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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED JUNE 30, 1995
[ ] 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: 1-12572
S.O.I. INDUSTRIES, INC.
(Name of small business issuer 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; telephone number)
(214) 248-1922
(Issuer's telephone number)
Securities registered pursuant to Section 12 (b) of the Exchange Act:
Title of each class: Name of exchange on which registered:
COMMON STOCK AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12 (g) of the Exchange Act: None
Check whether issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of September 29, 1995 was at least $5,810,000. Revenues
for the year ended June 30, 1995 were $23,279,817.
As of September 29, 1995, the registrant had issued and outstanding
14,330,755 shares of Common Stock, par value $.000025 per share.
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TABLE OF CONTENTS
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Item
Number Page
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PART I
1. Description of Business 1
2. Description of Property 5
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
PART II
5. Market for the Company's Common Stock and Related Stockholder Matters 7
6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
7. Index to Financial Statements 21
8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 22
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 22
10. Executive Compensation 24
11. Security Ownership of Certain Beneficial Owners and Management 26
12. Certain Relationships and Related Transactions 27
13. Exhibits and Reports on Form 8-K 28
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company is a diversified management company engaged, through its
subsidiaries and affiliates, in video duplication, kitchen and bathroom cabinet
production and light fixture manufacturing. The significant subsidiaries and
affiliates of the Company are Digital Communications Technology Corporation
("DCT"), a Delaware corporation doing business as MagneTech Corporation,
American Quality Manufacturing Corporation ("AQM"), a Delaware corporation
doing business as American Cabinet, Inc. and Tempo Lighting, Inc. ("Tempo"), a
Delaware corporation. The Company's primary business is to (i) procure goods
and services for the Company and its subsidiaries and affiliates on more
favorable terms than the individual subsidiaries and affiliates could obtain,
and (ii) provide management expertise to the subsidiaries and affiliates,
particularly in the areas of employee benefits, public relations and funds
management.
The Company was incorporated in the State of Florida in 1982 and changed
its state of incorporation by means of a merger with a Delaware corporation to
the State of Delaware in 1987. The address of the Company's principal
executive office is 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248 and
its telephone number is (214) 248-1922.
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
The Company owns approximately 47% of the issued and outstanding capital
stock of DCT, a publicly-held company whose common stock is listed on the
American Stock Exchange.
Products. DCT is an integrated video and audio communications company
which offers video and audio tape duplication and satellite communications
services. DCT duplicates a variety of video and audio cassettes, including
full-length movies, training, music, sales, sports and educational programs.
DCT offers its reproduction services to industrial companies, advertising
agencies, direct selling organizations and educational and religious groups and
its customers include Blockbuster Entertainment, Bristol-Myers Squib, Atlantic
Recording Corporation, Madacy Music Group and Warner Music Group. DCT's
satellite communications system is capable of transmitting live or pre-recorded
programming from remote locations to satellites. DCT's satellite
communications customers include local, network and cable television operators
such as ESPN, ABC/Capital Cities, WFAA News - Dallas, ABC News, HBO and
Beligishe Radio.
Customers. During the year ended June 30, 1994, one customer, Polygram,
accounted for approximately 21% of DCT's sales. During the year ended June 30,
1995, two of DCT's largest customers, Madacy Music Group and Atlantic Recording
Corporation, accounted for 16.3% and 12% respectively, of its sales.
Raw Materials and Manufacturing. DCT purchases blank audio and video
cassettes for its reproduction business from several distributors at market
prices in the United States and the Pacific Rim. The cassettes are readily
available on the open market. The majority of DCT's video duplication
equipment is manufactured by several major manufacturers in Japan and purchased
from domestic distributors.
The equipment utilized in DCT's satellite broadcasting business includes
two KU band broadcasting trucks, cameras, generators, telephonic equipment and
dual transmitters. DCT purchases its materials and
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equipment from several major manufacturers and believes that the loss of any of
its suppliers or manufacturers would not have a material adverse effect on
DCT's business, financial condition and results of operations.
Properties. DCT duplicates video and audio tapes at two facilities, one
located in Ft. Lauderdale, Florida and one located in Indianapolis, Indiana.
The Ft. Lauderdale facility, which is made up of two adjacent buildings and
covers a total of approximately 24,000 square feet, is a real-time duplication
facility with the capacity to duplicate an average of approximately 9,000
videos per day. The Indianapolis facility, which covers approximately 66,000
square feet, is a fully automated, state of the art high-speed duplication
facility with the capacity to duplicate 80,000 videos per day.
Competition. DCT's industry is highly competitive. There are other
commercial video duplicating and satellite broadcasting companies which compete
with DCT and have greater financial resources and sales volume than DCT. DCT
depends upon its ability to provide quality services at competitive prices to
its customers in order to be competitive.
Employees. As of June 30, 1995, DCT had a total of approximately 207
employees, all of whom are full-time employees. None of the employees are
represented by a labor union. The Company believes that DCT has good relations
with its employees.
AMERICAN QUALITY MANUFACTURING CORPORATION
The Company owns approximately 98.5% of the issued and outstanding capital
stock of AQM.
Products. AQM believes that it is one of the largest manufacturers of
unfinished wood cabinet products and vanities for the home, including kitchen
cabinets, bathroom cabinets and vanities and storage cabinets. AQM has also
recently introduced a line of finished cabinet products and has designed and
developed full-scale prototypes for several styles of home leisure products,
including home entertainment centers and electronic furniture centers. AQM
distributes its products to the remodeling and new construction markets through
a variety of channels, including home centers and independently owned
retailers.
Customers. The following three customers accounted for the following
percentages of AQM's sales in fiscal year 1994: Payless Cashways (17.82%);
Grossman's (10.32%); and Home Depot (12.86%). The following three customers
accounted for the following percentages of AQM's sales in fiscal year 1995:
Payless Cashways (21.20%); Home Depot (14.87%); and Builders Square (9.48%).
The loss of any of these customers could have a material adverse effect on AQM.
As is customary in the industry, AQM does not have long-term supply contracts
with any of its customers.
Raw Materials and Manufacturing. The materials used in AQM's manufacturing
operations include oak and birch lumber, particle board, fiber board,
laminates, paper and vinyl coverings, glass, furniture hardware and packaging
material. AQM is dependent upon outside suppliers for all of its raw material
needs and, therefore, is subject to fluctuations in prices of raw materials.
In particular, AQM's results of operations are affected significantly by
increases in the market prices of wood and wood products such as particle
board. AQM buys its raw materials at market-based prices from numerous
independent suppliers. Prices of wood and wood products can be adversely
affected by, among other things: (i) an overall shortage of lumber in the
United States caused by poor weather in timber harvesting areas; (ii)
governmental restrictions on lumber harvesting in the Pacific Northwest; (iii)
an increase in housing construction; (iv) increased demand for papermill
by-products, which are the primary materials used in the production of particle
board; and (v) increased substitution of particle board for solid wood. AQM
purchases these materials from various
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suppliers at market prices and believes that the loss of any one of its
suppliers would not have a material adverse effect on AQM's business, financial
condition and results of operations.
Properties. AQM manufactures its products in two facilities, one located
in Conway, Arkansas and the other in Burlington, Kansas. The Conway facility,
which was opened in 1990, covers approximately 200,000 square feet. The
Burlington facility, which was opened in 1991 and which the Company leased in
March 1994, covers approximately 185,000 square feet.
Competition. The industry in which AQM operates is highly competitive and
includes a large number of both domestic and foreign manufacturers. Certain of
AQM's competitors have greater sales volumes and financial resources than AQM.
The Company believes the following factors have enabled AQM to compete
effectively: (i) its low cost products that are attractively styled and high
quality; (ii) its ability to anticipate new markets and distribution channels
for its products; (iii) its continuing effort to improve its products; (iv) its
low cost production capabilities and stable, experienced work force; (v) its
strong commitment to customer service; and (vi) its experienced management
team.
Employees. As of June 30, 1995, AQM had a total of approximately 389
employees, all of whom are full-time employees. None of the employees are
represented by a labor union. The Company believes that AQM has good relations
with its employees.
TEMPO LIGHTING, INC.
The Company owns all of the issued and outstanding common stock of Tempo.
Products. Tempo designs, manufactures, assembles and markets a line of
medium-priced residential and commercial lamps and lighting fixtures. Tempo's
current line consists of approximately 525 designs that include medium-priced
contemporary and traditional table lamps, floor lamps and lighting fixtures
and a line of slightly higher-priced contemporary table and floor lamps under
the trade name "Infiniti Lighting." Tempo's products are sold throughout the
United States and the Caribbean principally to furniture stores, department
stores and lighting specialty shops including JC Penney and Burdine's Stores.
The products are also sold to large commercial users, such as office buildings
and hotels.
Customers. During the year ended June 30, 1994, one customer of Tempo, JC
Penney, accounted for approximately 15% of Tempo's revenues. During the year
ended June 30, 1995, two customers of Tempo, JC Penney and Heilig-Meyer,
accounted for approximately 18.8% and 13.8% respectively, of Tempo's revenues.
Raw Materials and Manufacturing. The raw materials used in Tempo's
manufacturing operations are glassware, ceramic, brass, wood, plastic and
various types of fabric. Tempo also purchases various component parts such as
electrical sockets and castings. Tempo purchases its raw materials and
component parts from several suppliers and believes that the loss of any of its
suppliers would not have a material adverse effect on Tempo's business,
financial condition and results of operations.
Properties. Tempo manufactures its products at two facilities, one in
Hialeah, Florida and one in Bangs, Texas. The Hialeah facility covers
approximately 27,000 square feet and the Bangs facility covers approximately
52,000 square feet. Tempo's manufacturing operations consist of fabrication,
assembly and testing of the parts and components, painting, finishing, firing
and decorating. Tempo also has fully integrated
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lamp shade manufacturing operations. Tempo also has showrooms and sales
offices in Dallas, Texas, Atlanta, Georgia and High Point, North Carolina.
Competition. The lighting fixture industry is highly fragmented,
consisting of many companies that compete with Tempo that are larger and have
greater resources. The Company believes that Tempo's principal competitive
advantages are its high product quality, variety of products and competitive
prices.
Employees. As of June 30, 1995, Tempo had a total of approximately 85
employees, all of whom are full-time employees. None of the employees are
represented by a labor union. The Company believes that Tempo has good
relations with its employees.
ENVIRONMENTAL REGULATIONS
The Company's operations, through its subsidiaries AQM and Tempo, are
subject to extensive federal, state and local laws, regulations and ordinances
relating to the generation, storage, handling, emission, transportation and
discharge of certain materials, substances and waste into the environment.
Permits are required for certain of the Company's operations and are subject to
revocation, modification and renewal by governmental authorities.
Governmental authorities have the power to enforce compliance with their
regulations, and violators may be subject to fines, injunctions or both.
Compliance with these regulations has not in the past had a material effect on
the Company's earnings, capital expenditures or competitive position. The
Company anticipates increased federal and state environmental regulation
affecting it as a manufacturer, particularly regarding emissions and the use of
certain materials in the production process. In particular, regulations
currently being issued under the Clean Air Act Amendments of 1990 likely will
subject the Company to new standards regulating emissions of certain hazardous
air pollutants from certain of its manufacturing operations. The Environmental
Protection Agency's development of these standards is still at a preliminary
stage. The Company cannot at this time estimate the impact of these new
standards on the Company's operations, future capital expenditure requirements
or the cost of compliance.
The manufacturing facilities of AQM and Tempo ship waste products to
various disposal sites. To the extent that such waste products include
hazardous substances that could be discharged into the environment at such
disposal sites or elsewhere, the Company could be potentially subject to laws
which provide for responses to and liability for releases of hazardous
substances into the environment and liability for natural resource damages.
One example of such laws is the federal Comprehensive Environmental Response,
Compensation and Liability Act, as amended ("CERCLA"). Generally, liability
under CERCLA is joint and several and is determined without regard to fault.
In addition to CERCLA, similar state or other laws and regulations may impose
the same or even broader liability for releases of hazardous substances.
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ITEM 2. DESCRIPTION OF PROPERTY
Set forth below is certain information with respect to the Company's
principal properties. The Company believes that all of these properties are
adequately insured, in good condition and suitable for the uses described
below.
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APPROXIMATE SIZE OWNED/ LEASE EXPIRATION
LOCATION PRIMARY USE (SQUARE FEET) LEASED DATE
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Dallas, Corporate 10,328 Leased June 2000
Texas Office
Hialeah, Manufacturing, 27,000 Leased (1) July 1996
Florida Office
Ft. Lauderdale, Duplication, 12,000 Leased June 1999
Florida Office
Ft.Lauderdale, Warehouse 12,000 Owned (2)
Florida
Indianapolis, Duplication 66,000 Leased June 1999
Indiana
Conway, Manufacturing, 200,000 Leased (3) December 2009
Arkansas Office
Burlington, Manufacturing, 185,000 Leased (4) May 2014
Kansas Office
Bangs, Manufacturing 52,000 Owned (5)
Texas
</TABLE>
(1) Donald E. Courtney, a former director and officer of the Company, is
a partner in the partnership that owns the Hialeah facility. See "Certain
Relationships and Related Transactions."
(2) The Company purchased this facility on March 31, 1992 for a purchase
price of $398,000.
(3) DeWayne Davis, a former director and officer of the Company and AQM,
was a major shareholder in American Industries, Inc., which owns the Conway
facility. See "Certain Relationships and Related Transactions."
(4) AQM has leased the Burlington, Kansas facility from the Coffey
County, Kansas Board of County Commissioners for a term of 20 years. Upon
expiration of the initial 20-year term, the Company has the option to renew the
lease for an additional 20-year term or purchase the facility.
(5) The Company purchased the Bangs facility on June 10, 1992. The
purchase price for the Bangs facility was $300,000 with a down payment of
$100,000 and a deed of trust in the amount of $200,000 to be paid over a period
of 72 months at an interest rate of 9% per annum and monthly payments of
$3,605.
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ITEM 3. LEGAL PROCEEDINGS
The Company may from time to time be party to various legal actions arising
in the ordinary course of its business. In addition, the Company is currently
involved in litigation with a former officer and director of the Company and
AQM. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Pending Litigation." The Company does not believe
that it is currently involved in any pending actions that will have a material
adverse effect on its business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 7, the Board of Directors called a special meeting of the
stockholders for the following purposes: (i) to approve a proposal to amend
the Company's Certificate of Incorporation to increase the authorized capital
stock; (ii) to approve a proposal to amend the Company's Certificate of
Incorporation to authorize a class of preferred stock; and (iii) to approve a
proposal to amend the Company's Certificate of Incorporation to effect a one
for eight reverse split of the Company's common stock at the discretion of the
Board of Directors.
The stockholders approved all of the above proposals. Proposal (i) described
above had 11,488,896 votes cast in favor and 1,285,147 votes cast against.
Proposal (ii) described above had 8,759,662 votes cast in favor and 1,364,523
votes cast against. Proposal (iii) described above had 11,559,827 votes cast
in favor and 1,210,526 votes cast against.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company was quoted on the Nasdaq Stock Market until
November 19, 1993 under the symbol "LAMP." The following table sets forth the
range of representative high and low closing bid prices for the Common Stock
for the periods indicated. Quotations represent inter-dealer prices, do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
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HIGH LOW
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FISCAL 1994
First Quarter 1.06 .81
Second Quarter 3.81 1.81
(through November 19, 1993)
</TABLE>
The Common Stock of the Company has been listed on the AMEX since November
19, 1993 under the symbol "SOI." The following table sets forth the high and
low sales prices of the Common Stock on the AMEX for the periods indicated.
<TABLE>
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HIGH LOW
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FISCAL 1994
Second Quarter $4.06 $2.75
(from November 19, 1993)
Third Quarter 3.82 3.00
Fourth Quarter 3.56 2.13
FISCAL 1995
First Quarter 2.56 1.63
Second Quarter 3.25 2.13
Third Quarter 3.00 1.38
Fourth Quarter 1.75 1.00
</TABLE>
On September 29, 1995, the closing price of the Common Stock was $.94 per
share. On September 29, 1995, there were 507 stockholders of record of the
Common Stock.
The Company currently intends to retain all earnings to finance the
development and expansion of its operations. The Company does not anticipate
paying cash dividends on its shares of Common Stock in the foreseeable future.
