UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission file number: 1-13088
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 65-0014636
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16910 Dallas Parkway, Suite 100, Dallas, Texas 75248
(Address of principal executive offices)
(214) 248-1922
(Issuer's telephone number)
_______________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) had been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of the common stock of the registrant on
October 31, 1995, the latest practicable date, was 5,961,188.
TABLE OF CONTENTS
Item Numbered
Number Page
- ------- --------
Part I
1 Financial Statements . . . . . . . . . . . . . .1
2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . . . . . . 6
Part II
1 Legal Proceedings . . . . . . . . . . . . . . N/A
2 Changes in Securities . . . . . . . . . . . . N/A
3 Defaults Upon Senior Securities . . . . . . . N/A
4 Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . .N/A
5 Other Information . . . . . . . . . . . . . . N/A
6 Exhibits and Reports on Form 8-K . . . . . . . N/A
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1995 1995
(Unaudited) (Audited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 528,310 $ 284,837
Marketable securities 2,256,530 2,574,626
Accounts receivable, less allowance
for doubtful accounts of
$1,125,476 at September 30, 1995
and $1,065,300 at June 30, 1994 3,870,925 3,143,689
Inventories 3,780,675 4,058,293
Prepaid expenses and other current assets 345,155 345,126
----------- ------------
Total current assets 10,781,595 10,406,571
----------- ------------
Property, plant and equipment, net 5,271,812 5,239,564
Other assets 31,158 31,158
Loans receivable, related parties 492,318 601,736
----------- ------------
Total assets $ 16,576,883 $ 16,279,029
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 4,100,000 $ 3,840,000
Current portion, long-term debt 2,717,000 2,735,418
Accounts payable 1,878,914 2,165,725
Accrued liabilities 636,555 418,376
----------- ------------
Total current liabilities 9,332,469 9,159,519
----------- ------------
Long-term debt, less current portion 483,412 644,144
Deferred tax liability 8,390 8,392
Commitments and contingencies
Stockholders' Equity:
Common stock, par value $0.0002;
25,000,000 shares authorized,
5,961,188 and 5,961,188 shares
issued and 5,313,641 and
5,301,809 shares outstanding
as of September 30, 1995 and
June 30,1995, respectively 1,192 1,192
Additional paid-in capital 6,567,062 6,567,062
Retained earnings 1,917,968 1,710,867
Investment in S.O.I. Industries, Inc. (1,198,158) (1,198,158)
Net unrealized holding loss on
investment securities (535,452) (613,989)
----------- ------------
Total stockholders' equity 6,752,612 6,466,974
----------- ------------
Total liabilities and
stockholders' equity $ 16,576,883 $ 16,279,029
=========== ============
The accompanying notes are an integral part of the financial statements
1
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For the three months ended
September 30,
1995 1994
----------- ------------
Net sales $ 5,386,471 $ 4,276,591
----------- ------------
Costs and Expenses:
Cost of goods sold (exclusive of
depreciation and amortization, shown
separately below) 4,184,326 3,089,912
Selling expenses (exclusive of
depreciation and amortization, shown
separately below) 253,579 220,669
General and administrative expenses
(exclusive of depreciation and
amortization, shown separately below) 359,909 301,305
Depreciation and amortization 298,071 257,744
----------- ------------
Total costs and expenses 5,095,885 3,869,630
----------- ------------
Operating profit 290,586 406,961
----------- ------------
Other income (expense):
Realized gains from investment
transactions 116,011 216,490
Interest and other income 11,430 10,744
Interest expense (176,363) (132,874)
----------- ------------
(48,922) (94,360)
----------- ------------
Income from continuing operations
before provision for income taxes 241,664 501,321
Provision for income taxes 93,564 188,700
----------- ------------
Income from continuing operations 148,100 312,621
Discontinued operations:
Loss from operations of discontinued
operation, net of related income taxes
of $38,600 and $72,086 for the three
months ended September 30, 1995 and
1994, respectively 59,001 (116,945)
----------- ------------
Net income $ 207,101 $ 195,676
=========== ============
Weighted average shares of common
stock outstanding 5,313,641 5,200,021
=========== ============
Earnings per share:
Continuing operations $ 0.03 $ 0.06
Discontinued operations 0.01 (0.02)
----------- ------------
Net income $ 0.04 $ 0.04
=========== ============
The accompanying notes are an integral part of the financial statements
2
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended
September 30,
1995 1994
----------- ------------
Cash flows from operating activities:
Net income $ 207,101 $ 195,676
----------- ------------
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 298,071 278,187
Gain on sale of marketable
securities (116,011) (217,119)
Provision for bad debts 75,000 45,000
