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 March 31, 1997
[ ] 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;)
(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 April 30, 1997, the latest practicable date, was 7,315,022.
Transitional Small Business Disclosure Format (check one): Yes[ ] No[X]
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....................................... 11
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....................... 12
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
1997 1996
(Unaudited) (Audited)
--------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ (225,305) $ 615,037
Marketable securities 887,087 1,900,050
Accounts receivable, net of allowance for doubtful accounts
$520,000 at March 31, 1997 and $414,000 at June 30, 1996 4,274,615 3,719,265
Inventories 2,170,526 2,862,911
Prepaid expenses and other current assets 722,646 614,210
-------------- -------------
Total current assets 7,829,569 9,711,473
-------------- -------------
Property, plant and equipment, net 5,450,309 5,469,304
Other assets 399,174 81,343
Loans receivable, related parties 414,300 413,369
-------------- -------------
Total assets 14,093,352 $ 15,675,489
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit 2,897,495 $ 1,625,325
Current portion, long-term debt 1,846,588 935,127
Accounts payable 761,931 3,032,236
Accrued liabilities 419,210 362,520
------------- ------------
Total current liabilities 4,545,191 5,955,208
Long-term debt, less current portion 529,810 1,666,063
Deferred tax liability 417,675 157,216
Commitments and contingencies
Stockholders' Equity:
Preferred stock, 10,000,000 shares of $.00001 par value per
authorized; Series A convertible preferred stock, 100,000
authorized and 0 and 100,000 shares issued and outstanding
March 31, 1997 and June 30, 1996, respectively 0 10
Common stock, 25,000,000 shares of $.0002 par value per share
authorized; 7,314,922 and 6,332,116 issued and 7,075,457
6,125,162 shares outstanding as of March 31, 1997 and
June 30, 1996, respectively 1,463 1,266
Additional paid-in capital 8,511,508 8,479,318
Retained earnings 530,873 1,030,152
Investment in Millennia, Inc. (1,084,983) (1,084,983)
Net unrealized holding loss on investment securities (738,218) (528,761)
------------- ------------
Total stockholders' equity 7,220,643 7,897,002
------------- ------------
Total liabilities and stockholders' equity 14,093,352 $ 15,675,489
============= ============
The accompanying notes are an integral part of the financial statements
1
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the three months ended For the nine months ended
March 31, March 31,
--------- ---------
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net sales $ 3,981,243 $ 5,929,998 $ 19,795,659 $ 19,211,980
------------- ------------- ------------- -------------
Costs and Expenses:
Cost of goods sold 3,601,034 4,396,183 16,243,305 14,858,921
Selling expenses 306,313 297,762 947,473 861,914
General and administrative expenses 615,816 523,126 1,803,528 1,367,597
Depreciation and amortization 379,477 315,792 1,108,458 921,412
------------- -------------
------------- -------------
Total costs and expenses 4,902,640 5,532,863 20,102,764 18,009,844
------------- ------------- -------------
-------------
Operating (loss) profit (921,397) 397,135 (307,105) 1,202,136
------------- ------------- ------------- -------------
Other income (expense):
Realized gains (losses) from investment
transactions 7,454 311,069 99,536 367,989
Interest and other (expense) income (5,393) 10,182 (5,393) 47,312
Interest expense (106,212) (149,775) (317,904) (529,704)
------------- ------------- -------------
-------------
(104,151) 171,476 (223,761) (114,403)
------------- ------------- ------------- -------------
(Loss) income from continuing operations
before (benefit) provision for income taxes (1,025,548) 568,611 (530,866) 1,087,733
(Benefit) provision for income taxes (226,053) 226,720 (33,311) 427,720
------------- ------------- ------------- -------------
(Loss) income from continuing operations (799,495) 341,891 (497,555) 660,013
Discontinued operations:
Gain (loss) from operations of
discontinued operation 2,963 6,159 (1,722) 101,519
------------- ------------- ------------- -------------
Net (loss) income $ (796,532) $ 348,050 $ (499,277) $ 761,532
============= ============= ============= =============
Preferred dividends 0 0 250,000 0
------------- ------------ ------------- -------------
Net loss (income) attributable to common
stockholders $ (796,532) $ 348,050 $ (749,277) $ 761,532
=============== ============= ============== ==============
Weighted average shares of common stock
outstanding 7,040,497 5,732,182 6,461,977 5,487,449
============== ============== ============== ==============
