UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-QSB/A
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number: 1-12572
S.O.I. INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 59-2158586
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16910 Dallas Parkway, Suite 100, Dallas, Texas 75248
(Address of principal executive offices)
(214) 248-1922
(Issuer's telephone number)
______________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) had been subject to such filing requirements
for the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of the common stock of the registrant on
November 8, 1995, the latest practicable date, was 14,330,755.
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
<S> <C>
Item Numbered
Number Page
Part I
1 Financial Statements . . . . . . . . . . . .1
2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . . . .7
Part II
1 Legal Proceedings . . . . . . . . . . . . N/A
2 Changes in Securities . . . . . . . . . . N/A
3 Defaults Upon Senior Securities . . . . . N/A
4 Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . 12
5 Other Information . . . . . . . . . . . . N/A
6 Exhibits and Reports on Form 8-K . . . . . N/A
</TABLE>
<PAGE>
<TABLE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, June 30,
1995 1995
(Unaudited)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 55,357 $ 203,410
Restricted cash 500,000 500,000
Marketable securities 261,536 923,212
Accounts receivable, less allowance
for doubtful accounts of $312,670
at September 30, 1995 and $1,087,262
at June 30, 1995 4,146,678 3,666,972
Inventories 2,933,373 3,152,456
Prepaid expenses and other 778,647 632,484
Deferred income taxes 179,976 179,976
----------- -----------
Total current assets 8,855,567 9,258,510
----------- -----------
Property, plant and equipment, net of
accumulated depreciation 2,727,763 2,837,109
Investment in Digital Communications
Technology Corporation 3,104,316 3,027,191
Goodwill, net of accumulated amortization 2,063,478 2,104,265
Other assets 362,015 356,444
----------- -----------
Total assets $ 17,113,139 $ 17,583,519
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit $ 4,360,627 $ 4,557,421
Current maturities of long-term debt 443,166 438,420
Trade accounts payable 3,891,002 3,583,438
Accounts payable, affiliate 492,318 601,736
Accrued liabilities 937,426 984,383
----------- -----------
Total current liabilities 10,124,539 10,165,398
----------- -----------
Long-term debt, less current maturities 1,141,176 1,233,615
Capital lease obligations, net of current
maturities 506,000 516,800
Deferred income taxes 179,976 179,976
Other - 80,472
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.000025; 20,000,000
shares authorized, 12,773,862 and
12,745,457 shares outstanding at September
30, 1995 and June 30, 1995, respectively 319 319
Additional paid-in capital 6,833,673 6,769,560
Less shares deemed treasury stock; 1,556,893
and 1,585,298 shares at September 30,
1995 and June 30, 1995, respectively (587,574) (598,162)
Accumulated deficit (655,422) (75,291)
Due from ESOP (324,652) (355,089)
Net unrealized holding loss on investment
securities (104,896) (334,079)
----------- -----------
Total stockholders' equity 5,161,448 5,407,258
----------- -----------
Total liabilities and stockholders'
equity $ 17,113,139 $ 17,583,519
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
1
<PAGE>
<TABLE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<CAPTION>
For the three months ended
September 30,
1995<F1> 1994<F2>
----------- -----------
<S> <C> <C>
Net sales $ 5,827,768 $ 10,616,640
----------- -----------
Costs and Expenses:
Cost of goods sold (exclusive of
depreciation and amortization,
shown separately below) 4,992,034 8,525,578
Research and development (exclusive
of depreciation and amortization,
shown separately below) 412,000
Selling expenses (exclusive of depreciation
and amortization, shown separately below) 500,446 838,624
General and administrative expenses
(exclusive of depreciation and
amortization, shown separately below) 682,413 1,349,642
Depreciation and amortization 165,686 380,478
----------- -----------
Total costs and expenses 6,340,579 11,506,322
----------- -----------
Operating loss (512,811) (889,682)
----------- -----------
Other income (expense):
Gain on sales of securities 54,146 338,009
Gain on equity investment in Digital
Communications Technology Corporation 95,209 -
Settlement of lawsuit 750,000
Interest and other income 733 7,071
Interest and other expense (217,408) (264,569)
----------- -----------
(67,320) 830,511
----------- -----------
(Loss) income before provision for
income taxes and minority interest (580,131) (59,171)
(Benefit) provision for income taxes - 237,263
----------- -----------
Loss before minority interest (580,131) (296,434)
Minority interest in net income
of consolidated subsidiary - 98,699
----------- -----------
Net loss $ (580,131) $ (395,133)
=========== ===========
Weighted average shares of common
stock outstanding 12,773,862 10,903,340
=========== ===========
Net loss per share $ (0.05) $ (0.04)
=========== ===========
<FN>
<F1> The September 30, 1995 financial statements account for the investment
in Digital Communications Technology Corporation using the equity
method.
