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, 1996
{ } 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
(Name of small business issuer 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;
telephone number)
(972) 248-1922
(Issuer's telephone number)
------------------------------------------------------------------------
(Former name,former address and former fiscal year,if changed since last report)
Check whether issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act 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 { }
The number of shares outstanding of the common stock of the registrant
on October 31, 1996, the latest practicable date, was 6,465,610.
TABLE OF CONTENTS
Item Numbered
Number Page
- ------ ----
Part I
1. Financial Statements................................................ 1
2. Management's Discussion and Analysis or
Plan of Operation................................................... 7
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 & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1996 1996
(Unaudited) (Audited)
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 252,673 $ 615,037
Marketable securities 1,905,976 1,900,050
Accounts receivable, net of allowance for doubtful accounts
of $433,000 at September 30, 1996 and $414,000 at June 30, 1996 5,376,204 3,719,265
Inventories 2,921,173 2,862,911
Prepaid expenses and other current assets 819,074 614,210
---------------- ---------------
Total current assets 11,275,100 9,711,473
---------------- ---------------
Property, plant and equipment, net 5,670,565 5,469,304
Other assets 281,265 81,343
Loans receivable, related parties 414,110 413,369
---------------- ---------------
Total assets $ 17,641,040 $ 15,675,489
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 2,039,944 $ 1,625,325
Current portion, long-term debt 913,715 935,127
Accounts payable 4,211,045 3,032,236
Accrued liabilities 339,039 362,520
---------------- ---------------
Total current liabilities 7,503,743 5,955,208
---------------- ---------------
Long-term debt, less current portion 1,505,333 1,666,063
Deferred tax liability 547,631 157,216
Commitments and contingencies
Stockholders' Equity:
Series A convertible preferred stock, 10,000,000 shares of $.0001
par value per share authorized; 80,000 and 100,000 shares issued
and outstanding as of September 30, 1996 and June 30, 1996,
respectively, $1,000,000 liquidation preference 8 10
Common stock, 25,000,000 shares of $.0002 par value per share
authorized; 6,465,610 and 6,332,116 issued and 6,152,273
and 6,125,162 shares outstanding as of September 30, 1996 and
June 30, 1996, respectively 1,293 1,266
Additional paid-in capital 8,479,293 8,479,318
Retained earnings 1,095,817 1,030,152
Investment in S.O.I. Industries, Inc. (1,084,983) (1,084,983)
Net unrealized holding loss on investment securities (407,095) (528,761)
---------------- ---------------
Total stockholders' equity 8,084,333 7,897,002
---------------- ---------------
Total liabilities and stockholders' equity $ 17,641,040 $ 15,675,489
================ ===============
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,
1996 1995
---------------- ----------------
Net sales $ 7,019,937 $ 5,386,471
---------------- ----------------
Costs and Expenses:
Cost of goods sold (exclusive of depreciation
and amortization, shown separately below) 5,567,126 4,084,326
Selling expenses (exclusive of depreciation
and amortization, shown separately below) 305,878 253,579
General and administrative expenses (exclusive
of depreciation and amortization, shown
separately below) 623,545 459,909
Depreciation and amortization 355,251 298,071
---------------- ----------------
Total costs and expenses 6,851,800 5,095,885
---------------- ----------------
Operating profit 168,137 290,586
---------------- ----------------
Other income (expense):
Realized gains from investment transactions 71,119 116,011
Interest and other income 0 11,430
Interest expense (108,508) (176,363)
---------------- ----------------
(37,389) (48,922)
---------------- ----------------
Income from continuing operations before
provision for income taxes 130,748 241,664
Provision for income taxes 65,331 93,564
---------------- ----------------
Income from continuing operations 65,417 148,100
Discontinued operations:
Gain from operations of discontinued operation,
net of related income taxes of $0 and $38,600
for the three months ended September 30, 1996
and 1995, respectively 250 59,001
---------------- ----------------
Net income $ 65,667 $ 207,101
================ ================
Weighted average shares of common
stock outstanding 6,152,723 5,313,641
================ ================
Earnings per share:
Continuing operations $ 0.01 $ 0.03
Discontinued operations 0.00 0.01
---------------- ----------------
Net income $ 0.01 $ 0.04
================ ================
The accompanying notes are an integral part of the financial statements