The Company's future dividend policy will be determined by its Board of
Directors on the basis of various factors, including but not limited to the
Company's results of operations, financial condition, business opportunities
and capital requirements. The payment of dividends will also be subject to the
requirements of Delaware law, as well as restrictive financial covenants in the
Company's existing and future credit agreements.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Fiscal Year 1995:
During the year ended June 30, 1995, the Company's ownership percentage of
DCT dropped to approximately 46.8% after the Company sold a portion of its
holdings in DCT. Even though the Company still controls DCT and still
maintains control over the largest block of DCT common stock, consolidation of
the operations of DCT is not allowed for investments under 50% stock ownership.
Consequently, the Company's ownership of DCT is accounted for under the equity
method of accounting and the Company's proportionate ownership of the net
assets of DCT is reflected as one line item on the Company's consolidated
balance sheet. Likewise the Company's proportionate share of DCT's earnings is
reflected as a single line item on the Company's consolidated statements of
operations. The complete financial statements of DCT have been included in
this Form 10-KSB, and a separate discussion of financial condition and results
of operations of DCT has been included as a separate section of this item. The
results of operations of the Company for the year ended June 30, 1994, however
do include the consolidated results of operations of DCT since the Company
owned in excess of 50% of DCT's common stock at June 30, 1994.
The Company experienced a net loss of approximately $2,648,000 for the year
ended June 30, 1995. Approximately $2,668,000 of the consolidated net loss
related to the loss from the Cabinet and Furniture segment. This loss,
discussed more fully below, resulted primarily from increases in both cost of
goods sold and general and administrative expenses. Costs related to the
initial operations of the segment's Kansas plant and costs associated with the
introduction of new product lines caused these increases.
Net sales declined from approximately $32,748,000 to $23,280,000. This is
largely due to the effects of consolidation in the prior year where DCT's sales
were included in the Company's consolidated net sales. If DCT's net sales were
included in the Company's consolidated net sales for the year ended June 30,
1995, the Company's net sales would have increased approximately 35%.
The Company's consolidated operating income declined from $1,232,000 to an
operating loss of $3,793,000 during the year ended June 30, 1994 and 1995,
respectively. Once again, the Cabinet and Furniture segment's results of
operation were the primary cause of the decline. By not consolidating DCT's
operations with the Company's for the year ended June 30, 1995, DCT's operating
income of approximately $811,000 was not available to offset operating losses
from the Company's subsidiaries.
An increase in interest expense from approximately $590,000 to $690,000 for
the years ended June 30, 1994 and 1995, respectively, also contributed to the
Company's consolidated net loss. Increased borrowings and higher prime rates
led to this increase.
The Company's increased operating costs were offset somewhat by
approximately $355,000 in realized gains on investment transactions.
Throughout the year, the Company invested 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.
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The asset balance recorded for these funds invested in marketable securities at
June 30, 1995 was approximately $923,000. An unrealized holding loss account
balance of approximately $334,000 is also recorded as a separate component of
shareholders' equity to account for declines below cost of certain of the
marketable securities held in the Company's investment portfolio. The Company
also recognized a gain of approximately $229,000 related to the sale of
117,000 shares of the common stock of DCT.
In addition, $750,000 was received in settlement of a lawsuit against the
Company's former President and Chairman. That lawsuit 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 balance of net unrealized holding losses on securities at June 30, 1994
reflected in the Consolidated Statements of Stockholders' Equity has been
restated to reflect a valuation allowance against deferred taxes that should
have been recorded in 1994 to reflect the tax benefit of unrealized capital
losses on marketable securities.
Fiscal Year 1994:
The significant increase in consolidated net sales for the year ended June
30, 1994 of approximately $18,208,000 or 125% as compared to consolidated net
sales for the year ended June 30, 1993 was due primarily to the sales provided
from the Company's Cabinet and Furniture segment, formed upon the acquisition
of AQM on January 1, 1994, and through the significant sales growth of the
Company's Video Production and Duplication segment during the year ended June
30, 1994. Approximately $9.6 million of the increased sales related to the
Cabinet and Furniture segment and $8.1 million related to increased sales from
the Video Production and Duplication segment. Sales from the Home Furnishings
segment increased approximately $450,000.
Operating income also increased for the year ended June 30, 1994, however
not at the same rate as net sales. Operating income increased by approximately
$274,000 or 29% from the year ended June 30, 1993. As a percentage of net
sales, the operating income actually declined from approximately 6.6% to 3.8%
for the years ended June 30, 1993 and 1994, respectively. This percentage
decline is attributable to increases in cost of goods sold, resulting from
higher volume sales at lower margins experienced at the Company's Video
Production and Duplication segment and the addition of the Cabinet and
Furniture segment which generally operates at lower margins than the Company's
other segments. Despite the increases in cost of goods sold, both selling
expenses and general and administrative expenses, as a percentage of net sales,
were consistent for the years ended June 30, 1994 and 1993.
The Company also experienced a large increase in interest expense during
the fiscal year 1994 from approximately $169,000 to $590,000 for the years
ended June 30, 1993 and 1994, respectively. The primary reasons for this
increase were due to (1) the Video Production and Duplication segment's
additional borrowings supporting the expansion of that segment and (2) the
addition of the Company's Cabinet and Furniture segment with its line of credit
and other short-term borrowing needs. This expense was offset by approximately
$589,000 added to other income during the year ended June 30, 1994 which
related to realized gains earned from the Company's marketable securities
portfolio.
On February 14, 1994, the Company issued 1,329,836 shares of the Company's
Common Stock in exchange for 580,538 shares of the common stock of DCT. The
transaction was recorded at fair value of the stock exchanged. This exchange
had no net effect on total shareholders' equity.
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Video Production and Duplication Segment
The Video Production and Duplication segment offers video and audio tape
duplication and production services and satellite communications services.
This segment was consolidated into the Company's financial statements for the
year ended June 30, 1994 but was not consolidated for the year ended June 30,
1995. Consequently, only a discussion of the fiscal year 1994 is included
below. See the separate discussion of DCT's operations included at the end of
this item.
Fiscal Year 1994:
This segment's continued expansion led to the full operation of the new
high-speed duplicating facility along with expanded capacity at the segment's
other locations. This expansion, in turn, resulted in dramatic sales growth in
fiscal year 1994. Net sales for the year ended June 30, 1994 increased 82% to
approximately $18,005,000. This increase was due to growing sales at all
locations, especially at the Company's high-speed duplication facility in
Indiana.
Although net sales increased significantly, operating income for this
segment did not increase at the same rate. Operating income increased 54% to
approximately $1,428,000 for the year ended June 30, 1994. When compared as a
percentage of sales however, operating income declined from approximately 9.4%
of net sales to 7.9% of net sales for the years ended June 30, 1993 and 1994,
respectively. This declining percentage of net sales was primarily due to cost
of goods sold, which increased at a faster rate than sales. As a percentage of
net sales, cost of goods sold was approximately 74.9% and 71.7% for the years
ended June 30, 1994 and 1993, respectively. The increased cost of goods sold
was due to lower margins earned from the higher volume retail sell-through
business of the segment.
In the quarter ended December 31, 1993, after evaluating the historical
contribution of this segment'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. The net effect of
the operation of Video Plus, Inc. for the year ended June 30, 1994 was a loss
of approximately $95,000.
Cabinet and Furniture Segment
The Cabinet and Furniture segment was formed with the acquisition of AQM,
effective January 1, 1994. AQM is a manufacturer of unfinished and finished
wood cabinet products and vanities for the home.
Fiscal Year 1995:
Net sales from the Cabinet and Furniture segment for the year ended June
30, 1995 contributed approximately $18,411,000 or 79% of the Company's
consolidated net sales for the 1995 fiscal year. Although contributing
substantially to the consolidated sales growth of the Company for the year
ended June 30, 1995, the consolidated net loss of the Company during this
period is almost entirely due to this segment's losses. Of the Company's
approximate $3,793,000 consolidated operating loss for the year ended June 30,
1995, approximately $3,234,000 was a direct result of losses from the cabinet
and furniture segment. Management is implementing several actions in order to
mitigate future losses from this segment, as follows: (1) A consolidation of
operations into a single operating plant is under consideration; (2) A full
review of all product lines is underway. As a result of this review, material
content of all product lines will be analyzed in order to reduce material
costs. In addition, based on this review, all unprofitable product lines and
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customers will be discontinued; (3) Negotiations with alternative lenders are
in process. Management anticipates moving the lending relationship with the
current lender in order to reduce the segment's interest burden; and (4) In
addition, the Company will fund operating requirements of this segment on an as
needed basis. Despite managements efforts, however, there can be no assurance
that these steps, once implemented will significantly improve the financial
position of the Company.
The segment's operating loss of approximately $3,234,000 was the result of
increases in both cost of goods sold and operating expenses. As a percentage
of net sales, cost of goods sold increased from 85.4% to 96.6% for the years
ended June 30, 1994 and 1995, respectively. These costs have increased at a
faster rate than net sales due to several factors. The largest factor related
to the effects of the commencement of operations at the segment's Kansas
facility which accounted for approximately $1,500,000 (8% of net sales) of
non-recurring costs included in the current year cost of goods sold. In
addition, the production of several different product lines was commenced on a
trial basis before the current product lines were established. These trials
contributed costs in a disproportionate amount to sales during the first two
fiscal quarters until the most beneficial product mix to be produced at the
Kansas facility could be established.
Increased material costs as well as increased labor and overhead costs also
contributed to the decline in gross margins. The segment's addition of the
finished cabinet product lines contributed to the overall increase in material
and labor costs. In addition, due to the segment's negative cash flow
position, certain bulk purchases of raw materials were not acquired in the same
quantities as in the past. The cost savings that had been realized due to
these quantity discounts and early payment discounts, were not realized in the
current year, which also contributed to the higher costs. As the newer product
lines are established and older, less profitable lines are discontinued,
management expects that gross margins will improve. Additionally management
has negotiated with several of its suppliers to schedule out amounts due.
Additionally, subsequent to June 30, 1995, the Company's majority shareholder
has transferred shares of the Company in settlement of the claims of certain of
this segment's creditors. As of September 25, 1995, 530,286 shares of the
Company have been transferred in satisfaction of approximately $417,000 of this
segment debt. The Company intends to issue new, restricted shares to the
majority shareholder for the dollar amount of claims satisfied and will treat
this as an additional capital contribution. Management expects that this cash
management strategy will alleviate immediate cash requirements, allowing more
controlled and cost effective inventory purchases. There can be no assurance,
however, that any of the strategies implemented by management will be effective
in returning this segment to profitability.
Operating expenses as a percentage of net sales also increased from 15% to
21% for the years ended June 30, 1994 and 1995. An increase in general and
administrative expenses comprised the majority of the increase in operating
expenses in the most recent fiscal year. Increased overhead payroll costs
associated with the operation of the Kansas facility for a full year along with
increased professional fees associated with a lawsuit (see Pending Litigation,
below) resulted in the higher expenses. In addition, approximately $404,000
was added to the allowance for doubtful accounts, contributing to the increased
operating expenses for the year ended June 30, 1995.
Fiscal Year 1994:
Net sales from this segment comprised approximately $9,586,000 or 29% of
the Company's consolidated net sales for the year ended June 30, 1994. (This
represents net sales from the acquisition date of January 1, 1994 to June 30,
1994.) In the fiscal year ended June 30, 1994, this segment provided an
operating profit of approximately $286,000. Results of operations, though
positive, were still not at the level expected by management. Due to the
addition of finished cabinets to AQM's product mix, changes were necessitated
in the production process which led to higher costs to produce the segment's
products.
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Management made these product changes in order to improve both sales and gross
margins and to position the segment for future growth and profitability.
In order to further assess the financial condition of this segment, a
comparison of the segment's full year results of operations to the prior year
is necessary, even though the Company only operated this segment for six months
of the current fiscal year. (Note that the reference to the prior fiscal year
of AQM is May 31, 1993. AQM's fiscal year end was changed to June 30 in the
1994 fiscal year to match the Company's fiscal year end.)
Net sales for the year ended June 30, 1994 increased approximately 3.5%
from the year ended May 31, 1993. The increased sales were obtained despite
the effects of poor weather in February which forced a plant slow down and the
cessation of shipping for several days. Management's efforts to devote more
attention to sales began to produce increased sales in the last quarter of
fiscal 1994. In addition, management was able to increase sales prices to
offset the increases in its raw material product costs.
Even when discounting the effects of the inclement weather noted above, the
sales growth experienced by this segment was still less than management
expectations. The sales results were due to adjustments in purchasing patterns
made by two of the segment's major customers. One customer began a
restructuring of its operations, closing some unprofitable retail locations and
therefore consolidating some of its inventory from closed stores to its other
locations. Another major customer, due to a shortage in storage and shelf
space, discontinued its orders of assembled cabinets, preferring instead to
order the segment's ready to assemble products.
This segment relied on three major customers for approximately 40% of its
gross sales for the year ended June 30, 1994. This dependence is down from
reliance on four major customers for approximately 56% of gross sales for the
year ended May 31, 1993.
Cost of sales as a percentage of net sales increased from approximately
83.6% to 85.4% for the years ended May 31, 1993 and June 30, 1994,
respectively. This increase was primarily due to the addition and start up of
the finished cabinet product line and the costs incurred initiating production
at the segment's Burlington, Kansas facility. In addition, the segment
incurred additional costs during the last six months of the year ended June 30,
1994 in redesigning an entire product line for a major customer and redesigning
its other products in order to conform their sizes to industry norms.
Home Furnishings Segment
The Home Furnishings segment designs, manufactures, assembles and markets a
line of medium priced residential and commercial lighting fixtures.
Fiscal Year 1995:
Net sales from the home furnishings segment decreased approximately 5.6%
for the year ended June 30, 1995 as compared to June 30, 1994. This decline in
sales is due to lower demand from the segment's record sales which were
experienced in the prior three fiscal years. Management has implemented
increased sales efforts in order to maintain an optimum sales volume, however
there can be no assurance that these efforts will produce increased sales or
increased operating profits.
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Along with the decline in net sales for this segment, the operating profit
generated in the prior fiscal year declined to an operating loss of
approximately $153,000 for the year ended June 30, 1995. The reduced
profitability of this segment is primarily the result of increased cost of
goods sold, which increased at a higher rate than sales. Specifically, higher
freight and labor costs along with higher workers compensation costs at the
segment's Bangs, Texas location contributed to the increased cost of goods
sold. Management has not been successful in passing these increased costs
along to its customers through price increases in the current fiscal year, and
will attempt to improve margins, either through price increases or cost
reductions. There can be no assurance, however that management's efforts will
improve operating profits.
Fiscal Year 1994:
In the fiscal year ended June 30, 1994, the Home Furnishings segment
generated approximately $92,000 of operating income from approximately
$5,158,000 in net sales. This is an approximate 68% increase in operating
income and an approximate 11% increase in net sales from the prior fiscal year.
The increase in net sales is due primarily to expanded listings of the
Company's products in a major customer's approved buying list. Department and
sales managers at major retailers are authorized to order merchandise only from
the retailers' approved buying lists, therefore, expanded listings of the
Company's products on these lists should yield higher sales.
During the fiscal year ended June 30, 1994, the Company moved some of its
lamp assembling activity from its Hialeah, Florida facility to its lamp base
manufacturing facility in Bangs, Texas. The costs incurred in establishing the
limited product line manufacturing capability in Bangs, Texas resulted in
increased costs. Although this segment's operating income as a percentage of
net sales increased slightly from approximately 1% of net sales in fiscal year
1993 to approximately 2% of net sales in fiscal year 1994, the segment's gross
profit percentage (gross profit as a percentage of net sales) declined slightly
from approximately 28% to 26%.
CAPITAL RESOURCES
During the year ended June 30, 1995, the Company acquired, through its
various subsidiaries, approximately $605,000 in equipment. Approximately
$546,000 was invested in equipment at the Company's Cabinet and Furniture
segment, with the remaining balance used for equipment purchases at the Home
Furnishings segment and the corporate office. These equipment acquisitions
were made with funds provided from operations and were necessary to position
the respective segments to expand their product offerings and maintain
competitive position. Management expects to maintain its current level of
capital acquisitions for the Cabinet and Furniture segment and expects only
limited fixed asset expenditures for the Home Furnishings segment through the
1996 fiscal year in order to modernize and improve plant equipment.