<F2> The September 30, 1994 financial statements account for the investment
in Digital Communications Technology Corporation using the
consolidation method.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE>
<TABLE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the three months ended
September 30,
1995 1994
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (580,131) $ (395,133)
----------- -----------
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and amortization 165,686 380,478
Provision for doubtful accounts 66,896
Reserve for inventory obsolescence 36,000
Stock issued to employees for compensation 69,696
Gain on sales of marketable securities (54,146) (338,009)
Gain on equity investment in Digital
Communications Technology Corporation (95,209)
Increase in accounts receivable (479,706) (1,339,794)
Decrease in inventories 219,083 247,079
Increase in prepaid expenses and other (146,163) (676,709)
Increase in accounts payable 307,564 2,553,177
Decrease in accrued liabilities (46,957) (973,510)
Decrease in income taxes payable and
deferred income taxes (624,820)
Other 115,034 93,050
----------- -----------
Net cash used in operating
activities (594,945) (901,599)
----------- -----------
Cash flows from investing activities:
(Increase ) decrease in loans receivable,
related parties (109,418) 301,876
Change in marketable securities -
available for sale 836,713 (422,704)
Capital expenditures (15,553) (77,920)
----------- -----------
Net cash used in investing activities 711,742 (198,748)
----------- -----------
Cash flows from financing activities:
Net long-term (repayments) borrowings (87,693) 186,245
Net short-term (repayments) borrowings (196,794) 686,569
Payments on capital lease obligations (10,800) (6,358)
Net payments from ESOP 30,437 -
Proceeds form issuance of common stock 60,060
----------- -----------
Net cash provided by financing
activities (264,850) 926,516
----------- -----------
Decrease in cash and cash equivalents (148,053) (173,831)
Cash and cash equivalents at beginning of period 203,410 892,745
----------- -----------
Cash and cash equivalents at end of period $ 55,357 $ 718,914
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (non-capitalized) $ 207,091 $ 263,454
=========== ===========
Income taxes $ 0 $ 636,121
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________
1. Summary of Significant Accounting Policies:
-------------------------------------------
The accompanying consolidated financial statements include the accounts
of S.O.I. Industries, Inc. 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 holds a 45.97% ownership interest in Digital
Communications Technology Corporation ("DCT") as of September 30, 1995.
At June 30, 1995, this ownership interest was 46.81%. For the period
ending September 30, 1995, the Company accounts for its investment in
DCT using the equity method of accounting. For the period ended
September 30, 1994, the Company consolidated the accounts of DCT, as its
ownership interest exceeded 50%.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from these unaudited
interim financial statements. These financial statements should be read
in conjunction with the financial statements and notes thereto included
in the Company's annual audited financial statements.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to conform with generally accepted accounting
principles. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year.
2. Marketable Securities:
----------------------
Marketable securities consist of listed common stocks with an aggregate
cost, based on specific identification, of $366,432 as of September 30,
1995. The net unrealized holding loss as of September 30, 1995 was
$104,896. All of the Company's securities are classified as available
for sale securities.
