UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] 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
April 30,1996, the latest practicable date, was 1,791,520.
<PAGE>
TABLE OF CONTENTS
Item Numbered
Number Page
Part I
1 Financial Statements . . . . . . . . . . . . . . . . . . 1
2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . 9
Part II
1 Legal Proceedings . . . . . . . . . . . . . . . . . . . 15
2 Changes in Securities . . . . . . . . . . . . . . . . . N/A
3 Defaults Upon Senior Securities . . . . . . . . . . . . N/A
4 Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . N/A
5 Other Information . . . . . . . . . . . . . . . . . . . . N/A
6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . N/A
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1996 June 30,
(Unaudited) 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 264,727 $ 203,410
Restricted cash 500,000 500,000
Marketable securities - 923,212
Accounts receivable, less allowance for doubtful accounts
of $149,804 at March 31, 1996 and $1,087,262 at
June 30, 1995 4,225,055 3,666,972
Inventories 1,841,866 3,152,456
Prepaid expenses and other current assets 549,985 632,484
Deferred income taxes 13,346 179,976
------------ ------------
Total current assets 7,394,979 9,258,510
------------ ------------
Property, plant and equipment, net of
accumulated depreciation 2,131,535 2,837,109
Investment in Digital Communications Technology Corporation 1,360,884 3,027,191
Goodwill, net of accumulated amortization of $336,328 at
March 31, 1996 and $219,232 at June 30, 1995 1,987,169 2,104,265
Other assets, net 525,552 356,444
------------ ------------
Total assets $ 13,400,119 $ 17,583,519
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit $ 4,434,573 $ 4,557,421
Current maturities of long-term debt and capital lease obligations 287,121 438,420
Trade accounts payable 3,445,357 3,583,438
Accounts payable, affiliate 459,871 601,736
Accrued liabilities and other current liabilities 857,698 984,383
------------ ------------
Total current liabilities 9,484,620 10,165,398
------------ ------------
Long-term debt, net of current maturities 733,509 1,233,615
Capital lease obligations, net of current maturities 567,740 516,800
Deferred income taxes and other 184,725 260,448
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.0002; 20,000,000 shares
authorized, 1,717,041 and 1,593,182 shares outstanding
at March 31, 1996 and June 30, 1995, respectively 342 319
Additional paid-in capital 6,348,166 6,769,560
Less shares deemed treasury stock; 74,479 and 198,162
shares at March 31, 1996 and June 30, 1995, respectively (96,409) (598,162)
Accumulated deficit (3,822,574) (75,291)
Due from ESOP - (355,089)
Net unrealized holding loss on investment securities - (334,079)
------------ ------------
Total stockholders' equity 2,429,525 5,407,258
------------ ------------
Total liabilities and stockholders' equity $ 13,400,119 $ 17,583,519
============ ============
The accompanying notes are an integral part of the consolidated financial
statements
</TABLE>
1
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
March 31, March 31,
---------- ----------
1996 <F1> 1995 <F2> 1996 <F1> 1995 <F2>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 5,529,856 $ 9,851,710 $14,851,565 $ 30,565,029
----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 4,939,324 8,996,462 13,470,697 26,834,822
Development expenses - - - 412,452
Selling expenses 323,505 758,427 974,053 2,018,948
General and administrative expenses 743,996 776,100 1,889,329 2,455,724
----------- ----------- ----------- -----------
Total costs and expenses 6,006,825 10,530,989 16,334,079 31,721,946
----------- ----------- ----------- -----------
Operating loss (476,969) (679,279) (1,482,514) (1,156,917)
----------- ----------- ----------- -----------
Other income (expense):
Gain (loss) on sales of securities - 120,770 (148,644) 1,703,163
Gain (loss) on sale of investment in Digital
Communications Technology Corporation 82,980 - (511,426) -
Interest expense and other (226,186) (456,823) (440,868) (1,029,877)
----------- ----------- ----------- -----------
(143,206) (336,053) (1,100,938) 673,286
----------- ----------- ----------- -----------
Loss from continuing operations before
provision for income taxes and minority interest (620,175) (1,015,332) (2,583,452) (483,631)
(Benefit) provision for income taxes - (197,277) - 486,228
----------- ----------- ----------- -----------
Loss from continuing operations before
minority interest (620,175) (818,055) (2,583,452) (969,859)
consolidated subsidiary - (126,132) - 278,586
----------- ----------- ----------- -----------
Loss from continuing operations before
