UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MarkOne)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number: 1-12572
MILLENNIA, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 59-2158586
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or
organization)
16910 Dallas Parkway, Suite 100, Dallas, TX 75248
(Address of principal executive offices)
(972) 248-1922
(Issuer's telephone number)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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 ( )
The number of shares outstanding of the common stock of the small business
issuer on April 30, 1997, the latest practicable date, was 2,274,385.
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
<PAGE>
TABLE OF CONTENTS
Item Numbered
Number Page
Part I
1 Financial Statements . . . . . . . . . . . . . . 1
2 Management's Discussion and
Analysis or Plan of Operation . . . . . . . . . . 9
Part II
1 Legal Proceedings . . . . . . . . . . . . . . . . . 15
2 Changes in Securities . . . . . . . . . . . . . . . N/A
3 Defaults Upon Senior Securities . . . . . . . . . . N/A
4 Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . N/A
5 Other Information . . . . . . . . . . . . . . . . . N/A
6 Exhibits and Reports on Form 8-K . . . . . . . . . . 15
<PAGE>
MILLENNIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
March 31,
1997 June 30,
(Unaudited) 1996
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 45,298 $ 36,628
Marketable securities 122,938 -
Accounts receivable, less allowance for doubtful accounts
of $30,000 at March 31, 1997 and $15,500 at June 30, 1996 80,872 71,867
Other accounts receivable 94,630 699
Inventories 107,323 105,760
Prepaid expenses and other 12,895 582,562
Deferred tax asset 6,200 617,142
Net current assets of discontinued operations - 5,072,860
--------- ---------
Total current assets 470,156 6,487,518
Property, plant and equipment, net of
accumulated depreciation and depletion 1,817,964 15,956
Investment in Digital Communications Technology Corporation 1,065,747 1,388,078
Deferred tax asset 31,600 77,214
Other assets 6,107 5,779
Net other assets of discontinued operations - 4,181,953
----------- -----------
Total assets $ 3,391,574 $ 12,156,498
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 239,440 $ 83,102
Accounts payable - officer / stockholder 238,100 16,000
Accrued liabilities and other 66,966 30,949
Current portion of note payable 44,537 -
Net current liabilities of discontinued operations - 9,018,638
----------- -----------
Total current liabilities 589,043 9,148,689
----------- -----------
Note payable - Magnum Hunter Production, Inc. 1,557,694 -
Net other liabilities of discontinued operations - 1,811,870
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.00001; 10,000,000 shares
authorized, none issued and outstanding - -
Common stock, par value $0.0002; 50,000,000 shares
authorized, 2,274,385 and 2,152,949 shares outstanding at
March 31, 1997 and June 30, 1996, respectively 455 431
Additional paid-in capital 6,654,637 6,717,093
Less shares deemed treasury stock; 72,606 and 70,401 shares
at March 31, 1997 and June 30, 1996, respectively (44,439) (39,425)
Accumulated deficit (5,171,163) (5,482,160)
Net unrealized holding loss on investment securities (194,653) -
----------- -----------
Total stockholders' equity 1,244,837 1,195,939
----------- -----------
Total liabilities and stockholders' equity $ 3,391,574 $ 12,156,498
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
1
<PAGE>
MILLENNIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the three For the nine
months ended months ended
March 31, March 31,
--------- ---------
1997 1996 1997 1996
-------- -------- -------- --------
Operating revenues:
Net sales $ 140,892 $ 97,243 $ 411,566 $ 537,848
Oil and gas sales 201,052 - 377,764 -
----------- ------------ ---------- -----------
341,944 97,243 789,330 537,848
----------- ------------ ---------- -----------
Operating costs and expenses:
Cost of sales 109,431 78,821 310,882 254,563
Oil and gas production 108,774 - 230,211 -
Selling expenses 14,510 11,610 42,304 38,279
General and administrative expenses 163,995 533,441 621,814 1,175,165
Depreciation and depletion 33,726 1,212 58,881 3,998
----------- ------------ ---------- -----------
Total operating expenses 430,436 625,084 1,264,092 1,472,005
----------- ------------ ---------- -----------
Loss from operations (88,492) (527,841) (474,762) (934,157)
----------- ------------ ---------- -----------
Other income (expense):
Gains (losses) on sales of securities 15,342 82,980 32,674 (660,070)
Interest and other (expense) income (167,888) (32,517) (121,420) 166,811
----------- ------------ ---------- -----------
