SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20649
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the Quarterly Period Ended: June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No. 0-15891
DK INDUSTRIES, INC.
-------------------
(Exact name of small business issuer as specified in its charter)
Colorado 84-0891674
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1580 Lincoln Street, Suite 900, Denver, Colorado 80203
-------------------------------------------------------
(Address of principal executive offices)
(303) 863-1869
--------------
(Issuer's telephone number)
425 John Deere Road, Ft. Collins, Colorado 80424 June 30, 1995
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [x] No [ ]
As of June 30, 1996, 2,374,104 shares of common stock were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [x]
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3
Item 2 - Management Discussion and Analysis 3
PART II - OTHER INFORMATION
Items 1 - 6 5
Signature 7
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
- ------------------------------
For financial information, please see the financial statements and the
notes thereto, attached hereto and incorporated herein by this reference.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
- -------------------------------------------------------------------
General Development of Business
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During fiscal year 1995, the Company brought in new management to provide
the Company with a viable long-term direction. This new management team brought
with it over 40 years of experience in the environmental arena. In fiscal year
1995, a four point plan aimed at bringing the Company stability and then growth
was devised and implemented by the new management. The plan as highlighted
below revolves around: first, restructuring the internal organization so that
the Company would be in a position to implement its long term strategy; growth
through acquisition of complementary technologies in order to build a single
source environmental solutions Company. The four point plan is as follows:
(1) Reduce overhead and improve gross margins by implementing new cost
controls and focusing on more profitable opportunities.
(2) Restructure existing debt and expand existing equipment and receivable
lines.
(3) Redefine and expand the Company's marketing organization in order to
secure more contracts.
(4) Raise equity to bolster working capital and enable the Company to move
its acquisition program forward.
Results of Operations for the three months and the nine months ended June 30,
- -----------------------------------------------------------------------------
1996 and 1995.
- --------------
The company earned revenues of $2,489,136 and $2,619,190 for the three
months ended June 30, 1996, and 1995, respectively. This represents a 5%
decline in revenues between the two periods. The Company's revenues for the nine
months ended June 30, 1996 declined 40% from the previous nine month period
ended June 30,1995 (from $9,178,950 in 1995 to $5,444,649 in 1996.) The
reduction in revenues during fiscal year 1996 is a result of management's plan
to focus on more profitable contracts with higher gross profit margins. This
also reflects a normal decline in billings on certain long-term contracts. As
these long-term contracts progress, and new long-term contracts begin, new
billings may increase.
For the three months ended June 30, 1996 and 1995, gross profit margins
were 36.8% and 39.7%, respectively. Gross profit margins for the nine months
ended June 30 increased from 31.7% for 1995 to 36.0% in 1996. As noted above,
management's plan to concentrate on contracts with higher profit margins,
coupled with implementation of significant cost cutting measures has yielded
better overall profit margins. Although total gross profit has decreased to
$1,940,530 from $2,908,255 for the nine months ended June 30, 1996 and 1995,
respectively.
3
Operating Expenses
------------------
Selling, general and administrative expenses in 1996 decreased $67,767 and
$528,275 over the same three and nine month periods for 1995, respectively.
This decrease was due primarily to reductions in personnel and in
administrative, marketing and certain indirect engineering areas, beginning in
the quarter ended September 30, 1995.
Interest expense in 1996 decreased $52,211 and $108,729 over the same three
and nine month periods for 1995, respectively. This decrease was due primarily
to the conversion of $1,068,457 of shareholder notes and accrued interest
payable to equity on March 12, 1996.
Other expense items totalled $167,573 and $382,456 for the three and nine
month periods ended June 30, 1996. This compares with other expenses of $23,710
and $214,471 for the same periods in 1995. The increase is attributed primarily
to write-offs of previous debt issuance costs, additional amortization of new
debt financing costs, and $128,108 of acquisition costs related to the merger.