discontinued operations (620,175) (691,923) (2,583,452) (1,248,445)
----------- ----------- ----------- -----------
Discontinued operations:
Loss on sale of Tempo Lighting, Inc. (900,000) - (900,000) -
(Loss) income from operations of Tempo Lighting,
Inc., less applicable income taxes of $0, ($15,500),
$0, and $12,800, respectively (67,636) (32,363) (263,831) 14,026
Income (loss) from operations of Tapes Unlimited,
Inc., less applicable income taxes of $8,159
and ($48,750), respectively - 8,537 - (77,639)
----------- ----------- ----------- -----------
Loss from discontinued operations (967,636) (23,826) (1,163,831) (63,613)
----------- ----------- ----------- -----------
Net loss $(1,587,811) $ (715,749) $(3,747,283) $ (1,312,058)
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding 1,714,419 1,219,147 1,665,750 1,218,573
============ =========== =========== ===========
Loss per share:
Continuing operations $ (0.36) $ (0.57) $ (1.55) $ (1.02)
Discontinued operations (0.56) (0.02) (0.70) (0.05)
----------- ----------- ----------- -----------
Net loss $ (0.92) $ (0.59) $ (2.25) $ (1.07)
=========== =========== =========== ===========
<FN>
<F1> The March 31, 1996 financial statements account for the investment in
Digital Communications Technology Corporation using the equity method.
<F2> The March 31, 1995 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 consolidated financial
statements
2
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended
March 31,
------------
1996 1995
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,747,283) $ (1,312,058)
------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 430,458 1,367,642
Loss (gain) on sales of marketable securities 148,644 (1,703,163)
Gain on equity investment in Digital Communications Technology Corp. (200,875) -
Loss on sale of investment in Digital Communications Technology Corp. 511,426 -
Loss on discontinued operations 1,163,831 63,613
Increase in accounts receivable, net (900,818) (973,218)
Increase in inventories (148,621) (1,458,029)
Decrease (increase) in prepaid expenses and other 183,541 (467,349)
Increase in accounts payable 29,683 1,742,301
(Decrease) increase in accounts payable, related parties (141,865) 189,318
Decrease in accrued liabilities (74,543) (903,775)
Decrease in income taxes payable and deferred taxes (237,968 (438,610)
Increase in minority interest - 633,633
Changes in discontinued operations 415,137 (87,704)
------------ ------------
Net cash used in operating activities (2,569,253) (3,347,399)
------------ ------------
Cash flows from investing activities:
Change in marketable securities - available for sale 1,189,029 1,457,874
Change in investment in Digital Communications Technology Corporation 1,355,756 -
Increase in other assets (59,960) (52,595)
Proceeds from sale of discontinued operations 453,436 -
Capital expenditures (28,481) (1,780,541)
Capital expenditures - discontinued operations (24,465) (32,496)
------------ ------------
Net cash provided by (used in) investing activities 2,885,315 (407,758)
------------ ------------
Cash flows from financing activities:
Net long-term (repayments) borrowings (131,897) 1,069,260
Net short-term borrowings 427,152 2,490,298
Proceeds from issuance of common stock - 12,560
Net short-term (repayments) borrowings - discontinued operations (550,000) 175,000
------------ ------------
Net cash (used in) provided by financing activities (254,745) 3,747,118
------------ ------------
Increase (decrease) in cash and cash equivalents 61,317 (8,039)
Cash and cash equivalents at beginning of period:
Continuing operations 109,654 778,466
Discontinued operations 93,756 114,279
------------ ------------
Total cash and cash equivalents at beginning of period 203,410 892,745
------------ ------------
Cash and cash equivalents at end of period:
Continuing operations 264,727 794,331
Discontinued operations - 90,375
------------- ------------
Total cash and cash equivalents at end of period $ 264,727 $ 884,706
============= ============
The accompanying notes are an integral part of the consolidated financial
statements
3
</TABLE>
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended
March 31,
------------
1996 1995
(Unaudited) (Unaudited)
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 560,023 $ 978,854
============ ============
Income taxes $ - $ 482,324
============ ============
Supplemental schedule of noncash investing and financing activities:
The Company transferred approximately 1,622,000 shares of its investment in the
common stock of Digital Communications Technology Corporation in connection with
the settlement of approximately $1,217,000 in creditors' claims against one of
the Company's subsidiaries.