(152,546) 50,463 (88,746) (493,259)
----------- ------------ ---------- -----------
Loss from continuing operations before income taxes (241,038) (477,378) (563,508) (1,427,416)
Provision for income taxes 42,115 - 144,069 -
----------- ------------ ---------- -----------
Loss from continuing operations (283,153) (477,378) (707,577) (1,427,416)
----------- ------------ ---------- -----------
Discontinued operations, net of income taxes
Loss from discontinued operations of American Quality
Manufacturing Corporation, net of income tax benefit of
$0 for the periods ended March 31, 1997 and 1996,
respectively - (142,797) (566,991) (1,156,036)
Loss from discontinued operations of Tempo Lighting,
Inc., net of income taxes of $1,600 - (67,636) - (263,831)
Gain on disposition of American Quality Manufacturing
Corporation, net of income tax provision of $539,000. - - 1,585,566 -
Loss on disposition of Tempo Lighting, Inc. - (900,000) - (900,000)
----------- ------------ ---------- -----------
(Loss) income from discontinued operations - (1,110,433) 1,018,575 (2,319,867)
----------- ------------ ---------- -----------
Net (loss) income $ (283,153) $ (1,587,811) $ 310,998 $(3,747,283)
=========== ============ ========== ===========
Weighted average shares of common
stock outstanding 2,199,118 1,714,419 2,127,679 1,665,750
=========== ============ ========== ===========
Loss per share from continuing operations $ (0.13) $ (0.28) $ (0.33)$ (0.86)
(Loss) income per share from discontinued operations - (0.65) 0.48 (1.39)
----------- ------------ ---------- ----------
Net (loss) income per share $ (0.13) $ (0.93) $ 0.15 $ (2.25)
=========== ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE>
MILLENNIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
For the nine months ended
March 31,
----------
1997 1996
-------- ---------
Cash flows from operating activities:
Net income (loss) $ 310,998 $(3,747,283)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, amortization and depletion 58,880 3,998
Provision for doubtful accounts 14,500 -
(Gain) loss on sales of marketable securities (32,674) 148,644
Loss (gain) on equity investment in Digital
Communications Technology Corporation 66,854 (200,875)
(Gain) loss on sales of securities of Digital
Communications Technology Corporation (9,680) 511,426
Discontinued operations (1,575,695) 2,220,337
Increase in accounts receivable (23,505) (1,502)
(Increase) decrease in inventories (1,563) 16,777
Decrease (increase) in prepaid expenses and other 491,097 (117,365)
Decrease in net deferred income tax benefit 656,556 111,309
Increase (decrease) in accounts payable 156,338 (16,409)
Increase (decrease) in accrued liabilities 38,017 (6,695)
----------- -----------
Net cash provided by (used in) operating activities 150,123 (1,077,638)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of securities of Digital Communications
Technology Corporation 45,710 71,007
Acquisition of oil and gas properties and capital expenditures (110,888)
Proceeds from sales of marketable securities 492,559 2,137,730
Purchases of marketable securities (777,476) (1,029,083)
----------- -----------
Net cash (used in) provided by investing activities (350,095) 1,179,654
----------- -----------
Cash flows from financing activities:
Repayment of advances from officer (16,000) -
Advances from stockholder, net of repayments 238,100 -
Repayments on note payable (13,458) -
Net short-term repayments - (355,089)
Net payments from ESOP - 355,089
----------- -----------
Net cash provided by financing activities 208,642 0
----------- -----------
Increase in cash and cash equivalents 8,670 102,016
Cash and cash equivalents at beginning of period 36,628 97,505
----------- -----------
Cash and cash equivalents at end of period $ 45,298 $ 199,521
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
MILLENNIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
For the nine months ended
March 31,
----------
1997 1996
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (non-capitalized) $ 3,684 $ 12,852
=========== ===========
Income taxes $ 0 $ 0
=========== ===========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
The Company acquired certain interests in oil and gas properties on
November 20, 1996. The purchase price consisted of $100,000 in cash, a
$1,625,842 promissory note and 120,000 shares of the Company's common stock,
valued at $150,000.
The Company's investment in Digital Communications Technology Corporation was
reduced by by $200,763 during the nine months ended March 31, 1997 due to the
dilutive effects of the issuance, by Digital Communications Technology
Corporation, of approximately 983,000 shares of its common stock.
