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 December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number: 1-12572
S.O.I. INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 59-2158586
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16910 Dallas Parkway, Suite 100, Dallas, Texas 75248
(Address of principal executive offices)
(214) 248-1922
(Issuer's telephone number)
_____________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) had been subject to such filing requirements for the
past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the common stock of the registrant
on January 31, 1996, the latest practicable date, was 1,791,520.
PAGE
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Item Numbered
Number Page
- ------- --------
<S> <C>
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 . . . . . . . . . . . . . . . . . . . . N/A
5 Other Information . . . . . . . . . . . . . . .N/A
6 Exhibits and Reports on Form 8-K . . . . . . . .N/A
</TABLE>
PAGE
<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1995 June 30,
(Unaudited) 1995
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 213,397 $ 203,410
Restricted cash 500,000 500,000
Marketable securities - 923,212
Accounts receivable, less allowance for
doubtful accounts of $172,009 at
December 31, 1995 and $1,087,262 at
June 30, 1995 3,649,607 3,666,972
Inventories 3,061,225 3,152,456
Prepaid expenses and other current assets 562,842 632,484
Deferred income taxes 173,337 179,976
----------- ----------
Total current assets 8,160,408 9,258,510
----------- ----------
Property, plant and equipment, net of
accumulated depreciation 2,636,235 2,837,109
Investment in Digital Communications Technology
Corporation 1,335,936 3,027,191
Goodwill, net of accumulated amortization of
$300,807 at December 31, 1995 and $219,232
at June 30, 1995 2,022,690 2,104,265
Other assets, net 396,884 356,444
----------- ----------
Total assets $ 14,552,153 $ 17,583,519
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit $ 4,315,788 $ 4,557,421
Current maturities of long-term debt and
capital lease obligations 442,966 438,420
Trade accounts payable 3,244,229 3,583,438
Accounts payable, affiliate 453,058 601,736
Accrued liabilities and other current
liabilities 747,719 984,383
----------- ----------
Total current liabilities 9,203,760 10,165,398
----------- ----------
Long-term debt, net of current maturities 1,065,681 1,233,615
Capital lease obligations, net of current
maturities 460,000 516,800
Deferred income taxes and other 179,976 260,448
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.0002; 20,000,000
shares authorized, 1,712,110 and 1,593,182
shares outstanding at December 31, 1995
and June 30, 1995, 342 319
Additional paid-in capital 6,349,657 6,769,560
Less shares deemed treasury stock; 79,410
and 198,162 shares at December 31, 1995
and June 30 (178,282) (598,162)
Accumulated deficit (2,234,764) (75,291)
Due from ESOP (294,217) (355,089)
Net unrealized holding loss on investment
securities - (334,079)
----------- ----------
Total stockholders' equity 3,642,736 5,407,258
----------- ----------
Total liabilities and stockholders' equity $ 14,552,153 $ 17,583,519
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 1<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended For the six months ended
December 31, December 31,
------------ ------------
1995 <F1> 1994 <F2> 1995 <F1> 1994 <F2>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 5,381,151 $13,256,957 $ 11,208,919 $ 23,147,380
----------- ---------- ---------- ----------
Costs and expenses:
Cost of goods sold 4,920,261 11,512,580 10,077,981 19,629,802
Development expenses - - - 412,000
Selling expenses 460,813 780,029 961,259 1,557,158
General and administrative expenses 657,963 641,751 1,340,376 1,932,841
----------- ---------- ---------- ----------
Total costs and expenses 6,039,037 12,934,360 12,379,616 23,531,801
----------- ---------- ---------- ----------
Operating (loss) profit (657,886) 322,597 (1,170,697) (384,421)
----------- ---------- ---------- ----------
Other income (expense):
(Loss) gain on sales of securities (137,218) 483,722 (148,644) 1,578,173
Loss on sale of investment in Digital
Communications Technology Corporation (594,406) - (594,406) -
Interest expense and other (189,832) (329,789) (245,726) (587,362)
---------- ---------- ---------- ----------
(921,456) 153,933 (988,776) 990,811
---------- ---------- ---------- ----------
(Loss) income from continuing operations
before provision for income taxes and
minority interest (1,579,342) 476,530 (2,159,473) 606,390
Provision for income taxes - 402,457 - 711,806
---------- ---------- ---------- ----------
(Loss) income from continuing operations
before minority interest (1,579,342) 74,073 (2,159,473) (105,416)
Minority interest in net income of
consolidated subsidiary - 306,019 - 404,717
---------- ---------- ---------- ----------
Loss from continuing operations before
discontinued operations (1,579,342) (231,946) (2,159,473) (510,133)
Discontinued operations:
Income (loss) from operations of Tapes
Unlimited, Inc., less applicable income
taxes of $15,177 and ($56,909),
respectively - 30,769 - (86,176)
---------- ----------
Net loss $ (1,579,342) $ (201,177) $ (2,159,473) $ (596,309)
========== ========== ========== ==========
Weighted average shares of common
stock outstanding 1,706,079 1,366,368 1,666,300 1,366,368
========== ========== ========== ==========
Loss (earnings) per share:
Continuing operations $ (0.93) $ (0.17) $ (1.29) $ (0.37)
Discontinued operations - 0.02 - (0.07)
---------- --------- ---------- ----------
Net income $ (0.93) $ (0.15) $ (1.29) $ (0.44)
========== ========= ========== ==========
<FN>
<F1> The December 31, 1995 financial statements account for the investment in
Digital Communications Corporation using the equity method.
