<TABLE>
<CAPTION>
<S> <C>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Three Months Ended March 31, 1996.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to
________.
Commission file number 0-19998
RESTOR INDUSTRIES, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 65-0044209
(State of Incorporation) (I.R.S. Employer Identification No.)
4501 Vineland Road, Orlando, Florida 32811
(Address of principal executive offices) (Zip Code)
(407) 843-7031
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock, Par Value $.01 Per Share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
The number of shares outstanding of the Registrant's common stock, par
value $.01 per share, at May 15, 1996 was 13,245,850.
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
Restor Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
March 31 December 31
1996 1995
______________________ ___________________
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 2,083,293 $ 1,886,819
Accounts receivable 10,081,971 9,648,817
Inventories 6,832,668 4,549,721
Notes receivable from stockholders --- 3,879,728
Unbilled revenue under customer contract 379,333 379,333
Prepaid expenses and other current assets 385,214 309,034
--------------------- ------------------
Total Current Assets 19,762,479 20,653,452
Property and equipment 2,292,594 2,062,749
Intangible assets 6,420,853 5,084,184
Other assets 884,980 714,848
--------------------- ------------------
Total Assets $ 29,360,906 $ 28,515,233
===================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 2,406,933 $ 5,385,220
Accounts payable 3,764,365 3,648,734
Accrued payroll and benefits 897,078 731,659
Other accrued liabilities 962,986 665,585
--------------------- ------------------
Total Current Liabilities 8,031,362 10,431,198
Long-term debt 3,600,000 3,750,000
--------------------- ------------------
Total Liabilities 11,631,362 14,181,198
--------------------- ------------------
Stockholders' Equity
Common stock 132,214 125,583
Capital in excess of par value 29,883,019 27,641,543
Note receivable from affiliate (982,752) (919,836)
Accumulated deficit (11,302,937) (12,513,255)
--------------------- ------------------
Total Stockholders' Equity 17,729,544 14,334,035
--------------------- ------------------
Total Liabilities and Stockholders' Equity $ 29,360,906 $ 28,515,233
===================== ==================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Restor Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended March 31
1996 1995
___________________ _________________
<S> <C> <C>
Sales of products $ 8,354,310 $ 1,555,810
Service revenues 4,038,935 3,063,845
------------------- ----------------
Total Revenues 12,393,245 4,619,655
Cost of products sold 6,188,321 1,071,351
Cost of services 3,265,709 2,500,383
Engineering and development 173,395 138,884
Selling, general and administrative 1,245,656 532,310
Depreciation and amortization 309,632 246,195
------------------- ----------------
Total Costs and Expenses 11,182,713 4,489,123
------------------- ----------------
Operating Income 1,210,532 130,532
Interest expense 103,005 126,304
Interest and other income (102,791) (6,538)
------------------- -----------------
Net Income $ 1,210,318 $ 10,766
=================== =================
Net Income Per Common Share
Primary $ .09 $ ---
=================== =================
Assuming Full Dilution $ .09 $ ---
=================== =================
Weighted Average Shares Outstanding
Primary 13,548,727 6,277,385
=================== =================
Assuming Full Dilution 13,548,727 6,277,385
=================== =================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Restor Industries, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<CAPTION>
Capital in
Common Excess of Par Note Receivable Accumulated
Stock Value from Affiliate Deficit Total
___________ ________________ _______________ ________________ ______________
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 125,583 $ 27,641,543 $ (919,836) $ (12,513,255) $ 14,334,035
Net income 1,210,318 1,210,318
Issuance of 562,365 shares for
Comtech acquisition 5,624 2,082,494 2,088,118
Loans to affiliate (62,916) (62,916)
Issuance of 99,488 shares for stock
options and warrants 995 149,248 150,243
Issuance of 1,163 shares for
matching contribution to 401K plan 12 9,734 9,746
----------- ---------------- --------------- ---------------- --------------
Balance at March 31, 1996 $ 132,214 $ 29,883,019 $ (982,752) $ (11,302,937) $ 17,729,544
=========== ================ =============== ================ ==============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Restor Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended March 31
1996 1995
__________________ __________________
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,210,318 $ 10,766
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 309,632 246,195
Provision for inventory reserves 41,250 22,500