(Loss) earnings per share:
Continuing operations $ (0.11) $ 0.06 $ (0.12) $ 0.12
Discontinued operations 0.00 0.00 0.00 0.02
------------- ------------- ------------- -------------
Net (loss) income $ (0.11) $ 0.06 $ (0.12) $ 0.14
============= ============= ============= =============
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 nine months ended
March 31,
1997 1996
---------------- ----------------
Cash flows from operating activities:
Net income $ (499,277) $ 761,532
---------------- ----------------
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 1,108,458 921,412
Gain on sale of marketable securities (99,536) (367,989)
Provision for bad debts 105,833 131,417
Increase in accounts receivable (661,183) (1,469,536)
Decrease in inventories 692,385 114,103
(Increase) decrease in prepaid expenses and other (426,267) 183,911
Decrease in accounts payable (2,270,305) (1,007,680)
Increase in accrued liabilities 56,690 197,187
Increase in deferred tax liability 260,456 0
---------------- ----------------
Net cash used in operating activities (1,732,746) (535,643)
---------------- ----------------
Cash flows from investing activities:
(Increase) decrease in loans receivable, related parties (931) 142,158
Change in marketable securities - available for sale 903,042 2,612,005
Increase in other assets and other liabilities 0 11,723
Capital expenditures (1,089,463) (693,965)
---------------- ----------------
Net cash (used in) provided by investing activities (187,352) 2,071,921
---------------- ----------------
Cash flows from financing activities:
Net long-term repayments (224,792) (541,973)
Net short-term borrowings (repayments) 1,272,170 (840,000)
Issuance of common stock 32,378 55,000
---------------- ---------------
Net cash provided by (used in) financing activities 1,079,756 (1,326,973)
---------------- ----------------
(Decrease) increase in cash and cash equivalents (840,342) 209,305
Cash and cash equivalents at beginning of period 615,037 284,837
---------------- ----------------
Cash and cash equivalents at end of period $ (225,305) $ 494,142
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (non-capitalized) $ 286,006 $ 544,129
================ ================
Income taxes $ - $ 146,000
================ ================
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 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 $1,625,314 as of March 31,
1997. The marketable securities portfolio contains unrealized losses
of $738,227, resulting in a carrying value of $887,087 at March 31,
1997. 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:
March 31, June 30,
1997 1996
---------------- ---------------
Raw materials $ 1,385,262 $ 1,891,393
Work-in-process 609,801 769,254
Finished goods 175,463 202,264
---------------- ---------------
2,170,526 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:
March 31, June 30,
1997 1996
---------------- ---------------
Land 73,000 73,000
Buildings and improvements 750,057 546,703
Machinery and equipment 10,447,031 9,612,867
---------------- ---------------
11,270,088 10,232,570
Less acccumulated depreciation (5,819,779) (4,763,266)
---------------- ---------------
Net property, plant
and equipment 5,450,309 5,469,304
================ ===============
5. Revolving Lines of Credit
-------------------------
The Company has a revolving line of credit agreement for aggregate
borrowings of up to $5,000,000. Interest is payable on all outstanding
cash advances at the bank's base lending rate (closely related to the
bank's prime interest rate) plus 1/2%. At March 31, $2,897,495 has
been drawn upon the Company's line of credit with an interest rate of
9.0%. Any unpaid principal and accrued interest is due on demand, but
no later than October 31, 1998. 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
March 31, the Company failed to meet certain of these financial
covenants, but is in negotiations with the bank to either cure any
events of non-compliance or obtain a waiver of the covenants.
6. Long Term Debt
--------------
Long term debt consists of the following:
March 31, June 30,
1997 1996
------------------ -----------------
Various mortgages and notes
payable with interest rates
ranging from 7.63% to 1% over
prime. Monthly payments range
from $3,198 to $29,000 and
expiration dates range from 1997
to 2007. 596,364 2,601,190
5
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
6. Long Term Debt, Continued:
--------------------------
Loan payable to bank in monthly installments plus
interest at the bank's base rate (prime) plus 1/2%,
maturing October 1998; collateralized by accounts
receivables, inventory and equipment. The terms
of the agreement require, among other provisions,
that the Company comply with certain
ratios and covenants.