<F2> The December 31, 1994 financial statements account for the investment in
Digital Communications Corporation using the consolidation method.
</FN>
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE> 2<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended
December 31,
------------
1995 1994
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,159,473) $ (596,309)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 331,682 921,231
Loss (gain) on sales of marketable securities 148,644 (1,577,980)
Gain on equity investment in Digital Communications
Technology Corporation (185,474)
Loss on sale of investment in Digital Communications
Technology Corporation 594,406
Decrease (increase) in accounts receivable, net 17,365 (2,312,744)
Decrease (increase) in inventories 91,231 (529,488)
Decrease (increase) in prepaid expenses and other 76,281 (80,792)
(Decrease) increase in accounts payable (339,209) 3,121,017
(Decrease) increase in accounts payable, related parties (148,678) 188,418
Decrease in accrued liabilities (236,664) (1,235,728)
Decrease in income taxes payable and deferred taxes (80,472) (413,344)
Increase in minority interest - 458,612
----------- -----------
Net cash used in operating activities (1,890,361) (2,057,107)
----------- -----------
Cash flows from investing activities:
Change in marketable securities - available for sale 1,108,647 942,788
Change in investment in Digital Communications
Technology Corporation 1,282,323 -
Increase in other assets (40,439) (433,127)
Capital expenditures (49,234) (1,698,511)
----------- -----------
Net cash provided by (used in) investing activities 2,301,297 (1,188,850)
----------- -----------
Cash flows from financing activities:
Net long-term (repayments) borrowings (159,316) 479,514
Net short-term (repayments) borrowings (241,633) 2,465,566
Proceeds from issuance of common stock - 10,060
----------- -----------
Net cash (used in) provided by financing activities (400,949) 2,955,140
----------- -----------
Increase (decrease) in cash and cash equivalents 9,987 (290,817)
Cash and cash equivalents at beginning of period 203,410 892,745
----------- -----------
Cash and cash equivalents at end of period $ 213,397 $ 601,928
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 400,171 $ 600,943
=========== ===========
Income taxes $ - $ 561,954
=========== ===========
</TABLE>
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
<PAGE> 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 an 18.76% ownership interest in Digital
Communications Technology Corporation ("DCT") as of December 31, 1995.
