<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required] FOR THE FISCAL YEAR ENDED JUNE 30,
1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
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)
(214) 248-1922
(Issuer's telephone number)
Securities registered pursuant to Section 12 (b) of the Exchange Act:
Title of each class: Name of exchange on which registered:
COMMON STOCK AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12 (g) of the Exchange Act: None
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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of September 29, 1995 was at least $4,625,409. Revenues
for the year ended June 30, 1995 were $20,894,025.
As of September 29, 1995, the registrant had issued and outstanding
5,961,233 shares of Common Stock, par value $.0002 per share.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item
Number Page
- ------ ----
<S> <C>
PART I
1. Description of Business 1
2. Description of Property 2
3. Legal Proceedings 2
4. Submission of Matters to a Vote of Security Holders 2
PART II
5. Market for the Company's Common Stock and Related Stockholder Matter 3
6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 4
7. Index to Financial Statements 8
8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 9
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 9
10. Executive Compensation 11
11. Security Ownership of Certain Beneficial Owners and Management 14
12. Certain Relationships and Related Transactions 14
13. Exhibits and Reports on Form 8-K 15
</TABLE>
-i-
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Digital Communications Technology Corporation (the "Company") is a Delaware
corporation doing business as MagneTech Corporation. Approximately 47% of the
Company's issued and outstanding Common Stock is owned by S.O.I. Industries,
Inc. ("SOI"), a publicly traded Delaware corporation whose common stock is
traded on the American Stock Exchange (the "AMEX").
The Company was incorporated in the State of Delaware on November 12, 1987.
The address of the Company's principal executive office is 16910 Dallas
Parkway, Suite 100, Dallas, Texas 75248 and its telephone number is (214)
248-1922.
PRODUCTS
The Company is an integrated video and audio communications company which
offers video and audio tape duplication and satellite communications services.
The Company duplicates a variety of video and audio cassettes, including full-
length movies, training, music, sales, sports and educational programs. The
Company offers its reproduction services to industrial companies, advertising
agencies, direct selling organizations and educational and religious groups and
its customers include Blockbuster Entertainment, Bristol-Myers Squib, Atlantic
Recording Corportion, Madacy Music Group and Warner Music Group. The Company's
satellite communications system is capable of transmitting live or pre-recorded
programming from remote locations to satellites. DCT's satellite
communications customers include local, network and cable television operators
such as ESPN, ABC/Capital Cities, WFAA News - Dallas, ABC News, HBO and
Beligishe Radio.
CUSTOMERS
During the year ended June 30, 1994, one customer, Polygram, accounted for
approximately 21% of the Company's sales. During the year ended June 30, 1995,
two of the Company's largest customers, Madacy Music Group and Atlantic
Recording Corporation, accounted for 16.3% and 12% respectively, of its sales.
RAW MATERIALS AND MANUFACTURING
The Company purchases blank audio and video cassettes for its reproduction
business from several distributors at market prices in the United States and
the Pacific Rim. The cassettes are readily available on the open market. The
majority of the Company's video duplication equipment is manufactured by
several major manufacturers in Japan and purchased from domestic distributors.
The equipment utilized in the Company's satellite broadcasting business
includes two KU band broadcasting trucks, cameras, generators, telephonic
equipment and dual transmitters. The Company purchases its materials and
equipment from several major manufacturers and believes that the loss of any of
its suppliers or manufacturers would not have a material adverse effect on the
Company's business, financial condition and results of operations.
1
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PROPERTIES
The Company duplicates video and audio tapes at two facilities, one located
in Ft. Lauderdale, Florida and one located in Indianapolis, Indiana. The Ft.
Lauderdale facility, which is made up of two adjacent buildings and covers a
total of approximately 24,000 square feet, is a real-time duplication facility
with the capacity to duplicate an average of approximately 9,000 videos per
day. The Indianapolis facility, which covers approximately 66,000 square feet,
is a fully automated, state of the art high-speed duplication facility with the
capacity to duplicate 80,000 videos per day.
COMPETITION
The Company's industry is highly competitive. There are other commercial
video duplicating and satellite broadcasting companies which compete with the
Company and have greater financial resources and sales volume than the Company.
The Company depends upon its ability to provide quality services at competitive
prices to its customers in order to be competitive.
EMPLOYEES
As of June 30, 1995, the Company had a total of approximately 207
employees, all of whom are full-time employees. None of the employees are
represented by a labor union. The Company believes that it has good relations
with its employees.
ITEM 2. DESCRIPTION OF PROPERTY
Set forth below is certain information with respect to the Company's
principal properties. The Company believes that all of these properties are
adequately insured, in good condition and suitable for the uses described
below.
<TABLE>
<CAPTION>
Approximate Size Owned/ Lease Expiration
LOCATION Primary Use (Square Feet) Leased Date
- -------- ----------- ------------- ------ ----
<S> <C> <C> <C> <C>
Ft.Lauderdale, Duplication 12,000 Leased August 1996
Florida Office
Ft.Lauderdale, Warehouse 12,000 Owned (1)
Florida
Indianapolis, Duplication 66,000 Leased June 1999
Indiana
</TABLE>
(1) The Company purchased this facility on March 31, 1992 for a purchase
price of $398,000.
ITEM 3. LEGAL PROCEEDINGS
The Company may from time to time be party to various legal actions arising
in the ordinary course of its business. The Company does not believe that it
is currently involved in any pending actions that will have a material adverse
effect on its business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
2
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company was quoted on the Nasdaq Stock Market until
May 23, 1994 under the symbol "TAPE." The following table sets forth the range
of representative high and low closing bid prices for the Common Stock for the
periods indicated. Quotations represent inter-dealer prices, do not include
retail markups, markdowns or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1994
First Quarter $5.56 $3.37
Second Quarter 9.25 5.25
Third Quarter 8.75 4.62
Fourth Quarter (until 6.00 4.00
May 23, 1994)
</TABLE>
The Common Stock of the Company has been listed on the AMEX since May 23,
1994 under the symbol "DCT." The following table sets forth the high and low
sales prices of the Common Stock on the AMEX for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1994
Fourth Quarter $4.50 $3.12
(from May 23, 1994)
FISCAL 1995
First Quarter $3.94 $2.19
Second Quarter 3.94 2.19
Third Quarter 2.75 1.75
Fourth Quarter 2.25 1.25
</TABLE>
On September 29, 1995, the closing price of the Common Stock was $1.50 per
share. On September 29, 1995, there were 580 stockholders of record of the
Common Stock.
The Company currently intends to retain all earnings, if any, to finance
the development and expansion of its operations. The Company does not
anticipate paying cash dividends on its shares of Common Stock in the
foreseeable future. The Company's future dividend policy will be determined by
its Board of Directors on the basis of various factors, including but not
limited to the Company's results of operations, financial condition, business
opportunities and capital requirements. The payment of dividends will also be
subject to the requirements of Delaware law, as well as restrictive financial
covenants in the Company's existing and future credit agreements.
3
<PAGE> 6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Digital Communications Technology Corporation ("the Company") experienced a
decline in operating income from approximately $1,484,000 to $811,000 for the
years ended June 30, 1994 and 1995, respectively. Increased operating costs,
primarily in general and administrative expenses, combined with increased cost
of goods sold caused the lower operating results. These increased operating
costs, along with increased interest expense and costs associated with the
effects of closing of the Company's Tapes Unlimited, Inc. ("TU") subsidiary
contributed to the net loss for the year ended June 30, 1995.
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 ($765,000) and
($81,000), net of income taxes, for the years ended June 30, 1995 and 1994,
respectively.
LIQUIDITY
The Company used approximately $109,000 in cash from operating activities
for the year ended June 30, 1995 as compared to approximately $425,000 in cash
provided by operating activities for the year ended June 30, 1994. The change
in the Company's operating cash position is primarily due to the net loss of
approximately $282,000 incurred during the year ended June 30, 1995 as compared
to the net income generated in the year ended June 30, 1994 of approximately
$699,000. Other significant items that affected cash from operating activities
for the year ended June 30, 1995 were increases in inventory, accounts
receivable and prepaid expenses.
Overall inventory levels increased approximately 26% from June 30, 1994 to
June 30, 1995 in order to support the increased sales levels experienced during
the year ended June 30, 1995. The largest increases occurred in the work-in-
process and raw material components of inventory which increased approximately
$400,000 and $315,000, respectively during the year ended June 30, 1995.
Toward the end of the fiscal year, the Company began pre-loading blank tapes in
anticipation of peak season demand in the fall. This activity led to the
increased inventory levels noted above.
Despite the increased inventory levels, the higher inventory amounts were
consistent with the sales levels experienced during the year ended June 30,
1995. This is evident from the consistent inventory turnover experienced
during the years ended June 30, 1994 and 1995, which actually improved slightly
during these periods from 4.9 times for the year ended June 30, 1994 to 5.2
times for the year ended June 30, 1995.
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 $891,000 for the year ended
June 30, 1995 as compared to approximately $1,880,000 for the year ended June
30, 1994. Although still contributing to the overall net
4
<PAGE> 7
negative operating cash flow position, the size of the increase in accounts
receivable was improved in the current year ended June 30, 1995 despite the
increase in sales for the same period.