1,780,034 0
------------ ----------
2,376,398 2,601,190
Less current portion (1,846,588) (935,127)
------------ ----------
$ 529,810 $ 1,666,063
============ ==========
Under the terms of certain of the above agreements, the Company is
required to comply with certain ratios and covenants. As of March 31,
the Company failed to meet certain of these financial covenants. As
such, all amounts due under these agreements are classified as current
liabilities until the next measurement date.
7. Preferred Stock:
----------------
On May 6, 1996 the Company sold 100,000 shares of Series A Convertible
Preferred Stock ( Preferred Stock") in a private placement. The
Preferred Stock is convertible into Common Stock at the discretion of
the holder at the lesser of (i) 20% discount on the previous five day
average closing bid at conversion, or (ii) previous five day average
closing bid price at closing. The holder may convert up to 20% of the
Preferred Stock every 30 days beginning June 15, 1996. The Preferred
Stock is convertible for a term of three years, and accrues dividends
at a rate of 7% per annum (dividends are rescinded if the shares are
converted in the first year). The holders of the preferred shares do
not have any voting rights.
Through March 1997, all 100,000 shares of Series A Preferred Stock had
been converted, pursuant to their original terms, into 968,430 shares
of Common Stock at an average per share conversion price of $1.08. The
terms of the Preferred Stock which provided for a lower conversion
price than the quoted market price of the Common Stock at the time of
conversion resulted in an aggregate difference of $250,000. Such terms
take into account a number of factors affecting value, including the
ability to market a significant number of shares of the underlying
common stock which were negotiated at the time of the issuance of the
Preferred Stock. Due to a recent SEC Staff Announcement regarding the
accounting for convertible debt and preferred stock with discounted
conversion rates, the difference has now been accounted for as a
Preferred Stock dividend. This difference was previously recorded at
the carrying amount of the Preferred Stock converted.
6
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
Digital Communications Technology Corporation ("the Company") experienced a
significant drop in net sales for the quarter, but was still above prior year
levels for the nine month period ended March 31, 1997. Net sales for the three
months ended March 31, 1997 decreased approximately 33%, while net sales for the
nine month period ended March 31, 1997 increased approximately 3% in comparison
to the respective periods of the prior year. The large operating loss for the
quarter also produced an operating loss for the nine months ended March 31,
1997. Increases in cost of goods sold and general and administrative expenses
contributed to the operating losses.
Liquidity
The Company utilized approximately $1,733,000 and $536,000 in cash from
operating activities for the nine months ended March 31, 1997 and 1996,
respectively. The Company's operating cash position is due primarily to the
large decrease in accounts payable and an increase in accounts receivable which
was partially offset by a decrease in the level of inventory.
Accounts payable decreased approximately $2,270,000 for the nine months
ended March 31, 1997 as compared to a decrease of approximately $1,001,000 for
the same period ended March 31, 1996. The decrease in accounts payable in the
current period is due primarily to the decline in raw material purchases which
is a result of the declining sales volume.
Accounts receivable increased approximately $661,000 from the balance at
June 30, 1996, while 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 65 days at March 31, 1997. The slight increase in the collection
period can be attributed to slower payments from some of the Company's
customers. However, the collection period for the nine months represents a
dramatic improvement from the 85 day period for the six month period ended
December 31, 1996. Management will continue to focus on this area to improve
credit and collections efforts, although there can be no assurances that these
efforts will be successful.
Overall inventory levels declined by $692,000 from June 30, 1996 to March
31, 1997. The reduction is primarily due to the decrease in sales volume that
has slowed the level of raw material purchases. Management has been successful
in its efforts to ensure 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. 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.
Approximately $187,000 in net cash was used in investing activities for the
nine month period ended March 31, 1997 as compared to approximately $2,072,000
in cash provided by investing activities for the corresponding period of the
prior year. The primary reason for this change in position is the increase in
capital expenditures in the current period (see Capital Resources below).
