UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ___________________ to ___________________
Commission file number: 1-12572
S.O.I. INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 59-2158586
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16910 Dallas Parkway, Suite 100, Dallas, Texas
75248 (Address of principal executive offices; telephone number)
(972) 248-1922
(Issuer's telephone number)
Securities registered pursuant to Section 12 (b) of the Exchange Act:
Title of each class: Name of exchange on which registered:
Common Stock American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Exchange Act: None
Check whether issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [ X ] No
[ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of September 15, 1996 was approximately $1,591,000 (based
on the closing price of the registrant's Common Stock on such date). Revenues
for the fiscal year ended June 30, 1996 were $623,978.
As of September 15, 1996, the registrant had issued and outstanding
2,152,949 shares of Common Stock, par value $0.0002 per share.
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TABLE OF CONTENTS
Item
Number Page
- ------ ----
Part I
1. Description of Business 1
2. Description of Property 3
3. Legal Proceedings 3
4. Submission of Matters to a Vote of Security Holders 4
Part II
5. Market for the Company's Common Stock and Related
Stockholder Matters 5
6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
7. Index to Financial Statements 14
8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 15
Part III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 16
10. Executive Compensation 18
11. Security Ownership of Certain Beneficial Owners and Management 20
12. Certain Relationships and Related Transactions 20
13. Exhibits and Reports on Form 8-K 21
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company is a diversified management company engaged, through its
affiliate and subsidiary, in videotape duplication, and industrial metal door
assembly and sales. The affiliate and subsidiary of the Company are Digital
Communications Technology Corporation ("DCT"), a Delaware corporation doing
business as MagneTech Corporation and Omni Doors, Inc. ("Omni"), a Florida
corporation, respectively. The Company's primary business is a holding company,
to acquire and operate business operations and provide management expertise to
the subsidiaries and affiliates.
Effective February 29, 1996, the Company sold 100% of the common stock of
its former subsidiary, Tempo Lighting, Inc. ("Tempo"), a Delaware corporation to
T.I. Inc., a Nevada corporation. The net purchase price for the common stock of
Tempo was $453,436 which resulted in a loss on the disposition of Tempo of
$900,000.
On September 10, 1996, with an effective date for accounting purposes of
August 31, 1996, the Company sold all of the common stock of American Quality
Manufacturing Corporation ("AQM"), a Delaware corporation doing business as
American Cabinet, Inc. The sale agreement relieved the Company of the net
liabilities of AQM from the consolidated group, and consequently, will result in
a gain on the disposition of AQM in the first quarter ending September 30, 1996.
The Company was incorporated in the State of Florida in 1982 and changed its
state of incorporation by means of a merger with a Delaware corporation to the
State of Delaware in 1987. The address of the Company's principal executive
office is 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248 and its telephone
number is (972) 248-1922.
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
The Company owns approximately 17% of the issued and outstanding capital
stock of DCT, a publicly-held company whose common stock is listed on the
American Stock Exchange.
Products. DCT is an integrated video communications company which offers
video tape duplication and satellite communications services. DCT duplicates a
variety of video cassettes, including full-length movies, training, music,
sales, sports and educational programs. DCT offers its reproduction services to
entertainment companies and a wide range of industrial customers including
advertising agencies, direct selling organizations and educational groups
throughout the United States, Canada and Latin America. DCT's satellite
operation consists of two mobile KU band units which are capable of transmitting
live or pre-recorded programming from any location to commercial satellites.
DCT's satellite communications customers include local, network and cable
television operators primarily in the Southeastern United States.
Customers. During the year ended June 30, 1996, DCT's largest customer,
Madacy Music Group, accounted for approximately 17.6% of its sales. During the
year ended June 30, 1995 two of DCT's customers, Madacy Music Group and Atlantic
Recording Corporation, accounted for approximately 16.3% and 12% respectively,
of its sales.
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Raw Materials and Manufacturing. DCT purchases bulk quantities of videotape
("pancake") and empty video cassettes ("shells") for its reproduction business
from several manufacturers at market prices in the United States and the Pacific
Rim. The pancake and shells are readily available on the open market. The
majority of DCT's video duplication equipment is manufactured by several major
manufacturers in Japan and purchased from domestic distributors.
The equipment utilized in DCT's satellite broadcasting business includes two
KU band broadcasting trucks, cameras, generators, telephonic equipment and dual
transmitters. DCT purchases its materials and equipment from several major
manufacturers and believes that the loss of any of its suppliers or
manufacturers would not have an adverse material effect on DCT's business,
financial condition and results of operations.
Properties. DCT duplicates video tapes at two facilities, one located in Ft.
Lauderdale, Florida and one located in Indianapolis, Indiana. The Ft. Lauderdale
facility, which is made up of two adjacent buildings and covers a total of
approximately 24,000 square feet, is a real-time duplication facility with the
capacity to duplicate an average of approximately 15,000 videos per day. The
Indianapolis facility, which covers approximately 66,000 square feet in adjacent
buildings, is a fully automated, state of the art high-speed duplication
facility with the capacity to duplicate 100,000 videos per day.
Competition. DCT's industry is highly competitive. There are other
commercial video duplicating and satellite broadcasting companies which compete
with DCT and have greater financial resources and sales volume than DCT. DCT
depends upon its ability to provide quality services at competitive prices to
its customers in order to be competitive.
Employees. As of June 30, 1996, DCT had a total of approximately 200
employees, all of whom are full-time employees. None of the employees are
represented by a labor union. The Company believes that DCT has good relations
with its employees.
OMNI DOORS, INC.
The Company owns all of the issued and outstanding common stock of Omni.
Products. Omni distributes and assembles industrial doors in the South
Florida region of the United States. Omni offers its services and products to
building contractors constructing such projects as hotels and motels, self
storage facilities and other construction projects requiring industrial doors.
Once assembled, the doors are either delivered to the construction site or
picked up by the contractor at Omni's office/warehouse facility.
Customers. No single customer accounts for over 10% of Omni's sales.
Raw materials. Omni is an authorized distributor for Republic Builders
Products ("Republic"), and consequently purchases the majority of its
unassembled industrial doors from Republic. These unassembled doors along with
other materials are readily available from Omni's suppliers. While Omni's
management does not anticipate, and has not experienced, any disruption in its
relationship with its primary vendor, any interruption may have a material
effect on the financial stability of Omni. Omni's assembly operation does not
require specialized equipment. This equipment is readily available from multiple
locations and sources.
Properties. Omni assembles and distributes its industrial doors at its
office/warehouse facility located in Pembroke Park, Florida. The facility is
leased under an operating lease agreement which expires in 1999. The facility
covers approximately 4,800 square feet.
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Competition. Omni's industry is highly competitive. There are other
industrial door distributors which compete with Omni and have greater financial
resources and sales volume than Omni. Omni depends on its ability to provide
quality service at competitive prices to customers in order to be competitive.
Employees. As of June 30, 1996, Omni had a total of three employees, all of
whom are full-time employees. None of the employees are represented by a labor
union. The Company believes that Omni has good relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTY
Set forth below is certain information with respect to the Company's
principal properties. The Company believes that all of these properties are
adequately insured, in good condition and suitable for the uses described below.
Approximate Size Owned/ Lease Expiration
Location Primary Use (Square Feet) Leased Date
- -------- ----------- ------------- ------ ----
Dallas, Corporate 10,328 * Leased June 2000
Texas Office
Pembroke Park, Assembly, 4,800 Leased February 1999
Florida Office
* Shared facilities with three other entities
ITEM 3. LEGAL PROCEEDINGS
The Company may from time to time be party to various legal actions arising
in the ordinary course of its business. In addition, the Company is currently
involved in the following litigation:
Davis Lawsuit:
--------------
On March 17, 1995, the Company announced that it had filed on behalf of
itself and its former 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 continues 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;"
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therefore no potential benefits will be reflected in the accompanying financial
statements until they are realized.
Mr. Davis has countersued AQM and the Company alleging incomplete
compensation during his tenure as an executive officer of AQM. AQM believes that
the amounts claimed under this countersuit are not material to the financial
statements of AQM. In addition, BWA has filed a lawsuit against AQM and the
Company on the basis that AQM allegedly owes APS for wood products purchased by
AQM from APS. These purchases were previously recorded as incurred and therefore
the effect of this claim is already reflected in AQM's 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.
Shareholder Derivative Lawsuit:
-------------------------------
On March 4, 1996, Adrian Jacoby, allegedly on behalf of the Company, and
Richard Abrons, allegedly on behalf of DCT, brought a purported shareholder
derivative lawsuit against the Company's Board of Directors - Kevin B. Halter,
Kevin B. Halter, Jr., Gary C. Evans and James Smith - Halter Capital Corporation
and Securities Transfer Corporation. In addition, the Company and DCT have been
joined as "nominal defendants." In the lawsuit, the Plaintiffs have alleged
breaches of fiduciary duty, fraud, and violations of state securities laws. The
Plaintiffs seek unspecified actual and exemplary damages, a constructive trust
against the assets of the Defendants and an accounting of the affairs of the
Defendants with respect to their dealings with the Company and DCT. In addition,
the Plaintiffs have requested a temporary injunction and the appointment of a
receiver for the Company and DCT. The Plaintiffs have brought this lawsuit
allegedly to vindicate the wrongs that the Plaintiffs claim were done to the
Company and DCT by the individual defendants and their affiliated companies,
and, if any damages are ultimately awarded to the Plaintiffs, those damages will
be awarded on behalf of, and for the benefit of, the Company and all of its
shareholders. If they are successful, the Plaintiffs may, however, recover
certain attorneys' fees and costs. The case is entitled Adrian S. Jacoby et al
v. Kevin B. Halter et al, cause no. 96-02169-G, and is pending 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 Plaintiffs have not
sought to recover any damages against the Company. In this type of lawsuit, the
Company is joined as a procedural matter to make it a party to the lawsuit.
All of the Defendants have answered and denied the allegations contained in
the Plaintiffs' Petition. A certain amount of discovery has been conducted by
both Plaintiffs and Defendants. All of the Defendants deny all the material
allegations and claims in the Petition, dispute the Plaintiffs' contention that
this is a proper shareholder derivative action, deny that the Plaintiffs have
the right to pursue this lawsuit on behalf of the Company and DCT and are
vigorously defending the lawsuit. In addition, the Defendants have filed
Counterclaims against the Plaintiffs and third party actions against Blake
Beckham, attorney at law, Beckham & Thomas, L.L.P., Sanford Whitman, the former
CFO of the Company and Jack Brown, the former president of DCT, seeking damages
in excess of $50 million. In its Counterclaim, the Company has asserted that the
filing of this lawsuit and Temporary Restraining Order caused the Company
damages. However, the Company does not believe that the lawsuit will have any
further material impact on the operations or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
the year ended June 30, 1996.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been listed on the AMEX since November
19, 1993 under the symbol "SOI." The following table sets forth the high and low
sales prices of the Common Stock on the AMEX for the periods indicated, adjusted
for a 1 for 8 reverse stock split which occurred on December 15, 1995.
High Low
---- ---
Fiscal 1995:
First Quarter $20.50 $13.00
Second Quarter $26.00 $17.00
Third Quarter $24.00 $11.00
Fourth Quarter $14.00 $ 8.00
Fiscal 1996:
First Quarter $10.00 $ 5.50
Second Quarter $ 7.00 $ 1.38
Third Quarter $ 1.38 $ 2.69
Fourth Quarter $ 2.13 $ 0.75
On September 15, 1996, the closing price of the Common Stock was $1.125 per
share. On September 15, 1996, there were 441 stockholders of record of the
Common Stock. Additionally, the Company believes there are in excess of 2,200
additional beneficial holders of the Company's Common Stock held in brokerage
accounts.
The Company currently intends to retain all earnings to finance the
development and expansion of its operations. The Company does not anticipate
paying cash dividends on its shares of Common Stock in the foreseeable future.
The Company's future dividend policy will be determined by its Board of
Directors on the basis of various factors, including but not limited to the
Company's results of operations, financial condition, business opportunities and
capital requirements. The payment of dividends will also be subject to the
requirements of Delaware law.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
Overview
Effective February 29, 1996, the Company sold 100% of the common stock of
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 the operations of Tempo have
been segregated and reflected separately in the discontinued operations section
of the
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Consolidated Statements of Operations for all periods presented. The net effect
of the discontinued operations of Tempo for the years ended June 30, 1996 and
1995 is approximately ($264,000) and ($153,000), respectively.
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. (AQM's total net liabilities -- total liabilities in excess
of total assets -- at June 30, 1996 approximated $3,900,000.) In addition, the
AQM sale included the release of the Company's guarantees of certain debt of AQM
with (1) AQM's primary lending institution; (2) certain key vendors; and (3) the
lessor of AQM'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 therefore 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 for the year ended June
30, 1996. The loss from discontinued operations of AQM for the years ended June
30, 1996 and 1995 is approximately $3,315,000 and $2,644,000, respectively.
The Company also generated an approximate $511,000 loss during the year
ended June 30, 1996 on the disposition of approximately 1,622,000 shares of its
investment in DCT. The transfer of these shares 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 year ended June 30, 1996. These open market 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 June 30, 1996 was 1,111,462
shares -- approximately 17.6% of the outstanding common stock of DCT.
Door Distribution Segment
The Door Distribution segment has previously not been separately reported
due to it's immateriality to the Company. However, with the sale of Tempo and
AQM, the sales of this segment have become material to the Company's
consolidated revenues. The Door Distribution segment consists of the operations
of the Company's Omni subsidiary, which was incorporated in July 1985 under the
laws of the State of Florida. Omni is a distributor and assembler of industrial
doors and frames in the South Florida region of the United States.
Net sales from this segment approximated $468,000 as compared to
approximately $507,000 for the years ended June 30, 1996 and 1995, respectively.
The approximate 8% decline in net sales was due to higher construction activity
in the prior years in Omni's market area. The South Florida area experienced a
significant increase in construction activity in the wake of hurricane Andrew
which caused significant property damage prior to fiscal year 1994. This
increased demand led to the higher sales in prior years. The net sales of this
segment for the year ended June 30, 1994 were approximately $492,000 which are
consistent with net sales for the year ended June 30, 1995.
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For the year ended June 30, 1996, this segment generated an operating loss
of approximately $11,000 as compared to an operating loss of approximately
$4,000 for the year ended June 30, 1995. The difference in operating results is
due primarily to an increase in the cost of goods sold during the most recent
fiscal year. Gross margins were approximately 2% higher for the year ended June
30, 1995 as compared with the year ended June 30, 1996 due primarily to the
higher volume sold in the prior year with the corresponding volume discounts
made available by Omni's supplier. Additionally, the product mix sold in the
prior years included slightly higher margin doors and frames than in the current
year ended June 30, 1996.
This segment generated operating income of approximately $13,000 for the
year ended June 30, 1994. Gross margins were consistent for the years ended June
30, 1995 and 1994. The primary reason for the operating loss incurred during the
year ended June 30, 1995 and the operating income during the year ended June 30,
1994 was bad debt expense in fiscal year 1995 in excess of bad debt expense in
fiscal year 1994. Omni has revised its credit policies, requiring credit
approvals for all new accounts from the corporate office prior to sales to new
customers.
Other Operations
The portion of the Company's net revenues for the year ended June 30, 1996
which were not attributable to Omni were generated through management fees
collected from DCT through December 1995, and totaled approximately $180,000. No
such fees were charged to DCT subsequent to that date. For the year ended June
30, 1995, management fees charged to DCT and included in the Company's net
revenue totaled approximately $171,000. All other management fees charged either
to Omni or to the discontinued operations have been eliminated upon
consolidation.
General and administrative expenses increased from approximately
$1,092,000 for the year ended June 30, 1995 to approximately $1,372,000 for the
year ended June 30, 1996. Approximately $150,000 of the increase in general and
administrative expenses were due to increased salaries, wages and related costs
over those costs incurred during the year ended June 30, 1995. Additionally,
legal and professional fees increased approximately $50,000 largely due to legal
costs associated with the shareholder derivative action. The retirement of the
Company's ESOP loan caused an increase in the ESOP contribution expense of
approximately $63,000. Smaller increases in insurance, shareholder relations
expense and utilities contributed to the remaining increase in general and
administrative expenses.
Interest income (expense) and other - net decreased from approximately
$728,000 to ($12,000) for the years ended June 30, 1995 and 1996, respectively.
This change is due primarily to a one-time $750,000 payment received during the
year ended June 30, 1995 from the Company's former President and Chairman, Don
Courtney, in full settlement of a lawsuit.
The Company liquidated its marketable securities portfolio during the year
ended June 30, 1996, incurring a loss of approximately $144,000. This is
compared to realized gains of approximately $355,000 recognized during the year
ended June 30, 1995. The funds generated from the sales of securities were
utilized to fund the operations of the Company and its subsidiaries during both
years. The loss incurred on sales of some of the Company's investment in DCT
stock also contributed to the Company's net loss for the year ended June 30,
1996, and has been discussed earlier.
Discontinued Operations
As mentioned above, during and subsequent to the year ended June 30, 1996,
the Company elected to dispose of the Tempo and AQM subsidiaries. The operations
of Tempo, up to the effective disposition date of
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February 29, 1996, contributed a net loss of approximately $264,000. Tempo's
sales levels continued to decline from the levels of prior years, and efforts to
increase sales did not produce the results expected by Tempo management. As
continued operating losses could be expected for the foreseeable future, the
board of directors and management of the Company elected to sell Tempo, thereby
stopping the continued losses incurred by this former subsidiary. Management
believes that the loss incurred on the sale of Tempo could be easily offset by
the operating losses that would have been incurred if Tempo had been retained
through the end of the fiscal year ended June 30, 1996.
The operating losses of AQM continued during the fourth quarter ended June
30, 1996 and into the first quarter of the new fiscal year ended June 30, 1997,
despite the efforts of AQM management to negotiate price increases and reduce
selling and general and administrative expenses. The AQM subsidiary had been
positioned for a turnaround, posting two months of income in January and
February before a work slowdown occurred beginning in April of 1996. This
occurred after the Company had advanced over $2,300,000 to AQM in the form of
cash, stock and services. On April 22, 1996, organizers of the Union of
Needletrades, Industrial and Textile Employees (the "Union") appeared at AQM's
Conway, Arkansas plant distributing leaflets to employees encouraging their
support for union representation. On April 23, 1996 the Union 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's employees subsequently elected
union representation.