The Company's accounts receivable collection period (measuring how quickly,
on average, the Company collects its accounts receivable) increased from
approximately 67 days at June 30, 1994 to approximately 74 days at June 30,
1995. The Company continues to receive competitive pressures from its
customers to grant longer payment terms due to the changing customer base
(discussed more fully in the "Results of Operations" section). Therefore, in
response to specific accounts that had deteriorated and overall increased
sales, the Company increased its allowance for doubtful accounts from
approximately $320,000 to $1,065,000 as of June 30, 1994 and 1995,
respectively.
Prepaid expenses and other current assets increased approximately $314,000
for the year ended June 30, 1995 as compared to an increase of approximately
$229,000 for the year ended June 30, 1994. The increase is primarily related
to income tax receivables based on anticipated refunds due to the Company's net
losses in the current year.
Included in the net loss for the year ended June 30, 1995 were several
non-cash losses which partially offset some of the uses of cash from operating
activities noted above. Approximately $531,000 was related to the write-off of
goodwill recorded from the acquisition of the Company's TU subsidiary which was
discontinued in June 1995. In addition, a net loss of approximately $106,000
was realized on the sale of equipment that was no longer needed.
Approximately $2,005,000 was used in investing activities for the year
ended June 30, 1995 as compared to approximately $2,588,000 for the year ended
June 30, 1994. A large portion of cash used in investing activities for the
year ended June 30, 1995, other than capital expenditures which is discussed in
the "Capital Resources" section, was an increase in investments in the
Company's marketable securities portfolio and an additional investment of
approximately $350,000 in the stock of the Company's majority owner, S.O.I.
Industries, Inc. A net use of approximately $99,000 was related to these
marketable securities investment activities during the year ended June 30,
1995. Additionally, cash was temporarily advanced to S.O.I. Industries, Inc.
and an affiliate of the Company which is expected to be repaid.
The Company utilized its line of credit to provide approximately $1,504,000
for working capital needs during the year ended June 30, 1995. In addition,
approximately $269,000 in cash was generated from issuances of common stock in
connection with bonuses and other employee compensation. 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.
5
<PAGE> 8
CAPITAL RESOURCES
The Company invested approximately $1,227,000 in equipment and leasehold
improvements for the year ended June 30, 1995. This was lower than amounts
invested during the year ended June 30, 1994 due to significant equipment
purchases for the Company's high-speed duplicating facility in Indianapolis,
Indiana in the prior fiscal year. The necessary equipment to initially
position the Company to expand sales to the retail-sell-through market (see
"Results of Operations" below) has now been acquired. However, 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.
Expenditures in the year ended June 30, 1995 consisted primarily of the
following: a satellite uplink unit for the Company's satellite broadcast
operations and machinery and equipment for general overall upgrades and
replacements at all of the Company's facilities. These expenditures were
financed 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 16% from
$18,005,000 to $20,894,000 for the years ended June 30, 1994 and 1995,
respectively. Significant sales increases, experienced primarily in the
Company's first and second fiscal quarters, led to this sales growth 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 $1,484,000 (8.2% of net sales) to $811,000 (3.9% of net sales)
for the years ended June 30, 1994 and 1995, respectively. The decline in
operating profit is due to increases in cost of goods sold and general and
administrative expenses.
Cost of goods sold as a percentage of sales increased to 77% for the year
ended June 30, 1995 as compared to 75% for the year ended June 30, 1994. The
increased cost of goods sold is directly attributable to increased material
costs, specifically the cost of the plastic video cassette shells, 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.
As a percentage of net sales, general and administrative expenses increased
from approximately 7% to 9% for the year ended June 30, 1994 and 1995,
respectively. This increase was due to a larger provision for doubtful
accounts and increased public relations expenses. In addition, increased legal
and professional expenses were incurred in connection with a lawsuit filed
against two former employees which was settled prior to June 30, 1995.
6
<PAGE> 9
Despite the increase in net sales, selling expenses increased only slightly
for the year ended June 30, 1995. As a percentage of net sales, selling costs
approximated 4.9% and 4.3% for the years ended June 30, 1995 and 1994,
respectively. The increase was due to an increase in commissions paid.
Interest expense increased from approximately $352,000 to $700,000 for the
years ended June 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. This additional debt, as
compared with the prior year, was incurred in connection with expansion of
operations, primarily at the Company's high-speed duplicating facility in
Indianapolis, Indiana and for funds borrowed for maintenance of the Company's
investment portfolio.
The Company realized income from securities transactions of approximately
$513,000 for the year ended June 30, 1995 as compared to approximately $259,000
for the year ended June 30, 1994. 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.
In the quarter ended December 31, 1993, after evaluating the historical
contribution of the Company's Video Plus, Inc. subsidiary and considering the
expected future contribution of this subsidiary, management decided to sell
Video Plus, Inc. The operations of Video Plus, Inc. have been removed from the
operating section of the consolidated statement of income for the year ended
June 30, 1994, and the income from operations of Video Plus, Inc. have been
segregated under discontinued operations. The net effect of the operation of
Video Plus, Inc. for the year ended June 30, 1994 was a reduction to net income
of approximately $94,000.
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 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.
7
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Financial Statements (Audited)
F-1 Reports of Independent Accountants
F-3 Consolidated Balance Sheets as of June 30, 1995 and 1994
F-4 Consolidated Statements of Operations for the Years Ended June 30,
1995 and 1994
F-5 Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 1995 and 1994
F-6 Consolidated Statements of Cash Flows for the Years Ended June 30,
1995 and 1994
F-8 Notes to Financial Statements
8
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Digital Communications Technology Corporation
Fort Lauderdale, Florida:
We have audited the accompanying consolidated balance sheet of Digital
Communications Technology Corporation and Subsidiaries as of June 30, 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Digital
Communications Technology Corporation and Subsidiaries as of June 30, 1995, and
the consolidated results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
We also audited the adjustment to net unrealized holding losses and the
adjustment to reduce the investment in S.O.I. Industries, Inc. to book value
described in Note 15 which adjustments were applied to restate the June 30,
1994 financial statements. In our opinion, such adjustments are appropriate
and have been properly applied to the June 30, 1994 financial statements.
/s/ COOPERS & LYBRAND L.L.P.
Miami, Florida
August 25, 1995
F-1
<PAGE> 12
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Digital Communications Technology Corporation
and Subsidiaries
We have audited the consolidated statement of income of Digital Communications
Technology Corporation and Subsidiaries as of June 30, 1994, and the related
consolidated statements of shareholders' equity, and cash flows for the year
ended June 30, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations of Digital
Communications Technology Corporation and Subsidiaries, changes in their
shareholders' equity and their cash flows for the year then ended June 30,
1994, in conformity with generally accepted accounting principles.
As discussed in NOTE 2 to the consolidated financial statements, in 1994 the
Company changed its methods of accounting for income taxes and for certain
investments in debt and equity securities.
MORRISON, BROWN, ARGIZ & COMPANY
Certified Public Accountants
/s/ Morrison, Brown, Argiz & Company
Miami, Florida
August 8, 1994
F-2
<PAGE> 13
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1995
<TABLE>
<CAPTION>
ASSETS 1995
<S> <C>
Current assets:
Cash and cash equivalents $ 284,837
Marketable securities 2,574,626
Accounts receivable, net of allowance for doubtful accounts of $1,065,300 3,143,689
Inventories 4,058,293
Prepaid expenses and other current assets 345,126
-------------
Total current assets 10,406,571
Property, plant and equipment, net 5,239,564
Other assets 31,158
Loans receivable, related parties 601,736
-------------
$ 16,279,029
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 3,840,000
Current portion of long-term debt 2,735,418
Accounts payable 2,165,725
Accrued liabilities 418,376
-------------
Total current liabilities 9,159,519
-------------
Long term debt, less current portion 644,144
-------------
Deferred tax liability 8,392
-------------
Commitments (Notes 8 and 12)
Shareholders' Equity:
Common stock, 25,000,000 shares of $.0002 par value per share
authorized; 5,961,188 shares issued, 5,301,809 shares outstanding 1,192
Additional paid-in capital 6,567,062
Retained earnings 1,710,867
Investment in S.O.I. Industries, Inc. (1,198,158)
Net unrealized holding loss on securities (613,989)
-------------
Total shareholders' equity 6,466,974
-------------
$ 16,279,029
=============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE> 14
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net sales $20,894,025 $18,004,917
----------- -----------
Costs and expenses:
Cost of goods sold (exclusive of depreciation) 16,094,788 13,490,134
Selling expenses 1,040,280 776,955
General and administrative expenses 1,793,171 1,275,855
Depreciation and amortization 1,154,880 977,524
----------- -----------
Total costs and expenses 20,083,119 16,520,468
----------- -----------
Operating income 810,906 1,484,449
Interest expense (700,251) (352,403)
Realized gain on sales of marketable securities 512,971 259,110
Other income 142,208 36,564
----------- -----------
Income from continuing operations before income taxes and
change in accounting principle 765,834 1,427,720
Provision for income taxes 283,167 525,372
----------- -----------
Income from continuing operations before change in accounting
principle 482,667 902,348
Discontinued operations (Note 14):
Loss from discontinued operations, net of related income taxes (321,140) (14,435)
Loss on disposal of discontinued operations, net of related income taxes (443,400) (162,164)
----------- -----------
(Loss) income before cumulative effect of change in accounting
principle (281,873) 725,749
Cumulative effect on prior years of change in method of accounting for
income taxes 0 26,285
----------- -----------
Net (loss) income $ (281,873) $ 699,464
=========== ===========
Weighted average shares of common stock outstanding 5,264,773 4,890,820
=========== ===========
Net (loss) income per common share:
Income from continuing operations $ 0.09 $ 0.18
(Loss) income from discontinued operations (0.06) 0.00
Loss on disposal of discontinued operations (0.08) (0.03)
----------- -----------
(Loss) income before cumulative effect of accounting change (0.05) 0.15
Cumulative effect of change in method of accounting for income taxes 0 (0.01)
----------- -----------
Net (loss) income per common share $ (0.05) $ 0.14
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE> 15
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Net
--------------------- Additional Investment Unrealized
Paid-In Retained in S.O.I. Holding Loss
Shares Amount Capital Earnings Industries, Inc. on Securities
------ ------ ------- -------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 5,042,927 $ 1,010 $ 6,916,360 $ 1,615,905 $ (2,062,500) $ 0
Exchange of shares with
S.O.I. Industries, Inc. 580,538 116 4,574,520 0 (4,574,636) 0
Shares issued 167,092 32 273,166 0 0 0
Net depreciation of
securities 0 0 0 0 0 (327,929)
Net income 0 0 0 699,464 0 0
--------- --------- ----------- ----------- -------------- ----------
Balance, June 30, 1994, as
previously reported 5,790,557 1,158 11,764,046 2,315,369 (6,637,136) (327,929)
Adjustment (Note 15) 0 0 0 0 0 (189,309)
Adjustment to reduce
investment in S.O.I.
