UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark one)
[XX] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee required)
For the fiscal year ended June 30, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE 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 of incorporation) (IRS Employer ID Number)
16910 Dallas Parkway, Suite 100, Dallas, TX 75248
(Address of principal executive offices)
(972) 248-1922
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class: Name of each exchange on which registered:
Common Stock American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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 in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the 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. X
State issuer's revenues for its most recent year. $22,553,457
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days:
As of September 25, 1997: $2,057,329 based upon 4,114,658 shares at $0.50
per share closing market price
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date: September 25, 1997: 7,451,386
Transitional Small Business Disclosure Format (check one): YES NO X
<PAGE>
TABLE OF CONTENTS
Item Number
Part I
Page
----
1. Description of Business 3
2. Description of Property 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 7
Part II
5. Market for the Company's Common Stock
and Related Stockholder Matters 7
6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
7. Index to Financial Statements 18
8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 18
Part III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 19
10. Executive Compensation 21
11. Security Ownership of Certain Beneficial Owners and Management 23
12. Certain Relationships and Related Transactions 25
13. Exhibits and Reports on Form 8-K 25
Signatures 26
<PAGE>
Caution Regarding Forward-Looking Information
This annual report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company or
management as well as assumptions made by and information currently available to
the Company or management. When used in this document, the words "anticipate,"
"believe," "estimate," "expect" and "intend" and similar expressions, as they
relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company regarding future events and are subject to certain risks, uncertainties
and assumptions, including the risks and uncertainties noted. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those described herein
as anticipated, believed, estimated, expected or intended. In each instance,
forward-looking information should be considered in light of the accompanying
meaningful cautionary statements herein.
ITEM 1 - DESCRIPTION OF BUSINESS
Digital Communications Technology Corporation (DCT or Company) is an integrated
communications company, primarily engaged in large quantity duplication of
prerecorded videocassettes for customers in the entertainment and a wide range
of other industries. The Company also provides mobile satellite uplink services
of breaking news stories and of entertainment, sporting and other events for
major television networks and news gathering organizations in the United States
and internationally. DCT's newest subsidiary, DCT-Internet Corporation, provides
professional website design, maintenance and hosting for corporate clients
worldwide.
DCT, a Delaware corporation, was incorporated on November 12, 1987 under the
name MagneTech Corporation as a wholly-owned subsidiary of S.O.I. Industries,
Inc. (now Millennia, Inc.). The Company's shareholders changed the name to
Digital Communications Technology Corporation on April 29, 1994. DCT's Common
Stock has traded on the American Stock Exchange since May 23, 1994. As of June
30, 1997, Millennia, Inc. owned approximately 13% of the Company's issued and
outstanding Common Stock. The address of the Company's principal executive
office is 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248 and its telephone
number is (972) 248-1922.
Products
The Company is an integrated video communications company which offers video
tape duplication and satellite communications services. The video tape
duplication market is defined by (i) the use or application of the product and
(ii) the method by which the product is distributed.
Once solely confined to entertainment uses, video tapes are finding a broader
range of uses as communication devices. These uses include direct marketing,
product instruction, education and employee/stockholder communications.
Method of distribution further defines the home video business as one market.
While the video rental business buys tapes from duplicators. ASell-through," the
business of selling, rather than or in addition to renting videos, is another
market. Sell-through is generally used for products expected to be used more
than once. Many of the tape uses noted above are distributed via sell-through.
Further definition of markets by distribution are as follows:
"Catalog" which refers to special interest programming of which expected
low volumes cannot support more costly methods of distribution.
AAdvertising and Direct Mail" in which tapes are used as sales tools,
similar to written materials.
"Direct Response" in which tapes are used for instruction or motivation in
the use of equipment. Exercise equipment is a well-known example.
<PAGE>
"Corporate" in which tapes are used for employee communication, sales
training, and other functional purposes.
The Company offers its reproduction services to entertainment companies and a
wide range of industrial customers, including advertising agencies, direct
selling organizations and educational groups throughout the United States,
Canada and Latin America.
The Company's satellite operation consists of one mobile KU band unit which is
capable of transmitting live or pre-recorded programming from any location to
commercial satellites. The Company's satellite customers include local, national
and international broadcast network and/or cable television outlets, with signal
origination points located principally in the Southeastern United States.
Customers
During the year ended June 30, 1997, two customers, Madacy Entertainment Group
and National Syndications, accounted for approximately 36% of the Company=s
sales. During the year ended June 30, 1996, one customer, Madacy Entertainment
Group, accounted for approximately 17.6% of the Company=s sale.
Raw Materials and Manufacturing
The Company purchases bulk quantities of videotape ( pancake") and empty video
cassettes ( shells") for its reproduction business from several manufacturers at
market prices in the United States and the Pacific Rim. The videotape and video
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 one KU band
broadcasting truck, cameras, generators, telephonic equipment and 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 an adverse material effect on the Company's
business, financial condition and results of operations.
Properties
During 1997 and 1996, the Company had two videotape duplication facilities
located in Ft. Lauderdale, Florida and Indianapolis, Indiana. The Ft. Lauderdale
facility was composed of two adjacent buildings and covered a total of
approximately 22,000 square feet. This facility was a real-time duplication
facility with the capacity to duplicate an average of approximately 15,000
videos per day. The Indianapolis facility covers approximately 172,000 square
feet and is a new, automated, state of the art, high-speed duplication facility
with the capacity to duplicate 120,000 videos per day. The layout of the
Indianapolis facility is designed to optimize process flow, to reduce product
handling and to minimize the total cycle time of productions from order entry to
delivery.
In September 1997, as reported on Form 8-K, the Company announced the closing
and related sale of its Ft. Lauderdale production facility.
<PAGE>
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, 1997, the Company had a total of approximately 80 employees. None
of the employees are represented by a labor union, and the Company believes that
it has good relations with its employees.
On May 20, 1997, the Board of Directors removed Hugh C. Coppen as President and
Chief Executive Officer, positions he had held since May 1996. Mr. Coppen also
resigned as a director effective May 20, 1997. The causes precipitating Mr.
Coppen's removal were the poor results of operations for the quarter ended March
31, 1997, Mr. Coppen's failure to report such results to the Board in a timely
manner and his failure to take prompt action to reduce costs in proportion to
the reduced revenues experienced. Mr. Coppen was immediately replaced by
Clifford E. Patton, an experienced manufacturing executive who had been employed
by the Company for four months as a consultant.
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>
<S> <C> <C> <C> <C>
Approximate Sum Owned/ Lease Expiration
Location Primary Use (Square Feet) Leased Date
-------- ----------- --------------- ------ ----------------
Indianapolis, Indiana Duplication & Warehouse 172,000 Leased May 2007
Ft. Lauderdale, Florida Warehouse 12,000 Owned (1)
Ft. Lauderdale, Florida Duplication & Office 10,000 Leased August 2000
</TABLE>
(1) The Company purchased this facility on March 31, 1992 for a purchase price
of $398,000. On June 27, 1997, the Company entered into an agreement to
sell this facility for $525,000, and the sale closed during September 1997.
ITEM 3 - LEGAL PROCEEDINGS
The Company may from time to time be party to various legal actions arising
during the ordinary course of its business. In addition, the Company is
currently involved in the following litigation:
<PAGE>
On March 4, 1996, Richard Abrons, allegedly on behalf of the Company,
and Adrian Jacoby, allegedly on behalf of an affiliate company,
Millennia, Inc., formerly known as S.O.I. Industries, Inc.
("Millennia"), brought a purported shareholder derivative lawsuit
against the Company's board of directors - Kevin B. Halter, Kevin B.
Halter, Jr., Gary C. Evans and James Smith - as well as Halter
Capital Corporation and Securities Transfer Corporation. In addition,
the Company and Millennia have been joined as "nominal defendants."
In the lawsuit, the plaintiffs have alleged breaches of fiduciary
duty, fraud, and violations of state securities laws. The plaintiffs
seek unspecified actual and exemplary damages, a constructive trust
against the assets of the defendants and an accounting of the affairs
of the defendants with respect to their dealings with the Company and
Millennia. In addition, the plaintiffs have requested a temporary
injunction and the appointment of a receiver for the Company and
Millennia.
In 1995, Halter Capital Corporation ("HCC"), in which Kevin B. Halter
and Kevin B. Halter, Jr. (the "Halters") are principals, negotiated
the satisfaction of $1,217,000 in debt owed to creditors by
Millennia's subsidiary, American Quality Manufacturing Corporation
("AQM," since sold). The Halters are also officers and directors of
Millennia. HCC satisfied these debts by transferring, in the
aggregate, 1,659,000 shares of Millennia common stock it owned to the
creditors. To repay HCC for the AQM indebtedness HCC paid, Millennia
transferred to HCC 1,622,000 shares of DCT Common Stock it held as an
investment. With the payment of DCT Common Stock to HCC and the
salaries or other compensation received from Millennia by the
Halters, Mr. Evans and Mr. Smith, plaintiffs assert that each
breached their duties of loyalty, usurped corporate opportunities and
committed gross mismanagement by wrongfully using Millennia and DCT
as instruments for their own and HCC's pecuniary gain to the
detriment of Millennia, DCT and their shareholders. If any damages
are ultimately awarded to the plaintiffs, those damages will be on
behalf of, and for the benefit of, the Company and all of its
shareholders. If they are successful, the plaintiffs may recover
certain attorney's fees and costs. This case is entitled Richard
Abrons et al v. Kevin B. Halter et al, Cause No. 96-02169-G, in the
134th Judicial District, Dallas County, Texas. Even though the
Company is a nominal defendant in the lawsuit, the Plaintiffs have
not sought to recover any damages against the Company. In this type
of lawsuit, the Company is joined as a procedural matter to make it a
party to the lawsuit.
All of the defendants have answered and denied the allegations
contained in the plaintiffs' Petition. A certain amount of discovery
has been conducted by both plaintiffs and defendants. All of the
defendants deny all of the material allegations and claims in the
Petition, dispute the plaintiffs' contention that it is a proper
shareholder derivative action, deny that the plaintiffs have the
right to pursue this lawsuit on behalf of the Company and Millennia
and are vigorously defending the lawsuit. In addition, the defendants
have filed counterclaims against the plaintiffs and third party
actions against Blake Beckham, Attorney at Law, Beckham & Thomas,
L.L.P., Sanford Whitman, the former CFO of the Company and Jack D.
Brown Jr., the former President of the Company, seeking damages in
excess of $50 million. In its counterclaim, the defendants have
asserted that the filing of this lawsuit and the temporary
restraining order the plaintiffs caused to be issued in the case
resulted in damages to the Company. However, the Company does not
believe that the lawsuit will have any further material impact on the
operations or financial condition of the Company. Discovery is
continuing and the matter has not been set for trial.
In February 1996, Convention Tapes International, Inc., a Florida
corporation, filed a civil action in the Circuit Court of the 11th
Judicial Circuit for Dade County, Florida, against Tapes Unlimited,
Inc. and MagneTech Corporation for damages "in excess of $50,000"
allegedly resulting from breach of contract and warranty, and
fraudulent inducement and/or negligent misrepresentation on the part
of Tapes Unlimited. MagneTech Corporation is the previous name of the
Company, and Tapes Unlimited was an Orlando, Florida subsidiary of
the Company from March 1994 until Tapes Unlimited was dissolved in
October 1995. Tapes Unlimited ceased operations in June 1995.