AQM also experienced a severe work slowdown which led to lower production
levels and caused a severe drain on AQM's cash resources which became a major
factor in not re-achieving the consistent production levels reached prior to
April 1996. The lower production levels contributed to significant operating
losses experienced by AQM since April 1996, which exceeded $2,000,000. It became
evident that AQM needed an immediate cash infusion to enable it to stabilize its
production process and begin a return to profitability. Since the Company was
not able to provide further cash advances, the Company's management and board of
directors believed that it was in the best interests of the Company's
stockholders, the Company, AQM and the employees of AQM to sell the operations
to another entity.
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 year ended June 30, 1996, the Company's cash flows from operating
activities resulted in a net use of cash of approximately $1,963,000. This is
compared with net cash used in operating activities of approximately $1,950,000
for the year ended June 30, 1995. The net loss of approximately $5,407,000 for
the year ended June 30, 1996 contributed significantly to the overall net use of
cash, with the significant portion of the loss resulting from discontinued
operations.
The other items contributing to the net use of cash from operating
activities are increases of approximately $858,000 related to an income tax
receivable and deferred income taxes. The increases in the deferred tax assets
are primarily the result of anticipated future utilization of net operating loss
carryforwards and the future deductibility of certain intangible expenses which
were capitalized for taxation purposes at their inception.
One item that offset the uses of cash from operating activities noted above
is management fees paid to the Company by DCT, Omni and the discontinued
operations. Due to the sale of Tempo and AQM and the
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resulting decrease in services needed from the Company, all of the funds
formerly provided by the discontinued operations will not need to be replaced to
provide adequate funding for the Company for the year ending June 30, 1997. The
primary sources of funding for the operations of the Company in fiscal year 1997
will be 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. Additionally, the Company plans to seek out
additional business acquisition candidates which will provide supplemental
operating cash necessary to fund the Company's overhead requirements.
Also affecting the cash flow from operating activities are approximately
$655,000 in losses recognized on sales of the Company's marketable securities
portfolio and sales of the Company's investment securities in DCT. These losses
are added back to net income in calculating cash flows from operations, and
therefore decrease the cash used in operating activities as presented on the
consolidated statements of cash flows.
In connection with the sale of Tempo, the Company used 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 year ended June 30, 1996. The board of directors voted to terminate the ESOP
plan as of July 1, 1996.
During the year ended June 30, 1996, the Company's cash needs were met
primarily through sales of marketable equity securities and sales of the
Company's investment securities in DCT. The utilization of credit lines by the
discontinued operations and cash from operations funded the operations of the
discontinued operations. Additionally, the Company issued approximately 358,000
shares of the Company's Common Stock which was used by AQM to pay AQM's trade
debt. Management expects that the Company will continue to meet all obligations
as they come due, and no vendor/supplier problems are expected.
OTHER COMMENTS
The Company's Door Distribution segment's sales levels generally follow the
commercial construction markets in South Florida. This segment is therefore
subject to economic and other influences affecting the southeastern portion of
the United States.
Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," is effective for fiscal years beginning after December 15,
1995. This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The effect of this pronouncement is not expected to have a material
effect on the financial position and results of operations of the Company.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" is effective for transactions entered
into in fiscal years that begin after December 15, 1995. This pronouncement
established financial accounting and reporting standards for stock-based
employee compensation plans. It encourages, but does not require companies to
recognize expense for grants of stock, stock options and other equity
instruments to employees based on fair value accounting rules. Companies that
choose not to adopt the new fair value accounting rules will be required to
disclose pro forma net income and
9
<PAGE>
earnings per share under the new method. The Company anticipates adopting the
disclosure provisions of SFAS 123, however the effect of adopting this
pronouncement is not expected to have a material effect on the financial
position and results of operations of the Company.
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, the separate financial statements of DCT are included as
part of this Form 10-KSB. Included below is a discussion related to these
financial statements.
OVERVIEW
DCT's sales continued to grow with a 19% increase over the previous year.
However, DCT experienced a decline in operating profits from approximately
$811,000 to $428,000 for the years ended June 30, 1995 and 1996, respectively.
Increased operating costs, primarily related to increased cost of goods sold,
caused the lower operating results. These increased operating costs were
partially offset by decreases in interest expense and income from the
discontinued operations of Tapes Unlimited, Inc. ("TU").
LIQUIDITY
DCT provided approximately $2,280,000 in cash from operating activities for
the year ended June 30, 1996 as compared to approximately $109,000 in cash used
by operating activities for the year ended June 30, 1995. The change in DCT's
operating cash position is due primarily to the significant decrease in the
level of inventory. In addition, net income of approximately $223,000 during the
year ended June 30, 1996 contributed to cash as compared to the net loss
generated in the year ended June 30, 1995 of approximately $282,000. Other items
that affected cash from operating activities for the year ended June 30, 1996
were changes in accounts receivable, accounts payable, and prepaid expenses.
Overall inventory levels decreased approximately 29% from June 30, 1995 to
June 30, 1996. The raw materials component of inventory dropped by 37% while the
work-in-process and finished goods components remained relatively consistent.
The large decrease in raw materials is due to the focus of management to ensure
that the least amount of operating cash is invested in inventory by insisting
that shipments of raw materials are made on a just-in-time basis and by
minimizing the amount of raw materials purchased. In addition, during the fourth
quarter of fiscal year 1996, management decided to sell off an excess
accumulation of reworkable inventory in order to provide needed warehouse space
and improve operating cash flow in anticipation of peak season demand in the
fall. In the past, sufficient profit margins had existed which supported the
labor required to rework this product and restore it to its full, salable
condition. This decision had a negative impact on operating profits
(approximately 3%) since the previous unit costs exceeded the resale market
prices.
The decreased inventory level and the higher net sales contributed to a
improved inventory turnover rate that increased from 5.2 times for the year
ended June 30, 1995 to 5.9 for the year ended June 30, 1996. Inventory levels,
particularly in the work-in-process and finished goods categories, will
fluctuate somewhat depending on the size and number of video tape duplicating
orders processed at any given time. Typically, DCT does not stock significant
quantities of finished products, shipping orders immediately upon completion.
Accounts receivable decreased approximately $76,000 for the year ended June
30, 1996 as compared to an increase of approximately $891,000 for the year ended
June 30, 1995. DCT's accounts receivable collection period (measuring how
quickly, on average, DCT collects its accounts receivable) decreased from
10
<PAGE>
approximately 74 days at June 30, 1995 to approximately 61 days at June 30,
1996. The decrease is due primarily to the write-off of significant accounts in
the current year that were previously reserved in the year ended June 30, 1995.
The above write-off, improved collection efforts, and the lack of any large
delinquent accounts allowed DCT to decrease its allowance for doubtful accounts
from approximately $1,065,000 to $414,000 as of June 30, 1995 and 1996,
respectively. Despite the improved collection periods, DCT continues to receive
competitive pressures from its customers to grant longer payment terms.
Management will continue to monitor collections and outstanding accounts
receivable to ensure timely collection.
Accounts payable increased approximately $867,000 for the year ended June
30, 1996 as compared to an increase of approximately $404,000 for the year ended
June 30, 1995. The increase is due primarily to the growth in sales volumes that
has dictated additional raw material, equipment and supply purchases. In
addition, DCT's attempts to minimize the outstanding balance on the revolving
line of credit have contributed to the increase.
Prepaid expenses and other current assets increased approximately $269,000
for the year ended June 30, 1996 as compared to an increase of approximately
$314,000 for the year ended June 30, 1995. The increase is primarily related to
income tax receivables based on anticipated refunds due to DCT's net taxable
loss in the current year.
Approximately $34,000 was provided by investing activities for the year
ended June 30, 1996 as compared to the use of approximately $2,005,000 for the
year ended June 30, 1995. The primary sources of funds were an approximate
$188,000 decrease in loans receivable from affiliate companies and an
approximate $1,120,000 decrease in DCT's marketable securities portfolio. In
addition, proceeds from the sale of stock of the Company's Common Stock held by
DCT provided approximately $113,000.
DCT utilized approximately $2,215,000 to reduce its indebtedness on its
credit line agreement during the year ended June 30, 1996 and repaid
approximately $778,000 in long term debt. In addition, approximately $79,000 in
cash was generated from issuances of common stock in connection with bonuses and
other employee compensation. On May 6, 1996 DCT generated $930,000 with the sale
of 100,000 shares of Class A convertible preferred stock in a private placement.
The Class A convertible preferred stock is convertible into DCT's Common Stock
at a 20% discount to the market price at the date of conversion.
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 year ended June 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 $1,388,000 in equipment and leasehold
improvements for the year ended June 30, 1996. Expenditures during the year
consisted primarily of the following: a high speed video duplication system at
DCT's Fort Lauderdale facility (subsequently relocated to the Indianapolis
facility), and factory upgrades for all 9 high-speed duplicators located in
Indianapolis. These upgrade kits increased the output yield of the equipment by
45%. These expenditures were financed through operations and borrowings on DCT's
line of credit.
11
<PAGE>
DCT plans to continue to expand its current operating facilities at both
the Indianapolis and Fort Lauderdale facilities in order to continue to meet the
volume demands of its sales growth. Included in the planned capital expansion is
the acquisition of 482 real-time duplicators in the Fort Lauderdale facility and
the purchase of additional tape loading and high-speed automatic packaging
equipment at both facilities.
Subsequent to June 30, 1996, DCT signed a commitment letter with Bank One,
N.A. ("Bank") which will provide a credit facility in excess of $9,400,000. This
new financing will replace the existing facility with NBD Bank , N.A. and
consists of a $5,000,000 revolving line of credit and over $4,400,000 in term
loans and a long term lease agreement. The facility has a two year term and
includes interest rates at .25% and .50% above the Bank's base rate (closely
related to the Bank's prime interest rate). This new facility, along with cash
from operations, will be used by DCT to fund the continued expansion of its
video duplication and satellite operations.
RESULTS OF OPERATIONS
Overall growth in DCT's target markets and overall growth in demand for
video tapes throughout the industry led to continued sales growth in the current
year. Net sales increased approximately 19% from $20,894,000 to $24,807,000 for
the years ended June 30, 1995 and 1996, respectively. Significant sales
increases, were experienced primarily in DCT's third and fourth fiscal quarters.
This sales growth is due to the expansion of DCT's fulfillment services along
with expanded orders from existing customers as DCT's reputation for providing
quality products has grown. As in the prior fiscal years, management's focus on
the retail sell through market has also contributed to the overall sales growth.
DCT's sales to the retail sell through market focuses on sales of
pre-recorded video tapes which are sold at the retail level. The most rapid
growth in video tapes sold to this market are those which are recorded on a
narrower band width (i.e. extended play mode) which allows more programming to
be recorded 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 through investment in high-speed
equipment optimally suited to the production of extended play programming,
management has positioned DCT to capitalize on this portion of the video
industry. Fulfillment services utilize DCT's ability to prepare packages that
include other promotional material and packaging, along with the video tape.
After assembly, these packages are then sent to multiple consumer or retail
destinations as stipulated by DCT's customers. Management hopes to increase
sales in this market segment by continuing to reorganize DCT's facilities and by
building a reputation for quality and reliability in the industry.
Operating profit did not keep pace with the increased sales, declining from
approximately $811,000 (3.9% of net sales) to $428,000 (1.7% of net sales) for
the years ended June 30, 1995 and 1996, respectively. The decline in operating
profit is due to increases in cost of goods sold.
Cost of goods sold as a percentage of sales increased to 82% for the year
ended June 30, 1996 as compared to 77% for the year ended June 30, 1995. The
increased cost of goods sold is related primarily to the sale of reworkable
inventory in the fourth quarter. Management decided to sell off an excess
accumulation of reworkable inventory in order to provide needed warehouse space
and improve operating cash flow in anticipation of peak season demand in the
fall. In the past, sufficient profit margins had existed which supported the
labor required to rework this product and restore it to its full, salable
condition. This decision had a negative impact on operating profits
(approximately 3%) since previous unit costs exceeded the resale market prices.
In addition, pricing pressures in the market have continued to restrict profit
margins. Management will continue to focus on cost containment, especially in
labor and overhead costs, to ensure more
12
<PAGE>
efficiency is obtained and thereby reduce the cost per unit as sales volumes
increase. Management is also continuously exploring alternative sources for its
raw materials in order to reduce material costs.
General and administrative expenses decreased slightly for the year ended
June 30, 1996. As a percentage of net sales, these expenses decreased from
approximately 9% to 7% for the year ended June 30, 1995 and 1996, respectively.
This decrease is due primarily to the lack of a large provision for doubtful
accounts as experienced in the previous year. In addition, management fees
previously paid to SOI were discontinued in December 1995. This significant
decrease was offset in the current year by substantial increases in legal and
professional expenses and an increase in officers and management salaries. Legal
fees were incurred in connection with the shareholder derivative lawsuit (see
Legal Proceedings, Item 3) and other professional fees were incurred in
connection with the upgrade of DCT's existing computer system.
Selling expenses increased in direct proportion to the increase in net
sales for the year ended June 30, 1996. As a percentage of net sales, selling
costs remained consistent at approximately 4.9% for the years ended June 30,
1995 and 1996.
Interest expense decreased from approximately $700,000 to $640,000 for the
years ended June 30, 1995 and 1996, respectively. This decrease is due to
repayments made on DCT's line of credit. The reduction was partially offset by
margin interest paid in connection with DCT's marketable securities portfolio.
DCT realized income from securities transactions of approximately $361,000
for the year ended June 30, 1996 as compared to approximately $513,000 for the
year ended June 30, 1995. The gains were from investment transactions associated
with DCT's marketable securities portfolio. DCT invests funds in equity
securities which are listed primarily on the New York Stock Exchange and on the
American Stock Exchange 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.
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 $170,000 and
($321,000) for the years ended June 30, 1996 and 1995, respectively. Although
the operations of Tapes Unlimited, Inc. have ceased, certain collection efforts,
along with debt forgiveness resulting from settlements with TU creditors, have
resulted in recoveries which are reflected in the income from continued
operations for the year ended June 30, 1996.
OTHER ITEMS
The costs of DCT's products are subject to inflationary pressures and
commodity price fluctuations. Inflationary pressures have been relatively modest
over the past five years and DCT has generally been able to mitigate the effects
of inflation and commodity price cost savings in other areas.
DCT's sales levels generally follow the retail sell through markets, which
typically peak in the fall and early winter months as retail demand and holiday
orders are met. DCT has attempted to mitigate this seasonality by increasing
sales efforts to lower volume, but higher margin, customers such as those
involved with corporate training video duplication and the video rental market.
Finally, management intends to focus its marketing efforts toward the mass
marketing advertising industry to help mitigate the seasonality of the retail
sell through markets. Even by utilizing these techniques, sales levels are still
lower in the spring and summer months.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of the Company (Audited)
F-1 Independent Auditors' Reports
F-3 Balance Sheet as of June 30, 1996
F-4 Statements of Operations for the Years Ended June 30, 1996 and 1995
F-5 Statements of Stockholders' Equity for the Years Ended June 30,
1996 and 1995
F-7 Statements of Cash Flows for the Years Ended June 30, 1996 and 1995
F-9 Notes to Financial Statements
Consolidated Financial Statements of the Company's significant
unconsolidated affiliate - Digital Communications Technology Corporation
(Audited)
F-20 Independent Auditors' Reports
F-21 Balance Sheets as of June 30, 1996
F-22 Statements of Operations for the Years Ended June 30, 1996 and 1995
F-23 Statements of Stockholders' Equity for the Years Ended June 30, 1996
and 1995
F-24 Statements of Cash Flows for the Years Ended June 30, 1996 and 1995
F-26 Notes to Financial Statements
14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
S. O. I. Industries, Inc.
We have audited the accompanying consolidated balance sheet of S. O. I.
Industries, Inc. (a Delaware corporation) and Subsidiaries as of June 30, 1996
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
The consolidated financial statements as of and for the year ended June 30, 1995
were audited by other auditors and they expressed an unqualified opinion in
their report dated September 25, 1995. The other auditors have not performed any
auditing procedures since that date.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of S. O. I. Industries,
Inc. and Subsidiaries as of June 30, 1996 and 1995 and the related consolidated
statements of operations, changes in stockholder's equity and cash flows for
each of the years ended June 30, 1996 and 1995, respectively, in conformity with
generally accepted accounting principles.
We also audited the reclassifications necessary to present the discontinued
operations, described in Note C, which were applied to the 1995 statement of
operations. In our opinion, such reclassifications are appropriate and have been
properly applied.
/s/ S. W. HATFIELD + ASSOCIATES
- -------------------------------
Dallas, Texas
September 19, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
S.O.I. Industries, Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of S.O.I. Industries, Inc. and Subsidiaries
for the year ended June 30, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of S.O.I. Industries,
Inc. and Subsidiaries operations and their cash flows for the year then ended
June 30, 1995 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
Dallas, Texas
September 25, 1995
F-2
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1996
<TABLE>
<CAPTION>
ASSETS
------
<S> <C> <C>
Current assets
Cash on hand and in bank $ 36,628
Accounts receivable
Trade, net of allowance for doubtful accounts of approximately $15,500 71,867
Other 699
Income tax refund receivable 581,669
Inventory 105,760
Prepaid expenses and other 893
Deferred tax asset, net of valuation allowance of approximately $1,702,820 617,142
Net current assets of discontinued operations 5,072,860
-----------
Total current assets 6,487,518
-----------
Property and equipment, net of accumulated depreciation 15,956
-----------
Other assets
Investment in affiliated company 1,388,078
Deferred tax asset 77,214
Other 5,779
Net other assets of discontinued operations 4,181,953
-----------
Total other assets 5,653,024
-----------
TOTAL ASSETS $ 12,156,498
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable
Trade $ 83,102
Officer 16,000
Other accrued liabilities 30,949
Net current liabilities of discontinued operations 9,018,638
-----------
Total current liabilities 9,148,689
Long-term liabilities
Net other liabilities of discontinued operations 1,811,870
-----------
Total liabilities 10,960,559
-----------
Commitments and contingencies
Stockholders' equity
Preferred stock - $0.00001 par value. 10,000,000 shares authorized.
none issued and outstanding. -
Common stock - $0.0002 par value. 50,000,000 shares authorized.
