<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
[ ] 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> 2
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
(Unaudited) (Audited)
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 884,706 $ 892,745
Restricted cash 500,000 500,000
Marketable securities 3,808,331 3,379,472
Accounts receivable, less allowance
for doubtful accounts of $1,067,381 at
March 31, 1995 and $775,875 at
June 30, 1994 8,367,395 7,532,560
Inventories 8,258,827 6,520,034
Loans receivable, related parties 301,876
Prepaid expenses and other 614,469 146,863
----------------- -----------------
Total current assets 22,433,728 19,273,550
----------------- -----------------
Property, plant and equipment, net of
accumulated depreciation 8,777,094 8,166,518
Goodwill, net of accumulated amortization 2,782,519 2,934,551
Deferred tax asset 486,477 618,677
Other assets 93,093 67,498
----------------- -----------------
Total assets $ 34,572,911 $ 31,060,794
================= =================
LIABILITIES
Current liabilities:
Revolving lines of credit $ 9,290,194 $ 6,624,896
Current portion, long-term debt 897,620 914,952
Current portion, ESOP note payable 121,745 121,745
Trade accounts payable 5,763,988 4,037,492
Accrued liabilities 487,440 2,291,596
Federal and state income taxes payable 621,377
Payable to officers 20,000 132,558
Other current liabilities 818,757
----------------- -----------------
Total current liabilities 17,399,744 14,744,616
----------------- -----------------
Long-term debt, less current maturities 4,333,587 3,246,995
ESOP note payable, less current maturities 263,780 355,089
Deferred income taxes 361,652 361,652
Minority interest 3,931,462 3,766,245
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $0.000025; 20,000,000
shares authorized, 10,944,150 and 10,901,470
shares outstanding at March 31, 1995 and
June 30, 1994, respectively 274 273
Additional paid-in capital 5,750,427 6,084,021
Retained earnings 3,284,946 3,529,743
Due from ESOP (385,525) (476,834)
Net unrealized holding loss on investment securities (367,436) (551,006)
----------------- -----------------
Total stockholders' equity 8,282,686 8,586,197
----------------- -----------------
Total liabilities and stockholders' equity $ 34,572,911 $ 31,060,794
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 3
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
March 31, March 31,
--------- ---------
1995 1994 1995 1994
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 11,723,746 $ 11,139,541 $ 36,473,155 $ 23,424,441
-------------- -------------- ------------- ---------------
Costs and Expenses:
Cost of goods sold (exclusive of depreciation
and amortization, shown separately below) 9,903,035 8,738,172 29,500,358 17,865,004
Research and development expenses (exclusive
of depreciation and amortization, shown
separately below) 412,452
Selling expenses (exclusive of depreciation
and amortization, shown separately below) 947,667 755,216 2,618,478 1,459,130
General and administrative expenses (exclusive
of depreciation and amortization, shown
separately below) 955,741 733,229 2,958,389 1,433,971
Depreciation and amortization 519,270 396,241 1,460,796 924,981
-------------- -------------- ------------- ---------------
Total costs and expenses 12,325,713 10,622,858 36,950,473 21,683,086
-------------- -------------- ------------- ---------------
Operating profit (601,967) 516,683 (477,318) 1,741,355
-------------- -------------- ------------- ---------------
Other income (expense):
Interest and other income 123,580 1,387,034 1,694,674 1,416,755
Interest expense (377,911) (158,821) (978,854) (301,587)
-------------- -------------- ------------- ---------------
(254,331) 1,228,213 715,820 1,115,168
-------------- -------------- ------------- ---------------
Income from continuing operations before
provision for income taxes and minority interest (856,298) 1,744,896 238,502 2,856,523
Provision for income taxes (261,460) 649,300 204,713 1,126,500
-------------- -------------- ------------- ---------------
Income from continuing operations
before minority interest (594,838) 1,095,596 33,789 1,730,023
Minority interest in net income of
consolidated subsidiary (126,132) 111,054 278,586 348,250
-------------- -------------- ------------- ---------------
Income from continuing operations before
discontinued operations (468,706) 984,542 (244,797) 1,381,773
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 income $ (468,706) $ 984,542 $ (244,797) $ 1,229,780
============== ============== ============= ===============
Weighted average shares of common
stock outstanding 10,934,906 9,592,670 10,934,906 9,592,670
============== ============== ============= ===============
Earnings per share:
Continuing operations $ (0.04) $ 0.10 $ (0.02) $ 0.15
Discontinued operations 0.00 0.00 0.00 (0.02)
-------------- -------------- ------------- ---------------
Net income $ (0.04) $ 0.10 $ (0.02) $ 0.13
============== ============== ============= ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 4