MagneTech Corporation is a named defendant against whom plaintiff
asserts vicarious or successor liability for its alleged damages,
claiming that Tapes Unlimited was the "alter ego" or "mere
instrumentality" of MagneTech. Upon motion of the defendants, in July
1996 the civil action was transferred to the Circuit Court in Orange
County, Florida, Case No. CI96-5851.
As best the Company has been able to determine, in February 1995
Tapes Unlimited duplicated certain videotapes for plaintiff from
videotape masters provided by plaintiff. Plaintiff alleges that the
duplicates delivered by Tapes Unlimited contained, in part,
extraneous and pornographic material which caused plaintiff to lose
the business of a certain account, as well as the prospective
business of other, unspecified persons. The plaintiff has since
ceased doing business.
<PAGE>
While this matter has been pending over one year, the litigation is
still in its early stages. Plaintiff=s counsel has just advised that
he intends to amend the Complaint to add Halter Capital Corporation
and Kevin Halter, Sr. as party defendants. Two depositions have been
taken and preliminary documents have been exchanged. Due to the early
stages of discovery, no evaluation of the likelihood of an
unfavorable outcome can be made. Management intends, however, to
vigorously contest any liability to Convention Tapes International,
Inc.
The Company does not believe that it is currently involved in any additional
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
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock
The authorized capital stock of the Company includes 25,000,000 shares of Common
Stock, $.0002 par value, all of the same class. The following is a summary of
the material terms of the Common Stock and is qualified in all respects by
reference to the Delaware General Corporation Law and to the Company's
Certificate of Incorporation, and Certificates of Amendments thereto, which have
previously been filed with the US Securities and Exchange Commission.
On June 30, 1997, the closing price of the Common Stock was $0.69 per share. As
of June 30, 1997, 7,315,022 shares of Common Stock were outstanding, held of
record by 571 shareholders. DCT believes that approximately 1,885 additional
holders of Common Stock are represented in Common Stock certificates held in
"street names" in brokerage accounts. The holders of the Common Stock are
entitled to receive dividends when and as declared by the Board of Directors out
of any funds lawfully available therefor. Holders of Common Stock are entitled
to one vote per share on all matters on which the holders of Common Stock are
entitled to vote and such voting rights are non-cumulative. There are no
preemptive rights associated with any of the shares of Common Stock. In the
event of liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share equally and ratably in the assets of the
Company, if any, remaining after the payment of all debts and liabilities of the
Company. All of the outstanding shares of Common Stock are fully paid and
nonassessable.
<PAGE>
The Common Stock has been listed on the American Stock Exchange (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.
High Low
----- -----
Fiscal 1996 First Quarter $1.79 $1.25
- -----------
Second Quarter $1.56 $1.00
Third Quarter $4.38 $1.06
Fourth Quarter $3.94 $1.81
Fiscal 1997 First Quarter $2.63 $1.25
- -----------
Second Quarter $1.56 $1.13
Third Quarter $1.50 $0.94
Fourth Quarter $1.13 $0.56
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.
Stock Options for Common Stock
The Company has outstanding approximately 271,625 stock options under its 1990
Employees' Stock Option Plan. Each outstanding stock option entitles the holder
to purchase one share of Common Stock at exercise prices ranging from $1.00 to
$3.44. All of these outstanding stock options are presently exercisable for a
period of five years from the date of issuance, and all will expire by their
terms on January 12, 2001 or before. 9,370 options remain reserved for future
issuance under the 1990 Employee Stock Option Plan.
On April 2, 1996, the Company entered into agreements with three management
employees whereby the Company would issue to such employees a number of
incentive stock options based upon the Company's income before taxes for the
year ended June 30, 1997. Two of the employees, Hugh C. Coppen and Robert A.
Byrne, Jr., have left the Company and will receive no incentive stock options
under their agreements with the Company. Under the agreement with Jim Weinberg,
he will receive 50,000 incentive stock options which will vest as of June 30,
1997 and be exercisable for a period of five years. Each of these incentive
stock options will entitle Mr. Weinberg to purchase one share of Common Stock at
an exercise price of $2.00.
All shares of Common Stock issued pursuant to exercise of stock options under
the Company's 1990 Employee Stock Option Plan and under the three agreements
with management employees are not registered securities under the Securities
Act, and the Company has no present intention of registering such securities
under the Securities Act, making the sale of such Common Stock subject to
strictures imposed by Rule 144 under the Securities Act.
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of Preferred Stock,
$.00001 par value. The following is a summary of the material terms of the
Preferred Stock and is qualified in all respects by reference to the Delaware
General Corporation Law and to the Company's Certificate of Incorporation, and
Certificates of Amendments and Certificate of Designations thereto, which have
been filed with the Commission and are incorporated by reference into the
Registration Statement of which this Prospectus is a part.
<PAGE>
Preferred Stock may be issued by the Company with such designations, rights and
preferences as may be determined from time to time. Accordingly, the Board of
Directors is empowered, without stockholder approval, to issue Preferred Stock
with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of Common
Stock. In the event of issuance, the Preferred Stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company.
On May 6, 1996, the Company issued and sold 100,000 shares of Series A
Convertible Preferred Stock in a private placement. The holder of the shares of
Series A Preferred Stock, pursuant to the designated terms for such stock, has
converted all shares of the series into 968,430 shares of Common Stock at an
average per share conversion price of $1.08. The terms of the Preferred Stock,
which provided for a lower conversion price than the quoted market price of the
Common Stock at the time of conversion, resulted in an aggregate difference of
approximately $250,000. Such terms took into account a number of factors
affecting value, including the ability to market a significant number of shares
of the underlying common stock which were negotiated at the time of the issuance
of the Preferred Stock.
No shares of Preferred Stock are currently outstanding, and the Company has no
present intention to issue any shares of its Preferred Stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is Securities Transfer
Corporation, located in Dallas, Texas.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Results of Operations
Fiscal Year ended June 30, 1997
Overview
Digital Communications Technology Corporation ("the Company") experienced an
approximate drop in net sales for the year ended June 30, 1997 of approximately
$2.25 million or 9.1% from the prior year ended June 30, 1996. The operating
loss for the year was approximately $3.1 million. The decrease in net sales and
increases in general and administrative expenses were the principal contributors
to the operating loss.
Liquidity
The Company generated approximately $242,000 and $2,280,000 in cash from
operating activities during the years ended June 30, 1997 and 1996,
respectively. The Company's operating cash position is due primarily to
decreases in the level of inventories.
Accounts payable increased approximately $462,000 for the year ended June 30,
1997 as compared to a decrease of approximately $866,500 for the same period
ended June 30, 1996. The increase in accounts payable in the current period is
due primarily to cash management practices related to lower net sales and
increased operating expenses related to the relocation and expansion of the
Indianapolis facility.
Accounts receivable increased approximately $86,000 from the balance at June 30,
1996. Management will continue to monitor this area to improve credit and
collections efforts, although there can be no assurances that these efforts will
be successful.
<PAGE>
Overall inventory levels declined by $1,184,000 from June 30, 1996 to June 30,
1997. The reduction is primarily due to the decrease in sales volume that has
slowed the level of raw material purchases. Management has been successful in
its efforts to ensure that the least amount of operating cash is invested in
inventory by insisting that shipments of raw materials are made on a
just-in-time basis. Inventory levels, particularly in the work-in-process and
finished goods categories, will fluctuate somewhat depending on the size and
number of video tape duplicating orders processed at any given time. Typically,
the Company does not stock significant quantities of finished products, shipping
orders immediately upon completion.
Approximately $1,168,000 in net cash was used in investing activities during the
year ended June 30, 1997 as compared to approximately $34,000 in cash being
provided by investing activities during the prior year. The primary reason for
this significant change in position is the increase in capital expenditures
during Fiscal 1997 and realized losses experienced from the sale of marketable
securities.
The Company utilized its line of credit to provide approximately $677,000 for
working capital needs during the year ended June 30, 1997 and repaid
approximately $527,000 in long-term debt. Management intends to selectively
utilize its line of credit, as available, to fund future working capital
requirements when needed.
During the year ended June 30, 1997, the Company's cash needs were met primarily
through existing cash reserves, cash provided by operations and net advances on
the Company's line of credit. This line of credit facility allows the Company to
borrow funds up to a certain collateral base, not to exceed $5,000,000. The
collateral base is comprised of a fixed percentage of eligible accounts
receivable and inventory, as defined in the credit agreement. On August 21,
1997, the Company=s lending institution notified the Company that the lending
institution intends, 120 days subsequent to the notice, to stop making further
advances on the line of credit and accelerate the maturity of the debt then
owed. As a result of this action, the Company has determined that it is in the
best interest of the Company to obtain a substitute lending institution and is
currently in ongoing negotiations to secure replacement financing.
The Company anticipates that it will be able to replace its line of credit in a
manner satisfactory to both a new lending institution and to the Company.
Accordingly, the Company intends to continue the utilization of a line of credit
to fund working capital needs in future periods. Long term capital requirements
are anticipated to be met through separate financing/leasing arrangements as
necessary. However, should the Company experience a cash shortfall in the
future, proceeds from the liquidation of Company's marketable securities
portfolio can be utilized.
In addition, the Company has additional debt with bank in the form of two term
loans. The first is a $1,800,000 term loan that is amortized over five years and
a $1,950,000 capital expenditure line of credit that is also amortized over five
years. Only $200,000 was drawn upon the capital expenditure line of credit as of
June 30, 1997. Both of these facilities are collateralized by equipment.
All facilities with the bank contain certain financial performance covenants
including tangible net worth and tangible leverage and fixed charge coverage
ratios. As of June 30, 1997, the Company failed to meet the covenant
requirements for the tangible net worth, the fixed charge coverage ratios and
the limitation on unrealized losses on marketable securities. There can be no
assurances that the Company will be able to meet future financial performance
covenants or that this credit facility could be replaced with another. The
Company is currently reporting the financial performance covenants on a monthly
basis. Additionally, the Company is seeking a substitute lending institution to
replace its existing bank financing package.
The cash overdraft balance at June 30, 1997 is the result of a controlled
disbursement account that was initiated as a component of the current bank
financing relationship with Bank One. This type of account will always have a
negative book balance and a zero or slightly positive bank balance as this
primary disbursement account is not funded until the day the respective
disbursement checks are presented to the bank.
<PAGE>
Capital Resources
The Company invested approximately $2,349,000 in equipment and leasehold
improvements during the year ended June 30, 1997. These capital outlays related
primarily to expenditures for duplication, loading, packaging, and leasehold
improvements at both the Company's Indianapolis and Ft. Lauderdale facilities.
The equipment additions in the Ft. Lauderdale facility will be relocated to the
Indianapolis facility as a result of the September 1997 closing of the Ft.
Lauderdale facility. The Company relocated and expanded the entire Indianapolis
facility into a new 172,000 square foot building during 1997. The Indianapolis
plant opened in June 1997 with an increased capacity of approximately 20%. The
new facility layout is designed to optimize process flow, to reduce product
handling and to minimize the total cycle time of productions from order entry to
delivery. In addition, the Company has budgeted approximately $2.0 million for
future capital expenditures to continue upgrading, updating and expansion of its
videotape duplication facilities, as necessary, in order to continue to meet the
quality, production and delivery requirements of the Company=s new and existing
customers. Any such expenditures, if necessary, would be financed through
operations and separate financing/leasing arrangements. There can be no
assurances, however, that the Company will actually incur these budgeted
expenditures.