Analysis of Financial Condition
- -------------------------------
Working Capital
---------------
The current ratio of the Company (current assets divided by current
liabilities) decreased from 1.10 as of September 30, 1995 to .80 as of June 30,
1996. Although current assets increased by $876,443 during this period, current
liabilities also increased by $2,090,639. Current liabilities as of June 30,
1996 include $1,000,000 of GDC Bridge Notes discussed below under "Liquidity and
Capital Resources". Also included in current liabilities are trade accounts
payable totalling approximately $200,000, which are over 60 days past due.
Liquidity and Capital Resources
-------------------------------
The Company's equipment needs have been met by a combination of cash
purchases, financing and lease financing provided by vendors, as well as
through standard lease finance companies. The Company anticipates future
capital purchases of approximately $200,000 to fulfill existing long-term
contract requirements. These purchases will be made through a combination of
internal cash flow and existing sources of credit. An additional $300,000 of
capital purchases may be required if the Company completes negotiations on a new
long-term contract. If successful, the Company expects the capital purchases to
be paid via advance payments from the customer.
In March 1996, approximately $1.1 million of notes and accrued interest
payable to shareholders were exchanged for 502,333 shares of the Company's
common stock.
Also in March, 1996, the Company refinanced an outstanding note payable
balance of $2,766,000 for a term of approximately five years payable in monthly
installments of approximately $47,000, of which $23,000 is interest, with a
balloon payment at maturity of approximately $1,400,000 based on a seven year
amortization of the original outstanding principal balance, and interest at 2.50
basis points over prime, payable monthly based on the rate in effect on March
15, 1996. In addition, the Company may draw, during 1996 only, up to an
additional $850,000 to finance certain equipment purchases in connection with
the performance of certain contracts. As of June 30, 1996, $750,000 had been
drawn on the $850,000 equipment line.
4
The Company agreed to pay the note maker a maintenance fee of $100,000 for
each year of the loan which is deemed earned on January 1 of each year and is
due and payable by December 31 of the applicable year. The Company also agreed
to pay a $300,000 Restructure Fee, all of which has been paid, and a Profit
Participation Fee of $500,000 in lieu of the Profit Participation Fee set forth
in the Original Agreement. The profit Participation Fee is payable in three
installments of $100,000 each due on September 30, 1996, October 31, 1996 and
November 30, 1996, with a final installment of $200,000 due on December 15,
1996. As of June 30, 1996, a total of $40,000 of the Profit Participation Fee
has been paid and applied against the December, 1996 installment, $200,000 was
paid as of July 31, 1996.
During April and May 1996, prior to consummation of the merger, GDC
Holdings sold promissory notes (the "GDC Bridge Notes") in the aggregate
principal amount of $1,000,000 (the "GDC" Bridge Loan"). The GDC Bridge Notes
mature on September 30, 1996 and bear interest at the rate of 10% per annum.
This bridge financing was procured with the assistance of a Placement Agent,
which received a commission of $80,000.
In August, 1996 the Company's wholly-owned subsidiaries executed an
agreement with Coast Business Credit ("CBC") for a $2.5 million credit facility
for GDC. The facility, guaranteed by the Company has a one-year term and is
limited to $1.25 million until either (i) the holders of the GDC Bridge Notes
convert to an equity investment in the Company or (ii) the Company receives
proceeds of at least $1.0 million in an equity offering. The purpose of the
facility is to borrow up to 80% of eligible accounts receivable and to fund
certain equipment acquisitions.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
The Company is involved in various legal actions arising in the ordinary
course of business. Management has assessed the range of loss, if any, related
to pending legal matters and has concluded that the impact of these matters will
not have a material adverse effect on the Company's consolidated financial
position, results of operations, or cash flows.
ITEM 2. CHANGES IN SECURITIES.
- -------------------------------
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- -----------------------------------------
NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
NONE.
ITEM 5. OTHER INFORMATION.
- ---------------------------
NONE.