LIQUIDITY
During the year ended June 30, 1995, the Company's cash flows from
operating activities resulted in a net use of cash of approximately $1,950,000.
This is compared with cash used in operating activities of approximately
$1,096,000 for the year ended June 30, 1994. The Cabinet and Furniture
segment's operating losses of approximately $3,234,000 were the primary factor
in the segment's overall net use of cash from operating activities. This
segment utilized cash management techniques to fund the segment's operations
and is evidenced by both the increase in the segment's accounts payable and the
virtually unchanged accounts receivable balance. Despite these efforts,
operations required funding from the segment's line of credit arrangements.
Additionally, long-term debt of approximately $1,225,000 was utilized for
development of the segment's finished cabinet product line. As this segment is
operating at its funding limitations with its current lender, future
deficiencies in cash provided from operations will be provided by the Company.
By
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implementing the strategies noted above in the Results of Operations section,
management hopes to minimize the amount of cash provided to this segment by the
Company, thereby returning the segment to profitability. There can be no
assurance, however, that the strategies planned by management will produce the
anticipated results.
As mentioned above, the large operating losses of the Company was the
primary reason for the current year change in overall operating cash flow
position of the Company. These losses are offset somewhat by decreases in
accounts receivable and increases in accounts payable and accrued liabilities.
Also affecting the cash flow from operating activities are approximately
$355,000 in gains recognized on sales of the Company's marketable securities
portfolio. These gains are subtracted from net income in calculating cash
flows from operations, and therefore increase the cash used in operating
activities as presented on the consolidated statement of cash flows.
Throughout all the Company's industry segments, the demand by customers for
longer payment terms resulted in some expansion of accounts receivable
balances. Despite these market pressures to extend longer payment terms, the
Company's overall accounts receivable conversion period (measuring how quickly
the Company, on average, collects its accounts receivable) has improved. The
accounts receivable conversion period decreased from 93 days to 75 days for the
years ended June 30, 1994 and 1995, respectively.
The reduction in the accounts receivable conversion period was due to the
improved collections at the Home Furnishings segment. The conversion period
improved from 64 days to 41 days for the years ended June 30, 1994 and 1995.
The reduction in the overall conversion period occurred despite an increase in
the accounts receivable conversion period at the Cabinet and Furniture segment
from 77 days to 83 days, for the years ended June 30, 1994 and 1995. In
response to the changing customer bases and overall sales increases, management
has increased the allowance for doubtful accounts. The Cabinet and Furniture
segment increased its allowance for doubtful accounts in response to its
increased sales and due to discontinuance of a short-lived custom cabinet
product line. 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
collection terms, management does not expect any significant detriment toward
its short-term liquidity.
During the year ended June 30, 1994, the Company's cash needs were met
primarily through utilization of credit lines to fund the expansion needs and
through operations. 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.
AQM's line of credit requires compliance with certain covenants with the
bank. As of June 30, 1995, AQM exceeded its borrowing base related to eligible
inventory and had approximately $117,000 of inventory on consignment with
customers, which is prohibited under the terms of the agreement with the bank.
On September 22, 1995, the Company and AQM entered into an agreement whereby
the bank agreed to amend the loan documents and forbear from enforcing its
rights and remedies under the loan documents until March 31, 1996. In order to
induce the bank to enter into this agreement, the Company pledged 515,000
shares of DCT common stock to the bank. After March 31, 1996, however, the
bank will have the right to call the loan. Management expects to be in
compliance and/or change the banking relationship, entering into a new debt
agreement by the March 31, 1996 date.
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 one share of NewCare Health
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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
175,000 shares of NWCA valued at approximately $577,000.
OTHER COMMENTS
The Company's Cabinet and Furniture segment'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 the Cabinet and Furniture segment'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, the segment
has generally been able to mitigate the effects of inflation and commodity
price fluctuations through sales price increases and cost savings in other
areas.
The Company was required to adopt Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" in the first quarter
of fiscal year 1994. As permitted under SFAS 109, prior years' financial
statements have not been restated. The adoption of this standard did not have
a material effect on the consolidated financial statements of the Company for
the year ended June 30, 1994.
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.
PENDING LITIGATION
On March 17, 1995, the Company announced that it had filed on behalf of
itself and its AQM subsidiary, 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.
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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. Due to the dispute
with Mr. Davis, the amount owed to BWA is being held by AQM, at the request of
counsel, pending resolution of the lawsuits.
SIGNIFICANT UNCONSOLIDATED SUBSIDIARY -- DIGITAL COMMUNICATIONS TECHNOLOGY
CORPORATION
As previously stated, the operations of DCT are not consolidated in the
Company's consolidated financial statements as of and for the year ended June
30, 1995. Since DCT is a significant subsidiary, the separate financial
statements of DCT are included as part of this Form 10-KSB. Included below is
a discussion related to these financial statements.
OVERVIEW
DCT experienced a decline in operating income from approximately $1,484,000
to $811,000 for the years ended June 30, 1994 and 1995, respectively.
Increased operating costs, primarily in general and administrative expenses,
combined with increased cost of goods sold caused the lower operating results.
These increased operating costs, along with increased interest expense and
costs associated with the effects of closing of DCT's Tapes Unlimited, Inc.
("TU") subsidiary contributed to the net loss for the year ended June 30, 1995.
During June 1995, DCT's management decided to discontinue the operations of
TU. Management believed that the cost of maintaining the TU subsidiary
outweighed the benefits provided to DCT. The effect on net (loss) income of
the operations of TU is segregated on the face of the income statement as
discontinued operations, and totaled approximately ($765,000) and ($81,000),
net of income taxes, for the years ended June 30, 1995 and 1994, respectively.
LIQUIDITY
DCT used approximately $109,000 in cash from operating activities for the
year ended June 30, 1995 as compared to approximately $425,000 in cash provided
by operating activities for the year ended June 30, 1994. The change in DCT's
operating cash position is primarily due to the net loss of approximately
$282,000 incurred during the year ended June 30, 1995 as compared to the net
income generated in the year ended June 30, 1994 of approximately $699,000.
Other significant items that affected cash from operating activities for the
year ended June 30, 1995 were increases in inventory, accounts receivable and
prepaid expenses.
Overall inventory levels increased approximately 26% from June 30, 1994 to
June 30, 1995 in order to support the increased sales levels experienced during
the year ended June 30, 1995. The largest increases occurred in the work-in-
process and raw material components of inventory which increased approximately
$400,000 and $315,000, respectively during the year ended June 30, 1995.
Toward the end of the fiscal year, DCT began pre-loading blank tapes in
anticipation of peak season demand in the fall. This activity led to the
increased inventory levels noted above.
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Despite the increased inventory levels, the higher inventory amounts were
consistent with the sales levels experienced during the year ended June 30,
1995. This is evident from the consistent inventory turnover experienced
during the years ended June 30, 1994 and 1995, which actually improved slightly
during these periods from 4.9 times for the year ended June 30, 1994 to 5.2
times for the year ended June 30, 1995.
Inventory levels, particularly in the work-in-process and finished goods
categories, will fluctuate somewhat depending on the size and number of video
tape duplicating orders processed at any given time. Typically DCT does not
stock significant quantities of finished products, shipping orders immediately
upon completion. Management will continue to focus on ensuring that the least
amount of operating cash is invested in inventory by ensuring that shipments
are made immediately upon project completion and by minimizing the amount of
raw materials purchased.
Accounts receivable increased approximately $891,000 for the year ended
June 30, 1995 as compared to approximately $1,880,000 for the year ended June
30, 1994. Although still contributing to the overall net negative operating
cash flow position, the size of the increase in accounts receivable was
improved in the current year ended June 30, 1995 despite the increase in sales
for the same period.
DCT's accounts receivable collection period (measuring how quickly, on
average, DCT collects its accounts receivable) increased from approximately 67
days at June 30, 1994 to approximately 74 days at June 30, 1995. DCT continues
to receive competitive pressures from its customers to grant longer payment
terms due to the changing customer base (discussed more fully in the "Results
of Operations" section). Therefore, in response to specific accounts that had
deteriorated and overall increased sales, DCT increased its allowance for
doubtful accounts from approximately $320,000 to $1,065,000 as of June 30, 1994
and 1995, respectively.
Prepaid expenses and other current assets increased approximately $314,000
for the year ended June 30, 1995 as compared to an increase of approximately
$229,000 for the year ended June 30, 1994. The increase is primarily related
to income tax receivables based on anticipated refunds due to DCT's net losses
in the current year.
Included in the net loss for the year ended June 30, 1995 were several
non-cash losses which partially offset some of the uses of cash from operating
activities noted above. Approximately $531,000 was related to the write-off of
goodwill recorded from the acquisition of DCT's TU subsidiary which was
discontinued in June 1995. In addition, a net loss of approximately $106,000
was realized on the sale of equipment that was no longer needed.
Approximately $2,005,000 was used in investing activities for the year
ended June 30, 1995 as compared to approximately $2,588,000 for the year ended
June 30, 1994. A large portion of cash used in investing activities for the
year ended June 30, 1995, other than capital expenditures which is discussed in
the "Capital Resources" section, was an increase in investments in DCT's
marketable securities portfolio and an additional investment of approximately
$350,000 in the stock of the Company. A net use of approximately $99,000 was
related to these marketable securities investment activities during the year
ended June 30, 1995. Additionally, cash was temporarily advanced to the
Company and an affiliate of DCT which is expected to be repaid.
DCT utilized its line of credit to provide for working capital needs during
the year ended June 30, 1995. In addition, approximately $269,000 in cash was
generated from issuances of common stock in connection with bonuses and other
employee compensation. Management intends to selectively utilize its line of
credit to fund capital expenditures and inventory purchases when needed, and
expects to reduce the amount outstanding on the line of credit as collections
on sales are received.
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As of June 30, 1995, DCT failed to meet a cash flow coverage ratio as
required by certain of DCT's loan agreements. Therefore, all amounts due under
these agreements have been classified as current liabilities on the balance
sheet. There can be no assurance that DCT will be able to comply with this
debt covenant in the future, however management will attempt to comply or
renegotiate the covenant with DCT's lender.
During the year ended June 30, 1995, DCT's cash needs were met primarily
through operations, with additional short- term borrowing on DCT's credit line.
Long-term liquidity needs are anticipated to be met through sales growth and
separate financing arrangements. Management anticipates that it will continue
to meet most obligations as they come due, and no vendor/supplier problems are
expected.
CAPITAL RESOURCES
DCT invested approximately $1,227,000 in equipment and leasehold
improvements for the year ended June 30, 1995. This was lower than amounts
invested during the year ended June 30, 1994 due to significant equipment
purchases for DCT's high-speed duplicating facility in Indianapolis, Indiana in
the prior fiscal year. The necessary equipment to initially position DCT to
expand sales to the retail-sell-through market (see "Results of Operations"
below) has now been acquired. However, DCT plans to continue to expand current
operating facilities at the Indianapolis plant to fully meet the high volume
demands of the retail-sell-through market.
Expenditures in the year ended June 30, 1995 consisted primarily of the
following: a satellite uplink unit for DCT's satellite broadcast operations and
machinery and equipment for general overall upgrades and replacements at all of
DCT's facilities. These expenditures were financed through operations.
RESULTS OF OPERATIONS
Overall growth in DCT's target markets led to continued sales growth in the
current year. Net sales increased approximately 16% from $18,005,000 to
$20,894,000 for the years ended June 30, 1994 and 1995, respectively.
Significant sales increases, experienced primarily in DCT's first and second
fiscal quarters, led to this sales growth as orders were filled to meet the
holiday buying season demands. As in the prior fiscal year, management's focus
on the "retail- sell-through market" resulted in this sales surge. This market
centers on sales of pre-recorded video tapes which are sold at the retail
level. The video tapes sold to this market are typically recorded on a
narrower band width (i.e. extended play mode) in order to record more
programming on less video tape at a lower cost. DCT's customer base has become
increasingly dominated by the companies which distribute these pre-recorded
videos to the retail-sell-through market, and management has positioned DCT to
capitalize on this portion of the video industry.
Operating profit did not keep pace with the increased sales, declining from
approximately $1,484,000 (8.2% of net sales) to $811,000 (3.9% of net sales)
for the years ended June 30, 1994 and 1995, respectively. The decline in
operating profit is due to increases in cost of goods sold and general and
administrative expenses.
Cost of goods sold as a percentage of sales increased to 77% for the year
ended June 30, 1995 as compared to 75% for the year ended June 30, 1994. The
increased cost of goods sold is directly attributable to increased material
costs, specifically the cost of the plastic video cassette shells, which have
been increasing in cost faster than DCT's ability to pass the increases to its
customers. Management will continue its efforts to pass on the material cost
increases to DCT's customers and will continue its focus on cost
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containment, especially in labor costs, to ensure more efficiency is obtained
and thereby reducing current cost levels even though sales volume increases.
Management is also exploring alternative sources for its raw materials to
reduce material costs.
As a percentage of net sales, general and administrative expenses increased
from approximately 7% to 9% for the year ended June 30, 1994 and 1995,
respectively. This increase was due to a larger provision for doubtful
accounts and increased public relations expenses. In addition, increased legal
and professional expenses were incurred in connection with a lawsuit filed
against two former employees which was settled prior to June 30, 1995.
Despite the increase in net sales, selling expenses increased only slightly
for the year ended June 30, 1995. As a percentage of net sales, selling costs
approximated 4.9% and 4.3% for the years ended June 30, 1995 and 1994,
respectively. The increase was due to an increase in commissions paid.
Interest expense increased from approximately $352,000 to $700,000 for the
years ended June 30, 1994 and 1995, respectively. This increase was due
primarily to increased borrowings on DCT's line of credit and increased
long-term borrowing over the levels of the prior year. In addition, increased
interest expense was due to an increase in the bank's prime interest rate which
directly affects DCT's borrowing rates. This additional debt, as compared with
the prior year, was incurred in connection with expansion of operations,
primarily at DCT's high-speed duplicating facility in Indianapolis, Indiana and
for funds borrowed for maintenance of DCT's investment portfolio.
DCT realized income from securities transactions of approximately $513,000
for the year ended June 30, 1995 as compared to approximately $259,000 for the
year ended June 30, 1994. The gains were from investment transactions
associated with DCT's marketable securities portfolio. DCT 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 any 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 a federally insured national bank.
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 been removed from the operating
section of the consolidated statement of income for the year ended June 30,
1994, and the income from operations of Video Plus, Inc. have been segregated
under discontinued operations. The net effect of the operation of Video Plus,
Inc. for the year ended June 30, 1994 was a reduction to net income of
approximately $94,000.
OTHER ITEMS
The costs of DCT's products are subject to inflationary pressures and
commodity price fluctuations. Inflationary pressures have been relatively
modest over the past five years and DCT has generally been able to mitigate the
effects of inflation and commodity price fluctuations through sales price
increases and cost savings in other areas.
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. DCT has mitigated this seasonality by increasing sales efforts
to lower volume, but higher margin customers such as corporate training video
duplication and the video rental market. In addition, management plans to
increase market penetration in the
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Canadian and other foreign markets where the seasonal base is different from
that of the domestic market. Finally, management intends to focus its
marketing efforts toward the amusement related industry (i.e. providing video
tape duplication services for video game manufacturers) as well as to the mass
marketing advertising industry to help mitigate the seasonality of the
retail-sell-through markets. Even by utilizing these techniques, sales levels
are still lower in the summer months.
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of the Company (Audited)
F-1 Independent Auditors' Reports
F-4 Balance Sheets as of June 30, 1995 and 1994
F-6 Statements of Operations for the Years Ended June 30, 1995 and 1994
F-7 Statements of Stockholders' Equity for the Years Ended June 30,
1995 and 1994
F-8 Statements of Cash Flows for the Years Ended June 30, 1995 and 1994
F-10 Notes to Financial Statements
Consolidated Financial Statements of the Company's significant
unconsolidated affiliate - Digital Communications Technology
Corporation (Audited)
F-27 Independent Auditors' Reports
F-29 Balance Sheets as of June 30, 1995 and 1994
F-30 Statements of Operations for the Years Ended June 30, 1995 and 1994
F-31 Statements of Stockholders' Equity for the Years Ended June 30,
1995 and 1994
F-32 Statements of Cash Flows for the Years Ended June 30, 1995 and 1994
F-34 Notes to Financial Statements
21
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
S.O.I. Industries, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of S.O.I.