Results of Operations
Net sales of $22.5 million for the year ended June 30, 1997 as compared with
$24.8 for the previous year. Fiscal 1996 generated the highest sales volume in
the Company=s history. Additionally, net sales for the three months ended June
30, 1997 (the Company's fourth operating quarter) decreased sharply by
approximately 50.7% to $2,757,000, down from approximately $5,595,000, the
highest ever sales for the quarter in the same period ended June 30, 1996. The
significant sales decrease during the six months ended June 30, 1997 can be
attributed to an industry wide decline in the six months that is the result of a
severe retail backlog caused by the closure of many stores in several large
retail chains. Product from these chain stores went back into the market,
providing other chains with the opportunity to buy distressed merchandise at
significantly reduced cost, and thus slowing further the third and fourth fiscal
quarter sales which are traditionally very slow. At the same time, other chains
achieved sharp, margin-driven reductions in inventory levels by reducing in
store quantities and by returning significant amounts of unsold product to their
vendors, which are the Company=s customers. In addition, releases of theatrical
product into video outlets lacked any real hits to draw people into retail, and
generally mild winter weather across the country reduced rental and sell-through
activity. It is important to note that the decline in sales volume is not
attributable to a loss of any major accounts to competitors, nor have any of the
Company's key customers gone out of business. The industry consensus is that the
overall industry sales activity during the first half of Calendar 1997 was
significantly slower than expected.
Operating profit also fell sharply, declining from a profit of approximately
$428,000 (1.7% of net sales) to a loss of approximately $3,085,000 (-13.7% of
net sales) for the years ended June 30, 1996 and 1997, respectively. The decline
in operating profit for the year is principally due to the decline in net sales,
increases in cost of goods sold as a percentage of sales and general and
administrative expenses.
Cost of goods sold, as a percentage of sales, increased to 85.4% for the year
ended June 30, 1997 as compared to 81.7% for the year ended June 30, 1996. The
increased cost of goods sold is directly attributable to increased usage of
temporary labor and the cost of offloading excess production volumes to other
duplicators during the first and second fiscal quarters. Use of these outside
sources was unavoidable in order to complete customer orders that exceeded
existing capacity at both facilities. The lack of sufficient capacity was due to
severely limited space in the current buildings and unexpected delays in the
installation of new equipment. Management has already taken the steps necessary
to provide for the increase in sales volume by providing for new duplication and
packaging equipment. In addition, due to the fixed nature of several direct
overhead components, particularly depreciation, the cost of goods sold
percentage will increase in periods where sales severely decline - such as the
third and fourth quarters of Fiscal 1997. Management recognizes that cost
containment through efficiency gains and productivity improvements is essential
to the Company's continued profitable growth and will continue to implement
actions to improve the Company's performance in this area. There can be no
assurances, however, that any such actions will be successful.
Selling expenses as a percentage of net sales increased slightly from 4.9% to
5.1% for the years ended June 30, 1996 and 1997, respectively. The increase is
due to sales commissions paid.
<PAGE>
General and administrative expenses increased for the year ended June 30, 1997
to approximately $3,470,000 (15.4% of net sales) as compared to approximately
$1,733,000 (7.0%) for the prior year. The increase in the percentage of general
and administrative expenses to net sales is attributable to the relocation of
the Indianapolis facility, salary increases and additional legal fees incurred
in connection with the shareholder derivative lawsuit. The Company realized
losses from securities transactions of approximately $343,000 for the year ended
June 30, 1997 as compared to realized gains of approximately $360,000 for the
prior year. The Company invests funds in equity securities, mainly listed on the
New York and American Stock Exchanges, and by policy, limits the amount of
exposure in any one equity investment. Such investments are continually
monitored to reduce the risk of any adverse stock market volatility. Cash not
invested in securities is placed on account with brokerage firms, which is swept
daily into a federally insured money market account, or placed on account with a
federally insured national bank.
Interest expense decreased sharply from approximately $639,500 to $429,500 for
the years ended June 30, 1996 and 1997, respectively. This decrease is due to
reduced borrowings on the Company's line of credit and the lack of interest
expense related to any borrowings from the Company's marketable securities
portfolio.
During June 1995, the Company's management decided to discontinue the operations
of Tapes Unlimited, Inc. (TU). Management believed that the cost of maintaining
the TU subsidiary outweighed the benefits provided to the Company. Although all
operations at TU have ceased, certain collection efforts are still conducted by
the Company on behalf of TU. These efforts, along with debt forgiveness
resulting from settlements with TU creditors, resulted in recoveries which is
reflected, net of related expenses, in the income from discontinued operations
of approximately $131,000 net of income taxes, for the year ended June 30, 1996.
Such efforts are still ongoing, but did not produce significant recoveries
during the year ended June 30, 1997.
<PAGE>
Management's Plans for Addressing Financial Results for Fiscal 1998
The Company's two video duplicating facilities differed dramatically in the kind
of customer served by each. At its Fort Lauderdale, Florida facility, the
Company handled regional "short run" or low volume duplication onto
videocassettes for advertising agencies, television stations, direct selling
organizations, educational groups and individuals. The gross margins possible on
such low-volume duplicating is much greater than for the mass duplication of
videocassettes that occurs at the Company's Indianapolis, Indiana facility.
After the financial results experienced for the quarter ended March 31, 1997,
management significantly downsized its operations at Fort Lauderdale by reducing
its labor force from about 70 to approximately 30, consolidating operations from
two buildings into a single 10,000 square foot leased building and reducing
daily operations from two shifts to one. Further, all accounting, electronic
data processing and customer service operations were consolidated at the
Company's plant in Indianapolis during the third quarter of Fiscal 1997.
Evaluation of the results of operations during the fourth quarter of Fiscal 1997
caused the Company to completely close all operations in the Ft. Lauderdale
facility and consolidate all videotape duplication activities in Indianapolis.
The Company entered into a contract to sell the vacated 12,000 square foot
building owned in Ft. Lauderdale and the sale closed during September 1997.
Further, due to the Company=s eliminating its presence in South Florida, the
Company also elected to close its mobile satellite uplink service operation and
sell the related assets. This asset sale is anticipated to close in September
1997.
At its plant in Indianapolis, the Company does high volume videocassette
duplicating for its national clients, both sell-through and rental, who can shop
across the country, even world-wide, for "best" prices. These operations
contributed heavily to the overall losses the Company experienced for the year
ended June 30, 1997. Even with the consolidation at Indianapolis of all of the
Company's videotape duplication, accounting, electronic data processing and
customer service operations, the work force at the plant was reduced from about
105 in April 1997 to approximately 50 currently, all working in one shift rather
than the two shifts employed before. In addition to seeking new mass-volume
customers, management is also offering incentives to current customers to
anticipate their future duplicating requirements with current orders so as to
increase current cash flows and level out duplicating demand which typically
peaks during the fall months. These incentives are anticipated by management to
favorably impact future financial results. However, there can be no assurance
that the actions taken by management will result in profitable operations at
Indianapolis or for the Company as a whole. If the Indianapolis plant does not
contribute more substantially to the Company's net sales for the balance of the
1997 calendar year, more reductions in force will occur and management may also
seek to sell excess manufacturing assets.
Fiscal Year ended June 30, 1996
The Company's sales continued to grow with a 19% increase over the previous
year. However, the Company experienced a decline in operating profits from
approximately $811,000 to $428,000 for the years ended June 30, 1995 and 1996,
respectively. Increased operating costs, primarily related to increased cost of
goods sold, caused the lower operating results. These increased operating costs
were partially offset by decreases in interest expense and income from the
discontinued operations of Tapes Unlimited, Inc. ( TU").
Overall growth in the Company's target markets and overall growth in demand for
video tapes throughout the industry led to continued sales growth. Net sales
increased approximately 19% from $20,894,000 to $24,807,000 for the years ended
June 30, 1995 and 1996, respectively. Significant sales increases were
experienced primarily in the Company's third and fourth fiscal quarters. This
sales growth was due to the expansion of the Company's fulfillment services
along with expanded orders from existing customers as the Company's reputation
for providing quality products grew. As in the prior fiscal years, management's
focus on the "retail-sell-through market" also contributed to the overall sales
growth.
<PAGE>
The Company's sales to the retail-sell-through market focuses on sales of
pre-recorded video tapes which are sold at the retail level. The Company's
customer base has become increasingly dominated by the companies which
distribute these pre-recorded videos to the retail-sell-through market, and
through investment in high-speed equipment optimally suited to the production of
extended play programming, management has positioned the Company to capitalize
on this portion of the video industry. Fulfillment services utilize the
Company's ability to prepare packages that include other promotional material
and packaging, along with the video tape. After assembly, these packages are
then sent to multiple consumer or retail destinations as stipulated by the
Company's customers. Management hopes to increase sales in this market segment
by continuing to reorganize the facilities and by building a reputation for
quality and reliability in the industry.
Operating profit did not keep pace with the increased sales, declining from
approximately $811,000 (3.9% of net sales) to $428,000 (1.7% of net sales) for
the years ended June 30, 1995 and 1996, respectively. The decline in operating
profit was due to increases in cost of goods sold.
Cost of goods sold as a percentage of sales increased to 82% for the year ended
June 30, 1996 as compared to 77% for the year ended June 30, 1995. The increased
cost of goods sold was related primarily to the sale of reworkable inventory in
the fourth fiscal quarter. Management decided to sell an excess accumulation of
reworkable inventory in order to provide needed warehouse space and improve
operating cash flow in anticipation of peak season demand in the fall. In the
past, sufficient profit margins had existed which supported the labor required
to rework this product and restore it to its full, saleable condition. This
decision had a negative impact on operating profits (approximately 3%) since
previous unit costs exceeded the resale market prices. In addition, pricing
pressures in the market have continued to restrict profit margins. Management
will continue to focus on cost containment, especially in labor and overhead
costs, to ensure more efficiency is obtained and thereby reducing the cost per
unit as sales volumes increase. Management is also continuously exploring
alternative sources for its raw materials to reduce material costs.
General and administrative expenses decreased slightly for the year ended June
30, 1996. As a percentage of net sales, these expenses decreased from
approximately 9% to 7% for the year ended June 30, 1995 and 1996, respectively.
This decrease was due primarily to the lack of a large provision for doubtful
accounts as experienced in the previous year. In addition, management fees
previously paid to Millennia were discontinued in December 1995. The significant
decrease was partially offset in the year by substantial increases in legal and
professional expenses and an increase in officers and management salaries. Legal
fees were incurred in connection with the shareholder derivative lawsuit. Other
professional fees were incurred in connection with the upgrade of the Company's
existing computer system.
Selling expenses increased in direct proportion to the increase in net sales for
the year ended June 30, 1996. As a percentage of net sales, selling costs
remained consistent at approximately 4.9% for the years ended June 30, 1995 and
1996.
Interest expense decreased from approximately $700,000 to $640,000 for the years
ended June 30, 1995 and 1996, respectively. This decrease was due to repayments
made on the Company's line of credit. The reduction was partially offset by
margin interest paid in connection with the Company's marketable securities
portfolio.
The Company realized income from securities transactions of approximately
$361,000 for the year ended June 30, 1996 as compared to approximately $513,000
for the year ended June 30, 1995. The gains were from investment transactions
associated with the Company's marketable securities portfolio. At June 30, 1996,
two equity investments accounted for approximately 67% of the total investments.
Such investments are continually monitored to reduce the risk of any adverse
stock market volatility.
<PAGE>
Liquidity
The Company provided approximately $2,280,000 in cash from operating activities
for the year ended June 30, 1996 as compared to approximately $109,000 in cash
used by operating activities for the year ended June 30, 1995. The change in the
Company's operating cash position was due primarily to the significant decrease
in the level of inventory. In addition, net income of approximately $223,000
during the year ended June 30, 1996 contributed to cash as compared to the net
loss generated in the year ended June 30, 1995 of approximately $282,000. Other
items that affected cash from operating activities for the year ended June 30,
1996 were changes in accounts receivable, accounts payable and prepaid expenses.