Provision for bad debts 18,300 6,000
Stock contributed to employee benefit plan 6,825 6,000
Changes in operating assets and liabilities,
net of effects from businesses acquired:
Accounts receivable (297,023) (270,945)
Inventories (2,007,482) (268,921)
Accounts payable (39,026) 282,220
Other assets and liabilities (406,958) (41,419)
------------------ ------------------
Net Cash Used by Operating Activities (1,164,164) (7,604)
------------------ ------------------
Cash Flows From Investing Activities:
Acquisition of business 805,360 ---
Loans to affiliate (62,916) ---
Expenditures for property and equipment (165,992) (62,062)
Prepaid rent on equipment lease 1,907 (219,992)
Debt issuance costs (56,546) ---
Other (62,859) ---
------------------ ------------------
Net Cash From (Used by) Investing Activities 458,954 (282,054)
------------------ ------------------
Cash Flows From Financing Activities:
Issuance of short-term debt 2,500,000 ---
Short-term debt repayments (5,628,287) (173,814)
Long-term debt repayments --- (30,000)
Proceeds from exercise of stock warrants and options 4,029,971 80,913
------------------ ------------------
Net Cash From (Used By) Financing Activities 901,684 (122,901)
------------------ ------------------
Increase in Cash and Equivalents 196,474 (412,559)
Cash and Equivalents at Beginning of Period 1,886,819 753,264
------------------ ------------------
Cash and Equivalents at End of Period $ 2,083,293 $ 340,705
================== ==================
Supplemental Schedule of Noncash Financing and
Investing Activities:
Issuance of common stock for business acquired $ 2,088,118
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
Restor Industries, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 1996
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q. Accordingly, the financial
information does not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results of the
interim periods covered have been included. For further information, refer to
the audited consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
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 and disclosure of
contingent 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.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results of the full year.
Certain reclassifications have been made to the prior period's financial
information to conform with the presentations used in 1996.
NOTE 2. ACQUISITIONS
Comtech Acquisition
In February 1996, the Company entered into a letter of intent to acquire Comtech
Sunrise, Inc. ("Comtech"), a Livermore, California based manufacturer of
intelligent telecommunications access products such as T1 multiplexors and
digital loop carrier equipment. In April 1996, a definitive agreement, plan of
merger and irrevocable proxies were executed whereby Comtech will be merged with
and into Restor-Comtech, Inc., a wholly owned subsidiary of the Company (the
"Comtech Merger"). The consummation of the merger is expected to occur in June
1996, after a mandatory registration process is completed in the State of
California.
In connection with the Comtech Merger, the stockholders of Comtech are expected
to receive approximately $300,000 in cash and 350,600 restricted shares of the
Company's common stock. These shares have an initial fair value of approximately
$6.00 a share or $2.1 million.
<PAGE>
In addition to the 350,600 shares noted above, the stockholders of Comtech will
be issued 211,765 restricted shares of the Company's common stock (the "Escrowed
Shares"). These shares will be placed in escrow, and along with $1.8 million in
additional purchase price (the "Additional Consideration"), will be released and
paid to the stockholders of Comtech contingent upon the realization of
predefined levels of pre-tax income from Comtech's operations during three
one-year periods beginning January 1, 1996. This Additional Consideration may be
paid, at the option of the Company, in the form of cash or restricted shares of
the Company's common stock valued at the then current market prices.
Escrowed Shares were valued by the Company at par value only, or $2,118. Once
conditions for release from escrow have been met, the fair market value of the
shares as measured at that time, along with any Additional Consideration earned,
will be recorded as additional goodwill and stockholders' equity, respectively.
The acquisition of Comtech has been accounted for using the purchase method of
accounting. Accordingly, the results of Comtech's operations have been included
in the accompanying consolidated financial statements from January 1, 1996, the
effective date of acquisition as defined in the definitive agreement and plan of
merger. The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of the date of acquisition. The
excess of purchase price over the fair value of net assets acquired, currently
estimated at approximately $1.5 million, has been recorded as goodwill and is
being amortized over a 15 year period.