At June 30, 1995, this ownership interest was 46.81%. For the period
ended December 31, 1995, the Company accounts for its investment in DCT
using the equity method. For the period ended December 31, 1994, the
Company consolidated the accounts of DCT, as its ownership interest in
DCT 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
therto 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 shareholder
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:
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995
----------- ----------
<S> <C> <C>
Raw materials $ 2,007,735 $ 2,001,257
Work-in process 774,595 694,866
Finished goods 278,895 456,333
---------- ----------
$ 3,061,225 $ 3,152,456
========== ==========
</TABLE>
<PAGE> 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>
December 31, June 30,
1995 1995
----------- ----------
<S> <C> <C>
Land $ 20,000 $ 20,000
Buildings and improvement 824,411 870,572
Machinery and equipment 3,014,836 2,919,442
----------- ----------
3,859,247 3,810,014
Less: accumulated depreciation 1,223,012 972,905
----------- ----------
$ 2,636,235 $ 2,837,109
=========== ==========
</TABLE>
5. Equity Investment in DCT:
Summarized financial statement information for DCT is presented below
(unaudited):
<TABLE>
<CAPTION>
For the three For the six
months ended months ended
December 31, December 31,
1995 1995
------------- ------------
<S> <C> <C>
Net sales $ 7,895,511 $ 13,281,982
Operating profit 514,415 805,001
Income from continuing operations 277,458 519,122
Net income 206,381 413,482
Earnings per share 0.04 0.07
</TABLE>
<TABLE>
<CAPTION>
As of As of
December 31, June 30,
1995 1995
----------- -----------
<S> <C> <C>
Current assets $ 11,028,328 $ 10,406,571
Total assets 16,617,470 16,279,029
Current liabilities 8,878,419 9,159,519
Total liabilities 7,122,398 9,812,055
</TABLE>
During the six months ended December 31, 1995, the 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 1,118,000,
or 19% at December 31, 1995.
<PAGE> 5<PAGE>
S.O.I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
_____________
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%.
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
December 31, 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 December 31, 1995, approximately $600,000 and $3,716,000 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>
December 31, 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. $ 1,495,780 $ 1,661,942
Less: current portion 430,099 428,327
------------ -----------
$ 1,065,681 $ 1,233,615
============ ===========
</TABLE>
<PAGE> 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 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 periods ended June 30,
1995 and December 31, 1995. However, for the period ended December 31, 1994,
the Company's ownership position in DCT exceeded 50%, and therefore the
Company's 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 December 31, 1994 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 December 31, 1994 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 December 31, 1994, compared to
summarized statement of operations for the periods ended December 31, 1995,
as presented in this Form 10-QSB:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
December 31, December 31,
-------------------------- ------------------------
1995 1994 1995 1994
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 5,381,151 $ 5,752,214 $11,208,919 $11,479,146
Total costs and expenses 6,039,037 6,118,340 12,379,616 12,959,251
Operating loss (657,886) (366,126) (1,170,697) (1,480,105)
Other income (expense) (921,456) 204,336 (988,776) 1,043,830
Net loss $(1,579,342) $ (201,177) $(2,159,473) $ (596,309)
=========== =========== =========== ===========
Net loss per share $ (0.93) $ (0.15) $ (1.33) $ (0.44)
</TABLE>
The Company experienced a net loss of approximately $1,579,000 for the
three months ended December 31, 1995. Approximately $754,000 of the
consolidated net loss related to the loss from the operations of the
Company's American Quality Manufacturing Corporation ("AQM") subsidiary.
Likewise, the Company's consolidated net loss for the six months ended
December 31, 1995 was due, in large part, to AQM's approximate $1,122,000 net
loss for the corresponding period. These losses, 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 is not expected to be realized until the next two fiscal quarters.
<PAGE> 7<PAGE>
The Company also generated an approximate $594,000 loss during the three
month period ended December 31, 1995 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. The Company's remaining ownership position
related to DCT at December 31, 1995 is approximately 1,118,000 shares --
approximately 19% of the outstanding common stock of DCT.
A realized loss of approximately $149,000 was incurred during the six
months ended December 31, 1995, as the Company liquidated its marketable
securities portfolio. This is compared to realized gains of approximately
$1,578,000 which were realized in the corresponding periuod 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 quarter and six
month period ended December 31, 1995.
An increase in interest expense from approximately $294,000 to $403,000
for the six month periods ended December 31, 1994 and 1995, respectively,
also contributed to the significant decline in other income (expense) along
with contributing to the Company's consolidated net loss. A similar increase
from approximately $159,000 to $202,000 was also experienced for the three
month periods ended December 31, 1994 and 1995. Increased borrowings and
higher prime rates led to this increase.
The remaining decline in other income (expense) 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.
American Quality Manufacturing Corporation
Net sales from AQM for the quarter ended December 31, 1995 contributed
approximately $4,434,000 or 82% of the Company's consolidated net sales.