Overall inventory levels decreased approximately 29% from June 30, 1995 to June
30, 1996. The raw materials component of inventory dropped by 37% while the
work-in-process and finished goods components remained relatively consistent.
The large decrease in raw materials was due to the focus of management to ensure
that the least amount of operating cash was invested in inventory by insisting
that shipments of raw materials were made on a just-in-time basis and by
minimizing the amount of raw materials purchased. In addition, during the fourth
quarter of fiscal year 1996, management decided to sell off an excess
accumulation of reworkable inventory in order to provide needed warehouse space
and improve operating cash flow in anticipation of peak season demand in the
fall. In the past, sufficient profit margins had existed which supported the
labor required to rework this product and restore it to its full, saleable
condition. This decision had a negative impact on operating profits
(approximately 3%) since previous unit costs exceeded the resale market prices.
The decreased inventory level and the higher net sales contributed to an
improved inventory turnover rate that increased from 5.2 times for the year
ended June 30, 1995 to 5.9 times for the year ended June 30, 1996. Inventory
levels, particularly in the work-in-process and finished goods categories, will
fluctuate somewhat depending on the size and number of video tape duplicating
orders processed at any given time. Typically, the Company does not stock
significant quantities of finished products, shipping orders immediately upon
completion.
Accounts receivable decreased approximately $76,000 for the year ended June 30,
1996 as compared to an increase of approximately $891,000 for the year ended
June 30, 1995. The Company's accounts receivable collection period (measuring
how quickly, on average, the Company collects its accounts receivable) decreased
from approximately 74 days at June 30, 1995 to approximately 61 days at June 30,
1996. The decrease is due primarily to the write-off of significant accounts in
1996 that were previously reserved in the year ended June 30, 1995. The above
write-off, improved collection efforts, and the lack of any large delinquent
accounts allowed the Company to decrease its allowance for doubtful accounts
from approximately $1,065,000 to $414,000 as of June 30, 1995 and 1996,
respectively. Despite the improved collection periods, the Company continued to
receive competitive pressures from its customers to grant longer payment terms.
Management will continue to monitor collections and outstanding accounts
receivable to ensure timely collection.
Accounts payable increased approximately $867,000 for the year ended June 30,
1996 as compared to an increase of approximately $404,000 for the year ended
June 30, 1995. The increase was due primarily to the growth in sales volume that
has dictated additional raw material, equipment and supply purchases. In
addition, reductions in the outstanding balance on the revolving line of credit
have contributed to the increase.
Prepaid expenses and other current assets increased approximately $269,000 for
the year ended June 30, 1996 as compared to an increase of approximately
$314,000 for the year ended June 30, 1995. The increase is primarily related to
income tax receivables based on anticipated refunds due to the Company's net
taxable loss in the current year.
Approximately $34,000 was provided by investing activities for the year ended
June 30, 1996 as compared to the use of approximately $2,005,000 for the year
ended June 30, 1995. The primary sources of funds were an approximate $188,000
decrease in loans receivable from affiliate companies and an approximate
$1,120,000 decrease in the Company's marketable securities portfolio.
The Company utilized approximately $2,215,000 to reduce its indebtedness on its
credit line agreement during the year ended June 30, 1996 and repaid
approximately $778,000 in long term debt. In addition, approximately $79,000 in
cash was generated in 1996 from issuances of Common Stock in connection with
bonuses and other employee compensation. On May 6, 1996 the Company generated
$930,000 with the sale of 100,000 shares of Series A Convertible Preferred Stock
in a private placement. The Series A Convertible Preferred Stock was convertible
into the Company's Common Stock at a 20% discount to the market price at the
date of conversion. All Series A Convertible Preferred Stock has been converted
to Common Stock.
<PAGE>
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.
During the year ended June 30, 1996, the Company's cash needs were met primarily
through operations. Long-term liquidity needs are anticipated to be met through
sales growth and separate financing arrangements. Management anticipates that it
will continue to meet most obligations as they come due, and no vendor/supplier
problems are expected.
Capital Resources
The Company invested approximately $1,388,000 in equipment and leasehold
improvements for the year ended June 30, 1996. Expenditures during the year
consisted primarily of the following: a high speed video duplication system at
the Company's Ft. Lauderdale facility (subsequently relocated to the
Indianapolis facility), and factory upgrades for all nine high-speed duplicators
located in Indianapolis. These upgrade kits increased the output yield of the
equipment by 45%. These expenditures were financed through operations and
borrowings on the Company's line of credit. The capital expansion has included
the acquisition of 482 real-time duplicators at the Ft. Lauderdale facility
which have been relocated to Indianapolis. The Company plans to continue
upgrading, updating and expansion of its videotape duplication facilities, as
necessary, in order to continue to meet the quality, production and delivery
requirements of the Company=s new and existing customers.
On November 6, 1996 the Company signed a new credit agreement with Bank One,
N.A. ( Bank") which replaced the existing facility with NBD Bank. The financing
consists of a revolving line of credit, term loans and a long term lease
agreement. Under the revolving line of credit, borrowings can be made up to
$5,000,000 based upon collateral values as determined under the agreement. The
term loans consist of a $1,800,000 secured term loan and a capital expenditure
term loan facility for up to $1,950,000, based upon 80% of the acquisition costs
of new machinery and equipment. The long term lease agreement is collateralized
with new equipment in excess of $700,000 in value. All borrowings are
collateralized by accounts receivable, inventory and equipment. The facility has
a two year term and includes interest rates at .25% and .50% above the Bank's
base rate (closely related to the Bank's prime interest rate), which base rate
is currently 8.5% per annum.
The agreement contains certain financial performance covenants pertaining to the
Company's tangible net worth and tangible leverage and fixed charge coverage
ratios. As of June 30, 1997, the Company failed to meet the covenant
requirements for tangible net worth, fixed charge coverage ratio and the
limitation on unrealized losses on marketable securities. On July 9, 1997, the
bank notified the Company that its failure to meet these covenant requirements
constitute events of default under the agreement. Until these events of default
are cured or waived, the bank has determined to not make any further advances
under the capital expenditure term loan and to not make any overadvances under
the remaining facilities until the Company has submitted a business recovery
plan acceptable to the bank. Meanwhile, the bank, under the terms of the
agreement, has begun charging a default interest rate of 13% per annum on all
outstanding obligations under the facility.
The Company is endeavoring to obtain the bank's acceptance of a recovery plan
and is currently reporting its performance under the respective financial
covenants to the bank on a monthly basis. The Company is involved in ongoing,
frequent discussions with the bank seeking either an amendment to the agreement
with respect to the financial performance covenants or a waiver of the default
that has occurred. There can be no assurance that the Company will be able to
secure either an amendment to the agreement or a waiver of the default. There
can be no assurances that the Company will be able to meet financial performance
covenants under the agreement in the future or that this credit facility could
be replaced with another, if terminated.
<PAGE>
Other Items
The costs of the Company's products are subject to inflationary pressures and
commodity price fluctuations. In addition, the Company from time to time
experiences increases in cost of materials and labor, as well as other
manufacturing and operating expenses. The Company's ability to pass along such
increased costs through increased prices has been difficult due to competitive
pressures. The Company attempts to minimize the effects of inflation on its
operations by controlling these costs.
The Company's sales levels generally follow the retail-sell-through markets,
which typically peak in the fall and early winter months as retail demand and
holiday orders are met. The Company has attempted to mitigate this seasonality
by increasing sales efforts to lower volume, but higher margin, customers such
as those involved with corporate communication duplication and the video rental
market. Finally, management intends to focus its marketing efforts toward the
direct marketing industry to help mitigate the seasonality of the
retail-sell-through markets. Even by utilizing these techniques, sales levels
are still expected to be lower in the spring and summer months.
Statement of Financial Accounting Standards ( SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
was effective for fiscal years beginning after December 15, 1995. This statement
requires that long lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The effect of this
pronouncement has not had a material impact on the financial position and
results of operations of the Company.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation" was effective for transactions entered into in fiscal years that
begin after December 15, 1995. This pronouncement established financial
accounting and reporting standards for stock-based employee compensation plans.
It encourages, but does not require companies to recognize expense for grants of
stock, stock options and other equity instruments to employees based on fair
value accounting rules. Companies that choose not to adopt the new fair value
accounting rules will be required to disclose pro forma net income and earnings
per share under the new method. The Company has adopted the disclosure
provisions of SFAS No. 123 and the effect of adopting this pronouncement did not
a material effect on the financial position and results of operations of the
Company.
<PAGE>
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (FAS 128). FAS 128
specifies new standards designed to improve the EPS information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of EPS
data on an international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS and
replacing it with basic EPS, with the principal difference being that common
stock equivalents are not considered in computing basic EPS, (b) eliminating the
modified treasury stock method and the three percent materiality provision, and
(c) revising the contingent share provisions and the supplemental EPS data
requirements. FAS 128 also makes a number of changes to existing disclosure
requirements. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. The Company has not
yet determined the impact of the implementation of FAS 128.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, AReporting Comprehensive Income@ (SFAS
130). SFAS 130 establishes standards for reporting and display of comprehensive
income. The purpose of reporting comprehensive income is to present a measure of
all changes in equity that result from recognized transactions and other
economic events of the period other than transactions with owners in their
capacity as owners. SFAS 130 requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated capital in the equity section of the balance sheet. SFAS 130 is
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. The Company has not yet determined the impact, if any, of
the implementation of SFAS 130.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, ADisclosures About Segments of an
Enterprise and Related Information@ (SFAS 131). SFAS 131 specifies revised
guidelines for determining an entity=s operating segments and the type and level
of financial information to be disclosed. Once operating segments have been
determined, SFAS 131 provides for a two-tier test for determining those
operating segments that would need to be disclosed for external reporting
purposes. In addition to providing the required disclosures for reportable
segments, SFAS 131 also requires disclosure of certain Asecond level@
information by geographic area and for products/services. SFAS 131 also makes a
number of changes to existing disclosure requirements. SFAS 131 is effective for
fiscal years beginning after December 15, 1997, with earlier application
encouraged. The Company has not yet determined the impact, if any, of the
implementation of SFAS 131.
ITEM 7 - INDEX TO FINANCIAL STATEMENTS
The required accompanying financial statements begin on page F-1 of this
document.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information about the executive officers
and directors of the Company.
<TABLE>
<S> <C> <C>
Name Age Position
Clifford E. Patton 52 President and Chief Executive Officer
Kevin B. Halter 61 Chairman of the Board of Directors
Jim Weinberg 41 Chief Operating Officer
Douglas L. Miller 31 Former Vice President and Chief
Financial Officer
Kevin B. Halter, Jr. 36 Vice President, Secretary and Director
Gary C. Evans 40 Director
James Smith 60 Director
Don R. Benton 66 Director
</TABLE>
Set forth below is a description of the backgrounds of the executive officers
and directors of the Company.
Clifford E. Patton has served as President and Chief Executive Officer of the
Company since May 1997. Mr. Patton has been in manufacturing management more
than 12 years. Immediately prior to being named President and Chief Executive
Officer, Mr. Patton had been employed by the Company for four months as a
consultant, directing the relocation of the Company's operations in Indianapolis
into new and expanded quarters. From 1994 to 1996, he served as President and
Chief Executive Officer of American Quality Manufacturing Corporation. From 1992
to 1994, Mr. Patton was Vice President and General Manager of American Cabinet,
Inc. and, from 1989 to 1992, he was General Manager of the Color Tile, Inc.
manufacturing plant in Melborn, Arkansas. From 1985 to 1989, Mr. Patton was Vice
President and General Manager of the Brinkley Motor Products Division of
Franklin Electric Company at Brinkley, Arkansas.