Reserve for inventory obsolescence - 36,000
Stock issued to employees as
compensation - 59,700
Increase in accounts receivable (802,236) (778,139)
Decrease in inventories 277,618 105,204
Increase in prepaid expenses and
other (29) (9,103)
(Decrease) increase in accounts
payable (286,811) 1,560,229
Increase (decrease) in accrued
liabilities 218,177 (177,312)
----------- ------------
Net cash (used in) provided by
operating activities (129,120) 1,098,323
----------- ------------
Cash flows from investing activities:
Decrease (increase) in loans receivable,
related parties 109,418 (157,410)
Change in marketable securities -
available for sale 512,644 (743,443)
Capital expenditures (330,319) (271,233)
----------- ------------
Net cash used in investing
activities 291,743 (1,172,086)
----------- ------------
Cash flows from financing activities:
Net long-term repayments (179,150)
Net short-term borrowings (repayments) 260,000 (134,595)
Proceeds from issuance of common stock - 60,000
----------- ------------
Net cash provided by financing
activities 80,850 (74,595)
----------- ------------
Decrease in cash and cash equivalents 243,473 (148,358)
Cash and cash equivalents at beginning of
period 284,837 625,421
----------- ------------
Cash and cash equivalents at end of period $ 528,310 $ 477,063
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (non-capitalized) $ 161,704 $ 129,581
=========== ============
Income taxes $ - $ 171,121
=========== ============
The accompanying notes are an integral part of the financial statements
3
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_____________
1. Summary of Significant Accounting Policies:
-------------------------------------------
The accompanying consolidated financial statements include the accounts
of Digital Communications Technology Corporation ("the Company"). The
operations of Tapes Unlimited, Inc., which were formerly consolidated
with the operations of the Company, have been segregated as discontinued
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.
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 listed common stocks with an aggregate
cost, based on specific identification, of $2,791,982 as of September 30,
1995. The net unrealized holding loss as of March 31, 1995 was $535,452.
All of the Company's securities are classified as available for sale
securities.
3. Inventories:
------------
The inventories are valued at the lower of cost (first-in, first-out
method) or market and consisted of the following:
September 30, June 30,
1995 1995
----------- ------------
Raw materials $ 3,069,658 $ 3,008,167
Work-in process 536,017 885,976
Finished goods 175,000 164,150
----------- ------------
$ 3,780,675 $ 4,058,293
=========== ============
4
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
_____________
4. Property, Plant and Equipment:
------------------------------
Property, plant and equipment and related accumulated depreciation are
summarized as follows:
September 30, June 30,
1995 1995
----------- ------------
Land $ 73,000 $ 73,000
Buildings and improvements 539,593 332,440
Machinery and equipment 8,562,426 8,439,261
----------- ------------
$ 9,175,019 $ 8,844,701
Less: accumulated depreciation 3,903,207 3,605,137
----------- ------------
$ 5,271,812 $ 5,239,564
=========== ============
5. Revolving Lines of Credit:
--------------------------
The Company has a revolving line of credit agreement for aggregate
borrowings of up to $5,400,000. Interest is payable on all outstanding
cash advances at the bank's prime lending rate plus 1/4% (9.00% at
September 30, 1995). Any unpaid principal and accrued interest is due on
demand, but no later than January 1996. The line of credit is
collateralized by accounts receivable, inventory and equipment. The terms
of the agreement require, among other provisions, that the Company comply
with requirements for maintaining certain cash flow and other financial
ratios. The Company failed to meet the cash flow coverage ratio
required under this agreement.
The Company also guaranteed a $900,000 line of credit for S.O.I.
Industries, Inc. as well as for an affiliate. As of September 30, 1995,
$558,500 has been drawn upon the affiliate's line of credit and $4,100,000
on the Company's line of credit.
6. Long-Term Debt:
---------------
Long-term debt is summarized as follows:
September 30, June 30,
1995 1995
----------- ------------
Long-term debt consists of various
mortgages and notes payable with
interest rates ranging from 8.75 percent
to 1 percent over prime. Monthly
payments range from $954 to $29,000
and expiration dates range from
1997 through 2007. $ 3,200,412 $ 3,379,562
Less: current portion 2,717,000 2,735,418
----------- ------------
$ 483,412 $ 644,144
=========== ============
Under the terms of certain of the above agreements, the Company is
required to comply with certain ratios and covenants. As of June 30,
1995, the Company failed to meet the cash flow coverage ratio. This
ratio is calculated on an annual basis, and therefore all amounts due
under these agreements are classified as current liabilities until the
next measurement date.
