As filed with the Securities and Exchange Commission on August 1, 1997
Registration No. 333-26509
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
AMENDMENT NO. 1
To
Form SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
(Name of small business issuer in its charter)
Delaware 7819 65-0014636
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
16910 Dallas Parkway, Suite 100, Dallas, Texas 75248 AC(972) 248-1922
(Address and telephone number of registrant's principal executive offices)
Kevin B. Halter, Jr., 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248
AC(972) 248-1922
(Name, address and telephone number of agent for service)
Copies to:
Rudolph L. Ennis, General Counsel
Digital Communications Technology Corporation
16910 Dallas Parkway, Suite 100
Dallas, Texas 75248
(972) 248-1922
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
---------
SUBJECT TO COMPLETION -- DATED August 1, 1997
PROSPECTUS
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
---------------------------------------------
1,047,448 Redeemable Class A Warrants,
1,831,190 Redeemable Class B Warrants and
2,878,638 Shares of Common Stock
The Class A Warrants and the Class B Warrants (collectively, the
"Warrants") will be issued by Digital Communication Technology Corporation, a
Delaware corporation (the "Company" or "DCT") and distributed as a dividend to
holders of shares of the Company's common stock, $.0002 par value (the "Common
Stock"). Shareholders of record as of April 30, 1997 (the "Record Date") will
receive one Class A Warrant for each seven shares of Common Stock held as of the
Record Date, and one Class B Warrant for each four shares of Common Stock held
as of the Record Date. No fractional Warrants will be issued. The number of
Warrants of each class due each holder of Common Stock will be rounded up to the
next whole number. The Warrants are transferable separately immediately upon
issuance.
Each Class A Warrant entitles the holder to purchase one share of Common
Stock at an exercise price of $3.50, subject to adjustment, until the second
anniversary of the date of this Prospectus. Each Class B Warrant entitles the
holder to purchase one share of Common Stock at an exercise price of $5.00,
subject to adjustment, until the third anniversary of the date of this
Prospectus. The exercise price of the Warrants bear no relation to any objective
criteria of value, and should in no event be regarded as an indication of any
future market price of the Common Stock.
The Warrants are subject to redemption by the Company commencing one year
after the date of this Prospectus, at $.01 per Warrant on 30 days' written
notice if the closing bid price of the Common Stock for five consecutive trading
days, ending within 15 days of the notice of redemption of the Warrants, average
in excess of $3.50 per share with respect to the Class A Warrants and $5.00 per
share with respect to the Class B Warrants.
The Common Stock is listed on the American Stock Exchange (the "Amex")
under the symbol DCT. The closing sale price of the Common Stock on the Amex on
________, 1997, the date of the last reported sale of the Common Stock, was
$__________.
----------
Application has been made to list the Warrants on the Amex under the
symbols _____ with respect to the Class A Warrants and _____ with respect to the
Class B Warrants.
----------
On May 20, 1997, the Board of Directors removed Hugh C. Coppen a 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. This change in a key position
could have an adverse effect upon the Company's results of operations. See "Risk
Factors--Recent Removal of Key Executive."
1
<PAGE>
See "Risk Factors" beginning on page 4 for certain information which should be
considered in making an investment decision in securities issued by the Company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Warrants are issued as a dividend to the holders of Common Stock as of
the Record Date. It is expected that delivery of the Warrants and the Common
Stock registered by the Registration Statement of which this Prospectus is a
part will be made at the office of Securities Transfer Corporation, Dallas,
Texas, on or about July ___, 1997. Securities Transfer Corporation is the
Company's agent (the "Warrant Agent") for the distribution, transfer, exercise
and redemption of the Warrants. Securities Transfer Corporation also is the
Transfer Agent for the Common Stock.
The date of this Prospectus is __________,1997
2
<PAGE>
NO DEALER, SALESMAN OR OTHER REPRESENTATIVE IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THESE SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
OR ANY SALE MADE HEREUNDER DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
---------------------
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission") under the File No.
1-13088. Such reports, proxy statements and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates, and at the following Regional Offices of the Commission:
Midwest Regional Office, 500 West Madison Street, Chicago, Illinois 60661 and
Northeast Regional Office, 7 World Trade Center, New York, New York 10048. The
Commission maintains a Web site that contains reports, proxy statements and
other information filed electronically with the Commission by the Company, and
the address of such Web site is http://www.sec.gov. The Company's Common Stock
is listed on the Amex and the reports, proxy statements and other information
filed by the Company with the Amex may be inspected at the public reference
facilities maintained by the Amex.