This is compared to AQM's net sales of approximately $4,208,000 (73% of the
Company's consolidated net sales for the corresponding period of the prior
fiscal year.) AQM's net sales for the six months ended December 31, 1995 and
1994 were approximately $8,881,000 (75% of consolidated net sales) and
$8,488,000 (74% of consolidated net sales), respectively. While AQM's net
sales have marginally increased by approximately 5% over the corresponding
periods of the prior year, the large operating losses experienced in the
prior year have been reduced in the current periods. AQM's operating losses
approximated $331,000 as compared to operating losses of approximately
$434,000 for the second quarters ended December 31, 1995 and 1994,
respectively. For the six month period ended December 31, 1995 and 1994,
AQM's operating losses approximated $709,000 and $1,574,000, respectively.
While still generating operating losses, the reduced losses for the
quarter ended December 31, 1995 are a result of reductions in AQM's cost of
goods sold which improved from approximately 97% of net sales for the three
months ended December 31, 1994 to 93% for the three months ended December 31,
1995. Smaller improvements of approximately 1% of net sales were also
experienced in selling costs and general and administrative expenses for the
quarter ended December 31, 1995.
For the six month periods ended December 31, 1995 and 1994, the
improvements in selling and general and administrative costs were also
evident, while cost of goods sold as a percentage of net sales remained
consistent with the quarter ended December 31, 1995. However, the major
reason for improvements 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.
<PAGE> 8<PAGE>
While management believes that these improvements are indicative of
overall improved performance of the Company, the Company is still generating
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 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 have commenced. In addition, as of December 31,
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 $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 has alleviated 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.
Tempo Lighting, Inc.
Tempo Lighting, Inc.'s ("Tempo") net sales provided approximately 13% of
the consolidated net sales of the Company for the quarter ended December 31,
1995. This is down significantly from the 21% provided during the
corresponding quarter of the prior year. Likewise, for the six months ended
December 31, 1995 Tempo's net sales provided approximately 17% of the
consolidated net sales of the Company as compared to 21% for the corresponding
period of the prior year. When compared to itself, Tempo's sales also
declined from approximately $1,224,000 to $721,000 for the three month
periods ended December 31, 1994 and 1995 and declined from approximately
$2,434,000 to $1,887,000 for the six months ended December 31, 1994 and 1995,
respectively. 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 profits generated in
the prior fiscal periods turned to operating losses of approximately $219,000
for the three months ended December 31, 1995 and $202,000 for the six month
period ended December 31, 1995. 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 six months ended December 31, 1995 the Company invested
approximately $49,000 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 both AQM and Tempo to
maintain their competitive positions. These equipment acquisitions are
expected to be made with funds provided from operations.
<PAGE> 9<PAGE>
Liquidity
During the six months ended December 31, 1995, the Company used
approximately $1,890,000 in cash from operating activities as compared to
approximately $2,057,000 used in the corresponding period of the prior year.
The overall net use of cash in the six months ended December 31, 1995 is due
primarily to the net loss incurred in this period and the payment of certain
trade accounts payable and accruals.
All of the Company's subsidiaries continue to experience demands by
customers for longer payment terms. Despite this, and despite the increase
in sales, the total accounts receivable balance remained consistent with the
balance at June 30, 1995. 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 63 days for the year
ended June 30, 1995 and the six months ended December 31, 1995, respectively.
The improvement was due to stepped up collection efforts, primarily at AQM.
The decline in the allowance for doubtful accounts from approximately
$1,087,000 at June 30, 1995 to approximately $172,000 at December 31, 1995
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 sixth month period ended December 31, 1995.
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 six months ended December 31, 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, however there can be no
assurance that management will be able to meet this deadline.
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.
The Company was required to adopt Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" in the first
quarter of fiscal year 1994. As permitted under SFAS 109, prior years'
financial statements have not been restated. The adoption of this standard
did not have a material effect on the consolidated financial statements of
the Company for the year ended June 30, 1994.
<PAGE> 10<PAGE>
Pending Litigation
On March 17, 1995, the Company announced that it had filed, on behalf of
itself and its AQM subsidiary, a lawsuit in the Chancery Court of Faulkner
County, Arkansas against DeWayne Davis, the former Chief Executive Officer,
Chief Financial Officer and director of AQM. In the lawsuit, the companies
charge Mr. Davis with fraud, self-dealing, misappropriation of company assets,
misappropriation of trade secrets, breach of fiduciary duty and other causes
of action for certain alleged acts committed as a director and officer of AQM
and the Company. One of the alleged acts involved the purchase of materials
and timber products from American Plywood Sales, Inc. ("APS"), a wholly-owned
subsidiary of Builders Warehouse Association, Inc. ("BWA"). (Mr. Davis
controlled BWA as a director and major shareholder.) The lawsuit alleges
that these purchases were at prices in excess of those that could have been
obtained by purchasing materials directly from the suppliers. Additionally,
the lawsuit seeks recovery of certain amounts deemed by the Company's
management to be unauthorized compensation and executive benefits. AQM is
not seeking any recovery from BWA or APS for amounts paid for materials
purchased in the current or preceding fiscal periods.
