UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 1-13088
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 65-0014636
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16910 Dallas Parkway, Suite 100, Dallas, Texas 75248
(Address of principal executive offices)
(214) 248-1922
(Issuer's telephone number)
- -----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) had been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
The number of shares outstanding of the common stock of the registrant
on April 30, 1996, the latest practicable date, was 6,016,233.
<PAGE>
TABLE OF CONTENTS
Item Numbered
Number Page
Part I
1 Financial Statements .............................................. 1
2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations ........................................ 6
Part II
1 Legal Proceedings ............................................... 10
2 Changes in Securities .......................................... N/A
3 Defaults Upon Senior Securities ................................ N/A
4 Submission of Matters to a Vote of Security
Holders .................................................. N/A
5 Other Information .............................................. N/A
6 Exhibits and Reports on Form 8-K ................................ N/A
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1996 June 30,
(Unaudited) 1995
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 494,142 $ 284,837
Marketable securities 781,743 2,574,626
Accounts receivable, less allowance for doubtful
accounts of $1,196,717 at March 31, 1996 and
$1,065,300 at June 30, 1995 4,481,808 3,143,689
Inventories 3,944,190 4,058,293
Prepaid expenses and other current assets 161,215 345,126
----------------- -----------------
Total current assets 9,863,098 10,406,571
----------------- -----------------
Property, plant and equipment, net 5,012,117 5,239,564
Other assets 31,543 31,158
Loans receivable, related parties 459,578 601,736
----------------- -----------------
Total assets $ 15,366,336 $ 16,279,029
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 3,000,000 $ 3,840,000
Current portion, long-term debt 2,241,258 2,735,418
Accounts payable 1,158,045 2,165,725
Accrued liabilities 615,563 418,376
----------------- -----------------
Total current liabilities 7,014,866 9,159,519
----------------- -----------------
Long-term debt, less current portion 596,331 644,144
Deferred tax liability 20,500 8,392
Commitments and contingencies
Stockholders' Equity:
Common stock, par value $0.0002; 25,000,000 shares
authorized, 6,016,233 and 5,961,188 shares
issued and 5,766,167 and 5,301,809 shares
outstanding as of March 31, 1996 and June 30,
1995, respectively 1,302 1,192
Additional paid-in capital 6,621,952 6,567,062
Retained earnings 2,472,399 1,710,867
Investment in S.O.I. Industries, Inc. (1,198,158) (1,198,158)
Net unrealized holding loss on investment securities (162,856) (613,989)
----------------- -----------------
Total stockholders' equity 7,734,639 6,466,974
----------------- -----------------
Total liabilities and stockholders' equity $ 15,366,336 $ 16,279,029
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
March 31, March 31,
--------- ---------
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 5,929,998 $ 4,472,949 $ 19,211,980 $ 16,477,183
-------------- ------------ -------------- -------------
Costs and Expenses:
Cost of goods sold 4,711,975 3,953,646 15,780,333 13,748,234
Selling expenses 297,762 266,676 861,914 747,596
General and administrative expenses 523,126 376,865 1,367,597 1,009,907
-------------- ------------ -------------- -------------
Total costs and expenses 5,532,863 4,597,187 18,009,844 15,505,737
-------------- ------------ -------------- -------------
Operating profit (loss) 397,135 (124,238) 1,202,136 971,446
-------------- ------------ -------------- -------------
Other income (expense):
Interest and other income (expense) 321,251 (112,830) 415,301 503,697
Interest expense (149,775) (179,118) (529,704) (468,132)
-------------- ------------ -------------- -------------
171,476 (291,948) (114,403) 35,565
-------------- ------------ -------------- -------------
Income (loss) from continuing operations before
provision for income taxes 568,611 (416,186) 1,087,733 1,007,011