Industries, Inc. to book
value (Note 15) 0 0 (5,466,349) 0 5,466,349 0
--------- --------- ----------- ----------- -------------- ----------
Balance, June 30, 1994.
as restated 5,790,557 1,158 6,297,697 2,315,369 (1,170,787) (517,238)
Purchase of S.O.I.
Industries, Inc
Inc. shares 0 0 0 0 (27,371) 0
Excess over book value of
amounts paid for shares of
S.O.I. Industries, Inc. 0 0 0 (322,629) 0 0
Exercise of options 142,705 28 179,377 0 0 0
Shares issued 27,926 6 89,988 0 0 0
Net depreciation of
securities 0 0 0 0 0 (96,751)
Net loss 0 0 0 (281,873) 0 0
--------- --------- ----------- ----------- -------------- ----------
Balance, June 30, 1995 5,961,188 $ 1,192 $6,567,062 $ 1,710,867 $ (1,198,158) $ (613,989)
========= ========= ========== =========== ============= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE> 16
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (281,873) $ 699,464
------------ ------------
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Depreciation and amortization (including $74,068 in 1995 and
$35,162 in 1994 from discontinued operations 1,228,948 1,012,686
Gain on sale of marketable securities (512,971) (259,110)
Cumulative effect of change in accounting principle 0 26,285
Loss on sale of property, plant and equipment 106,272 0
Provision for bad debts 745,776 372,645
Reserve for inventory obsolescence 0 127,283
Loss on disposal of subsidiary 530,637 162,164
Deferred tax benefit (87,282) 0
Increase in accounts receivable (890,666) (1,879,511)
Increase in inventories (842,355) (557,952)
Increase in prepaid expenses and other assets (313,772) (229,172)
Increase in other assets (13,798) 0
Increase in accounts payable 404,154 724,836
(Decrease) increase in accrued liabilities (12,904) 157,233
(Decrease) increase in income taxes payable (169,077) 68,152
------------ ------------
Net cash (used for) provided by
operating activities (108,911) 425,003
------------ ------------
Cash flows from investing activities:
Net assets of discontinued subsidiary 0 2,809,995
Change in marketable securities (99,343) (2,317,191)
Acquisition of property, plant and equipment (1,226,568) (2,317,131)
Proceeds from sales of property, plant and equipment 24,000 0
Net advances to affiliates (352,736) (606,900)
Purchase of Parent Company shares (350,000) 0
Acquisition of subsidiary 0 (500,000)
Proceeds from sale of subsidiary 0 342,917
------------ ------------
Net cash used for investing activities (2,004,647) (2,588,310)
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE> 17
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from financing activities:
Borrowings from bank $ 838,932 $ 3,225,023
Payments to bank (625,790) (801,303)
Proceeds from revolving lines of credit, net 1,290,433 0
Proceeds from issuance of common stock 269,399 53,198
------------ --------------
Net cash provided by financing activities 1,772,974 2,476,918
------------ --------------
Net (decrease) increase in cash and cash equivalents (340,584) 313,611
Cash and cash equivalents, beginning of year 625,421 311,810
------------ --------------
Cash and cash equivalents, end of year $ 284,837 $ 625,421
============ ==============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 686,559 $ 421,798
============ ==============
Income taxes $ 380,247 $ 521,046
============ ==============
Supplemental schedule of non-cash investing and
financing activities:
Common stock issued for services and acquisition $ 0 $ 220,000
============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE> 18
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
On April 29, 1994, the shareholders of MagneTech Corporation approved a
resolution to change the name of the Company to Digital Communications
Technology Corporation (the "Company"). The Company was incorporated on
November 12, 1987, under the laws of the State of Delaware, as a
wholly-owned subsidiary of S.O.I. Industries, Inc. ("S.O.I"). As of June
30, 1995, S.O.I. owned approximately 47% of the Company.
The Company is in the business of video and audio tape production and
duplication. Sales for the years ended June 30, 1995 and 1994 were
generated from tape duplicating at the Fort Lauderdale and Indianapolis
facilities, as well as satellite broadcasting and video production.
On July 3, 1992, the Company purchased 1,000 shares (representing 100%
ownership) of Video Direct, Inc. for $342,917. The closing of this
transaction took place July 13, 1992. On July 13, 1992, Video Direct, Inc.
was merged into Video Plus, Inc., a Delaware corporation, and became a
wholly-owned subsidiary of the Company. On December 6, 1993, the Company
sold its subsidiary, Video Plus, Inc. Such sale was accounted for as a
discontinued operation (See Note 14).
On March 25, 1994, the Company finalized the purchase of Tapes Unlimited,
Inc. and Tapes Unlimited USA, Inc. Notwithstanding the closing date, the
effective date for the consummation of the transactions was deemed to be
January 1, 1994. On June 30, 1994, Tapes Unlimited USA, Inc. was
liquidated into its parent, Tapes Unlimited, Inc. Tapes Unlimited, Inc.
provides tapes loading services. On June 9, 1995, the operations of Tapes
Unlimited, Inc. were discontinued (See Note 14).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements for the years ended June
30, 1995 and 1994 include the accounts of Digital Communications Technology
Corporation, (F/K/A MagneTech Corporation) and its wholly-owned subsidiary,
Tapes Unlimited, Inc., whose operations were discontinued on June 9, 1995.
All significant intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" (FAS
115) as of June 30, 1994.
F-8
<PAGE> 19
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
MARKETABLE SECURITIES, CONTINUED
Under FAS 115, debt securities and equity securities that have readily
determinable fair values are to be classified in three categories:
HELD TO MATURITY - the positive intent and ability to hold to
maturity. Amounts are reported at amortized cost, adjusted for
amortization of premiums and accretion of discounts.
TRADING SECURITIES - bought principally for purpose of selling them in
the near term. Amounts are reported at fair value, with unrealized
gains and losses included in earnings.
AVAILABLE FOR SALE - not classified in one of the above categories.
Amounts are reported at fair value, with unrealized gain and losses
excluded from earnings and reported separately as a component of
shareholders' equity.
Marketable securities consist of listed common stocks with an aggregate
cost, based on specific identification, of $3,188,614 as of June 30, 1995.
The gross unrealized holding losses as of June 30, 1995 were $643,547, and
the net unrealized holding gains were $29,558. All of the Company's
securities are classified as available for sale securities.
Gains or losses on dispositions of securities are based on the net
difference of the proceeds and the adjusted carrying amounts of the
securities sold, using the specific identification method.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
related assets, which range from 3 to 32 years. Costs of repairs and
maintenance are charged to operating expense as incurred; improvements and
betterments are capitalized; when items are retired or otherwise disposed
of, the related costs and accumulated depreciation are removed from the
accounts and any resulting gains or losses are credited or charged to
income.
INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). As
permitted, the consolidated financial statements prior to the adoption of
the new standard were not restated.
SFAS 109 changes the criteria for the recognition and measurement of
deferred tax assets and liabilities, including net operating loss and tax
credit carryovers. Deferred taxes are recorded based upon differences
between the financial statement and tax bases of assets and liabilities and
available tax credit carryovers.
F-9
<PAGE> 20
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NET (LOSS) INCOME PER COMMON SHARE
The net income (loss) per common share has been calculated using the
weighted average shares outstanding during each year. Such weighted
average shares have been reduced by the number of treasury shares owned by
the Company through its investment in S.O.I. The number of treasury shares
owned were approximately 659,400 and 634,700 at June 30, 1995 and 1994,
respectively.
RECLASSIFICATIONS
Certain amounts reflected in the 1994 consolidated financial statements
have been reclassified to conform to the 1995 presentation.