2,152,949 shares issued and outstanding. 431
Additional paid-in capital 6,717,093
Accumulated deficit (5,482,160)
-----------
1,235,364
Shares deemed to be treasury stock (70,401 shares) (39,425)
-----------
Total stockholders' equity 1,195,939
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,156,498
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 1996 and 1995
1996 1995
---------------------------
Net revenues $ 623,978 $ 678,431
Cost of sales 374,740 396,942
----------- ----------
Gross profit 249,238 281,489
----------- ----------
Operating expenses
Selling 49,667 51,889
General and administrative 1,372,254 1,091,908
Depreciation 5,211 3,915
----------- ----------
Total operating expenses 1,427,132 1,147,712
----------- ----------
Loss from operations (1,177,894) (866,223)
Other (expense) income
Interest (expense) income and other - net (12,414) 290,251
(Loss) Gain on sale of marketable securities (143,524) 355,348
(Loss) Gain on sale of securities of affiliated company (511,426) 228,728
Equity in earnings (loss) of affiliated company 160,255 (280,407)
----------- ----------
(Loss) Income from continuing operations before income taxes (1,685,003) (272,303)
Income tax benefit (expense) 756,608 421,738
----------- ----------
(Loss) Income from continuing operations (928,395) 149,435
----------- ----------
Discontinued operations, net of income taxes
Loss from discontinued operations of Tempo Lighting, Inc.,
net of income tax benefit of $-0- and $51,997, respectively (263,832) (152,771)
Loss from discontinued operations of American Quality
Manufacturing Corp., net of income tax benefit of
$11,769 and $932,061, respectively (3,314,642) (2,644,315)
Loss on disposition of Tempo Lighting, Inc. (900,000) -
----------- ----------
Loss from discontinued operations (4,478,474) (2,797,086)
----------- ---------
Net Loss $(5,406,869) $(2,647,651)
=========== =========
(Loss) Earnings per weighted-average
share of common stock outstanding
From continuing operations $ (0.54) $ 0.09
From discontinued operations (2.60) (1.78)
----------- ---------
Total loss per share $ (3.14) $(1.69)
=========== =========
Weighted-average number of common shares outstanding 1,719,924 1,567,684
=========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended June 30, 1996 and 1995
</TABLE>
<TABLE>
<CAPTION>
Shares Unrealized
Additional deemed Due loss on
Common Stock paid-in Accumulated treasury from marketable
Shares Amount capital deficit stock ESOP securities Total
------ ------ ------- ------- ----- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1994,
as originally reported 10,926,670 $ 273 $6,949,677 $3,149,640 $(262,120) $(476,834) $(874,905) $8,485,731
Effect of 1 for 8 reverse split (10,949,378) - - - - - - -
Rounding 176 - - - - - - -
Adjustment for shares deemed
treasury stock 1,586,704 39 (39) - - - - -
----------- ----- --------- ----------- ----------- ----------- ---------- -----------
Balances at July 1, 1994,
as restated 1,564,172 312 6,949,638 3,149,640 (262,120) (476,834) (874,905) 8,485,731
Shares held by affiliate 225,163 45 (45) - - - - -
Exercise of stock options 1,250 1 2,499 - - - - 2,500
Shares issued for services 935 - 10,060 - - - - 10,060
Dividends of securities - - - (577,280) - - - (577,280)
Adjustment to shares deemed
to be treasury stock - - 336,042 - (336,042) - - -
Reduction of amount due
from ESOP - - - - - 121,745 - 121,745
Affiliate issuance of equity
securities in excess of
book value - - 85,316 - - - - 85,316
Change in unrealized holding
losses on marketable equity
securities held by affiliate - - (613,989) - - - 613,989 -
Change in unrealized holding
losses on marketable equity
securities - - - - - - (73,163) (73,163)
Net loss for the year - - - (2,647,651) - - - (2,647,651)
----------- ------ -------- ----------- ------------ ---------- ----------- ---------
Balances at June 30, 1995 1,791,520 $ 358 $6,769,521 $ (75,291) $(598,162) $(355,089) $(334,079) $5,407,258
=========== ====== ========= =========== =========== ========== =========== =========
- Continued -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
CONTINUED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Shares Unrealized
Additional deemed Due loss on
Common Stock paid-in Accumulated treasury from marketable
Shares Amount capital deficit stock ESOP securities Total
------ ------ ------- ------- ----- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1995 1,791,520 $358 $6,769,521 $ (75,291) $(598,162) $(355,089) $(334,079) $5,407,258
Shares issued for payment
of subsidiary trade
accounts payable 358,304 72 380,699 - - - - 380,771
Shares issued for services 3,125 1 3,718 - - - - 3,719
Adjustment to shares deemed
to be treasury stock - - (558,737) - 558,737 - - -
Reduction of amount due
from ESOP - - - - - 355,089 - 355,089
Affiliate issuance of equity
securities in excess of
book value - - 163,494 - - - - 163,494
Change in unrealized holding
losses on marketable equity
securities held by affiliate - - (41,602) - - - - (41,602)
Change in unrealized holding
losses on marketable equity
securities - - - - - - 334,079 334,079
Net loss for the year - - - (5,406,879) - - - (5,406,869)
---------- --- ----------- --------- ---------- ----------- ---------- -----------
Balances at June 30, 1996 2,152,949 $431 $6,717,093 $(5,482,160) $(39,425) $ - $ - $1,195,939
========== === =========== ========= ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
--------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss for the year $(5,406,869) $(2,647,651)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 5,211 678,913
Provision for bad debts - 588,404
(Gain) Loss on sale of property and equipment 774 (75,714)
Common stock issued for services 3,719 -
(Gain) Loss on sale of marketable equity securities 143,524 (355,348)
(Gain) Loss on sale of securities of affiliated company 511,426 (228,728)
Issuance of affiliate stock in excess of book value - 85,316
Dividends of securities - (577,280)
Loss on equity investment in discontinued operations 3,578,474 -
Loss on disposition of Tempo Lighting, Inc. 900,000 -
Gain on equity investment in affiliate company (160,255) 109,348
Reserve for obsolescence - 148,676
Management fees paid in cash by affiliate company
and discontinued operations 112,478 -
Change in net assets and liabilities of discontinued operations (743,184) -
(Increase) Decrease in:
Accounts receivable (29,291) 278,385
Inventories 18,886 2,964
Income taxes receivable (581,669) (525,442)
Prepaid and other assets 2,827 8,467
Deferred tax assets-current and noncurrent (265,260) -
Increase (Decrease) in:
Accounts payable (64,091) 1,327,517
Other accrued liabilities 21,572 (543,620)
Payable to officer - (132,558)
Accounts payable to affiliated company - 352,736
Other long-term liabilities - 73,855
Deferred tax liability-noncurrent (11,233) (517,758)
--------- ---------
Net cash used in operating activities (1,962,961) (1,949,518)
--------- ---------
Cash flows from investing activities
Proceeds from sales of marketable equity securities 2,908,307 5,944,869
Purchase of marketable equity securities (1,794,540) (5,547,672)
Proceeds from sales of investment in affiliate company 212,976 243,275
Proceeds from sale of subsidiary 453,436 -
Change in other assets - (207,601)
Change in loans receivable - related parties - 301,876
Proceeds from sale of property and equipment - 26,271
Purchases of property and equipment - (605,479)
Proceeds from insurance settlement - 192,500
----------- ----------
Net cash provided by investing activities 1,780,179 348,039
----------- ----------
</TABLE>
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ --------
<S> <C> <C>
Cash flows from financing activities
Principal retirement of long-term debt (355,089) -
Proceeds from advances from officer 16,000 -
Proceeds from long-term borrowings - net - 745,304
Proceeds from revolving lines of credit - net - 482,092
Proceeds from sale of common stock - 2,500
Payment from ESOP 355,089 121,745
Payments on capital lease obligations - (107,184)
Payment of bank overdraft - (332,313)
--------- ---------
Net cash provided by financing activities 16,000 912,144
--------- ---------
INCREASE (DECREASE) IN CASH (166,782) (689,335)
Change in cash and cash equivalents at
beginning of year attributable to
affiliated company and discontinued operations 105,905 625,421
Cash at beginning of year 97,505 267,324
--------- ---------
Cash at end of year $ 36,628 $ 203,410
========= =========
Supplemental disclosure of interest and income taxes paid
Interest paid for the period $ 11,640 $ 681,090
========= =========
Income taxes paid for the period $ (9,703) $ 522,963
========= =========
Supplemental disclosure of non-cash
investing and financing activities
Common stock of SOI Industries issued to
retire accounts payable of subsidiary $ 380,771 $ -
========= =========
Common stock issued for services and acquisition $ - $ 10,060
========= =========
Investment securities issued for dividends $ - $ 577,280
========= =========
Acquisition of equipment by discontinued
operations subsidiary on a long-term
capital lease $ - $ 58,354
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
S. O. I. Industries, Inc. (SOI) was incorporated in 1982 under the laws of the
State of Florida and merged with a Delaware corporation in 1987 to effectively
change its incorporated domicile to Delaware. SOI is a diversified management
company owning subsidiaries involved in kitchen and bathroom cabinet
manufacturing, lighting fixture manufacturing and door distribution.
Tempo Lighting, Inc. (Tempo), a Delaware corporation, was a wholly-owned
subsidiary involved in the manufacture and sale of medium-priced residential and
commercial lamps and lighting fixtures through a variety of retail stores and
wholesale distributors. SOI sold 100.0% of its interest in Tempo to T. I., Inc.,
a Nevada corporation, effective February 29, 1996.
American Quality Manufacturing Corporation (AQM), a Delaware corporation, is a
wholly-owned subsidiary involved in the manufacture and sale of kitchen and
bathroom cabinets to the home construction and remodeling industry principally
through home centers and independently owned retailers. SOI sold 100.0% of its
interest in AQM to an unrelated third-party during September 1996.
Omni Doors, Inc. (Omni), a Florida corporation is a wholly-owned subsidiary that
distributes and assembles industrial doors in the South Florida region of the
United States.
Additionally, SOI owns, as of June 30, 1996 and 1995, respectively,
approximately 17.58% and 46.81% of the issued and outstanding stock of Digital
Communications Technology Corporation (DCT), a publicly owned Delaware
corporation. DCT and its subsidiaries are involved in the business of video and
audio tape production and duplication and the provision of remote video
satellite uplink services for commercial television broadcast networks and
station affiliates. The presence of common executive management and board of
directors, both at SOI and DCT, provides SOI with the ability to exercise
influence over operating and financial policies of DCT even though SOI holds
less than 20.0% of the voting common stock of DCT. Therefore, SOI accounts for
this investment using the equity method of accounting. As of June 30, 1996, the
market value of SOI's holdings in DCT was approximately $1,181,000.
DCT also owns approximately 18.62% of SOI. SOI uses the treasury stock method of
accounting for the reciprocal ownership. The shares deemed treasury stock
represent the ownership interest SOI has in itself through its investment in
DCT. These shares represent approximately 3.27% of the issued and outstanding
common stock of SOI.
During Fiscal 1996, SOI, with stockholder approval, effected a one for eight (1
for 8) reverse stock split. All issued and outstanding shares in the
accompanying consolidated financial statements have been adjusted to reflect the
effect of the reverse split as of the first day of the first period presented.
The accompanying consolidated financial statements include the accounts of
S.O.I. Industries, Inc., Tempo Lighting, Inc., American Quality Manufacturing
Corporation and Omni Doors, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
F-9
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS - Continued
Omni's sales levels generally follow the commercial construction markets in
South Florida. This segment is therefore subject to economic and other
influences affecting the southeastern portion of the United States.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and cash equivalents
---------------------------
The Company considers all cash on hand and in banks, including accounts in
book overdraft positions, certificates of deposit and other highly-liquid
investments with maturities of three months or less, when purchased, to be
cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2. Accounts receivable and revenue recognition
-------------------------------------------
In the normal course of business, Omni extends unsecured credit to
virtually all of its customers which are located principally in the South
Florida region of the United States. As Omni's products are used
principally in real property construction, the Company has the right to
file materialman's liens against its customers and/or the respective
project to collateralize its accounts receivable where the Company's
materials are installed under the pertinent provisions of the Uniform
Commercial Code and under the State of Florida laws.
Because of the credit risk involved, management has provided an allowance
for doubtful accounts which reflects its opinion of amounts which will
eventually become uncollectible. In the event of complete non-performance,
the maximum exposure to the Company is the recorded amount of trade
accounts receivable shown on the balance sheet at the date of
non-performance.
Revenue is recognized at the time doors are shipped to the Company's
customers.
3. Marketable Securities
---------------------
Marketable securities consist of equity securities and money market funds.
Gains or losses on dispositions of marketable securities are based on the
difference between the proceeds received and the adjusted carrying amount
of the securities sold, using the specific identification method.
4. Inventory
---------
Inventory consists of purchased doors, related door parts and other
supplies and raw materials necessary to assemble commercial doors for
resale. These items are carried at the lower of cost or market using the
first-in, first-out method.
F-10
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Property, plant and equipment
-----------------------------
Property and equipment, if any, are recorded at historical cost. These
costs are depreciated over the estimated useful lives, generally five (5)
to seven (7) years, of the individual assets using the straight-line
method.
Expenditures for repairs and maintenance are charged to expense as
incurred. Renewals and betterments which extend the economic life of the
respective asset are capitalized. Gains and losses from disposition of
property and equipment are recognized as incurred and are included in
operations.
6. Income taxes
------------
The Company utilizes the asset and liability method of accounting for
income taxes. At June 30, 1996 and 1995, the deferred tax asset and
deferred tax liability accounts, as recorded when material, are entirely
the result of temporary differences. Temporary differences represent
differences in the recognition of assets and liabilities for tax and
financial reporting purposes, primarily the allowance for doubtful
accounts, accumulated depreciation and certain liability items. A valuation
allowance was provided against deferred tax assets, where applicable.
The Company's operating results are included in the consolidated income tax
return of the Company's Parent. The Company calculates income tax expense
or benefits based on the applicable Federal and State income tax rates in
effect at the end of each operating year as a payable to or receivable from
its Parent company.
7. Changes in ownership changes in affiliates and/or subsidiaries
--------------------------------------------------------------
Issuances of SOI subsidiary or affiliate's common stock that cause changes
in SOI's ownership percentage in the subsidiary/affiliate are accounted for
as additions to paid-in capital. Additionally, the proportionate changes in
DCT's unrealized gains or losses in marketable equity securities, that
impact SOI's carrying value of the investment using the equity method, are
also recognized as a change to paid-in capital.
8. Earnings (loss) per share
-------------------------
Earnings (loss) per share are computed by dividing net income (loss) by the
weighted-average number of shares issued and outstanding during the
reporting period, excluding shares deemed to be treasury stock. Shares
owned by SOI's Employee Stock Ownership Plan (Plan) and either allocated to
employees or held in trust for future allocation are treated as issued and
outstanding for this computation.
9. Reclassifications
-----------------
Certain amounts, principally related to the discontinued operations of
Tempo and AQM have been reclassified in the June 30, 1995 financial
statements to conform to the current year presentation.
F-11
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
10. Accounting Standards not yet adopted
------------------------------------
Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," is effective for fiscal years beginning after
December 15, 1995. This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The effect of this pronouncement is not expected to
have a material effect on the financial position and results of operations
of the Company.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" is effective for transactions
entered into in fiscal years that begin after December 15, 1995. This
pronouncement established financial accounting and reporting standards for
stock-based employee compensation plans. It encourages, but does not
require companies to recognize expense for grants of stock, stock options
and other equity instruments to employees based on fair value accounting
rules. Companies that choose not to adopt the new fair value accounting
rules will be required to disclose pro forma net income and earnings per
share under the new method. The Company anticipates adopting the disclosure
provisions of SFAS 123, however the effect of adopting this pronouncement
is not expected to have a material effect on the financial position and
results of operations of the Company.
NOTE C - DISCONTINUED OPERATIONS
In March 1996, effective as of February 29, 1996, SOI sold 100.0% of the issued
and outstanding stock of Tempo Lighting, Inc. to T. I., Inc., a Nevada
corporation, for cash of approximately $453,000. The results of operations of
Tempo for the year ended June 30, 1995 and for the period through February 29,
1996 are presented separately as a component of discontinued operations in the
consolidated statements of operations. Additionally, the loss incurred on the
sale of Tempo is also presented separately as a component of discontinued
operations.
In September 1996, SOI sold 100.0% of the issued and outstanding stock of
American Quality Manufacturing Corporation to a corporate unrelated third party
for the assumption of all liabilities of AQM. In addition, the AQM sale included
the release of SOI's guarantees of certain debt of AQM with 1) their primary
lending institution; 2) certain key vendors; and 3) the lessor of AQM's
principal operating facility in Conway Arkansas. The sale agreement contains a
total guaranty release cap of $5.5 million. Additionally, SOI retained its
contingent guarantee of a $400,000 note between SOI and DCT, a significant
affiliate of SOI. The results of operations of AQM for the years ended June 30,
1996 and 1995, respectively, are presented as a component of discontinued
operations in the consolidated statements of operations.