Pro Forma Results of Operations
In May, 1995, the Company acquired AIT, Inc. ("AIT"), a provider of Northern
Telecom switching systems, add-on frames and related circuit boards to the
telecommunications industry. In October 1995, the Company acquired Westec
Communications, Inc. ("Westec"), a provider of wireless systems and repair
services to the cable television and telecommunications industries. The results
of operations for both AIT and Westec have been included in the Company's
consolidated financial statements from their respective dates of acquisition. A
detailed discussion of the terms and conditions of these two acquisitions is
presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
The following unaudited pro forma results of operations for the three months
ended March 31, 1996 and 1995 gives effect to the AIT, Westec and Comtech
acquisitions as if they had occurred on January 1, 1995, after giving effect to
certain adjustments including interest income and expense, amortization of
goodwill, increased depreciation due to the adjusted basis of fixed assets
acquired and elimination of intercompany sales. These pro forma results have
been prepared for comparative purposes only and do not purport to indicate the
results of operations which would actually have occurred had the acquisition
been in effect on the date indicated, or which may occur in the future:
<TABLE>
<CAPTION>
1996 1995
_________________ _________________
<S> <C> <C>
Total Revenues $ 12,393,245 $ 7,766,180
Net Income $ 1,210,318 $ 253,610
Net Income Per Common Share $ .09 $ .03
</TABLE>
<PAGE>
NOTE 3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
________________ _________________
<S> <C> <C>
Switching systems, frames and related circuit boards $ 4,236,032 $ 2,127,653
Electronic components 1,730,932 1,595,281
Pay telephone parts 402,155 346,978
Work in progress 238,388 307,438
Other finished goods 225,161 172,371
----------------- -----------------
$ 6,832,668 $ 4,549,721
================= =================
</TABLE>
NOTE 4. DEBT
Debt outstanding consists of the following:
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
________________ _______________
<S> <C> <C>
Revolving credit loans payable to bank $ 2,000,000 $ 4,926,142
Term loan payable to bank 4,000,000 4,200,500
Other notes payable 6,933 8,578
---------------- ---------------
Total debt 6,006,933 9,135,220
Amount due within one year (2,406,933) (5,385,220)
---------------- ---------------
Long-term debt $ 3,600,000 $ 3,750,000
================ ===============
</TABLE>
In March 1996, the Company and its primary lender amended their existing bank
credit facility to increase the revolving line of credit to $6 million, reduce
the interest rate by one percent and extend the bank's commitment until March
2001. The existing $4 million term loan, originally scheduled to mature in
November 1997, was replaced with a new $4 million term loan requiring escalating
quarterly payments through March 2001.
Aggregate maturities of long-term debt are as follows: 1997 -- $600,000;
1998 -- $800,000; 1999 - $1,000,000; 2000 -- $1,000,000; 2001 -- $350,000.
Interest on the new bank facility is set at prime plus 1 1/4% or Libor plus 2
1/2%, at the option of the Company. As of March 31, 1996, the interest rate on
all bank debt was 7.94 percent.
Interest paid was $131,000 and $134,400 for the three months ended March 31,
1996 and 1995, respectively.
<PAGE>
NOTE 5. EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY
The computation of earnings per share is based on the weighted average number of
outstanding common shares during the period plus, when their effect is dilutive,
common stock equivalents consisting of shares subject to stock options and
warrants. A total of 1,107,509 common shares held in escrow from the Company's
initial public offering and from certain acquisitions have been excluded from
the earnings per share calculations because the conditions for release of shares
from escrow have not been satisfied.
In October 1995, the Company raised approximately $6.5 million of new capital
through the exercise of previously issued warrants and non-qualified options to
purchase 2,433,853 shares of the Company's common stock. Of the $6.5 million
raised, approximately $1.6 million was invested by the directors, management and
the principal lender of the Company. In exercising their warrants or options,
investors had the option of paying cash or executing an 8% interest bearing note
made payable to the Company. Approximately $2.4 million of the total proceeds
was paid in cash and $4.1 million through notes. The notes were paid in full by
March 29, 1996.
Common stock issued and outstanding at March 31, 1996 and December 31, 1995 was
13,221,295 and 12,558,279 shares, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
When compared to the first quarter of 1995, the Company realized an
approximately $8 million or 168 percent increase in its first quarter 1996
revenues and a significant improvement in net income. The improved performance
relates primarily to the operating results of the Company's three recent
business acquisitions and the shipment of approximately $3.5 million in DSC
access products under a new distribution agreement entered into with DSC
Communications Corporation ("DSC") in late 1995. The acquisitions and the
distribution agreement are a direct result of management's strategy to expand
Restor's product offerings and position the Company to aggressively participate
in the rapidly growing worldwide communications markets.