The Company has filed with the Commission a Registration Statement on Form
SB-2 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), covering the securities described herein. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby made
to the Registration Statement.
3
<PAGE>
THE COMPANY
-----------
DCT 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. The percentage of the Company's
revenues for the nine months ended March 31, 1997 for the each of these business
segments is as follows: video tape duplication, 98.22%; mobile satellite uplink
services, 1.56%; and Internet services, 0.22%.
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.
RISK FACTORS
------------
Any investment in the securities offered hereby involves a high degree of
risk and may result in a loss of the entire amount invested. Prospective
investors should carefully consider the following risk factors, in addition to
the other information set forth throughout this Prospectus, including the
Consolidated Financial Statements and Notes thereto, prior to making an
investment in the Company.
Recent Removal of Key Executive
- -------------------------------
On May 20, 1997, the Company's 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 the face of the reduced revenues experienced throughout the quarter. 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, directing the relocation of the Company's operations in
Indianapolis into new and expanded quarters. Mr. Patton previously was President
and Chief Executive Officer of American Quality Manufacturing Corporation from
1994 to 1996, Vice President and General Manager of American Cabinet, Inc. from
1992 to 1994, and General Manager of the Color Tile, Inc. manufacturing plant at
Melborn, Arkansas from 1989 to 1993. 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. See "Directors, Executive
Officers, Promoters and Control Persons."
The Company's future success depends to a significant degree on the
continued service of its key personnel and on its ability to attract, motivate
and retain highly qualified employees. At this time, the Company is particularly
dependent upon the management services of Clifford E. Patton. Mr. Patton does
not have an employment agreement with DCT; however, such an agreement may be
entered into at some future time. Competition for employees such as Mr. Patton
is intense and the process of locating key management and technical personnel
with the combination of skills and attributes required to execute the Company's
strategy is often lengthy. Accordingly, the loss of the servives of key
personnel could have a material adverse effect upon the Company's results of
operations and, in such an event, there can be no assurance that DCT could find
a qualified replacement.
4
<PAGE>
Financial Results for the Quarter Ended March 31, 1997
- ------------------------------------------------------
The Company experienced poor results from operations for the most recent
fiscal quarter ended March 31, 1997. Net sales for the three months ended March
31, 1997 decreased sharply by approximately 33% in comparison with the prior
year. This decline in net sales contributed to operating loses of approximately
$921,000 and $307,000 for the quarter and fiscal year to date, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Nine Months Ended March 31, 1997."
The Company has two video duplicating facilities which differ dramatically
in the kind of customer served by each. In its facility in Fort Lauderdale,
Florida, the Company handles regional "short run" or low volume duplication onto
videocassettes for advertising agencies, television stations, direct selling
organizations, educational groups and individuals. See "Business-- Products."
The per unit 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. A buyer has been found for
the now vacated 12,000 square foot building in Fort Lauderdale owned by the
Company. See "Description of Property." All accounting, electronic data
processing and customer service operations were consolidated at the Company's
plant in Indianapolis. As a result of these measures, the Fort Lauderdale plant
is now operating at a profit, and management projects continued profitability at
this plant.
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. See
"Business--Products." These operations contributed heavily to the overall losses
the Company experienced for the quarter ended March 31, 1997. The work force at
the plant has been reduced from about 105 in April 1997 to approximately 50 as
of July 25, 1997, 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 cashflows and level
out duplicating demand which typically peaks during the fall months. These
incentives are expected by management to favorably impact the financial results
to be reported for the quarter ending September 30, 1997. There can be no
assurance, however, 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations-- Nine Months Ended March 31,
1997--Management's Plans for Addressing Poor Financial Results for the Third
Quarter."
Competition
- ------------
The business of the Company is highly competitive. All aspects of its
business, including price, promptness of service, and product quality are
significant competitive factors and the ability of the Company to successfully
compete with respect to each factor is material to its profitability. The
Company competes with a number of other businesses that have greater financial,
technical and human resources. Such companies may develop products or services
that may be more effective than the Company's products or services and may be
more successful in marketing their products or services than the Company. The
Company depends upon its demonstrated ability to provide quality service to its
customers in order to be competitive in the market place, although no assurance
can be given that the Company will be able to compete successfully. See
"Business--Competition," and "Management Discussion and Analysis of Financial
Condition and Results of Operations--Other Items."