3. INVENTORY:
Inventories consists of the following at June 30:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Raw materials $ 3,008,167 $ 2,693,238
Work-in-process 885,976 485,809
Finished goods 164,150 36,891
------------- ---------------
$ 4,058,293 $ 3,215,938
============= ===============
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Land $ 73,000
Buildings and improvements 332,440
Machinery and equipment 7,559,667
Leasehold improvements 207,152
Furniture and fixtures 118,309
Transportation equipment 369,030
Computer equipment 181,103
Master tapes 4,000
-------------
8,844,701
Less accumulated depreciation (3,605,137)
-------------
Net property, plant and equipment 5,239,564
=============
</TABLE>
F-10
<PAGE> 21
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY, PLANT AND EQUIPMENT, CONTINUED:
Depreciation expense was $1,189,449 and $1,031,767 for the years ended June
30, 1995 and 1994, respectively.
5. RELATED PARTY TRANSACTIONS:
LOANS RECEIVABLE
These amounts represent advances to an affiliated company ($433,105 at June
30, 1995) and S.O.I. ($168,631 at June 30, 1995). They are due on demand.
Advances, except for advances to S.O.I., are interest bearing.
MANAGEMENT FEES
The Company paid S.O.I. $340,800 and $102,000 for administrative services
for the years ended June 30, 1995 and 1994, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company participates in S.O.I.'s Employee Stock Ownership Plan (ESOP).
This Plan provides retirement benefits to substantially all employees. The
ESOP is a qualified employee benefits plan exempt from taxation under the
Internal Revenue Code of 1986, as amended. There are 800,000 common shares
of the S.O.I. in the ESOP.
NOTE PAYABLE
The Company is the guarantor of a note payable by S.O.I. in the amount of
$547,000.
6. 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% (9.25% at June 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.
Average short-term borrowings under this revolving credit agreement were
$3,428,135, at an average interest rate of 8.9%.
The Company also guaranteed a $900,000 line of credit for S.O.I. as well as
for an affiliate. As of June 30, 1995, $550,000 has been drawn upon the
affiliate's line of credit and $3,840,000 on the Company's line of credit.
F-11
<PAGE> 22
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. LONG-TERM DEBT:
Long-term debt as of June 30, 1995 consists of the following:
<TABLE>
<S> <C>
Loan payable to a bank in monthly installments of $3,198
including interest at 8.75%, maturing April 2007; collateralized
by real estate. $ 283,585
Vehicle loans payable to a bank in monthly installments of
$548 including interest at 8.66%. These notes mature in
March 1996, and are collateralized by the corresponding
company vehicles. 4,761
Loan payable to a bank in monthly principal installments of
$7,440 plus interest at prime plus 1% (10.00% at June 30, 1995),
maturing June 1997; 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. 394,351
Loans payable to a bank in monthly installments of $18,868
plus interest at prime plus 1/4% (9.25% at June 30,
1995), maturing through June 2000; collateralized by the
accounts receivables, 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. 1,053,416
Loan payable to a bank in monthly installments of $29,000 plus
interest at prime plus 1/4% (9.25% at June 30, 1995), maturing
December 1998; collateralized by accounts receivables, 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. 1,224,125
Loan payable to a bank in monthly installments of $6,149
including interest at 7.63%, maturing January 2003;
collateralized by machinery and equipment; guaranteed by S.O.I. 419,324
-----------
3,379,562
Less current portion (2,735,418)
-----------
$ 644,144
===========
</TABLE>
F-12
<PAGE> 23
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. LONG-TERM DEBT, CONTINUED:
The Company failed to meet the cash flow coverage ratio required under the
above agreements at June 30, 1995. Therefore, all amounts due under these
agreements have been reclassified to a current liabilities.
The contractual maturities on long-term debt assuming repayment terms were
not accelerated are as follows:
<TABLE>
<CAPTION>
Years ending June 30,
---------------------
<S> <C>
1996 $ 727,228
1997 942,565
1998 822,269
1999 304,649
2000 220,322
Thereafter 362,529
-------------
$ 3,379,562
=============
</TABLE>
8. COMMITMENTS:
The Company leases its office facilities under operating leases expiring
through May 1999. The leases provide for increases based on real estate
taxes and operating expenses. The Company also leases facilities and
equipment on a month-to-month basis.
Aggregate future minimum rental payments under the above leases are as
follows:
<TABLE>
<CAPTION>
Year ending June 30,
--------------------
<S> <C>
1996 $ 393,335
1997 306,127
1998 297,852
1999 273,031
-------------
$ 1,270,345
=============
</TABLE>
Rent expense under the above leases for the years ended June 30, 1995 and 1994
was $412,568 and $283,636, respectively.
9. SALES TO MAJOR CUSTOMERS:
During the year ended June 30, 1995, two customers accounted for
approximately 28% of the Company's sales. During the year ended June 30,
1994, two customers accounted for 29% of the Company's sales.
F-13
<PAGE> 24
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTION PLAN:
On January 22, 1990, the Board of Directors adopted the MagneTech
Corporation 1990 Employees' Stock Option Plan. As of June 30, 1995, there
were 219,125 shares reserved for future issuance at exercise prices which
range from $1.00 to $3.44 per share.
There was no compensation expense as of June 30, 1995 and compensation
expense for June 30, 1994 was $122,400.
<TABLE>
<CAPTION>
SHARES OPTION PRICE
<S> <C> <C>
Outstanding June 30, 1993 211,875 $1.00 - $1.50
Granted 40,000 $1.00
Exercised (7,500) $1.50
----------- -------------
Outstanding June 30, 1994 244,375 $1.00 - $1.50
Granted 35,000 $2.25 - $3.44
Exercised (141,250) $1.00 - $1.50
Canceled 15,000 $1.50
----------- -------------
Outstanding June 30, 1995 123,125 $1.00 - $3.44
=========== =============
</TABLE>
11. INCOME TAXES:
Effective July 1, 1993, the Company adopted SFAS No. 109 "Accounting for
Income Taxes". The cumulative effect of the change amounted to $26,285
which amount is reflected as a charge to income in the consolidated
statement of operations for 1994.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Current:
Federal $ 294,762 $ 446,619
State 76,724 56,374
------------- -------------
371,486 502,993
------------- -------------
Deferred:
Federal (70,077) 20,082
State (18,242) 2,297
------------- -------------
(88,319) 22,379
------------- -------------
$ 283,167 $ 525,372
============= =============
</TABLE>
F-14
<PAGE> 25
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES, CONTINUED:
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and consolidated provisions for income taxes are as
follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Tax at federal statutory rate 34.0 % 34.0 %
State income tax - net of federal benefit 8.8 % 2.8 %
Other (4.9) % 0
------ -------
37.9 % 36.8 %
====== ======
</TABLE>
The tax effects of temporary differences which comprise the deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
1995
<S> <C>
Assets:
Allowance for doubtful accounts $ 408,061
Investments - unrealized holding losses 263,094
------------
671,155
Liabilities:
Property and equipment - depreciation (416,453)
------------
Net asset 254,702)
Less: Valuation allowance (263,094)
------------
Deferred tax liability $ (8,392)
============
</TABLE>
12. EMPLOYMENT AGREEMENTS:
The Company entered into employment agreements on July 1, 1994 with two
officers. The agreements are for a term of three years and contain certain
bonus provisions. The minimum annual salaries (excluding bonus
arrangements) for the years ending June 30, are as follows:
<TABLE>
<S> <C>
1996 $ 160,000
1997 160,000
--------------
$ 320,000
==============
</TABLE>
F-15
<PAGE> 26
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of cash and trade
receivables. The Company places substantially all its cash with major
financial institutions, and by policy, limits the amount of credit exposure
to any one financial institution. The balances, at times, may exceed
federally insured limits. At June 30, 1995, the Company exceeded the
insured limit by approximately $67,000. Approximately 40% of the Company's
accounts receivable, before allowances, were due from three customers at
June 30, 1995.
14. DISCONTINUED OPERATIONS:
In December 1993, the Company sold its subsidiary, Video Plus, Inc. The
results of operations of Video Plus, Inc. have been reported separately as
a discontinued operation in the Consolidated Statements of Operations for
the year ended June 30, 1994.
In June 1995, the Company discontinued the operations of Tapes Unlimited,
Inc. ("Tapes"). The results of operations of Tapes have been reported
separately as a discontinued operation in the Consolidated Statements of
Operations. Prior years consolidated financial statements have been
reclassified to conform with the current year presentation.
Summarized results of operations of the discontinued operations of tapes
for 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net sales $ 2,658,516 $ 1,368,863
============ ===========
Operating income (loss) $ 37,926 $ (117,519)
============ ===========
Loss before income taxes $ 561,924 $ (128,429)
Income tax benefit (240,784) (47,259)
------------ -----------
Loss from discontinued operation $ (321,140) $ (81,170)
============ ===========
</TABLE>
F-16
<PAGE> 27
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. DISCONTINUED OPERATIONS, CONTINUED:
In connection with the shutdown of operations of Tapes, the Company
recorded a charge of $443,400, net of tax of $87,237, to write-off the
goodwill recorded in connection with the acquisition of tapes. The net
income for the sale of Video Plus, Inc. for the year ended June 30, 1994
amounted to $66,735, net of tax of $38,854, which when netted against the
loss from the discontinued operation of Tapes of $81,170 amounts to $14,475
which amount is shown in the accompanying statements of operations under
the caption loss from discontinued operations, net of tax. The entire loss
on disposal of discontinued operations of $162,164 net of tax of $94,416
relates to Video Plus, Inc.