In mid-1995, the Company acquired AIT, Inc., a full service provider of Northern
Telecom switching systems and related equipment. In October 1995, Westec
Communications, Inc., a manufacturer, installer and repair agent for wireless
CATV and telecommunications products was acquired. In the first quarter of 1996,
the Company acquired Comtech Sunrise, Inc., a manufacturer of intelligent
telecommunications access products. All three wholly-owned subsidiaries
contributed to the Company's improved performance during the first quarter of
1996 and have benefited from Restor's financial strength, large
telecommunications customer base, growing inventory of telecommunications
products and broad range of circuit board repair services.
<PAGE>
On January 2, 1996, Hensley E. ("Buddy") West joined the Company as its new
President and Chief Operating Officer. Mr. West spent the last nine years in
executive management and sales positions with DSC. His last assignment was Group
Vice President for the Access Systems Group where he had responsibility for all
facets of DSC's access products infrastructure including product development,
engineering, manufacturing and worldwide operations consisting of over 500
employees. As Vice President of Business Development during 1990-1991, Vice
President of Regional Bell Operating Company Sales during 1991 - 1992 and Senior
Vice President of North American Sales during 1993, Mr. West was instrumental in
growing the Access Systems Group sales from less than $20 million in 1990 to in
excess of $400 million in 1995.
Mr. West is highly capable and conversant with all aspects of the
telecommunications business and his vision, technical expertise and management
experience are all expected to be significant contributors to the Company's
continued growth and success. Mr. West has a track record of understanding the
products and operations of the RBOCs and building technical alliances and
strong, lasting relationships with these customers. He has had significant
experience in designing, developing and manufacturing digital, fiber-optic and
wireless loop carrier networks and related applications for U.S. and
international customers. His background and experience will provide significant
support and added value to the Company's current operations and future strategic
objectives.
In March 1996, Scott N. Madigan joined the Company as its Vice President of
Business Development. In this newly created position, Mr. Madigan will
coordinate the Company's strategic planning efforts, oversee Restor's global
marketing programs, provide direct sales support for the Company's new
subsidiaries and pursue external and internal growth opportunities. Mr. Madigan
spent the last four years with DSC as Vice President of Marketing of
Litespan-2000, DSC's flagship access product and later Vice President of
Litespan International Operations and Wireless Access Marketing. From 1987 to
1992, he held product and account management positions with Northern Telecom,
Inc., where he was responsible for identification, assessment and development of
new business opportunities for Northern's switching, transmission and access
products. Prior to 1987, Mr. Madigan held engineering and operations management
positions with California Microwave, Inc. and ITT Corporation.
In March 1996, the Company established a dedicated international sales and
marketing group to pursue the significant telecommunications equipment
opportunities that are expected to occur over the next three to five years as
developing countries privatize their telecommunications industry and/or upgrade
their local, long distance and wireless communications infrastructures. Reynaldo
Rodriguez, who has held several key sales and executive management positions
since he joined Restor in 1989, was promoted to Vice President and General
Manager - International and will oversee this new group's activities.
<PAGE>
In addition to the growth in the Company's revenue base, management was also
very successful in the first quarter of 1996 in further strengthening the
Company's balance sheet. Approximately $3.9 million in interest-bearing notes
due from stockholders as a result of an October 1995 warrant exercise program
were collected in full during the quarter. In late March, the Company executed a
new $10 million credit facility with its primary lender. The new facility
consists of a $6 million line of credit and a $4 million term loan to be repaid
in graduated quarterly payments through the year 2001. As of the date of this
report, the Company has no borrowings outstanding under this line of credit.
The acquisitions, recruitment of executive management, international focus and
strengthened balance sheet are all key elements of management's strategy to
provide switching, access and wireless products and related services to the
global communications marketplace. The numerous strategic and financial
initiatives completed since November 1994 have all been to position Restor to
participate in these growth markets. Management intends to continue to
aggressively pursue acquisitions, technology licensing agreements and other
strategic alliances in 1996 and the future that are accretive to the Company's
stockholders and that bring advanced technology and new products into Restor.