The Company transferred approximately 1,622,000 shares of its investment in
the common stock of Digital Communications Technology Corporation in
connection with the settlement of approximately $1,217,000 in creditors'
claims against one of the Company's discontinued subsidiaries during the nine
month period ended March 31, 1996.
The accompanying notes are an integral part of the financial statements
4
<PAGE>
MILLENNIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-------------
1. Summary of Significant Accounting Policies:
-------------------------------------------
The accompanying consolidated financial statements include the accounts of
Millennia, Inc. and all majority-owned subsidiaries (collectively referred to as
the "Company"). The subsidiaries include Omni Doors, Inc. ("Omni"), Doblique
Energy Corporation ("Doblique") and Millennia Entertainment, Inc. ("MEI").
Significant intercompany accounts and transactions have been eliminated.
The Company also holds a 14.76% ownership interest in Digital Communications
Technology Corporation ("DCT") as of March 31, 1997. At June 30, 1996, this
ownership interest was 17.55%. The Company accounts for its investment in DCT
using the equity method. (The reduction in ownership percentage is due to the
dilutive effect of the issuance of additional common stock by DCT and to the
Company's open market sales of DCT stock.)
Effective February 29, 1996, the Company sold 100% of the common stock of Tempo
Lighting, Inc. ("Tempo"). The operations of Tempo are therefore segregated and
presented as discontinued operations on the Consolidated Statements of
Operations.
Effective August 31, 1996, the Company sold 100% of its ownership interest in
American Quality Manufacturing Corporation ("AQM") for the assumption of all
liabilities of AQM. The results of operations of AQM are therefore presented as
a component of discontinued operations in the Consolidated Statements of
Operations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from these unaudited interim financial
statements. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's annual audited
financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to conform with generally accepted accounting principles. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year.
2. Marketable Securities:
---------------------
Marketable securities consist of equity securities which had an aggregate cost
of $317,590 at March 31, 1997. The marketable securities portfolio contains net
unrealized losses of $194,653, resulting in a carrying amount of $122,938 at
March 31, 1997. The unrealized losses are reported as a separate component of
stockholders' equity. The Company's marketable securities are classified as
available for sale securities.
5
<PAGE>
MILLENNIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
-------------
3. Inventories:
-----------
The inventories are valued at the lower of cost (first-in, first-out method) or
market and consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, June 30,
1997 1996
---------------- --------------
Finished goods and purchased product $ 102,923 $ 100,934
Raw materials and supplies 4,400 4,826
---------------- --------------
$ 107,323 $ 105,760
================ ==============
</TABLE>
4. Property, Plant and Equipment:
Property, plant and equipment and related accumulated depreciation are
summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, June 30,
1997 1996
---------------- --------------
Vehicle $ 19,635 $ 19,635
Machinery and equipment 15,172 13,034
Leasehold improvements 4,193 4,193
Oil and gas properties 1,858,750 -
---------------- --------------
1,897,750 36,862
Less: accumulated depreciation and depletion (79,786) (20,906)
---------------- --------------
$ 1,817,964 $ 15,956
================ ==============
</TABLE>
5. Equity Investment in DCT:
Summarized financial statement information for DCT is presented below
(unaudited):
<TABLE>
<CAPTION>
<S> <C> <C>
For the nine For the nine
months ended months ended
March 31, March 31,
1997 1996
------------------ ------------------
Net sales $ 19,795,659 $ 19,211,980
Operating (loss) profit $ (307,105) $ 1,202,136
(Loss) income from continuing operations $ (497,555) $ 660,013
Net (loss) income $ (499,277) $ 761,532
(Loss) earnings per share $ (0.12) $ 0.14
</TABLE>
6
<PAGE>
MILLENNIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
-------------
5. Equity Investment in DCT, continued:
-----------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 1997 June 30, 1996
------------------ ------------------
Current assets $ 7,829,569 $ 9,711,473
Total assets $ 14,093,352 $ 15,675,489
Current liabilities $ 4,545,191 $ 5,955,208
Total liabilities $ 6,872,706 $ 7,778,487
Total stockholders' equity $ 7,220,646 $ 7,897,002
</TABLE>
6. Discontinued Operations:
-----------------------
Effective February 29, 1996, the Company sold 100% of the common stock of Tempo
for a net cash purchase price of $453,436. The results of operations of Tempo
have been reported separately as a discontinued operation in the Consolidated
Statement of Operations.