Certain reclassifications were made to the 1994 amounts to reflect the
effects of the discontinued operation in the prior year on a basis
comparable with 1995.
The assets and liabilities of Tapes, which have not been reclassified on
the consolidated balance sheets, are as follows:
<TABLE>
<CAPTION>
1995
<S> <C>
Current assets, principally cash, accounts receivable and
inventories $ 133,790
Plant and equipment 3,839
------------
Total assets $ 137,629
============
Accounts payable and accrued liabilities, net of amounts
due to Digital of $40,700 $ 423,114
------------
Total liabilities $ 423,114
============
</TABLE>
15. RESTATEMENT:
The balance of net unrealized holding losses on securities at June 30, 1994
reflected in the Consolidated Statements of Stockholders' Equity has been
restated to reflect a valuation allowance that should have been recorded in
1994 against deferred tax assets which were recorded to reflect the tax
benefit of unrealized capital losses on marketable securities.
In addition, the investment in S.O.I. Industries, Inc. at June 30, 1994 in
the Consolidated Statements of Stockholders' Equity has been adjusted to
reflect the investment at book value. A corresponding adjustment was made
to additional paid-in-capital.
F-17
<PAGE> 28
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective January 1994, the Company engaged the accounting firm of
Morrison, Brown, Argiz & Company as its independent auditors. The Company's
former accounting firm, Wainberg, Zipper, Strauss & Co., P.A., was dissolved
and effectively ceased to exist as of January 1994. The Company has had no
disagreements with Wainberg, Zipper, Strauss & Co., P.A. on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure or any reportable items.
The accounting firm of Morrison, Brown, Argiz & Co., the independent
auditors for the Company, was dismissed effective as of December 6, 1994.
During the fiscal year ended June 30, 1994 and the interim period subsequent to
June 30, 1994, there have been no disagreements with Morrison, Brown, Argiz &
Co. on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure or any reportable events. Morrison,
Brown, Argiz & Co.'s report on the financial statements for the fiscal year
ended June 30, 1994 contained no adverse opinion or disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or accounting
principles.
The Company engaged the accounting firm of Coopers & Lybrand L.L.P. as
independent auditors for the Company, effective as of December 6, 1994. During
the fiscal years ended June 30, 1993 and 1994 and the interim period subsequent
to June 30, 1994 and prior to December 6, 1994, there were no consultations
with Coopers & Lybrand L.L.P. on any matter of accounting principles to a
specific transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jack D. Brown, Jr. 38 President and Director
Kevin B. Halter 59 Chief Executive Officer and
Chairman of the Board
Jim N. Weinberg 39 Executive Vice President and Director
Sanford M. Whitman 61 Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Kevin B. Halter, Jr. 34 Vice President, Secretary and Director
Gary C. Evans 38 Director
James Smith 58 Director
</TABLE>
Set forth below is a description of the backgrounds of the executive
officers and directors of the Company.
Jack D. Brown, Jr. has served as President and a Director of the Company
since its inception in 1987. From 1981 to 1987, he was employed as Creative
Director for Slides and Video Services, Inc., a production and duplication film
company.
9
<PAGE> 29
Kevin B. Halter has served as Chief Executive Officer and Chairman of the
Board of DCT since January 1994 and as President, Chief Executive Officer and
Chairman of the Board of SOI since June 28, 1994. Mr. Halter also served as
Vice Chairman of the Board of SOI from January 1994 to June 28, 1994. Mr.
Halter also serves as Chairman of the Board of Directors of American Quality
Manufacturing Corporation, a subsidiary of SOI ("AQM"). In addition, Mr.
Halter has served as Chairman of the Board and Chief Executive Officer of
Halter Capital Corporation ("HCC"), a privately-held investment and consulting
company, since 1987. From 1987 until October 1992, Mr. Halter was a director
and officer of Halter Venture Corporation, a publicly-held company based in
Dallas, Texas. Mr. Halter is the father of Kevin B. Halter, Jr. and Timothy
P. Halter.
Jim N. Weinberg has served as Executive Vice President and a Director of
the Company since its incorporation in 1987. From 1978 to 1987, he was the
owner of Television Production Services, Inc., a video production company
specializing in national television commercials and sporting events.
Sanford M. Whitman has served as Chief Financial Officer of the Company
since 1992 and as Vice President, Treasurer and Assistant Secretary since
January 1994. Mr. Whitman has also served as Chief Financial Officer of SOI
since 1992 and has served as Vice President, Treasurer and Assistant Secretary
of SOI since January, 1994. Mr. Whitman has also held these offices in
American Quality Manufacturing Corporation since March 1995. Mr. Whitman
served as Controller of U.S. Brass Corporation from 1979 to 1988 and as Chief
Financial Officer of the Roberts Group from 1990 through 1992. Mr. Whitman was
an independent consultant from 1989 through 1990.
Kevin B. Halter, Jr. has served as Vice President, Secretary and director
of the Company since January 1994. Mr. Halter has also served as Secretary,
Treasurer and director of SOI and AQM since February 1994. He is also the
President of Securities Transfer Corporation, a registered stock transfer
company, a position he has held since 1987. Mr. Halter is also Vice President
and Secretary of HCC. Mr. Halter also served as a director and officer of
Texas American Group, Inc., a publicly-held company based in Dallas, Texas from
1987 to July 1989 and as a director and officer of Ceetac Corporation, a
publicly-held company, from the Spring of 1991 until September 1991. Mr.
Halter is the son of Kevin B. Halter and the brother of Timothy P. Halter.
Gary C. Evans currently serves as a director of the Company. Mr. Evans has
served as President and Chief Executive Officer of Magnum Petroleum, Inc. since
July of 1995. Mr. Evans has served as Chairman of the Board, President and
Chief Executive Officer of Hunter Resources, Inc. (formerly Intramerican
Corporation) since September 1992, prior to it being acquired by Magnum
Petroleum, Inc. Mr. Evans also served as President, Chief Operating Officer
and director of Hunter Resources, Inc. from December 1990 to September 1992.
He was President and Chief Executive Officer of Sunbelt Energy, Inc. (the
predecessor to Hunter Resources, Inc.) and its subsidiaries from 1985 to
December 1990. Mr. Evans is President and Chief Executive Officer of Gruy
Petroleum Management Co., Magnum Hunter Production, Inc. and Hunter Gas
Gathering, Inc., wholly-owned subsidiaries of Magnum Petroleum, Inc. Mr. Evans
was Vice President and Manager of the Southwestern region of the Energy
division of Mercantile Bank of Canada for four years prior to forming Sunbelt
Energy, Inc.
James Smith has served as a director of the Company since March 1995. Mr.
Smith has served as President of Pension Analysis Bureau, Inc., a consulting
firm specializing in the administration of company retirement and profit
sharing plans, since 1993. Mr. Smith also served as Vice President of Pension
Analysis Bureau, Inc. from 1988 to 1992.
10
<PAGE> 30
All directors of the Company hold office until the next annual meeting of
stockholders or until their successors have been elected and qualified.
Executive officers are elected by the Company's Board of Directors to hold
office until their respective successors are elected and qualified.
The Company's Bylaws provide that directors may be paid their expenses, if
any, and may be paid a fixed sum for attendance of each Board of Directors
meeting.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two committees, an Audit Committee and a
Compensation Committee, each composed of at least two independent directors.
The Audit Committee, composed of Kevin B. Halter, Gary C. Evans and James
Smith, recommends the annual appointment of the Company's auditors, with whom
the Audit Committee will review the scope of audit and non-audit assignments
and related fees, accounting principals used by the Company in financial
reporting, internal auditing procedures and the adequacy of the Company's
internal control procedures. The Compensation Committee, composed of Kevin B.
Halter, Gary C. Evans and James Smith, will administer the Company's ESOP and
1988 Employee Stock Option Plan and make recommendations to the Board of
Directors regarding compensation for the Company's executive officers.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely on the review of Form's 3, 4 and 5 and amendments thereto provided
to the Company pursuant to Rule 16a-3(e), the following individuals have
failed to file on a timely basis reports required required by Section 16(a) of
the 1934 Act during the period from the date that the Company's Common Stock
was registered under the Section 12 of the Securities Exchange Act of 1934, as
amended to June 30, 1995:
Jack D. Brown, Jr. - Delinquent filing of Form 3, and delinquent filings
of Form 4's. Mr. Brown failed to timely report the acquistion and exercise
of option transactions.