AQM has begun internal discovery to determine the amount of recovery
being sought through the litigation. Management has determined, however,
that no material impact to the historical financial statements will be
incurred. Further, the potential recovery, if any, will be accounted for as
a gain contingency under Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," therefore no potential benefits will be
reflected in the accompanying financial statements until they are realized.
Mr. Davis has countersued AQM for the aggregate amount of $5,000
alleging, among other things, incomplete compensation during his tenure as an
executive officer of AQM. AQM believes that the amounts claimed under this
countersuit are not material to the financial statements of AQM. In addition,
BWA has filed a lawsuit against AQM and the Company on the basis that AQM
allegedly owes APS for wood products purchased by AQM from APS. These
purchases were previously recorded as incurred and therefore the effect of
this claim is already reflected in AQM's interim financial statements. AQM
has ceased purchasing any materials from APS and has secured alternative
suppliers which AQM believes will meet its production requirements. Due to
the dispute with Mr. Davis, the amount owed to BWA is being held by AQM, at
the request of counsel, pending resolution of the lawsuits.
Significant Unconsolidated 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 six month period ended December 31, 1995. 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 six months
ended December 31, 1995.
Overall growth in DCT's target markets continued the sales growth
experienced during the first quarter ended September 30, 1995 and during the
year ended June 30, 1995. Net sales increased approximately 2% from
$7,728,000 to $7,896,000 for the three months ended December 31, 1994 and
1995, respectively. Net sales also increased for the six month period ended
December 31, 1995 to $13,282,000 from $12,004,000 for the six month period
ended December 31, 1994, an 11% increase. 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.
Operating profit did not keep pace with the increased sales, declining
from approximately $689,000 (8.9% of net sales) to $514,000 (6.5% of net
sales) for the three months ended December 31, 1994 and 1995, respectively.
A similar decline was experienced for six months ended December 31, 1995.
Operating profit for this period declined from approximately $1,096,000
(9.1% of net sales) to $805,000 (6.1% of net sales). The declines in
operating profits are due to increases in cost of goods sold and general and
operating expenses.
<PAGE> 11<PAGE>
Cost of goods sold, as a percentage of sales, increased to 83% for the
six months ended December 31, 1995 as compared to 82% for the six months
ended December 31, 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 ensure more efficiency is obtained and thereby
reducing current cost levels even though sales volume increases. Management
is also exploring alternative sources for its raw materials to reduce
material costs and was successful in purchasing lower cost materials at the
end of the current quarter.
An overall increase in general and administrative expenses also
contributed to the lower operating profit. As a percentage of net sales,
these costs increased from 5.3% to 6.4% for the six month periods ended
December 31, 1994 and 1995, respectively. Increases in professional fees
over prior year levels and an increase in the allowance for doubtful accounts
primarily contributed to this increase.
Interest expense increased from approximately $300,000 to $380,000 for
the six months ended December 31, 1994 and 1995, respectively and from
approximately $166,000 to $204,000 for the three months ended December 31,
1994 and 1995, respectively. These increases were due primarily to increased
borrowings on DCT's line of credit and increased long-term borrowing over the
levels of the prior year as well as margin interest paid in connection with
DCT's marketable securities portfolio. 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
$72,000 for the three months ended December 31, 1995 as compared to
approximately $611,000 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 Tapes Unlimited, Inc. ("TU"). Management believed that the cost of
maintaining the TU subsidiary outweighed the benefits provided to DCT. The
effect on net income (loss) of the operations of TU is segregated on the face
of the income statement as discontinued operations, and totaled approximately
$95,000 and ($86,000), net of income taxes, for the six months ended December
31, 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 is reflected in the income from
discontinued operations for the six months ended December 31, 1995.
<PAGE> 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.O.I. INDUSTRIES, INC.
/s/ Tim C. Hafer
By: __________________________________ Date: February 14, 1996
Tim C. Hafer, Vice President
and Chief Financial Officer
PAGE
<PAGE>
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