The accompanying notes are an integral part of the consolidated financial
statements
4
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-------------
1. Summary of Significant Accounting Policies:
-------------------------------------------
The accompanying consolidated financial statements include the accounts of
S.O.I. Industries, Inc. and all majority-owned subsidiaries (collectively
referred to as the "Company"). The subsidiaries include Omni Doors, Inc.
("Omni") and American Quality Manufacturing Corporation ("AQM").
Significant intercompany accounts and transactions have been eliminated.
The Company also holds a 17.59% ownership interest in Digital
Communications Technology Corporation ("DCT") as of March 31, 1996. At June
30, 1995, this ownership interest was 46.81%. For the periods ended March
31, 1996, the Company accounts for its investment in DCT using the equity
method. For the periods ended March 31, 1995, the Company consolidated the
accounts of DCT, as its ownership interest in DCT exceeded 50%.
Effective February 29, 1996, the Company sold 100% of the common stock of
Tempo Lighting, Inc. ("Tempo") for a net cash purchase price of $453,436.
The operations of Tempo are therefore segregated and presented as
discontinued operations on the Consolidated Statements of Operations.
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 statement 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. Stock Split:
------------
On December 15, 1995, the Board of Directors, pursuant to stockholder
approval authorized a one-for-eight reverse stock split. All references in
the financial statements to number of shares, per share amounts and market
prices of the Company's common stock have been restated to reflect the
decrease in number of common shares outstanding.
3. Inventories:
------------
The inventories are valued at the lower of cost (first-in, first-out
method) or market and consisted of the following:
March 31, June 30,
1996 1995
------------ ------------
Raw materials $ 1,007,749 $ 2,001,257
Work-in process 577,094 694,866
Finished goods 257,023 456,333
------------ ------------
$ 1,841,866 $ 3,152,456
============ ============
5
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
-------------
4. Property, Plant and Equipment:
------------------------------
Property, plant and equipment and related accumulated depreciation are
summarized as follows:
March 31, June 30,
1996 1995
------------ ------------
Land $ 20,000
Buildings and improvements $ 499,316 870,572
Machinery and equipment 2,373,000 2,919,442
------------ ------------
2,872,316 3,810,014
Less: accumulated depreciation 740,781 972,905
------------ ------------
$ 2,131,535 $ 2,837,109
============ ============
5. Equity Investment in DCT:
-------------------------
Summarized financial statement information for DCT is presented below
(unaudited)
For the three For the nine
months ended months ended
March 31, March 31,
1996 1996
------------ ------------
Net sales $ 5,929,998 $ 19,211,980
Operating profit $ 397,135 $ 1,202,136
Income from continuing operations $ 568,611 $ 1,087,733
Net income $ 348,050 $ 761,532
Earnings per share $ 0.06 $ 0.14
As of As of
March 31, June 30,
1996 1995
------------ ------------
Current assets $ 9,863,098 $ 10,406,571
Total assets $ 15,366,336 $ 16,279,029
Current liabilities $ 7,014,866 $ 9,159,519
Total liabilities $ 7,631,697 $ 9,812,055
During the nine months ended March 31, 1996, the former majority
shareholder of the Company transferred approximately 1,659,000 of the
Company's common stock that it previously owned to certain creditors of AQM
in settlement of approximately $1,217,000 of the creditors' outstanding
claims against AQM. In repayment to the shareholder, the Company
transferred approximately 1,622,000 shares of its investment in DCT. The
Company's remaining ownership interest in DCT is approximately 1,059,000 or
18% at March 31, 1996.
6
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
-------------
6. Revolving Line of Credit:
-------------------------
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 March 31,
1996, AQM has exceeded its borrowing base relating to eligible inventory.
On April 26, 1996, AQM and the Company entered into an amended and restated
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 September 30, 1996. After September
30, 1996, the bank will have the right to call the loan.