James N. Weinberg - Delinquent filing of Form 3, and delinquent filings of
Form 4's. Mr. Weinberg failed to timely report the acquistion of option
transactions.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid by
the Company to its President for the fiscal year ended June 30, 1995, 1994 and
1993. None of the Company's other executive officers and directors received
cash or non-cash compensation in excess of $100,000 for the fiscal year ended
June 30, 1995.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS PAYOUTS
------ -------
ANNUAL COMPENSATION
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other
and Annual Restricted
Principal Compen- Stock Options/ LTIP All Other
Position Year Salary Bonus sation Awards SARs(#) Payouts Compensation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jack D. Brown, Jr 1995 $85,000 - - - - - -
President 1994 $64,667 $50,000 $15,217 - - - -
1993 $60,008 $52,940 - - - - -
</TABLE>
11
<PAGE> 31
In 1990 and 1993, the Company granted Mr. Brown options to purchase up to
50,000 and 50,000 shares of Common Stock, respectively. The stock options are
presently fully vested. The 1990 stock options were exercised at an exercise
price of $1.50 per share. Based on the last reported sales price of the Common
Stock on September 29, 1995, the aggregate dollar value of the remaining option
is $25,000.
<TABLE>
<CAPTION>
Value of unexercised
Number of unexercised in-the-money
options/SARS at options/SARS at
fiscal year end (#) fiscal year end (#)
Shares acquired on Value exercisable/ exercisable/
Name exercise realized unexercisable unexercisable
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Jack D. Brown 50,000 $43,750 50,000/ -0- $31,250/ -0-
</TABLE>
Outside directors each received compensation for attending Board meetings
during the fiscal year ended June 30, 1995 in the amount of $3000. Such
compensation was payable in common stock of the Company.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Jack D. Brown, Jr. The
agreement with Mr. Brown is for a term of 3 years commencing July 1, 1994 and
provides for a salary of $85,000 per annum. In addition, Mr. Brown receives
the same benefits as other employees of the Company and reimbursement for
expenses incurred on behalf of the Company. The employment agreement also
contains, among other things, covenants by Mr. Brown that in the event of
termination for cause, he will not associate with a business that competes with
the Company for a period of one year after cessation of employment. The
employment agreement also provides for a bonus arrangement based on the
following formula: a bonus not to exceed 3.5% of the net operating profits
before taxes and any income/loss arising from investments or extraordinary
items.
1990 EMPLOYEE STOCK OPTION PLAN
On January 25, 1990, the Company's Board of Directors adopted the 1990
Employee Stock Option Plan (the "Plan").
The administration of the Plan rests with the Compensation Committee (the
"Committee"). Subject to the express provisions of the Plan and the Board of
Directors, the Committee shall have complete authority in its discretion to
determine those employees to whom, and the price at which options shall be
granted, the option periods and the number of shares of Common Stock to be
subject to each option. The Committee shall also have the authority in its
discretion to prescribe the time or times at which the options may be exercised
and limitations upon the exercise of options (including limitations effective
upon the death or termination of employment of the optionee), and the
restrictions, if any, to be imposed upon the transferability of shares acquired
upon exercise of options. In making such determinations, the Committee may
take into account the nature of the services rendered by respective employees,
their present and potential contributions to the success of the Company or its
subsidiaries, and such other factors as the Committee in its discretion shall
deem relevant.
12
<PAGE> 32
An option may be granted under the Plan only to an employee of the Company
or its subsidiaries. The Plan made available for option 800,000 shares (as
adjusted for a one for eight reverse split) of the Company's Common Stock.
If an optionee ceases to be employed by the Company or any of its
subsidiaries, his or her options shall terminate immediately; provided,
however, that if an optionee's cessation of employment with the Company and its
subsidiaries is due to his death or retirement with the consent of the Company
or any of its subsidiaries, the optionee may, at any time within twelve months
in the event of death, or three months after such cessation of employment,
exercise his options to the extent that he was entitled to exercise them on the
date of cessation of employment, but in no event shall any option be
exercisable more than five years from the date it was granted.
The term of each option granted under the Plan will be for such period not
exceeding five years as the Committee shall determine. Each option granted
under the Plan will be exercisable on such date or dates and during such period
and for such number of shares as shall be determined pursuant to the provisions
of the option agreement evidencing such option. Subject to the express
provisions of the Plan, the Committee shall have complete authority, in its
discretion, to determine the extent, if any, and the conditions under which an
option may be exercised in the event of the death of the optionee or in the
event the optionee leaves the employ of the Company or has his employment
terminated by the Company. The purchase price for shares of Common Stock under
each option shall be determined by the Committee at the time of the option's
issuance and may be less than the fair market value of such shares on the date
on which the options are granted. The agreements evidencing the grant of
options may contain other terms and conditions, consistent with the Plan, that
the Committee may approve.
S.O.I INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN
The Company participates in the SOI Employee Stock Ownership Plan ("ESOP").
The ESOP provides retirement benefits to substantially all employees. The
ESOP is a qualified employee benefit plan exempt from taxation under the
Internal Revenue Code of 1986, as amended. There are 800,000 shares of SOI
common stock in the ESOP.
On January 7, 1991, the Employee Stock Ownership Trust (the "ESOT")
purchased the 800,000 shares of SOI common stock from an officer and director
of SOI, Mr. Donald Courtney. The ESOT is entitled to vote on all matters
presented to holders of common stock, voting together as a class.
13
<PAGE> 33
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 29, 1995
with regard to the beneficial ownership of the Common Stock by (i) each person
known to the Company to be the beneficial owner of 5% or more of its
outstanding Common Stock, (ii) by the officers, directors and key employees of
the Company individually and (iii) by the officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENT
------------------ -------
<S> <C> <C>
S.O.I. Industries, Inc. 2,730,870 46%
16910 Dallas Parkway #100
Dallas, Texas 75248
Jack D. Brown, Jr. 68,850 1%
Jim N. Weinberg 65,503 1%
Sanford M. Whitman 12,404 (1)
All directors and officers as a 146,757 2.5%
group (6 persons)
</TABLE>
(1) less than 1%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXCHANGE OF SHARES WITH SOI
On January 27, 1994 the Board of Directors agreed to exchange additional
shares of the Company's Common Stock for common stock of SOI. On February 14,
1994 the exchange of shares was made based on the average price of the stock of
both companies on January 27, 1994. The 580,538 shares of Common Stock that
were exchanged were worth approximately $4,574,636 and were exchanged for
1,329,836 shares of SOI common stock worth approximately $4,574,636. The
reason for the share exchange was that the Company wished to sell certain
shares of its Common Stock pursuant to Rule 144 under the Securities Act of
1933, as amended, and still retain the same percentage of ownership in the
Company upon such sale.
14
<PAGE> 34
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Certificate of Incorporation, as amended *
3.2 Bylaws*
10.1 Secured Credit Agreement with NBD Bank, N.A.**
10.2 Employment Agreement between the Registrant and Jack D. Brown, Jr.
10.3 Lease Agreement for Indianapolis, Indiana facility *
10.4 Lease Agreement for Ft. Lauderdale facility *
10.5 Employee Stock Ownership Plan of S.O.I. Industries, Inc. *
21.1 Subsidiaries of the Registrant**
27 Financial Data Schedule
* Previously filed with the Securities and Exchange Commission in
connection with the Registration Statement (including any amendments thereto)
on Form S-18 of the Registrant, No 33-27974-A.
** Previously filed with the Securities and Exchange Commission as
Exhibits to the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1994.
(b) REPORTS ON FORM 8-K
Not applicable.
15
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf of the undersigned, thereunto duly authorized.
DIGITAL COMMUNICATIONS CORPORATION
By: /s/ Jack D. Brown, Jr.
----------------------------- October 11, 1995
Jack D. Brown, Jr., President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the date indicated.
/s/ Jack D. Brown, Jr.
- ---------------------------------- October 11, 1995
Jack D. Brown, Jr., President
(Principal Executive Officer) and
Director
/s/ Kevin B. Halter
- ---------------------------------- October 11, 1995
Kevin B. Halter Chief
Executive Officer and Director
/s/ Jim N. Weinberg
- ---------------------------------- October 11, 1995
Jim N. Weinberg, Executive
Vice President and Director
/s/ Sanford M. Whitman
- ---------------------------------- October 11, 1995
Sanford M. Whitman, Chief
Financial Officer (Principal
Financial and Accounting Officer),
Vice President and Treasurer
/s/ Kevin B. Halter, Jr.
- ---------------------------------- October 11, 1995
Kevin B. Halter, Jr., Vice
President, Secretary and Director
/s/ Gary Evans
- ---------------------------------- October 11, 1995
Gary Evans, Director
<PAGE> 36
EXHIBIT INDEX
Exhibit
No. Descirption
- ------- -----------
3.1 Certificate of Incorporation, as amended *
3.2 Bylaws*
10.1 Secured Credit Agreement with NBD Bank, N.A.**
10.2 Employment Agreement between the Registrant and Jack D. Brown, Jr.
10.3 Lease Agreement for Indianapolis, Indiana facility *
10.4 Lease Agreement for Ft. Lauderdale facility *
10.5 Employee Stock Ownership Plan of S.O.I. Industries, Inc. *
21.1 Subsidiaries of the Registrant**
27 Financial Data Schedule
* Previously filed with the Securities and Exchange Commission in
connection with the Registration Statement (including any amendments thereto)
on Form S-18 of the Registrant, No 33-27974-A.
** Previously filed with the Securities and Exchange Commission as
Exhibits to the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1994.
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into this 1st day of July 1994, by and
between JACK D. BROWN, JR., (hereinafter referred to as the "Employee") and
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION, 3941 SW 47th Avenue, Ft.
Lauderdale, Florida 33314, (hereinafter referred to as the "Corporation").