Kevin B. Halter has served as Chairman of the Board of DCT since June 28, 1994
and as Vice Chairman of the Board of DCT from February 1994 to June 1994. Mr.
Halter served as Chief Executive Officer of DCT from June 1994 to May 1996. Mr.
Halter has served as President, Chief Executive Officer and Chairman of the
Board of Millennia since June 28, 1994. Mr. Halter also served as Vice Chairman
of the Board of Millennia from January 1994 to June 28, 1994. Mr. Halter also
served as Chairman of the Board of Directors of American Quality Manufacturing
Corporation (AAQM@) until September 1996. 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 then based in Dallas, Texas. Mr. Halter is
the father of Kevin B. Halter, Jr.
Jim Weinberg has served as Chief Operating Officer since May 1997, a position he
also held with the Company from April 1996 to March 1997. A co-founder of the
Company in 1987, Mr. Weinberg served as its Executive Vice President until March
1996. From March 1997 to the current date, Mr. Weinberg also serves as President
of Millennia Entertainment, Inc. (a subsidiary of Millennia, Inc., an affiliate
of the Company). From 1978 to 1987, Mr. Weinberg was owner of Television
Services, Inc., a video production company specializing in national television
commercials and sporting events.
Douglas L. Miller served as Vice President and Chief Financial Officer of the
Company from February 1996 through August 1997. From 1991 to January 1996, Mr.
Miller served as the Controller of Independent National Distributors, Inc., a
national music distribution subsidiary of Alliance Entertainment Corporation, a
publicly-held company listed on the New York Stock Exchange. Prior to that, Mr.
Miller served with KPMG Peat Marwick. Mr. Miller is a licensed CPA.
<PAGE>
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 Millennia since February 1994, and of AQM from February 1994
until September 1996. Mr. Halter 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 is the
son of Kevin B. Halter.
Gary C. Evans has served as a director of the Company since March 1995. Mr.
Evans has served as President and Chief Executive Officer of Magnum Hunter
Resources, Inc., a publicly-held company listed on the American Stock Exchange,
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 Hunter
Resources, Inc. Mr. Evans also served as President, Chief Operating Officer and
director of Hunter Resources, Inc. from December 1990 to September 1992. Mr.
Evans 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 Hunter Resources, 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.
Don R. Benton has served as a director of the Company since October 1996. Dr.
Benton has served as a director and President of the Dallas Texas based The
Kindness Foundation since 1995. Dr. Benton also has served as a director and
President of Arrowhead Ranch Corporation since 1978 and, since 1975, as a
director of American Diversified Industries and Fagin Resources, Inc.
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 reviews the scope of audit and non-audit assignments and related fees,
accounting principles 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, administers the Company's 1990 Employees' Stock Option
Plan and makes recommendations to the Board of Directors regarding compensation
for the Company's executive officers.
ITEM 10- EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid by the
Company to its Presidents and Chairman for the fiscal years ended June 30, 1997
and 1996. None of the Company's other executive officers and directors received
cash or non-cash compensation in excess of $100,000 for the fiscal year ended
June 30, 1997.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Long Term Compensation
Annual Compensation Awards Payouts
------------------- --------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Other Restricted Securities All
Principal Annual Stock underlying LTIP Other
Position Year Salary Bonus Compensation Award(s) Options/SAR=s Payouts Compensation
($) ($) ($) ($) (#) ($) ($)
-----------------------------------------------------------------------------------------------------------------
Kevin B. Halter
Chairman 1997 $134,615 - - - - - - -
1996 $114,538 - - - - - - -
1995 $72,000 - - - - - - -
Clifford E. Patton
President & 1997 $14,678 - - - - - - -
CEO(1)
Hugh C. Coppen
President & 1997 $146,635 - - - - - - -
CEO (2) 1996 $19,230 - - - - - - -
1995 - - - - - - - -
Jack D. Brown, Jr.
President (3) 1996 $67,019 $20,946 - - - - $17,981
1995 $85,000 - - - - - - -
</TABLE>
(1) Mr. Patton was named President on May 20, 1997. The salary listed reflect
earnings from that date to the year ended June 30, 1997.
(2) Mr. Coppen was named President and CEO of the Company on May 6, 1996. The
salary listed reflects earnings from that date to the year ended June 30,
1996 and for the period from July 1, 1996 through May 20, 1997. Mr.
Coppen's employment was terminated May 20, 1997.
(3) Mr.Brown's employment was terminated April 12, 1996. The salary and bonus
listed reflects earnings from July 1, 1995 to that date. The all other
compensation" represents the partial accrual of a six month severance
package provided to Mr. Brown upon his termination. These severance
payments were accrued weekly in amounts equal to his salary at the
termination date.
<TABLE>
<S> <C> <C> <C> <C>
Individual Grants
-----------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SAR's
underlying granted to
options/SAR's Employees in Exercise in Expiration on
Name granted Fiscal Year Base Price Date
(#) ($/share)
- --------------------------------------------------------------------------------------------------------
Kevin B. Halter 65,000 15% $1.31/share July 1, 2002
</TABLE>
In 1990 and 1993, the Company granted the former President, Jack D. Brown, Jr.,
options to purchase up to 100,000 shares of Common Stock, 50,000 shares in each
grant. The stock options were fully vested upon grant. The stock options granted
in 1990 were exercised in 1995 at an exercise price of $1.50 per share, and the
stock options granted in 1993 were exercised in 1996 at an exercise price of
$1.00 per share.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SAR's Options/ SAR's
Shares at FY-end at FY-end
acquired on Value Exercisable/ Exercisable/
Name exercise realized Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------------------
Jack D. Brown, Jr. 50,000 $78,000 -0-/-0- -0-/-0-
</TABLE>
Employment Agreements
The Company has an employment agreement with Kevin B. Halter for a term of three
years which expires on December 31, 1998. The agreement provides a salary of
$175,000 per annum. In addition, Mr. Halter 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. Halter 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.
1990 Employees' Stock Option Plan
On January 25, 1990, the Company's Board of Directors adopted the 1990
Employees' Stock Option Plan (the "Plan"). The administration of the Plan rests
with the Board's 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.
An option may be granted under the Plan only to an employee of the Company or
its subsidiaries. The Plan made available for option 500,000 shares (as adjusted
for splits) of Common Stock. 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.
<PAGE>
Incentive Stock Options
On April 2, 1996, the Company entered into agreements with three management
employees whereby the Company would issue to such employees a number of
incentive stock options based upon the Company's income before taxes for the
year ended June 30, 1997. Two of the employees, Hugh C. Coppen and Robert A.
Byrne, Jr., have left the Company and will receive no incentive stock options
under their agreements with the Company. Under the agreement with Jim Weinberg,
he will receive 50,000 incentive stock options which will vest as of June 30,
1997 and be exercisable for a period of five years. Each of these incentive
stock options will entitle Mr. Weinberg to purchase one share of Common Stock at
an exercise price of $2.00.
Employee Stock Ownership Plan
While an affiliate of S.O.I. Industries, Inc., now known as Millennia, Inc.
("Millennia"), the Company participated in the Millennia Employee Stock
Ownership Plan ("ESOP"). The ESOP provided retirement benefits to substantially
all employees. The ESOP was a qualified employee benefit plan exempt from
taxation under the Internal Revenue Code of 1986, as amended. There were 90,291
shares of Millennia common stock in the ESOP.
Effective July 1, 1996, the Board of Directors of Millennia voted to terminate
the ESOP. The ESOP stock (that is, Millennia common stock) will therefore be
distributed to employees of the Company who were eligible to participate in the
ESOP after a final allocation and accounting of the ESOP is completed.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 30, 1997 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) the officers, directors and key employees of the Company
individually and (iii) the officers and directors as a group.
<TABLE>
<S> <C> <C>
Name and Address Number of shares
of Beneficial Owner beneficially owned Percent of class
Halter Capital Corporation 1,905,646 26%
P.O. Box 701629
Dallas, Texas 75370
Millennia, Inc. 967,162 13%
16910 Dallas Parkway, Suite 100
Dallas, Texas 75248
Kevin B. Halter 2,045,636 (1) 28%
Kevin B. Halter, Jr. 1,970,636 (1) 27%
Gary C. Evans 164,376 2%
James Smith 236 *
Don R. Benton 4,300 *
Jim Weinberg 40,018 (2) *
Douglas L. Miller 50,000 (2) *
All Directors and Officers as
a group (7 persons) 3,336,728 (2) 44%
</TABLE>
<PAGE>
(1) Kevin B. Halter and Kevin B. Halter, Jr. serve as directors and officers of
Halter Capital Corporation ( HCC"), and as a result may be deemed to be the
beneficial owners of the 1,905,646 shares of Common Stock owned by HCC.
However, pursuant to Rule 16a-3 promulgated under the Exchange Act, they
expressly disclaim that they are the beneficial owners, for purposes of
Section 16 of the Exchange Act, of any such stock, other than those shares
in which they have an economic interest. In addition, the total number of
shares includes 65,000 shares for which both Kevin B. Halter and Kevin B.
Halter, Jr. have the right to acquire from stock options previously granted
pursuant to the 1990 Employees' Stock Option Plan. These options are fully
vested and are exercisable within the next 60 days.
(2) The number of shares includes shares for which the directors and officers
have the right to acquire from stock options previously granted pursuant to
the 1990 Employees' Stock Option Plan. These options are fully vested and
are exercisable within the next 60 days.
* Less than 1%.
The above table does not include shares which may be acquired pursuant to
incentive stock options to be granted to Mr. Jim Weinberg.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company paid to Millennia $7,855 and $180,000 for administrative services
for the years ended June 30, 1997 and 1996, respectively. Management fees
payable to Millennia were discontinued in December 1995 as certain
administrative functions were taken over by the Company.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation, as amended *
3.2 Certificate of Amendment to Certificate of Incorporation of the Company
dated November 8, 1995
3.3 Bylaws
4.1 Certificate of Designation of Convertible Series A Preferred Stock
10.1 Secured Credit Agreement with NBDBank, NA
10.2 Employment Agreement between the Registrant and Hugh C. Coppen
10.3 Lease Agreement for Indianapolis, Indiana facility
10.4 Lease Agreement for Ft. Lauderdale, Florida facility
10.5 Lease Agreement for relocated Indianapolis, Indiana facility
10.5 Employment Agreement between theRegistrant and Kevin B. Halter
21.0 Listing of Subsidiaries
* Previously filed with the US 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 US Securities and Exchange Commission as Exhibits
to the Company's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1996.
*** Previously filed with the US 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>
(b) Reports on Form 8-K
The following Reports on Form 8-K were filed during the fourth quarter of Fiscal
1997.
April 3, 1997 Relocation and expansion of the Indianapolis Indiana
facility.
May 29, 1997 Removal of Hugh C. Coppen as President and Chief Executive
Officer and announcement of appointment of Clifford
Patton as President and Chief Executive Officer.
September 25, 1997 Announcement of closing all operations in Ft. Lauderdale,
Florida including videotape duplication and mobile
satellite uplink service operations.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
<TABLE>
<S> <C>
/s/ Kevin B. Halter September 26, 1997
---------------------------------
Kevin B. Halter
Chairman of the Board and Director
(Principal Executive and Financial and Accounting Officer)
/s/ Kevin B. Halter, Jr. September 26, 1997
----------------------------------
Kevin B. Halter, Jr.