The line of credit is collateralized by substantially all accounts
receivable, inventories and all equipment not being used to collateralize
other equipment and mortgage notes. The agreement further provides 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 March 31, 1996, approximately $4,435,000 has been drawn against AQM's
line of credit.
7. Long-Term Debt:
---------------
Long-term debt is summarized as follows:
March 31, June 30,
1996 1995
------------ ------------
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. $ 989,417 $ 1,661,942
Less: current portion 255,908 428,327
------------ ------------
$ 733,509 $ 1,233,615
============ ============
7
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
-------------
8. Discontinued Operations:
------------------------
Effective February 29, 1996, the Company sold 100% of the common stock of
Tempo for a net cash purchase price of $453,436. A loss of $900,000 was
recorded on the sale of Tempo, and is reflected separately on the
Consolidated Statement of Operations.
The results of operations of Tempo have been reported separately as a
discontinued operation in the Consolidated Statements of Operations for the
three and nine month periods ended March 31, 1996. Prior years consolidated
financial statements have been reclassified to conform with the current
year presentation.
Summarized results of operations of the discontinued operations of Tempo
for the nine months ended March 31, 1996 and 1995 are as follows:
March 31, March 31,
1996 1995
------------ ------------
Net sales $ 2,443,017 $ 3,550,092
Operating (loss) income $ (222,721) $ 128,921
Net (loss) income from discontinued
operation $ (263,831) $ 14,026
The assets and liabilities of Tempo, which have not been reclassified on
the consolidated balance sheets are summarized as follows:
June 30,
1995
------------
Current assets, principally cash,
accounts receivable and inventories $ 2,085,263
Plant, equipment and other 473,790
------------
Total assets $ 2,559,053
============
Current liabilities $ 804,362
Long-term debt, less current maturities 79,023
------------
Total liabilities $ 883,385
============
8
<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
47% 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
interest in the net assets and income of DCT is reflected as a single line item
on the Company's consolidated balance sheets and statements of operations as of
and for the year ended June 30, 1995 and the period ended March 31, 1996.
However, for the periods ended March 31, 1995, the Company's ownership position
in DCT exceeded 50%, and therefore the Company's results of operations and cash
flows for these periods 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
March 31, 1995 statements of operations and cash flows have been adjusted to
exclude the consolidating effect of DCT. A separate discussion of the results of
operations of DCT is included toward the end of this item. The pro-forma effect
of not consolidating the results of operations of DCT for the periods ended
March 31, 1995 are summarized below to assist in a more meaningful comparison of
results of operations.
Summarized proforma statements of operations, adjusted to exclude the operations
of DCT for the periods ended March 31, 1995, compared to summarized statements
of operations for the periods ended March 31, 1996, as presented in this Form
10-QSB:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
March 31, March 31,
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
(unaudited) (unaudited) (unaudited) (unaudited)
---------------- --------------- --------------- ----------------
Net sales $ 5,529,856 $ 5,318,290 $ 14,851,565 $ 14,027,375
Total costs and expenses 6,006,825 5,873,331 16,334,079 16,155,738
Operating loss (476,969) (555,041) (1,482,514) (2,128,363)
Other (expense) income (143,206) (177,559) (1,100,938) 970,976
Net loss $ (1,587,811) $ (715,749) $ (3,747,283) $ (1,312,058)
================ =============== =============== ================
Net loss per share $ (0.92) $ (0.59) $ (2.25) $ (1.07)
================ =============== =============== ================
</TABLE>
The Company experienced a net loss of approximately $1,588,000 for the
three months ended March 31, 1996. Approximately $968,000 of the consolidated
net loss related to discontinued operations and approximately $300,000 of the
consolidated net loss was due to an Employee Stock Ownership Plan ("ESOP")
contribution made by the Company in connection with the pay off of the related
ESOP debt. Additionally, approximately $159,000 of the consolidated net loss
related to the net loss from the operations of the Company's American Quality
Manufacturing Corporation ("AQM") subsidiary, with the remainder comprised of
professional fees, management and officer salaries and general operating
expenses of the Company. Total costs and expenses for the three months ended
March 31, 1996 increased due to the ESOP contribution mentioned above. Without
this one-time charge, total costs and expenses
9
<PAGE>
would have been less than the corresponding period of the prior year, despite
the increase in net sales during the current period.