Effective August 31, 1996, the Company sold 100% of its ownership interest in
AQM for the assumption of all liabilities of AQM. In addition, the AQM sale
included the release of the Company's guarantees of certain debt (1) with AQM's
primary lending institution; (2) with certain key vendors; and (3) related to
the payment and performance under AQM's lease of its operating facility in
Conway, Arkansas. The sale agreement contains a total guaranty release cap of
$5.5 million. Additionally, the Company retained its contingent guarantee of a
$400,000 note between AQM and DCT. The results of operations of AQM are
therefore presented as a component of discontinued operations in the
Consolidated Statements of Operations.
Summarized results of operations of the discontinued operations of Tempo for the
nine months ended March 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
March 31,
1996
----------------
Net sales $ 2,443,017
Operating loss $ (281,121)
Net loss from discontinued operation $ (263,831)
</TABLE>
Summarized results of operations of the discontinued operations of AQM for the
period from July 1, 1996 to the disposition date and for the nine months ended
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
July 1,1996 to March 31,
Disposition 1996
----------------- ----------------
Net sales $ 2,682,751 $ 14,313,717
Operating loss $ (983,604) $ (663,057)
Net loss from discontinued
operation $ (566,991) $ (1,156,036)
</TABLE>
7
<PAGE>
MILLENNIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
-------------
7. Oil and Gas Operations:
----------------------
On November 4, 1996, Doblique acquired certain oil and gas properties. The
purchase price consisted of $100,000, a $1,625,842 promissory note and 120,000
shares of the Company's common stock. The terms of the promissory note require
monthly interest payments at an annual rate of 12%. The monthly payments are to
be paid from 100% of the net proceeds generated by the oil and gas properties.
Any remaining unpaid principal balance is due on November 1, 1999. The
promissory note is secured by the interests in the oil and gas properties, and
is further secured by 750,000 shares of common stock of Digital Communications
Technology Corporation.
The asset purchase and sale agreement stipulated an effective date for
transferring the seller's interests in the oil and gas properties to be October
1, 1996. Consequently, the operations of the acquired interests in the oil and
gas properties are reflected in the consolidated statements of operations from
the effective date. The Company accounted for the acquisition using the purchase
method of accounting.
The Company follows the full-cost method of accounting for oil and gas
properties, as prescribed by the Securities and Exchange Commission.
Accordingly, all costs associated with acquisition, exploration and development
of oil and gas reserves, including directly related overhead costs, are
capitalized.
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are amortized on the unit-of-production method
using estimates of proved reserves. Costs directly associated with the
acquisition and evaluation of unproved properties are excluded from the
amortization base until the related properties are evaluated. Such unproved
properties are assessed periodically, and any provision for impairment is
transferred to the full-cost amortization base. Sales of oil and gas properties
are credited to the full-cost pool unless the sale would have a significant
effect on the amortization rate. Abandonments of properties are accounted for as
adjustments to capitalized costs with no loss recognized. The Company's does not
currently own any unproved properties.
The net capitalized costs are subject to a "ceiling test," which limits such
costs to the aggregate of the estimated present value of future net revenues
from proved reserves discounted at ten percent based on current economic
conditions.
Information regarding the Company's oil and gas reserves has been filed as a
part of the Company's Form 8-K/A on December 30, 1996.
8. Contingencies:
-------------
In connection with the disposition of AQM, the Company was released from its
guarantees of trade debts of AQM with certain key vendors. Nonetheless, one of
these vendors has brought an action against the Company asserting its alleged
rights under one of these guaranty agreements. Plaintiff's current demand is
approximately $247,500. The Company believes that it was released from its
guaranty of this debt and intends to vigorously defend itself in this matter.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Overview
Effective August 31, 1996, the Company sold all the issued and
outstanding stock of AQM. Since, at the time of the sale, AQM had liabilities in
excess of its assets, the sale of AQM relieved the Company of the net
liabilities of AQM upon consolidation and resulted in a gain from the
disposition of AQM of approximately $1,586,000. AQM generated losses from
operations from July 1, 1996 to the effective sale date of approximately
$567,000 which resulted in a net gain from the discontinued operations and sale
of AQM of approximately $1,019,000. The gain on disposition of AQM and the
losses generated from AQM's operations are segregated under discontinued
operations on the Company's consolidated statements of operations.
