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 December 31, 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 January 31, 1996, the latest practicable date, was 5,961,188.
PAGE
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
PAGE
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
1995 June 30,
(Unaudited) 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 401,983 $ 284,837
Marketable securities 1,874,639 2,574,626
Accounts receivable, less allowance for doubtful
accounts of $1,177,795 at December 31, 1995
and $1,065,300 at June 30, 1995 4,363,016 3,143,689
Inventories 4,205,790 4,058,293
Prepaid expenses and other current assets 182,900 345,126
------------ ------------
Total current assets 11,028,328 10,406,571
------------ ------------
Property, plant and equipment, net 5,091,426 5,239,564
Other assets 44,658 31,158
Loans receivable, related parties 453,058 601,736
------------ ------------
Total assets $ 16,617,470 $ 16,279,029
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 4,200,000 $ 3,840,000
Current portion, long-term debt 2,406,341 2,735,418
Accounts payable 1,588,782 2,165,725
Accrued liabilities 683,296 418,376
------------ ------------
Total current liabilities 8,878,419 9,159,519
------------ ------------
Long-term debt, less current portion 616,653 644,144
Deferred tax liability - 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 5,696,929 and
5,301,809 shares outstanding as of December 31,
1995 and June 30, 1995, respectively 1,192 1,192
Additional paid-in capital 6,567,062 6,567,062
Retained earnings 2,124,349 1,710,867
Investment in S.O.I. Industries, Inc. (1,198,158) (1,198,158)
Net unrealized holding loss on investment
securities (372,047) (613,989)
------------ ------------
Total stockholders' equity 7,122,398 6,466,974
------------ ------------
Total liabilities and stockholders' equity $ 16,617,470 $ 16,279,029
============ ============
The accompanying notes are an integral part of the financial statements
1
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended For the six months ended
December 31, December 31,
------------ ------------
1995 1994 1995 1994
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------ ------------ -------------
Net sales $ 7,895,511 $ 7,727,643 $ 13,281,982 $ 12,004,234
------------- ------------ ------------ -------------
Costs and Expenses:
Cost of goods sold 6,585,961 6,446,932 11,068,358 9,794,588
Selling expenses 310,573 260,251 564,152 480,920
General and administrative expenses 484,562 331,737 844,471 633,042
------------- ------------ ------------ -------------
Total costs and expenses 7,381,096 7,038,920 12,476,981 10,908,550
------------- ------------ ------------ -------------
Operating profit 514,415 688,723 805,001 1,095,684
------------- ------------ ------------ -------------
Other income (expense):
Interest and other (expense) income (33,391) 399,582 94,050 627,275
Interest expense (203,566) (166,429) (379,929) (299,762)
------------- ------------ ------------ -------------
(236,957) 233,153 (285,879) 327,513
------------- ------------ ------------ -------------
Income from continuing operations before
provision for income taxes 277,458 921,876 519,122 1,423,197
Provision for income taxes 107,436 363,070 201,000 551,770
------------- ------------ ------------ -------------
Income from continuing operations 170,022 558,806 318,122 871,427
Discontinued operations:
Income (loss) from operations of Tapes
Unlimited, Inc. net of applicable
income taxes (benefit) of $21,900,
$15,177, $60,500, and ($56,909),
respectively 36,359 30,769 95,360 (86,176)
------------- ------------ ------------ -------------
Net income $ 206,381 $ 589,575 $ 413,482 $ 785,251
============= ============ ============ =============
Weighted average shares of common
stock outstanding 5,677,443 5,291,148 5,411,957 5,238,385
============= ============ ============ =============
Earnings per share:
Continuing operations $ 0.03 $ 0.11 $ 0.06 $ 0.17
Discontinued operations 0.01 - 0.01 (0.02)
------------- ------------ ------------ -------------
Net income $ 0.04 $ 0.11 $ 0.07 $ 0.15
============= ============ ============ =============
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 six months ended
December 31,
------------
1995 1994
----------- ----------
Cash flows from operating activities:
Net income $ 413,482 $ 785,251
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 605,620 586,171
Gain on sale of marketable securities (72,438) (611,299)
Increase in accounts receivable, net (1,219,327) (2,954,658)
(Increase) decrease in inventories (147,497) 178,378