Summarized results of operations for Tempo for Fiscal 1996 and 1995 are as
follows:
1996 1995
--------- ---------
Net sales $2,443,017 $4,361,700
========= =========
Operating loss $ (281,121) $ (152,884)
========= =========
Loss before income taxes $ (263,832) $ (204,768)
Income tax benefit - 51,997
--------- ---------
Loss from discontinued operations $ (263,832) $ (152,771)
========= =========
F-12
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - DISCONTINUED OPERATIONS - Continued
Summarized results of operations for AQM for Fiscal 1996 and 1995 are as
follows:
1996 1995
----------- ----------
Net sales $21,918,899 $18,410,778
=========== ==========
Operating loss, including management fees $(2,497,711) $(3,322,045)
=========== ==========
Loss before income taxes $(3,326,411) $(3,576,376)
Income tax benefit 11,769 932,061
----------- ----------
Loss from discontinued operations $(3,314,642) $(2,644,315)
=========== ==========
NOTE D - MARKETABLE SECURITIES
Marketable securities consist of equity securities and money market funds. The
securities had an aggregate cost of approximately $1,257,300 at June 30, 1995
and the portfolio contained net unrealized losses of approximately $334,000 at
the same date. These items resulted in a net carrying value of approximately
$923,300 at June 30, 1995. The entire portfolio was liquidated by June 30, 1996.
NOTE E - INVENTORY
Inventory consists of the following as of June 30, 1996:
Finished goods and purchased product $100,934
Raw materials and supplies 4,826
--------
$105,760
========
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 1996:
Vehicle $19,635
Machinery and equipment 13,034
Leasehold improvements 4,193
----------
36,862
Accumulated depreciation (20,906)
----------
Net property and equipment $15,956
==========
F-13
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - COMMON STOCK TRANSACTIONS
In November 1995, SOI, with prior stockholder approval, effected a one for eight
(1 for 8) reverse stock split. All issued and outstanding shares in the
accompanying consolidated financial statements have been adjusted to reflect the
effect of the reverse split as of the first day of the first period presented.
Additionally, in November 1995, the Board of Directors approved changes to the
SOI Articles of Incorporation allowing SOI to issue up to 50,000,000 shares of
common stock at $0.0002 par value and authorized the issuance of up to
10,000,000 preferred stock at $0.00001 par value. As of June 30, 1996, no shares
of preferred stock have been issued.
In May and June 1996, SOI issued an aggregate of approximately 358,300 shares of
common stock to various creditors of AQM in partial settlement of open trade
accounts payable. These shares were subsequently sold by the various creditors
and the proceeds were credited against amounts owed them by AQM. SOI recorded
these shares at the market price received that was reported by the respective
creditors.
NOTE H - COMMITMENTS
Omni leases office and warehouse facilities under an operating lease agreement.
The lease expires in 1999 and contains an annual lease payment escalation clause
whereby the base monthly rental increases by the greater of 6.0% per year or the
actual increase in the published consumer price index. Rent expense under this
lease agreement for the years ended June 30, 1996 and 1995 was approximately
$31,632 and $29,841, respectively.
Aggregate future non-cancelable rental payments under this agreement are as
follows:
Year ending
June 30, Amount
-------- ------
1997 $33,500
1998 35,500
1999 21,600
-------
Total $90,600
=======
NOTE I - EMPLOYEE STOCK OWNERSHIP PLAN
SOI's Employee Stock Ownership Plan (ESOP) provided retirement benefits to
substantially all employees of SOI and its subsidiaries. The ESOP is a qualified
employee benefit plan exempt from taxation under the Internal Revenue Code of
1986, as amended. There are approximately 90,291 (post-reverse split) shares in
the ESOP, which are held by the Employee Stock Ownership Trust (ESOT) for the
benefit of the participants. Employees of SOI and DCT began to participate in
the ESOP as of January 1, 1992. Payments by SOI to the ESOP for Fiscal 1996 and
1995 were approximately $375,240 and $162,430, including interest.
F-14
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - EMPLOYEE STOCK OWNERSHIP PLAN - Continued
The ESOT initially purchased the common shares of SOI using the proceeds of a
bank loan to SOI. In Fiscal 1994, this loan was refinanced with a bank and was
included in long-term debt in prior years. The loan was paid in full in March
1996, concurrent with the sale of Tempo.
The SOI Board of Directors approved the termination of the ESOP effective July
1, 1996 and SOI has applied for determination letter from the Internal Revenue
Service approving the termination of the ESOP. Final distribution of all shares
held in the ESOT is anticipated to occur prior to June 30, 1997.
NOTE J - RELATED PARTY TRANSACTIONS
During Fiscal 1996 and prior years, SOI made advances to and has made various
payments on Omni's behalf. These advances were unsecured, non-interest bearing
and repayable upon demand. During Fiscal 1996, SOI "forgave" approximately
$172,500 in advances to Omni and reclassified this balance to Omni's contributed
capital.
SOI received cash of approximately $58,400 in management fees from Tempo prior
to its February 1996 sale and approximately $180,000 in management fees from DCT
through December 1995. No other management fees were received from these
entities subsequent to the aforementioned dates.
SOI paid approximately $29,000 for the year ended June 30, 1996 to an entity
controlled by SOI officers for corporate office facilities rent.
NOTE K - STOCK OPTION PLAN
On March 19, 1988, the SOI Board of Directors adopted the S. O. I. 1988
Employees' Stock Option Plan. As of June 30, 1996, there are approximately
178,125 post-reverse shares reserved for issuance under the plan.
Exercise price
Options per share
------- ---------
Balance at July 1, 1994 2,500 $2.00
Exercised during Fiscal 1995 (1,250) -
-------- --------
Balance at June 30, 1995 1,250 $2.00
Exercised during Fiscal 1996 - -
-------- --------
Balance at June 30, 1996 1,250 $2.00
======== ========
F-15
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - EMPLOYMENT AGREEMENTS
SOI entered into two employment agreements with officers on January 15, 1996.
The agreements are for three years each and expire on December 31, 1998. The
minimum annual salaries (excluding bonus arrangements) for future years ending
June 30 are as follows:
Year ending
June 30 Amount
------- ------
1997 $180,000
1998 180,000
1999 90,000
---- --------
Totals $450,000
========
NOTE M - SEGMENT INFORMATION
All information reflected in the accompanying consolidated balance sheet and
statement of operations reflect principally the assets, liabilities and
operations of Omni, excluding the marketable securities portfolio, the
investment in DCT and the operating effects therefrom. Summarized business
segment data for Omni is as follows:
1996 1995
---------- --------
Net sales $467,600 $507,400
======= =======
Operating loss $(11,200) $ (4,300)
======= =======
Loss before income taxes $(12,800) $ (4,700)
Income tax benefit 2,400 1,200
------- -------
Loss from discontinued operations $(10,400) $ (3,500)
======= =======
Identifiable assets $240,200 $250,800
======= =======
Depreciation and amortization $ 4,900 $ 3,200
======= =======
Capital expenditures $ - $ 19,600
======= =======
NOTE N - INCOME TAXES
SOI and its wholly-owned subsidiaries file a consolidated Federal Income Tax
Return and separate company State Income/Franchise Tax Returns, as appropriate.
SOI has cumulative net operating loss carryforwards of approximately $6,500,000,
inclusive of amounts related to discontinued operations. Certain of these
operating loss carryforwards will be used to increase SOI's basis in
discontinued operations and, accordingly, offset any tax gains resulting from
such dispositions, as permitted by the Internal Revenue Code. If unused, the net
operating losses will begin to expire in 2010.
F-16
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - INCOME TAXES - Continued
The deferred current and non-current tax asset accounts on the accompanying
consolidated balance sheet consist of the following:
Current deferred tax asset $ 2,454,764
Valuation allowance for
current deferred tax asset (1,837,622)
Current deferred tax asset liability -
----------------
Net current deferred tax asset $ 617,142
================
Non-current deferred tax asset $ 77,984
Valuation allowance for
non-current deferred tax asset -
Non-current deferred tax liability (770)
----------------
Net non-current deferred tax liability $ 77,214
================
The current deferred tax asset relates principally to the anticipated future
utilization of the net operating loss carryforward. The non-current deferred tax
asset results to the anticipated future deductibility of certain SOI intangible
expenses which were capitalized for taxation purposes at their inception. The
net change in the valuation allowance for the year ended June 30, 1996 was an
increase of approximately $1,024,000.
The components of income tax benefit (expense) for the years ended June 30, 1996
and 1995, respectively, are as follows:
1996 1995
---- ----
Federal:
Current $245,124 $357,827
Deferred 453,299 17,719
------- -------
698,423 375,546
------- -------
State:
Current 9,248 39,765
Deferred 48,937 6,427
------- -------
58,185 46,192
------- -------
Total $756,608 $421,738
======= =======
The Company's income tax (benefit) expense for the years ended June 30, 1996 and
1995, respectively, differed from the statutory federal rate of 34 percent as
follows:
1996 1995
---- ----
Statutory rate applied to loss
before income taxes (34.0)% (34.0)%
Increase (decrease) in income taxes
resulting from:
State income taxes (3.4)% (15.8)%
Change in valuation allowance (2.8)% (8.9)%
Other, inclusive of SOI utilization of net
operating losses of discontinued operations (4.7)% (96.2)%
-------- -------
Income tax expense (benefit) (44.9)% (154.9)%
======== =======
F-17
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - INCOME TAXES - Continued
Deferred income tax expense (benefit) as of June 30, 1996 and 1995,
respectively, consists of the following components:
1996 1995
---- ----
Changes in deferred tax assets
Effect of future utilization of
net operating loss carryforwards $603,796 $ -
Effect of discontinued operations and
sale of subsidiary (42,171) (24,146)
Changes in deferred tax liabilities
Effect of discontinued operations and
sale of subsidiary (59,389) -
--------- ---------
Changes in deferred income tax accounts $502,236 $ (24,146)
========= =========
NOTE O - LITIGATION
The Company may from time to time be party to various legal actions arising in
the ordinary course of its business. In addition, the Company is currently
involved in the following litigation:
On March 17, 1995, the Company announced that it had filed on behalf of itself
and its former 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 continues 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.
F-18
<PAGE>
S. O. I. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - LITIGATION - Continued
Mr. Davis has countersued AQM and the Company alleging incomplete compensation
during his tenure as an executive officer of AQM. AQM believes that the amounts
claimed under this countersuit are not material to the financial statements of
AQM. In addition, BWA has filed a lawsuit against AQM and the Company on the
basis that AQM allegedly owes APS for wood products purchased by AQM from APS.
These purchases were previously recorded as incurred and therefore the effect of
this claim is already reflected in AQM's 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.
On March 4, 1996, Adrian Jacoby, allegedly on behalf of the SOI, and Richard
Abrons, allegedly on behalf of DCT, brought a purported shareholder derivative
lawsuit against the SOI Board of Directors - Kevin B. Halter, Kevin B. Halter,
Jr., Gary C. Evans and James Smith, Halter Capital Corporation and Securities
Transfer Corporation. In addition, SOI and DCT have been joined as "nominal
defendants". In the lawsuit, the Plaintiffs have alleged breaches of fiduciary
duty, fraud, and violations of state securities laws. The Plaintiffs seek
unspecified actual and exemplary damages, a constructive trust against the
assets of the Defendants and an accounting of the affairs of the Defendants with
respect to their dealings with SOI and DCT. In addition, the Plaintiffs have
requested a temporary injunction and the appointment of a receiver for SOI and
DCT. The Plaintiffs have brought this lawsuit allegedly to vindicate the wrongs
that the Plaintiffs claim were done to SOI and DCT by the individual defendants
and their affiliated companies, and, if any damages are ultimately awarded to
the Plaintiffs, those damages will be awarded on behalf of, and for the benefit
of, SOI and all of its shareholders. If they are successful, the Plaintiffs may,
however, recover certain attorneys fees and costs. The case is entitled Adrian
S. Jacoby et al v. Kevin B. Halter et al, cause no. 96-02169-G, and is pending
in the 134th Judicial District for the District Court of Dallas County, Texas.
Even though SOI is a nominal defendant in the lawsuit, the Plaintiffs have not
sought to recover any damages against SOI. In this type of lawsuit, SOI is
joined as a procedural matter to make it a party to the lawsuit.
All of the Defendants have answered and denied the allegations contained in the
Plaintiffs' Petition. A certain amount of discovery has been conducted by both
Plaintiffs and Defendants. All of the Defendants deny all the material
allegations and claims in the Petition, dispute the Plaintiffs' contention that
this is a proper shareholder derivative action, deny that the Plaintiffs have
the right to pursue this lawsuit on behalf of SOI and DCT and are vigorously
defending the lawsuit. In addition, the Defendants have filed Counterclaims
against the Plaintiffs and third party actions against Blake Beckham, attorney
at law, Beckham & Thomas, L.L.P., Sanford Whitman, the former CFO of SOI and
Jack Brown, the former president of DCT, seeking damages in excess of $50
million. In its Counterclaim, SOI asserted that the filing of this lawsuit and
Temporary Restraining Order caused the Company damages. However, SOI does not
believe that the lawsuit will have any further material impact on the operations
or financial condition of SOI.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Digital Communications Technology Corporation
Dallas, Texas:
We have audited the accompanying consolidated balance sheet of Digital
Communications Technology Corporation and Subsidiaries as of June 30, 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Digital
Communications Technology Corporation and Subsidiaries as of June 30, 1996, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended June 30, 1996 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND
- ---------------------
COOPERS & LYBRAND L.L.P.
Miami, Florida
August 23, 1996
F-20
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ASSETS 1996
Current assets:
Cash and cash equivalents $ 615,037
Marketable securities 1,900,050
Accounts receivable, net of allowance for doubtful accounts of $414,000 3,719,265
Inventories 2,862,911
Prepaid expenses and other current assets 614,210
-------------
Total current assets 9,711,473
Property, plant and equipment, net 5,469,304
Other assets 81,343
Loans receivable, related parties 413,369
-------------
$ 15,675,489
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 1,625,325
Current portion of long-term debt 935,127
Accounts payable 3,032,236
Accrued liabilities 362,520
-------------
Total current liabilities 5,955,208
---------
Long-term debt, less current portion 1,666,063
---------
Deferred tax liability 157,216
-------
Commitments (Notes 8 and 14)
Shareholders' Equity:
Series A convertible preferred stock, 10,000,000 shares of $.0001 par value
per share authorized; 100,000 shares issued and
outstanding, $1,000,000 liquidation preference 10
Common stock, 25,000,000 shares of $.0002 par value per share
authorized; 6,332,116 shares issued, 6,125,162 shares
outstanding 1,266
Additional paid-in capital 8,479,318
Retained earnings 1,030,152
Investment in S.O.I. Industries, Inc. (1,084,983)
Net unrealized holding loss on securities (528,761)
-------------
Total shareholders' equity 7,897,002
-------------
$ 15,675,489
=============
The accompanying notes are an integral part of these financial statements
</TABLE>
F-21
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Net sales $ 24,807,244 $ 20,894,025
-------------- -------------
Costs and expenses:
Cost of goods sold (exclusive of depreciation) 20,272,614 16,094,788
Selling expenses 1,215,082 1,040,280
General and administrative expenses 1,733,482 1,793,171
Depreciation and amortization 1,157,917 1,154,880
-------------- --------------
Total costs and expenses 24,379,095 20,083,119
-------------- --------------
Operating income 428,149 810,906
Interest expense (639,517) (700,251)
Realized gain on sales of marketable securities 360,512 512,971
Other income 51,166 142,208
-------------- --------------
Income from continuing operations before provision for
income taxes 200,310 765,834
Provision for income taxes 109,003 283,167
-------------- --------------
Income from continuing operations 91,307 482,667
Discontinued operations (Note 16):
Income (loss) from discontinued operations, net of related
income taxes 131,737 (321,140)
Loss on disposal of discontinued operations, net of related
income taxes 0 (443,400)
-------------- --------------
Net Income (loss) $ 223,044 $ (281,873)
============== ==============
Weighted average shares of common stock outstanding 5,553,415 5,264,773
================ ==============
Net (loss) income per common share:
Income from continuing operations $ 0.02 $ 0.09
Income (loss) from discontinued operations 0.02 (0.06)
Loss on disposal of discontinued operations 0 (0.08)
-------------- -------------
Net income (loss) per common share $ 0.04 $ (0.05)
============== =============
The accompanying notes are an integral part of these financial statements
F-22
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
for the years ended June 30, 1996 and 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Additional Investment Net Unrealized
Paid-In Retained in S.O.I. Holding Loss
Shares Amount Shares Amount Capital Earnings Industries, Inc. on Securities
------ ------ ------ ------ ------- -------- ---------------- -------------
Balance, June 30, 1994,
as restated 0 $ 0 5,790,557 $ 1,158 $ 6,297,697 $ 2,315,369 $ (1,170,787) $ (517,238)
Purchase of S.O.I.
Industries, Inc. shares 0 0 0 0 0 0 (27,371) 0
Excess over book value of
amounts paid for shares of
S.O.I. Industries, Inc. 0 0 0 0 0 (322,629) 0 0
Exercise of options 0 0 142,705 28 179,377 0 0 0
Shares issued 0 0 27,926 6 89,988 0 0 0
Net depreciation of
securities 0 0 0 0 0 0 0 (96,751)
Net loss 0 0 0 0 0 (281,873) 0 0
-------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 0 $ 0 5,961,188 $ 1,192 6,567,062 $ 1,710,867 $ (1,198,158) $ (613,989)
Exercise of options 0 0 57,500 12 60,613 0 0 0
5% Stock dividend 0 0 301,253 60 903,699 (903,759) 0 0
Sale of preferred
stock 100,000 10 0 0 929,990 0 0 0
Shares Issued 0 0 12,175 2 17,954 0 0 0
Sale of S.O.I.