The Company's consolidated net loss for the nine months ended March 31,
1996 was due, in large part, to the approximate $1,164,000 loss from
discontinued operations and AQM's approximate $1,171,000 net loss for the
period. ESOP contributions of approximately $375,000, losses on sales of
marketable securities and of the Company's investment in DCT of approximately
$660,000, and professional fees and general operating expenses of the Company
comprised the remaining portion of the consolidated net loss. The losses
generated by AQM are discussed more fully on the following page.
Effective February 29, 1996, the Company sold 100% of the common stock of
Tempo Lighting, Inc. ("Tempo") for a total purchase price of $1,046,544, however
$593,108 of this amount was required to be used to retire the outstanding debt
on Tempo's revolving line of credit agreement to which the Company was a
guarantor. The net cash purchase price was therefore $453,436. A loss of
$900,000 was recorded on the sale of Tempo, and has been reflected separately on
the Consolidated Statements of Operations. Likewise, the historical losses from
operations of Tempo have also been segregated and reflected separately in the
discontinued operations section of the Consolidated Statements of Operations for
all periods presented. The net effect of the discontinued operations of Tempo
for the three months ended March 31, 1996 and 1995 is approximately ($968,000)
and ($32,000), respectively, and for the nine month periods ended March 31, 1996
and 1995 is approximately ($1,164,000) and $14,026, respectively.
In connection with the sale of Tempo, the Company agreed to use a portion
of the proceeds to retire the debt related to the Company's ESOP plan,
approximately $265,000. As the Company made contributions to the ESOP, the debt
related to the ESOP was reduced. The receivable due from the ESOP, reflected as
a component of stockholders' equity, was also reduced, and an ESOP contribution
expense was charged. Therefore, upon retirement of the ESOP debt, a
corresponding expense of $265,000 was charged to operations. This expense along
with the contributions made prior to the debt payoff, approximately $110,000,
was reflected as a component of the Company's consolidated general and
administrative expenses for the nine month period ended March 31, 1996.
The Company also generated an approximate $605,000 loss during the nine
month period ended March 31, 1996 upon the disposition of approximately
1,622,000 shares of its investment in DCT. The transfer of DCT stock was
effected in order to repay a stockholder of the Company which had previously
transferred approximately 1,659,000 of the Company's common stock, that the
stockholder had previously owned, to certain creditors of AQM. The outstanding
claims by AQM creditors which were satisfied through this transfer approximated
$1,217,000. In addition to the disposition of DCT common stock described above,
the Company also sold approximately 110,000 shares of its DCT common stock in
open market transactions during the nine month period ended March 31, 1996.
These sales generated operating cash needed for the Company and its AQM
subsidiary, while also providing an approximate $94,000 gain to help offset the
loss generated upon the disposition of the 1,622,000 shares of DCT common stock.
The Company's remaining ownership position related to DCT at March 31, 1996 is
1,058,536 shares -- approximately 18% of the outstanding common stock of DCT.
A realized loss of approximately $149,000 was incurred during the nine
months ended March 31, 1996, as the Company liquidated its marketable securities
portfolio. This is compared to realized gains of approximately $1,703,000 which
were realized in the corresponding period of the prior year. The funds generated
from the sales of securities were utilized to fund the operations of the Company
and its subsidiaries during the nine month period ended March 31, 1996.
The changes in net sales, costs and expenses and operating losses as
summarized in the table on the previous page, are primarily attributable to the
operations of AQM. A separate discussion of the operations of AQM is included
under a separate heading on the following page.
Other (expense) income for the nine months ended March 31, 1996 and 1995
changed significantly. Other income for the nine months ended March 31, 1995 was
due primarily 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. Interest income along with the Company's allocable
portion of DCT's net income comprised the remaining
10
<PAGE>
portion of the other income as stated above in the pro forma statement of
operations for the nine month period ended March 31, 1995. Other expense for the
nine months ended March 31, 1996 was comprised of the losses on sales of
marketable securities and the loss on sale of the investment in DCT common
stock, as discussed above. The remainder was due primarily to interest expense
incurred at AQM.
