UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-QSB
(MarkOne)
{x} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
(972) 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 small
business issuer on October 31, 1996, the latest practicable date, was 2,152,949.
<PAGE>
TABLE OF CONTENTS
Item Numbered
Number Page
- -----------
Part I
1 Financial Statements . . . . . . . . . . . . . . . . 1
2 Management's Discussion and
Analysis or Plan of Operation . . . . . . . . . . . 8
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 . . . . . . . . . . . . . . . . . . . . . . . . N/A
5 Other Information . . . . . . . .. . . . . . . . . . . N/A
6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . 13
<PAGE>
S.O.I.INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
September 30,
1996 June 30,
(Unaudited) 1996
--------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 53,232 $ 36,628
Marketable securities 198,188 -
Accounts receivable, less allowance for doubtful accounts
of $25,400 at September 30, 1996 and $15,500 at June 30, 1996 77,849 71,867
Other accounts receivable - 699
Inventories 99,188 105,760
Prepaid expenses and other 214,092 582,562
Deferred income taxes 10,687 617,142
Net current assets of discontinued operations - 5,072,860
--------------------- -------------------
Total current assets 653,236 6,487,518
Property, plant and equipment, net of
accumulated depreciation 14,744 15,956
Investment in Digital Communications Technology Corporation 1,374,439 1,388,078
Deferred tax asset 71,026 77,214
Other assets 5,779 5,779
Net other assets of discontinued operations - 4,181,953
--------------------- -------------------
Total assets $ 2,119,224 $ 12,156,498
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 81,323 $ 83,102
Accounts payable - officer - 16,000
Accrued liabilities and other 14,895 30,949
Net current liabilities of discontinued operations - 9,018,638
--------------------- -------------------
Total current liabilities 96,218 9,148,689
--------------------- -------------------
Net other liabilities of discontinued operations - 1,811,870
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.00001 par value; 10,000,000
shares authorized, none issued and outstanding - -
Common stock, par value $0.0002; 50,000,000 shares
authorized, 2,152,949 shares outstanding at September 30,
1996 and June 30, 1996 417 431
Additional paid-in capital 6,734,714 6,717,093
Less shares deemed treasury stock; 68,332 and 70,401 shares
at September 30, 1996 and June 30, 1996, respectively (64,483) (39,425)
Accumulated deficit (4,652,284) (5,482,160)
Net unrealized holding gain on investment securities 4,642 -
--------------------- -------------------
Total stockholders' equity 2,023,006 1,195,939
--------------------- -------------------
Total liabilities and stockholders' equity $ 2,119,224 $ 12,156,498
===================== ===================
The accompanying notes are an integral part of the financial statements
</TABLE>
1
<PAGE>
S.O.I.INDUSTRIES,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the three months ended
September 30,
1996 1995
------------------- ---------------------
Net revenues $ 130,165 $ 214,738
Cost of sales 96,832 94,263
------------------- ---------------------
33,333 120,475
------------------- ---------------------
Operating expenses
Selling expenses 11,669 11,872
General and administrative expenses 251,468 337,377
Depreciation 1,212 1,213
------------------- ---------------------
Total operating expenses 264,349 350,462
------------------- ---------------------
Loss from operations (231,016) (229,987)
------------------- ---------------------
Other income (expense):
Gains on sales of securities 11,129 54,146
Interest and other income 29,759 100,403
------------------- ---------------------
40,888 154,549
------------------- ---------------------
Loss from continuing operations before income taxes (190,128) (75,438)
Benefit for income taxes (1,429) -
------------------- ---------------------
Loss from continuing operations (188,699) (75,438)
------------------- ---------------------
Discontinued operations, net of income taxes
Loss from discontinued operations of American Quality
Manufacturing Corporation, net of income tax benefit of
$0 for the periods ended September 30, 1996 and 1995,
respectively (566,991) (526,738)
Income from discontinued operations of Tempo Lighting, Inc.,
net of income taxes of $1,600 22,045
Gain on disposition of American Quality Manufacturing
Corporation, net of income tax provision of $617,412. 1,585,566 -
------------------- ---------------------
Income (loss) from discontinued operations 1,018,575 (504,693)
------------------- ---------------------
Net income (loss) $ 829,876 $ (580,131)
=================== =====================
Weighted average shares of common
stock outstanding 2,083,914 1,596,733
=================== =====================
Loss per share from continuing operations $ (0.09) $ (0.05)
Income (loss) per share from discontinued operations 0.49 (0.31)
=================== =====================
Net income (loss) per share $ 0.40 $ (0.36)
=================== =====================
The accompanying notes are an integral part of the financial statements
</TABLE>
2
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S.O.I.INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the three months ended
September 30,
1996 1995
(Unaudited) (Unaudited)
------------------- -------------------
Cash flows from operating activities:
Net income (loss) $ 829,876 $ (580,131)
------------------- -------------------