2
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended
September 30,
1996 1995
---------------- ----------------
Cash flows from operating activities:
Net income $ 65,667 $ 207,101
---------------- ----------------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 355,251 298,071
Gain on sale of marketable securities (71,119) (116,011)
Provision for bad debts 18,777 75,000
Increase in accounts receivable (1,675,716) (802,236)
(Increase) decrease in inventories (58,262) 277,618
Increase in prepaid expenses and other (404,788) (29)
Increase (decrease) in accounts payable 1,178,809 (286,811)
(Decrease) increase in accrued liabilities (23,481) 218,177
Increase in deferred tax liability 390,415 0
---------------- ----------------
Net cash (used in) operating activities (224,447) (129,120)
---------------- ----------------
Cash flows from investing activities:
(Increase) decrease in loans receivable, related parties (741) 109,418
Change in marketable securities - available for sale 186,859 512,644
Capital expenditures (556,512) (330,319)
---------------- ----------------
Net cash (used in) provided by investing activities (370,394) 291,743
---------------- ----------------
Cash flows from financing activities:
Net long-term repayments (182,142) (179,150)
Net short-term borrowings 414,619 260,000
---------------- ----------------
Net cash provided by financing activities 232,477 80,850
---------------- ----------------
(Decrease) increase in cash and cash equivalents (362,364) 243,473
Cash and cash equivalents at beginning of period 615,037 284,837
---------------- ----------------
Cash and cash equivalents at end of period $ 252,673 $ 528,310
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (non-capitalized) $ 110,638 $ 161,704
================ ================
Income taxes $ $
- -
================ ================
The accompanying notes are an integral part of the financial statements
3
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
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, (D/B/A MagneTech
Corporation) and its wholly-owned subsidiaries, Tapes Unlimited, Inc.
and DCT - Internet Corporation. The operations of Tapes Unlimited, Inc.
which were formerly consolidated with the operations of the Company,
have been segregated as discontinued operations. All significant
intercompany transactions have been eliminated.
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 internal 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.
Certain amounts in the prior period financial statements have been
reclassified to conform with current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, (consisting of only normal
recurring accruals) necessary to conform with generally accepted
accounting principles. The results of operations for the periods
presented are not necessarily indicative of the results to be expected
for the full year.
2. Marketable Securities
---------------------
Marketable securities consist of equity securities with an aggregate
cost, based on specific identification, of $2,313,071 as of September
30, 1996. The marketable securities portfolio contains unrealized
losses of $407,095, resulting in a carrying value of $1,905,976 at
September 30, 1996. The unrealized losses are reported as a separate
component of stockholders' equity. All of the Company's securities are
classified as available for sale securities.
3. Inventory
---------
Inventories are valued at the lower of cost (weighted average) or
market and consisted of the following:
September 30, June 30,
1996 1996
---- ----
Raw materials $ 2,066,096 $ 1,891,393
Work-in-process 684,061 769,254
Finished goods 171,016 202,264
---------------- ----------------
$ 2,921,173 $ 2,862,911
================ ================
4
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
4. Property, Plant and Equipment
-----------------------------
Property, plant and equipment consist of the following:
September 30, June 30,
1996 1996
---- ----
Land $ 73,000 $ 73,000
Buildings and improvements 611,588 546,703
Machinery and equipment 10,104,494 9,612,867
--------------- ----------------
10,789,082 10,232,570
Less accumulated depreciation (5,118,517) (4,763,266)
--------------- ----------------
Net property, plant and equipment $ 5,670,565 $ 5,469,304
=============== ================
5. Revolving Lines of Credit
-------------------------
The Company has a revolving line of credit agreement for aggregate
borrowings of up to $4,000,000. Interest is payable on all outstanding
cash advances at the bank's prime lending rate plus 3/8% (8.625% at
September 30, 1996). Any unpaid principal and accrued interest is due
on demand, but no later than August 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 and restricts the payment of cash dividends. As
of September 30, 1996, $2,040,000 has been drawn upon the Company's
line of credit.