Decrease (increase) in prepaid expenses
and other 162,226 (46,682)
(Decrease) increase in accounts payable (576,943) 1,531,749
Increase (decrease) in accrued liabilities
and other 264,920 (253,588)
------------ -----------
Net cash used in operating activities (569,957) (784,678)
------------ -----------
Cash flows from investing activities:
Decrease (increase) in loans receivable,
related parties 148,678 (164,775)
Change in marketable securities - available
for sale 1,014,367 (59,343)
Increase in other assets and other liabilities (21,892) (176,568)
Capital expenditures (457,482) (967,345)
------------ -----------
Net cash provided by (used in) investing
activities 683,671 (1,368,031)
------------ -----------
Cash flows from financing activities:
Net long-term (repayments) borrowings (356,568) 39,964
Net short-term borrowings 360,000 1,521,716
Payments to parent company - (105,722)
Proceeds from issuance of common stock - 142,024
------------ -----------
Net cash provided by financing
activities 3,432 1,597,982
------------ -----------
Increase (decrease) in cash and cash equivalents 117,146 (554,727)
Cash and cash equivalents at beginning of period 284,837 625,421
------------ -----------
Cash and cash equivalents at end of period $ 401,983 $ 70,694
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (non-capitalized) $ 379,550 $ 305,170
============ ===========
Income taxes $ - $ 403,463
============ ===========
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 consolidated
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 typically subject to seasonal variations and 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 $2,246,686 as of December 31,
1995. The net unrealized holding loss as of December 31, 1995 was
$372,047. 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:
December 31, June 30,
1995 1995
----------- -----------
Raw materials $ 3,250,746 $ 3,008,167
Work-in process 839,078 885,976
Finished goods 115,966 164,150
----------- -----------
$ 4,205,790 $ 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:
December 31, June 30,
1995 1995
------------ -----------
Land $ 73,000 $ 73,000
Buildings and improvements 544,893 332,440
Machinery and equipment 8,684,289 8,439,261
------------ -----------
9,302,182 8,844,701
Less: accumulated depreciation 4,210,756 3,605,137
------------ -----------
$ 5,091,426 $ 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
December 31, 1995). Any unpaid principal and accrued interest is due on
demand, but no later than March 31, 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 an affiliate.
As of December 31, 1995, $600,000 has been drawn upon the affiliate's
line of credit and $4,200,000 on the Company's line of credit.
5
6. Long-Term Debt:
---------------
Long-term debt is summarized as follows:
December 31, 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. $ 3,022,994 $ 3,379,562
Less: current portion 2,406,341 2,735,418
----------- -----------
$ 616,653 $ 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.
6
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 for both the quarter and six month period ended
December 31, 1995. However, the Company continued to experience a decline in
operating profit and net income, both in real terms and as a percentage of
net sales. Increased raw material costs as well as increased general and
administrative costs were primarily responsible for the declining operating
profits. Increased interest expense and lower realized gains from the
marketable securities portfolio, coupled with the lower operating profits,
resulted in the lower net income.
Liquidity
The Company used approximately $570,000 in cash from operating activities
for the six months ended December 31, 1995 as compared to approximately
$785,000 in cash used in operating activities for the six months ended
December 31, 1994. An overall net use of cash in operating activities for
the six month period ended December 31, 1995 is consistent with prior years.
During this period the Company typically experiences its highest sales
volume, but cash collections on many of the sales follows in the subsequent
quarter. This situation is evident in the period ended December 31, 1995, as
accounts receivable increased approximately $1,219,000 from the June 30, 1995
balance. In addition, the Company's inventory increased approximately
$147,000 during the same period. The increase was due to significant
purchases of raw materials at the end of the second quarter which were
acquired for a lower per unit cost than had been available in prior months.