Although the timing of customer equipment upgrade and expansion programs may
cause fluctuations in the Company's quarterly results from time to time,
management believes the Company is now well positioned financially and
operationally to pursue growth opportunities in the worldwide telecommunications
marketplace. The telecommunications equipment business and expertise brought to
the Company by AIT and Comtech, the sixteen years of wireless technology
experience contributed by Westec, the traditional repair, refurbishment and
electronic manufacturing services of the Company and a highly experienced board
of directors and management team should allow the Company to offer low-cost,
high quality, comprehensive product and service solutions to an increasing
number of companies providing telecommunications, data and video services. As
deregulation of the telecommunications industry within the United States occurs
as a result of state legislation and The Telecommunications Act of 1996,
management believes the demand for the Company's products and services from
local bypass, long distance, cable television and other communications service
providers will be strong.
Although there is no assurance that the level of improved financial performance
realized in the first quarter of 1996 will be sustained throughout the year,
management is currently projecting the Company's overall performance in 1996 to
be improved over that experienced in 1995.
<PAGE>
Results of Operations
<TABLE>
The following table sets forth items in the Company's Consolidated Statements of
Operations as a percentage of total revenues:
<CAPTION>
Three Months Ended March 31
1996 1995
______ ______
<S> <C> <C>
Service revenues 67.4% 33.7%
Sales of products 32.6 66.3
------ ------
Total Revenues 100.0 100.0
Cost of products sold 50.0 23.2
Cost of services 26.3 54.1
Engineering and development 1.4 3.0
Selling, general and administrative 10.0 11.6
Depreciation and amortization 2.5 5.3
------ ------
Total Costs and Expenses 90.2 97.2
------ ------
Operating Income 9.8 2.8
Interest expense .8 2.7
Interest and other income (.8) (.1)
------ ------
Net Income 9.8% .2%
====== ======
</TABLE>
Revenues
A summary of the Company's revenue performance follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
1996 1995
_________________ _________________
<S> <C> <C>
Switching systems and circuit boards $ 4,549,526 $ 923,834
Distributed products 3,503,678 ---
Pay telephone products 182,896 631,976
Wireless communication systems 118,210 ---
----------------- -----------------
Total Products 8,354,310 1,555,810
Circuit board repair 977,510 633,720
Pay telephone refurbishment 899,262 1,186,521
Electronic manufacturing 1,774,928 1,243,604
Wireless equipment repair 387,235 ---
----------------- -----------------
Total Services 4,038,935 3,063,845
----------------- -----------------
Total Revenues $ 12,393,245 $ 4,619,655
================= =================
</TABLE>
<PAGE>
Three Months Ended March 31, 1996 and 1995
Products
The dramatic increase in telephone switching systems and related circuit boards
sold by the Company is due to the Company's acquisitions of AIT in May 1995 and
Comtech in January 1996.
The distributed products revenues relate to the sale of DSC products under a
non-exclusive Distribution Agreement entered into in the fourth quarter of 1995.
Management expects to continue marketing DSC products in 1996, especially to its
Latin American markets. The primary focus under its new distribution agreement
for the U.S. market is expected to be on the smaller scale access orders
currently being supplied to telecommunications providers by DSC. The Company
hopes to provide DSC customers with a stocking distributor to further speed the
delivery of its access products.
The decline in pay telephone products revenues, primarily custom-logo, stainless
steel vault doors, is due mainly to the timing of customer orders. Stainless
steel vault doors, a relatively new product offering of the Company, are gaining
market acceptance due to the overall appearance and maintenance advantages they
offer over traditional chrome plated doors.
Overall, demand for the Company's products is expected to remain strong for
1996. However product sales such as switching systems, vault doors and
distributed products are subject to the timing of customer upgrade and new
installation programs and as a result may contribute to significant fluctuations
in the Company's future quarterly revenues.
Services
The Company's 1996 circuit board repair revenues exceeded 1995 revenues by
$343,790 or approximately 54 percent. The increase in circuit board repair
revenues is primarily due to the introduction of new repair services and
contracts executed in 1995.
Beginning in late 1993 and 1994, the Company began investing in the development
of new repair services, especially in the digital equipment repair arena where
initial manufacturer warranty periods are beginning to expire. Several new
repair services have been introduced to customers such as the repair of Northern
Telecom DMS-100 and DMS 10 equipment, Stromberg-DCO and DSC Timespan. The
majority of the cost for development of services such as these relate to the
procurement of a used switch and the engineering effort spent by Company
personnel. As these new services continue to be introduced in 1996, along with
new repair service programs such as the Company's Premier Logistics and private
label repair services, the Company believes its traditional circuit board repair
activity will continue to grow.
In addition to the new services, management expects circuit board repair
revenues to continue trending upward throughout 1996 based on the strength of
several new contracts received in 1995.