3. Inventories:
------------
The inventories are valued at the lower of cost (first-in, first-out
method) or market and consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
----------- -----------
<S> <C> <C>
Raw materials $ 1,981,193 $ 2,001,257
Work-in process 604,352 694,866
Finished goods 496,504 605,009
----------- -----------
3,082,049 3,301,132
Less slow moving and obsolete reserve (148,676) (148,676)
----------- -----------
$ 2,933,373 $ 3,152,456
=========== ===========
</TABLE>
4
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
_____________
4. Property, Plant and Equipment:
------------------------------
Property, plant and equipment and related accumulated depreciation are
summarized as follows:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
----------- -----------
<S> <C> <C>
Land $ 20,000 $ 20,000
Buildings and improvements 876,211 870,572
Machinery and equipment 2,929,534 2,919,442
----------- -----------
3,825,745 3,810,014
Less: accumulated depreciation 1,097,982 972,905
----------- -----------
$ 2,727,763 $ 2,837,109
=========== ===========
</TABLE>
5. Equity Investment in Digital Communications Technology Corporation:
-------------------------------------------------------------------
Summarized financial statement information for DCT is presented below
(unaudited):
<TABLE>
<CAPTION>
For the three months ended
September 30,
1995
------------
<S> <C>
Net sales $ 5,386,471
Operating profit 290,586
Income from continuing operations 148,100
Net income 207,101
Earnings per share 0.04
</TABLE>
<TABLE>
<CAPTION>
As of As of
September 30, June 30,
1995 1995
----------- -----------
<S> <C> <C>
Current assets $ 10,781,595 $ 10,406,571
Total assets 16,576,883 16,279,029
Current liabilities 9,332,469 9,159,519
Total liabilities 9,824,271 9,812,055
</TABLE>
6. Revolving Lines of Credit:
--------------------------
Tempo has a revolving line of credit agreement which permits aggregate
borrowings up to $900,000 based upon certain percentages applied to
eligible accounts receivable and inventory. Interest is payable on all
outstanding cash advances at the bank's prime rate plus 1/4%.
5
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
_____________
6. Revolving Lines of Credit, continued:
-------------------------------------
AQM has a $6,500,000 line of credit payable to a bank with interest
payable on all outstanding cash advances at the bank's prime rate plus
2%. Borrowings under the revolving line of credit are limited to the
sum of 85% of eligible accounts receivable and 50% of eligible
inventory. At September 30, 1995, AQM has exceeded its borrowing base
relating to eligible inventory. 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. 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, inventories and all equipment not being used to
collateralize other equipment and mortgage notes. The agreements further
provide that the Company and its subsidiaries must comply with certain
covenants, the most restrictive of which requires a minimum net leverage
ratio as defined by the agreement. These lines of credit are guaranteed
by the Company and its subsidiaries. The Company has also guaranteed
DCT's $5,400,000 line of credit.
As of September 30, 1995, approximately $559,000 and $3,802,000 have
been drawn against Tempo's and AQM's lines of credit, respectively.
7. Long-Term Debt:
---------------
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
----------- -----------
<S> <C> <C>
Long-term debt consists of various
mortgages and notes payable with
interest rates ranging from 8% to
2 percent over prime. Monthly payments
range from $636 to $20,417 with
expiration dates ranging from 1996
through 2000. $ 2,090,342 $ 1,661,942
Less: current portion 443,166 428,327
----------- -----------
$ 1,647,176 $ 1,233,615
=========== ===========
</TABLE>
8. Quarterly Adjustments:
----------------------
The results of operations for the quarter ended September 30, 1994 have
been restated to correct for accounting errors determined in the course
of preparation of the Company's June 30, 1995 year-end financial
statements. The errors involved certain adjustments primarily related to
the capitalization of display units, inventory adjustments and the
related tax effects. Previously reported operating income, net income
and earnings per share for the three months ended September 30, 1994
were $335,833, $634,480 and $0.06, respectively.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Overview
During the year ended June 30, 1995, the Company's ownership percentage
of Digital Communications Technology Corporation ("DCT") dropped to
approximately 46.8% after the Company sold a portion of its holdings in
DCT. Even though the Company 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 sheets as of June 30, 1995 and September 30, 1995. However, for
the period ended September 30, 1994, the Company's ownership position
exceeded 50%, and therefore the results of operations and cash flows for
this period have been consolidated with the operations of DCT.