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,212 1,213
Provision for doubtful accounts 9,900 -
(Gain) loss on sales of marketable securities (830) 11,426
Gain on equity investment in Digital Communications
Technology Corporation (5,786) (95,209)
Gain on sales of securities of Digital Communications
Technology Corporation (10,453) (65,572)
Discontinued operations (1,575,541) (433,241)
Increase in accounts receivable (15,882) (1,335)
Decrease in inventories 6,572 6,206
Decrease in prepaid expenses and other 369,169 -
Decrease in net deferred income tax benefit (liability) 612,643 (303,740)
(Decrease) increase in accounts payable (1,779) 365,484
Decrease in accrued liabilities (16,054) (3,329)
------------------- -------------------
Net cash provided by (used in) operating activities 203,047 (1,098,228)
------------------- -------------------
Cash flows from investing activities:
Proceeds from sale of securities of Digital Communications
Technology Corporation 22,273 71,007
Proceeds from sales of marketable securities 32,482 1,988,261
Purchases of marketable securities (225,198) (1,021,298)
------------------- -------------------
Net cash (used in) provided by investing activities (170,443) 1,037,970
------------------- -------------------
Cash flows from financing activities:
Repayment of advances from officer (16,000) -
Net short-term repayments - (30,437)
Net payments from ESOP - 30,437
------------------- --------------------
Net cash used in financing activities (16,000) 0
------------------- --------------------
Increase (decrease) in cash and cash equivalents 16,604 (60,258)
Cash and cash equivalents at beginning of period 36,628 97,505
------------------- ---------------------
Cash and cash equivalents at end of period $ 53,232 $ 37,247
=================== =====================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest (non-capitalized) $ 0 $ 4,347
=================== =====================
Income taxes $ 0 $ 0
=================== =====================
The accompanying notes are an integral part of the financial statements
</TABLE>
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 Omni Doors, Inc. ("Omni") and Doblique Energy
Corporation ("Doblique"). Significant intercompany accounts and
transactions have been eliminated.
The Company also holds a 17.04% ownership interest in Digital
Communications Technology Corporation ("DCT") as of September 30,
1996. At June 30, 1996, this ownership interest was 17.55%. The
Company accounts for its investment in DCT using the equity method.
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.
Effective August 31, 1996, the Company sold 100% of its ownership
interest in American Quality Manufacturing Corporation ("AQM") to a
corporate unrelated third party for the assumption of all liabilities
of AQM. The results of operations of AQM are therefore presented as a
component of discontinued operations in 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 statements and notes
thereto included in the Company's annual audited financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could
differ from those estimates.
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 equity securities which had an
aggregate cost of approximately $193,546 at September 30, 1996. The
marketable securities portfolio contains net unrealized gains of
$4,642, resulting in a carrying amount of $198,188 at September 30,
1996. The unrealized gains are reported as a separate component of
stockholders' equity. The Company's marketable securities are
classified as available for sale securities.
4
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
-------------
<TABLE>
<CAPTION>
<S> <C> <C>
3. Inventories:
The inventories are valued at the lower of cost (first-in, first-out
method) or market and consisted of the following:
September 30, June 30,
1996 1996
------------------ ----------------
Finished goods and purchased product $ 94,688 $ 100,934
Raw materials and supplies 4,500 4,826
================== ================
$ 99,188 $ 105,760
================== ================
4. Property, Plant and Equipment:
Property, plant and equipment and related accumulated depreciation are
summarized as follows:
September 30, June 30,
1996 1996
------------------ ----------------
Vehicle $ 19,635 $ 19,635
Machinery and equipment 13,034 13,034
Leasehold improvements 4,193 4,193
------------------ ----------------
36,862 36,862
Less: accumulated depreciation 22,118 20,906
================== ================
$ 14,744 $ 15,956
================== ================
5. Equity Investment in DCT:
Summarized financial statement information for DCT is presented below (unaudited):
For the three For the three
months ended months ended
September 30, September 30,
1996 1995
------------------ ----------------
Net sales $ 7,019,937 $ 5,386,471
Operating profit $ 168,137 $ 290,586
Income from continuing operations $ 130,748 $ 148,100
Net income $ 65,667 $ 207,101
Earnings per share $ 0.01 $ 0.04
As of As of
September 30, June 30,
1996 1996
------------------ ----------------
Current assets $ 11,275,100 $ 9,711,473
Total assets $ 17,641,040 $ 15,675,489
Current liabilities $ 7,503,743 $ 5,955,208
Total liabilities $ 9,556,707 $ 7,778,487
Total stockholders' equity $ 8,084,333 $ 7,897,002
</TABLE>
5
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
-------------
6. 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. The results of
operations of Tempo have been reported separately as a discontinued
operation in the Consolidated Statement of Operations for the three
month period ended September 30, 1995.