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended
March 31,
---------
1995 1994
(Unaudited) (Unaudited)
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (244,797) $ 1,229,780
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,460,796 924,981
Increase in accounts receivable (834,835) (2,683,408)
Increase in inventories (1,738,793) (1,091,653)
Increase in prepaid expenses and other (467,606) (360,872)
Increase (decrease) in accounts payable 1,726,496 (179,485)
(Decrease) increase in accrued liabilities (985,399) 231,126
(Decrease) increase in income taxes payable (489,177) 647,566
(Decrease) increase in minority interest (180,936) 577,515
---------------- ---------------
Net cash used in operating activities (1,754,251) (704,450)
---------------- ---------------
Cash flows from investing activities:
Proceeds from sale of Video Plus, Inc. 2,634,865
Decrease in loans receivable, related parties 189,318 6,537
Change in marketable securites - available for sale (245,289) (953,105)
Decrease in other assets (25,595) 37,269
Capital expenditures (1,919,340) (2,035,401)
---------------- ---------------
Net cash used in investing activities (2,000,906) (309,835)
---------------- ---------------
Cash flows from financing activities:
Net long-term borrowings 1,069,260 1,318,811
Net short-term borrowings 2,665,298
Payments on loan from related party (61,200)
Proceeds from issuance of common stock 12,560 66,764
Payments made on note due from ESOP (91,309) (82,016)
Decrease in note payable - ESOP 91,309 82,016
---------------- ---------------
Net cash provided by financing activities 3,747,118 1,324,375
---------------- ---------------
(Decrease) increase in cash and cash equivalents (8,039) 310,090
Cash and cash equivalents at beginning of period 892,745 1,109,008
---------------- ---------------
Cash and cash equivalents at end of period $ 884,706 $ 1,419,098
================ ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (non-capitalized) $ 978,854 $ 301,587
================ ===============
Income taxes $ 482,324 $ 441,175
================ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 5
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 $3,379,472 as of
March 31, 1995. The net unrealized holding loss as of March 31, 1995
was $367,436. 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>
March 31, June 30,
1995 1994
----------------- ------------------
<S> <C> <C>
Raw materials $ 7,020,003 $ 5,092,038
Work-in process 824,856 1,027,936
Finished goods 413,968 400,060
----------------- ------------------
$ 8,258,827 $ 6,520,034
================= ==================
</TABLE>
<PAGE> 6
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>
March 31, June 30,
1995 1994
----------------- ------------------
<S> <C> <C>
Land $ 93,000 $ 93,000
Buildings and improvements 1,400,622 1,143,181
Machinery and equipment 11,642,687 10,034,870
----------------- ------------------
13,136,309 11,271,051
Less: accumulated depreciation 4,359,215 3,104,533
----------------- ------------------
$ 8,777,094 $ 8,166,518
================= ==================
</TABLE>
5. Lines of Credit:
The Company's subsidiaries, DCT and Tempo, have revolving line of
credit agreements which permit aggregate borrowings up to $6,300,000
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 and is all due no
later than January 1996. The lines 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 March 31, 1995, $4,614,800 had been drawn against
DCT's and Tempo's lines of credit.
The Company's AQM subsidiary has a $6,500,000 line of credit
agreement bearing interest at the bank's prime interest rate plus 2%.
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 $1,000,000. 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. As of March 31,
1995, approximately $4,675,000 was outstanding on this loan facility.
<PAGE> 7
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>
March 31, June 30,
1995 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. $ 5,352,952 $ 3,586,224
Less: current portion 1,019,365 869,058
----------------- ------------------
$ 4,333,587 $ 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 March 31, 1995,
there were 1,425,000 shares reserved for future issuance. No options
were granted during the nine months ended March 31, 1995.
8. Pending Litigation:
During March 1995, the Company dismissed Mr. DeWayne Davis as the
Chief Financial Officer of AQM and subsequently filed a lawsuit on
behalf of AQM against Mr. Davis alleging malfeasance and
improprieties for a breach of his fiduciary duties to AQM based upon
his relationship with Builders Warehouse Association, Inc. ("BWA")
and its subsidiary, American Plywood Sales, Inc., while he was
associated with AQM and, simultaneously, a member of BWA's Board of
Directors. Additionally, the lawsuit seeks recovery of certain
amounts deemed by the Company's management to be unauthorized
compensation and/or executive benefits. The Company is not seeking
any recovery from BWA for amounts paid for materials purchased in the
current or preceding fiscal periods.