Provision (benefit) for income taxes 226,720 (156,600) 427,720 395,170
-------------- ------------ -------------- -------------
Income (loss) from continuing operations 341,891 (259,586) 660,013 611,841
Discontinued operations:
Income (loss) from operations of Tapes Unlimited,
Inc. net of applicable income taxes (benefit) of
$0, $8,159, $0, and ($48,750), respectively 6,159 8,537 101,519 (77,639)
-------------- ------------ -------------- -------------
Net income (loss) $ 348,050 $ (251,049) $ 761,532 $ 534,202
============== ============ ============== =============
Weighted average shares of common
stock outstanding 5,732,182 5,286,750 5,487,449 5,240,752
============== ============ ============== =============
Earnings (loss) per share:
Continuing operations $ 0.06 $ (0.05) $ 0.12 $ 0.12
Discontinued operations 0.00 0.00 0.02 (0.02)
-------------- ------------ -------------- -------------
Net income (loss) $ 0.06 $ (0.05) $ 0.14 $ 0.10
============== ============ ============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended
March 31,
1996 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 761,532 $ 534,202
---------------- ----------------
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 921,412 895,922
Gain on sale of marketable securities (367,989) (604,659)
Increase in accounts receivable, (1,338,119) (698,356)
net
Decrease (increase) in inventories 114,103 (929,355)
Decrease (increase) in prepaid expenses and other 183,911 (147,310)
(Decrease) increase in accounts payable (1,007,680) 919,496
Increase (decrease) in accrued liabilities and other 197,187 (132,131)
---------------- ----------------
Net cash used in operating activities (535,643) (162,191)
---------------- ----------------
Cash flows from investing activities:
Decrease (increase) in loans receivable, related parties 142,158 (174,613)
Change in marketable securities - available for 2,612,005 (37,664)
sale
Decrease (increase) in other assets and other liabilities 11,723 (11,468)
Investment in stock of parent company 0 (350,001)
Capital expenditures (693,965) (1,059,663)
---------------- ----------------
Net cash provided by (used in) investing activities 2,071,921 (1,633,409)
---------------- ----------------
Cash flows from financing activities:
Net long-term (repayments) borrowings (541,973) 243,498
Net short-term (repayments) borrowings (840,000) 1,515,233
Payments to parent company - (231,135)
Proceeds from issuance of common stock 55,000 254,555
---------------- ----------------
Net cash provided by financing activities (1,326,973) 1,782,151
---------------- ----------------
Increase (decrease) in cash and cash equivalents 209,305 (13,449)
Cash and cash equivalents at beginning of period 284,837 625,421
---------------- ----------------
Cash and cash equivalents at end of period $ 494,142 $ 611,972
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (non-capitalized) $ 544,129 $ 495,538
================ ================
Income taxes $ 146,000 $ 482,324
================ ================
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-------------
1. Summary of Significant Accounting Policies:
The accompanying consolidated financial statements include the accounts
of Digital Communications Technology Corporation ("the Company"). The
operations of Tapes Unlimited, Inc., which were formerly consolidated
with the operations of the Company, have been segregated as
discontinued operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from these
unaudited interim financial statements. These financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's annual audited financial statements.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to conform with generally accepted
accounting principles. The results of operations for the periods
presented are typically subject to seasonal variations and are not
necessarily indicative of the results to be expected for the full year.
2. Marketable Securities
Marketable securities consist of listed common stocks with an aggregate
cost, based on specific identification, of $944,599 as of March 31,
1996. The net unrealized holding loss as of March 31, 1996 was
$162,856. All of the Company's securities are classified as available
for sale securities.