Effective November 7, 1996, the Company entered into a new credit
faciliy with Bank One, N.A. ("Bank") which replaced the existing
facility with NBD Bank, N.A. The new financing consists of a revolving
line of credit, term loans and a long term lease agreement. Under the
revolving line of credit, borrowings can be made up to $5,000,000
based upon collateral values as determined under the agreement. The
term loans consist of a $1,800,000 secured term loan and a capital
expenditure term loan facility for up to $1,950,000, based upon 80% of
the acquisition costs of new machinery and equipment. The long term
lease agreement is collateralized with new equipment in excess of
$700,000. All of the above agreements are collateralized by accounts
receivable, inventory and equipment. The facility has a two year term
and includes interest rates at .50% above the Bank's base rate
(closely related to the Bank's prime interest rate).
5
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
6. Long-Term Debt
--------------
Long-term debt is summarized as follows:
Various mortgages and notes payable with
interest rates ranging from 8.75% to 1%
over prime. Monthly payments range from
$3,198 to $29,000 and expiration dates
range from 1997 through 2007. $ 2,419,048
Less current portion (913,715)
-----------------
$ 1,505,333
=================
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
- --------
Digital Communications Technology Corporation ("the Company") continued
to experience rapid sales growth for the three months ended September 30, 1996.
Net sales increased by over 30% from the corresponding quarter of the prior
year. However, the Company continued to experience a decline in operating profit
from approximately $291,000 to $168,000 for the three months ended September 30,
1995 and 1996, respectively. Increases in cost of goods sold and general and
administrative expenses, particularly legal fees associated with the shareholder
derivative lawsuit (approximately $96,000), contributed to the lower operating
profits.
Liquidity
- ---------
The Company utilized approximately $224,000 and $129,000 in cash from
operating activities for the three months ended September 30, 1996 and 1995,
respectively. The Company's operating cash position is due primarily to the
large increase in accounts receivable which was partially offset by an increase
in accounts payable. In addition, increases in prepaid expenses and other assets
contributed to the current operating cash position.
Accounts receivable increased approximately $1,676,000 from the balance
at June 30, 1996. The increase is due to the corresponding increase in net sales
for the current three month period. The Company's accounts receivable collection
period (measuring how quickly, on average, the Company collects its accounts
receivable) increased from approximately 61 days at June 30, 1996 to
approximately 76 days at September 30, 1996. The increase is due to significant
billings that occurred in the last week of September. These billings negatively
affected the average days in collection by increasing the balance of accounts
receivable at the end of the quarter. 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.
Accounts payable increased approximately $1,179,000 for the three
months ended September 30, 1996 as compared to a decrease of approximately
$287,000 for the same period ended September 30, 1995. The increase in accounts
payable in the current period is due primarily to the growth in sales volume
that has dictated additional raw material, equipment, and supply purchases. In
addition, efforts to maintain a low outstanding balance on the revolving line of
credit have contributed to the increase.
Prepaid expenses and other assets increased by approximately $405,000
for the first quarter ended September 30, 1996. This significant increase is
primarily the result of the increase of prepaid income taxes and deferred tax
assets in the current period. Prepaid income taxes are due to the overpayment of
estimated taxes and the anticipated refunds due to the Company's net taxable
loss in the prior fiscal year.
Overall inventory levels remained relatively consistent from June 30,
1996 to September 30, 1996. 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 insisting that shipments of raw materials are made on a
just-in-time basis and by minimizing the amount of raw materials purchased.
7
Approximately $370,000 in net cash was used in investing activities for the
first quarter ended September 30, 1996 as compared to approximately $292,000 in
cash provided by investing activities for the corresponding quarter of the prior
year. The primary reason for this change in position is the decrease in the
funds invested in the Company's marketable securities portfolio. The Company
intends to continue to invest funds in equity securities, mainly listed on the
New York and American Stock Exchanges, and by policy, limits the amount of
exposure in any one equity investment. Such investments are continually
monitored to reduce the risk of any adverse stock market volatility. Cash not
invested in securities is placed on account with brokerage firms, which is swept
daily into a federally insured money market account, or placed on account with a
federally insured national bank.
The Company utilized its line of credit to provide approximately $414,000
for working capital needs during the three months ended September 30, 1995 and
repaid approximately $182,000 in long-term debt. Management intends to
selectively utilize its line of credit to fund working capital requirements when
needed, and expects to reduce the amount outstanding on the line of credit as
collections on sales are received.