5
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
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(a) Exhibits
-------------
27. Financial Data Schedule.
(b) Reports on Form 8-K
------------------------
The Company has filed:
(i) a Form 8-K dated May 31, 1996 to describe the transaction
whereby the issuer acquired through reverse merger GDC Holdings Corporation and
its wholly-owned subsidiary, GDC Enviro-Solutions, Inc., and the change in
directors of the Company pursuant to such merger.
(ii) Form 8-KA, dated May 31, 1996, filing the financial data
required by Form 8-K, Item 7(a) and 7(b).
(iii) Form 8-K, dated June 25, 1996, describing a change in the
Company's certifying accountants, and a change in the Company's fiscal year end.
6
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DK INDUSTRIES, INC.
Date: September 25, 1996 By:/s/ James W. Muzzy
----------------------
James W. Muzzy
Vice President and Principal Financial
Officer
7
D.K. INDUSTRIES, INC.
(formerly Vetline, Inc.)
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1996 1995
----------- ------------
ASSETS (Unaudited)
------
Current Assets:
Cash and cash equivalents $157,794 $115,919
Accounts receivable, trade 2,240,129 2,118,372
Other receivables 417,432 338,821
Prepaid expenses 162,100 99,890
Other current assets 888,301 316,311
------------ ------------
Total Current Assets 3,865,756 2,989,313
Property & equipment, net 6,489,383 6,921,803
Other assets 1,319,814 399,754
------------ ------------
$11,674,953 $10,310,870
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
Current Liabilities:
Current maturities of LT debt $ 1,856,842 $ 1,114,775
Line of credit payable 750,000 672,200
Accounts payable & accrued expenses 2,198,760 927,988
------------ ------------
Total Current Liabilities 4,805,602 2,714,963
Long-term debt, net of current 2,822,701 4,011,691
Deferred income taxes payable 533,160 714,120
STOCKHOLDERS' EQUITY:
Common stock, 10,000,000 shares
authorized, 1,271,387 shares
issued and outstanding, no par
value as of September 30, 1995, and
2,374,104 shares issued and
outstanding, $.02 par value as of
June 30, 1996 47,482 187,664
Additional paid-in capital 1,157,984 ---
Unearned compensation (157,664) (157,664)
Retained earnings 2,465,688 2,840,096
------------ ------------
Total Stockholders' Equity 3,513,490 2,870,096
------------ ------------
$11,674,953 $10,310,870
============ ============
See Note to Financial Statements.
F-1
D.K. INDUSTRIES, INC.
(formerly Vetline, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Contract Revenue $2,489,216 $2,619,190 $5,444,649 $9,178,950
Cost of Contract Revenue 1,573,555 1,580,356 3,487,119 6,270,695
----------- ----------- ----------- -----------
Gross Profit 915,661 1,038,834 1,957,530 2,908,255
Selling, General & Admin. Expenses 670,348 738,115 1,779,816 2,308,091
----------- ----------- ----------- -----------
Net Operating Income (Loss) 245,313 300,719 177,714 600,164
Other (Income) Deductions:
Interest 103,173 165,384 329,666 438,395
Gain on sale of subsidiary 0 0 0 (81,711)
Other, net 167,573 23,710 382,456 214,471
----------- ----------- ----------- -----------
270,746 189,094 712,122 571,155
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes (25,433) 111,625 (534,408) 29,009
Income Tax (Expense) Benefit 8,846 (38,500) 160,000 (9,584)
----------- ----------- ----------- -----------
Net Income (Loss) ($16,587) $73,125 ($374,408) $19,425
=========== =========== =========== ===========
Net Income (Loss) per Common Share ($0.008) $0.064 ($0.244) $0.017
=========== =========== =========== ===========
Weighted Average Shares Outstanding 1,973,848 1,140,000 1,533,448 1,140,000
=========== =========== =========== ===========
See Note to Financial Statements.
F-2
D.K. INDUSTRIES, INC.