The net gain from discontinued operations offset the Company's loss
from continuing operations before income taxes of approximately $633,000 for the
nine months ended March 31, 1997, resulting in net income of approximately
$385,000 for the same period. For both the three month and nine month periods
ended March 31, 1997, the Company generated smaller losses from continuing
operations before income taxes than in the corresponding periods of the prior
year. This difference is due primarily to significant losses incurred in the
prior year upon the disposition of approximately 1,622,000 shares of the
Company's investment in DCT. The transfer of DCT stock in the prior year was
effected in order to repay a stockholder of the Company. The stockholder had
previously transferred approximately 1,659,000 shares of the Company's common
stock to creditors of AQM. Another significant factor resulting in the variance
of operating losses for comparable periods is significantly lower general and
administrative expenses which is discussed later.
During the quarter ended December 31, 1996, an income tax provision
resulted from a reevaluation of an estimate of the income tax refund to be
received by the Company. Upon collection of the refund and based on the results
of an Internal Revenue Service examination, it was determined that approximately
$102,000 of the balance recorded as an income tax receivable would not be
collected. Consequently, the asset was reduced and a corresponding tax provision
was expensed in the second fiscal quarter. This non cash item did not impact the
Company's liquidity. In addition, management determined that a valuation
allowance against the Company's deferred tax assets was appropriate and elected
to record an additional tax provision of approximately $42,000 during the
quarter ended March 31, 1997.
Interest and other income for the three and nine months ended March 31,
1997 are lower than the results for the comparative periods. The difference is
due to the reduction of the Company's ownership percentage in DCT since the
corresponding periods of the prior year. The Company's average ownership in DCT
for the nine month period ended March 31, 1997 was 16% (declining from 17.55% to
14.76%) as compared to 32% (declining from 46.81% to 17.59%) for the nine months
ended March 31, 1996, resulting in the lower equity interest in DCT's net
income. The current period reduction in the Company's ownership percentage in
DCT is due to the dilutive effect of the issuance of additional common stock by
DCT during the nine month period ended March 31, 1997. DCT's issuance of
additional common stock reduced the Company's ownership interest percentage by
2.79% while open market sales of some of the Company's DCT common stock to
support the Company's operations reduced the Company's ownership percentage by
the remaining 0.45%.
The Company's general and administrative expenses continued to be the
most significant operating expense item for the three and nine month periods
ended March 31, 1997 and 1996. Current period costs were lower than those from
the comparable periods of the prior year due to a reduction of corporate
overhead payroll costs resulting from the lower level of activity during these
periods caused by the disposition of AQM and Tempo. Overhead
9
<PAGE>
payroll costs declined approximately 33% and 144% for the three and nine month
periods ended March 31, 1997 as compared to the same periods ended March 31,
1996. However, legal and professional fees increased 55% to approximately
$170,000 for the nine months ended March 31, 1997 over the same period ended
March 31, 1996. These legal fees were associated with the shareholder
derivative action, as discussed in the Company's prior reports.
The Company's net sales revenues for the nine month period ended March
31, 1997 are approximately 31% lower than those of the corresponding period of
the prior year. The decline is due to the discontinuance of management fees
which were charged to DCT during the period ended March 31, 1996. Management
fees charged to DCT ceased in December 1995, coinciding with the Company's
reduced ownership interest in DCT. Services previously provided by the Company
were assumed by DCT employees.
Door Distribution Segment
Net sales from this segment approximated $140,000 and $411,000 for the
three and nine months ended March 31, 1997 as compared to approximately $97,000
and $327,000 for the three and nine months ended March 31, 1996. The highly
competitive market in which Omni operates will often produce fluctuations in
sales depending on various external factors. The increase in sales, therefore,
does not necessarily represent a trend of continued sales increases, but is
instead a function of the volatility of the marketplace. This segment is
however, enjoying repeat business as it continues to establish a reputation in
the marketplace. Therefore, some of the sales increases can be attributable to
customer satisfaction with the products and services provided.
For the three and nine month periods ended March 31, 1997, this segment
generated operating income of approximately $2,000 and $4,400 as compared to
operating losses of approximately $1,100 and $7,000 for the comparable periods
of the prior year. The primary reason for the operating income in the current
periods is the increased sales, especially during the three months periods ended
March 31, 1997 and December 31, 1996. Also, a decline in cost of goods sold as a
percentage of sales from approximately 78% for the nine month period ended March
31, 1996 to approximately 76% during the nine months ended March 31, 1997
contributed to the operating income in the current periods. Increased sales of
wood doors, for which the segment earns slightly higher margins, contributed to
the decline in cost of goods sold. Some fluctuation in cost of goods sold is
anticipated as additional direct labor costs are added and adjusted to support
the increased sales levels.