The Company has begun internal discovery to determine the amount of
the recovery being sought through the litigation and the future
impact to the Company's financial statements. However, preliminary
investigations have revealed that no material impact to the Company's
financial statements for the nine months ended March 31, 1995 will be
incurred. Further, the potential recovery, if any, qualifies as a
"gain contingency" under Statement of Financial Accounting Standards
No. 5, "Accounting for Contingencies;" therefore, no potential
benefits are reflected in the accompanying financial statements.
Related to this litigation, Mr. Davis has sued AQM alleging
incomplete compensation during his tenure as an executive officer of
the Company. The Company believes this action to be without merit.
Any amounts related to this counterclaim would be immaterial to the
accompanying financial statements. Additionally, BWA has filed a
lawsuit against AQM and the Company on the basis that AQM allegedly
owes a subsidiary of BWA for wood products purchased by AQM from
BWA's subsidiary. These purchases were previously recorded as
incurred and therefore the effect of this claim is already reflected
in the accompanying financial statements.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Net sales increased approximately $584,000 for the three months ended
March 31, 1995 as compared to the corresponding quarter of the prior year. For
the nine months ended March 31, 1995, net sales increased approximately
$13,049,000. The primary reason for this large increase was the acquisition of
American Quality Manufacturing Corporation ("AQM") on January 1, 1994, the
operations of which were not included for the entire nine month period of the
prior fiscal year. AQM also experienced an increase in sales for the three
month period ended March 31, 1995 which offset a slight decline in sales at the
Company's other major subsidiary, Digital Communications Technology Corporation
("DCT") during the same three month period.
Despite the increased sales revenue, the Company generated operating
losses for both the three months and nine months ended March 31, 1995. This
decline was due to lower margins earned on the higher volume sales at the
Company's DCT subsidiary and to the historically lower margin, but higher
volume, earned on sales at the Company's AQM subsidiary. Increased public
relations costs along with increased legal and professional costs contributed
to higher general and administrative costs, adding to the operating losses. In
addition, reflected in the statement of income for the nine months ended March
31, 1995 are adjustments to the first quarter income statements of the
Company's AQM subsidiary in the amount of $812,000. The Company is currently
registering 5,910,000 shares of its AQM common stock for distribution to the
Company's stockholders pursuant to a registration statement of Form S-1. In
connection with the Securities and Exchange Commission's review of such
registration statement, two adjustments were required. One adjustment
increased AQM's allowance for doubtful accounts by $400,000 and the other
adjustment expensed $412,000 of development costs which had previously been
capitalized. The effect of these adjustments is a reduction of the Company's
consolidated net income by $812,000 or approximately $0.06 per share.
LIQUIDITY
For the nine months ended March 31, 1995, the Company used
approximately $1,754,000 in cash for operating activities. This is compared
with approximately $704,000 in cash used in operating activities for the nine
months ended March 31, 1994. The increased use of cash from operations is
primarily the result of increases in inventory along with increases in accounts
receivable and other assets. The decrease in accrued liabilities was offset by
a corresponding increase in accounts payable, therefore this did not have a
material impact on operating cash flows.
The increase in inventory is due almost entirely to an increase in the
raw materials component of inventory. The percentage of raw materials to total
inventory increased from 78% at June 30, 1994 to 85% at March 31, 1995. This
increase was the result of growth in inventory at both DCT and AQM which
increased approximately $955,000 and $655,000, respectively from June 30, 1994
to March 31, 1995.
Management at DCT increased purchases of raw materials in the third
quarter ended March 31, 1995 based on news of upcoming price increases by
several of DCT's significant vendors. The higher levels of raw materials in
inventory are expected to continue into the next two quarters as
<PAGE> 9
DCT uses these materials in production, however management believes that the
lower prices obtained justifies the effect on DCT's and the Company's cash
flow.
All components of inventory increased at AQM during the period from
June 30, 1994 to March 31, 1995. AQM experiences the highest levels of
production during the spring as higher levels of orders and re-orders by the
large homecenters are filled. Additionally, production at AQM's Burlington,
Kansas facility has increased since June 30, 1994 creating the need for higher
levels of inventory, coinciding with the higher levels of production.
Despite the increased inventory levels at DCT, the inventory turnover
(annualized based on the nine month period ended March 31, 1995) was
approximately 5 times, which equaled DCT's inventory turnover for the year
ended June 30, 1994. The build up of inventory is therefore keeping pace with
the overall sales of this subsidiary.