Industries, Inc. and Subsidiaries as of June 30, 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements 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.
We also audited the adjustment described in Note 20 that was applied to restate
the June 30, 1994 financial statements. In our opinion, such adjustment is
appropriate and has been properly applied to the June 30, 1994 financial
statements.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of S.O.I.
Industries, Inc. and Subsidiaries as of June 30, 1995, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
September 25, 1995
F-1
<PAGE> 25
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
S.O.I. Industries, Inc. and Subsidiaries
We have audited the consolidated statement of operations of S.O.I. Industries,
Inc. and Subsidiaries and the related consolidated statements of shareholders'
equity and cash flows for the year then ended June 30, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We did not audit the financial
statements of American Quality Manufacturing Corporation, a wholly-owned
subsidiary, which statements reflect total revenues of $9,585,572 for the six
months ended June 30, 1994. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for this subsidiary, is based solely on the report of
the other auditors.
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 consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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 and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our report and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the results of operations of S.O.I. Industries, Inc. and
Subsidiaries, changes in their shareholders' equity and their cash flows for
the year then ended June 30, 1994, in conformity with generally accepted
accounting principles.
As discussed in NOTE 1 to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities. Also as discussed in the first paragraph of NOTE 20, the
consolidated financial statements as of June 30, 1994 have been restated.
MORRISON, BROWN, ARGIZ & COMPANY
Certified Public Accountants
/s/ Morrison, Brown, Argiz & Company
Miami, Florida
August 31, 1994
Except with respect to the first paragraph of NOTE 20
as to which the date is June 15, 1995 and to the
disclosures regarding the Company's settlement
of a lawsuit with a former officer as to which the
date is September 16, 1994
F-2
<PAGE> 26
[S.W. HATFIELD + ASSOCIATES LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholder
American Quality Manufacturing Corporation
(formerly American Cabinet, Incorporated)
We have audited the accompanying balance sheets of American Quality
Manufacturing Corporation (a Delaware corporation) (formerly American Cabinet,
Incorporated) (a wholly-owned subsidiary of S. O. I. Industries, Inc.) as of
June 30, 1994 and May 31, 1993, and the related statements of operations,
changes in shareholder's equity and cash flows for each of the years ended May
31, 1993 and 1992. Additionally, we have audited the condensed balance sheets
as of December 31, 1993 (pre-acquisition by S. O. I. Industries, Inc.) and
January 1, 1994 (post-acquisition by S. O. I. Industries, Inc.) and the
statements of operations and cash flows for each of the six month periods ended
December 31, 1993 and June 30, 1994. Further, we have audited the transitional
statements of operations and cash flows for the month ended June 30, 1993.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of American Quality Manufacturing
Corporation (formerly American Cabinet, Incorporated) as of June 30, 1994,
January 1, 1994, December 31, 1993 and May 31, 1993, and the results of its
operations and its cash flows for each of the years ended May 31, 1993 and
1992; for the six month periods ended June 30, 1994 and December 31, 1993 and
for the month ended June 30, 1993, respectively, in conformity with generally
accepted accounting principles.
As described in the Notes to the Financial Statements, the Company changed its
method of accounting for income taxes in 1993 as required by the provisions of
Statement of Financial Accounting Standards No. 109.
Further, as discussed in the Notes to Financial Statements, the Company has
significant transactions with affiliates.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying financial statement
schedules as listed on page F-2 are presented for the purpose of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. These financial statement schedules have been subjected
to the auditing procedures applied in the audits of the basic financial
statements, and in our opinion, fairly present in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ S. W. HATFIELD + ASSOCIATES
Dallas, Texas
August 24, 1994
F-3
<PAGE> 27
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 203,410
Restricted cash 500,000
Marketable securities 923,212
Accounts receivable, net of allowance for doubtful accounts of $1,087,262 3,666,972
Inventories 3,152,456
Income taxes receivable 525,442
Prepaid expenses and other current assets 107,042
Deferred income taxes 179,976
------------
Total current assets 9,258,510
Property, plant and equipment, net 2,837,109
Investment in Digital Communications Technology Corporation 3,027,191
Goodwill, net of accumulated amortization of $219,232 2,104,265
Other assets, net 356,444
------------
$ 17,583,519
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 28
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, CONTINUED
JUNE 30, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Revolving line of credit $ 4,557,421
Current maturities of long-term debt 428,327
Current maturities of capital lease obligations 10,093
Accounts payable, trade 3,583,438
Accounts payable, affiliate 601,736
Accrued liabilities 984,383
------------
Total current liabilities 10,165,398
Long-term debt, net of current maturities 1,233,615
Capital lease obligations, net of current maturities 516,800
Deferred income taxes 179,976
Other 80,472
------------
Total liabilities 12,176,261
------------
Shareholders' equity:
Common stock; $.000025 par value; 20,000,000 shares authorized; 13,956,156
shares issued and outstanding 349
Additional paid-in capital 6,356,449
Less shares deemed treasury stock; 374,599 shares (Note 1) (185,081)
Accumulated deficit (75,291)
Due from ESOP (355,089)
Net unrealized holding loss on securities (334,079)
------------
Total shareholders' equity 5,407,258
------------
$ 17,583,519
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 29
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
(1) (2)
1995 1994
------------ ---------------
(as restated)
<S> <C> <C>
Sales, net $ 23,279,817 $ 32,748,225
------------ ---------------
Costs and expenses:
Cost of goods sold (exclusive of depreciation and amortization) 21,106,605 24,610,100
Selling expenses 2,333,607 2,873,727
General and administrative expenses 2,953,814 2,720,298
Depreciation and amortization 678,913 1,311,816
------------ ---------------
Total costs and expenses 27,072,939 31,515,941
------------ ---------------
Operating (loss) income (3,793,122) 1,232,284
------------ ---------------
Other income (expense):
Realized gains on investment transactions, net 355,348 588,783
Interest and other income 798,303 40,621
Interest expense (689,880) (590,423)
Loss on equity investment in Digital Communications Technology Corporation (109,348) -
Gain on sale of affiliates/subsidiary's common stock 228,728 1,239,820
------------ ---------------
Total other income 583,151 1,278,801
------------ ---------------
(Loss) income from continuing operations before income tax benefit (provision) (3,209,971) 2,511,085
Benefit (provision) for income taxes 562,320 (756,059)
------------ ---------------
(Loss) income before discontinued operations and minority interest (2,647,651) 1,755,026
Loss from discontinued operations, net of income tax benefit of $8,405 - (14,435)
Loss on disposal of discontinued operations net of income tax benefit of $94,416 - (162,164)
------------ ---------------
(Loss) income before minority interest (2,647,651) 1,578,427
Minority interest - (338,366)
------------ ---------------
Net (loss) income $ (2,647,651) $ 1,240,061
============ ===============
Weighted average shares of common stock outstanding 13,752,167 9,557,181
============ ===============
Earnings (loss) per share of common stock:
(Loss) income from continuing operations $ (.19) $ .18
Discontinued operations, net of income taxes - -
Loss on disposal of discontinued operations - (.01)
------------ ---------------
(Loss) income before minority interest (.19) .17
Minority interest - (.04)
------------ ---------------
Net (loss) earnings $ (.19) $ .13
============ ===============
</TABLE>
(1) The 1995 financial statements account for the investment in Digital
Communications Technology Corporation using the equity method.
(2) The 1994 financial statements account for the investment in Digital
Communications Technology Corporation using the consolidation method.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 30
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Additional Shares Retained
----------------------- Paid-In Deemed (Deficit)
Shares Amount Capital Treasury Stock Earnings
---------- --------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1993 8,884,670 $ 222 $ 3,698,918 $ - $1,909,579
Exercise of warrants and stock exchange - - 371,978 - -
Share exchange agreement, American Quality
Manufacturing Corporation 1,300,000 33 2,274,967 - -
Exercise of stock options 530,000 13 132,487 - -
Shares issued for services 212,000 5 45,932 - -
Treasury stock 262,120 (262,120)
Reduction in due from ESOP - - - - -
Net unrealized holding loss on securities - - - - -
Net income - - - - 1,240,061
---------- --------- ----------- ----------- ----------
Balance at June 30, 1994 10,926,670 273 6,786,402 (262,120) 3,149,640
Adjustment (Note 20) - - 163,275 - -
---------- --------- ----------- ----------- ----------
Balance at June 30, 1994 as restated 10,926,670 273 6,949,677 (262,120) 3,149,640
Shares held by Digital Communications
Technology Corporation 3,012,006 75 (75) - -
Net unrealized holding loss on securities
relating to Digital Communications
Technology Corporation - - (613,989) - -
Issuance of affiliate stock in excess of
book value - - 85,316 - -
Exercise of stock options 10,000 1 2,499 - -
Shares issued for services 7,480 - 10,060 - -
Treasury stock (Note 1) (77,039) 77,039
Reduction in due from ESOP - - - - -
Dividends of securities - - - - (577,280)
Net unrealized holding loss on securities - - - - -
Net loss - - - - (2,647,651)
---------- --------- ----------- ----------- ----------
Balance at June 30, 1995 13,956,156 $ 349 $ 6,356,449 $ (185,081) $ (75,291)
========== ========= =========== =========== ==========
<CAPTION>
Due Net Unrealized
From Holding Loss
ESOP On Securities
---------- ---------------
<S> <C> <C>
Balance at July 1, 1993 $ (589,286) $ -
Exercise of warrants and stock exchange - -
Share exchange agreement, American Quality
Manufacturing Corporation - -
Exercise of stock options - -
Shares issued for services - -
Treasury stock
Reduction in due from ESOP 112,452 -
Net unrealized holding loss on securities - (387,731)
Net income - -
---------- ----------
Balance at June 30, 1994 (476,834) (387,731)
Adjustment (Note 20) - (487,174)
---------- ----------
Balance at June 30, 1994 as restated (476,834) (874,905)
Shares held by Digital Communications
Technology Corporation - -
Net unrealized holding loss on securities
relating to Digital Communications
Technology Corporation - 613,989
Issuance of affiliate stock in excess of
book value - -
Exercise of stock options - -
Shares issued for services - -
Treasury stock (Note 1)
Reduction in due from ESOP 121,745 -
Dividends of securities - -
Net unrealized holding loss on securities - (73,163)
Net loss - -
---------- ----------
Balance at June 30, 1995 $ (355,089) $ (334,079)
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 31
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -------------
(as restated)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(2,647,651) $ 1,240,061
----------- -------------
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation and amortization 678,913 1,311,816
Provision for bad debts 588,404 475,889
Gain on sale of property, plant and equipment (75,714) (2,588)
Gain on sale of Digital Communications Technology Corporation's common stock (228,728) (1,239,820)
Issuance of affiliate stock in excess of book value 85,316 -
Gain on sale of marketable securities, available for sale (355,348) (588,783)
Dividends of securities (577,280) -
Loss on disposal of discontinued operations - 162,164
Loss on equity investment in Digital Communications Technology Corporation 109,348 -
Reserve for obsolescence 148,676 127,283
Change in:
Accounts receivable 278,385 (3,446,447)
Inventories 2,964 (1,461,545)
Prepaid expenses and other current assets 8,467 (362,464)
Accounts payable, trade 1,327,517 314,484
Payable to officers (132,558) -
Accounts payable, affiliate 352,736 -
Accrued liabilities (543,620) 1,268,042
Income tax receivable (525,442) -
Income taxes payable and deferred income taxes (517,758) 456,137
Other long-term liabilities 73,855 649,389
----------- -------------
Total adjustments 698,133 (2,336,443)
----------- -------------
Net cash used in operating activities (1,949,518) (1,096,382)
----------- -------------
Cash flows from investing activities:
Change in other assets (207,601) 151,480
Purchases of marketable securities (5,547,672) (12,136,672)
Proceeds from sales of marketable securities 5,944,869 8,474,496
Change in loans receivable, related parties 301,876 2,388,234
Purchases of property, plant and equipment (605,479) (2,762,184)
Proceeds from sale of Digital Communications Technology Corporation's common stock 243,275 -
Proceeds from sale of property, plant and equipment 26,271 19,996
Proceeds from insurance settlement 192,500 -
Purchase of subsidiaries - (604,498)
Proceeds from sale of subsidiary - 342,917
Proceeds from sale of subsidiary's common stock - 1,667,645
----------- -------------
Net cash provided by (used in) investing activities 348,039 (2,458,586)
----------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings, net 745,304 1,353,687
Proceeds from revolving lines of credit, net 482,092 2,099,171
Proceeds from issuance of common stock 2,500 132,500
Payment from ESOP 121,745 112,452
Payments on capital lease obligations (107,184) (5,437)
Payment of bank overdraft (332,313) -
----------- -------------
Net cash provided by financing activities 912,144 3,692,373
----------- -------------
Net (decrease) increase in cash and cash equivalents (689,335) 137,405
Cash and cash equivalents at beginning of year 267,324 755,340
Cash and cash equivalents at beginning of year related to Digital Communications
Technology Corporation 625,421 -
----------- -------------
Cash and cash equivalents at end of year $ 203,410 $ 892,745
=========== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE> 32
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
(as restated)
<S> <C> <C>
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 681,090 $ 622,649
============= =============
Income taxes 522,993 521,046
============= =============
Noncash investing and financing activities:
Common stock issued for services and acquisition $ 10,060 $ 45,937
============= =============
Investment securities issued for dividends $ 577,280 $ -
============= =============
Acquisition of equipment on a long-term capital lease $ 58,354 $ 481,160
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE> 33
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
The consolidated financial statements include the accounts for S.O.I.
Industries, Inc. ("S.O.I.") and all majority-owned subsidiaries
(collectively referred to as the "Company"). The subsidiaries include
Tempo Lighting, Inc. ("Tempo"), Omni Doors, Inc. ("Omni") and American
Quality Manufacturing Corporation ("AQM"). Significant intercompany
accounts and transactions have been eliminated.
The Company also has a 46.81% ownership in Digital Communications
Technology Corporation ("DCT") and DCT's wholly-owned subsidiary, Tapes
Unlimited, Inc. ("Tapes") as of June 30, 1995. At June 30, 1994, the
Company's investment in DCT was 50.21%. As a result of S.O.I.'s
decrease in ownership of DCT, the method used to account for the
investment in DCT has changed from the consolidation method to the
equity method. The impact of the change in methods was to increase the
loss from continuing operations and the loss per share of common stock
from continuing operations by $592,288 and $.06, respectively. The
market value of DCT's stock held by the Company had an aggregate market
value of $4,534,452 as of June 30, 1995.
As of June 30, 1995 and 1994, DCT owns 3,386,605 and 3,066,678 shares of
S.O.I.'s common stock, respectively. The Company has utilized the
treasury stock method in accounting for the reciprocal shareholdings.
The shares deemed treasury stock represents the ownership interest
S.O.I. has in itself through its investment in DCT.
The primary business of S.O.I. is to provide executive managerial
functions for the consolidated group. Tempo designs, manufacturers,
assembles and markets a line of medium-priced residential and commercial
lamps and lighting fixtures. AQM manufacturers and distributes kitchen
and bathroom cabinets, fixtures and related wood products. Omni
manufactures and distributes industrial metal doors. DCT and its
subsidiaries are in the business of video and audio tape production and
duplication, as well as satellite broadcasting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-10
<PAGE> 34
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
MARKETABLE SECURITIES
Marketable securities consist of equity securities and money market
funds. The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" as of June 30, 1994. Prior
to the adoption of SFAS No. 115, marketable securities were stated at
cost, which approximated fair market value.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
computed using the straight-line basis over the estimated useful lives
ranging from three to forty years. Gains and losses resulting from the
disposition on retirement of property, plant and equipment are included
in operations in the current period.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED (GOODWILL)
Excess of costs over fair value of net assets acquired represents the
excess of the purchase price over the fair market value of the tangible
net assets acquired in business combinations accounted for by the
purchase method.
The Company continually reevaluates the propriety of the carrying amount
of goodwill as well as the amortization period to determine whether
current events and circumstances warrant adjustments to the carrying
value and/or revised estimates of useful lives. At this time, the
Company believes that no significant impairment of the goodwill has
occurred and that no reduction of the estimated useful lives is
warranted.