5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Digital Communications Technology Corporation ("the Company") continued to
experience sales growth and recorded a higher net income for the three
months ended September 30, 1995 than the corresponding quarter of the
prior year. However, the Company continued to experience a decline in
operating profit from approximately $407,000 to $291,000 for the three
months ended September 30, 1994 and 1995, respectively. Overall raw
material cost increases, which were in excess of 6%, contributed
substantially to the lower operating profits.
Liquidity
The Company used approximately $129,000 in cash from operating activities
for the three months ended September 30, 1995 as compared to approximately
$1,098,000 in cash provided by operating activities for the three months
ended September 30, 1994. The change in the Company's operating cash
position is primarily due to the accounts payable and accrual position of
the Company. For the three months ended September 30, 1994, the Company
experienced a combined increase in accounts payable and accruals of
approximately $1,383,000. On the contrary, the combined change in these
components for the three months ended September 30, 1995 was minimal.
The large increase in 1994 was due to increases to the Company's margin
account related to its marketable securities portfolio and due to an
inventory build-up in anticipation of orders that were expected in the
prior fiscal year's second quarter. All other items that affect cash
from operating activities for the three months ended September 30, 1995
were consistent with the corresponding quarter of the prior year.
Overall inventory levels decreased approximately 7% from June 30, 1995 to
September 30, 1995. This decrease was due to the utilization of blank
tapes that had been pre-loaded toward the later part of the fiscal year
ended June 30, 1995 in anticipation of peak season demand. Inventory
levels are expected to fluctuate during the next quarter to correspond
with demand during the fall season. 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, the Company does not stock
significant quantities of finished products, shipping orders immediately
upon completion. Management will continue to focus on ensuring that the
least amount of operating cash is invested in inventory by ensuring that
shipments are made immediately upon project completion and by minimizing
the amount of raw materials purchased.
Accounts receivable increased approximately $802,000 from the balance at
June 30, 1995. The Company's accounts receivable collection period
(measuring how quickly, on average, the Company collects its accounts
receivable) increased from approximately 74 days at June 30, 1995 to
approximately 85 days at September 30, 1995. The Company continues to
receive competitive pressures from its customers to grant longer payment
terms. Management will continue to focus on this area to improve credit
and collections efforts. However, there can be no assurances that such
efforts will yield improvements in this area. The increased accounts
receivable balances were also due to delays in billing created upon
implementation of a new computerized billing and accounts receivable
system. This system is now operational and no such delays are expected in
the future.
Approximately $292,000 in cash was provided by investing activities for
the three months ended September 30, 1995 as compared to approximately
$1,172,000 in cash used in investing activities for the corresponding
quarter of the prior year. The primary sources for the funds were an
approximate $109,000 decrease in loans receivable from affiliated
companies and an approximate $513,000 decrease in funds invested in the
Company's marketable securities portfolio. When not invested in
marketable securities, the majority of these funds are invested in
federally-insured money market funds, and are classified as cash
equivalents.
The Company utilized its line of credit to provide approximately $260,000
for working capital needs during the three months ended September 30, 1995
and repaid approximately $179,000 in long-term debt. Management intends
to selectively utilize its line of credit to fund capital expenditures and
inventory purchases when needed, and expects to reduce the amount
outstanding on the line of credit as collections on sales are received.
As of June 30, 1995, the Company failed to meet a cash flow coverage ratio
as required by certain of the Company's loan agreements. Therefore, all
amounts due under these agreements have been classified as current
liabilities on the balance sheet. There can be no assurance that the
Company will be able to comply with this debt covenant in the future,
however management will attempt to comply or renegotiate the covenant with
the Company's lender.
During the year ended June 30, 1995, the Company's cash needs were met
primarily through operations, with additional short-term borrowing on the
Company's credit line. 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
The Company invested approximately $330,000 in equipment and leasehold
improvements for the three months ended September 30, 1995. This amount
was consistent with capital expenditures during the corresponding quarter
of the prior year. The current quarter expenditures related primarily
to a high-speed video duplicating system which was acquired for the
Company's Fort Lauderdale facility. The Company plans to continue to
expand current operating facilities at the Indianapolis plant to fully
meet the high volume demands of the retail-sell-through market. The
Company intends to finance these expenditures through operations.