WHEREAS, the Corporation is engaged in the broadcast quality video tape
duplicating industry (the "video reproduction industry"); and
WHEREAS, the Employee desires to be employed by the Corporation and the
Corporation desires to employ the Employee;
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein, it is mutually agreed that the terms and conditions of the
employment relationship are as follows:
ARTICLE I
CERTAIN DEFINITIONS
For purposes of this Agreement, the following terms shall have the meanings
indicated:
Section 1.01 Associated Person. "Associated Person" means any person, entity
or organization engaged in or about to be engaged in and which, in fact, does
later become engaged in, the marketing of a "Conflicting Product."
Section 1.02 Confidential Information. "Confidential Information" means
information disclosed to the Employee or known by the Employee as a consequence
of or through his employment by the Corporation, not generally known in the
broadcast quality video tape duplicating industry about the Corporation's
customers, manufacturing, processes, financial condition, results of
operations, business, properties, assets, liabilities, or future prospects of
the Corporation or of any customer or supplier of the Corporation.
Section 1.03 Conflicting Product. "Conflicting Product" means any product,
process or service, of any person or organization other than the Corporation,
which resembles or competes with a product, process or service of the
Corporation.
Section 1.04 Corporation. "Corporation" means Digital Communications
Technology Corporation, its successors and assigns, any of its present or
future subsidiaries, organization controlled
<PAGE> 2
by it or organizations resulting from its merger or other change in form of
conducting business.
ARTICLE II
DUTIES
Section 2.01 General. The Corporation hereby employs the Employee to
faithfully, and to the best of his ability, perform those duties as listed on
Schedule A, attached hereto and made a part of this Agreement by reference, as
the Corporation may direct.
Section 2.02 Additional Duties. The Employee shall perform such additional
work as may be required by the Corporation from time to time under the terms
and conditions and according to the directions, instructions and control of the
Corporation. However, the Employee is not required to perform any duties
outside of the times and places of employment set forth in this Agreement.
Section 2.03 Change of Duties. The duties of the Employee may be changed from
time to time, by mutual agreement, without having any effect upon any other
terms of this Agreement.
Section 2.04 Corporation's Rules and Regulations. The Employee shall strictly
adhere to all of the rules and regulations of the Corporation which are
presently in force or which may be established hereafter with respect to the
conduct of his employment. The Employee shall also strictly follow the
directions of the Corporation with respect to the methods to be used in
performing his duties. The Corporation's practice or policy manuals, price
lists, product designs, customer lists, general letters and other written
publications are all made a part of this Agreement. The Corporation shall have
the right to amend, revise or discontinue the policies or procedures as the
Corporation deems necessary from time to time. Any such change in policies or
procedures will be effective upon issuance of same by the Corporation.
Section 2.05 Other Business or Civic Activities. The Employee may participate
in other business or civic activities, public or private, wholly apart from the
Employee's duties hereunder, provided such participation does not unreasonably
interfere with the performance of such duties. Duties required by public or
private corporations or associations for profit, by reason of the Employee's
membership, directorship or the Employee acting as an officer thereof, shall
not be construed as interference with the performance required by this Article
II. Fees or salaries earned for such duties, including sums received for the
reimbursement of expenses in connection with such duties, shall be retained by
the Employee.
2
<PAGE> 3
Section 2.06 Vacations. The Employee shall be entitled to vacations as may be
provided for by the Employer on Schedule B, attached hereto and made a part of
this Agreement by reference.
ARTICLE III
COMPENSATION AND TERM
Section 3.01 Compensation. The Corporation agrees to compensate the Employee
as provided on Schedule B attached hereto and made part of this Agreement by
reference, and, in the discretion of the Corporation, to pay such additional
compensation as the Corporation may from time to time determine, either under
any general plan or plans for payment of bonuses and additional compensation,
or otherwise, taking into account the Employee's productivity, experience and
responsibilities. In addition, the Employee shall be eligible, as an Employee
of the Corporation, to receive all of the fringe benefits provided by the
Corporation from time to time during the term of this Agreement, including, but
not limited to, any life insurance, medical insurance and disability insurance
programs, pension and profit sharing plans, stock option plans or medical
reimbursement plans which the Corporation has adopted or may adopt during the
term of this Agreement.
Section 3.02 Bonus Account. If the Employee is entitled to receive any bonus
or commission, an account will be established to record all transactions
between the Corporation and the Employee. Unless otherwise specified, any debit
balance of the account shall not be considered an account receivable of the
Corporation but shall nevertheless be carried forward on all subsequent net
earnings determinations, until the account shall be settled at the terms and
under the conditions as provided from time to time by the Corporation.
Section 3.03 Expenses. During the period of the Employee's employment, each
party will be responsible for all items of expense as listed on Schedule B.
Section 3.04 Term. The initial term of this Agreement shall be three years,
commencing on the effective date of this Agreement, shall be reviewed at the
end of each fiscal year and may be amended by mutual agreement of the Employee
and the Corporation.
Section 3.05 Termination. Notwithstanding anything herein contained, if on or
after the date hereof and prior to the end of the employment period:
(a) Either (i) Employee shall be physically or mentally
incapacitated or disabled or otherwise unable fully to discharge his duties
hereunder for a period of three months, (ii)
3
<PAGE> 4
Employee shall be convicted of a felony, (iii) Employee shall commit any act,
or omit to take any action, in bad faith and to the detriment of the
Corporation, or (iv) Employee shall breach any term of this Agreement and fail
to correct such breach within 20 days after being notified in writing of same,
then, in each case, the Corporation shall have the right to give notice of
termination of the Employee's services hereunder as of the date (not earlier
than 10 days from such notice) to be specified in such notice and this
Agreement shall terminate on the date so specified; or
(b) Employee shall die, then this Agreement shall terminate on
the date of Employee's death; or
(c) The Corporation shall seek protection under the Bankruptcy
laws of the United States then the Agreement shall terminate on such date;
whereupon Employee or his estate, as the case may be, shall be entitled to
receive only his salary at the rate provided in Section 3.01 to the date on
which termination shall take effect. Nothing contained in this Section 3.05
shall be deemed to limit any other right of the Corporation to terminate
Employee's employment hereunder upon any ground permitted by law.
ARTICLE IV
CONFIDENTIAL INFORMATION
Section 4.01 General. The Corporation has maintained and continues to maintain
and use commercially valuable Confidential Information which is vital to the
success of the Corporation's business. The Employee is employed by the
Corporation in a capacity in which he will become acquainted with all or part
of this Confidential Information. In order to guard the legitimate interest of
the Corporation in this Confidential Information, it is necessary for the
Corporation to protect this information by holding it confidential.
Section 4.02 Confidentiality. The Employee agrees that any information
received by the Employee during his employment which concerns the personal,
financial or other affairs of the Corporation will be treated by the Employee
in full confidence and will not be revealed to any other person, firm or
organization, either during or after the termination of his employment. The
Employee further agrees, recognizes and acknowledges:
(a) That the names and addresses of customers are and shall
remain the exclusive property of the Corporation, are confidential and are of
great value to the Corporation. The Employee further agrees that all other
information used by the
4
<PAGE> 5
Employee in soliciting customers, including, but not by way of limitation, the
names of customers' personnel are trade secrets, are confidential and are the
valuable property of the Corporation, and that any such information developed
by the Employee during the course of any such employment is and shall remain
the property of the Corporation;
(b) That certain services which the Corporation performs will be
confidential, that the good will of the Corporation depends, among other
things, on keeping such services confidential, and that unauthorized disclosure
of the same would irreparably damage the Corporation;
(c) That the business matters and affairs of the Corporation, and
the methods of business operations of the Corporation, are valuable and
confidential and that unauthorized disclosure of the same would irreparably
damage the Corporation; and
(d) That the Employee will treat as confidential all information
obtained by the Employee concerning customers of the Corporation or its
business, products, techniques, methods, systems, price books, plans or
policies; and will not during the period of employment or at any time
thereafter disclose such information in whole or in part to any person, firm or
corporation for any reason or purpose whatsoever, or use such information in
any way or in any capacity other than as an Employee of the Corporation in
furtherance of its interests. Upon the termination or cessation of employment
or sooner if it is required by the Corporation, the Employee will forthwith
deliver to the Corporation, any and all literature, documents, data,
information, order forms, price lists, memoranda, correspondence, computer and
financial records, customer and prospective customer lists, customer's orders,
records and cards acquired or coming to the knowledge and custody of the
Employee in connection with the Employee's activities as an Employee of the
Corporation.
Section 4.03 Remedies for Breach. The Employee acknowledges that the
Corporation's remedy in the form of monetary damages for any breach by the
Employee of any of the provisions of this article may be inadequate and that,
in addition to any remedy for such breach, the Corporation shall be entitled to
institute and maintain any appropriate proceeding or proceedings including an
action for specific performance and/or injunctive relief.