5
<PAGE>
Rapidly Changing Technology
- ----------------------------
Technology in video duplicating equipment is advancing rapidly. The Company
is aware that research and development is being conducted both to develop new
systems and methods of video reproduction, such as digital variable disc (DVD)
technology, and to improve existing ones. There can be no assurance that
continued development of and market penetration by DVD technology or new
discoveries, or both, will not render the Company's equipment uneconomical or
obsolete.
The Company's future profitability will depend upon its ability to adjust
to new developments such as DVD since the Company is not conducting research and
development to develop new systems and methods of video reproduction.
Reproduction equipment utilizing DVD technology is readily available from
manufacturers thereof, and it is the Company's intent to acquire DVD
reproduction capability if and when consumer market penetration of DVD player
decks becomes significant. Thus far, consumer sales of DVD player decks in the
United States have been numerically insignificant.
Possible Volatility of Stock Price
- -----------------------------------
The Common Stock of DCT is currently traded on the Amex. DCT believes that
such factors as quarterly variations in DCT's financial results, announcements
regarding the operations of DCT and developments affecting DCT or its markets
have historically caused significant fluctuation in the market price of the
Common Stock and could continue to do so in the future. In addition, the stock
market in general has recently experienced extreme price and volume
fluctuations. Some of these fluctuations have been unrelated to the operating
performance of DCT. Broad market fluctuations may adversely affect the market
price of the Common Stock. See "Market for Common Stock and Related Stockholder
Matters" for quarterly high and low sale prices of the Common Stock on the Amex
for the past three fiscal years. For the quarter ended June 30, 1997, such high
and low prices were $1.13 and $0.56, respectively.
Credit Facility and the Company's Default on Certain of Its Covenants
- ---------------------------------------------------------------------
The Company has a credit facility in place with Bank One, N.A. providing
for a revolving line of credit, term loans and a long term equipment lease
agreement. Under the revolving line of credit, borrowings can be made up to
$5,000,000 based on 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. The agreement runs through
October 31, 1998, is collateralized by accounts receivable, inventory and
equipment, and includes interest rates from .25% to .50% above the bank's base
rate (closely related to the bank's prime interest rate), which base rate is
currently 9% per annum. See "Management's Discussion and Analysis and Results of
Operations--Results of Operations--Nine Months Ended March 31, 1997" and
"--Capital Resources."
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 March 31, 1997, the Company failed to meet the covenant
requirements for tangible net worth and fixed charge coverage ratio. 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.
6
<PAGE>
The Company is endeavoring to obtain the bank's acceptance of a recovery
plan and is currently reporting to the bank on a monthly basis its performance
under the financial covenants. 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. See "Management's Discussion and Analysis and
Results of Operations--Results of Operations--Nine Months Ended March 31, 1997"
and "--Capital Resources."
Concentration of Customers
- ---------------------------
During the year ended June 30, 1996, DCT's largest customer, Madacy Music
Group, accounted for 17.6% of its sales. As of June 30, 1997, that entity
remains a customer of DCT. As is customary in the industry, DCT does not have
long-term supply contracts with its customers. The loss of any of these
customers could have a material adverse effect on the Company See "Business--
Customers".
Requirements for Continued Listing on the Amex; Disclosure Relating to
- -------------------------------------------------------------------------------
Low-Priced Stocks
- ------------------
Under the rules for continued listing on the Amex, a company must maintain
certain minimum requirements. The Amex will consider suspending dealings and
delisting the Common Stock if, among other things, (i) the number of shares of
Common Stock outstanding (exclusive of certain affiliates and concentrated
holdings) is less than 200,000, (ii) the number of round lot stockholders of
record is less than 300, or (iii) the aggregate market value of the Common Stock
is less than $1,000,000. Failure of the Company to meet the maintenance
requirements of the Amex could result in the Common Stock being delisted from
the Amex. The Common Stock would then be traded on the OTC Bulletin Board
maintained by the National Association of Securities Dealers, Inc., which is
generally considered to be a less efficient market than the Amex. The Company is
in no danger of being delisted and has no reason to believe that the Company
will be delisted from the Amex.
In addition, if the Company's securities are delisted, they would be
subject to Rule 15c2-6 promulgated under the Exchange Act that imposes
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those persons with assets in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with their spouse). For transactions
covered by this rule, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to the purchase. Consequently, the rule may
restrict the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers in this offering to sell their securities in
the secondary market. The delisting from the Amex may also cause a decline in
share price, loss of news coverage of the Company, and difficulty in obtaining
subsequent financing.