3. Inventories:
The inventories are valued at the lower of cost (first-in, first-out
method) or market and consisted of the following:
March 31, June 30,
1996 1995
---------------- ----------------
Raw materials $ 3,267,371 $ 3,008,167
Work-in process 514,367 885,976
Finished goods 162,452 164,150
================ ================
$ 3,944,190 $ 4,058,293
================ ================
4
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
-------------
4. Property, Plant and Equipment:
Property, plant and equipment and related accumulated depreciation are
summarized as follows:
March 31, June 30,
1996 1995
------------ ------------
Land $ 73,000 $ 73,000
Buildings and improvements 544,893 332,440
Machinery and equipment 8,920,138 8,439,261
------------ ------------
9,538,031 8,844,701
Less: accumulated depreciation 4,525,914 3,605,137
============ ============
$ 5,012,117 $ 5,239,564
============ ============
5. Revolving Lines of Credit:
The Company has a revolving line of credit agreement for aggregate
borrowings of up to $5,400,000. Interest is payable on all outstanding
cash advances at the bank's prime lending rate plus 1/4% (8.625% at
March 31, 1996). Any unpaid principal and accrued interest is due on
demand, but no later than June 30, 1996. The line of credit is
collateralized by accounts receivable, inventory and equipment. The
terms of the agreement require, among other provisions, that the
Company comply with requirements for maintaining certain cash flow and
other financial ratios. The Company failed to meet the cash flow
coverage ratio required under this agreement.
The Company had previously guaranteed a $900,000 line of credit for an
affiliate. With the sale of Tempo Lighting on February 29, 1996, this
line of credit was paid in full. As of March 31, 1996, $3,000,000 has
been drawn upon the Company's line of credit.
6. Long-Term Debt:
Long-term debt is summarized as follows:
March 31, June 30,
1996 1995
------------- ------------
Long-term debt consists of
various mortgages and notes
payable with interest rates
ranging from 8.75 percent to
1 percent over prime. Monthly
payments range from $954 to
$29,000 and expiration dates
range from 1997 through 2007. $ 2,837,589 $ 3,379,562
Less: current portion 2,241,258 2,735,418
------------- ------------
$ 596,331 $ 644,144
============= ============
Under the terms of certain of the above agreements, the Company is
required to comply with certain ratios and covenants. As of June 30,
1995, the Company failed to meet the cash flow coverage ratio. This
ratio is calculated on an annual basis, and therefore all amounts due
under these agreements are classified as current liabilities until the
next measurement date.
7. Subsequent Event:
On May 3, 1996, the Company sold 100,000 shares of Class A convertible
preferreed stock in a private placement. The net proceeds from the
sale totaled $930,000.
5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
Digital Communications Technology Corporation's ("the Company") net sales
for the quarter ended March 31, 1996 of $5,930,000 were approximately 33% higher
than the corresponding period of the prior year. This sales increase, along with
reductions in cost of goods sold, led to the operating profit in the three
months ended March 31, 1996. The decrease in cost of goods sold is attributable
to a cost reduction on a large purchase of raw materials and a reduction of
direct labor costs. Net sales also increased during the nine month period ended
March 31, 1996, as compared to the corresponding period of the prior year.
Unlike recent fiscal quarters however, the increased sales for the three and
nine month periods ended March 31, 1996 were not accompanied by a decline in
operating profits. Operating profits remained consistent at approximately 6% of
net sales for both nine month periods ended March 31, 1996 and 1995.
Liquidity
- ---------
The Company used approximately $536,000 in cash from operating activities
for the nine months ended March 31, 1996 as compared to approximately $162,000
in cash used in operating activities for the nine months ended March 31, 1995.
The higher overall net use of cash for the nine month period ended March 31,
1996 is due primarily to the use of cash generated in operations to pay trade
payables at a faster rate than in the corresponding period of the prior year.
The higher sales generated during the most recent nine month period generated
enough operating cash to keep the accounts payable balance lower than in the
prior year and also led to an increase in the accounts receivable balance, which
increased approximately $1,338,000 for the nine months ended March 31, 1996. The
increased uses of operating cash mentioned above were partially offset by a
decrease in inventory. In prior months, raw material purchases, specifically of
video tape cassette shells and video tape "pancakes," were increased based on
anticipated orders for the next several months, and to mitigate steadily
increasing material costs. The usage of this inventory, without the necessity of
significant additional inventory purchases, resulted in the decrease in
inventory as well as contributing positively to the improved operating profits.