5
<PAGE> 6
ARTICLE V
COVENANT TO PROTECT CORPORATION'S CONFIDENTIAL INFORMATION
The Employee, in consideration of his responsibility to protect the
Corporation's Confidential Information, agrees as follows:
(a) That the Corporation is engaged in the broadcast quality
video tape duplicating industry;
(b) That the Confidential Information learned of by the Employee
during the term of this Agreement is the sole property of the Corporation;
(c) That this covenant to protect the Corporation's Confidential
Information is necessary as the Employee shall be employed as part of the
professional staff of the Corporation, reporting directly to executives and
management personnel, and that in the course of employment he shall have access
to Confidential Information of the Corporation as part of this position of
trust and confidence;
(d) That this covenant to protect the Corporation's Confidential
Information is without geographic limit as the Corporation engages in business
world-wide and is not an unreasonable restraint on any future employment by the
Employee;
(e) That a breach of any of the obligations of the Employee in
this Agreement may not be one which is capable of being reasonably measured by
monetary damages, but that this provision is an essential part of the
Employment Agreement with the Corporation;
(f) That the Employee specifically agrees that this covenant may
be enforced by injunctive relief as well as claims for compensatory damages;
and
(g) That in the event a court of competent jurisdiction finds any
of the provisions of this section to be so over broad as to be unenforceable,
it is the intent of the parties that such provision be reduced in scope by the
court, but only to the extent deemed necessary by the court to render the
provision reasonable and enforceable, the court being advised it is the intent
of the parties that this contract be construed as broadly as possible in order
to protect the Confidential Information of the Corporation except that the
provisions of this Article V will not be deemed breached merely because
Employee owns not more than it of the outstanding common stock of a
corporation, if, at any time of its acquisition by Employee, such stock is
listed on a national securities exchange, is reported on NASDAQ, or is
regularly traded
6
<PAGE> 7
in the over-the-counter market by a member of a national securities exchange.
ARTICLE VI
COVENANT NOT TO COMPETE
Section 6.01 Competition During the Term of this Agreement. Employee
agrees that during the term of this Agreement, neither he, nor any company
controlled by Employee (an "Affiliate"), will directly or indirectly compete
with the Corporation in any way, and that he will not act as an officer,
director, employee, consultant, shareholder, lender, or agent of any entity
which is engaged in any business of the same nature as, or in competition with,
the business in which the Corporation is now engaged or other related business
in which the Corporation becomes engaged during the term of this Agreement.
Furthermore, Employee agrees that during the term of this Agreement, he will
undertake no planning for the organization of any business activity competitive
with the work he performs as an employee of the Corporation and Employee will
not combine or conspire with any employees of the Corporation for the purpose
of organization of any such competitive business activity.
Section 6.02 Competition Following Termination of this Agreement. Employee
agrees that for a period of one year after the termination of this Agreement
for any reason whatsoever, neither Employee, nor any Affiliate, shall
knowingly, directly or indirectly, for itself or himself or on behalf of any
other corporation, person, firm, partnership, association, or any other entity
(whether as an individual, agent, servant, employee, employer, officer,
director, shareholder, investor, principal, consultant or in any other
capacity):
(a) engage or participate in any business which engages in
competition with related businesses being conducted by the Corporation or any
of its affiliates, or any other services rendered by the Corporation during the
term of this Agreement anywhere in the United States;
(b) induce or attempt to influence any employee of the
Corporation to terminate his/her employment, or to hire any such employee,
whether or not so induced or influenced except that any such employee may be
hired with the Corporation's prior written consent or after six (6) months
subsequent to the end of employee's employment with the Corporation; or
(c) assist for compensation or finance any person or entity which
competes with the Corporation.
7
<PAGE> 8
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF EMPLOYEE
Section 7.01 Performance of Duties. Employee represents and warrants to the
Corporation that (a) Employee is under no contractual or other restriction or
obligation which is inconsistent with the execution of this Agreement, the
performance of his duties hereunder, or the other rights of the Corporation
hereunder and (b) Employee is under no physical or mental disability that would
hinder his performance of duties under this Agreement.
Section 7.02 Life Insurance. If requested by the Corporation, Employee shall
submit to such physical examinations and otherwise take such actions and
execute and deliver such documents as may be reasonably necessary to enable the
Corporation at its expense and for its own benefit, to obtain life insurance on
the life of the Employee. Employee has no reason to believe that his life is
not insurable with a reputable insurance company at rates now prevailing for
healthy men of his age.
ARTICLE VIII
MERGER
In the event of a future disposition of (or including) the properties and
business of the Corporation, substantially as an entirety, by merger,
consolidation, sale of assets or otherwise, then the Corporation may elect:
(a) To assign this Agreement and all of its rights and obligation
hereunder to the acquiring or surviving corporation; provided that such
corporation shall assume in writing all of the obligations of the Corporation
hereunder; and provided, further, that the Corporation (if and so long as it
remains in business as an independent going enterprise) shall remain liable for
the performance of its obligations hereunder in the event of an unjustified
failure of the acquiring corporation to perform its obligations under this
Agreement; or
(b) In addition to its other rights of termination, to terminate
this Agreement upon at least 30 days written notice by paying Employee the
compensation at the rate provided in Section 3.01 to the date on which such
termination shall take effect.
ARTICLE IX
SEVERABILITY
In case any provision of this Agreement shall be held invalid, illegal, or
unenforceable, in whole or in part, neither the
8
<PAGE> 9
validity of the remaining part of such provision nor the validity of any other
provision of this Agreement shall in any way be affected thereby.
ARTICLE X
MISCELLANEOUS PROVISIONS
Section 10.01 Survival. The covenants, agreements, representations and
warranties contained in or made pursuant to this Agreement shall survive
Employee's termination of employment, irrespective of any investigation made by
or on behalf of any party.
Section 10.02 Modification. This Agreement sets forth the entire understanding
of the parties with respect to the subject matter hereof, supersedes all
existing agreements between them concerning such subject matter, and may be
modified only by a written instrument duly executed by each party.
Section 10.03 Notices. Any notice or other communication required or permitted
to be given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested (or by the most nearly comparable method of mailing
from or to a location outside the United States), or delivered against receipt
to the party to whom it is to be given at the address of such party set forth in
the preamble to this Agreement (or to such other address as the party shall have
furnished in writing in accordance with the provisions of this Section 10.03).
Any notice given to the Corporation shall be addressed to the attention of the
Corporate Secretary. Notice to the estate of Employee shall be sufficient if
addressed to Employee as provided in this Section 10.03. Any notice or other
communication given by certified mail (or such comparable method) shall be
deemed given at the time of certification thereof (or comparable act), except
for a notice changing a party's address which shall be deemed given at the time
of receipt thereof.
Section 10.04 Waiver. Any waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed to be a waiver of any
other breach of that provision or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term of
this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
Section 10.05 Transferability and Binding Effect. Employee's rights and
obligations under this Agreement shall not be
9
<PAGE> 10
transferable by assignment or otherwise, nor shall such rights be subject to
commutation, encumbrance, or the claims of Employee's creditors, and any
attempt to do any of the foregoing shall be void. The provisions of this
Agreement shall be binding upon and inure to the benefit of Employee and his
heirs and personal representatives, and shall be binding upon and inure to the
benefit of the Corporation and its successors and those who are its assigns
under Article VIII.
Section 10.06 No Third Party Beneficiaries. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by any person not a
party to this Agreement (except as provided in Article VIII).
Section 10.07 Headings. The headings in this Agreement are solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
Section 10.08 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
Section 10.09 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas, for contracts entered into
and wholly performed in such state.
WITNESS WHEREOF, the parties have duly executed this Agreement as of the
first date written above.
EMPLOYEE: DIGITAL COMMUNICATIONS
TECHNOLOGY CORPORATION:
/s/ JACK D. BROWN, JR. /s/ KEVIN B. HALTER
Jack D. Brown, Jr. Kevin B. Halter, CEO
10
<PAGE> 11
SCHEDULE A
DUTIES OF EMPLOYEE:
As directed by the Chief Executive Officer of the Corporation.
[ THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY ]
11
<PAGE> 12
SCHEDULE B
1. Compensation of Employee:
A. Salary: As compensation for services, the Corporation shall pay
the Employee a salary of $85,000 annually beginning on the date
of this Agreement and a bonus arrangement set forth below which
the Corporation and the Employee may change from time to time in
writing. The Corporation shall also provide the Employee with
such other benefits as the Corporation generally provides to its
employees.
In the event the Corporation terminates this Agreement or the
Employee dies or becomes disabled, the Employee or his estate
shall receive six month's salary payable in six equal installment
payments at the rate in effect at the time; unless such early
termination or non-renewal is due to an event(s) set forth in
Section 3.05 (a)(ii)(iii) or (iv).
B. Bonus: Expressly conditioned on the Employee being employed on
the last day of the fiscal year of the Corporation, the Employee
shall receive a bonus not to exceed 3.5% of the net operating
profits of the Corporation before taxes and any income/loss
arising from investments or extraordinary items. Such bonus is
to be calculated in addition to any salary paid the Employee for
the fiscal year. The Bonus may be paid in cash or the Employee
may request payment of the Bonus in shares of common stock of the
Corporation. Notwithstanding the foregoing, the Corporation may
require or limit the amount of Bonus to be paid in shares of
common stock of the Corporation to 50% of such Bonus. In either
case, the shares of common stock, for purposes of computing the
Bonus shall be the average of the closing bid and ask price for
the last calendar month of the fiscal year of the Corporation.
The shares of common stock will be registered on Form S-8 with
the Securities and Exchange Commission. The Bonus will be payable
within 75 days following the end of the fiscal year.
12
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