The raw material purchases, specifically of video tape cassette shells and
video tape "pancakes," were purchased based on anticipated orders for the
next several months, and were purchased to mitigate the steadily increasing
material costs that have been eroding operating profits.
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 77 days at
December 31, 1995. While the 77 days is a marked improvement from the 85
days for the first quarter ended September 30, 1995, it still demonstrates
the effect of competitive pressures from the Company's customers to grant
longer payment terms.
As discussed above, inventory levels increased approximately 4% from
June 30, 1995 to December 31, 1995. The finished goods and work in process
components of inventory declined slightly from the June 30, 1995 levels,
while raw materials increased. The raw materials inventory component is
expected to decline as in-stock raw materials are utilized to meet production
requirements in subsequent months. 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.
7
Approximately $684,000 in cash was provided by investing activities for
the six months ended December 31, 1995 as compared to approximately
$1,368,000 in cash used in investing activities for the corresponding period
of the prior year. The primary sources for the funds were an approximate
$149,000 decrease in loans receivable from affiliated companies and an
approximate $1,014,000 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
$360,000 for working capital needs during the six months ended December 31,
1995 and repaid approximately $357,000 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 $457,000 in equipment and leasehold
improvements for the six months ended December 31, 1995. This amount was
consistent with capital expenditures during the corresponding period of the
prior year. The expenditures related primarily to a high-speed video
duplicating system which was acquired for the Company's Fort Lauderdale
facility during the first quarter ended September 30, 1995. 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.
8
Results of Operations
Overall growth in the Company's target markets continued the sales
growth experienced during the first quarter ended September 30, 1995 and
during the year ended June 30, 1995. Net sales increased approximately 2%
from $7,728,000 to $7,896,000 for the three months ended December 31, 1994
and 1995, respectively. Net sales also increased for the six month period
ended December 31, 1995 to approximately $13,282,000 from approximately
$12,004,000 for the six month period ended December 31, 1994, an 11% increase.
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 hike. 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 $689,000 (8.9% of net sales) to $514,000 (6.5% of net
sales) for the three months ended December 31, 1994 and 1995, respectively.
A similar decline was experienced for six months ended December 31, 1995.
Operating profit for this period declined from approximately $1,096,000 (9.1%
of net sales) to $805,000 (6.1% of net sales). The decline in operating
profits are due to increases in cost of goods sold and general and operating
expenses.
Cost of goods sold, as a percentage of sales, increased to 83% for the
six months ended December 31, 1995 as compared to 82% for the six months
ended December 31, 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 and was successful in purchasing lower cost materials at the
end of the current quarter.
9
An overall increase in general and administrative expenses also
contributed to the lower operating profit. As a percentage of net sales,
these costs increased from 5.3% to 6.4% for the six month periods ended
December 31, 1994 and 1995, respectively. Increases in professional fees
over prior year levels and an increase in the allowance for doubtful accounts
primarily contributed to this increase.
Interest expense increased from approximately $300,000 to $380,000 for
the six months ended December 31, 1994 and 1995, respectively and from
approximately $166,000 to $204,000 for the three months ended December 31,
1994 and 1995, respectively. These increases were due primarily to increased
borrowings on the Company's line of credit and increased long-term borrowing
over the levels of the prior year as well as margin interest paid in
connection with the Company's marketable securities portfolio. 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
$72,000 for the three months ended December 31, 1995 as compared to
approximately $611,000 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 Tapes Unlimited, Inc. ("TU"). Management believed that the
cost of maintaining the TU subsidiary outweighed the benefits provided to the
Company. The effect on net income (loss) of the operations of TU is segregated
on the face of the income statement as discontinued operations, and totaled
approximately $95,000 and ($86,000), net of income taxes, for the six months
ended December 31, 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 six months ended December 31,
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.
10
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.
11
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/ Douglas L. Miller Date: February 14, 1996
Douglas L. Miller, Vice President
and Chief Financial Officer
12