The Company's accounts receivable collection period (measuring how quickly,
on average, the Company collects its accounts receivable) increased from
approximately 74 days at June 30, 1995 to approximately 81 days at March 31,
1996. The increase in the average collection period is due primarily to a large
outstanding balance of a significant customer who delayed payment at the end of
March 1996. Payment on this outstanding balance was subsequently received in the
month of April 1996. The increase in the average collection period also
demonstrates the effect of competitive pressures from the Company's customers to
grant longer payment terms. Management will continue to monitor collections and
outstanding accounts receivable to ensure timely collection.
As discussed above, inventory levels decreased approximately 3% from June
30, 1995 to March 31, 1996. The finished goods component of inventory remained
consistent with the June 30, 1995 levels. Raw materials, however, increased
while work in progress decreased. The raw materials inventory component is
expected to decline as in-stock raw materials are utilized to meet production
requirements in subsequent months. Inventory levels, particularly in the
work-in-process and finished goods categories, will fluctuate somewhat depending
on the size and number of video tape duplicating orders processed at any given
time. Typically, the Company does not stock significant quantities of finished
products, shipping orders immediately upon completion.
6
<PAGE>
Approximately $2,072,000 in cash was provided by investing activities for
the nine months ended March 31, 1996 as compared to approximately $1,633,000 in
cash used in investing activities for the corresponding period of the prior
year. The primary sources for the funds were an approximate $142,000 decrease in
loans receivable from affiliated companies and an approximate $2,612,000
decrease in funds invested in the Company's marketable securities portfolio.
When not invested in marketable securities, the majority of these funds are
invested in federally-insured money market funds, and are classified as cash
equivalents.
The Company utilized approximately $840,000 to reduce its indebtedness on
its line of credit agreement during the nine months ended March 31, 1996 and
repaid approximately $542,000 in long-term debt. Management intends to
selectively utilize its line of credit to fund capital expenditures and
inventory purchases when needed, and expects to continue 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 anticipates that the
Company will be in compliance with all debt covenants at June 30, 1996.
During the nine month period ended March 31, 1996, the Company's cash needs
were met primarily through operations, with additional short-term borrowing on
the Company's credit line and with proceeds from sales of its marketable
securities portfolio. Long-term liquidity needs are anticipated to be met
through sales growth and separate financing arrangements. Management anticipates
that it will continue to meet most obligations as they come due, and no
vendor/supplier problems are expected.
Capital Resources
- -----------------
The Company invested approximately $694,000 in equipment and leasehold
improvements for the nine months ended March 31, 1996. This amount was less than
capital expenditures during the corresponding period of the prior year due to
increased expenditures for high speed duplicating equipment acquired in the
prior year. The current year expenditures relate primarily to a high-speed video
duplicating system which was acquired for the Company's Fort Lauderdale facility
during the first quarter ended September 30, 1995.
The Company plans to continue to expand current operating facilities at the
Indianapolis plant to fully meet the high volume demands of the
retail-sell-through market. Specifically, the Company intends to acquire
software upgrade kits for its high-speed duplicating equipment which is expected
to increase the machines' capacity up to 30% without acquiring additional
equipment. The Company intends to finance these expenditures through operations
and through borrowings on the Company's line of credit, as needed.
Results of Operations
- ---------------------
Continued growth in the Company's target markets and overall growth in
demand for video tapes throughout the industry extended into the third quarter
ended March 31, 1996 as Company sales increased approximately 33% to $5,930,000.
This further increased the fiscal year to date sales growth, increasing from
approximately $16,477,000 to $19,212,000 for the nine month periods ended March
31, 1995 and 1996, respectively. The primary reason for the sales growth in the
third quarter -- which has historically been a slower sales quarter -- is due to
expansion of the Company's fulfillment services along with expanded orders from
several existing customers as the Company's reputation for providing quality
products has grown.
The Company's sales in the retail sell through area continue to grow along
with the closely related area of fulfillment services provided by the Company.
The retail sell through 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. Fulfillment
services however, utilize the Company's ability to prepare packages that include
other promotional material and packaging, along with the video tape. After
assembly, these packages can then be sent to multiple destinations as stipulated
by the Company's customers. Management hopes to increase sales of this type of
service by continuing to build a reputation for quality and reliability within
the industry.