ISSUANCE OF SUBSIDIARY AND AFFILIATES STOCK
Issuances of stock by the Company's subsidiaries or affiliates that
cause changes in the Company's ownership percentage in the
subsidiary/affiliate are accounted for as additions to paid-in capital.
F-11
<PAGE> 35
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
INCOME TAXES
The Company files its federal and state income tax returns on a
consolidated basis except DCT, which files separately. The Company
accounts for income taxes utilizing the liability method described in
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). Deferred income taxes are recorded to
reflect the consequences on future years of differences between the tax
basis of assets and liabilities and their financial reporting amounts.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share ("EPS") are computed by dividing net income
(loss) by the weighted average number of outstanding common shares
excluding Treasury Shares which represents the number of shares S.O.I.
owns of itself through its affiliate, DCT. Shares released to Employee
Stock Ownership Plan ("ESOP") participants as well as the shares held in
trust are considered outstanding for the EPS computation.
RECLASSIFICATION
Certain amounts reflected in the June 30, 1994 statements have been
reclassified to conform with current year presentation.
3. RESTRICTED CASH:
AQM is self-insured for its workers' compensation insurance in
accordance with the applicable requirements of the laws of the State of
Arkansas. AQM was required by the state oversight body to deposit
$500,000 in one or more certificates of deposit to be held in trust on
behalf of AQM's workers to ensure the payment of employee claims. AQM's
Certificate of Authority for Self-Insurance expires on May 1, 1996 and
must be renewed annually. In the event of nonrenewal, the Company
anticipates that it will be able to acquire coverage through normal
business insurance markets.
F-12
<PAGE> 36
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVENTORIES:
Inventories consist of the following at June 30, 1995:
<TABLE>
<S> <C>
Raw materials $ 2,001,257
Work in process 694,866
Finished goods 605,009
------------
3,301,132
Less slow moving and obsolete reserve (148,676)
------------
$ 3,152,456
============
</TABLE>
5. ACQUISITIONS AND DIVESTITURES:
DCT
On December 6, 1993, DCT sold its subsidiary, Video Plus, Inc. The
results of operations of Video Plus, Inc. have been reported separately
as a discontinued operation in the consolidated statements of operations
for the year ended June 30, 1994. The income from discontinued
operations for this subsidiary was $66,735, net of tax of $38,854 and
the loss on disposal for this subsidiary was $162,164, net of tax of
$94,416 for the year ended June 30, 1994. There were no remaining
assets or liabilities for Video Plus, Inc. at June 30, 1994.
On March 25, 1994, DCT finalized the purchase of Tapes Unlimited, Inc.
and Tapes Unlimited USA, Inc. (collectively "Tapes"). Notwithstanding
the closing date, the effective date for the consummation of the
transactions was deemed to be January 1, 1994. The consolidated
statements of operations for the year ended June 30, 1994 reflect
transactions since the effective date.
In June 1995, DCT discontinued the operations of Tapes. The results
of operations of Tapes for the year ended June 30, 1994 have been
reported separately as a discontinued operation in the consolidated
statements of operations.
F-13
<PAGE> 37
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Summarized results of operations of Tapes for 1994 are as follows:
<TABLE>
<S> <C>
Net sales $ 1,368,863
=============
Operating loss $ (117,519)
=============
Loss before income taxes $ (128,429)
Income tax benefit 47,259
-------------
Loss from discontinued operations $ (81,170)
=============
</TABLE>
On February 14, 1994, DCT issued 580,538 shares of common stock to the
Company in exchange for 1,329,836 shares of common stock of the Company.
The transaction was recorded at the fair value of the stock exchanged,
which amounted to $4,574,633.
During the year ended June 30, 1994, the Company sold 347,975 shares of
common stock of DCT for $1,667,645 resulting in a realized gain in the
amount of $1,239,820. During the year ended June 30, 1995, the Company
sold 117,000 shares of common stock of DCT for $243,275 resulting in a
realized gain in the amount of $228,728.
During the year ended June 30, 1995, DCT sold 170,631 shares of common
stock to third parties. The excess value DCT received over book value
resulted in an increase of $85,316 to additional paid-in capital on the
Company's books.
AQM
Effective January 1, 1994, the Company acquired all of the issued and
outstanding capital stock of AQM, a Delaware corporation. The
transaction involved the transfer of 1,300,000 shares of the Company's
common stock valued at $2,275,000 to the shareholders of AQM in exchange
for all of the issued and outstanding capital stock of AQM. The
transaction was accounted for under the purchase method of accounting.
As a result of this transaction, AQM became a wholly-owned subsidiary of
the Company.
The consolidated statements of operations reflect the transaction since
the effective date. Goodwill of $2,323,293 was recorded as part of this
transaction and is being amortized over fifteen years.
F-14
<PAGE> 38
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The pro forma financial information including AQM for the twelve-month
period ended June 30, 1994 would have been as follows:
<TABLE>
<S> <C>
Sales $44,177,659
===========
Income from continuing operations before minority interest $ 1,707,164
===========
Net income $ 1,358,901
===========
Earnings per share $ .14
===========
</TABLE>
6. MARKETABLE SECURITIES:
Marketable securities consist of equity securities and money market
funds. The securities have an aggregate cost of $1,257,291 at June 30,
1995. The marketable securities portfolio contains net unrealized
losses of $334,079 as of June 30, 1995. This resulted in the carrying
amount of $923,212 at June 30, 1995. The net unrealized holding loss
has no deferred tax impact due to the full valuation allowance currently
recorded against this loss, see Note 17.
Gains or losses on dispositions of securities are based on the net
difference of the proceeds and the adjusted carrying amounts of the
securities sold, using the specific identification method.
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at June 30, 1995:
<TABLE>
<S> <C>
Land $ 20,000
Buildings and leaseholds 870,572
Machinery and equipment 2,548,912
Furniture and fixtures 292,640
Vehicles 77,890
------------
3,810,014
Less accumulated depreciation and amortization (972,905)
------------
$ 2,837,109
============
</TABLE>
Included in property, plant and equipment at June 30, 1995 are assets
under capital leases as follows:
F-15
<PAGE> 39
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<TABLE>
<S> <C>
Building $ 328,923
Equipment 506,806
------------
835,729
Less accumulated depreciation (109,263)
------------
Net book value $ 726,466
============
</TABLE>
8. REVOLVING LINES OF CREDIT:
Tempo has a revolving line of credit agreement which permits aggregate
borrowings up to $900,000 with interest payable on all outstanding cash
advances at the bank's prime rate plus 1/4% (9.25% at June 30, 1995).
AQM has a $6,500,000 line of credit payable to a bank with interest at
the bank's prime rate plus 2% (11% at June 30, 1995). Borrowings under
the revolving line of credit are limited to the sum of 85% of eligible
accounts receivable and 50% of eligible inventory. The line of credit
requires compliance with certain covenants. On June 30, 1995, AQM has
exceeded its borrowing base relating to eligible inventory.
Additionally, AQM has approximately $117,000 of inventory on consignment
with customers which is prohibited under the terms of the agreement. On
September 22, 1995, AQM and the Company entered into an amendment and
forbearance agreement with the bank whereby the bank agreed to amend the
loan documents and forbear from enforcing its rights and remedies under
the loan documents until March 31, 1996. In order to induce the bank to
enter into this agreement, the Company pledged 515,000 shares of DCT
common stock to the bank. After March 31, 1996, the bank will have the
right to call the loan.
The lines of credit are collateralized by substantially all accounts
receivable and inventories and all equipment not being used to
collateralize other equipment and mortgage notes. The agreements
provide that the Company 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. In
addition, the Company has guaranteed DCT's $5,400,000 line of credit.
As of June 30, 1995, $3,840,000 has been drawn upon DCT's line of
credit. The Company has also guaranteed a bank loan for DCT with an
outstanding balance of $419,324 at June 30, 1995.
As of June 30, 1995, $550,000 and $4,007,421 have been drawn against
Tempo's and AQM's, lines of credit, respectively.
F-16
<PAGE> 40
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Average short-term borrowings under revolving credit agreements were
$4,949,066 in 1995, at an average interest rate of 9.89%.
9. LONG-TERM DEBT:
<TABLE>
<S> <C>
Long-term debt consisted of the following at June 30, 1995:
Term note payable to bank at the bank's prime rate (9% at June 30,
1995) plus 2% payable in monthly installments of $20,417, due March 2000.
Collateralized by accounts receivable, inventories, equipment and fixtures $ 1,163,749
Note payable to finance company, interest at 8%, payable in monthly
installments of $636, due in October 1996, collateralized by a vehicle 9,625
Mortgage payable in monthly installments of $3,605 including interest at 9%,
maturing in June 1998, collateralized by real estate in Texas 113,479
Note payable to bank in monthly installments of $10,145 plus interest at the
bank's prime rate plus 1/4%, maturing 1998, collateralized by tangible and
intangible assets 355,089
Other 20,000
------------
1,661,942
Less current maturities of long-term debt (428,327)
------------
$ 1,233,615
============
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ending June 30:
1996 $ 428,327
1997 406,941
1998 397,957
1999 245,004
2000 183,713
-----------
$ 1,661,942
===========
</TABLE>
Certain loan agreements require, among other provisions, that the
Company comply with requirements for maintaining certain cash flow and
other financial ratios.
F-17
<PAGE> 41
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. EMPLOYEE STOCK OWNERSHIP PLAN:
The Company's Employee Stock Ownership Plan ("ESOP") provides retirement
benefits to substantially all employees. The ESOP is a qualified
employee benefit plan exempt from taxation under the Internal Revenue
Code of 1986, as amended. There are 800,000 common shares in the ESOP.
Employees of DCT began to participate in the ESOP as of January 1, 1992.
Payments by the Company for the year ended June 30, 1995 were $162,428,
including interest.
On January 7, 1991, the Employee Stock Ownership Trust ("ESOT")
purchased 800,000 common shares of the Company from the Company's then
Chairman of the Board of Directors, for $900,000. The common shares are
entitled to vote on all matters presented to holders of common shares,
voting together as a class. The ESOP provides for pass through of
voting rights to the ESOP participants and beneficiaries.
The ESOT initially purchased the common shares of the Company using the
proceeds of a bank loan to the Company. In October of 1993, the
outstanding balance on this loan was refinanced with a bank and is
included in long-term debt. The loan has an outstanding balance of
$355,089 at June 30, 1995. The unallocated portion of the ESOP shares
is reflected as a receivable due from ESOP as a reduction of
shareholders' equity. Additionally, as the principal of the loan is
reduced, the common shares held by the ESOT are proportionally allocated
to the employees' accounts on the basis of compensation. Shares are
granted at no cost to the employee; compensation expense is equal to the
fair market value of such stock on the date of grant.
11. CAPITAL LEASE OBLIGATIONS:
On April 22, 1994, AQM entered into a long-term capital lease obligation
with Coffey County, Kansas for a building and certain manufacturing
equipment. The building portion of the lease is for a term of twenty
years and requires monthly payments of $2,500 and the purchase of the
facility for $500,000 at the expiration of the lease term. The
equipment portion of the lease is for ten years and requires monthly
payments of approximately $3,300.
F-18
<PAGE> 42
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Future minimum lease payments under capital leases together with the
present value of the future minimum lease payments at June 30, 1995 are
as follows:
<TABLE>
<S> <C>
1996 $ 85,134
1997 85,134
1998 85,134
1999 85,134
2000 73,780
Thereafter 1,135,814
------------
1,550,130
Less amounts representing interest (1,023,237)
------------
Present value of future minimum lease payments 526,893
Less current maturities (10,093)
------------
Capital lease obligation, net of current maturities $ 516,800
============
</TABLE>
12. OPERATING LEASES:
The Company leases various of its office facilities under operating
leases expiring through 2009. The leases provide for rent increases
based on real estate taxes and expenses. Certain office facility leases
provide for increases in the monthly payments based on the incremental
increase in the Consumer Price Index. The Company also leases
facilities on a month-to-month basis. Rent expense for the years ended
June 30, 1995 and 1994 was $486,236 and $623,582, respectively.
The future minimum lease payments under noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C>
1996 $ 393,972
1997 360,606
1998 338,517
1999 332,485
2000 312,195
Thereafter 2,760,064
-----------
$ 4,497,839
===========
</TABLE>
F-19
<PAGE> 43
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. STOCK OPTION PLAN:
On March 19, 1988, the Company's Board of Directors adopted the S.O.I.
1988 Employees' Stock Option Plan. As of June 30, 1995, there are
1,425,000 shares reserved for issuance under the plan.
<TABLE>
<CAPTION>
Exercise Price
Options Per Share
------- ----------------
<S> <C> <C>
Balance, June 30,1994 20,000 $ .25
Exercised (10,000) $ .25
-------
Balance, June 30, 1995 10,000 $ .25
=======
</TABLE>
14. EMPLOYMENT AGREEMENTS:
S.O.I. and AQM entered into employment agreements with officers on
February 1, 1994 and March 4, 1995, respectively. The agreements are
for terms of three years and contain certain bonus provisions. The
minimum annual salaries (excluding bonus arrangements) for the years
ending June 30, are as follows:
<TABLE>
<S> <C>
1996 $ 172,000
1997 148,000
1998 66,666
-----------
$ 386,666
===========
</TABLE>
F-20
<PAGE> 44
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. SEGMENT INFORMATION:
Business segment data from continuing operations for the year ended
June 30, 1995:
<TABLE>
<CAPTION>
Cabinets and Home
Furniture Furnishings Consolidated
------------ ------------ ------------
<S> <C> <C> <C>
Sales, net $ 18,410,778 $ 4,869,039 $ 23,279,817
============ =========== ============
Operating loss $ (3,234,184) $ (152,692) $ (3,386,876)
============ ===========
General corporate revenue, net 866,785
Interest expense (689,880)
------------
Loss from continuing operations before income taxes $ (3,209,971)
============
Identifiable assets at June 30, 1995 $ 10,310,202 $ 2,606,632 $ 12,916,834
============ ===========
Corporate assets 4,666,685
------------
Total assets at June 30, 1995 $ 17,583,519
============
Depreciation and amortization $ 582,898 $ 96,015 $ 678,913
============ =========== ============
Capital expenditures $ 545,593 $ 59,886 $ 605,479
============ =========== ============
</TABLE>
F-21
<PAGE> 45
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Business segment data from continuing operations for the year ended June
30, 1994 (as restated):
<TABLE>
<CAPTION>
Cabinets and Home Video Production
Furniture Furnishings and Duplication Consolidated
------------ ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Sales, net $ 9,585,572 $ 5,157,736 $ 18,004,917 $32,748,225
============ ============ ============ ===========
Operating profit $ 285,928 $ 92,002 $ 1,427,720 $ 1,805,650
============ ============ ============
General corporate revenue, net 1,295,858
Interest expense (590,423)
-----------
Income from continuing operations
before income taxes $ 2,511,085
===========
Identifiable assets of continuing
operations at June 30, 1994 $ 11,186,645 $ 3,064,517 $ 15,193,423 $29,444,585
============ ============ ============
Corporate assets 1,616,209
-----------
Total assets at June 30, 1994 $31,060,794
===========
Depreciation and amortization $ 198,769 $ 99,638 $ 1,013,409 $ 1,311,816
============ ============ ============ ===========
Capital expenditures $ 361,247 $ 45,570 $ 2,355,367 $ 2,762,184
============ ============ ============ ===========
</TABLE>
16. CONCENTRATION OF CREDIT RISK:
The Company had cash in bank deposit accounts in excess of federally
insured limits of approximately $584,000 at June 30, 1995.
In the normal course of business, management evaluates the credit
worthiness of customers and extends credit. The three largest customers
of AQM and Tempo accounted for approximately 47% and 27%, respectively,
of accounts receivable at June 30, 1995.