Industries, Inc.
shares 0 0 0 0 0 0 113,175 0
Net appreciation of
securities 0 0 0 0 0 0 0 85,228
Net income 0 0 0 0 0 223,044 0 0
-------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 1996 100,000 $ 10 6,332,116 1,266 8,479,318 1,030,152 (1,084,983) $ (528,761)
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-23
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995
Cash flows from operating activities:
Net income (loss) $ 223,044 $ (281,873)
------------ ---------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization (including $74,068
in 1995 from discontinued operations) 1,157,917 1,228,948
Gain on sale of marketable securities (360,512) (512,971)
Loss on sale of property, plant and equipment 0 106,272
(Recovery) provision for bad debts (651,133) 745,776
Loss on disposal of subsidiary 0 530,637
Increase (decrease) deferred tax liability 148,824 (87,282)
Decrease (increase) in accounts receivable 75,557 (890,666)
Decrease (increase) in inventories 1,195,382 (842,355)
Increase in prepaid expenses and other assets (269,084) (313,772)
Increase in other assets (50,185) (13,798)
Increase in accounts payable 866,511 404,154
(Decrease) in accrued liabilities (55,856) (12,904)
(Decrease) in income taxes payable (0) (169,077)
--------------- ---------------
Net cash provided by (used in) operating activities 2,280,465 (108,911)
------------- ---------------
Cash flows from investing activities:
Change in marketable securities 1,120,316 (99,343)
Acquisition of property, plant and equipment (1,387,657) (1,226,568)
Proceeds from sales of property, plant and equipment 0 24,000
Net repayments (advances) to affiliates 188,367 (352,736)
Sale (purchase) of S.O. I. Industries, Inc. shares 113,175 (350,000)
--------------- ---------------
Net cash provided by (used in) investing activities 34,201 (2,004,647)
---------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-24
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
for the years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Cash flows from financing activities:
Borrowings from bank $ 0 $ 838,932
Repayment to bank (778,372) (625,790)
(Repayments) proceeds from revolving lines of credit, net (2,214,675) 1,290,433
Proceeds from sale of preferred stock 930,000 0
Proceeds from issuance of common stock 78,581 269,399
--------------- -------------
Net cash (used in) provided by financing activities
(1,984,466) 1,772,974
------------- -----------
Net increase (decrease) in cash and cash equivalents 330,200 (340,584)
Cash and cash equivalents, beginning of year 284,837 625,421
--------------- ---------------
Cash and cash equivalents, end of year $ 615,037 $ 284,837
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 691,677 $ 686,559
=============== ===============
Income taxes $ 252,243 $ 380,247
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-25
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Organization:
On April 29, 1994, the shareholders of MagneTech Corporation approved a
resolution to change the name of the Company to Digital Communications
Technology Corporation (the "Company"). The Company was incorporated on
November 12, 1987, under the laws of the State of Delaware, as a
wholly-owned subsidiary of S.O.I. Industries, Inc. ("S.O.I"). As of June
30, 1996, S.O.I. owned approximately 18% of the Company.
The Company is an integrated video communications company which offers
video tape duplication and satellite communications services. Sales for
the years ended June 30, 1996 and 1995 were generated from video tape
duplicating at the Fort Lauderdale and Indianapolis facilities, as well
as satellite broadcasting.
The Company duplicates a variety of video cassettes, including
full-length movies, training, music, promotional, sports and
educational programs. The Company offers its reproduction services to
entertainment companies and a wide range of industrial customers,
including advertising agencies, direct selling organizations and
educational groups. These customers are located throughout the United
States, Canada, and Latin America. Raw materials, primarily videotape
("pancake") and empty video cassettes ("shells") are purchased from
several manufacturers at market prices in the United States and the
Pacific Rim. The tape and video cassettes are readily available on the
open market. The majority of the Company's video duplication equipment
is manufactured by several major manufacturers in Japan and purchased
from domestic distributors.
The Company's satellite operation consists of two mobile KU band units
which are capable of transmitting live or pre-recorded programming from
any location to commercial satellites. DCT's satellite communications
customers include local, network and cable television operators,
primarily in the Southeastern United States. The equipment utilized in
the Company's satellite broadcasting business includes the two KU band
broadcasting trucks, cameras, generators, telephonic equipment and dual
transmitters. The Company purchases its materials and equipment from
several major manufacturers.
The costs of the Company's products are subject to inflationary
pressures and commodity price fluctuations. In addition, the Company
from time to time experiences increases in the costs of materials and
labor, as well as other manufacturing and operating expenses. The
Company's ability to pass along such increased costs through increased
prices has been difficult due to competitive pressures. The Company
attempts to minimize any effects of inflation on its operations by
controlling these costs.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The accompanying consolidated financial statements for the years ended
June 30, 1996 and 1995 include the accounts of Digital Communications
Technology Corporation, (D/B/A MagneTech Corporation) and its
wholly-owned subsidiaries, Tapes Unlimited, Inc. and DCT - Internet
Corporation. The operations of Tapes Unlimited, Inc. were discontinued
on June 9, 1995. All significant intercompany transactions have been
eliminated.
F-26
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, Continued:
Management's Estimates
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Marketable Securities
The Company accounts for marketable securities in accordance with the
provisions of Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115).
Under SFAS 115, debt securities and equity securities that have readily
determinable fair values are to be classified in three categories:
Held to Maturity - the positive intent and ability to hold to
maturity. Amounts are reported at amortized cost, adjusted for
amortization of premiums and accretion of discounts.
Trading Securities - bought principally for purpose of selling
them in the near term. Amounts are reported at fair value,
with unrealized gains and losses included in earnings.
Available for Sale - not classified in one of the above
categories. Amounts are reported at fair value, with
unrealized gains and losses excluded from earnings and
reported separately as a component of shareholders' equity.
Marketable securities consist of listed common stocks with an aggregate
cost, based on specific identification, of $2,428,811 as of June 30,
1996. The gross unrealized holding losses as of June 30, 1996 were
$533,701, and the gross unrealized holding gains were $4,940. All of
the Company's securities are classified as available for sale
securities.
Gains or losses on dispositions of securities are based on the net
difference of the proceeds and the adjusted carrying amounts of the
securities sold, using the specific identification method.
Investment S.O.I.
The market value of the Company's investment in S.O.I. Industries,
Inc. is less than the carrying value (cost) of such investment by
approximately $600,000 at June 30, 1996. Management does not believe
that this investment has been permanently impaired. Subsequesnt to
June 30, 1996, the market vaule has increased by approximately
$360,000.
Inventories are valued at the lower of cost (weighted average) or
market value.
F-27
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, Continued:
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives
of the related assets, which range from 5 to 30 years. Costs of repairs
and maintenance are charged to operating expense as incurred;
improvements and betterments are capitalized; when items are retired or
otherwise disposed of, the related costs and accumulated depreciation
are removed from the accounts and any resulting gains or losses are
credited or charged to income.
Income Taxes
The Company uses the asset and liability method of accounting for
income taxes as prescribed by SFAS No. 109, "Accounting for Income
Taxes". Under this method, deferred income taxes are recognized for the
tax consequences in future years for differences between the tax basis
of assets and liabilities and their financial reporting amounts at each
year end based on enacted tax laws and statutory tax rates applicable
to the time period in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change
during the period in the deferred tax asset and liability.
Revenue Recognition
Revenues are recognized when a product is shipped or a service is
performed.
Net Income (Loss) Per Common Share
The net income (loss) per common share has been calculated using the
weighted average shares outstanding during each year. Such weighted
average shares have been reduced by the number of treasury shares owned
by the Company through its investment in S.O.I. The number of treasury
shares owned were approximately 207,000 and 659,400 at June 30, 1996
and 1995, respectively.
Change in Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," is effective for fiscal years beginning
after December 15, 1995. This statement requires that long lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The effect of this
pronouncement is not expected to have a material impact on the
financial position and results of operations of the Company.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" is effective for transactions entered into in
fiscal years that begin after December 15, 1995. This pronouncement
established financial accounting and reporting standards for
stock-based employee compensation plans. It encourages, but does not
require companies to recognize expense for grants of stock, stock
options and other equity.
F-28
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, Continued:
instruments to employees based on fair value accounting rules.
Companies that choose not to adopt the new fair value accounting rules
will be required to disclose pro forma net income and earnings per
share under the new method. The Company anticipates adopting the
disclosure provisions of SFAS No. 123, although the impact of such
disclosure has not been determined.
Reclassifications
Certain amounts reflected in the 1995 consolidated financial statements
have been reclassified to conform to the 1996 presentation.
3. Inventory:
Inventories consist of the following at June 30:
1996 1995
Raw materials $ 1,891,393 $ 3,008,167
Work-in-process 769,254 885,976
Finished goods
202,264 164,150
------------- -------------
$ 2,862,911 $ 4,058,293
============= =============
4. Property, Plant and Equipment:
Property, plant and equipment consists of the following:
Land $ 73,000
Buildings and improvements 333,040
Machinery and equipment 8,779,665
Leasehold improvements 213,663
Furniture and fixtures 145,050
Transportation equipment 369,030
Computer equipment 319,122
-------------
10,232,570
Less accumulated depreciation (4,763,266)
Net property, plant and equipment $ 5,469,304
=============
Depreciation expense was $1,157,917 and $1,189,449 for the years ended June
30, 1996 and 1995, respectively.
F-29
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
5. Related Party Transactions:
Loans Receivable
These amounts represent advances to affiliates and are due on
demand. Advances are non-interest bearing.
Management Fees
The Company paid to S.O.I. $180,000 and $340,800 for administrative
services for the years ended June 30, 1996 and 1995, respectively.
Management fees payable to S.O.I were terminated December 31, 1995.
Employee Stock Ownership Plan
The Company participates in S.O.I.'s Employee Stock Ownership Plan
(ESOP). This Plan provides retirement benefits to substantially all
employees. The ESOP is a qualified employee benefits plan exempt from
taxation under the Internal Revenue Code of 1986, as amended. There are
90,291 shares of S.O.I common stock in the ESOP.
Effective July 1, 1996, the Board of Directors of S.O.I voted to
terminate the ESOP. The ESOP stock will therefore be distributed to
employees of SOI, DCT, and Tempo Lighting, Inc. who were eligible to
participate in the ESOP after a final allocation and accounting of the
ESOP is conducted.
6. Revolving Lines of Credit:
The Company has a revolving line of credit agreement for aggregate
borrowings of up to $4,000,000. Interest is payable on all outstanding cash
advances at the bank's prime lending rate plus 3/8% (8.625% at June 30,
1996). Any unpaid principal and accrued interest is due on demand, but no
later than August 1996. The line of credit is collateralized by accounts
receivable, inventory and equipment. The terms of the agreement require,
among other provisions, that the Company comply with requirements for
maintaining certain cash flow and other financial ratios and restricts the
payment of cash dividends. As of June 30, 1996, $1,625,000 has been drawn
upon the line of credit.
Average short-term borrowings under this revolving credit agreement were
$3,699,194, at an average interest rate of 8.87%.
Subsequent to June 30, 1996 the Company signed a commitment letter, subject
to certain conditions, with Bank One, N.A. ("Bank") which would provide a
new credit facility to replace the existing facility with NBD Bank, N.A..
The financing consists of a revolving line of credit, term loans and a long
term lease agreement. Under the revolving line of credit, borrowings can be
made up to $5,000,000 based upon collateral values as determined under the
agreement. The term loans consist of a $2,500,000 secured term loan and a
capital expenditure term loan facility for up to $1,250,000, based upon 80%
of the acquisition costs of new machinery and equipment. The long term
lease agreement is collateralized with new equipment in excess of $700,000.
All of the above agreements are collateralized by accounts receivable,
inventory and equipment. The facility has a two year term and includes
interest rates at .25% and .50% above the Bank's base rate (closely related
to the Bank's prime interest rate).
<TABLE>
<CAPTION>
F-30
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
7. Long-Term Debt:
Long-term debt as of June 30, 1996 consists of the following:
<S> <C> <C>
Loan payable to a bank in monthly installments of $3,198
including interest at 8.75%, maturing April 2007;
collateralized
by real estate. $ 269,899
Loan payable to a bank in monthly principal installments of
$7,440 plus interest at prime plus 1% (9.25% at June 30,
1996), maturing June 1997; collateralized by accounts
receivable, inventory, and equipment. The terms of the
agreement require, among other provisions, that the Company
comply with
requirements for maintaining certain cash flow and other
financial ratios. 297,619
Loans payable to a bank in monthly installments of $18,868
plus interest at prime plus 1/4% (8.5% at June 30, 1996),
maturing through June 2000; collateralized by the accounts
receivables, inventory and equipment. The terms of the
agreement require, among other provisions, that the Company
comply with requirements for maintaining certain cash flow and
other financial ratios. 813,810
Loan payable to a bank in monthly installments of $29,000 plus
interest at prime plus 1/4% (8.5% at June 30, 1996), maturing
December 1998; collateralized by accounts receivables,
inventory, and equipment. The terms of the agreement require,
among other provisions, that the Company comply with
requirements for
maintaining certain cash flow and other financial ratios. 847,125
Loan payable to a bank in monthly installments of $6,149
including interest at 7.63%, maturing January 2003;
collateralized by machinery and equipment; guaranteed by S.O.I. 372,737
----------------
2,601,190
Less current portion (935,127)
-----------------
$ 1,666,063
================
</TABLE>
The contractual maturities on long-term debt are as follows:
Years ending June 30,
---------------------
1997 $ 935,127
1998 641,786
1999 450,262
2000 212,633
2001 83,854
Thereafter 277,528
----------------
$ 2,601,190
================
F-31
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
8. Commitments:
The Company leases its office facilities under operating leases
expiring through May 1999. The leases provide for increases based on
real estate taxes and operating expenses. The Company also leases
facilities and equipment on a month-to-month basis.
Aggregate future minimum rental payments under the above leases are as
follows:
Year ending June 30,
--------------------
1997 $ 306,127
1998 297,852
1999 273,031
---------------
$ 877,010
===============
Rent expense under the above leases for the years ended June 30, 1996
and 1995 was $414,075 and $412,568, respectively.
9. Preferred Stock:
On May 6, 1996 the Company sold 100,000 shares of Class A Convertible
Preferred Stock ("Preferred Stock") in a private placement. The
Preferred Stock is convertible into Common Stock at the discretion of
the holder at the lesser of (i) 20% discount on the previous five day
average closing bid at conversion, or (ii) previous five day average
closing bid price at closing. The holder may convert up to 20% of the
Preferred Stock every 30 days beginning June 15. The Preferred Stock
is convertible for a term of three years, and accrues dividends at a
rate of 7% per annum (dividends are rescinded if the shares are
converted in the first year). The holders of the preferred shares do
not have any voting rights. As of June 30, 1996 no shares of Preferred
Stock were converted.
Through September 1996, 20,000 shares of Series A Preferred Stock had
been converted, pursuant to their original terms, into 133,494 shares
of Common Stock at an average per share conversion price of $ 1.57.
The terms of the Preferred Stock which provided for a lower conversion
price than the quoted market price of the Common Stock at the time of
conversion resulted in an aggregate difference of approximately $
7,825 related to the shares converted through September 1996. Such
terms take into account a number of factors affecting value, including
the ability to market a significant number of shares of the underlying
common stock which were negotiated at the time of the issuance of the
Preferred Stock. Accordingly, management believes that the value of
shares issued should be recorded at the carrying amount of the
Preferred Stock converted. If such treatment is ultimately determined
to be inappropriate, all or a portion of the difference could be
accounted for as a Preferred Stock dividend which although would not
impact the Company's statements of operations or total shareholders'
equity, would adversely impact the Company's earnings per share
calculations in periods of conversions. If these shares had been
converted at the beginning of fiscal year 1996, the net income per
share would have been $ 0.04.
F-32
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
10. Sales to Major Customers:
During the year ended June 30, 1996, one customer accounted for
approximately 17.6% of the Company's sales. During the year ended June
30, 1995, two customers accounted for approximately 28% of the
Company's sales.
11. Financial Instruments:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial
instruments. Fair value estimates discussed herein are based upon
certain market assumptions and pertinent other information available to
management as of June 30, 1996. Such amounts have not been
comprehensively reviewed or updated since that date and, therefore may
not represent current estimates of fair value. The fair value of debt
has been estimated using discounted cash flow models incorporating
discount rates based on current market interest rates for similar types
of instruments. At June 30, 1996, the difference between the fair value
and the carrying value of debt instruments was not material.
12. Stock Option Plan:
On January 22, 1990, the Board of Directors adopted the MagneTech
Corporation 1990 Employees' Stock Option Plan. As of June 30, 1996,
there were 9,370 shares reserved for future issuance at exercise prices
which range from $1.00 to $3.44 per share.
There was no compensation expense as of June 30, 1996 and June 30, 1995.
The following is a summary of all option transactions:
Shares Option Price
Outstanding July 1, 1994 244,375 $1.00 - $1.50
Granted 35,000 $2.25 - $3.44
Exercised (141,250) $1.00 - $1.50
Canceled (15,000) $1.50
--------------- ----------------
Outstanding June 30, 1995 123,125 $1.00 - $3.44
Granted 204,500 $1.00 - $1.50
Exercised (57,500 $1.00 - $2.25
--------------- ----------------
Outstanding June 30, 1996 270,125 $1.00 - $3.44
=============== ================
F-33
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATON AND SUBSIDIARIES
Notes to Consolidated Financial Statement, Continued
13. Income Taxes:
The provision for income taxes is as follows:
1996 1995
Current:
Federal $ 23,784 $ 294,762
State 21,109 76,724
-------------- --------------
44,893 371,486
-------------- --------------
Deferred:
Federal 54,395 (70,077)
State 9,715 (18,242)
-------------- --------------
64,110 (88,319)
-------------- --------------
$ 109,003 $ 283,167
============== ==============
Reconciliations of the differences between income taxes computed at
federal statutory tax rates and consolidated provisions for income
taxes are as follows:
1996 1995
Tax at federal statutory rate 34.0% 34.0 %
State income tax - net of federal
benefit 5.5% 8.8 %
Other 15.0% (4.9)%
----------- -----------
54.4% 37.9%
=========== ===========
The tax effects of temporary differences which comprise the deferred
tax assets and liabilities are as follows:
1996
Assets:
Allowance for doubtful accounts 163,596
Investments - unrealized holding losses 208,861
Loss and credit carryforwards 185,816
Reserve for inventory obsolesence 7,900
-------
566,173
Liabilities:
Property and equipment - depreciation (507,322)
Deferred state tax benefit (7,206)
Net asset 51,645
Less: Valuation allowance (208,861)
--------
Deferred tax liability $ (157,216)
========
F-34
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARIES
Note to Consolidated Financial Statements, Continued
14. Employment Agreements:
The Company has entered into employment agreements with four of its
officers. The agreements range for terms of two to three years and
contain certain bonus provisions. The minimum annual salaries
(excluding bonus arrangements) for the years ending June 30, are as
follows:
1997 $ 478,000
1998 345,500
1999 191,700
---------------
$ 1,015,200
===============
15. Concentration of Credit Risk:
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of cash investments,
and trade receivables. The Company places substantially all its cash
with major financial institutions, and by policy, limits the amount of
credit exposure to any one financial institution. The balances, at
times, may exceed federally insured limits. At June 30, 1996, the
Company exceeded the insured limit by approximately $388,600. At June
30, 1996 two equity investments accounted for approximately 67% of
total investments. Approximately 41% of the Company's accounts
receivable, before allowances, was due from three customers at June
30, 1996.