American Quality Manufacturing Corporation
Due to the sale of Tempo, AQM's operations comprise an even larger portion
of the consolidated operations of the Company than in prior periods. Net sales
from AQM for the quarter ended March 31, 1996 contributed approximately
$5,433,000 or 98% of the Company's consolidated net sales. This is compared to
AQM's net sales of approximately $5,233,000 (98% of the Company's consolidated
net sales, adjusted to exclude DCT and the discontinued operations of Tempo),
for the corresponding period of the prior fiscal year. AQM's net sales for the
nine months ended March 31, 1996 and 1995 were approximately $14,314,000 (96% of
consolidated net sales) and $13,721,000 (98% of consolidated net sales),
respectively. While AQM's net sales have marginally increased by approximately
4% over the corresponding periods of the prior year, the large operating losses
experienced in the prior year have reversed to an operating income in the
current period. AQM's operating income approximated $46,000 as compared to an
operating loss of approximately $424,000 for the third quarters ended March 31,
1996 and 1995, respectively. For the nine month period ended March 31, 1996 and
1995, AQM's operating losses approximated $663,000 and $2,057,000, respectively.
The operating income for the quarter ended March 31, 1996 is primarily the
result of reductions in AQM's cost of goods sold which improved from
approximately 96% of net sales for the three months ended March 31, 1995 to 89%
for the three months ended March 31, 1996. The significant improvement is due to
price increases that went into effect in January 1996 and the effect of material
cost reductions on certain raw materials, as compared with the corresponding
period of the prior year.
Operating losses were reduced for the nine month periods ended March 31,
1996 as compared to the nine months ended March 31, 1995. This was primarily due
to improvements in selling and general and administrative costs. As a percentage
of net sales, AQM's selling expenses declined from 9.0% to 6.5% for the nine
month periods ended March 31, 1995 and 1996, respectively. Likewise, for the
same periods, general and administrative expenses declined from 9.2% to 6.1%.
The reductions in selling expenses are due to reductions in payroll costs,
commissions and other selling costs. Management's efforts to obtain new
customers and service these customers through internal sales staff, reducing the
reliance on outside sales representatives, led to the decrease in selling
expenses. The decline in general and administrative expenses is due primarily to
a prior year write-off of accounts receivable of approximately $400,000 which
was not necessary in the current year. Another reason for improvements in the
operating loss was due to development costs of approximately $412,000 which were
incurred in the prior year to position the Company to produce its finished
cabinet product line. These costs were not repeated in the current year, and no
further such expenditures are anticipated at this time.
While management believes that these improvements are indicative of overall
improved performance of the Company, the Company is still generating net losses.
Beginning at June 30, 1995 management began implementing several actions in
order to mitigate future losses from AQM, as follows: (1) A consolidation of
operations into a single operating plant was considered; (2) A full review of
all product lines was implemented. As a result of this review, material content
of all product lines was analyzed in order to reduce material costs. In
addition, based on this review, all unprofitable product lines and customers
were 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 fully implemented will
significantly improve the financial position of the Company.
Since year end, the following developments have occurred. Management has
negotiated with customers to increase selling prices, where required. These
price increases, based on projected sales levels, are expected to yield over
$700,000 in improvements in revenues on an annualized basis. In addition,
management expects to reduce
11
<PAGE>
material and direct labor costs by purchasing pre-processed doors and face frame
components directly from a supplier. Component purchases from this supplier have
commenced. In addition, from August 1995 to December 1995, management negotiated
with creditors to accept shares of the Company's common stock, previously held
by the Company's majority stockholder, equivalent to approximately $1,217,000 in
satisfaction of AQM's trade debt. The stock which was provided to the Company
has been repaid to the majority stockholder with shares of DCT held in the
Company's investment portfolio. This action alleviated some 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.
Capital Resources
During the nine months ended March 31, 1996 the Company invested
approximately $28,000 in equipment, primarily at AQM. The funds for these
acquisitions were provided from operations. The decreased expenditures in the
current period as compared to the corresponding period of the prior 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 AQM to maintain their competitive
position. These equipment acquisitions are expected to be made with funds
provided from operations.