F-22
<PAGE> 46
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. INCOME TAXES:
The components of income tax (benefit) provision are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
(as restated)
<S> <C> <C>
Current:
Federal $ (554,672) $ 1,077,730
State (1,804) 97,854
----------- ------------
(556,476) 1,175,584
----------- ------------
Deferred:
Federal (10,124) (359,398)
State 4,280 (60,127)
----------- ------------
(5,844) (419,525)
----------- ------------
(Benefit) provision $ (562,320) $ 756,059
=========== ============
</TABLE>
Reconciliations of the differences between income taxes computed at
federal statutory tax rates and consolidated provisions for income taxes
are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ------------
(as restated)
<S> <C> <C>
Tax at federal statutory rate (34.0)% 34.0%
State income tax, net (3.6) 3.6
Change in valuation allowance 15.3 (12.9)
Other 4.8 5.4
----- -----
(17.5)% 30.1%
===== =====
</TABLE>
F-23
<PAGE> 47
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The tax effects of significant temporary differences which comprise the
deferred tax assets and liabilities at June 30, 1995 are as follows:
<TABLE>
<S> <C>
Reserve for inventory obsolescence $ 56,430
Investments, unrealized holding losses 127,062
Accrued liabilities 149,506
Net operating loss carryforwards 346,690
Allowance for doubtful accounts 280,451
Deferred rent 33,733
Property and equipment (179,976)
----------
813,896
Valuation allowance (813,896)
----------
$ -
==========
</TABLE>
18. QUARTERLY DATA:
The results of operations for the quarters ended September 30, 1994,
December 31, 1994 and March 31, 1995 have been restated to correct for
accounting errors determined in the course of preparation of the
Company's year-end financial statements. The errors involved certain
adjustments primarily related to the capitalization of display units,
inventory adjustments and the related tax effects. The following is a
summary of these corrections on the reported results:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Three Months Ended
September 30, 1994 December 31, 1994 March 31, 1995
-------------------------- -------------------------- --------------------------
As Reported As Restated As Reported As Restated As Reported As Restated
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Operating income (loss) $ 335,833 $ 22,139 $ 696,102 $ 378,302 $ (856,298) $ (1,046,499)
Net income (loss) $ 634,480 $ 227,038 $ 211,599 $ (201,176) $ (468,706) $ (715,749)
Net income (loss) per share $ 0.06 $ 0.02 $ 0.02 $ (0.02) $ (.04) $ (.07)
</TABLE>
For the three months ended June 30, 1995, these accounting errors
increased the operating loss and net loss by $145,017 and $188,356,
respectively.
F-24
<PAGE> 48
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
19. SUBSEQUENT EVENT:
The majority shareholder of S.O.I. has transferred shares of S.O.I.'s
common stock that it previously owned to certain creditors of AQM in
settlement of the creditors' outstanding claims against AQM. As of
September 25, 1995, 530,286 shares of S.O.I. have been transferred in
satisfaction of approximately $417,000 of debt. The Company intends to
issue new, restricted shares to the majority shareholder for the dollar
amount of claims satisfied and will treat this as a capital
contribution.
20. PRIOR PERIOD ADJUSTMENT:
The financial statements for the year ended June 30, 1994, have been
restated to properly reflect the minority interest in DCT. The effect
of the transaction was previously reported as a component of the gain on
the sale of subsidiary's common stock. As a result of the change, net
income and retained earnings decreased by approximately $390,000 and
earnings per share decreased $.03 from $.16 to $.13 per share.
The balance of net unrealized holding losses on securities at June 30,
1994 reflected in the consolidated statements of stockholders' equity
has been restated to reflect a valuation allowance against deferred tax
assets that should have been recorded in 1994 to reflect the tax benefit
of unrealized capital losses on marketable securities.
F-25
<PAGE> 49
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
F-26
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Digital Communications Technology Corporation
Fort Lauderdale, Florida:
We have audited the accompanying consolidated balance sheet of Digital
Communications Technology Corporation and Subsidiaries as of June 30, 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements 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 1995 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Digital
Communications Technology Corporation and Subsidiaries as of June 30, 1995, and
the consolidated results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
We also audited the adjustment to net unrealized holding losses and the
adjustment to reduce the investment in S.O.I. Industries, Inc. to book value
described in Note 15 which adjustments were applied to restate the June 30,
1994 financial statements. In our opinion, such adjustments are appropriate
and have been properly applied to the June 30, 1994 financial statements.
/s/ COOPERS & LYBRAND L.L.P.
Miami, Florida
August 25, 1995
F-27
<PAGE> 51
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Digital Communications Technology Corporation
and Subsidiaries
We have audited the consolidated statement of income of Digital Communications
Technology Corporation and Subsidiaries as of June 30, 1994, and the related
consolidated statements of shareholders' equity, and cash flows for the year
ended June 30, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements 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 consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations of Digital
Communications Technology Corporation and Subsidiaries, changes in their
shareholders' equity and their cash flows for the year then ended June 30,
1994, in conformity with generally accepted accounting principles.
As discussed in NOTE 2 to the consolidated financial statements, in 1994 the
Company changed its methods of accounting for income taxes and for certain
investments in debt and equity securities.
MORRISON, BROWN, ARGIZ & COMPANY
Certified Public Accountants
/s/ Morrison, Brown, Argiz & Company
Miami, Florida
August 8, 1994
F-28
<PAGE> 52
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1995
<TABLE>
<CAPTION>
ASSETS 1995
<S> <C>
Current assets:
Cash and cash equivalents $ 284,837
Marketable securities 2,574,626
Accounts receivable, net of allowance for doubtful accounts of $1,065,300 3,143,689
Inventories 4,058,293
Prepaid expenses and other current assets 345,126
------------
Total current assets 10,406,571
Property, plant and equipment, net 5,239,564
Other assets 31,158
Loans receivable, related parties 601,736
------------
$ 16,279,029
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 3,840,000
Current portion of long-term debt 2,735,418
Accounts payable 2,165,725
Accrued liabilities 418,376
------------
Total current liabilities 9,159,519
------------
Long-term debt, less current portion 644,144
------------
Deferred tax liability 8,392
------------
Commitments (Notes 8 and 12)
Shareholders' Equity:
Common stock, 25,000,000 shares of $.0002 par value per share
authorized; 5,961,188 shares issued, 5,301,809 shares outstanding 1,192
Additional paid-in capital 6,567,062
Retained earnings 1,710,867
Investment in S.O.I. Industries, Inc. (1,198,158)
Net unrealized holding loss on securities (613,989)
------------
Total shareholders' equity 6,466,974
------------
$ 16,279,029
============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-29
<PAGE> 53
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net sales $20,894,025 $ 18,004,917
----------- ------------
Costs and expenses:
Cost of goods sold (exclusive of depreciation) 16,094,788 13,490,134
Selling expenses 1,040,280 776,955
General and administrative expenses 1,793,171 1,275,855
Depreciation and amortization 1,154,880 977,524
----------- ------------
Total costs and expenses 20,083,119 16,520,468
----------- ------------
Operating income 810,906 1,484,449
Interest expense (700,251) (352,403)
Realized gain on sales of marketable securities 512,971 259,110
Other income 142,208 36,564
----------- ------------
Income from continuing operations before income taxes and
change in accounting principle 765,834 1,427,720
Provision for income taxes 283,167 525,372
----------- ------------
Income from continuing operations before change in accounting
principle 482,667 902,348
Discontinued operations (Note 14):
Loss from discontinued operations, net of related income taxes (321,140) (14,435)
Loss on disposal of discontinued operations, net of related income taxes (443,400) (162,164)
----------- ------------
(Loss) income before cumulative effect of change in accounting
principle (281,873) 725,749
Cumulative effect on prior years of change in method of accounting for
income taxes 0 26,285
----------- ------------
Net (loss) income $ (281,873) $ 699,464
=========== ============
Weighted average shares of common stock outstanding 5,264,773 4,890,820
=========== ============
Net (loss) income per common share:
Income from continuing operations $ 0.09 $ 0.18
(Loss) income from discontinued operations (0.06) 0
Loss on disposal of discontinued operations (0.08) (0.03)
----------- ------------
(Loss) income before cumulative effect of accounting change (0.05) 0.15
Cumulative effect of change in method of accounting for income taxes 0 (0.01)
----------- ------------
Net (loss) income per common share $ (0.05) $ 0.14
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-30
<PAGE> 54
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Additional Investment Net Unrealized
--------------------------- Paid-In Retained in S.O.I. Holding Loss
Shares Amount Capital Earnings Industries, Inc. on Securities
------ ------ ------- -------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 5,042,927 $ 1,010 $ 6,916,360 $ 1,615,905 $ (2,062,500) $ 0
Exchange of shares with
S.O.I. Industries, Inc. 580,538 116 4,574,520 0 (4,574,636) 0
Shares issued 167,092 32 273,166 0 0 0
Net depreciation of securities 0 0 0 0 0 (327,929)
Net income 0 0 0 699,464 0 0
------------ ------------ ----------- ------------ ------------ ------------
Balance, June 30, 1994, as
previously reported 5,790,557 1,158 11,764,046 2,315,369 (6,637,136) (327,929)
Adjustment (Note 15) 0 0 0 0 0 (189,309)
Adjustment to reduce
investment in S.O.I.
Industries, Inc. to book
value (Note 15) 0 0 (5,466,349) 0 5,466,349 0
------------ ------------ ----------- ------------ ------------ ------------
Balance, June 30, 1994,
as restated 5,790,557 1,158 6,297,697 2,315,369 (1,170,787) (517,238)
Purchase of S.O.I. Industries,
Inc. shares 0 0 0 0 (27,371) 0
Excess over book value of
amounts paid for shares of
S.O.I. Industries, Inc. 0 0 0 (322,629) 0 0
Exercise of options 142,705 28 179,377 0 0 0
Shares issued 27,926 6 89,988 0 0 0
Net depreciation of securities 0 0 0 0 0 (96,751)
Net loss 0 0 0 (281,873) 0 0
------------ ------------ ----------- ------------ ------------ ------------
Balance, June 30, 1995 $ 5,961,188 $ 1,192 $ 6,567,062 $ 1,710,867 $ (1,198,158) $ (613,989)
============ ============ =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-31
<PAGE> 55
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (281,873) $ 699,464
------------ ------------
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Depreciation and amortization (including $74,068 in 1995 and
$35,162 in 1994 from discontinued operations 1,228,948 1,012,686
Gain on sale of marketable securities (512,971) (259,110)
Cumulative effect of change in accounting principle 0 26,285
Loss on sale of property, plant and equipment 106,272 0
Provision for bad debts 745,776 372,645
Reserve for inventory obsolescence 0 127,283
Loss on disposal of subsidiary 530,637 162,164
Deferred tax benefit (87,282) 0
Increase in accounts receivable (890,666) (1,879,511)
Increase in inventories (842,355) (557,952)
Increase in prepaid expenses and other assets (313,772) (229,172)
Increase in other assets (13,798) 0
Increase in accounts payable 404,154 724,836
(Decrease) increase in accrued liabilities (12,904) 157,233
(Decrease) increase in income taxes payable (169,077) 68,152
------------ ------------
Net cash (used for) provided by
operating activities (108,911) 425,003
------------ ------------
Cash flows from investing activities:
Net assets of discontinued subsidiary 0 2,809,995
Change in marketable securities (99,343) (2,317,191)
Acquisition of property, plant and equipment (1,226,568) (2,317,131)
Proceeds from sales of property, plant and equipment 24,000 0
Net advances to affiliates (352,736) (606,900)
Purchase of Parent Company shares (350,000) 0
Acquisition of subsidiary 0 (500,000)
Proceeds from sale of subsidiary 0 342,917
------------ ------------
Net cash used for investing activities (2,004,647) (2,588,310)
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-32
<PAGE> 56
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from financing activities:
Borrowings from bank $ 838,932 $ 3,225,023
Payments to bank (625,790) (801,303)
Proceeds from revolving lines of credit, net 1,290,433 0
Proceeds from issuance of common stock 269,399 53,198
------------ -----------
Net cash provided by financing activities 1,772,974 2,476,918
------------ -----------
Net (decrease) increase in cash and cash equivalents (340,584) 313,611
Cash and cash equivalents, beginning of year 625,421 311,810
------------ -----------
Cash and cash equivalents, end of year $ 284,837 $ 625,421
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 686,559 $ 421,798
============ ===========
Income taxes $ 380,247 $ 521,046
============ ===========
Supplemental schedule of non-cash investing and
financing activities:
Common stock issued for services and acquisition $ 0 $ 220,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-33
<PAGE> 57
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
On April 29, 1994, the shareholders of MagneTech Corporation approved a
resolution to change the name of the Company to Digital Communications
Technology Corporation (the "Company"). The Company was incorporated on
November 12, 1987, under the laws of the State of Delaware, as a
wholly-owned subsidiary of S.O.I. Industries, Inc. ("S.O.I"). As of
June 30, 1995, S.O.I. owned approximately 47% of the Company.
The Company is in the business of video and audio tape production and
duplication. Sales for the years ended June 30, 1995 and 1994 were
generated from tape duplicating at the Fort Lauderdale and Indianapolis
facilities, as well as satellite broadcasting and video production.
On July 3, 1992, the Company purchased 1,000 shares (representing 100%
ownership) of Video Direct, Inc. for $342,917. The closing of this
transaction took place July 13, 1992. On July 13, 1992, Video Direct,
Inc. was merged into Video Plus, Inc., a Delaware corporation, and
became a wholly-owned subsidiary of the Company. On December 6, 1993,
the Company sold its subsidiary, Video Plus, Inc. Such sale was
accounted for as a discontinued operation (See Note 14).
On March 25, 1994, the Company finalized the purchase of Tapes
Unlimited, Inc. and Tapes Unlimited USA, Inc. Notwithstanding the
closing date, the effective date for the consummation of the
transactions was deemed to be January 1, 1994. On June 30, 1994, Tapes
Unlimited USA, Inc. was liquidated into its parent, Tapes Unlimited,
Inc. Tapes Unlimited, Inc. provides tapes loading services. On June 9,
1995, the operations of Tapes Unlimited, Inc. were discontinued (See
Note 14).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements for the years ended
June 30, 1995 and 1994 include the accounts of Digital Communications
Technology Corporation, (F/K/A MagneTech Corporation) and its
wholly-owned subsidiary, Tapes Unlimited, Inc., whose operations were
discontinued on June 9, 1995. All significant intercompany transactions
have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" (FAS
115) as of June 30, 1994.
F-34
<PAGE> 58
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
MARKETABLE SECURITIES, CONTINUED
Under FAS 115, debt securities and equity securities that have readily
determinable fair values are to be classified in three categories:
HELD TO MATURITY - the positive intent and ability to hold to
maturity. Amounts are reported at amortized cost, adjusted for
amortization of premiums and accretion of discounts.
TRADING SECURITIES - bought principally for purpose of selling
them in the near term. Amounts are reported at fair value, with
unrealized gains and losses included in earnings.
AVAILABLE FOR SALE - not classified in one of the above
categories. Amounts are reported at fair value, with unrealized
gain and losses excluded from earnings and reported separately
as a component of shareholders' equity.
Marketable securities consist of listed common stocks with an aggregate
cost, based on specific identification, of $3,188,614 as of June 30,
1995. The gross unrealized holding losses as of June 30, 1995 were
$643,547, and the net unrealized holding gains were $29,558. All of the
Company's securities are classified as available for sale securities.
Gains or losses on dispositions of securities are based on the net
difference of the proceeds and the adjusted carrying amounts of the
securities sold, using the specific identification method.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method)
or market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives
of the related assets, which range from 3 to 32 years. Costs of repairs
and maintenance are charged to operating expense as incurred;
improvements and betterments are capitalized; when items are retired or
otherwise disposed of, the related costs and accumulated depreciation
are removed from the accounts and any resulting gains or losses are
credited or charged to income.
INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109).
As permitted, the consolidated financial statements prior to the
adoption of the new standard were not restated.
SFAS 109 changes the criteria for the recognition and measurement of
deferred tax assets and liabilities, including net operating loss and
tax credit carryovers. Deferred taxes are recorded based upon
differences between the financial statement and tax bases of assets and
liabilities and available tax credit carryovers.
F-35
<PAGE> 59
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NET (LOSS) INCOME PER COMMON SHARE
The net income (loss) per common share has been calculated using the
weighted average shares outstanding during each year. Such weighted
average shares have been reduced by the number of treasury shares owned
by the Company through its investment in S.O.I. The number of treasury
shares owned were approximately 659,400 and 634,700 at June 30, 1995 and
1994, respectively.
RECLASSIFICATIONS
Certain amounts reflected in the 1994 consolidated financial statements
have been reclassified to conform to the 1995 presentation.
