaries. As a percentage of net sales, both selling expenses and
general and administrative expenses were fairly consistent for the three month
periods ended December 31, 1994 and 1993, although selling expenses increased
slightly. The increase in selling expenses were due to higher commissions and
advertising costs than in the corresponding quarter of the prior year,
primarily due to the acquisition of AQM.
For the six month period ended December 31, 1994 both selling and general
and administrative expenses, as a percentage of net sales, increased. As a
percentage of net sales, selling expenses were approximately 6.7% as compared
to 5.7% for the six month periods ended December 31, 1994 and 1993,
respectively. General and administrative expenses increased from approximately
$701,000 to $2,045,000 for the six months ended December 31, 1993 and 1994,
respectively. Approximately $648,000 of this increase is directly attributable
to the addition of the Company's AQM subsidiary. When compared as a
percentage of net sales, general and administrative expenses also increased
from 5.7% to 8.3% for the six month periods ended December 31, 1993 and 1994,
respectively. This increase is due to an increase in the allowance for
doubtful accounts, primarily at AQM, and increased legal and professional
expenses incurred due to the acquisition of AQM and the overall growth of the
Company.
Operating profit for the six months ended December 31, 1994 was also
affected by development costs incurred at AQM in the development of new product
lines. The new product lines, which utilize standardized components and other
wood types, and includes finished cabinets, have now been implemented,
therefore further development costs related to these product lines are not
currently anticipated.
Approximately $487,000 was added to other income during the three months
ended December 31, 1994 related to realized gains earned from the Company's
marketable securities portfolio. The Company invests funds in quality equity
securities through high quality brokers and, by policy, limits the amount of
exposure in any one equity investment. Such investments are continually
monitored to reduce the risk of adverse stock market volatility. Cash not
invested in securities is placed on account with high quality brokerage firms,
which is swept daily into a federally insured money market account, or placed on
account with federally insured national banks.
In September 1994, the Company settled a lawsuit against its former
President and Chairman that alleged he caused the Company to sell him its
wholly-owned subsidiary, CeraTech Corporation, for less than fair value in June
1992. The former President paid the Company $750,000 on September 16, 1994, in
full settlement of the lawsuit.
The Company experienced a large increase in interest expense during the
quarter ended December 31, 1994 as compared to the quarter ended
December 31, 1993, increasing from approximately $95,000 to $339,000,
respectively. Likewise, interest expense for the six month periods ended
December 31, 1993 and 1994 increased from approximately $143,000 to $603,000,
respectively. The primary reasons for this increase were due to (1) the
addition of the Company's AQM subsidiary with its line of credit and other
short-term borrowing needs and (2) an increase in the overall prime lending
rate on which several of the Company's borrowing rates are based.
In the quarter ended December 31, 1993, after evaluating the historical
contribution of DCT's Video Plus, Inc. subsidiary and considering the expected
future contribution of this subsidiary, management decided to sell Video Plus,
11
<PAGE>
Inc. The operations of Video Plus, Inc. have therefore been removed from the
operating section of the consolidated statements of income for all periods
presented, and the income or loss from operations of Video Plus, Inc. have been
segregated under discontinued operations. The net effect of the operation of
Video Plus, Inc. for the quarter ended December 31, 1993 was a loss of
approximately $380,000. For the six months ended December 31, 1993, the
effect of these discontinued operations was a loss of approximately $152,000.
A significant increase in net income, as compared to the corresponding
quarter of the prior year, occurred for the three months ended December 31,
1994, however for the six months ended December 31, 1994 net income declined
slightly. The increase in the three month period is largely attributable to
the loss from discontinued operations that was present in the corresponding
quarter of the prior year, but not present in the current quarter. Similarly,
the costs associated with the discontinued operations affected the six months
ended December 31, 1993. The lower net income and income from continuing
operations before minority interest is a direct result of the lower operating
profit offset by gains from the Company's investment portfolio and to the
settlement of the lawsuit mentioned above.
Other Comments
DCT's sales levels generally follow the retail sell through markets,
which typically peak in the fall and early winter months as retail demand and
holiday orders are met. The subsidiary has mitigated this seasonality by
increasing sales efforts to lower volume, higher margin customers such as
corporate training video duplication and the video rental market. Even by
utilizing these techniques, sales levels are still lower in the summer months.
AQM's sales levels generally follow remodeling and other "do it yourself"
retail markets, which traditionally peak in the winter and spring. Therefore,
this segment is subjected to seasonal influences, with the highest level of
sales typically realized in the period from January through April.
The costs of DCT's and AQM's products are subject to inflationary
pressures and commodity price fluctuations. Inflationary pressure has been
relatively modest over the past five years, except for lumber prices, which
rose approximately 14% during the fiscal year 1994. However, both
subsidiaries have generally been able to mitigate the effects of inflation
and commodity price fluctuations through sales price increases and cost
savings in other areas.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
S.O.I. INDUSTRIES, INC.
By: /s/ Sanford M. Whitman Date: November 28, 1995
Sanford M. Whitman, Vice President
and Chief Financial Officer
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