During the three month period ended September 30, 1996, the Company's
cash needs were met primarily through operations. 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 $557,000 in equipment and leasehold
improvements for the first quarter ended September 30, 1996. These larger
capital expenditures during the most recent quarter related primarily to
expenditures for duplication, loading, packaging, and leasehold improvements at
the Company's Indianapolis facility. The Company plans to continue to expand
current operating facilities at both the Fort Lauderdale and Indianapolis plants
in order to fully meet the high volume demands of the retail-sell-through market
and the fall selling season. The Company intends to finance these expenditures
through operations and through separate financing arrangements.
Results of Operations
- ---------------------
Overall growth in the Company's target markets led to continued sales
growth in the current year. Net sales increased approximately 30% from
$5,386,000 to $7,020,000 for the three months ended September 30, 1995 and 1996,
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 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 match the increased sales, declining from
approximately $291,000 (5.4% of net sales) to $168,000 (2.4% of net sales) for
the three months ended September 30, 1995 and 1996, respectively. The decline in
operating profit is due to increases in cost of goods sold and general and
administrative expenses, particular legal fees associated with the shareholder
derivative lawsuit (approximately $96,000).
8
Cost of goods sold, as a percentage of sales, increased to 79% for the
three months ended September 30, 1996 as compared to 76% for the three months
ended September 30, 1995. The increased cost of goods sold is directly
attributable to increased usage of temporary labor and the cost of offloading
excess production volumes. Use of these outside sources was unavoidable in order
complete customer orders that exceeded existing capacity at both facilities. The
lack of sufficient capacity was due to unexpected delays in the installation of
new capacity. Management has already taken the steps necessary to provide for
the increase in sales volume by providing for new duplication and packaging
equipment. In addition, increased consultant fees were incurred in the current
period as hands-on outside experts were utilized to accelerate the
implementation of expanded capacity and new management methods in the
Indianapolis facility. Management recognizes that cost containment through
efficiency gains and productivity improvements is essential to the Company's
continued profitable growth and will continue to analyze and monitor the
Company's performance in this area.
Selling expenses increased in relative proportion to the increase in
net sales for the three months ended September 30, 1996. As a percentage of net
sales, selling expenses remained relatively consistent, decreasing from 4.6% to
4.4% for the three months ended September 30, 1995 and 1996, respectively.
General and administrative expenses increased for the first quarter
ended September 30, 1996 to approximately $624,000 (8.8% of net sales) as
compared to approximately $460,000 (8.5%) for the corresponding period of the
prior year. The slight increase in the percentage of net sales is attributable
to salary increases and additional legal fees incurred in connection with the
shareholder derivative lawsuit, see discussion of this matter in the Company's
Form 10-KSB.
The Company realized income from securities transactions of
approximately $71,000 for the three months ended September 30, 1996 as compared
to approximately $116,000 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 equity securities, mainly
listed on the New York and American Stock Exchanges, and by policy, limits the
amount of exposure in any one equity investment. Such investments are
continually monitored to reduce the risk of any adverse stock market volatility.
Cash not invested in securities is placed on account with brokerage firms, which
is swept daily into a federally insured money market account, or placed on
account with a federally insured national bank.
Interest expense decreased from approximately $176,000 to $109,000 for
the three months ended September 30, 1995 and 1996, respectively. This decrease
is due to decreased borrowings on the Company's line of credit.
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 of the operations of TU is segregated on the face of
the income statement as discontinued operations, and totaled approximately
$59,000 net of income taxes, for the three months ended September 30, 1995.
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. Such efforts are still ongoing, but did not
produce significant recoveries for the three months ended September 30, 1996.
9
Other Items
- -----------
The costs of the Company's products are subject to inflationary
pressures and commodity price fluctuations. In addition, the Company from time
to time experiences increases in cost of materials and labor, as well as other
manufacturing and operating expenses. The Company's ability to pass along such
increased costs through increased prices has been difficult due to competitive
pressures. The Company attempts to minimize the effects of inflation on its
operations by controlling these costs.
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 attempted to mitigate this
seasonality by increasing sales efforts to lower volume, but higher margin
customers such as those involved with corporate training video duplication and
the video rental market. Finally, management intends to focus its marketing
efforts toward 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 expected to be lower in the spring and summer
months.
10
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: November 7, 1996
-----------------------------------------
Douglas L. Miller, Vice-President and
Chief Financial Officer