In order to present a balanced and more meaningful discussion of the
results of operations of the Company, references to specific line items
in the September 30, 1994 statements and cash flows have been adjusted
to exclude the consolidating effect of DCT for purposes of the following
discussion. A separate discussion of the results of operations of DCT
is included toward the end of this item.
The Company experienced a net loss of approximately $580,000 for the
three months ended September 30, 1995. Approximately $582,000 of the
consolidated net loss related to the loss from the operations of the
Company's American Quality Manufacturing Corporation ("AQM") subsidiary.
This loss, discussed more fully below, resulted primarily from increases
in both cost of goods sold and general and administrative expenses.
Management has increased selling prices on selected products to offset
these cost increases, however the effect of the price increases will
not be realized until the next two fiscal quarters.
An increase in interest and other expense from approximately $135,000
to $217,000 for the three month periods ended September 30, 1994 and
1995, respectively, also contributed to the Company's consolidated net
loss. Increased borrowings and higher prime rates led to this increase.
Interest and other income declined dramatically from $756,615 to $733
for the three month periods ended September 30, 1994 and 1995,
respectively. This decline was due to a one-time $750,000 payment
received during the period ended September 30, 1994 from the Company's
former President and Chairman in full settlement of a lawsuit.
The Company's increased operating costs were offset somewhat by
approximately $54,000 in realized gains on investment transactions.
The Company invests funds in quality equity securities through high
quality brokers and, by policy, limits the amount of exposure in any
one equity investment. Such investments are continually monitored to
reduce the risk of adverse stock market volatility. Cash not invested
in securities is placed on account with high quality brokerage firms,
which is swept daily into a federally insured money market account, or
placed on account with federally insured national banks. The asset
balance recorded for these funds invested in marketable securities at
September 30, 1995 was approximately $262,000. An unrealized holding
loss account balance of approximately $105,000 is also recorded as a
separate component od shareholders' equity for declines below cost of
certain of the marketable securities held in the Company's investment
portfolio.
American Quality Manufacturing Corporation
Net sales from AQM for the quarter ended September 30, 1995 contributed
approximately $4,447,000 or 76% of the Company's consolidated net sales.
This is compared to AQM's net sales of approximately $4,280,000 (75% of
the Company's consolidated net sales for the corresponding period of the
prior fiscal year.) While net sales have increased, operating profits
have declined from approximately $158,000 for the quarter ended
September 30, 1994 to an operating loss of approximately $378,000 for
the three months ended September 30, 1995. As
7
<PAGE>
mentioned above, increased cost of goods sold and general and
administrative costs led to this deterioration. At AQM's fiscal year
end, management was in the process of implementing several actions in
order to mitigate future losses from AQM, 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 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) The
Company will fund operating requirements for AQM, as necessary. Despite
management's efforts, however, there can be no assurance that these
steps, once implemented will significantly improve the financial
position of the Company.
Since year end, the following developments have occurred. Management
has begun negotiations with customers to increase selling prices, where
required. These price increases are expected to yield over $200,000 in
improvements in revenues on an annualized basis. In addition,
management expects to reduce material and direct labor costs by
purchasing pre-processed doors and face frame components directly from
a supplier. Component purchases from this supplier are expected to begin
in January 1996. In addition, as of September 30, 1995, management has
negotiated with creditors to accept shares of the Company's common
stock, previously held by the Company's majority stockholder, equivalent
to approximately $417,000 in satisfaction of AQM's trade debt. This
amount is expected to rise to over $1,000,000 by the end of the next
fiscal quarter. The stock which was provided to the Company is expected
to be repaid to the majority stockholder with shares of DCT held in the
Company's investment portfolio. The Company then anticipates conveying
the stock to AQM inreturn for a charge to the intercompany account. This
action will alleviate much of AQM's immediate cash flow needs, allowing
AQM management the time necessary to focus on returning AQM to
profitability. There can be no assurance, however, that any of the
strategies implemented by management will be effective in returning this
segment to profitability.
AQM's general and administrative expenses also increased during the
quarter ended September 30, 1995. As a percentage of net sales, AQM's
general and administrative expenses increased to 6.7% from 6.3% for the
quarters ended September 30, 1995 and 1994, respectively. The increase
is due primarily to increased overhead payroll costs associated with the
operation of the Kansas facility, which was not present for the first
quarter ended September 30, 1994. Additionally, increased professional
fees caused this expense category to increase.