7
<PAGE>
The following table sets forth, for the fiscal periods indicated, certain
items from the Company's Consolidated Statements of Operations, expressed as a
percentage of net sales:
<TABLE>
<CAPTION>
Income Statement Comparison
(unaudited)
For the three months ended For the nine months ended
March 31, March 31,
--------- ---------
1996 1995 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of goods sold 79.46% 88.39% 82.14% 83.44%
Selling expenses 5.02% 5.96% 4.49% 4.54%
General and administrative
expenses 8.82% 8.43% 7.12% 6.13%
------ ------ ------ ------
Operating profit (loss) 6.70% -2.78% 6.26% 5.90%
Interest and other income
(expense) 5.42% -2.52% 2.16% 3.06%
Interest expense -2.53% -4.00% -2.76% -2.84%
------ ------ ------ ------
Income (loss) from continuing
operations before income taxes 9.59% -9.30% 5.66% 6.11%
Provision (benefit) for income
taxes 3.82% -3.50% 2.23% 2.40%
------ ------ ------ ------
Income (loss) from continuing
operations 5.77% -5.80% 3.44% 3.71%
Discontinued operations 0.10% 0.19% 0.53% -0.47%
------ ------ ------ ------
Net income (loss) 5.87% -5.61% 3.96% 3.24%
------ ------ ------ ------
</TABLE>
Operating profit improved for both the three month and nine month periods
ended March 31, 1996. As a percentage of net sales, operating profit increased
slightly from 5.9% to 6.3% for the nine months ended March 31, 1995 and 1996,
respectively. This increase is an improvement from the declining operating
margins experienced in recent quarters and is primarily due to lower cost of
goods sold.
Cost of goods sold, as a percentage of sales, decreased to 82% for the nine
months ended March 31, 1996 as compared to 83% for the nine months ended March
31, 1995. The lower cost of goods sold is attributable to lower material costs,
specifically the cost of the plastic video cassette shells, which the Company
had acquired during the prior fiscal quarter in anticipation of larger
production requirements in the third quarter. The lower cost raw materials were
utilized in the current quarter, having a positive effect on cost of goods sold
and operating profit. Additionally, a reduction in direct labor costs also
contributed to the lower cost of goods sold and positively affected operating
margins. Management will continue to closely monitor material costs in order to
pass on 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.
8
<PAGE>
As a percentage of net sales, general and administrative expenses increased
from 6.1% to 7.1% for the nine month periods ended March 31, 1995 and 1996,
respectively. Increases in professional fees over prior year levels and an
increase in officers and management salaries primarily contributed to this
increase. This increase was partially offset by the elimination of management
fees previously paid to S.O.I. Industries, Inc., which were discontinued in
December 1995.
Interest expense increased from approximately $468,000 to $530,000 for the
nine months ended March 31, 1995 and 1996, respectively and decreased from
approximately $179,000 to $150,000 for the three months ended March 31, 1995 and
1996, respectively. The year to date increase was due primarily to increased
borrowings on the Company's line of credit during the first six months of the
fiscal year and due to increased long-term borrowing over the levels of the
prior year. Additionally, margin interest paid in connection with the Company's
marketable securities portfolio contributed to the increased interest expense.
The current quarter decline in interest expense is due to decreased borrowings
on the Company's line of credit.
The Company realized income from securities transactions of approximately
$368,000 for the nine months ended March 31, 1996 as compared to approximately
$605,000 for the corresponding period of the prior year. The gains were from
investment transactions associated with the Company's marketable securities
portfolio. The Company invests funds in equity securities through high quality
brokers and, by policy, limits the amount of exposure in any one equity
investment. Such investments are continually monitored to reduce the risk of any
adverse stock market volatility. Cash not invested in securities is placed on
account with high quality brokerage firms, which is swept daily into a federally
insured money market account, or placed on account with a federally insured
national bank.
During June 1995, the Company's management decided to discontinue the
operations of Tapes Unlimited, Inc. ("TU"). Management believed that the cost of
maintaining the TU subsidiary outweighed the benefits provided to the Company.