Director
/s/ Gary C. Evans September 26, 1997
----------------------------------
Gary C. Evans
Director
/s/ James Smith September 26, 1997
----------------------------------
James Smith
Director
/s/ Don R. Benton September 26, 1997
----------------------------------
Don R. Benton
Director
</TABLE>
<PAGE>
EXHIBIT 10.5
Lease Agreement for the Relocated Indianapolis, Indiana facility
To be filed supplementally
<PAGE>
EXHIBIT 21.0
Digital Communications Technology Corporation
List of Subsidiaries
DCT-Internet Corporation, a Texas corporation
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND FOR
THE TWO YEARS IN THE PERIOD ENDED JUNE 30, 1997
<PAGE>
TABLE OF CONTENTS
Pages
Report of Independent Accountants F-1
Consolidated Financial Statements:
Balance Sheet F-2
Statements of Operations F-3
Statements of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
<PAGE>
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, 1997, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended June 30, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1997, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand, L.L.P.
Miami, Florida
August 27, 1997, except for Note 18
as to which the date is
September 17, 1997
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1997
<TABLE>
<S> <C> <C>
ASSETS 1997
Current assets:
Cash and cash equivalents $ 229,740
Marketable securities 657,562
Accounts receivable, net of allowance for doubtful accounts of $1,000,000 3,219,433
Intercompany accounts receivable 39,678
Inventories 1,679,011
Prepaid expenses and other current assets 128,385
Deferred tax asset 374,000
-----------
Total current assets 6,327,809
Property, plant and equipment, net 5,823,634
Other assets 193,859
-----------
$12,345,302
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 2,485,346
Current portion of long-term debt 1,564,728
Accounts payable 2,577,706
Cash overdraft 174,616
Accrued liabilities 387,646
----------
Total current liabilities 7,190,042
----------
Long-term debt, less current portion 509,366
----------
Commitments (Notes 8 and 12)
Shareholders' Equity:
Common stock, 25,000,000 shares of $.0002 par value per share
authorized; 7,315,022 shares issued, 7,043,830 shares outstanding 1,463
Additional paid-in capital 8,511,509
Accumulated deficit (2,417,237)
Investment in Millennia, Inc. (1,529,157)
Net unrealized holding gain on securities 79,316
----------
Total shareholders' equity 4,645,894
----------
$12,345,302
==========
</TABLE>
The accompanying notes are an integral part of these financial
statements
F-2
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended June 30, 1997 and 1996
<TABLE>
<S> <C> <C>
1997 1996
---- ----
Net sales $ 22,553,457 $ 24,807,244
------------ ------------
Costs and expenses:
Cost of goods sold (exclusive of depreciation) 19,260,565 20,272,614
Selling expenses 1,149,813 1,215,082
General and administrative expenses 3,470,288 1,733,482
Depreciation and amortization 1,758,022 1,157,917
------------ ------------
Total costs and expenses 25,638,688 24,379,095
------------ ------------
Operating (loss) income (3,085,231) 428,149
Interest expense (429,499) (639,517)
Realized (loss) gain on sales of marketable securities (343,425) 360,512
Other (expense) income (120,450) 51,166
(Loss) income from continuing operations before income taxes (3,978,605) 200,310
Income tax benefit (provision for income taxes) 531,216 (109,003)
------------- ------------
(Loss) income from continuing operations (3,447,389) 91,307
Discontinued operations (Note 6):
Income from discontinued operations, net of related
income taxes 0 131,737
------------- ------------
Net (loss) income $ (3,447,389) $ 223,044
------------- ------------
Net (loss) income applicable to common stock used in computing
(loss) earnings per common share $ (3,697,339) $ 223,044
------------- ------------
Net (loss) income per common share:
(Loss) income per common share $ (0.57) $ 0.02
Income from discontinued operations 0.00 0.02
Net (loss) income per common share $ (0.57) $ 0.04
============= ============
Weighted average shares of common stock outstanding 6,494,019 5,553,415
============= ============
</TABLE>
The accompanying notes are an integral part of these financia statements
F-3
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
for the years ended June 30, 1997 and 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Additional
--------------- ------------- Net Unrealized
Paid-In Accumulated Investment in Holding Gains
Capital Deficit Millennia, Inc. on Securities
------- ----------- --------------- -------------
Shares Amount Shares Amount
------ ------ ------ ------
Balance, June 30, 1995 0 $ 0 5,961,188 $ 1,192 $ 6,567,062 $ 1,710,867 $(1,198,158) $ (613,989)
Exercise of options 0 0 57,545 12 60,613 0 0 0
5% stock dividends 0 0 301,253 60 903,699 (903,759) 0 0
Reg. S offering 100,000 10 0 0 929,990 0 0 0
Shares issued 0 0 12,130 2 17,954 0 0 0
Sale of Millennia, Inc.
shares 0 0 0 0 0 0 113,175 0
Net appreciation of
marketable securities 0 0 0 0 0 0 0 85,228
Net income 0 0 0 0 0 223,044 0 0
-------- ------- ------- ------- ------- ------- ------- ------
Balance,
June 30, 1996 100,000 10 6,332,116 1,266 8,479,318 1,030,152 (1,084,983) (528,761)
Conversion of
preferred stock (100,000) (10) 968,430 194 (184)
Shares issued 14,476 3 32,375
Transfer of Millennia,
Inc. shares (444,174)
Net appreciation of
marketablesecurities 608,077
Net loss (3,447,389)
-------- -------- -------- ------- ---------- ---------- --------- -------
Balance,
June 30, 1997 0 $ 0 7,315,022 $ 1,463 $8,511,509 $(2,417,237) $(1,529,157) $ 79,316
======== ========= ========= ======= ========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended June 30, 1997 and 1996
<TABLE>
<S> <C> <C>
1997 1996
Cash flows from operating activities:
Net (loss) income $(3,447,389) $ 223,044
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,758,022 1,157,917
Loss (gain) on sale of marketable securities 343,245 (360,512)
Loss on sale of property, plant and equipment 99,896 0
Provision for bad debts 985,833 (651,133)
Changes in assets and liabilities:
Deferred tax liability (157,216) 148,824
Deferred tax asset (374,000) 0
Accounts receivable (86,000) 75,557
Inventories 1,183,900 1,195,382
Prepaid expenses and other assets 485,825 (269,084)
Other assets (112,516) (50,185)
Accounts payable (462,205) 866,511
Accrued liabilities 25,126 (55,856)
------------- -------------
Net cash (used in) provided by operating activities 242,521 2,280,465
------------- -------------
Cash flows from investing activities:
Purchases of marketable securities (8,812,230)
Sale of marketable securities 10,327,223 11,545,079
Acquisition of property, plant and equipment (2,349,247) (1,387,657)
Proceeds from sales of property, plant and equipment 137,000 0
Net (advances) repayments to affiliates (26,309) 188,367
(Purchase) sale of Millennia, Inc. shares (444,174) 113,175
------------- -------------
Net cash (used in) provided by investing activities (1,167,737) 34,201
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
for the years ended June 30, 1997 and 1996
<TABLE>
<S> <C> <C>
1997 1996
Cash flows from financing activities:
Proceeds from bank for long-term debt $ 1,800,000 $ 0
Payments to bank for long-term debt (2,327,096) (778,372)
Proceeds on revolving line of credit 18,352,277 1,678,665
Repayments for revolving line of credit (17,492,253) (3,893,340)
Proceeds from sale of preferred stock 0 930,000
Proceeds from issuance of common stock 32,375 78,581
Cash Overdraft 174,616 0
------------- ------------
Net cash provided by (used in) financing activities 539,919 (1,984,466)
------------ ------------
Net (decrease) increase in cash and cash equivalents (385,297) 330,200
Cash and cash equivalents, beginning of year 615,037 284,837
------------- ------------
Cash and cash equivalents, end of year $ 229,740 $ 615,037
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 401,297 $ 691,677
============= ============
Income taxes $ 0 $ 252,243
</TABLE>
The accompanying notes are an integral part of these financial
statements
F-6
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Organization:
Digital Communications Technology Corporation is an integrated video
communications company which offers video tape duplication and satellite
communications services. Sales for the years ended June 30, 1997 and 1996 were
generated from video tape duplicating at the Fort Lauderdale and Indianapolis
facilities, as well as satellite broadcasting. The Company was incorporated on
November 12, 1987, under the laws of the State of Delaware, as a wholly-owned
subsidiary of Millennia, Inc., formerly known as S.O.I. Industries, Inc.
("Millennia"). As of June 30, 1997, Millennia and the Company have reciprocal
investments in each other. Millennia owned approximately 13% of the Company and
the Company owned approximately 28% of Millennia.
The Company duplicates a variety of video cassettes, including full-length
movies, training, music, promotional, sports and educational programs. The
Company offers its reproduction services to entertainment companies and a wide
range of industrial customers, including advertising agencies, direct selling
organizations and educational groups. These customers are located throughout the
United States, Canada and Latin America. Raw materials, primarily videotape
("pancake") and empty video cassettes ("shells") are purchased from several
manufacturers at market prices in the United States and the Pacific Rim. The
tape and video 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 Company's satellite operation consists of two mobile KU bank units which are
capable of transmitting live or pre-recorded programming from any location to
commercial satellites. The Company's satellite communications customers include
local, network and cable television operators, primarily in the Southeastern
United States. The equipment utilized in the Company's satellite broadcasting
business includes the two KU bank broadcasting trucks, cameras, generators,
telephonic equipment and dual transmitters. The Company purchases its materials
and equipment from several major manufacturers.
The costs of the Company's products are subject to inflationary pressures and
commodity price fluctuations. In addition, the Company from time-to-time
experiences increases in the costs of materials and labor, as well as other
manufacturing and operating expenses. The Company's ability to pass along such
increased costs through increased prices has been difficult due to competitive
pressures. The Company attempts to minimize any effects of inflation on its
operations by controlling these costs.
Principles of Consolidation
The accompanying consolidated financial statements for the years ended June 30,
1997 and 1996 include the accounts of Digital Communications Technology
Corporation, (F/K/A MagneTech Corporation) and its wholly-owned subsidiaries,
Tapes Unlimited, Inc., and DCT - Internet Corporation. The operations of Tapes
Unlimited, Inc. were discontinued on June 9, 1995. All significant intercompany
transactions have been eliminated.
F-7
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies:
Management's Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
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 classified marketable securities consisting of debt securities and
equity securities that have readily determinable fair values in one of 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 purposes 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 gains 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 $578,246 as of June 30, 1997. The gross
unrealized holding losses as of June 30, 1997 were $179,565, and the gross
unrealized holding gains were $258,881. All of the Company's securities are
classified as available for sale.
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.
F-8
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, Continued:
Investment in Millennia
As of June 30, 1997, the Company owns 636,727 shares of Millennia common stock
with a book value of $1,529,157 and a market value of $1,910,181. Subsequent to
year end, the market value increased to $2,626,499.
Inventories
Inventories are valued at the lower of weighted average cost 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 5 to 30 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.
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
was issued in March 1995 and was adopted in the Company's fiscal year beginning
July 1, 1996. SFAS 121 requires that long-lived assets, such as property and
equipment, and certain identifiable intangibles to be held and used, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. This SFAS had no
impact on the financial statements of the Company for fiscal year 1997.
Income Taxes
Income taxes are computed pursuant to the asset and liability approach that
requires the recognition of deferred tax assets and liabilities based on the
difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance reduces deferred tax
assets when it is deemed more likely than not that some portion or all of the
deferred tax assets will not be realized.