Oil and Gas Segment
Effective in October 1996, the Company's Doblique subsidiary acquired
certain interests in oil and gas properties located in Texas, Oklahoma and New
Mexico. Revenues and production expenses related to these activities are
included as separate line items on the Company's consolidated statements of
operations. Prior to interest expense of approximately $79,000, this segment
generated approximately $72,000 in operating income during the period from
inception to March 31, 1997. Oil and gas revenues for the quarter ended March
31, 1997 were higher than those of the quarter ended December 31, 1996 due to an
overall increase in wholesale oil and gas prices during the same periods.
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 (seller-financing) and
new stock issuances.
10
<PAGE>
Liquidity
During the nine month period ended March 31, 1997, the Company's
operating activities provided cash flows of approximately $150,000. This is
compared with net cash used in operating activities of approximately $1,078,000
for the nine month period ended March 31, 1996. The primary reason for the
positive operating cash flows in the nine months ended March 31, 1997 was the
receipt of the Company's income tax refund and related interest totaling
approximately $494,000. The Company was able to utilize its net operating losses
experienced during the 1995 fiscal year and carry them back to prior years when
the Company generated taxable income and paid income taxes. The income tax
refund offset the operating cash requirements of the nine months ended March 31,
1997, and the excess cash was utilized to establish the Company's marketable
securities portfolio which had previously been liquidated prior to June 30,
1996.
In addition to the establishment of the Company's marketable securities
portfolio, approximately $111,000 was used to acquire interests in oil and gas
properties through the Company's Doblique subsidiary. When combining the
activities of the marketable securities portfolio, proceeds from the sale of
21,500 shares of the Company's investment in DCT and the investment in oil and
gas properties, approximately $350,000 in cash was used in investing activities
during the nine months ended March 31, 1997.
In connection with the disposition of AQM, the Company was released
from its guarantees of trade debts of AQM with certain key vendors. Nonetheless,
one of these vendors has brought an action against the Company asserting its
alleged rights under one of these guaranty agreements. Plaintiff's current
demand is approximately $247,500. The Company believes that it was released from
its guaranty of this debt and intends to vigorously defend itself in this
matter. There can be no assurance, however, that the Company will be successful.
If the Company is unsuccessful in its defense, a negative impact on the
Company's earnings, overall liquidity and, specifically, its cash flows from
operating activities would occur.
In order to finance current operations, approximately $238,000 was
advanced to the Company by a stockholder during the nine months ended March 31,
1997. These temporary advances are anticipated to be repaid from proceeds from
the marketable securities portfolio and/or from the Company's operations. In
addition, approximately $13,000 in cash was used to repay principal amounts due
on the note payable related to the oil and gas operations of Doblique.
The primary sources of funding for the operations of the Company in
fiscal year 1997 will be proceeds from the marketable securities portfolio. The
Company may also sell part of its investment securities in DCT to provide cash
as needed. Furthermore, the Company plans to seek out additional business
acquisition candidates and/or start-up opportunities in order to provide
supplemental operating cash necessary to fund the Company's overhead
requirements.
Significant Unconsolidated Subsidiary -- Digital Communications Technology
Corporation
DCT files a separate Form 10-QSB with the Securities and Exchange
Commission. Excerpts from DCT's management discussion and analysis section of
its Form 10-QSB is included below. The reader is encouraged to read DCT's entire
Form 10-QSB for more complete information.
Overview
DCT experienced a significant drop in net sales for the quarter, but
was still above prior year levels for the nine month period ended March 31,
1997. Net sales for the three months ended March 31, 1997 decreased
approximately 33%, while net sales for the nine month period ended March 31,
1997 increased approximately 3%
11
<PAGE>
in comparison to the respective periods of the prior year. The large operating
loss for the quarter also produced an operating loss for the nine months ended
March 31, 1997. Increases in cost of goods sold and general and administrative
expenses contributed to the operating losses.
Liquidity
DCT utilized approximately $1,733,000 and $536,000 in cash from
operating activities for the nine months ended March 31, 1997 and 1996,
respectively. DCT's operating cash position is due primarily to the large
decrease in accounts payable and an increase in accounts receivable which was
partially offset by a decrease in the level of inventory.