Liquidity
During the nine months ended March 31, 1996, the Company used approximately
$2,569,000 in cash from operating activities as compared to approximately
$3,347,000 used in the corresponding period of the prior year. The overall net
use of cash in the nine months ended March 31, 1996 is due primarily to the net
loss incurred in this period, an increase in accounts receivable and the payment
of certain trade accounts payable and accruals.
Both of the Company's subsidiaries continue to experience demands by
customers for longer payment terms. Because of this and due to increased sales,
the total accounts receivable balance increased approximately $901,000 for the
nine month period ended March 31, 1996. The Company's overall accounts
receivable conversion period (measuring how quickly the Company, on average,
collects its accounts receivable) increased from 80 days for the year ended June
30, 1995 to 81 days for the nine months ended March 31, 1996. The increase was
primarily due to a delayed payment from a large customer which was subsequently
received in May 1996. If this balance was collected before March 31, 1996,
accounts receivable would have instead increased approximately $600,000 and the
accounts receivable conversion period would have been approximately 76 days. The
decline in the allowance for doubtful accounts from approximately $1,087,000 at
June 30, 1995 to approximately $150,000 at March 31, 1996 was due to the
write-off of several long-outstanding receivables at the Company's AQM
subsidiary which management deemed uncollectible. Despite the demand for longer
collection terms, management does not expect any significant detriment toward
its short-term liquidity.
The reduction of accounts payable and accruals is due to the timing of
payments close to the end of the nine month period ended March 31, 1996.
Additionally, as discussed above under the results of operations section, the
decline in accounts payable and accruals was due to the reduction of AQM's trade
debt by utilizing some of the Company's DCT common stock.
During the nine months ended March 31, 1996, the Company's cash needs were
met primarily through proceeds from the Company's marketable securities
portfolio, through proceeds received on the sale of Tempo, through borrowings on
AQM's line of credit 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 most obligations as
they come due, and no vendor/supplier problems are expected.
On April 26, 1996, 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 September 30, 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 September 30, 1996, however, the
bank will have the right to call the loan. Management expects
12
<PAGE>
to be in compliance and/or change the banking relationship, entering into a new
debt agreement by the September 30, 1996 date. There can be no assurance,
however, that management will be able to meet this deadline.
On May 2, 1996, the Company announced that AQM experienced a severe work
disruption at its plant located in Conway, Arkansas. On April 22, 1996,
organizers of the Union of Needletrades, Industrial and Textile Employees
appeared at the Conway plant handing out leaflets to employees encouraging their
support for union representation, and on April 23, 1996 filed a petition with
the National Labor Relations Board seeking an election to obtain certification
as the collective bargaining representative of production and maintenance
employees at the Conway plant. AQM management has informed its Conway plant
employees of their rights to oppose or support union representation. Company
management believes, however , that a unionized workforce is not in the best
interests of either the Company or its employees, and intends to provide full
information to allow employees to make a reasoned decision concerning union
representation.
During the week of April 22, 1996, plant production at AQM dropped about
40%. Subsequent to that time, production increased, but remains at sub normal
levels. The Conway facility historically provided approximately 70% of AQM's
production volume and therefore a continuing work disruption would result in
continued operating losses. Management is reviewing all possible alternatives in
order to resume full production, including shifting work, where possible, from
the Conway facility to another Company facility. There can be no assurance,
however that such actions will alleviate the production decline.
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, AQM has generally been able to mitigate
the effects of inflation and commodity price fluctuations through sales price
increases and cost savings in other areas.
Significant Unconsolidated Equity Investment -- 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 nine month period ended March 31, 1996. Since DCT is a
significant unconsolidated equity investment, 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 nine months
ended March 31, 1996.
DCT's operating profit improved for both the three month and nine month
periods ended March 31, 1996. As a percentage of net sales, operating profit
increased slightly from 5.9% to 6.3% for the nine months ended March 31, 1995
and 1996, respectively. This increase is an improvement from the declining
operating margins experienced in recent quarters and is primarily due to lower
cost of goods sold.