Revenue Recognition
Revenues are recognized when a product is shipped or services
are performed.
F-9
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, Continued:
Net Income (Loss) 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 Millennia. The number of treasury shares owned were approximately
271,000 and 207,000 at June 30, 1997 and 1996, respectively.
In determining the net loss per common share in fiscal year 1997, net loss
applicable to common shareholders was increased by a deemed dividend of
approximately $250,000 relating to the Company's Series A Convertible Preferred
Stock issued in May
1996.
Stock Options
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation", encourages but does not require companies to record
compensation cost for stock based employee compensation plans at fair value. The
Company has chosen to continue to account for stock based compensation using the
intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured based on the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the exercise price of the option. Any current income tax benefit
from the exercise and early disposition of stock options is accounted for as a
credit to additional paid-in-capital.
Change in Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS 128
specifies new standards designed to improve the earnings per share ("EPS")
information provided in financial statements by simplifying the existing
computational guidelines. Some of the changes made to simplify EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic EPS, (b) eliminating the modified treasury stock method and the three
percent materiality provision, and (c) revising the contingent share provisions
and the supplemental EPS data requirements. SFAS 128 also makes a number of
changes to existing disclosure requirements. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. The Company does not believe SFAS 128 will have a material effect on
its EPS calculation.
F-10
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, Continued:
Change in Accounting Standards, Continued
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for reporting and display of
comprehensive income. The purpose of reporting comprehensive income is to
present a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. SFAS 130 requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. SFAS 130 is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. The Company does
not believe the implementation of SFAS 130 will have a material impact on the
financial statements.
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS 131 specifies revised guidelines
for determining an entity's operating segments and the type and level of
financial information to be disclosed. Once operating segments have been
determined, SFAS 131 provides for a two-tier test for determining those
operating segments that would need to be disclosed for external reporting
purposes. In addition to providing the required disclosures for reportable
segments, SFAS 131 also requires disclosure of certain "second level"
information by geographic area and for products/services. SFAS 131 also makes a
number of changes to existing disclosure requirements. SFAS 131 is effective for
fiscal years beginning after December 15, 1997, with earlier application
encouraged. The Company does not believe that the implementation of SFAS 131
will have a material impact on the financial statements.
Reclassifications
Certain amounts reflected in the 1996 consolidated financial statements have
been reclassified to conform to the 1997 presentation.
3. Inventory:
Inventories consist of the following at June 30:
1997 1996
---------- -----------
Raw materials $ 1,164,970 $ 1,891,393
Work-in-process 474,091 769,254
Finished goods 39,950 202,264
------------ ------------
$ 1,679,011 $ 2,862,911
============ ============
F-11
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
4.Property, Plant and Equipment:
Property, plant and equipment consists of the following:
Land 73,000
Buildings and improvements 332,440
Machinery and equipment 9,794,616
Leasehold improvements 973,608
Furniture and fixtures 304,055
Transportation equipment 269,966
Computer equipment 447,087
-----------
12,194,772
Less accumulated depreciation 6,371,138
-----------
Net property, plant and equipment $ 5,823,634
===========
Depreciation expense was $1,745,344 and $1,157,917 for the years ended June 30,
1997 and 1996, respectively. Depreciation expense for June 30, 1997 reflects the
effect of a change in useful life of certain assets. The effect of the change
was accounted for on a prespective basis.
5. Related Party Transactions:
Management Fees
The Company paid to Millennia $7,855 and $180,000 for administrative services
for the years ended June 30, 1997 and 1996, respectively. Management fees
payable to Millennia were terminated December 31, 1995.
Employee Stock Ownership Plan
The Company participates in Millennia'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 were 55,438 and 90,291 shares of
Millennia common stock in the ESOP at June 30, 1997 and June 30, 1996,
respectively
Effective July 1, 1996, the Board of Directors of Millennia voted to terminate
the ESOP. The ESOP stock will, therefore, be distributed to employees of
Millennia, DCT, and Tempo Lighting, Inc. who were eligible to participate in the
ESOP after a final allocation and accounting of the ESOP is conducted.
F-12
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
6. Revolving Lines of Credit:
The Company has a revolving line of credit agreement for aggregate borrowings of
up to $6,950,000. Interest is payable on all outstanding cash advances at the
bank's base lending rate (closely related to the bank's prime interest rate)
plus 1/2%. At June 30, 1997, $2,485,346 has been drawn upon the Company's line
of credit with an interest rate of 9.0%. Any unpaid principal and accrued
interest is due on demand, but no later than October 31, 1998. The line of
credit is collateralized by accounts receivable, inventory and equipment. The
terms of the agreement require, among other provisions, that the Company comply
with requirements for maintaining certain cash flow and other financial ratios
and restricts the payment of cash dividends.
The Company has failed to meet the covenant requirements for tangible net worth,
fixed charge coverage ratio and limitations on unrealized losses. On July 9,
1997, the bank notified the Company that its failure to meet these covenant
requirements constitute events of default under the agreement. Until these
events of default are cured or waived, the bank has determined to not make any
further advances under the capital expenditure term loans and to not make any
overadvances under the remaining facilities until the Company has submitted a
business recovery plan acceptable to the bank. Additionally, commencing July 9,
1997, the bank, under the terms of the agreement, has begun charging a default
interest rate of 13% per annum on all outstanding obligations under the
facility. On August 21, 1997, the Company was notified by the bank that it
intends, 120 days thereafter, to stop making further advances and to accelerate
the maturity of the debt then owed.
The Company is currently reporting to the bank on a monthly basis its
performance regarding financial covenants. However, the Company has determined
that it is in its best interest to obtain a substitute bank lender and is
currently negotiating with several potential bank lenders. Although no
assurances can be given, the Company believes that substitute credit facilities
can be put in place prior to the accelerated maturity date.
F-13
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
7. Long-Term Debt:
Long-term debt as of June 30, 1996 consists of the following:
<TABLE>
<S> <C> <C>
June 30, June 30,
1997 1996
------------ -----------
Various mortgages and notes payable with interest rates ranging from 7.63% to 1%
over prime. Monthly payments range from $3,198 to $29,000 and expiration dates
range from 1997 to 2007 $ 577,394 $ 2,601,190
Loan payable to a bank in monthly principal installments plus interest at the
bank's base rate (prime) plus 1/2%, maturing October 1998; collateralized by
accounts receivable, inventory and equipment. The terms of the agreement
require, among other provisions, that the Company comply with certain ratios and
covenants 1,496,700 0
----------- -----------
2,074,094 2,601,190
Less current portion (1,564,728) (935,127)
----------- -----------
$ 509,366 $ 1,666,063
=========== ===========
</TABLE>
Under the terms of certain of the above agreements, the Company is required to
comply with certain ratios and covenants. The Company failed to meet certain of
these financial covenants. As such, all amounts due under these agreements are
classified as current liabilities until the next measurement date. (See Note 6).
The contractual maturities on long-term debt are as follows:
Years ending June 30,
---------------------
1998 $ 397,368
1999 1,239,419
2000 78,084
2001 83,854
2002 90,058
Thereafter 185,311
------------
$ 2,074,094
============
8.Commitments:
The Company leases its office facilities and certain equipment under operating
leases expiring through May 2007. 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.
F-14
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
8.Commitments, Continued:
Aggregate future minimum rental payments under the above leases are as follows:
Years ending June 30,
---------------------
1998 $ 710,046
1999 713,955
2000 718,020
2001 630,050
2002 612,320
Thereafter 3,010,574
------------
$ 6,394,965
============
Rent expense under the above leases for the years ended June 30, 1997 and 1996
was $513,529 and $414,075, respectively. The above future minimal rentals
include rental of the Indianapolis, Indiana and Fort Lauderdale, Florida
facilities. Management intends to sublease the Fort Lauderdale, Florida
facility. (See Note 18).
9.Preferred Stock:
On May 6, 1996, the Company sold 100,000 shares of Series A Convertible
Preferred Stock ("Preferred Stock") in a private placement. The Preferred Stock
is convertible into common stock at the discretion of the holder at the lesser
of (i) 20% discount on the previous five day average closing bid at conversion,
or (ii) previous five day average closing bid price at closing. The holder may
convert up to 20% of the Preferred Stock every 30 days beginning June 15, 1996.
The Preferred Stock is convertible for a term of three years, and accrues
dividends at a rate of 7% per annum (dividends are rescinded if the shares are
converted in the first year). The holders of the preferred shares do not have
any voting rights.
Through June 30, 1997, all 100,000 shares of Series A Preferred Stock had been
converted, pursuant to their original terms, into 968,430 shares of Common Stock
at an average per share conversion price of $1.08. The terms of the Preferred
Stock which provided for a lower conversion price than the quoted market price
of the Common Stock at the time of conversion resulted in an aggregate
difference of $250,000 which was accounted for as a preferred stock dividend.
Such terms take into account a number of factors affecting value, including the
ability to market a significant number of shares of the underlying common stock
which were negotiated at the time of the issuance of the Preferred Stock.
F-15
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
10.Sales to Major Customers:
During the year ended June 30, 1997, two customers accounted for approximately
38% of the Company's sales. During the year ended June 30, 1996, one customer
accounted for approximately 17.6% of the Company's sales.
11.Financial Instruments:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires
disclosure of fair value information about financial instruments. Fair value
estimates discussed herein are based upon certain market assumptions and
pertinent other information available to management as of June 30, 1997. Such
amounts have not been comprehensively reviewed or updated since that date and,
therefore, may not represent current estimates of fair value. At June 30, 1997,
the difference between the fair value and the carrying value of debt instruments
was not material.
12.Stock Option Plan:
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its plans. SFAS No. 123 "Accounting for Stock-Based Compensation" was issued
by the FASB in 1995 and, if fully adopted, changes the methods for recognition
of cost on plans similar to those of the Company. Adoption of SFAS No. 123 is
optional; however, pro forma disclosures as if the Company adopted the cost
recognition requirements under SFAS No. 123 in 1997 are presented below.
The Company generally offers fixed stock option plans which provide for the
granting of non-qualified and incentive stock options to certain employees and
members of the Board of Directors of the Company. Generally, options outstanding
under the Company's stock option plans: (i) are granted at prices which equate
to or are above the market value of the stock on the date of grant, (ii) vest
ratably over a year of service vesting period, and (iii) expire five years
subsequent to award.
F-16
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
12. Stock Option Plan, Continued:
A summary or the status of the Company's fixed stock options as of June 30, 1997
and 1996 and changes during the year ended on those dates is presented below:
1997
------------------------
Weighted
Average
Exercise
Shares Price
------------------------
Outstanding at beginning of year 396,625 $ 1.58
Granted 0 0.00
Exercised 0 0.00
Canceled (75,000) 2.00
-------- --------
Outstanding at end of year 321,625 $ 1.49
-------- --------
Options exercisable at year-end 321,625
--------
Options available for future grant 9,370
--------
Weighted average fair value of options
granted during the year 0.00
========
1996
------------------------
Weighted
Average
Exercise
Shares Price
-------- --------
Outstanding at beginning of year 123,125 $ 1.29
Granted 401,000 1.74
Exercised (57,500) 1.05
Canceled (70,000) 2.41
-------- --------
Outstanding at end of year 396,625 $ 1.58
Options exercisable at year-end 271,625
--------
Options available for future grant 9,370
--------
Weighted average fair value of options
granted during the year 1.20
========
F-17
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
12. Stock Option Plan, Continued:
The fair value of each option granted during 1997 and 1996 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
1997 1996
------ ------
Expected life (years) 5 5
Risk free interest rate 7.00% 7.00%
Expected volatility 108.80% 108.80%
Dividend yield 0% 0%
The following table summarizes information about stock options outstanding at
June 30, 1997.