Effective August 31, 1996, the Company sold 100% of its ownership
interest in AQM to a corporate unrelated third party for the
assumption of all liabilities of AQM. In addition, the AQM sale
included the release of the Company's guarantees of certain debt (1)
with their primary lending institution; (2) with certain key vendors;
and (3) related to the payment and performance of AQM's lease of its
operating facility in Conway, Arkansas. The sale agreement contains a
total guaranty release cap of $5.5 million. Additionally, the Company
retained its contingent guarantee of a $400,000 note between AQM and
DCT. The results of operations of AQM are therefore presented as a
component of discontinued operations in the Consolidated Statements of
Operations.
Summarized results of operations of the discontinued operations of
Tempo for the three months ended September 30, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30,
1995
----------------
Net sales $ 1,166,011
Operating income $ 38,901
Net income from discontinued operation $ 22,045
Summarized results of operations of the discontinued operations of AQM
for the three months ended September 30, 1996 and 1995 are as follows:
September 30, September 30,
1996 1995
------------------ ----------------
Net sales $ 2,682,751 $ 4,447,019
Operating loss $ (983,604) $ (322,925)
Net loss from discontinued operation $ (566,991) $ (526,738)
The assets and liabilities of AQM have been reclassified into net
assets and net liabilities of discontinued operations on the
consolidated balance sheet for June 30, 1996.
</TABLE>
6
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
-------------
7. Subsequent Event:
In October, 1996, the Company's wholly-owned subsidiary, Doblique,
signed a letter of intent to acquire certain interests in oil and gas
properties located in Texas, Oklahoma and New Mexico. On November 4,
1996, a final agreement was signed. The terms of the agreement
stipulated a total purchase price of $1,850,000, structured as
follows: (1) $100,000 in cash, (2) 120,000 newly-issued shares of the
Company's Series A convertible preferred stock (convertible into
120,000 shares of the Company's common stock) and (3) a promissory
note in the amount of $1,600,000, secured by the acquired properties
and also secured by 750,000 shares of DCT common stock held by the
Company. In addition, the Company guaranteed payment of the promissory
note. The promissory note will have a term of 36 months, bearing
interest at 12% per annum, with principal and interest payable
monthly.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
- ---------------------
Overview
Effective August 31, 1996, the Company sold all the issued and
outstanding stock of AQM. Since, at the time of the sale, AQM had liabilities in
excess of its assets, the sale of AQM relieved the Company of the net
liabilities of AQM upon consolidation and resulted in a gain from the
disposition of AQM of approximately $1,586,000. AQM generated losses from
operations from July 1, 1996 to the effective sale date of approximately
$567,000 which resulted in a net gain from the discontinued operations and sale
of AQM of approximately $1,019,000 during the three month period ended September
30, 1996.
The AQM sale included the release of the Company's guarantees of certain
debt of AQM (1) with AQM's primary lending institution; (2) with certain key
vendors; and (3)related to the payment and performance under AQM's lease of it's
principal operating facility in Conway, Arkansas. The sale agreement contains a
total guaranty release cap of $5.5 million. The Company retained, however, its
contingent guarantee of a $400,000 note between AQM and DCT. As part of the
transaction, the Company also forgave approximately $2,300,000 of intercompany
debt related to advances made by the Company to AQM and unpaid management fees
due from AQM. The losses attributable to the operation of AQM have been
segregated under discontinued operations on the statements of operations.
Likewise, the net assets and liabilities of AQM have also been segregated on the
Company's balance sheet as of June 30, 1996.