Accounts payable decreased approximately $2,270,000 for the nine months
ended March 31, 1997 as compared to a decrease of approximately $1,001,000 for
the same period ended March 31, 1996. The decrease in accounts payable in the
current period is due primarily to the decline in raw material purchases which
is a result of the declining sales volume.
Accounts receivable increased approximately $661,000 from the balance
at June 30, 1996, while DCT's accounts receivable collection period (measuring
how quickly, on average, DCT collects its accounts receivable) increased from
approximately 61 days at June 30, 1996 to approximately 65 days at March 31,
1997. The slight increase in the collection period can be attributed to slower
payments from some of DCT's customers. However, the collection period for the
nine months represents a dramatic improvement from the 85 day period for the six
month period ended December 31, 1996. Management will continue to focus on this
area to improve credit and collections efforts, although there can be no
assurances that these efforts will be successful.
Overall inventory levels declined by $692,000 from June 30, 1996 to
March 31, 1997. The reduction is primarily due to the decrease in sales volume
that has slowed the level of raw material purchases. Management has been
successful in its efforts 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. 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.
Approximately $187,000 in net cash was used in investing activities for
the nine month period ended March 31, 1997 as compared to approximately
$2,072,000 in cash provided by investing activities for the corresponding period
of the prior year. The primary reason for this change in position is the
increase in capital expenditures in the current period (see Capital Resources
below).
DCT utilized its line of credit to provide approximately $1,080,000 for
working capital needs during the nine months ended March 31, 1997 and repaid
approximately $225,000 in long-term debt. Management intends to selectively
utilize its line of credit to fund working capital requirements when needed.
During the nine month period ended March 31, 1997, DCT's cash needs
were met primarily through operations and draws on DCT's line of credit.
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 $1,089,000 in equipment and leasehold
improvements for the nine month
12
<PAGE>
period ended March 31, 1997. These larger capital outlays related primarily
to expenditures for duplication, loading, packaging, and leasehold improvements
at both DCT's Indianapolis and Ft. Lauderdale facilities. DCT recently announced
the expansion and relocation of the entire Indianapolis facility into a new
172,000 square foot building. The Indianapolis plant is scheduled to open in
June with an increased capacity of approximately 20%. The new facility layout is
designed to optimize process flow, to reduce product handling and to minimize
the total cycle time of productions from order entry to delivery. In addition,
DCT intends to make capital expenditures in excess of $2,000,000 in the coming
fiscal year and intends to finance these expenditures through operations and
through separate financing arrangements. There can be no assurances, however
that DCT will actually incur these budgeted expenditures.
Results of Operations
Overall growth in DCT's target markets led to continued sales growth of
approximately 3% in the current fiscal year to date. Net sales of $19,796,000
for the nine month period ended March 31, 1997 were the highest in DCT's
history, compared with $19,212,000 for the same period last year. However, net
sales for the three months ended March 31, 1997 decreased sharply by
approximately 33% to $3,981,000, down from $5,930,000, which was the highest
ever sales for the quarter in the same period ended March 31, 1996. The
significant sales decrease in the quarter ended March 31, 1997 can be attributed
to an industry wide decline in the quarter that is the result of a severe retail
backlog caused by the closure of many stores in several large retail chains.
Product from these chain stores went back into the market, providing other
chains with the opportunity to buy distressed merchandise at significantly
reduced cost, and thus slowing further the third fiscal quarter sales which are
traditionally very slow. At the same time, other chains achieved sharp,
margin-driven reductions in inventory levels by reducing in store quantities and
by returning significant amounts of unsold product to their vendors, our
customers. In addition, releases of theatrical product into video outlets lacked
any real hits to draw people into retail, and generally mild winter weather
across the country reduced rental and sell-through activity. It is important to
note that the decline in sales volume is not attributable to a loss of any major
accounts to competitors, nor have any of DCT's key customers gone out of
business. The industry consensus is that the first few months of 1997 have been
significantly slower than expected.