16. Discontinued Operations:
In June 1995, the Company discontinued the operations of Tapes
Unlimited, Inc. ("Tapes"). The results of operations of Tapes have been
reported separately as a discontinued operation in the Consolidated
Statements of Operations. Prior years consolidated financial statements
have been reclassified to conform with the current year presentation.
Summarized results of operations of the discontinued operations of
Tapes for 1996 and 1995 are as follows:
1996 1995
Net sales $ 0 $ 2,658,516
========== =============
Operating income (loss) $ 0 $ 37,926
========== =============
Loss before income taxes $ 230,511 $ (561,924)
Income tax benefit 98,774 (240,784)
---------- -------------
Gain (loss) from discontinued operation $ 131,737 $ (321,140)
========== =============
F-35
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
16. Discontinued Operations, Continued:
In connection with the shutdown of operations of Tapes, the Company
recorded a charge of $443,400, net of tax of $87,237, to write-off the
goodwill recorded in connection with the acquisition of tapes.
The assets and liabilities of Tapes, which have not been reclassified
on the consolidated balance sheets, are as follows:
1996 1995
Current assets, principally cash, accounts
receivable and inventories $ 16,649 $ 133,790
Plant and equipment - 3,839
---------- --------------
Total assets $ 16,649 $ 137,629
========== ==============
Accounts payable and accrued liabilities, net
of amounts due to the Company of $100,967
in 1996 and $40,700 in 1996 $ 71,856 $ 423,114
---------- --------------
Total liabilities $ 71,856 $ 423,114
========== ==============
17. Litigation:
The Company may from time to time be party to various legal actions
arising during the ordinary course of its business. In addition, the
Company is currently involved in the following litigation:
On March 4, 1996, Richard Abrons, allegedly on behalf of the Company,
and Adrian Jacoby, allegedly on behalf of an affiliate company, S.O.I.
Industries, Inc. ("SOI"), brought a purported shareholder derivative
lawsuit against the Company's board of directors - Kevin B. Halter,
Kevin B. Halter, Jr., Gary C. Evans and James Smith - Halter Capital
Corporation and Securities Transfer Corporation. In addition, the
Company and SOI have been joined as "nominal defendants." In the
lawsuit, the Plaintiffs have alleged breaches of fiduciary duty, fraud,
and violations of state securities laws. The Plaintiffs seek
unspecified actual and exemplary damages, a constructive trust against
the assets of the defendants and an accounting of the affairs of the
Defendants with respect to their dealings with the Company and SOI. In
addition, the Plaintiffs have requested a temporary injunction and the
appointment of a receiver for the Company and SOI. The Plaintiffs have
brought this lawsuit allegedly to vindicate the wrongs that the
Plaintiffs claim were done to the Company and SOI by the individual
defendants and their affiliated companies, and if any damages are
ultimately awarded to the Plaintiffs, those damages will be on behalf
of, and for the benefit of, the Company and all of its shareholders. If
they are successful, the Plaintiffs may recover certain attorney's fees
and costs. This case is entitled Richard Abrons et al v. Kevin B.
Halter et al, Cause no. 96-02169-G, in the 134th Judicial District,
Dallas County, Texas. Even though the Company is a nominal defendant in
the lawsuit, the Plaintiffs have not sought to recover any damages
against the Company. In this type of lawsuit, the Company is joined as
a procedural matter to make it a party to the lawsuit.
F-36
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
17. Litigation, Continued:
All of the Defendants have answered and denied the allegations
contained in the Plaintiffs' Petition. A certain amount of discovery
has been conducted by both Plaintiffs and Defendants. All of the
Defendants deny all of the material allegations and claims in the
Petition, dispute the Plaintiffs' contention that it is a proper
shareholder derivative action, deny that the Plaintiffs have the right
to pursue this lawsuit on behalf of the Company and SOI and are
vigorously defending the lawsuit. In addition, the defendants have
filed Counterclaims against the Plaintiffs and third party actions
against Blake Beckham, Attorney at Law, Beckham & Thomas, L.L.P.,
Sanford Whitman, the former CFO of the Company and Jack Brown, the
former president of the Company, seeking damages in excess of $50
million. In its Counterclaim, the Company has asserted that the filing
of this lawsuit and Temporary Restraining Order caused the Company
damages. However, the Company does not believe that the lawsuit will
have any further material impact on the operations or financial
condition of the Company.
The Company does not believe that it is currently involved in any
pending actions that will have a material adverse effect on its
business, financial condition and results of operations.
F-37
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The accounting firm of Morrison, Brown, Argiz & Co., the independent
auditors for the Company, was dismissed effective as of December 6, 1994. During
the fiscal year ended June 30, 1994 and the interim period subsequent to June
30, 1994, there have been no disagreements with Morrison, Brown, Argiz & Co. on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure or any reportable events. Morrison, Brown, Argiz
& Co.'s report on the financial statements for the fiscal year ended June 30,
1994 contained no adverse opinion or disclaimer of opinion and was not qualified
or modified as to uncertainty, audit scope or accounting principles.
The Company engaged the accounting firm of Coopers & Lybrand L.L.P. as
independent auditors for the Company, effective as of December 6, 1994. The
engagement of Coopers & Lybrand L.L.P. was approved by the Company's board of
directors. During the fiscal years ended June 30, 1993 and 1994 and the interim
period subsequent to June 30, 1994 and prior to December 6, 1994, there were no
consultations with Coopers & Lybrand L.L.P. on any matter of accounting
principles to a specific transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements.
The accounting firm of Coopers & Lybrand L.L.P., the independent auditors
of the Company, was dismissed effective as of August 14, 1996. During the fiscal
years ended June 30, 1995 and 1996 and the interim period subsequent to June 30,
1996, there have been no disagreements with Coopers & Lybrand L.L.P. on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure or any reportable events. Coopers & Lybrand L.L.P.'s
report on the financial statements for the fiscal year ended June 30, 1995
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
The Company engaged the accounting firm of S.W. Hatfield + Associates as
independent auditors for the Company, effective as of August 14, 1996. The
engagement of S.W. Hatfield + Associates was approved by the Company's board of
directors. During the fiscal years ended June 30, 1995 and 1996 and the interim
period subsequent to June 30, 1996 and prior to August 14, 1996, there were no
consultations with S.W. Hatfield + Associates on any matter of accounting
principles to a specific transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements.
15
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
The following table sets forth certain information about the executive officers
and directors of the Company.
NAME AGE POSITION
- ---- --- --------
Kevin B. Halter 60 President, Chief Executive Officer and
Chairman of the Board
Kevin B. Halter, Jr. 35 Vice President, Secretary and Director
Gary C. Evans 39 Director
James Smith 59 Director
Tim C. Hafer 34 Vice President, Chief Financial Officer
Set forth below is a description of the backgrounds of the executive officers
and directors of the Company.
Kevin B. Halter has served as President, Chief Executive Officer and
Chairman of the Board of the Company since June 28, 1994. Mr. Halter also served
as Vice Chairman of the Board of the Company from January 1994 to June 28, 1994.
Mr. Halter has served as Chairman of the Board of DCT since June 28, 1994 and as
Vice Chairman of the Board of DCT from February 1994 to June 1994. Mr. Halter
also served as Chief Executive Officer of DCT from June 1994 to May 1996. Mr.
Halter served as Chairman of the Board of Directors of AQM until September 1996.
In addition, Mr. Halter has served as Chairman of the Board and Chief Executive
Officer of Halter Capital Corporation ("HCC"), a privately-held investment and
consulting company, since 1987. From 1987 until October 1992, Mr. Halter was a
director and officer of Halter Venture Corporation, a publicly-held company then
based in Dallas, Texas. Mr. Halter is the father of Kevin B. Halter, Jr.
Kevin B. Halter, Jr. has served as Vice President, Secretary and director
of the Company and DCT since January 1994. Mr. Halter has also served as
Secretary and director of AQM from February 1994 to September 1996. He is also
the President of Securities Transfer Corporation, a registered stock transfer
company, a position he has held since 1987. Mr. Halter is also Vice President
and Secretary of HCC. Kevin B. Halter, Jr. is the son of Kevin B. Halter.
Gary C. Evans currently serves as a director of the Company. Mr. Evans has
served as President and Chief Executive Officer of Magnum Petroleum, Inc., a
publicly-held company listed on the American Stock Exchange, since July of 1995.
Mr. Evans has served as Chairman of the Board, President and Chief Executive
Officer of Hunter Resources, Inc. (formerly Intramerican Corporation) since
September 1992, prior to it being acquired by Magnum Petroleum, Inc. Mr. Evans
also served as President, Chief Operating Officer and director of Hunter
Resources, Inc. from December 1990 to September 1992. He was President and Chief
Executive Officer of Sunbelt Energy, Inc. (the predecessor to Hunter Resources,
Inc.) and its subsidiaries from 1985 to December 1990. Mr. Evans is President
and Chief Executive Officer of Gruy Petroleum Management Co., Magnum Hunter
Production, Inc. and Hunter Gas Gathering, Inc., wholly-owned subsidiaries of
Magnum Petroleum, Inc. Mr. Evans was Vice President and Manager of the
Southwestern region of the Energy division of Mercantile Bank of Canada for four
years prior to forming Sunbelt Energy, Inc.
James Smith has served as a director of the Company since March 1995. Mr.
Smith has served as President of Pension Analysis Bureau, Inc., a consulting
firm specializing in the administration of company retirement
16
<PAGE>
and profit sharing plans, since 1993. Mr. Smith also served as Vice President of
Pension Analysis Bureau, Inc. from 1988 to 1992.
Tim C. Hafer has served as Vice President and Chief Financial Officer of
the Company since January 4, 1996. Mr. Hafer served as the Company's
Vice-President of Finance from February 1, 1994 through January 3, 1996 and was
responsible for financial reporting for the Company. In addition, since March of
1993, Mr. Hafer serves as the Chief Financial Officer of Halter Capital
Corporation, a privately-held consulting company. Prior to his work at Halter
Capital Corporation, Mr. Hafer was a general practice manager with Coopers &
Lybrand L.L.P. in Dallas, Texas from August 1985 to March 1993, responsible for
the audits of several public and private companies. Mr. Hafer holds a M.S. and
B.S. in accounting from the University of North Texas and is a licensed CPA.
All directors of the Company hold office until the next annual meeting of
stockholders or until their successors have been elected and qualified.
Executive officers are elected by the Company's Board of Directors to hold
office until their respective successors are elected and qualified.
The Company's Bylaws provide that directors may be paid their expenses, if
any, and may be paid a fixed sum for attendance of each Board of Directors
meeting.
The Company is currently involved in litigation with a former officer and
director of the Company and AQM. See Item 3, "Legal Proceedings."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two committees, an Audit Committee and a
Compensation Committee, each composed of at least two independent directors. The
Audit Committee, composed of Kevin B. Halter, Gary C. Evans and James Smith,
recommends the annual appointment of the Company's auditors, with whom the Audit
Committee will review the scope of audit and non-audit assignments and related
fees, accounting principals used by the Company in financial reporting, internal
auditing procedures and the adequacy of the Company's internal control
procedures. The Compensation Committee, composed of Kevin B. Halter, Gary C.
Evans and James Smith, will administer the Company's ESOP and 1988 Employee
Stock Option Plan and make recommendations to the Board of Directors regarding
compensation for the Company's executive officers.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely on the review of Form's 3, 4 and 5 and amendments thereto provided
to the Company pursuant to Rule 16a-3(e), the following individuals failed to
file on a timely basis reports required by Section 16(a) of the 1934 Act during
the period from the date that the Company's Common Stock was registered under
Section 12 of the Securities Exchange Act of 1934, as amended to June 30, 1996:
Kevin B. Halter - Delinquent filing of Form 4. Kevin B. Halter failed to
timely report the purchase of the Company's Common Stock.
Kevin B. Halter, Jr. - Delinquent filing of Form 4. Kevin B. Halter, Jr.
failed to timely report the purchase of the Company's Common Stock.
17
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid by
the Company to its President and Vice President and Secretary for the fiscal
years ended June 30, 1996 and 1995. None of the Company's other executive
officers and directors received cash or non-cash compensation in excess of
$100,000 for the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
-------------------------------------- --------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying All Other
Name and Principal Fiscal Compen- Stock Options/ LTIP Compen-
Position Year Salary ($) Bonus ($) sation ($) Awards ($) SARs(#) Payouts ($) sation ($)
- --------------------- ------- ----------- ------------ ------------- ------------- ------------- ------------- ------------
Kevin B. Halter 1996 $ 194,792 - - - - - -
President and 1995 $ 122,750 - - - - - -
Chairman * 1994 $ 26,000 - - - - - -
Kevin B. Halter, Jr. 1996 $ 164,500 - - - - - -
Vice President, 1995 $ 86,000 - - - - - -
Secretary and 1994 $ 15,000 - - - - - -
Director *
</TABLE>
* The compensation for Kevin B. Halter and Kevin B. Halter, Jr. in 1994 was
for a partial year.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Kevin B. Halter and Kevin B.
Halter, Jr.
The agreement with Kevin B. Halter is for a term of three years through
December 31, 1998. The terms of the agreement provide for an annual base salary
of $100,000. In addition, Mr. Halter receives the same benefits as other
employees of the Company and reimbursement for expenses incurred on behalf of
the Company. The employment agreement also contains, among other things,
covenants by Mr. Halter that in the event of termination and at the end of the
term of the agreement, he will not associate with a business that competes with
the Company for a period of one year. The agreement also provides for a bonus,
the amount of which, if any, to be determined at the sole discretion of the
Company's board of directors.
The agreement with Kevin B. Halter, Jr. is for a term of three years
through December 31, 1998. The terms of the agreement provide for an annual base
salary of $80,000. In addition, Mr. Halter receives the same benefits as other
employees of the Company and reimbursement for expenses incurred on behalf of
the Company. The employment agreement also contains, among other things,
covenants by Mr. Halter that in the event of termination and at the end of the
term of the agreement, he will not associate with a business that competes with
the Company for a period of one year. The agreement also provides for a bonus,
the amount of which, if any, to be determined at the sole discretion of the
Company's board of directors.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
The Company's ESOP provided retirement benefits to substantially all
employees. The ESOP was a qualified employee benefit plan under the Internal
Revenue Code of 1986, as amended. There were 90,291 shares of Common Stock
available for the ESOP. Effective July 1, 1996, the Board of Directors voted to
18
<PAGE>
terminate the ESOP. The ESOP stock will therefore be distributed to employees of
SOI, DCT and Tempo who were eligible to participate in the ESOP after a final
allocation and accounting of the ESOP is conducted.
1988 EMPLOYEE STOCK OPTION PLAN
On March 19, 1988, the Company's Board of Directors adopted the S.O.I.
Industries, Inc. 1988 Employee Stock Option Plan (the "Plan"). The Plan was
approved by a vote of the stockholders on July 3, 1989.
The administration of the Plan rests with the Compensation Committee (the
"Committee"). Subject to the express provisions of the Plan and the Board of
Directors, the Committee shall have complete authority in its discretion to
determine those employees to whom, and the price at which options shall be
granted, the option periods and the number of shares of Common Stock to be
subject to each option. The Committee shall also have the authority in its
discretion to prescribe the time or times at which the options may be exercised
and limitations upon the exercise of options (including limitations effective
upon the death or termination of employment of the optionee), and the
restrictions, if any, to be imposed upon the transferability of shares acquired
upon exercise of options. In making such determinations, the Committee may take
into account the nature of the services rendered by respective employees, their
present and potential contributions to the success of the Company or its
subsidiaries, and such other factors as the Committee in its discretion shall
deem relevant.
An option may be granted under the Plan only to an employee of the Company
or its subsidiaries. The Plan made available for option 250,000 shares of the
Company's Common Stock.
The term of each option granted under the Plan will be for such period not
exceeding five years as the Committee shall determine. Each option granted under
the Plan will be exercisable on such date or dates and during such period and
for such number of shares as shall be determined pursuant to the provisions of
the option agreement evidencing such option. Subject to the express provisions
of the Plan, the Committee shall have complete authority, in its discretion, to
determine the extent, if any, and the conditions under which an option may be
exercised in the event of the death of the optionee or in the event the optionee
leaves the employ of the Company or has his employment terminated by the
Company. The purchase price for shares of Common Stock under each option shall
be determined by the Committee at the time of the option's issuance and may be
less than the fair market value of such shares on the date on which the options
are granted. The agreements evidencing the grant of options may contain other
terms and conditions, consistent with the Plan, that the Committee may approve.
19
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 15, 1996
with regard to the beneficial ownership of the Common Stock by (i) each person
known to the Company to be the beneficial owner of 5% or more of its outstanding
Common Stock, (ii) by the officers, directors and key employees of the Company
individually and (iii) by the officers and directors as a group.
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Owner Percent
------------------------------------ ---------------- -------
Halter Capital Corporation
16910 Dallas Parkway, Suite 100
Dallas, TX 75248 209,940 10%
Digital Communications Technology
Corporation
3941 SW 47th Avenue
Ft. Lauderdale, FL 33314 400,927 (1) 19%
Kevin B. Halter 338,109 (2) 16%
Kevin B. Halter, Jr. 209,940 (2) 10%
Gary C. Evans - -
James Smith - -
Tim C. Hafer - -
All directors and officers as a group
(5 persons) 338,109 16%
(1) The Company owns approximately 17% of the issued and outstanding common
stock of DCT.