The net gain from discontinued operations offset the Company's loss
from continuing operations of approximately $189,000 for the three months ended
September 30, 1996, resulting in net income of approximately $830,000 for the
same period. The loss from continuing operations for the three months ended
September 30, 1996 exceeded the loss from continuing operations for the
corresponding period of the prior year which was approximately $75,000. Since
the operating losses for both periods were consistent, the primary reason for
the larger loss in the period ended September 30, 1996 is the fewer sales, and
the resulting gains generated by them, of the Company's investment securities of
DCT. Additionally, the Company's ownership percentage in DCT was lower during
the period ended September 30, 1996 as compared to the period ended September
30, 1995. This, coupled with lower earnings by DCT, resulted in a lower equity
interest in DCT's net income (which is included in the Company's other income)
for the three month period ended September 30, 1996.
Contributing to the Company's operating losses during the three month
periods ended September 30, 1996 and September 30, 1995 were general and
administrative expenses of approximately $251,000 and $337,000, respectively.
With the disposition of AQM and Tempo, an approximate 70% reduction in the
corporate overhead payroll costs occurred during the three months ended
September 30, 1996 as compared to the corresponding period of the prior year.
The savings resulted from fewer personnel required at the Company's corporate
offices due to the reduced activity of the Company during the three month period
ended September 30, 1996. However, the lower payroll costs were offset by a
significant increase in legal fees for the three months ended September 30,
1996. These legal fees were associated with the shareholder derivative action,
as discussed in the Company's prior reports.
The Company's net revenues for the three month period ended September
30, 1996 are approximately 39% lower than those of the corresponding period of
the prior year. This decline is due to the discontinuance of management fees
which were charged to DCT during the three month period ended September 30,
1995. Management fees charged to DCT ceased in December 1995, coinciding with
the Company's reduced ownership
8
<PAGE>
interest in DCT. Services previously provided by the Company were assumed by DCT
employees.
Door Distribution Segment
Net sales from this segment approximated $130,000 as compared to
approximately $125,000 for the three month periods ended September 30, 1996 and
1995, respectively. The highly competitive market in which Omni operates will
often produce slight fluctuations in sales depending on various external
factors. Therefore, the 4% increase in sales does not necessarily represent a
trend of continued sales increases, but is instead a function of the volatility
of the marketplace.
For the three month period ended September 30, 1996, this segment
generated an operating loss of approximately $2,900 as compared to an operating
income of approximately $2,700 for the three months ended September 30, 1995.
The difference in operating results is due primarily to an increase in the
general and administrative expenses of Omni, particularly an approximate $9,900
increase in the provision for bad debts. No specific accounts were written off,
however, based on slower collections occurring in the first quarter ended
September 30, 1996, management believed that an increase in the reserve for bad
debts was appropriate. Management will continually monitor collections on all
accounts receivable to ensure timely collections.
Capital Resources
- -----------------
The Company does not currently have any material commitments for
capital expenditures. However, the Company is actively seeking acquisition
candidates to include within the consolidated group. Such business acquisitions
are expected to be financed through a combination of debt and new stock
issuances.
Liquidity
- ---------
During the three month period ended September 30, 1996, the Company's
operating activities provided cash flows of approximately $203,000. This is
compared with net cash used in operating activities of approximately $1,098,000
for the three month period ended September 30, 1995. The primary reason for the
positive operating cash flows in the first quarter ended September 30, 1996 was
the receipt of the Company's income tax refund and related interest totaling
approximately $395,000. The Company was able to utilize its net operating losses
experienced during the 1995 fiscal year and carry them back to prior years when
the Company generated taxable income and paid income taxes. The income tax
refund offset the operating cash requirements of the first quarter ended
September 30, 1996, and the excess cash was utilized to establish the Company's
marketable securities portfolio which had previously been liquidated prior to
June 30, 1996.
The primary sources of funding for the operations of the Company in
fiscal year 1997 will be remaining proceeds from the Company's income tax
refund, which will be invested in the Company's marketable securities portfolio,
and proceeds from the marketable securities portfolio. The Company may also sell
its investment securities in DCT to provide cash as needed. Furthermore, the
Company plans to seek out additional business acquisition candidates which will
provide supplemental operating cash necessary to fund the Company's overhead
requirements.
In connection with seeking out business acquisition candidates, the
Company's wholly-owned subsidiary, Doblique, signed a letter of intent with
Magnum Hunter Production, Inc. to purchase certain interests in oil and gas
properties located in Texas, Oklahoma and New Mexico in October 1996. On
November 4, 1996, a final agreement was signed. The general terms of the
agreement transfered
9
<PAGE>
the ownership interests of the oil and gas properties to Doblique in exchange
for a total purchase price of $1,850,000, structured as follows: (1) $100,000 in
cash, (2) 120,0000 newly-issued shares of the Company's Series A convertible
preferred stock (convertible into 120,000 shares of the Company's Common Stock )
and (3) a promissory note in the amount of $1,600,000, secured by the acquired
properties and 750,000 shares of DCT common stock held by the Company. In
addition, the Company will guaranteed payment of the promissory note.