The inventory turnover at AQM (annualized based on the nine month
period ended March 31, 1995) of approximately 8 times is a decline from this
subsidiary's year end position of approximately 9 times. This decline is due
to purchases of additional inventory items required for AQM's new finished
cabinet product line along with the new oak and birch product lines.
A portion of the increased accounts receivable is due to the increase
in sales for the nine month period ended March 31, 1995 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. The demand by the
Company's customers for longer payment terms resulted in an expansion of
accounts receivable balances. The initial effect of this expansion has been
absorbed and the average collection period (measuring how quickly the Company,
on average, collects its accounts receivable) has begun to level out. This
conversion period was 81 days at June 30, 1994 and declined to 63 days at March
31, 1995. Additional collection efforts at some of the Company's subsidiaries
resulted in this decline. 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.
The increase in prepaid expenses and other current assets of
approximately $468,000 also contributed to the overall net use of cash from
operations. The increase in this asset category was due to an increase in
prepaid insurance at the Company's Tempo Lighting, Inc. ("Tempo") subsidiary
along with an increase in the Federal income tax benefit due to the recent
operating losses.
Approximately $2,001,000 of cash was used in investing activities for
the nine months ended March 31, 1995 as compared to approximately $310,000 used
in investing activities for the nine months ended March 31, 1994. 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). The improved cash position for the nine months ended March
31, 1994 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.
<PAGE> 10
During the nine months ended March 31, 1995, the Company's cash needs
were met primarily through financing activities by utilizing its available
credit lines and the addition of approximately $1,069,000 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. Additionally, some borrowings were used to
acquire additional fixed assets, specifically another satellite uplink unit at
the Company's DCT subsidiary. 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 most obligations as they come
due, and no vendor/supplier problems are expected.
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 nine months ended March 31, 1995, the Company made capital
expenditures through its various subsidiaries of approximately $1,919,000.
This compares with capital expenditures of approximately $2,035,000 for the
nine months ended March 31, 1994. Of the approximate $1,919,000, $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 along with general upgrading of equipment.
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, 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 March 31, 1995 as compared to the
corresponding quarter of the prior year increased 5% from approximately
$11,140,000 for the three months ended March 31, 1994 to approximately
$11,724,000 for the three months ended March 31, 1995. Similarly, net sales
increased 56% from approximately $23,424,000 for the nine months ended March
31, 1994 to approximately $36,473,000 for the nine months ended March 31, 1995.
The primary reason for the large increase in sales for the nine months ended
March 31, 1995 is due to the acquisition of AQM on January 1, 1994 which
provided approximately $8.5 million of the increased sales for the nine months
ended March 31, 1995. Additionally, the acquisition of DCT's subsidiary, Tapes
Unlimited, Inc. on January 1, 1994 also provided approximately $1.7 million of
the increased sales for the same nine month period. The remaining sales
increase for both the nine and three month periods ended March 31, 1995 was due
to AQM's expansion of operations.
<PAGE> 11
Net sales at DCT for the three month period ended March 31, 1995
declined by approximately $68,000. Sales at DCT are historically lower during
the third and fourth quarters. The cyclical nature of sales at DCT is even
more pronounced with the 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.
An operating loss was generated in both the three months ended March
31, 1995 and for the nine months ended March 31, 1995 as compared to operating
profits in the corresponding periods of the prior year; this occurred despite
increases in sales. The decline is primarily attributable to increases in cost
of goods sold which, as a percentage of sales, increased from 78% to 84% for
the three months ended March 31, 1995 and from 76% to 81% for the nine month
periods ended March 31, 1995. The increases resulted 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. Additionally,
higher than expected material costs at DCT increased cost of goods sold along
with lower margins at Tapes Unlimited, Inc. The Company's Tempo subsidiary
also experienced lower margins due to higher material costs which also
contributed to the operating loss. Management will continue its efforts to
pass on material cost increases to the Company's customers and will continue
its focus on cost containment, especially in labor costs, to ensure more
efficiency is obtained and thereby reducing current cost levels even though
sales volume increases. There can be no assurances that these measures will
produce positive results.
As a percentage of net sales, both selling expenses and general and
administrative expenses increased for the three month periods ended March 31,
1995 and for the nine month period ended March 31, 1995. As a percentage of
net sales, selling expenses were approximately 8.1% as compared to 6.8% for the
three month periods ended March 31, 1995 and 1994, respectively. Likewise, for
the nine month periods ending March 31, 1995 and 1994, selling expenses were
approximately 7.2% and 6.2% of net sales, respectively. Due to the change in
customer mix at DCT to higher volume customers, DCT's sales commissions have
increased with the higher volume sales. Additionally, increased advertising
and promotion costs have also increased selling expenses.