3. INVENTORY:
Inventories consists of the following at June 30:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Raw materials $ 3,008,167 $ 2,693,238
Work-in-process 885,976 485,809
Finished goods 164,150 36,891
------------ -------------
$ 4,058,293 $ 3,215,938
============ =============
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Land $ 73,000
Buildings and improvements 332,440
Machinery and equipment 7,559,667
Leasehold improvements 207,152
Furniture and fixtures 118,309
Transportation equipment 369,030
Computer equipment 181,103
Master tapes 4,000
-----------
8,844,701
Less accumulated depreciation (3,605,137)
-----------
Net property, plant and equipment $ 5,239,564
===========
</TABLE>
F-36
<PAGE> 60
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY, PLANT AND EQUIPMENT, CONTINUED:
Depreciation expense was $1,189,449 and $1,031,767 for the years ended
June 30, 1995 and 1994, respectively.
5. RELATED PARTY TRANSACTIONS:
LOANS RECEIVABLE
These amounts represent advances to an affiliated company ($433,105 at
June 30, 1995) and S.O.I. ($168,631 at June 30, 1995). They are due on
demand. Advances, except for advances to S.O.I., are interest bearing.
MANAGEMENT FEES
The Company paid S.O.I. $340,800 and $102,000 for administrative
services for the years ended June 30, 1995 and 1994, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company participates in S.O.I.'s Employee Stock Ownership Plan
(ESOP). This Plan provides retirement benefits to substantially all
employees. The ESOP is a qualified employee benefits plan exempt from
taxation under the Internal Revenue Code of 1986, as amended. There are
800,000 common shares of the S.O.I. in the ESOP.
NOTE PAYABLE
The Company is the guarantor of a note payable by S.O.I. in the amount
of $547,000.
6. REVOLVING LINES OF CREDIT:
The Company has a revolving line of credit agreement for aggregate
borrowings of up to $5,400,000. Interest is payable on all outstanding
cash advances at the bank's prime lending rate plus 1/4% (9.25% at June
30, 1995). Any unpaid principal and accrued interest is due on demand,
but no later than January 1996. The line of credit is collateralized by
accounts receivable, inventory, and equipment. The terms of the
agreement require, among other provisions, that the Company comply with
requirements for maintaining certain cash flow and other financial
ratios. The Company failed to meet the cash flow coverage ratio
required under this agreement.
Average short-term borrowings under this revolving credit agreement were
$3,428,135, at an average interest rate of 8.9%.
The Company also guaranteed a $900,000 line of credit for S.O.I. as well
as for an affiliate. As of June 30, 1995, $550,000 has been drawn upon
the affiliate's line of credit and $3,840,000 on the Company's line of
credit.
F-37
<PAGE> 61
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. LONG-TERM DEBT:
Long-term debt as of June 30, 1995 consists of the following:
<TABLE>
<S> <C>
Loan payable to a bank in monthly installments of $3,198
including interest at 8.75%, maturing April 2007; collateralized
by real estate. $ 283,585
Vehicle loans payable to a bank in monthly installments of
$548 including interest at 8.66% . These notes mature in
March 1996, and are collateralized by the corresponding
company vehicles. 4,761
Loan payable to a bank in monthly principal installments of
$7,440 plus interest at prime plus 1% (10.00% at June 30, 1995),
maturing June 1997; collateralized by accounts receivable,
inventory, and equipment. The terms of the agreement require,
among other provisions, that the Company comply with
requirements for maintaining certain cash flow and other
financial ratios. 394,351
Loans payable to a bank in monthly installments of $18,868
plus interest at prime plus 1/4% (9.25% at June 30,
1995), maturing through June 2000; collateralized by the
accounts receivables, inventory and equipment. The terms of
the agreement require, among other provisions, that the Company
comply with requirements for maintaining certain cash flow and
other financial ratios. 1,053,416
Loan payable to a bank in monthly installments of $29,000 plus
interest at prime plus 1/4% (9.25% at June 30, 1995), maturing
December 1998; collateralized by accounts receivables, inventory,
and equipment. The terms of the agreement require, among other
provisions, that the Company comply with requirements for
maintaining certain cash flow and other financial ratios. 1,224,125
Loan payable to a bank in monthly installments of $6,149
including interest at 7.63%, maturing January 2003;
collateralized by machinery and equipment; guaranteed by S.O.I. 419,324
------------
3,379,562
Less current portion (2,735,418)
------------
$ 644,144
============
</TABLE>
F-38
<PAGE> 62
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. LONG-TERM DEBT, CONTINUED:
The Company failed to meet the cash flow coverage ratio required under
the above agreements at June 30, 1995. Therefore, all amounts due under
these agreements have been reclassified to a current liabilities.
The contractual maturities on long-term debt assuming repayment terms
were not accelerated are as follows:
<TABLE>
<CAPTION>
Years ending June 30,
---------------------
<S> <C>
1996 $ 727,228
1997 942,565
1998 822,269
1999 304,649
2000 220,322
Thereafter 362,529
------------
$ 3,379,562
============
</TABLE>
8. COMMITMENTS:
The Company leases its office facilities under operating leases expiring
through May 1999. The leases provide for increases based on real estate
taxes and operating expenses. The Company also leases facilities and
equipment on a month-to-month basis.
Aggregate future minimum rental payments under the above leases are as
follows:
<TABLE>
<CAPTION>
Year ending June 30,
--------------------
<S> <C>
1996 $ 393,335
1997 306,127
1998 297,852
1999 273,031
-----------
$ 1,270,345
===========
</TABLE>
Rent expense under the above leases for the years ended June 30, 1995
and 1994 was $412,568 and $283,636, respectively.
9. SALES TO MAJOR CUSTOMERS:
During the year ended June 30, 1995, two customers accounted for
approximately 28% of the Company's sales. During the year ended June 30,
1994, two customers accounted for 29% of the Company's sales.
F-39
<PAGE> 63
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTION PLAN:
On January 22, 1990, the Board of Directors adopted the MagneTech
Corporation 1990 Employees' Stock Option Plan. As of June 30, 1995,
there were 219,125 shares reserved for future issuance at exercise
prices which range from $1.00 to $3.44 per share.
There was no compensation expense as of June 30, 1995 and compensation
expense for June 30, 1994 was $122,400.
<TABLE>
<CAPTION>
SHARES OPTION PRICE
<S> <C> <C>
Outstanding June 30, 1993 211,875 $1.00 - $1.50
Granted 40,000 $1.00
Exercised (7,500) $1.50
-------- -------------
Outstanding June 30, 1994 244,375 $1.00 - $1.50
Granted 35,000 $2.25 - $3.44
Exercised (141,250) $1.00 - $1.50
-------- -------------
Canceled (15,000) $1.50
Outstanding June 30, 1995 123,125 $1.00 - $3.44
======== =============
</TABLE>
11. INCOME TAXES:
Effective July 1, 1993, the Company adopted SFAS No. 109 "Accounting for
Income Taxes". The cumulative effect of the change amounted to $26,285
which amount is reflected as a charge to income in the consolidated
statement of operations for 1994.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Current:
Federal $ 294,762 $ 446,619
State 76,724 56,374
----------- -----------
371,486 502,993
----------- -----------
Deferred:
Federal (70,077) 20,082
State (18,242) 2,297
----------- -----------
(88,319) 22,379
----------- -----------
$ 283,167 $ 525,372
=========== ===========
</TABLE>
F-40
<PAGE> 64
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES, CONTINUED:
Reconciliations of the differences between income taxes computed at
federal statutory tax rates and consolidated provisions for income taxes
are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Tax at federal statutory rate 34.0 % 34.0 %
State income tax - net of federal benefit 8.8 % 2.8 %
Other (4.9) % 0
---- ----
37.9 % 36.8 %
==== ====
</TABLE>
The tax effects of temporary differences which comprise the deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1995
<S> <C>
Assets:
Allowance for doubtful accounts $ 408,061
Investments - unrealized holding losses 263,094
-----------
671,155
Liabilities:
Property and equipment - depreciation (416,453)
-----------
Net asset 254,702
Less: Valuation allowance (263,094)
-----------
Deferred tax liability $ (8,392)
===========
</TABLE>
12. EMPLOYMENT AGREEMENTS:
The Company entered into employment agreements on July 1, 1994 with two
officers. The agreements are for a term of three years and contain
certain bonus provisions. The minimum annual salaries (excluding bonus
arrangements) for the years ending June 30, are as follows:
<TABLE>
<S> <C>
1996 $ 160,000
1997 160,000
-----------
$ 320,000
===========
</TABLE>
F-41
<PAGE> 65
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of cash and trade
receivables. The Company places substantially all its cash with major
financial institutions, and by policy, limits the amount of credit
exposure to any one financial institution. The balances, at times, may
exceed federally insured limits. At June 30, 1995, the Company exceeded
the insured limit by approximately $67,000. Approximately 40% of the
Company's accounts receivable, before allowances, were due from three
customers at June 30, 1995.
14. DISCONTINUED OPERATIONS:
In December 1993, the Company sold its subsidiary, Video Plus, Inc. The
results of operations of Video Plus, Inc. have been reported separately
as a discontinued operation in the Consolidated Statements of Operations
for the year ended June 30, 1994.
In June 1995, the Company discontinued the operations of Tapes
Unlimited, Inc. ("Tapes"). The results of operations of Tapes have been
reported separately as a discontinued operation in the Consolidated
Statements of Operations. Prior years consolidated financial statements
have been reclassified to conform with the current year presentation.
Summarized results of operations of the discontinued operations of tapes
for 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net sales $ 2,658,516 $ 1,368,863
=========== ============
Operating income (loss) $ 37,926 $ (117,519)
=========== ============
Loss before income taxes $ (561,924) $ (128,429)
Income tax benefit (240,784) (47,259)
----------- ------------
Loss from discontinued operation $ (321,140) $ (81,170)
=========== ============
</TABLE>
F-42
<PAGE> 66
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. DISCONTINUED OPERATIONS, CONTINUED:
In connection with the shutdown of operations of Tapes, the Company
recorded a charge of $443,400, net of tax of $87,237, to write-off the
goodwill recorded in connection with the acquisition of tapes. The net
income for the sale of Video Plus, Inc. for the year ended June 30, 1994
amounted to $66,735, net of tax of $38,854, which when netted against
the loss from the discontinued operation of Tapes of $81,170 amounts to
$14,475 which amount is shown in the accompanying statements of
operations under the caption loss from discontinued operations, net of
tax. The entire loss on disposal of discontinued operations of $162,164
net of tax of $94,416 relates to Video Plus, Inc.
Certain reclassifications were made to the 1994 amounts to reflect the
effects of the discontinued operation in the prior year on a basis
comparable with 1995.
The assets and liabilities of Tapes, which have not been reclassified on
the consolidated balance sheets, are as follows:
<TABLE>
<CAPTION>
1995
<S> <C>
Current assets, principally cash, accounts receivable and
inventories $ 133,790
Plant and equipment 3,839
-----------
Total assets $ 137,629
===========
Accounts payable and accrued liabilities, net of amounts
due to Digital of $40,700 $ 423,114
-----------
Total liabilities $ 423,114
===========
</TABLE>
15. RESTATEMENT:
The balance of net unrealized holding losses on securities at June 30,
1994 reflected in the Consolidated Statements of Stockholders' Equity
has been restated to reflect a valuation allowance that should have been
recorded in 1994 against deferred tax assets which were recorded to
reflect the tax benefit of unrealized capital losses on marketable
securities.
In addition, the investment in S.O.I. Industries, Inc. at June 30, 1994
in the Consolidated Statements of Stockholders' Equity has been adjusted
to reflect the investment at book value. A corresponding adjustment was
made to additional paid-in-capital.
F-43
<PAGE> 67
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective January 1994, the Company engaged the accounting firm of
Morrison, Brown, Argiz & Company as its independent auditors. The Company's
former accounting firm, Wainberg, Zipper, Strauss & Co., P.A., was dissolved
and effectively ceased to exist as of January 1994. The Company has had no
disagreements with Wainberg, Zipper, Strauss & Co., P.A. on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure or any reportable items.
The accounting firm of Morrison, Brown, Argiz & Co., the independent
auditors for the Company, was dismissed effective as of December 6, 1994.
During the fiscal year ended June 30, 1994 and the interim period subsequent to
June 30, 1994, there have been no disagreements with Morrison, Brown, Argiz &
Co. on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure or any reportable events. Morrison,
Brown, Argiz & Co.'s report on the financial statements for the fiscal year
ended June 30, 1994 contained no adverse opinion or disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or accounting
principles.
The Company engaged the accounting firm of Coopers & Lybrand L.L.P. as
independent auditors for the Company, effective as of December 6, 1994. During
the fiscal years ended June 30, 1993 and 1994 and the interim period subsequent
to June 30, 1994 and prior to December 6, 1994, there were no consultations
with Coopers & Lybrand L.L.P. on any matter of accounting principles to a
specific transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
The following table sets forth certain information about the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C>
Kevin B. Halter 59 President, Chief Executive Officer
Chairman of the Board
Sanford M. Whitman 61 Chief Financial Officer, Vice President
and Treasurer
Kevin B. Halter, Jr. 34 Vice President, Secretary and Director
Gary C. Evans 38 Director
James Smith 58 Director
</TABLE>
Set forth below is a description of the backgrounds of the executive
officers and directors of the Company.
Kevin B. Halter has served as President, Chief Executive Officer and
Chairman of the Board of the Company since June 28, 1994. Mr. Halter also
served as Vice Chairman of the Board of the Company from January 1994 to June
28, 1994. Mr. Halter has served as Vice Chairman of the Board of DCT since
February 1994. Mr. Halter also serves as Chairman of the Board of Directors of
AQM. In addition, Mr. Halter has
22
<PAGE> 68
served as Chairman of the Board and Chief Executive Officer of Halter Capital
Corporation ("HCC"), a privately-held investment and consulting company, since
1987. From 1987 until October 1992, Mr. Halter was a director and officer of
Halter Venture Corporation, a publicly-held company based in Dallas, Texas.
Mr. Halter is the father of Kevin B. Halter, Jr.
Sanford M. Whitman has served as Chief Financial Officer of the Company
since 1992 and as Vice President and Treasurer since January 1994. Mr. Whitman
has also held these offices in AQM since March 1995. Mr. Whitman has also
served as Chief Financial Officer of DCT and Tempo since 1992 and has served as
Vice President, Treasurer and Assistant Secretary of DCT since January, 1994.
Mr. Whitman served as Controller of U.S. Brass Corporation from 1979 to 1988
and as Chief Financial Officer of the Roberts Group from 1990 through 1992.
Mr. Whitman was an independent consultant from 1989 through 1990.
Kevin B. Halter, Jr. has served as Vice President, Secretary and director
of the Company and DCT since January 1994. Mr. Halter has also served as
Secretary and director of AQM since February 1994. He is also the President of
Securities Transfer Corporation, a registered stock transfer company, a
position he has held since 1987. Mr. Halter is also Vice President and
Secretary of HCC. Mr. Halter also served as a director and officer of Texas
American Group, Inc., a publicly-held company, from 1987 to July 1989 and as a
director and officer of Ceetac Corporation, a publicly-held company, from the
Spring of 1991 until September 1991. Mr. Halter is the son of Kevin B. Halter.
Gary C. Evans currently serves as a director of the Company. Mr. Evans has
served as President and Chief Executive Officer of Magnum Petroleum, Inc. since
July of 1995. Mr. Evans has served as Chairman of the Board, President and
Chief Executive Officer of Hunter Resources, Inc. (formerly Intramerican
Corporation) since September 1992, prior to it being acquired by Magnum
Petroleum, Inc. Mr. Evans also served as President, Chief Operating Officer
and director of Hunter Resources, Inc. from December 1990 to September 1992.
He was President and Chief Executive Officer of Sunbelt Energy, Inc. (the
predecessor to Hunter Resources, Inc.) and its subsidiaries from 1985 to
December 1990. Mr. Evans is President and Chief Executive Officer of Gruy
Petroleum Management Co., Magnum Hunter Production, Inc. and Hunter Gas
Gathering, Inc., wholly-owned subsidiaries of Magnum Petroleum, Inc. Mr. Evans
was Vice President and Manager of the Southwestern region of the Energy
division of Mercantile Bank of Canada for four years prior to forming Sunbelt
Energy, Inc.