(2) Kevin B. Halter and Kevin B. Halter, Jr. serve as directors and
officers of HCC and as a result may each be deemed to be the beneficial owner of
the 209,940 shares of Common Stock beneficially owned by HCC. However, pursuant
to Rule 16a-3 promulgated under the Exchange Act, they expressly disclaim that
they are the beneficial owner, for purposes of Section 16 of the Exchange Act,
of any such stock, other than those shares in which they have an economic
interest.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
LEASE OF CONWAY FACILITY
DeWayne Davis, a former director and officer of the Company, previously
owned 50% of the outstanding common stock of American Industries, Inc., which
owns the Conway, Arkansas facility utilized by AQM. The monthly rental payment
is $20,000 and the lease expires on December 31, 2009. Management of the Company
believes the rental rates and other terms and conditions of the lease are
competitive with comparable properties in the area and are at least as favorable
as could be obtained from an unrelated party.
Mr. Davis is also a director and former officer of Builders Warehouse
Association, Inc. In the past, AQM has purchased a portion of its plywood needs
from American Plywood Sales, Inc., a subsidiary of Builders Warehouse
Association, Inc. For the fiscal year ended June 30, 1994, American Plywood
Sales, Inc. sold
20
<PAGE>
AQM approximately $2,000,000 worth of wood products. At the time of the
purchases, AQM believed that American Plywood Sales, Inc. charged AQM on a
competitive price basis. See Item 3 -- "Legal Proceedings." AQM has ceased
purchasing any materials from Builders Warehouse Association, Inc. or American
Plywood Sales, Inc. and has secured alternative suppliers which AQM believes
will meet its production requirements.
PURCHASE OF MARKETABLE SECURITIES FROM HCC
On October 17, 1994, the Company purchased from HCC 200,000 shares of
common stock of NewCare Health Corporation, a publicly-held company whose common
stock is currently traded on the Nasdaq SmallCap Market. The purchase price,
$3.50 per share, represented a 23% discount from its market price in
consideration for the relatively large number of shares purchased. The
disinterested directors approved this transaction on October 5, 1995. On
December 4, 1995, the Company distributed 175,000 shares of such common stock to
its stockholders in the form of a stock dividend.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Stock Exchange Agreement dated November 30, 1993 by and between
American Quality Manufacturing Corporation and the Company (3)
2.2 Agreement for Purchase and Sale of Stock between the Company and T.I.
Inc., dated as of March 1, 1996. (4)
2.3 Stock Purchase Agreement dated September 10, 1996 by and between
Olympus Sales Co. and the Company (5)
3.1 Certificate of Incorporation and Bylaws of the Company (1)
3.2 Certificate of Amendment of the Company (2)
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company dated November 28, 1995
10.1 Employment agreement between the Company and Kevin B. Halter
10.2 Employment agreement between the Company and Kevin B. Halter, Jr.
16.1 Letter from Coopers & Lybrand L.L.P. addressed to the Commission
regarding the cessation of the auditor client relationship and
agreement with statements made by the Company in Item 4 of Form 8-K/A,
dated August 14, 1996. (6)
21.0 List of Subsidiaries
(1) These exhibits were previously filed by the Company with the
Commission as Exhibits to its Registration Statement No. 33-1 4668-A
and are respectively incorporated herein by specific reference
thereto.
21
<PAGE>
(2) These exhibits were previously filed by the Company with the
Commission as Exhibits to its Amendment No. 2 to its Registration
Statement No. 33-14668-A and are respectively incorporated herein by
specific reference thereto.
(3) This exhibit was previously filed by the Company with the Commission
as an Exhibit to its Form 8-K dated February 14, 1994 and is
incorporated by reference herein by specific reference thereto.
(4) This exhibit was previously filed by the Company with the Commission
as an Exhibit to its Form 8-K dated March 22, 1996 and is incorporated
by reference herein by specific reference thereto.
(5) This exhibit was previously filed by the Company with the Commission
as an Exhibit to its Form 8-K dated September 10, 1996 and is
incorporated by reference herein by specific reference thereto.
(6) This exhibit was previously filed by the Company with the Commission
as an Exhibit to its Form 8- K/A dated August 14, 1996 and is
incorporated by reference herein by specific reference thereto.
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the last quarter of the
period covered by this report on Form 10-KSB:
None
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized.
S.O.I. INDUSTRIES, INC.
/s/ Kevin B. Halter
By: _____________________________ September 30, 1996
Kevin B. Halter, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the date indicated.
/s/ Kevin B. Halter
______________________________ September 30, 1996
Kevin B. Halter, President
(Principal Executive Officer) and
Director
/s/ Tim C. Hafer
______________________________ September 30, 1996
Tim C. Hafer, Chief
Financial Officer (Principal
Financial and Accounting Officer),
/s/ Kevin B. Halter, Jr.
______________________________ September 30, 1996
Kevin B. Halter, Jr., Vice
President, Secretary and Director
/s/ Gary Evans
____________________________ September 30, 1996
Gary Evans, Director
/s/ James Smith
____________________________ September 30, 1996
James Smith, Director
<PAGE>
EXHIBIT 3.3
<PAGE>
CERTIFICATE OF AMENDMENT
TO CERTIFICATE OF INCORPORATION
OF S.O.I. INDUSTRIES, INC.
In accordance with Sections 242 and 103 of the Delaware General Corporation
Law, as amended, S.O.I. Industries, Inc., a Delaware corporation, does hereby
adopt the following amendments to its Certificate of Incorporation:
FIRST: The first paragraph of Article V of the Company's Certificate of
Incorporation will be amended to read as follows:
"The total number of shares of stock which the Corporation shall have the
authority to issue is 50,000,000 shares of Common Stock, with par value of
$.0002, all of the same class and 10,000,000 shares of Preferred Stock, with par
value of $.00001. Each one share of the Corporation's Common Stock issued and
outstanding immediately prior to the effective date of this amendment, December
16, 1995, shall be and hereby is automatically changed without further action
into 1/8 of a fully paid and nonassessable share of the Corporation's Common
Stock, provided that no fractional shares shall be issued pursuant to such
change. The Corporation shall issue to each stockholder who would otherwise be
entitled to a franctional share as a result of such change one full share of the
Corporation's Common Stock."
SECOND: The foregoing amendment was adopted by the Board of Directors. The
amendment was recommended to the stockholders by the Board of Directors. A
special meeting of the stockholders was held on September 7, 1995. The
stockholders approved the amendment in accordance with Section 242 of the
Delaware General Corporation Law.
EXECUTED as of the 28th day of November, 1995.
S.O.I. INDUSTRIES, INC.
By: /s/ Kevin B. Halter
--------------------------
Kevin B. Halter, President
<PAGE>
EXHIBIT 10.1
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement (the "Agreement") is made and entered into as of the 15th
day of January 1996, by and between S.O.I. Industries, Inc., a Delaware
corporation, ("Employer") and Kevin B. Halter ("Employee").
WHEREAS, Employer desires to retain the services of Employee in the
capacity of its President and Chairman of the Board of Directors;
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. Employment. Employer hereby employs Employee and Employee hereby accepts
employment with Employer upon the terms and conditions hereinafter set forth.
2. Duties. Employee shall serve as President of Employer, with such duties
customarily associated with such position. Employee shall report to the Board of
Directors of Employer; provided, however, that all duties assigned to Employee
hereunder shall be commensurate with the skill and experience of Employee. Such
duties shall be rendered at Employer's principal executive offices in Dallas,
Texas, or at such other place or places and at such times as the needs of
Employer may dictate from time to time.
3. Term. This Agreement shall become effective on January 15, 1996, and
shall continue, unless earlier terminated pursuant to Section 7 below, until
December 31, 1998 (the "Term").
4. Compensation. As compensation for his services rendered under this
Agreement, Employee shall be entitled to receive the following:
(a) Salary. During the Term, Employee shall be paid a base salary of
$100,000 per year (the "Salary"), payable in accordance with the Company's
standard payroll procedures.
(b) Expenses. Throughout the Term, Employer shall reimburse Employee
for all other reasonable and necessary out-of-pocket travel and other
expenses incurred by Employee in rendering services required under the
terms of this Agreement promptly after receipt of a detailed statement of
such expenses and reasonable documentation.
(c) Bonus. Employee is eligible for performance-based bonuses, but
there is no assurance or expectation that bonuses will be paid. Bonuses
will be paid, if at all, in the sole discretion of the Board of Directors.
<PAGE>
(d) Benefits. During the Term, Employee shall be entitled to receive
such group benefits as Employer may provide to its other employees at
comparable salaries and responsibilities to those of Employee.
The compensation set forth in this Section 4 will be the sole compensation
payable to Employee and no additional compensation or fee will be payable by
Employer to Employee by reason of any benefit gained by the Employer directly or
indirectly through Employee's efforts on Employer's behalf, nor shall Employer
be liable in any way for any additional compensation or fee unless Employer
shall have expressly agreed thereto in writing.
5. Confidentiality; Covenants Not-To-Compete.
(a) Acknowledgment of Proprietary Interest. Employee recognizes the
proprietary interest of Employer in any Trade Secrets (as hereinafter
defined) of Employer. Employee acknowledges and agrees that any and all
Trade Secrets of Employer, learned by Employee during the course of his
employment by Employer or otherwise, whether developed by Employee alone or
in conjunction with others or otherwise, shall be and is the property of
Employer. Employee further acknowledges and understands that his disclosure
of any Trade Secrets of Employer will result in irreparable injury and
damage to Employer. As used herein, "Trade Secrets" means all non-public
confidential and proprietary information of Employer including, without
limitation, information derived from reports, investigations, experiments,
research, work in progress, drawings, designs, plans, proposals, codes,
software, source codes, databases, marketing and sales programs, client
lists, client mailing lists, financial projections, cost summaries, pricing
formula, and all other materials, or information prepared or performed for
or by Employer. "Trade Secrets" also includes confidential information
related to the business, products or sales of Employer or Employer's
customers.
(b) Covenants Not-To-Divulge Trade Secrets. Employee acknowledges and
agrees that Employer is entitled to prevent the disclosure of Trade Secrets
of Employer. As a portion of the consideration for the employment of
Employee and for the compensation being paid to Employee by Employer,
Employee agrees at all times during the term of this Agreement and for one
year thereafter to hold in strictest confidence and not to disclose or
allow to be disclosed to any person, firm, or corporation, other than to
persons engaged by Employer to further the business of Employer, Trade
Secrets of Employer, without the prior written consent of Employer,
including Trade Secrets developed by Employee. Notwithstanding the
foregoing, Employee shall not be obligated to keep secret and not to
disclose or allow to be disclosed knowledge or information (a) which has
become generally known to the public through no wrongful act of Employee;
(b) which has been rightfully received by Employee from a third party which
to Employee's knowledge was received without restriction on disclosure and
not in violation of any confidentiality obligation of said third party, (c)
which has been approved for release without restriction as to use or
disclosure by written authorization of Employer,
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or (d) which has been disclosed pursuant to a requirement of a governmental
agency or of law without similar restrictions or other protections against
public disclosure, or which disclosure is required by operation of law.
Without limiting the generality of the foregoing, Employee agrees to
affirmatively take such precautions as Employer may reasonably request or
Employee reasonably believes are appropriate to prevent the disclosure,
copying or use of any of the computer software programs, data bases or
other such information now existing or hereafter developed to any person or
for any purpose not specifically authorized by Employer.
(c) Return of Materials at Termination. In the event of any
termination of this Agreement for any reason whatsoever, Employee will
promptly deliver to Employer all documents, data and other information
pertaining to Trade Secrets. Employee shall not take any documents or other
information, or any reproduction or excerpt thereof, containing or
pertaining to any Trade Secrets.
(d) Competition During the Term of this Agreement. Employee agrees
that during the term of this Agreement, neither he, nor any company
controlled by Employee (an "Affiliate"), will directly or indirectly
compete with Employer in any way, and that he will not act as an officer,
director, employee, consultant, shareholder, lender, or agent of any entity
which is engaged in any business of the same nature as, or in competition
with, the business in which Employer is now engaged or other related
business in which Employer becomes engaged during the term of this
Agreement; provided, however, that this Section 5(d) shall not prohibit
Employee or any Affiliate from purchasing or holding an aggregate equity
interest of up to 1%, so long as Employee and Affiliates combined do not
purchase or hold an aggregate equity interest of more than 5%, in any
business in competition with Employer. Furthermore, Employee agrees that
during the term of this Agreement, he will undertake no planning for the
organization of any business activity competitive with the work he performs
as an employee of Employer and Employee will not combine or conspire with
any employees of Employer for the purpose of organization of any such
competitive business activity.
(e) Competition Following Termination of this Agreement. In order to
protect Employer against the unauthorized use or the disclosure of any
Trade Secrets of Employer presently known or hereinafter obtained by
Employee during the term of this Agreement, Employee agrees that for a
period of one year after the termination of this Agreement for any reason
whatsoever, neither Employee, nor any Affiliate, shall knowingly, directly
or indirectly, for itself or himself or on behalf of any other corporation,
person, firm, partnership, association, or any other entity (whether as an
individual, agent, servant, employee, employer, officer, director,
shareholder, investor, principal, consultant or in any other capacity)
induce or attempt to influence any employee of Employer to terminate
his/her employment, or to hire any such employee, whether or not so induced
or influenced except that any such employee may be hired with Employer's
prior written consent.
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6. Prohibition of Disparaging Remarks. Employee shall, during the term of
this Agreement, refrain from making disparaging, negative or other similar
remarks concerning Employer, any of its subsidiaries or other affiliated
companies, to any third party that causes substantial harm to Employer, except
to the extent that Employee is required to make such remarks (a) by applicable
law or regulation or judicial or regulatory process or (b) in or in connection
with any pending or threatened litigation relating to this Agreement or any
transaction contemplated hereby or thereby. Similarly, Employer shall, during
the term of this Agreement, refrain from making disparaging, negative or other
similar remarks concerning Employee to any third party except to the extent that
Employer is required to make such remarks (a) by applicable law or regulation or
judicial or regulatory process or (b) in or in connection with any pending or
threatened litigation relating to this Agreement or any transaction contemplated
hereby or thereby. In view of the difficulty of determining the amount of
damages that may result to the parties hereto from the breach of the provision
of this Section 6, it is the intent of the parties hereto that, in addition to
monetary damages, any non-breaching party shall have the right to prevent any
such breach in equity or otherwise, including without limitation prevention by
means of injunctive relief.
7. Termination. This Agreement and the employment relationship created
hereby shall terminate upon the occurrence of any of the following events:
(a) The expiration of the Term as set forth in Section 3 above;
(b) The death of Employee;
(c) The "disability" (as hereinafter defined) of Employee;
(d) Written notice to Employee from Employer of termination for "just
cause" (as hereinafter defined); or
(e) 30 days write notice of termination to Employer from Employee
provided that a "change in control" (as hereinafter defined) of
the Employer has occurred.
For purposes of Section 7(c) above, the "disability" of Employee shall mean
his inability, because of mental or physical illness or incapacity, to perform
his duties under this Agreement for a continuous period of 120 days or for 120
days out of any 150-days period.
For purposes of Section 7(d) above, "just cause" shall mean (a) the failure
of Employee to diligently or effectively perform his duties under this
Agreement, (b) the commission by Employee of any act involving moral turpitude
or the commission by Employee of any act or the suffering by Employee of any
occurrence or state of facts which renders Employee incapable of performing his
duties under this Agreement, or adversely affects or could reasonably be
expected to adversely affect Employer's business reputation, (c) any breach by
Employee of any of the material terms of, or the failure to perform any material
covenant contained in, this Agreement, or (d) the violation by Employee of
material instructions or material policies
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<PAGE>
established by Employer with respect to the operation of its business and
affairs or Employee's failure, in a material respect, to carry out the
reasonable instructions of the Board of Directors of Employer.
For purposes of Section 7(e) above, the term "change in control" of the
Employer shall mean a change in control of a nature that would be required to be
reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended, as in effect on the date
of this Agreement; provided that, without limitation, such change in control
shall be deemed to have occurred if and when (a) any "person" (as such term is
used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended) is or becomes a beneficial owner, directly or indirectly, of securities
of the Employer representing 25% or more of the combined voting power of the
Employer's then outstanding securities or (b) during the Term, individuals who
at the beginning of such Term were directors of the Employer cease for any
reason to constitute at least a majority of the Board of the Directors of the
Employer.
Notwithstanding anything to the contrary in this Agreement, the provisions
of Sections 5 and 6 shall survive any termination, for whatever reason, of
Employee's employment under this Agreement. In the event of the termination of
Employee's employment for any reason specified in this Section 7 (other than the
reason set forth in Section 7(a) and 7(e)), Employee shall be entitled only to
the compensation, including, but not limited to any bonus or prorata portion
thereof, earned by him as of the date of termination.
In the event of the termination of Employee's employment for the reason
specified in this Section 7(e), Employee shall be immediately entitled to (i)
the compensation, including, but not limited to any bonus or prorata portion
thereof, earned by him as of the date of termination plus (ii) 100% of his
Salary for each and every year and portion of year remaining during the Term,
and such payment shall be paid in one lump sum to the Employee as of the date of
termination.
8. Remedies. Each party recognizes and acknowledges that in the event of
any default in, or breach of any of, the terms, conditions and provisions of
this Agreement (either actual or threatened) by the other party, then the
non-defaulting party's remedies at law shall be inadequate. Accordingly, each
party agrees that in such event, the non-defaulting party shall have the right
of specific performance and/or injunctive relief in addition to any and all
other remedies and rights at law or in equity, and such rights and remedies
shall be cumulative.
9. Acknowledgments. Employee acknowledges and recognizes that the
enforcement of any of the non-competition provisions set forth in Section 5
above by Employer will not interfere with Employee's ability to pursue a proper
livelihood. Employee further represents that he is capable of pursuing a career
in other industries to earn a proper livelihood. Employee recognizes and agrees
that the enforcement of this Agreement is necessary to ensure the preservation
and continuity of the business and good will of Employer. Employee agrees that
due to the nature of Employer's business, the non-competition restrictions set
forth in this Agreement are reasonable as to time and geographic area. Employer
and Employee hereby
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<PAGE>
agree that notwithstanding any other provision of this Agreement, Employee shall
have all rights to products or information, or applications of such information,
which do not relate to Employer's business and were developed during the
non-employment hours and without utilizing any resources of Employer.