7
The Company utilized its line of credit to provide approximately $1,080,000
for working capital needs during the nine months ended March 31, 1997 and repaid
approximately $225,000 in long-term debt. Management intends to selectively
utilize its line of credit to fund working capital requirements when needed.
During the nine month period ended March 31, 1997, the Company's cash needs
were met primarily through operations and draws on the Company's line of credit.
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 $1,089,000 in equipment and leasehold
improvements for the nine month period ended March 31, 1997. These larger
capital outlays related primarily to expenditures for duplication, loading,
packaging, and leasehold improvements at both the Company's Indianapolis and Ft.
Lauderdale facilities. The Company recently announced the expansion and
relocation of the entire Indianapolis facility into a new 172,000 square foot
building. The Indianapolis plant is scheduled to open in June with an increased
capacity of approximately 20%. The new facility layout is designed to optimize
process flow, to reduce product handling and to minimize the total cycle time of
productions from order entry to delivery. In addition, the Company intends to
make capital expenditures in excess of $2,000,000 in the coming fiscal year and
intends to finance these expenditures through operations and through separate
financing arrangements. There can be no assurances , however, that the Company
will actually incur these budgeted expenditures.
Results of Operations
Overall growth in the Company's target markets led to continued sales
growth of approximately 3% in the current fiscal year to date. Net sales of
$19,796,000 for the nine month period ended March 31, 1997 were the highest in
the Company's history, compared with $19,212,000 for the same period last year.
However, net sales for the three months ended March 31, 1997 decreased sharply
by approximately 33% to $3,981,000, down from $5,930,000, the highest ever sales
for the quarter in the same period ended March 31, 1996. The significant sales
decrease in the quarter ended March 31, 1997 can be attributed to an industry
wide decline in the quarter that is the result of a severe retail backlog caused
by the closure of many stores in several large retail chains. Product from these
chain stores went back into the market, providing other chains with the
opportunity to buy distressed merchandise at significantly reduced cost, and
thus slowing further the third fiscal quarter sales which are traditionally very
slow. At the same time, other chains achieved sharp, margin-driven reductions in
inventory levels by reducing in store quantities and by returning significant
amounts of unsold product to their vendors, our customers. In addition, releases
of theatrical product into video outlets lacked any real hits to draw people
into retail, and generally mild winter weather across the country reduced rental
and sell-through activity. It is important to note that the decline in sales
volume is not attributable to a loss of any major accounts to competitors, nor
have any of the Company's key customers gone out of business. The industry
consensus is that the first few months of 1997 have been significantly slower
than expected.
8
Operating profit also fell sharply, declining from a profit of
approximately $397,000 (6.7% of net sales) to a loss of approximately $921,000
(-23.1% of net sales) for the three months ended March 31, 1996 and 1997,
respectively. A lesser decline was experienced for the nine months ended March
31, 1997 as operating profit for this period declined from a profit of
approximately $1,202,000 (6.3% of net sales) in the previous year to a loss of
$307,000 (-1.6% of net sales). Approximately $98,000 of the total operating loss
(31.9%) for the nine months ended March 31, 1997 is attributable to losses from
one of the Company's subsidiaries, DCT-Internet Corporation ( DCTI"). DCTI has
experienced start up losses in its first year of operation as sales have not yet
covered its operating expenses. The Company fully anticipates that DCTI's sales
will continue to increase and that DCTI will provide operating profit for the
Company by the end of the calendar year. There can be no assurances, however,
that actual results will meet these projections. The remaining decline for the
Company is due to increases in cost of goods sold as a percentage of sales and
general and administrative expenses.
Cost of goods sold, as a percentage of sales, increased to 82% for the nine
months ended March 31, 1997 as compared to 77% for the nine months ended March
31, 1996. The increased cost of goods sold is directly attributable to increased
usage of temporary labor and the cost of offloading excess production volumes to
other duplicators during the first and second fiscal quarters. Use of these
outside sources was unavoidable in order to complete customer orders that
exceeded existing capacity at both facilities. The lack of sufficient capacity
was due to severely limited space in the current buildings and unexpected delays
in the installation of new equipment. 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, due to the fixed nature of
several direct overhead components, particularly depreciation, the cost of goods
sold percentage will increase in periods where sales severely decline - such as
the third quarter of fiscal 1997. Management recognizes that cost containment
through efficiency gains and productivity improvements is essential to the
Company's continued profitable growth and will continue to implement actions to
improve the Company's performance in this area. There can be no assurances,
however, that any such actions will be successful.