The Company utilized approximately $170,000 in cash from investing
activities during the three months ended September 30, 1996 as compared to
approximately $1,038,000 in cash provided by investing activities for the
corresponding period of the prior year. During the first quarter ended September
30, 1995, the Company's marketable securities portfolio was larger than in the
most recent quarter, and consequently generated more cash from investing
activities. The Company intends to continue to invest funds in equity securities
which are listed primarily on the New York Stock Exchange and American Stock
Exchange. The Company limits the amount of exposure in any one equity investment
and continually monitors them to reduce the risk of any adverse stock market
volatility. Cash not invested in securities is placed on account with brokerage
firms, which is swept daily into a federally insured money market account, or
placed on account with a federally insured national bank.
Significant Unconsolidated Subsidiary -- Digital Communications Technology
- -------------------------------------------------------------------------------
Corporation
- -----------
The operations of DCT are not consolidated in the Company's
consolidated financial statements as of and for the years ended June 30, 1995
and 1996 as the Company's ownership in DCT is less than 50%. However, since DCT
is a significant investee corporation, selected financial statement information
for DCT is included as part of this Form 10-QSB. Included below is a discussion
related to this financial statement information.
Overview
- --------
DCT continued to experience rapid sales growth for the three months ended
September 30, 1996. Net sales increased by over 30% from the corresponding
quarter of the prior year. However, DCT continued to experience a decline in
operating profit from approximately $291,000 to $168,000 for the three months
ended September 30, 1995 and 1996, respectively. Increases in cost of goods sold
and general and administrative expenses particularly related to legal fees
associated with the shareholder derivative lawsuit (approximately $96,000),
contributed to the lower operating profits.
Liquidity
- ---------
DCT utilized approximately $224,000 and $129,000 in cash from operating
activities for the three months ended September 30, 1996 and 1995, respectively.
DCT s operating cash position is due primarily to the large increase in accounts
receivable which was partially offset by an increase in accounts payable. In
addition, increases in prepaid expenses and other assets contributed to the
current operating cash position.
Accounts receivable increased approximately $1,676,000 from the balance
at June 30, 1996. The increase is due to the corresponding increase in net sales
for the current three month period. DCT's accounts receivable collection period
(measuring how quickly, on average, DCT collects its accounts receivable)
increased from approximately 61 days at June 30, 1996 to approximately 76 days
at September 30, 1996. The increase is due to significant billings that occurred
in the last week of September. These billings negatively affected the average
days in collection by increasing the balance of accounts receivable at the end
of the quarter. DCT continues to receive competitive pressures from its
customers to grant longer payment terms. Management will continue to focus on
this area to improve credit and collections efforts.
10
<PAGE>
Accounts payable increased approximately $1,179,000 for the three
months ended September 30, 1996 as compared to a decrease of approximately
$287,000 for the same period ended September 30, 1995. The increase in accounts
payable in the current year is due primarily to the growth in sales volume that
has dictated additional raw material, equipment, and supply purchases. In
addition, efforts to maintain a low outstanding balance on the revolving line of
credit have contributed to the increase.
Prepaid expenses and other assets increased by approximately $405,000
for the first quarter ended September 30, 1996. This significant increase is
primarily the result of the increase of prepaid income taxes and deferred tax
assets in the current year.
Approximately $370,000 in net cash was used in investing activities for the
first quarter ended September 30, 1996 as compared to approximately $292,000 in
cash provided by investing activities for the corresponding quarter of the prior
year. The primary reason for this change in position is the decrease in the
funds invested in DCT's marketable securities portfolio. DCT invests funds in
equity securities, mainly listed on the New York and American Stock Exchanges,
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
brokerage firms, which is swept daily into a federally insured money market
account, or placed on account with a federally insured national bank.
DCT utilized its line of credit to provide approximately $414,000 for
working capital needs during the three months ended September 30, 1995 and
repaid approximately $182,000 in long-term debt. 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.
During the three month period ended September 30, 1996, DCT's cash
needs were met primarily through operations. 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 $557,000 in equipment and leasehold
improvements for the first quarter ended September 30, 1996. This amount was
larger than capital expenditures during the corresponding quarter of the prior
year. The current quarter expenditures related primarily to duplication,
loading, packaging, and leasehold improvements at DCT's Indianapolis facility.