<PAGE>
In July 1995, the Company executed a two year Repair Agent Agreement with
Century Telephone ("Century"), a subsidiary of Century Telephone Enterprises,
Inc., the 16th largest local exchange telephone company in the United States.
Under the Terms of this agreement, the Company has been appointed as the primary
provider of repair and replacement services for all electronic or mechanical
telecommunications equipment sent out for repair by Century.
In October 1995, Puerto Rico Telephone Company ("PRTC") appointed the Company as
its primary provider of repair and replacement services for printed circuit
boards for a two year period. The Company was awarded PRTC's business on a lump
sum basis as the lowest bidder who complied with all required terms and
conditions. Management expects this new business, along with Century, to play a
significant role in continuing to improve the Company's circuit board repair
revenues.
Pay telephone refurbishment revenues decreased approximately 24% in the three
months ended March 31, 1996. Demand for refurbishment services is subject to
quarterly fluctuations due to customer budgetary constraints and restructuring
programs.
Electronic manufacturing revenues increased by approximately 43% during 1996.
The increase in revenues is due to market opportunities created due to the new
surface mount assembly and automated testing equipment acquired in late 1995 and
the improved financial condition of the Company.
Revenues related to wireless communications systems sales and repair represent
revenues from Westec operations which was acquired on October 2, 1995.
Gross Margins
The Company has realized the following gross margins:
Three Months Ended March 31
1996 1995
_______ _______
Product sales 25.9% 31.1%
Service revenues 19.1 18.4
Total revenues 23.7 22.7
The Company's gross profit percentage related to products sold is subject to
wide fluctuations depending on sales mix. The decrease in gross profit
percentage related to products sold in 1996 relates to the $3.5 million of
distributed product sales, which margins are approximately 25 percent of those
realized from sales of internal products such as switching systems and circuit
boards.
<PAGE>
The Company's gross profit percentage for service revenues is also subject to
wide fluctuations depending on sales mix, i.e., in-house circuit board and
wireless equipment repair has targeted margins approximately three times those
of electronic manufacturing services. Overall service gross margins improved
slightly primarily due to improved margins generated by the electronic
manufacturing services. Increased revenues, manufacturing efficiencies and
quality gained by the new surface mount line acquired in 1995 substantially
improved the margins for these services.
Other Expenses
The increase in engineering and development of $34,511 is primarily due to the
new Comtech subsidiary acquired in January 1996.
Selling, general and administrative expenses as a percentage of total revenues
decreased from 11.6 percent to 10.0 percent for the three months ended March 31,
1996. Management continues to believe that its current operating infrastructure
is capable of servicing a significantly higher level of business.
Included in the Company's first quarter selling, general and administrative
expenses is approximately $95,000 for the anticipated repayment of 1996 salary
costs under a voluntary salary reduction program implemented in December 1995.
Under the program, 61 of the Company's 66 exempt salaried employees agreed to
forego $849,254 in compensation in exchange for 424,627 non-qualified options at
$7.00 per share, the then current market value of the Company's common stock,
i.e., one stock option for every $2 of compensation. This program provides that
if certain levels of pre-tax income is achieved in 1996 in excess of that
reported for 1995, a partial or full repayment of salaries will be made in
February 1997.
Based on the Company's net income in the first quarter of 1996, management felt
it prudent to record the expense of a partial repayment in this period. The
total first quarter 1996 charge for this program amounted to $150,000, including
salary costs charged to cost of sales and engineering and development. This
liability is included in Accrued Payroll and Benefits on the March 31, 1996
balance sheet.
Depreciation and amortization expenses increased by $63,437 or 26 percent in the
first quarter of 1996. The increase relates to approximately $145,000 of
additional depreciation and amortization of goodwill related to acquisitions.
This increase was partially offset by an approximate $100,000 reduction in
depreciation expense resulting from the write-down of the net book value of
certain repair assets in the second quarter of 1995.
Despite a significant increase in average borrowings outstanding in 1996,
interest expense decreased $23,299 or 18 percent primarily as a result of an
approximate three and one-half percent reduction in the interest rate being paid
on bank debt.
The increase in interest and other income in 1996 is primarily due to interest
earned on the notes receivable from stockholders and note receivable from the
former owner of AIT, as well as a general increase in the Company's overall
invested cash balances. As of March 31, 1996, the notes receivable from
stockholders were paid in full.