Selling expenses as a percentage of net sales increased slightly from 4.5%
to 4.8% for the nine months ended March 31, 1996 and 1997, respectively. The
increase is due to sales commissions paid.
General and administrative expenses increased for the nine months ended
March 31, 1997 to approximately $1,804,000 (9.1% of net sales) as compared to
approximately $1,368,000 (7.1%) for the corresponding period of the prior year.
The increase in the percentage of general and administrative expenses to 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.
9
The Company realized income from securities transactions of approximately
$99,000 for the nine months ended March 31, 1997 as compared to approximately
$368,000 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 sharply from approximately $530,000 to $318,000
for the nine months ended March 31, 1996 and 1997, respectively and from
approximately $150,000 to $106,000 for the three months ended March 31, 1996 and
1997, respectively. This decrease is due to reduced borrowings on the Company's
line of credit and the lack of interest expense related to any borrowings from
the Company's marketable securities portfolio.
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
$95,000 net of income taxes, for the six months ended December 31, 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, net of related expenses, in the income from discontinued
operations for the nine months ended March 31, 1996. Such efforts are still
ongoing, but did not produce significant recoveries for the nine months ended
March 31, 1997.
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
PART II
Item 1. Legal Proceedings
In February 1996, Convention Tapes International, Inc., a Florida
corporation, filed a civil action in the Circuit Court of the 11th Judicial
Circuit for Dade County, Florida, against Tapes Unlimited, Inc. and MagneTech
Corporation for damages "in excess of $50,000" allegedly resulting from breach
of contract and warranty, and fraudulent inducement and/or negligent
misrepresentation on the part of Tapes Unlimited. MagneTech Corporation is the
previous name of the Company, and Tapes Unlimited was an Orlando, Florida
subsidiary of the Company from March 1994 until Tapes Unlimited was dissolved in
October 1995. Tapes Unlimited ceased operations in June 1995. MagneTech
Corporation is a named defendant against whom plaintiff asserts vicarious or
successor liability for its alleged damages, claiming that Tapes Unlimited was
the "alter ego" or "mere instrumentality" of MagneTech.
Upon motion of the defendants, in July 1996 the civil action was
transferred to the Circuit Court in Orange County, Florida, Case No. CI96-5851.
As best the Company has been able to determine, in February 1995 Tapes
Unlimited duplicated certain videotapes for plaintiff from videotape masters
provided by plaintiff. Plaintiff alleges that the duplicates delivered by Tapes
Unlimited contained, in part, extraneous material which caused plaintiff to lose
the business of a certain account, as well as the prospective business of other,
unspecified persons. The plaintiff has since ceased doing business.
The Company currently has pending a motion to dismiss the matter and,
therefore, has not filed a substantive response to plaintiff's complaint.
Minimal discovery and some settlement discussions occurred in summer of 1996.
Until the court rules on the Company's motion to dismiss, it is uncertain
whether the Company must even defend the action. Even assuming that the motion
to dismiss is denied, the validity or depth of the claim is unknown to the
Company. Similarly, the probability of judgment, if any, and the potential range
of monetary award thereon, cannot be evaluated until substantive, formal
discovery is undertaken. Meanwhile, the Company intends to vigorously defend
this matter, procedurally and substantively.
11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Lease agreement with Duke Realty, Inc.*
* Previously filed with the Securities and Exchange Commission as an exhibit to
the Company's Registration Statement on Form SB-2, Registration No. 333-26509,
filed May 5, 1997.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K with the Commission on March
31, 1997 announcing the plan to issue Class A and Class B Warrants as a dividend
to shareholders of record as of April 30, 1997.
The Company filed a current report on Form 8-K with the Commission on April
2, 1997 announcing the relocation and expansion of its Indianapolis plant
operations.
12
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: May 14, 1997
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Douglas L. Miller, Vice-President and
Chief Financial Officer