General and administrative expenses increased from approximately
$1,434,000 to $2,996,000 for the nine months ended March 31, 1994 and 1995,
respectively. When compared as a percentage of net sales, general and
administrative expenses increased from 6.6% to 8.3% for the three months ended
March 31, 1994 and 1995, respectively and from 6.1% to 8.2% for the nine month
periods ended March 31, 1994 and 1995, respectively. Approximately $648,000 of
the increase for the nine month period ended March 31, 1995 is directly
attributable to the addition of the Company's AQM subsidiary. The remaining
increases are due to a second quarter increase in the allowance for doubtful
accounts, primarily at AQM, increased legal and professional expenses
attributable to AQM and the overall growth of the Company and increased public
relations expenses.
Operating profit for the nine months ended March 31, 1995 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 include finished cabinets, have now been implemented, therefore
further development costs related to these product lines are not currently
anticipated.
Approximately $848,000 was added to other income during the nine
months ended March
<PAGE> 12
31, 1995 related to realized gains and other income 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 March 31, 1995 as compared to the quarter ended March 31,
1994, increasing from approximately $159,000 to $378,000, respectively.
Likewise, interest expense for the nine month periods ended March 31, 1994 and
1995 increased from approximately $302,000 to $979,000, 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, 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. For the nine months
ended March 31, 1994, the effect of these discontinued operations was a loss of
approximately $152,000.
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.
<PAGE> 13
PENDING LITIGATION
On March 17, 1995, the Company announced that it had filed on behalf
of itself and AQM a lawsuit in the Chancery Court of Faulkner County, Arkansas
against DeWayne Davis, the former Chief Executive Officer, Chief Financial
Officer and director of AQM. In the lawsuit, the companies charge Mr. Davis
with fraud, self-dealing, misappropriation of company assets, misappropriation
of trade secrets, breach of fiduciary duty and other causes of action for
certain alleged acts committed as a director and officer of AQM and the
Company. One of the alleged acts involved the purchase of materials and timber
products from American Plywood Sales, Inc. ("APS"), a wholly-owned subsidiary
of Builders Warehouse Association, Inc. ("BWA"). (Mr. Davis controlled BWA as
a director and major shareholder.) The lawsuit alleges that these purchases
were at prices in excess of those that could have been obtained by purchasing
materials directly from the suppliers. Additionally, the lawsuit seeks
recovery of certain amounts deemed by the Company's management to be
unauthorized compensation and executive benefits. AQM is not seeking any
recovery from BWA or APS for amounts paid for materials purchased in the
current or preceding fiscal periods.
AQM has begun internal discovery to determine the amount of recovery
being sought through the litigation. Management has determined, however that
no material impact to the historical financial statements will be incurred.
Further, the potential recovery, if any, will be accounted for as a gain
contingency under Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies;" therefore no potential benefits will be
reflected in the accompanying financial statements until they are realized.
Mr. Davis has countersued AQM alleging incomplete compensation during
his tenure as an executive officer of AQM. AQM believes that the amounts
claimed under this countersuit are not material to the financial statements of
AQM. In addition, BWA has filed a lawsuit against AQM and the Company on the
basis that AQM allegedly owes APS for wood products purchased by AQM from APS.
These purchases were previously recorded as incurred and therefore the effect
of this claim is already reflected in AQM's interim financial statements. AQM
has ceased purchasing any materials from APS and has secured alternative
suppliers which AQM believes will meet its production requirements.
<PAGE> 14
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: May 10, 1995
Sanford M. Whitman, Vice President
and Chief Financial Officer
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 1,384,706
<SECURITIES> 3,808,331
<RECEIVABLES> 9,434,776
<ALLOWANCES> 1,067,381
<INVENTORY> 8,258,827
<CURRENT-ASSETS> 22,433,728
<PP&E> 13,136,309
<DEPRECIATION> 4,359,215
<TOTAL-ASSETS> 34,572,911
<CURRENT-LIABILITIES> 17,399,744
<BONDS> 4,597,367
<COMMON> 274
0
0
<OTHER-SE> 8,282,412
<TOTAL-LIABILITY-AND-EQUITY> 34,572,911
<SALES> 36,473,155
<TOTAL-REVENUES> 36,473,155
<CGS> 29,500,358
<TOTAL-COSTS> 36,950,473
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 978,854
<INCOME-PRETAX> 238,502
<INCOME-TAX> 204,713
<INCOME-CONTINUING> 33,789
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (244,797)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