<PAGE>
Cash Flows From Operating Activities
Accounts receivable at March 31, 1996 were $10,081,971, an increase of $433,154
or 4.5% from December 31, 1995. This increase is primarily due to March 1996
revenues exceeding those of December 1995. Average day sales outstanding at
March 31, 1996 were 50 days as compared to 49 days at December 31, 1995.
Inventories at March 31, 1996, were $6,832,668, an increase of $2,282,947 or 50%
over December 31, 1995 levels. This increase is due to a planned build-up of AIT
inventories of approximately $1 million to support the increased demand for AIT
products and $918,000 of distributed product inventories on hand as of March 31,
1996. The remaining increase relates primarily to inventories from the
acquisition of Comtech Sunrise.
Accounts payable at March 31, 1996, were $3,764,365, an increase of $115,631, or
3 percent over December 31, 1995.
Cash Flows From Investing Activities
In February 1996, the Company entered into a letter of intent to acquire Comtech
Sunrise, Inc. ("Comtech") a Livermore, California based manufacturer of
intelligent telecommunications access products such as T1 multiplexors and
digital loop carrier equipment. In April 1996, a definitive agreement, plan of
merger and irrevocable proxies were executed whereby Comtech will be merged with
and into Restor-Comtech, Inc., a wholly owned subsidiary of the Company. In
connection with the Comtech Merger, the stockholders of Comtech are expected to
receive approximately $300,000 in cash and 350,600 restricted shares of the
Company's common stock. These shares have an initial fair value of approximately
$6.00 a share or $2.1 million.
In addition to the 350,600 shares noted above, the stockholders of Comtech will
be issued 211,765 restricted shares of the Company's common stock (the "Escrowed
Shares"). These shares will be placed in escrow, and along with $1.8 million in
additional purchase price (the "Additional Consideration"), will be released and
paid to the stockholders of Comtech contingent upon the realization of
predefined levels of pre-tax income from Comtech's operations during three
one-year periods beginning January 1, 1996. This Additional Consideration may be
paid, at the option of the Company, in the form of cash or restricted shares of
the Company's common stock valued at the then current market prices.
Other than estimated cash consideration of $300,000 and contingent cash payments
that could be earned by the stockholders if predefined pre-tax incomes levels
are realized by Comtech over the next three years (see Note 2 to "Financial
Statements"), the cash expenditures directly related to the purchase price of
Comtech consist of approximately $100,000 in legal, audit and other fees. The
$805,360 shown under Acquisition of Business in the Consolidated Statements of
Cash Flows represents the cash balance of Comtech on the effective date of
acquisition.
<PAGE>
In July 1995, the Company loaned the sole stockholder of AIT $1.3 million in
cash in connection with a $2,330,000 promissory note executed as an integral
part of the merger agreement between the two companies. An additional $1,030,000
may be loaned to the stockholder as specific accounts receivable, notes
receivable and inventories on AIT's May 17, 1995 balance sheet are collected
and/or realized by the Company. During the first quarter of 1996, $62,916 was
advanced to the sole stockholder and as of March 31, 1996, the Company had
loaned an aggregate of $1,562,252 to the stockholder. All borrowings under the
promissory note, along with interest charged at an annual rate of six percent,
are to be repaid to the Company on August 15, 1997, or earlier if certain
contingent cash payments are earned by the stockholder in connection with AIT's
gross profit performance. All loans to the stockholder under this promissory
note are collateralized by 520,970 shares of the Company's common stock owned by
the stockholder. As a result of this pledge agreement, the note receivable from
the stockholder has been accounted for as a reduction of stockholder's equity.
In connection with the acquisition of AIT, the sole stockholder of AIT was
issued 637,308 restricted shares of the Company's common stock. These shares
were immediately placed into escrow, and along with $2,330,000 in potential cash
payments, may be released to the sole stockholder over a two year period ended
August 15, 1997 contingent upon the realization of predefined levels of gross
profit from AIT's operations during this same period. To the extent cash
consideration is paid, the sole stockholder will immediately be required to
repay the equivalent amount of borrowings outstanding under the promissory note
described above. Once repaid, the stockholder will not be entitled to reborrow
such funds.