Operating profit also fell sharply, declining from a profit of
approximately $397,000 (6.7% of net sales) to a loss of approximately $921,000
(-23.1% of net sales) for the three months ended March 31, 1996 and 1997,
respectively. A lesser decline was experienced for the nine months ended March
31, 1997 as operating profit for this period declined from a profit of
approximately $1,202,000 (6.3% of net sales) in the previous year to a loss of
$307,000 (-1.6% of net sales). Approximately $98,000 of the total operating loss
(31.9%) for the nine months ended March 31, 1997 is attributable to losses from
one of DCT's subsidiaries, DCT-Internet Corporation ("DCTI"). DCTI has
experienced start up losses in its first year of operation as sales have not yet
covered its operating expenses. DCT fully anticipates that DCTI's sales will
continue to increase and that DCTI will provide operating profit for DCT by the
end of the calendar year. There can be no assurances, however, that actual
results will meet these projections. The remaining decline for DCT is due to
increases in cost of goods sold as a percentage of sales and general and
administrative expenses.
Cost of goods sold, as a percentage of sales, increased to 82% for the
nine months ended March 31, 1997 as compared to 77% for the nine months ended
March 31, 1996. The increased cost of goods sold is directly attributable to
increased usage of temporary labor and the cost of offloading excess production
volumes to other duplicators during the first and second fiscal quarters. Use of
these outside sources was unavoidable in order to complete customer orders that
exceeded existing capacity at both facilities. The lack of sufficient capacity
was due to severely limited space in the current buildings and unexpected delays
in the installation of new equipment. Management has already taken the steps
necessary to provide for the increase in sales volume by providing for new
duplication and packaging equipment. In addition, due to the fixed nature of
several direct overhead
13
<PAGE>
components, particularly depreciation, the cost of goods sold percentage will
increase in periods where sales severely decline - such as the third quarter of
fiscal 1997. Management recognizes that cost containment through efficiency
gains and productivity improvements is essential to DCT's continued profitable
growth and will continue to implement actions to improve DCT's performance in
this area. There can be no assurances, however, that any such actions will be
successful.
Selling expenses as a percentage of net sales increased slightly for
the nine month period, increasing from 4.5% to 4.8% for the nine months ended
March 31, 1996 and 1997, respectively. The increase is due commissions paid.
General and administrative expenses increased for the nine months ended
March 31, 1997 to approximately $1,804,000 (9.1% of net sales) as compared to
approximately $1,368,000 (7.1%) for the corresponding period of the prior year.
The increase in the percentage of general and administrative expenses to net
sales is attributable to salary increases and additional legal fees incurred in
connection with the shareholder derivative lawsuit.
See discussion of this matter in DCT's Form 10-KSB.
DCT realized income from securities transactions of approximately
$99,000 for the nine months ended March 31, 1997 as compared to approximately
$368,000 for the corresponding period of the prior year. The gains were from
investment transactions associated with DCT's marketable securities portfolio.
DCT invests funds in equity securities, mainly listed on the New York and
American Stock Exchanges, and by policy, limits the amount of exposure in any
one equity investment. Such investments are continually monitored to reduce the
risk of any adverse stock market volatility. Cash not invested in securities is
placed on account with brokerage firms, which is swept daily into a federally
insured money market account, or placed on account with a federally insured
national bank.
Interest expense decreased sharply from approximately $530,000 to
$318,000 for the nine months ended March 31, 1996 and 1997, respectively and
from approximately $150,000 to $106,000 for the three months ended March 31,
1996 and 1997, respectively. This decrease is due to reduced borrowings on DCT's
line of credit and the lack of interest expense related to any borrowings from
DCT's marketable securities portfolio.
14
<PAGE>
PART II
Item 1. Legal Proceedings
In connection with the disposition of AQM, the Company was released from
its guarantees of trade debts of AQM with certain key vendors. Nonetheless, one
of these vendors has brought an action against the Company asserting its alleged
rights under one of these guaranty agreements. Plaintiff's current demand is
approximately $247,500. The matter is before the Circuit Court for Multnomah
County, Oregon, Case No. 9612-09247 and has net been set for trial. Discovery
and settlement negotiations have occurred and are continuing. The Company
believes that it was released from its guaranty of this debt and intends to
vigorously defend itself in this matter. There can be no assurance, however,
that the Company will be successful.
Item 6. Exhibits and Reports on Form 8-K
The Company filed a current report on Form 8-K with the Commission on March
14, 1997 announcing the formation of the Company's new subsidiary, Millennia
Entertainment, Inc.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MILLENNIA, INC.
/s/ Kevin B. Halter
By: ________________________________ Date: May 15, 1997
Kevin B. Halter, President
/s/ Tim C. Hafer
By: ________________________________ Date: May 15, 1997
Tim C. Hafer, Vice President and
Chief Financial Officer
16
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