<TABLE>
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------------
Number Weighted Average Weighted Number Weighted
Range of Exercise Outstanding at Remaining Average Exercisable at Average
Price 6/30/97 Contractual Life Exercise Price 6/30/97 Exercise Price
- ----------------- -------------- ---------------- -------------- -------------- --------------
$1.00 10,000 2.0 $ 1.00 10,000 $ 1.00
$1.24-$1.58 277,625 3.5 1.41 277,625 1.41
$2.30 34,000 3.0 2.30 34,000 2.30
- ----------------- -------------- ---------------- --------------- -------------- ---------------
$1.00 - $2.30 321,625 3.4 $ 1.49 321,625 $ 1.49
================= ============== ================ =============== ============== ===============
</TABLE>
Had compensation cost for the Company's 1997 and 1996 grants for stock-based
compensation plans been determined consistent with SFAS no. 123, the Company's
net income (loss), net income (loss) applicable to common stock, and net income
(loss) per common share for 1997 and 1996 would approximate the pro forma
amounts below:
1997 1997 1996 1996
as Reported as Reported as Reported Pro Forma
------------ ------------ ----------- ---------
Net income (loss) $(3,447,489) $(3,518,489) $ 223,044 $ 108,586
------------ ------------ ----------- ---------
Net income (loss)
applicable to
common stock $(3,697,389) $(3,768,489) $ 223,044 $ 108,586
============ ============ =========== =========
Net income (loss)
per common share $ (0.57) $ (0.58) $ 0.04 $ 0.02
============ ============ =========== =========
F-18
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
12. Stock Option Plan, Continued:
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
13. Income Taxes:
The provision (benefit) for income taxes is as follows:
1997 1996
---------- ----------
Current
Federal $ 0 $ 23,784
State 0 21,109
---------- ----------
0 44,893
---------- ----------
Deferred:
Federal (350,603) 54,395
State (180,613) 9,715
---------- ----------
(531,216) 64,110
---------- ----------
$ (531,216) 109,003
========== ==========
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and consolidated provisions for income taxes are as follows:
1997 1996
---------- ----------
Tax at federal statutory rate (34.0)% 34.0%
State income tax - net of federal benefit (5.5)% 5.5%
Other 0.0 % 15.0
Reduction in income tax benefit due to
valuation allowance 26.1 % 0%
---------- -----------
(13.4)% 54.4%
========== ===========
F-19
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
13. Income Taxes, Continued:
The tax effects of temporary differences which comprise the deferred tax assets
and liabilities are as follows:
1997
---------
Assets:
Allowance for doubtful accounts $ 370,000
Loss and credit carryforwards 1,400,000
Reserve for inventory obsolescence 18,000
----------
Total deferred tax assets 1,788,000
Liabilities:
Property and equipment - depreciation 535,000
----------
Total deferred tax liabilities 535,000
----------
Deferred income taxes, net 1,253,000
----------
Less: Valuation allowance 879,000
----------
Deferred tax asset $ 374,000
==========
At June 30, 1997, the Company had net operating loss carryforwards for tax
purposes of approximately $4 million which may be subject to certain
restrictions and limitations and which will expire in the year 2012.
At June 30, 1997, the Company had approximately $1,788,000 of unrecognized net
deferred tax assets comprised primarily of net operating loss carryforwards,
available to offset future taxable income for federal tax purposes. A valuation
has been provided against this deferred tax asset as the Company has not
demonstrated the ability to consistently sustain taxable income. The Company
continues to evaluate the realizability of its deferred tax assets and its
estimate is subject to change.
14. Employment Agreements:
The Company has entered into employment agreements with two of its officers. The
agreements range for terms of two to three years and contain certain bonus
provisions. The minimum annual salaries (excluding bonus arrangements) are
$220,500 and $87,500 for the years ending June 30, 1998 and June 30, 1999,
respectively.
F-20
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
15. Concentration of Credit Risk:
Financial instruments which potentially expose the Company to a concentration of
credit risk consist principally of cash, investments, 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, 1997, the Company did not exceed the insured limit. At June 30, 1997,
four equity investments accounted for total investments. Approximately 34% of
the Company's accounts receivable, before allowances, was due from three
customers at June 30, 1997.
16. Discontinued Operations:
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.
Summarized results of operations of the discontinued operations of Tapes for
1996 are as follows:
1996
----------
Net sales $ 0
==========
Operating income (loss) $ 0
==========
Gain (loss) before income taxes $ 230,511
Income tax expense (benefit) 98,774
----------
Gain (loss) from discontinued operation $ 131,737
==========
F-21
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
16. Discontinued Operations, Continued:
The assets and liabilities of Tapes, which have not been reclassified on the
consolidated balance sheets, are as follows:
1997 1996
---------- ----------
Current assets, principally cash,
accounts receivable and inventories $ 0 $ 16,649
Plant and equipment 0 0
Total assets $ 0 $ 16,649
========== ==========
Accounts payable and accrued
liabilities, net of amounts
due to the Company of $0 in 1997
and $100,967 in 1996 $ 65,000 $ 71,856
---------- -----------
Total liabilities $ 65,000 $ 71,856
========== ===========
17. Litigation:
The Company may from time-to-time be party to various legal actions arising
during the ordinary course of its business. In addition, the Company is
currently involved in the following litigation:
On March 4, 1996, Richard Abrons, allegedly on behalf of the Company, and Adrian
Jacoby, allegedly on behalf of an affiliate company, Millennia, brought a
purported shareholder derivative lawsuit against the Company's board of
directors - Kevin B. Halter, Kevin B. Halter, Jr., Gary C. Evans and James Smith
- - as well as Halter Capital Corporation and Securities Transfer Corporation. In
addition, the Company and Millennia have been joined as "nominal defendants". In
the lawsuit, the plaintiffs have alleged breaches of fiduciary duty, fraud, and
violations of state securities laws. The plaintiffs seek unspecified actual and
exemplary damages, a constructive trust against the assets of the defendants and
an accounting of the affairs of the defendants with respect to their dealings
with the Company and Millennia. In addition, the plaintiffs have requested a
temporary injunction and the appointment of a receiver for the Company and
Millennia.
F-22
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
17. Litigation, Continued:
In 1995, Halter Capital Corporation ("HCC"), in which Kevin B. Halter and Kevin
B. Halter, Jr. (the "Halters") are principals, negotiated the satisfaction of
$1,217,000 in debt owed to creditors by Millennia's subsidiary, American Quality
Manufacturing Corporation ("AQM", since sold). The Halters are also officers and
directors of Millennia. HCC satisfied these debts by transferring, in the
aggregate, 1,659,000 shares of Millennia common stock it owned to the creditors.
To repay HCC for the AQM indebtedness HCC paid, Millennia transferred to HCC
1,622,000 shares of DCT Common Stock it held as an investment. With the payment
of DCT Common Stock to HCC and the salaries or other compensation received from
Millennia by the Halters, Mr. Evans and Mr. Smith, plaintiffs assert that each
breach their duties of loyalty, usurped corporate opportunities and committed
gross mismanagement by wrongfully using Millennia and DCT as instruments for
their own and HCC's pecuniary gain to the detriment of Millennia, DCT and their
shareholders. If any damages are ultimately awarded to the plaintiffs, those
damages will be on behalf of, and for the benefit of, the Company and all of its
shareholders. If they are successful, the plaintiffs may recover certain
attorney's fees and costs. This case is entitled Richard Abrons et al v. Kevin
B. Halter et al, Cause No. 96-02169-G, in the 134th Judicial District, Dallas
County, Texas. Even though the Company is a nominal defendant in the lawsuit,
the Plaintiffs have not sought to recover any damages against the Company. In
this type of lawsuit, the Company is joined as a procedural matter to make it a
party to the lawsuit.
All of the defendants have answered and denied the allegations contained in the
plaintiffs' Petition. A certain amount of discovery has been conducted by both
plaintiffs and defendants. All of the defendants deny all of the material
allegations and claims in the Petition, dispute the plaintiffs' contention that
it is a proper shareholder derivative action, deny that the plaintiffs have the
right to pursue this lawsuit on behalf of the Company and Millennia and are
vigorously defending the lawsuit. In addition, the defendants have filed
counterclaims against the plaintiffs and third party actions against Blake
Beckham, Attorney at Law, Beckham & Thomas, L.L.P., Sanford Whitman, the former
CFO of the Company and Jack D. Brown Jr., the former President of the Company,
seeking damages in excess of $50 million. In its counterclaim, the Company has
asserted that the filing of this lawsuit and the temporary restraining order the
plaintiffs caused to be issued in the case resulted in damages to the Company.
However, the Company does not believe that the lawsuit will have any further
material impact on the operations or financial condition of the Company.
Discovery is continuing and the matter has not been set for trial.
F-23
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
17. Litigation, Continued:
In February 1996, Convention Tapes International, Inc., a Florida corporation,
filed a civil action in the Circuit Court of the 11th Judicial Circuit for Dade
County, Florida, against Tapes Unlimited, Inc. and MagneTech Corporation for
damages "in excess of $50,000" allegedly resulting from breach of contract and
warranty, and fraudulent inducement and/or negligent misrepresentation on the
part of Tapes Unlimited. MagneTech Corporation is the previous name of the
Company, and Tapes Unlimited was an Orlando, Florida subsidiary of the Company
from March 1994 until Tapes Unlimited was dissolved in October 1995. Tapes
Unlimited ceased operations in June 1995. MagneTech Corporation is a named
defendant against whom plaintiff asserts vicarious or successor liability for
its alleged damages, claiming that Tapes Unlimited was the "alter ego" or "mere
instrumentality" of MagneTech.
Upon motion of the defendants, in July 1996 the civil action was transferred to
the Circuit Court in Orange County, Florida, Case No. CI96-5851.
As best the Company has been able to determine, in February 1995 Tapes Unlimited
duplicated certain videotapes for plaintiff from videotape masters provided by
plaintiff. Plaintiff alleges that the duplicates delivered by Tapes Unlimited
contained, in part, extraneous and pornographic material which caused plaintiff
to lose the business of a certain account, as well as the prospective business
of other, unspecified persons. The plaintiff has since ceased doing business.
While this matter has been pending for over one year, the litigation is still in
its early stages. Plaintiff's counsel has just advised that he intends to amend
the Complaint to add Halter Capital Corporation and Kevin Halter, Sr. as party
defendants. Two depositions have been taken and preliminary documents have been
exchanged. Due to the early stages of discovery, no evaluation of the likelihood
of an unfavorable outcome can be made. Management intends, however, to
vigorously contest any liability to Convention Tapes International, Inc.
The Company does not believe that it is currently involved in any additional
pending actions that will have a material adverse effect on its business,
financial condition and results of operations.
18. Subsequent Events:
On September 17, 1997, the Company shut down its Fort Lauderdale duplication
operations. The Fort Lauderdale, Florida, operations have been consolidated with
the Company's operations in Indianapolis, Indiana. The Fort Lauderdale
facilities were housed in two buildings, one of which was owned by the Company
and has been sold. The other building, a leased facility, will be sublet to a
new tenant. Additionally, the Company has terminated the operations of its DCT
Satellite Division which was also located in Fort Lauderdale.
Management believes that the elimination of these operations will generate
future cost savings.
F-24
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000743051
<NAME> Digital Communications Technology Communications
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
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