DCT plans to continue to expand current operating facilities at both the Fort
Lauderdale and Indianapolis plants in order to fully meet the high volume
demands of the retail-sell-through market and the fall selling season. DCT
intends to finance these expenditures through operations and through separate
financing arrangements.
Results of Operations
- ---------------------
Overall growth in DCT's target markets led to continued sales growth in
the current year. Net sales increased approximately 30% from $5,386,000 to
$7,020,000 for the three months ended September 30, 1995 and 1996, 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.
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.
11
<PAGE>
Operating profit did not match the increased sales, declining from
approximately $291,000 (5.4% of net sales) to $168,000 (2.4% of net sales) for
the three months ended September 30, 1995 and 1996, respectively. The decline in
operating profit is due to increases in cost of goods sold and general and
administrative expenses, particularly related to legal fees associated with the
shareholder derivative lawsuit ( approximately $96,000 ).
Cost of goods sold, as a percentage of sales, increased to 79% for the
three months ended September 30, 1996 as compared to 76% for the three months
ended September 30, 1995. The increased cost of goods sold is directly
attributable to increased usage of temporary labor and the cost of offloading
excess production volumes. Use of these outside sources was unavoidable in order
to complete customer orders that exceeded existing capacity at both facilities
- -- due to unexpected delays in the installation of new capacity. Management has
already taken the steps necessary to provide for the increase in sales volume by
providing for new duplication and packaging equipment. In addition, increased
consultant fees were incurred in the current period as hands-on outside experts
were utilized to accelerate the implementation of expanded capacity and new
management methods in the Indianapolis facility. Management recognizes that cost
containment through efficiency gains and productivity improvements is essential
to DCT s continued profitable growth.
Selling expenses increased in relative proportion to the increase in
net sales for the three months ended September 30, 1996. As a percentage of net
sales, selling expenses remained relatively consistent, decreasing from 4.6% to
4.4% for the three months ended September 30, 1995 and 1996, respectively.
General and administrative expenses increased for the first quarter
ended September 30, 1996 to approximately $624,000 (8.8% of net sales) as
compared to approximately $460,000 (8.5%) for the corresponding period of the
prior year. The slight increase in the percentage of net sales is attributable
to salary increases and additional legal fees incurred in connection with the
shareholder derivative lawsuit.
DCT realized income from securities transactions of approximately
$71,000 for the three months ended September 30, 1996 as compared to
approximately $116,000 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, mainly listed on the New York
and American Stock Exchanges, 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 brokerage firms, which is swept daily into a federally
insured money market account, or placed on account with a federally insured
national bank.
Interest expense decreased from approximately $176,000 to $109,000 for
the three months ended September 30, 1995 and 1996, respectively. This decrease
is due to decreased borrowings on DCT's line of credit.
12
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company filed a current report on Form 8-K with the Commission on August 21,
1996 reporting the dismissal of Coopers & Lybrand L.L.P. as its independent
auditors and the appointment of S.W. Hatfield + Associates as its independent
auditors effective as of August 14, 1996. On September 5, 1996, the Company
filed a current report on Form 8-K/A with the Commission amending its current
report on Form 8-K which included a letter from Coopers & Lybrand L.L.P. dated
September 5, 1996 addressed to the Commission.
13
<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/ Kevin B. Halter
By: ________________________________ Date: November 5, 1996
Kevin B. Halter, President
/s/ Tim C. Hafer
By: ________________________________ Date: November 5, 1996
Tim C. Hafer, Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 53,232
<SECURITIES> 198,188
<RECEIVABLES> 103,249
<ALLOWANCES> 25,400
<INVENTORY> 99,188
<CURRENT-ASSETS> 653,236
<PP&E> 36,862
<DEPRECIATION> 22,118
<TOTAL-ASSETS> 2,119,224
<CURRENT-LIABILITIES> 96,218
<BONDS> 0
0
0
<COMMON> 417
<OTHER-SE> 2,022,589
<TOTAL-LIABILITY-AND-EQUITY> 2,119,224
<SALES> 130,165
<TOTAL-REVENUES> 130,165
<CGS> 96,832
<TOTAL-COSTS> 96,832
<OTHER-EXPENSES> 264,349
<LOSS-PROVISION> 9,900
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (190,128)
<INCOME-TAX> (1,429)
<INCOME-CONTINUING> (188,699)
<DISCONTINUED> 1,018,575
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 829,876
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