Results of Operations
Overall growth in the Company's target markets led to continued sales
growth in the current year. Net sales increased approximately 26% from
$4,277,000 to $5,386,000 for the three months ended September 30, 1994 and
1995, respectively. Significant sales increases were experienced as
orders were filled to meet the holiday buying season demands. As in the
prior fiscal year, management's focus on the "retail-sell-through market"
resulted in this sales surge. This market centers on sales of
pre-recorded video tapes which are sold at the retail level. The video
tapes sold to this market are typically recorded on a narrower band
width (i.e. extended play mode) in order to record more programming on
less video tape at a lower cost. The Company's customer base has become
increasingly dominated by the companies which distribute these
pre-recorded videos to the retail sell- through market, and management
has positioned the Company to capitalize on this portion of the video
industry.
Operating profit did not keep pace with the increased sales, declining
from approximately $407,000 (9.5% of net sales) to $291,000 (5.4% of net
sales) for the three months ended September 30, 1994 and 1995,
respectively. The decline in operating profit is due to increases in
cost of goods sold.
Cost of goods sold, as a percentage of sales, increased to 78% for the
three months ended September 30, 1995 as compared to 72% for the three
months ended September 30, 1994. The increased cost of goods sold is
directly attributable to increased material costs, specifically the cost
of the plastic video cassette shells and video tape, which have been
increasing in cost faster than the Company's ability to pass the increases
to its customers. Management will continue its efforts to pass on the
material cost increases to the Company's customers and will continue its
focus on cost containment, especially in labor costs, to ensure more
efficiency is obtained and thereby reducing current cost levels even
though sales volume increases. Management is also exploring alternative
sources for its raw materials to reduce material costs. Management
expects the costs of the raw materials mentioned above to decline in the
following months, however there can be no assurance that such declines
will occur.
Interest expense increased from approximately $133,000 to $176,000 for the
three months ended September 30, 1994 and 1995, respectively. This
increase was due primarily to increased borrowings on the Company's line
of credit and increased long-term borrowing over the levels of the prior
year. In addition, increased interest expense was due to an increase in
the bank's prime interest rate, which directly affects the Company's
borrowing rates.
The Company realized income from securities transactions of approximately
$116,000 for the three months ended September 30, 1995 as compared to
approximately $216,000 for the corresponding period of the prior year.
The gains were from investment transactions associated with the Company's
marketable securities portfolio. The Company invests funds in quality
equity securities through high quality brokers and, by policy, limits the
amount of exposure in any one equity investment. Such investments are
continually monitored to reduce the risk of any adverse stock market
volatility. Cash not invested in securities is placed on account with
high quality brokerage firms, which is swept daily into a federally
insured money market account, or placed on account with a federally
insured national bank.
During June 1995, the Company's management decided to discontinue the
operations of TU. Management believed that the cost of maintaining the
TU subsidiary outweighed the benefits provided to the Company. The effect
on net (loss) income of the operations of TU is segregated on the face of
the income statement as discontinued operations, and totaled approximately
$59,000 and ($117,000), net of income taxes, for the three months ended
September 30, 1995 and 1994, respectively. Although all operations at TU
have ceased, certain collection efforts are still conducted by the Company
on behalf of TU. These efforts, along with debt forgiveness resulting
from settlements with TU creditors, resulted in recoveries which is
reflected in the income from discontinued operations for the three
months ended September 30, 1995.
Other Items
The costs of the Company's products are subject to inflationary pressures
and commodity price fluctuations. Inflationary pressures have been
relatively modest over the past five years and the Company has generally
been able to mitigate the effects of inflation and commodity price
fluctuations through sales price increases and cost savings in other
areas. The Company's ability to pass on increased costs of its raw
materials is limited by competitive market pressures, and there can be
no assurances that the Company will be able to offset future material
cost increases with its own price increases.
The Company's sales levels generally follow the retail sell-through
markets, which typically peak in the fall and early winter months as
retail demand and holiday orders are met. The Company has mitigated this
seasonality by increasing sales efforts to lower volume, but higher
margin customers such as corporate training video duplication and the
video rental market. In addition, management plans to increase market
penetration in the Canadian and other foreign markets where the
seasonal base is different from that of the domestic market. Finally,
management intends to focus its marketing efforts toward the amusement
related industry (i.e. providing video tape duplication services for
video game manufacturers) as well as to the mass marketing advertising
industry to help mitigate the seasonality of the retail sell-through
markets. Even by utilizing these techniques, sales levels are still
lower in the summer months.
6
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.
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
By: /s/ Sanford M.Whitman Date: November 14, 1995
Sanford M. Whitman, Vice President
and Chief Financial Office