(formerly Vetline, Inc.)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 1996
Unearned
Compensation-
Common Common Additional Restricted Total
Shares Stock at Paid-in Stock Retained Stockholders'
Outstanding Par Value Capital Award Earnings Equity
----------- --------- ---------- ------------- ----------- -------------
Balances, September 30, 1995 1,271,387 $ 187,664 ($ 157,664) $ 2,840,096 $ 2,870,096
Related party debt converted to
equity 502,333 $ 1,063,457 1,063,457
Subsidiary debt assumed in
connection with merger (45,655) (45,655)
Adjustment to reflect common stock
outstanding at par value as a
result of merger 600,384 (140,182) 140,182 0
Net loss for the period,
(unaudited) (374,408) (374,408)
--------- --------- ----------- ---------- ----------- -----------
Balances, June 30, 1996 2,374,104 $ 47,482 $ 1,157,984 ($ 157,664) $ 2,465,688 $ 3,513,490
========= ========= =========== ========== =========== ===========
See Note to Financial Statements.
F-3
D.K. INDUSTRIES, INC.
(formerly Vetline, Inc.)
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
June 30,
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($ 374,408) $ 19,425
Adjustments to reconcile net loss
from operating activities:
Depreciation and amortization 840,550 1,178,247
Deferred income taxes (180,960) 56,049
Changes in operating assets
and liabilities:
Receivables (200,368) 818,843
Prepaid expenses (62,210) (82,779)
Other assets (1,810,104) (554,119)
Accounts pay. & accrued exp. 1,372,836 (1,253,706)
Deferred revenue 0 500,872
----------- -----------
Net Cash Provided by (Used in)
Operations (414,664) 682,832
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of subsidiary 0 45,000
Purchase of property and equipment (90,076) (17,759)
----------- -----------
Net Cash Provided by (Used in)
Investing Activities (90,076) 27,241
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of LT debt 1,334,276 124,754
Principal payments on long-term debt (787,661) (934,881)
----------- -----------
Net Cash Provided by (Used in)
Financing Activities 546,615 (810,127)
----------- -----------
INCREASE (DECREASE) IN CASH 41,875 (100,054)
CASH, beginning of period 115,919 100,054
----------- -----------
CASH, end of period $ 157,794 $ 0
=========== ===========
SUPPLEMENTARY CASH FLOW DISCLOSURES:
Cash paid for interest $ 324,359 $ 386,412
=========== ===========
Related party debt converted to
equity $ 1,063,457 $ 0
=========== ===========
See Note to Financial Statements.
F-4
NOTES TO FINANCIAL INFORMATION
1. In May, 1996, DK Industries, Inc. (Registrant) consummated a reverse
merger with GDC Holdings Corporation (GDC). Shareholders in GDC were issued
1,773,720 shares in Registrant in exchange for all of the outstanding stock of
GDC. As a result of the reverse merger, GDC becomes the surviving entity for
accounting purposes.
2. The accompanying unaudited consolidated balance sheet presents the
financial position of the Registrant as if the merger had occurred on March 31,
1996. Because of the reverse merger, the capital structure of Registrant was
eliminated in consolidation. The additional paid-in capital of GDC was reduced
by $45,655 to reflect the net liabilities of Registrant assumed by GDC. The
consolidated statements of operations combined the statements of Registrant and
GDC for the interim six month periods ended March 31, 1996 and 1995.
3. These statements are not necessarily indicative of future operations
or the actual results that would have occurred had the transactions been
consummated at the beginning of the periods indicated. The unaudited
consolidated financial statements should be read in conjunction with the audited
historical financial statements of Registrant and notes thereto included in the
annual report of Registrant on Form 10-K dated June 30, 1995 and June 30, 1994
and the audited consolidated financial statements for GDC Holdings Corporation
and its subsidiary included in Registrants' Current Report on Form 8-KA dated
May 31, 1996.
F-5