Tempo Lighting, Inc.
Tempo Lighting, Inc.'s ("Tempo") net sales provided approximately 20% of
the consolidated net sales of the Company for the quarter ended
September 30, 1995. This is down slightly from the 21% provided during
the corresponding quarter of the prior year. When compared to itself,
Tempo's sales also declined from approximately $1,210,000 to $1,166,000
for the three month periods ended September 30, 1994 and 1995. Tempo
continues to experience declines in sales from its 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.
Along with the decline in net sales, the operating profit generated in
the prior fiscal quarter declined from approximately $22,000 to $17,000
for the quarters ended September 30, 1994 and 1995, respectively.
Management intends to continue its focus on increased sales 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.
Capital Resources
During the three months ended September 30, 1995 the Company invested
approximately $16,000 in equipment. The decreased expenditures in the
current quarter as compared to the corresponding quarter of the prior
8
<PAGE>
year are due to significant prior year fixed asset acquisitions at AQM's
Kansas facility and expanded manufacturing capacity at AQM's Arkansas
facility. Currently, only necessary upgrades are anticipated at both
AQM and Tempo to maintain their competitive positions.. These equipment
acquisitions are expected to be made with funds provided from operations.
Liquidity
During the three months ended September 30, 1995, the Company used
approximately $595,000 in cash from operating activities as compared to
approximately $980,000 used in the corresponding period of the prior
year. The overall net use of cash is due primarily to the net loss
incurred in the first quarter and due to increased accounts receivable,
prepaid expenses and other current assets.
All of the Company's subsidiaries continue to experience demands by
customers for longer payment terms. This, along with increased sales,
led to an expansion of accounts receivable balances. Despite the
increased sales and the 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)
improved from June 30, 1995. The accounts receivable conversion period
decreased from 80 days to 70 days for the year ended June 30, 1995 and
the three months ended September 30, 1995, respectively. The improvement
was due to stepped up collection efforts, primarily at AQM. Despite the
demand for longer collection terms, management does not expect any
significant detriment toward its short-term liquidity.
The increase in prepaid expenses and other also contributed to the
overall net use of cash from operating activities. The increase in
prepaids is due primarily to an increase in prepaid insurance and due to
an increase in AQM's deferred tax assets.
During the three months ended September 30, 1995, the Company's cash
needs were met primarily through proceeds from the Company's marketable
securities portfolio 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.
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.
Other Comments
AQM's sales levels generally follow remodeling and other "do-it-yourself"
retail markets, which traditionally peak in the winter and spring.
Therefore, this segment is subjected to seasonal influences, with the
highest level of sales typically realized in the period from January
through April.
The costs of AQM's products are subject to inflationary pressures and
commodity price fluctuations. Inflationary pressure has been relatively
modest over the past five years, except for lumber prices, which rose
approximately 14% during the fiscal year 1994. However, the segment has
generally been able to mitigate the effects of inflation and commodity
price fluctuations through sales price increases and cost savings in
others.
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'
9
<PAGE>
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.
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 preceeding fiscal periods.
AQM has begun internal discovery to determine the amount of recovery
being sought through the litigation. Management has determined, however,
that no material impact to the historical financial statements will be
incurred. Further, the potential recovery, if any, will be accounted for
as a gain contingency under Statement of Financial Accounting Standards
No. 5, "Accounting for Contingencies," therefore no potential benefits
will be reflected in the accompanying financial statements until they
are realized.
Mr. Davis has countersued AQM alleging incomplete compensation during
his tenure as an executive officer of AQM. AQM believes that the
amounts claimed under this countersuit are not material to the financial
statements of AQM. In addition, BWA has filed a lawsuit against AQM
and the Company on the basis that AQM allegedly owes APS for wood
products purchased by AQM from APS. These purchases were previously
recorded as incurred and therefore the effect of this claim is already
reflected in AQM's interim financial statements. AQM has ceased
purchasing any materials from APS and has secured altermnative 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 or for the three month period ended September 30, 1995.