The first measurement period for purposes of releasing escrowed shares and
paying contingent cash consideration was May 17, 1995 to December 31, 1995. In
reviewing AIT's gross profit performance as of September 30, 1995, the Company
determined that it was highly probable that the conditions for release and
payment for this first period would be met. The actual results for this period
confirmed this determination. Accordingly, 159,327 escrowed shares were
accounted for as if released and $582,500 in contingent cash payments were
accounted for as if paid as of September 30, 1995. The net effect of this
accounting was to increase goodwill and stockholders' equity by approximately
$1.1 million at September 30, 1995. These shares were released and payment was
made on February 15, 1996. The payment was immediately repaid to the Company,
reducing the note receivable from the sole stockholder of AIT to $982,752.
During the three months ended March 31, 1996, the Company made approximately
$166,000 in capital expenditures. The Company invested approximately $50,000 in
network communications equipment, personal computers, and software. The Company
intends to make continued investments in this area in 1996 to enhance its
information systems and integrate new acquisitions. The Company also invested
approximately $20,000 in machinery and equipment for the electronic
manufacturing operations and approximately $40,000 for facility improvements and
equipment for AIT.
<PAGE>
Cash Flows From Financing Activities
In December 1995, the Company and its bank amended their credit agreement
temporarily increasing the revolving line of credit to $5 million until February
1, 1996. The Company borrowed $4.9 million against the revolving line of credit
in late December 1995, primarily to remit payment to DSC, supplier of the
distributed products sold during the fourth quarter of 1995. These borrowings
were repaid to the bank in January and early February when the Company collected
the related accounts receivable from its customer.
In March 1996, the agreement was further amended to permanently increase the
revolving line of credit to $6 million, reduce the interest rate by one percent
and extend the bank's commitment until March 2001. The existing term loan,
originally scheduled to mature in November 1997, was replaced with a new $4
million term loan requiring graduated quarterly payments through March 2001.
In late March 1996, the Company borrowed $2.0 million against the revolving line
of credit, primarily to remit payment to DSC for distributed products sold
during the first quarter 1996. As of May 15, 1996 there were no amounts
outstanding on the Company's line of credit.
In October 1995, the Company raised approximately $6.5 million of new capital
through the exercise of previously issued warrants and non-qualified options to
purchase 2,433,853 shares of the Company's common stock. Of the $6.5 million
raised, approximately $1.6 million was invested by the directors, management and
the principal lender of the Company. In exercising their warrants or options,
investors had the option of paying cash or executing an 8% interest bearing note
made payable to the Company. Approximately $2.4 million of the total proceeds
was paid in cash and $4.1 million through notes. The notes were paid in full by
March 29, 1996.
Income Taxes
As of March 31, 1996, the Company has tax net operating loss carryforwards
available to reduce future income through 2010 of approximately $7.3 million. In
addition, the Company has capital loss carryforwards of approximately $1.2
million expiring in 1995. Due to the exercise of certain stock options and
warrants and the issuance of Company common stock related to acquisitions during
1995, the Company may have undergone an ownership change under Internal Revenue
Service regulations which would limit the annual utilization of net operating
loss carryforwards. If an ownership change has occurred, the annual limitation
would currently be set at approximately $4.4 million.
Liquidity and Financial Condition
The Company's improved operating performance has significantly enhanced its
financial strength and improved it's liquidity. As of March 31, 1996, the
Company's stockholders' equity is approximately $17.7 million, long-term debt to
equity ratio now stands at approximately 1 to 5, and the current ratio is 2.5 to
1. Currently, the Company may borrow up to $6 million under its existing bank
line of credit.
<PAGE>
The Company has realized a significant increase in its revenues and net income,
most notably during the fourth quarter of 1995 and the first quarter of 1996.
Management is cautiously optimistic that these positive trends will continue
throughout 1996 and as a result, is forecasting additional improvements in its
liquidity and financial condition. These trends, along with the improved cash
and financial position discussed above, lead management to believe the Company
has sufficient financial resources to support the working capital requirements
of its operations and its current business plans.
II. OTHER INFORMATION
Item 5. Other Information
On January 2, 1996, Hensley E. ("Buddy") West joined the Company as its
President and Chief Operating Officer. On January 30, 1996 the Company appointed
Mr. West to the Company's Board of Directors expanding its membership to six.
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report, to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESTOR INDUSTRIES, INC.
By: /s/ Mark A. Gergel
---------------------------
Mark A. Gergel
Vice President
and Chief Financial Officer
Dated: May 15, 1996