The effect on net income (loss) of the operations of TU is segregated on the
face of the income statement as discontinued operations, and totaled
approximately $102,000 and ($78,000), net of income taxes, for the nine months
ended March 31, 1996 and 1995, respectively. Although all operations at TU have
ceased, certain collection efforts are still conducted by the Company on behalf
of TU. These efforts, along with debt forgiveness resulting from settlements
with TU creditors, resulted in recoveries which are reflected in the income from
discontinued operations for the nine months ended March 31, 1996.
Other Items
- -----------
The costs of the Company's products are subject to inflationary pressures
and commodity price fluctuations. Inflationary pressures have been relatively
modest over the past five years and the Company has generally been able to
mitigate the effects of inflation and commodity price fluctuations through sales
price increases and cost savings in other areas. The Company's ability to pass
on increased costs of its raw materials is limited by competitive market
pressures, and there can be no assurances that the Company will be able to
offset future material cost increases with its own price increases.
The Company's sales levels generally follow the retail-sell-through
markets, which typically peak in the fall and early winter months as retail
demand and holiday orders are met. The Company has mitigated this seasonality by
increasing sales efforts to lower volume, but higher margin customers such as
corporate training video duplication and the video rental market. In addition,
management plans to increase market penetration in the Canadian and other
foreign markets where the seasonal base is different from that of the domestic
market. Finally, management intends to focus its marketing efforts toward the
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.
Subsequent to March 31, 1996, the Company sold 100,000 shares of Class A
convertible preferred stock in a private placement. The Class A convertible
preferred stock is convertible into the Company's common stock at a 20% discount
to the market price at the date of conversion. The net proceeds from the sale
totaled $930,000.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
On March 4, 1996, Richard Abrons, on behalf of the Company, filed a
shareholder derivative action against Kevin B. Halter, Kevin B. Halter,
Jr., Halter Capital Corporation, Securities Transfer Corporation, Gary C.
Evans and James Smith alleging breaches of fiduciary duty, fraud, and
violations of state securities laws in their actions as directors of the
Company. The plaintiff seeks unspecified actual and exemplary damages, a
constructive trust against the assets of the defendants and an accounting
of the affiars of the defendants. The plaintiff brought this suit allegedly
to vindicate the wrongs done to the Company by the individual defendants
and their affiliated companies and any damages which are awarded will be on
behalf of, and for the benefit of, the Company and all of its shareholders.
The lawsuit is entitled Richard Abrons on behalf of Digital Communications
---------------------------------------------------
Technology Corporation et al v. Kevin B. Halter, Halter Capital
---------------------------------------------------------------------------
Corporation, Securites Transfer Corporation, Kevin B. Halter, Jr., Gary C.
---------------------------------------------------------------------------
Evans and James Smith, Cause no. 96-02169, in the 134th Judicial District,
----------------------
Dallas County, Texas.
Even though the Company is a nominal defendant in the lawsuit, the
plaintiffs seek no relief or damages against the Company. As a procedural
matter in lawsuits of this type, the Company is named as a nominal
defendant. This is done to make the Company a party to the action but the
plaintiffs seek no damages from the Company. Therefore, the lawsuit will
not have a material impact on the operations or financial condition of the
Company.
All of the defendants have answered the allegations contained in the
plaintiffs' petition and there has been little discovery taken by either
party. All of the defendants deny all of the allegations contained in the
plaintiffs' petition and will vigorously defend this lawsuit. In addition,
the defendants have filed a lawsuit against Sanford M. Whitman, the former
CFO of the company, Blake Beckham, Attorney at Law, Beckham & Thomas,
L.L.P., and a countersuit against Richard Abrons and Adrian Jacoby seeking
damages in excess of $32 million. Additionally, a motion for contempt and
sanctions was filed against Sanford M. Whitman for filing a false
verification, and Richard Abrons and Adrian Jacoby for filing false
affidavits and disobeying court orders.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
By: /s/ Douglas L. Miller Date: May 14, 1996
Douglas L. Miller, Vice President
and Chief Financial Officer
11
<PAGE>
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