Since DCT is a significant subsidiary, summarized financial statement
information is included in the notes to the Company's financial
statements. Included below is a summarized discussion regarding DCT for
the first quarter ended September 30, 1995.
Overall growth in DCT's target markets led to continued sales growth in
the current year. Net sales increased approximately 26% from $4,277,000
to $5,386,000 for the three months ended September 30, 1994 and 1995,
respectively. Significant sales increases were experienced 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.
10
<PAGE>
Operating profit did not keep pace with the increased sales, declining
from approximately $407,000 (9.5% of net sales) to $291,000 (5.4% of net
sales) for the three months ended September 30, 1994 and 1995,
respectively. The decline in operating profit is due to increases in
cost of goods sold.
Cost of goods sold as a percentage of sales increased to 78% for the
three months ended September 30, 1995 as compared to 72% for the three
months ended September 30, 1994. The increased cost of goods sold is
directly attributable to increased material costs, specifically the cost
of the plastic video cassette shells and video tape, 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 containment, especially in labor costs, to insure 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 drop in the coming months, however there can be no
assurance that this expected cost decline will occur.
Interest expense increased from approximately $133,000 to $176,000 for
the three months ended September 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.
DCT realized income from securities transactions of approximately
$116,000 for the three months ended September 30, 1995 as compared to
approximately $216,000 for the corresponding period of the prior year.
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.
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
$59,000 and ($117,000), net of income taxes, for the three months ended
September 30, 1995 and 1994, respectively. Although all operations at
TU have ceased, certain collection efforts are still conducted by DCT on
behalf of TU. These efforts, along with debt forgiveness resulting from
settlements with TU creditors, resulted in recoveries which are
reflected in the income from discontinued operations for the three
months ended September 30, 1995.
11
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of Stockholders of the Company was held at the
Company's corporate offices in Dallas, Texas on September 7, 1995. A
proposal to amend the Company's Certificate of Incorporation to increase
the authorized shares of Common Stock from 20,000,000 to 50,000,000
shares was approved as follows:
11,488,896 shares, or 89.68% of the outstanding shares represented at
the meeting voted in favor of the proposal.
1,285,147 shares, or 10% of the outstanding shares represented voted
against the proposal.
36,125 shares abstained from voting.
A proposal to amend the Certificate of Incorporation to authorize
10,000,000 shares of preferred stock, par value $.00001 per share
was approved as follows:
8,759,662 shares, or 68.37% of the outstanding shares represented at
the meeting voted in favor of the proposal.
1,364,523 shares, or 10.65% of the outstanding shares represented voted
against the proposal.
40,925 shares abstained from voting.
A proposal to grant the board of directors the authority, if and when
they deem it necessary in their discretion, to amend the Certificate of
Incorporation to effect a one for eight reverse split of the Common
Stock of the Company was approved as follows:
11,559,827 shares, or 90.23% of the outstanding shares represented at
the meeting voted in favor of the proposal.
1,210,526 shares, or 9.44% of the outstanding shares represented voted
against the proposal.
41,915 shares abstained from voting.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
/s/ Tim C. Hafer
By: __________________________________ Date: January 18, 1996
Tim C. Hafer, Vice President
and Chief Financial Officer
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 555,357
<SECURITIES> 261,536
<RECEIVABLES> 4,459,348
<ALLOWANCES> (312,670)
<INVENTORY> 2,933,373
<CURRENT-ASSETS> 8,855,567
<PP&E> 3,825,745
<DEPRECIATION> (1,097,982)
<TOTAL-ASSETS> 17,113,139
<CURRENT-LIABILITIES> 10,124,539
<BONDS> 1,647,176
<COMMON> 319
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<OTHER-SE> 5,161,129
<TOTAL-LIABILITY-AND-EQUITY> 17,113,139
<SALES> 5,827,768
<TOTAL-REVENUES> 5,827,768
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<OTHER-EXPENSES> 1,348,545
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<INCOME-PRETAX> (580,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> (580,131)
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<CHANGES> 0
<NET-INCOME> (580,131)
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