DCT's cost of goods sold, as a percentage of sales, decreased to 82% for
the nine months ended March 31, 1996 as compared to 83% for the nine months
ended March 31, 1995. The lower cost of goods sold is attributable to lower
material costs, specifically the cost of the plastic video cassette shells,
which DCT had acquired during the prior fiscal quarter in anticipation of larger
production requirements in the third quarter. The lower cost raw materials were
utilized in the current quarter, having a positive effect on cost of goods sold
and operating profit. Additionally, a reduction in direct labor costs also
contributed to the lower cost of goods sold and positively affected operating
margins. Management will continue to closely monitor material costs in order to
pass on material cost increases to DCT's customers and will continue its focus
on cost containment, especially in labor costs, to ensure more efficiency is
obtained and thereby reducing current cost levels even though sales volume
increases.
13
<PAGE>
As a percentage of net sales, general and administrative expenses increased
from 6.1% to 7.1% for the nine month periods ended March 31, 1995 and 1996,
respectively. Increases in professional fees over prior year levels and an
increase in officers and management salaries primarily contributed to this
increase. This increase was partially offset by the elimination of management
fees previously paid to the Company, which were discontinued in December 1995.
Interest expense increased from approximately $468,000 to $530,000 for the
nine months ended March 31, 1995 and 1996, respectively and decreased from
approximately $179,000 to $150,000 for the three months ended March 31, 1995 and
1996, respectively. The year to date increase was due primarily to increased
borrowings on DCT's line of credit during the first six months of the fiscal
year and due to increased long-term borrowing over the levels of the prior year.
Additionally, margin interest paid in connection with DCT's marketable
securities portfolio contributed to the increased interest expense. The current
quarter decline in interest expense is due to decreased borrowings on DCT's line
of credit.
DCT realized income from securities transactions of approximately $368,000
for the nine months ended March 31, 1996 as compared to approximately $605,000
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 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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings.
On March 4, 1996, Adrian S. Jacoby, on behalf of the Company, filed a
shareholder derivative action against Kevin B. Halter, Kevin B. Halter, Jr.,
Halter Capital Corporation, Securities Transfer Corporation, Gary C. Evans and
James Smith alleging breaches of fiduciary duty, fraud, and violations of state
securities laws in their actions as directors of the Company. The plaintiff
seeks unspecified actual and exemplary damages, a constructive trust against the
assets of the defendants and an accounting of the affairs of the defendants. The
plaintiff has brought this suit allegedly to vindicate the wrongs done to the
Company by the individual defendants and their affiliated companies and any
damages which are awarded will be on behalf of, and for the benefit of, the
Company and all of its shareholders. The case is entitled Adrian S. Jacoby et al
v. Kevin B. Halter et al, cause no. 96-2169-G, in the 134th Judicial District
for the District Court of Dallas County, Texas. Even though the Company is a
nominal defendant in the lawsuit, the plaintiff seeks no relief or damages
against the Company. As a procedural matter in lawsuits of this type, the
Company is named as a nominal defendant. This is done to make the Company a
party to the action but the plaintiff seeks no damages from the Company.
Therefore, the lawsuit will not have a material impact on the operations or
financial condition of the Company.
All of the defendants have answered the allegations contained in the
plaintiffs' petition and there has been little discovery taken by either party.
All of the defendants deny all of the allegations contained in the plaintiffs'
petition and will vigorously defend this lawsuit. In addition, the defendants
have filed a lawsuit against Sanford M. Whitman, the former CFO of the Company,
Blake Beckham, Attorney at Law, Beckham & Thomas, L.L.P., and a countersuit
against Richard Abrons and Adrian Jacoby seeking damages in excess of $14
million. Additionally, a motion for contempt and sanctions was filed against
Sanford M. Whitman for filing a false verification, and Richard Abrons and
Adrian Jacoby for filing false affidavits and disobeying court orders.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
S.O.I. INDUSTRIES, INC.
/s/ Tim C. Hafer
By: __________________________________ Date: May 15, 1996
Tim C. Hafer, Vice President
and Chief Financial Officer
16
<PAGE>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 764,727
<SECURITIES> 0
<RECEIVABLES> 4,374,859
<ALLOWANCES> 149,804
<INVENTORY> 1,841,866
<CURRENT-ASSETS> 7,394,979
<PP&E> 2,872,316
<DEPRECIATION> 740,781
<TOTAL-ASSETS> 13,400,119
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<COMMON> 342
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<TOTAL-LIABILITY-AND-EQUITY> 13,400,119
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<INCOME-CONTINUING> (2,583,452)
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