James Smith has served as a director of the Company since March 1995. Mr.
Smith has served as President of Pension Analysis Bureau, Inc., a consulting
firm specializing in the administration of company retirement and profit
sharing plans, since 1993. Mr. Smith also served as Vice President of Pension
Analysis Bureau, Inc. from 1988 to 1992.
All directors of the Company hold office until the next annual meeting of
stockholders or until their successors have been elected and qualified.
Executive officers are elected by the Company's Board of Directors to hold
office until their respective successors are elected and qualified.
The Company's Bylaws provide that directors may be paid their expenses, if
any, and may be paid a fixed sum for attendance of each Board of Directors
meeting.
The Company is currently involved in litigation with a former officer and
director of the Company and AQM. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Pending Litigation."
23
<PAGE> 69
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two committees, an Audit Committee and a
Compensation Committee, each composed of at least two independent directors.
The Audit Committee, composed of Kevin B. Halter, Gary C. Evans and James
Smith, recommends the annual appointment of the Company's auditors, with whom
the Audit Committee will review the scope of audit and non-audit assignments
and related fees, accounting principals used by the Company in financial
reporting, internal auditing procedures and the adequacy of the Company's
internal control procedures. The Compensation Committee, composed of Kevin B.
Halter, Gary C. Evans and James Smith, will administer the Company's ESOP and
1988 Employee Stock Option Plan and make recommendations to the Board of
Directors regarding compensation for the Company's executive officers.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid by
the Company to its President for the fiscal years ended June 30, 1995 and 1994.
None of the Company's other executive officers and directors received cash or
non-cash compensation in excess of $100,000 for the fiscal year ended June 30,
1995.
<TABLE>
<CAPTION>
Long Term Compensation
Awards Payouts
------ -------
ANNUAL COMPENSATION
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other
and Annual Restricted
Principal Compen- Stock Options/ LTIP All Other
Position Year Salary Bonus sation Awards SARs(#) Payouts Compensation
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kevin B. Halter 1995 $72,000 - - - - - -
President and Chairman 1994(1) $15,000 - - - - - -
</TABLE>
(1) This amount represents compensation received by Mr. Halter in his
capacity as Vice Chairman of the Board of Directors from February 1, 1994
through June 30, 1994.
Outside directors each received compensation for attending Board meetings
during the fiscal year ended June 30, 1995 in the amount of $3,000. Such
compensation was payable in common stock of the Company.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company's ESOP provides retirement benefits to substantially all
employees. The ESOP is a qualified employee benefit plan under the Internal
Revenue Code of 1986, as amended. There are 800,000 shares of Common Stock
available for the ESOP. Employees of DCT and AQM are also eligible to
participate in the ESOP.
On January 7, 1991, the Employee Stock Ownership Trust (the "ESOT")
purchased 800,000 shares of Common Stock at fair market value as determined by
the average bid and ask price information obtained
24
<PAGE> 70
from the National Quotation System, Inc. The holders of such Common Stock are
entitled to vote on all matters presented to holders of Common Stock.
1988 EMPLOYEE STOCK OPTION PLAN
On March 19, 1988, the Company's Board of Directors adopted the S.O.I.
Industries, Inc. 1988 Employee Stock Option Plan (the "Plan"). The Plan was
approved by a vote of the stockholders on July 3, 1989.
The administration of the Plan rests with the Compensation Committee (the
"Committee"). Subject to the express provisions of the Plan and the Board of
Directors, the Committee shall have complete authority in its discretion to
determine those employees to whom, and the price at which options shall be
granted, the option periods and the number of shares of Common Stock to be
subject to each option. The Committee shall also have the authority in its
discretion to prescribe the time or times at which the options may be exercised
and limitations upon the exercise of options (including limitations effective
upon the death or termination of employment of the optionee), and the
restrictions, if any, to be imposed upon the transferability of shares acquired
upon exercise of options. In making such determinations, the Committee may
take into account the nature of the services rendered by respective employees,
their present and potential contributions to the success of the Company or its
subsidiaries, and such other factors as the Committee in its discretion shall
deem relevant.
An option may be granted under the Plan only to an employee of the Company
or its subsidiaries. The Plan made available for option 2,000,000 shares of
the Company's Common Stock.
If an optionee ceases to be employed by the Company or any of its
subsidiaries, his or her options shall terminate immediately; provided,
however, that if an optionee's cessation of employment with the Company and its
subsidiaries is due to his death or retirement with the consent of the Company
or any of its subsidiaries, the optionee may, at any time within twelve months
in the event of death, or three months after such cessation of employment,
exercise his options to the extent that he was entitled to exercise them on the
date of cessation of employment, but in no event shall any option be
exercisable more than five years from the date it was granted.
The term of each option granted under the Plan will be for such period not
exceeding five years as the Committee shall determine. Each option granted
under the Plan will be exercisable on such date or dates and during such period
and for such number of shares as shall be determined pursuant to the provisions
of the option agreement evidencing such option. Subject to the express
provisions of the Plan, the Committee shall have complete authority, in its
discretion, to determine the extent, if any, and the conditions under which an
option may be exercised in the event of the death of the optionee or in the
event the optionee leaves the employ of the Company or has his employment
terminated by the Company. The purchase price for shares of Common Stock under
each option shall be determined by the Committee at the time of the option's
issuance and may be less than the fair market value of such shares on the date
on which the options are granted. The agreements evidencing the grant of
options may contain other terms and conditions, consistent with the Plan, that
the Committee may approve.
25
<PAGE> 71
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 29, 1995
with regard to the beneficial ownership of the Common Stock by (i) each person
known to the Company to be the beneficial owner of 5% or more of its
outstanding Common Stock, (ii) by the officers, directors and key employees of
the Company individually and (iii) by the officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENT
------------------ -------
<S> <C> <C>
Halter Capital Corporation 3,784,047 26%
16910 Dallas Parkway #100
Dallas, Texas 75248
Digital Communications 3,386,605(1) 24%
Technology Corporation
3941 SW 47th Avenue
Ft. Lauderdale, FL 33314
S.O.I. Employee Stock 722,314 5%
Ownership Plan
16910 Dallas Parkway #100
Dallas, Texas 75248
Kevin B. Halter 3,884,047(2)(3) 27%
Sanford M. Whitman 12,285 (6)
Kevin B. Halter, Jr. 3,884,047(2)(3) 27%
DeWayne Davis 750,000(4) 5%
Gary C. Evans 144,312(5) (6)
All directors and officers as a 4,040,644 28%
group (5 persons)
</TABLE>
(1) The Company owns approximately 47% of the issued and outstanding
common stock of DCT.
(2) Kevin B. Halter and Kevin B. Halter Jr. serve as directors and
officers of HCC and as a result may each be deemed to be the beneficial owner
of the 3,784,047 shares of Common Stock beneficially owned by HCC. However,
pursuant to Rule 16a-3 promulgated under the Exchange Act, they expressly
disclaim that they are the beneficial owner, for purposes of Section 16 of the
Exchange Act, of any such stock, other than those shares in which they have an
economic interest.
(3) This number includes 100,000 shares of Common Stock which are subject
to an option which is currently exercisable.
(4) This number includes 550,000 shares held by Mr. Davis (a former
director and officer of the Company) and 200,000 shares held in a trust for the
benefit of his children established on August 1, 1988, with Sharon Davis, wife
of Mr. Davis, serving as Trustee.
26
<PAGE> 72
(5) This number includes 9,177 shares of Common Stock held by Mr. Evans
and 135,135 shares of Common Stock held by Evans Equity L.L.P., in which Mr.
Evans is a member.
(6) Less than 1%.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASE OF HIALEAH FACILITY
Donald E. Courtney, the former President and Chairman of the Board of the
Company, is a partner in a partnership that owns the property leased by the
Company at 1051 East 24th Street, Hialeah, Florida. See "Description of
Business - - Properties." Mr. Courtney is a 50% partner and the remaining 50%
is owned by unrelated parties. Management of the Company believes the rental
rates and other terms and conditions of the lease are competitive with
comparable properties in the area and are at least as favorable as could be
obtained from an unrelated party.
LEASE OF CONWAY FACILITY
DeWayne Davis, a former director and officer of the Company, previously
owned 50% of the outstanding common stock of American Industries, Inc., which
owns the Conway facility. The monthly rental payment is $20,000 and the lease
expires on December 31, 2009. Management of the Company believes the rental
rates and other terms and conditions of the lease are competitive with
comparable properties in the area and are at least as favorable as could be
obtained from an unrelated party.
Mr. Davis is also a director and former officer of Builders Warehouse
Association, Inc. In the past, AQM has purchased a portion of its plywood
needs from American Plywood Sales, Inc., a subsidiary of Builders Warehouse
Association, Inc. For the fiscal year ended June 30, 1994, American Plywood
Sales, Inc. sold AQM approximately $2,000,000 worth of wood products. At the
time of the purchases, AQM believed that American Plywood Sales, Inc. charged
AQM on a competitive price basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Pending Litigation." AQM has
ceased purchasing any materials from Builders Warehouse Association, Inc. or
American Plywood Sales, Inc. and has secured alternative suppliers which AQM
believes will meet its production requirements.
EXCHANGE OF SHARES WITH DCT
On January 27, 1994 the Board of Directors agreed to exchange additional
shares of the Company's Common Stock for common stock of DCT. On February 14,
1994 the exchange of shares was made based on the average price of the stock of
both companies on January 27, 1994. The 580,538 shares of DCT's common stock
that were exchanged were worth approximately $4,574,636 and were exchanged for
1,329,836 shares of the Company's Common Stock worth approximately $4,574,636.
The reason for the share exchange was that the Company wished to sell certain
shares of its DCT common stock pursuant to Rule 144 and still retain the same
percentage of ownership in DCT upon such sale.
ISSUANCE OF AQM COMMON STOCK TO HCC
On October 1, 1994, AQM issued 90,000 shares of its common stock to HCC as
compensation for certain consulting services pursuant to a consulting
agreement. The consulting services to be provided by HCC to AQM included the
preparing of proposals regarding AQM becoming a public company and
27
<PAGE> 73
preparation and review of all documents required to be filed with the
Securities and Exchange Commission in order to effectuate the distribution,
including AQM's registration statement and all necessary amendments.
PURCHASE OF MARKETABLE SECURITIES FROM HCC
On October 17, 1994, the Company purchased from HCC 200,000 shares of
common stock of NewCare Health Corporation, a publicly-held company whose
common stock is currently traded on the Nasdaq SmallCap Market. The purchase
price, $3.50 per share, represented a 23% discount from its market price in
consideration for the relatively large number of shares purchased. The
disinterested directors approved this transaction on October 5, 1995. On
December 4, 1995, the Company distributed 175,000 shares of such common stock
to its stockholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Stock Exchange Agreement dated November 30, 1993 by and between
American Quality Manufacturing Corporation and the Company (5)
3.1 Certificate of Incorporation and Bylaws of the Company (1)
3.2 Certificate of Amendment of the Company (2)
4.0 Specimen Certificate of Common Shares, par value $.000025 (6)
9.1 Voting Agreement dated December 2, 1993, by and among DeWayne Davis,
Robert L. Ott, Trustee of the Robert L. Ott Revocable Trust, J.R.
Ott, Joanna O. Burger, Sharon Davis, Trustee UA dtd 8/1/88 and
Halter Capital Corporation (6)
9.2 Voting Agreement dated January 26, 1994, by and between Kwai Chung
Corporation, a Turks and Caicos corporation and Halter Capital
Corporation (6)
9.3 Voting Agreement dated January 26, 1994, by and between M. D. Abel
and Halter Capital Corporation (6)
9.4 Voting Agreement dated January 26, 1994, by and between Stuart G.
Johnston, Jr. and Halter Capital Corporation (6)
9.5 Voting Agreement dated January 26, 1994, by and between Richard A.
Hansen and Halter Capital Corporation (6)
9.6 Voting Agreement dated January 26, 1994, by and between Catherine J.
Alven and Halter Capital Corporation (6)
9.7 Voting Agreement dated January 26, 1994, by and between Edward J.
Lott and Halter Capital Corporation (6)
9.8 Voting Agreement dated January 26, 1994, by and between Gary C.
Evans and Halter Capital Corporation (6)
28
<PAGE> 74
9.9 Voting Agreement dated January 26, 1994, by and between Evans
Equity, L.L.C. and Halter Capital Corporation (6)
10.1 Lease Agreement for Hialeah, Florida (6)
10.2 Lease Agreement for Ft. Lauderdale, Florida (6)
10.3 Lease Agreement for Indianapolis, Indiana (6)
10.4 Lease Agreement dated January 2, 1994 by and between American
Industries, Inc. and American Quality Manufacturing Corporation (6)
10.5 Lease Agreement dated May 21, 1994 by and among American Quality
Manufacturing Corporation, the Board of County Commissioners,
Coffey County, Kansas and the Company (6)
10.6 Promissory Note between the Company and MagneTech Corporation (3)
10.7 The Company's Employees' Stock Ownership Plan Documents (3)
(i) Employee Stock Option Plan
(ii) Stock Purchase Agreement
(iii) ESOP Loan Agreement
(iv) Non-negotiable Promissory Loan Documents (3)
21.1 List of Subsidiaries (6)
27. Financial Data Schedule
(1) These exhibits were previously filed by the Company with the
Commission as Exhibits to its Registration Statement No. 33-1 4668-A and are
respectively incorporated herein by specific reference thereto.
(2) These exhibits were previously filed by the Company with the
Commission as Exhibits to its Amendment No. 2 to its Registration Statement No.
33-14668-A and are respectively incorporated herein by specific reference
thereto.
(3) These exhibits were previously filed with the Commission by the
Company as Exhibits to its Form 8-K and are respectively incorporated herein by
specific reference thereto.
(4) These exhibits were previously filed with the Commission by the
Company as Exhibits to its Form 10-K for the year ended June 30, 1993 and are
respectively incorporated herein by specific reference thereto.
(5) This exhibit was previously filed by the Company with the Commission
as an Exhibit to its Form 8-K dated February 14, 1994 and is incorporated by
reference herein by specific reference thereto.
(6) These exhibits were previously filed by the Company with the
Commission as Exhibits to its Registration Statement on Form SB-2 filed on June
29, 1994 and are incorporated by reference herein by specific reference
thereto.
(b) REPORTS ON FORM 8-K
Not applicable.
29
<PAGE> 75
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 of the undersigned, thereunto duly authorized.
S.O.I. INDUSTRIES, INC.
By: /s/ Kevin B. Halter
----------------------------- October 12, 1995
Kevin B. Halter, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the date indicated.
/s/ Kevin B. Halter
- ---------------------------------- October 12, 1995
Kevin B. Halter, President
(Principal Executive Officer) and
Director
/s/ Sanford M. Whitma
- ---------------------------------- October 12, 1995
Sanford M. Whitman, Chief
Financial Officer (Principal
Financial and Accounting Officer),
Vice President and Treasurer
/s/ Kevin B. Halter, Jr.
- ---------------------------------- October 12, 1995
Kevin B. Halter, Jr., Vice
President, Secretary and Director
/s/ Gary Evans
- ---------------------------------- October 12, 1995
Gary Evans, Director
/s/ James Smith
- ---------------------------------- October 12, 1995
James Smith, Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 703,410
<SECURITIES> 923,212
<RECEIVABLES> 3,666,972
<ALLOWANCES> 1,087,262
<INVENTORY> 3,152,456
<CURRENT-ASSETS> 0
<PP&E> 3,810,014
<DEPRECIATION> (972,905)
<TOTAL-ASSETS> 17,583,519
<CURRENT-LIABILITIES> 10,165,398
<BONDS> 1,750,415
<COMMON> 349
0
0
<OTHER-SE> 5,407,258
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 23,279,817
<TOTAL-REVENUES> 23,279,817
<CGS> 21,106,605
<TOTAL-COSTS> 21,106,605
<OTHER-EXPENSES> 5,966,334
<LOSS-PROVISION> 588,404
<INTEREST-EXPENSE> 689,880
<INCOME-PRETAX> (3,209,971)
<INCOME-TAX> 562,320
<INCOME-CONTINUING> (2,647,651)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,647,651)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