10. Notices. Any notices, consents, demands, requests, approvals and
other communications to be given under this Agreement by either party to the
other shall be deemed to have been duly given in writing personally delivered,
by facsimile or sent by mail, registered or certified, postage prepaid with
return receipt requested, as follows:
If to Employer: 16910 Dallas Parkway, Suite 100
Dallas, Texas 75248
Attn: Board of Directors
If to Employee: 1208 Whispering Oaks
Desoto, Texas 75115
Notices delivered personally shall be deemed communicated as of actual
receipt or receipt of facsimile; mailed notices shall be deemed communicated as
of three days after mailing.
11. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and supersedes all prior agreements and understandings, oral or
written between the parties hereto. No modification or amendment of any of the
terms, conditions or provisions herein may be made otherwise than by written
agreement signed by the parties hereto.
12. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HERETO SHALL BE GOVERNED, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS.
13. Parties Bound. This Agreement and the rights and obligations hereunder
shall be binding upon and inure to the benefit of Employer and Employee, and
their respective heirs, personal representatives, successors and assigns.
Employer shall have the right to assign this Agreement to any affiliate or to
its successors or assigns provided that such affiliate, successor or assign
agrees to be bound by the terms hereof. The terms "successors" and "assigns"
shall include any person, corporation, partnership or other entity that buys all
or substantially all of Employer's assets or all of its stock, or with which
Employer merges or consolidates. The rights, duties or benefits to Employee
hereunder are personal to him, and no such right or benefit may be assigned by
him.
14. Estate. If Employee dies prior to the payment of all sums owed, or to
be owed, to Employee pursuant to Section 4 above, then such sums, as they become
due, shall be paid to Employee's estate.
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15. Enforceability. If, for any reason, any provision contained in this
Agreement should be held invalid in part by a court of competent jurisdiction,
then it is the intent of each of the parties hereto that the balance of this
Agreement be enforced to the fullest extent permitted by applicable law. It is
the intent of each of the parties that the covenants not-to- compete contained
in Section 5 above be enforced to the fullest extent permitted by applicable
law. Accordingly, should a court of competent jurisdiction determine that the
scope of any covenant is too broad to be enforced as written, it is the intent
of each of the parties that the court should reform such covenant to such
narrower scope as it determines enforceable.
16. Waiver of Breach. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any party.
17. Captions. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
18. Costs. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees, costs and necessary disbursements in addition to any
other relief to which he or it may be entitled.
19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument, but only one of which need be produced.
S.O.I. INDUSTRIES, INC.
By: /s/ Tim C. Hafer
-------------------------------------
Tim C. Hafer, Chief Financial Officer
/s/ Kevin B. Halter
- ------------------------------
Kevin B. Halter, Individually
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EXHIBIT 10.2
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement (the "Agreement") is made and entered into as of the 15th
day of January 1996, by and between S.O.I. Industries, Inc., a Delaware
corporation, ("Employer") and Kevin B. Halter, Jr. ("Employee").
WHEREAS, Employer desires to retain the services of Employee in the
capacity of its Executive Vice President and Secretary;
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. Employment. Employer hereby employs Employee and Employee hereby accepts
employment with Employer upon the terms and conditions hereinafter set forth.
2. Duties. Employee shall serve as Executive Vice President and Secretary
of Employer, with such duties customarily associated with such position.
Employee shall report to the President and Board of Directors of Employer;
provided, however, that all duties assigned to Employee hereunder shall be
commensurate with the skill and experience of Employee. Such duties shall be
rendered at Employer's principal executive offices in Dallas, Texas, or at such
other place or places and at such times as the needs of Employer may dictate
from time to time.
3. Term. This Agreement shall become effective on January 15, 1996, and
shall continue, unless earlier terminated pursuant to Section 7 below, until
December 31, 1998 (the "Term").
4. Compensation. As compensation for his services rendered under this
Agreement, Employee shall be entitled to receive the following:
(a) Salary. During the Term, Employee shall be paid a base salary of
$80,000.00 per year (the "Salary"), payable in accordance with the
Company's standard payroll procedures.
(b) Expenses. Throughout the Term, Employer shall reimburse Employee
for all other reasonable and necessary out-of-pocket travel and other
expenses incurred by Employee in rendering services required under the
terms of this Agreement promptly after receipt of a detailed statement of
such expenses and reasonable documentation.
(c) Bonus. Employee is eligible for performance-based bonuses, but
there is no assurance or expectation that bonuses will be paid. Bonuses
will be paid, if at all, in the sole discretion of the Board of Directors.
<PAGE>
(d) Benefits. During the Term, Employee shall be entitled to receive
such group benefits as Employer may provide to its other employees at
comparable salaries and responsibilities to those of Employee.
The compensation set forth in this Section 4 will be the sole compensation
payable to Employee and no additional compensation or fee will be payable by
Employer to Employee by reason of any benefit gained by the Employer directly or
indirectly through Employee's efforts on Employer's behalf, nor shall Employer
be liable in any way for any additional compensation or fee unless Employer
shall have expressly agreed thereto in writing.
5. Confidentiality; Covenants Not-To-Compete.
(a) Acknowledgment of Proprietary Interest. Employee recognizes the
proprietary interest of Employer in any Trade Secrets (as hereinafter
defined) of Employer. Employee acknowledges and agrees that any and all
Trade Secrets of Employer, learned by Employee during the course of his
employment by Employer or otherwise, whether developed by Employee alone or
in conjunction with others or otherwise, shall be and is the property of
Employer. Employee further acknowledges and understands that his disclosure
of any Trade Secrets of Employer will result in irreparable injury and
damage to Employer. As used herein, "Trade Secrets" means all non-public
confidential and proprietary information of Employer including, without
limitation, information derived from reports, investigations, experiments,
research, work in progress, drawings, designs, plans, proposals, codes,
software, source codes, databases, marketing and sales programs, client
lists, client mailing lists, financial projections, cost summaries, pricing
formula, and all other materials, or information prepared or performed for
or by Employer. "Trade Secrets" also includes confidential information
related to the business, products or sales of Employer or Employer's
customers.
(b) Covenants Not-To-Divulge Trade Secrets. Employee acknowledges and
agrees that Employer is entitled to prevent the disclosure of Trade Secrets
of Employer. As a portion of the consideration for the employment of
Employee and for the compensation being paid to Employee by Employer,
Employee agrees at all times during the term of this Agreement and for one
year thereafter to hold in strictest confidence and not to disclose or
allow to be disclosed to any person, firm, or corporation, other than to
persons engaged by Employer to further the business of Employer, Trade
Secrets of Employer, without the prior written consent of Employer,
including Trade Secrets developed by Employee. Notwithstanding the
foregoing, Employee shall not be obligated to keep secret and not to
disclose or allow to be disclosed knowledge or information (a) which has
become generally known to the public through no wrongful act of Employee;
(b) which has been rightfully received by Employee from a third party which
to Employee's knowledge was received without restriction on disclosure and
not in violation of any confidentiality obligation of said third party, (c)
which has been approved for release without restriction as to use or
disclosure by written authorization of Employer,
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or (d) which has been disclosed pursuant to a requirement of a governmental
agency or of law without similar restrictions or other protections against
public disclosure, or which disclosure is required by operation of law.
Without limiting the generality of the foregoing, Employee agrees to
affirmatively take such precautions as Employer may reasonably request or
Employee reasonably believes are appropriate to prevent the disclosure,
copying or use of any of the computer software programs, data bases or
other such information now existing or hereafter developed to any person or
for any purpose not specifically authorized by Employer.
(c) Return of Materials at Termination. In the event of any
termination of this Agreement for any reason whatsoever, Employee will
promptly deliver to Employer all documents, data and other information
pertaining to Trade Secrets. Employee shall not take any documents or other
information, or any reproduction or excerpt thereof, containing or
pertaining to any Trade Secrets.
(d) Competition During the Term of this Agreement. Employee agrees
that during the term of this Agreement, neither he, nor any company
controlled by Employee (an "Affiliate"), will directly or indirectly
compete with Employer in any way, and that he will not act as an officer,
director, employee, consultant, shareholder, lender, or agent of any entity
which is engaged in any business of the same nature as, or in competition
with, the business in which Employer is now engaged or other related
business in which Employer becomes engaged during the term of this
Agreement; provided, however, that this Section 5(d) shall not prohibit
Employee or any Affiliate from purchasing or holding an aggregate equity
interest of up to 1%, so long as Employee and Affiliates combined do not
purchase or hold an aggregate equity interest of more than 5%, in any
business in competition with Employer. Furthermore, Employee agrees that
during the term of this Agreement, he will undertake no planning for the
organization of any business activity competitive with the work he performs
as an employee of Employer and Employee will not combine or conspire with
any employees of Employer for the purpose of organization of any such
competitive business activity.
(e) Competition Following Termination of this Agreement. In order to
protect Employer against the unauthorized use or the disclosure of any
Trade Secrets of Employer presently known or hereinafter obtained by
Employee during the term of this Agreement, Employee agrees that for a
period of one year after the termination of this Agreement for any reason
whatsoever, neither Employee, nor any Affiliate, shall knowingly, directly
or indirectly, for itself or himself or on behalf of any other corporation,
person, firm, partnership, association, or any other entity (whether as an
individual, agent, servant, employee, employer, officer, director,
shareholder, investor, principal, consultant or in any other capacity
induce or attempt to influence any employee of Employer to terminate
his/her employment, or to hire any such employee, whether or not so induced
or influenced except that any such employee may be hired with Employer's
prior written consent.
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6. Prohibition of Disparaging Remarks. Employee shall, during the term of
this Agreement, refrain from making disparaging, negative or other similar
remarks concerning Employer, any of its subsidiaries or other affiliated
companies, to any third party that causes substantial harm to Employer, except
to the extent that Employee is required to make such remarks (a) by applicable
law or regulation or judicial or regulatory process or (b) in or in connection
with any pending or threatened litigation relating to this Agreement or any
transaction contemplated hereby or thereby. Similarly, Employer shall, during
the term of this Agreement, refrain from making disparaging, negative or other
similar remarks concerning Employee to any third party except to the extent that
Employer is required to make such remarks (a) by applicable law or regulation or
judicial or regulatory process or (b) in or in connection with any pending or
threatened litigation relating to this Agreement or any transaction contemplated
hereby or thereby. In view of the difficulty of determining the amount of
damages that may result to the parties hereto from the breach of the provision
of this Section 6, it is the intent of the parties hereto that, in addition to
monetary damages, any non-breaching party shall have the right to prevent any
such breach in equity or otherwise, including without limitation prevention by
means of injunctive relief.
7. Termination. This Agreement and the employment relationship created
hereby shall terminate upon the occurrence of any of the following events:
(a) The expiration of the Term as set forth in Section 3 above;
(b) The death of Employee;
(c) The "disability" (as hereinafter defined) of Employee;
(d) Written notice to Employee from Employer of termination for "just
cause" (as hereinafter defined); or
(e) 30 days write notice of termination to Employer from Employee
provided that a "change in control" (as hereinafter defined) of
the Employer has occurred.
For purposes of Section 7(c) above, the "disability" of Employee shall mean
his inability, because of mental or physical illness or incapacity, to perform
his duties under this Agreement for a continuous period of 120 days or for 120
days out of any 150-days period.
For purposes of Section 7(d) above, "just cause" shall mean (a) the failure
of Employee to diligently or effectively perform his duties under this
Agreement, (b) the commission by Employee of any act involving moral turpitude
or the commission by Employee of any act or the suffering by Employee of any
occurrence or state of facts which renders Employee incapable of performing his
duties under this Agreement, or adversely affects or could reasonably be
expected to adversely affect Employer's business reputation, (c) any breach by
Employee of any of the material terms of, or the failure to perform any material
covenant contained in, this Agreement, or (d) the violation by Employee of
material instructions or material policies
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established by Employer with respect to the operation of its business and
affairs or Employee's failure, in a material respect, to carry out the
reasonable instructions of the Chairman of the Board of Employer.
For purposes of Section 7(e) above, the term "change in control" of the
Employer shall mean a change in control of a nature that would be required to be
reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended, as in effect on the date
of this Agreement; provided that, without limitation, such change in control
shall be deemed to have occurred if and when (a) any "person" (as such term is
used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended) is or becomes a beneficial owner, directly or indirectly, of securities
of the Employer representing 25% or more of the combined voting power of the
Employer's then outstanding securities or (b) during the Term, individuals who
at the beginning of such Term were directors of the Employer cease for any
reason to constitute at least a majority of the Board of the Directors of the
Employer.
Notwithstanding anything to the contrary in this Agreement, the provisions
of Sections 5 and 6 shall survive any termination, for whatever reason, of
Employee's employment under this Agreement. In the event of the termination of
Employee's employment for any reason specified in this Section 7 (other than the
reason set forth in Section 7(a) and 7(e)), Employee shall be entitled only to
the compensation, including, but not limited to any bonus or prorata portion
thereof, earned by him as of the date of termination.
In the event of the termination of Employee's employment for the reason
specified in this Section 7(e), Employee shall be immediately entitled to (i)
the compensation, including, but not limited to any bonus or prorata portion
thereof, earned by him as of the date of termination plus (ii) 100% of his
Salary for each and every year and portion of year remaining during the Term,
and such payment shall be paid in one lump sum to the Employee as of the date of
termination.
8. Remedies. Each party recognizes and acknowledges that in the event of
any default in, or breach of any of, the terms, conditions and provisions of
this Agreement (either actual or threatened) by the other party, then the
non-defaulting party's remedies at law shall be inadequate. Accordingly, each
party agrees that in such event, the non-defaulting party shall have the right
of specific performance and/or injunctive relief in addition to any and all
other remedies and rights at law or in equity, and such rights and remedies
shall be cumulative.
9. Acknowledgments. Employee acknowledges and recognizes that the
enforcement of any of the non-competition provisions set forth in Section 5
above by Employer will not interfere with Employee's ability to pursue a proper
livelihood. Employee further represents that he is capable of pursuing a career
in other industries to earn a proper livelihood. Employee recognizes and agrees
that the enforcement of this Agreement is necessary to ensure the preservation
and continuity of the business and good will of Employer. Employee agrees that
due to the nature of Employer's business, the non-competition restrictions set
forth in this Agreement are reasonable as to time and geographic area. Employer
and Employee hereby
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agree that notwithstanding any other provision of this Agreement, Employee shall
have all rights to products or information, or applications of such information,
which do not relate to Employer's business and were developed during the
non-employment hours and without utilizing any resources of Employer.
10. Notices. Any notices, consents, demands, requests, approvals and
other communications to be given under this Agreement by either party to the
other shall be deemed to have been duly given in writing personally delivered,
by facsimile or sent by mail, registered or certified, postage prepaid with
return receipt requested, as follows:
If to Employer: 16910 Dallas Parkway, Suite 100
Dallas, Texas 75248
Attn: Board of Directors
If to Employee: 1804 Switzerland
Plano, Texas 75025
Notices delivered personally shall be deemed communicated as of actual
receipt or receipt of facsimile; mailed notices shall be deemed communicated as
of three days after mailing.
11. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and supersedes all prior agreements and understandings, oral or
written between the parties hereto. No modification or amendment of any of the
terms, conditions or provisions herein may be made otherwise than by written
agreement signed by the parties hereto.
12. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HERETO SHALL BE GOVERNED, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS.
13. Parties Bound. This Agreement and the rights and obligations hereunder
shall be binding upon and inure to the benefit of Employer and Employee, and
their respective heirs, personal representatives, successors and assigns.
Employer shall have the right to assign this Agreement to any affiliate or to
its successors or assigns provided that such affiliate, successor or assign
agrees to be bound by the terms hereof. The terms "successors" and "assigns"
shall include any person, corporation, partnership or other entity that buys all
or substantially all of Employer's assets or all of its stock, or with which
Employer merges or consolidates. The rights, duties or benefits to Employee
hereunder are personal to him, and no such right or benefit may be assigned by
him.
14. Estate. If Employee dies prior to the payment of all sums owed, or to
be owed, to Employee pursuant to Section 4 above, then such sums, as they become
due, shall be paid to Employee's estate.
6
<PAGE>
15. Enforceability. If, for any reason, any provision contained in this
Agreement should be held invalid in part by a court of competent jurisdiction,
then it is the intent of each of the parties hereto that the balance of this
Agreement be enforced to the fullest extent permitted by applicable law. It is
the intent of each of the parties that the covenants not-to- compete contained
in Section 5 above be enforced to the fullest extent permitted by applicable
law. Accordingly, should a court of competent jurisdiction determine that the
scope of any covenant is too broad to be enforced as written, it is the intent
of each of the parties that the court should reform such covenant to such
narrower scope as it determines enforceable.
16. Waiver of Breach. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any party.
17. Captions. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
18. Costs. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees, costs and necessary disbursements in addition to any
other relief to which he or it may be entitled.
19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument, but only one of which need be produced.
S.O.I. INDUSTRIES, INC.
By: /s/ Tim C. Hafer
-------------------------------------
Tim C. Hafer, Chief Financial Officer
/s/ Kevin B. Halter, Jr.
- ----------------------------------
Kevin B. Halter, Jr., Individually
7
<PAGE>
EXHIBIT 21.0
<PAGE>
S.O.I. Industries, Inc.
List of Subsidiaries
Exhibit 21.0
Omni Doors, Inc., a Florida Corporation
Doblique Energy Corporation, a Texas Corporation *
* Incorporated September 20, 1996, with no operations as of September 30, 1996.
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<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
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<SECURITIES> 0
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<CURRENT-ASSETS> 6,487,518
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0
0
<OTHER-SE> 1,195,508
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<SALES> 623,978
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<INCOME-PRETAX> (1,685,003)
<INCOME-TAX> (756,608)
<INCOME-CONTINUING> (928,395)
<DISCONTINUED> (4,478,474)
<EXTRAORDINARY> 0
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<NET-INCOME> (5,406,869)
<EPS-PRIMARY> (3.14)
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