The Commission has also recently adopted regulations which define a "penny
stock" to be any equity security that has a market price (as defined in such
regulations) less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. One exception is for stocks
listed on certain exchanges, such as the Amex. For any transaction involving a
penny stock, unless exempt, the rules would require the delivery prior to any
transaction in a penny stock, of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure would also have to be
made about commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and its
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account
together with information on the limited market in penny stocks.
7
<PAGE>
Anti-Takeover Provisions
- -------------------------
The Company's Certificate of Incorporation contains a provision authorizing
the issue of "blank check" preferred stock. The Company is subject to the
provisions of Section 203 of the Delaware General Corporation Law. Such
provisions could impede any merger, consolidation, takeover or other business
combination involving the Company or discourage a potential acquired from making
a tender offer or otherwise attempting to obtain control of the Company. See
"Description of Securities--Preferred Stock."
Lack of Cash Dividends
- -----------------------
At the present time, the Company intends to use any earnings which may be
generated to finance the growth of the Company's business. Accordingly, while
payment of cash dividends rests within the discretion of the Board of Directors,
the Company does not presently intend to pay cash dividends and there can be no
assurance such dividends will be paid in the future. See "Dividend Policy" and
"Market for Common Stock and Related Stockholder Matters."
Potential Acquisitions of Business Enterprises
- -----------------------------------------------
Although no specific acquisitions are currently contemplated, the Company
may achieve growth through acquisitions of existing business enterprises in the
future. The Company does not plan to limit such potential acquisitions to any
particular industry. Accordingly, there can be no assurance that the Company can
integrate such businesses into its operations or that it can operate such
businesses on a profitable basis in the future. In addition, there can be no
assurance that future acquisition opportunities will become available, that such
future acquisitions can be accomplished on favorable terms, or that such
acquisitions will result in profitable operations in the future. In addition,
many of the Company's acquisitions are structured as stock exchanges.
Fluctuations in the Common Stock may have an adverse effect on the Company's
ability to make additional acquisitions. See " -- Possible Volatility of Stock
Price" and "Market for Common Stock and Related Stockholder Matters."
Potential Adverse Effect of Fluctuations in Prices and Supplies of Raw Materials
- -------------------------------------------------------------------------------
Upon Operations
- ----------------
DCT is dependent upon outside suppliers for all of its raw material needs
and, therefore, is subject to fluctuations in prices of raw materials. In
particular, DCT's results of operations are affected significantly by increases
in the prices of empty videocassettes ("shells") and bulk quantities of blank
videotape ("pancakes"). DCT buys its raw materials at market-based prices from
numerous independent suppliers. Prices of videocassettes and videotape can be
adversely affected by the price of materials from which they are manufactured,
such as, among other things, polystyrene resins, which are a major material used
in the manufacturing of shells. No assurances can be given that prices will not
increase significantly in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Fiscal year 1995" and "--Other
Matters," and see "Business--Raw Material and Manufacturing."
8
<PAGE>
Arbitrary Determination of Exercise and Redemption Prices; No Assurance of
- -------------------------------------------------------------------------------
Public Market for the Warrants
- -------------------------------
The exercise and redemption prices and other terms of the Warrants have
been arbitrarily set by the Company. The exercise prices of the Warrants should
not be construed to imply or predict any increase in the market price of the
Common Stock. The exercise prices of the Warrants are substantially higher than
the price at which the Common Stock is currently trading or has traded in the
recent past on the Amex. See "Market for Common Stock and Related Stockholder
Matters." There is no assurance that the Common Stock will ever trade above the
exercise prices of the Warrants during the exercise periods and, thus, it may
remain in the warrantholders' best interests to never exercise the Warrants. At
the expiration of their respective exercise periods, unexercised Class A and
Class B Warrants become null and void and of no value whatsoever. See
"Description of Securities--Warrants---Exercise Periods, Prices and Terms." The
Company may only redeem each class of Warrants should the Common Stock closing
bid price on the Amex exceed the exercise price of each class of Warrants for
five (5) consecutive trading days. There is no requirement that the Company ever
redeem the Warrants. The redemption price for all Warrants, if and when
redeemed, is $.01 each. See "Description of Securities--Warrants--Redemption
Provisions."
The Class A and Class B Warrants are transferable separately immediately
upon issuance. Although the Company has applied to list the Warrants separately
on the Amex, no assurance can be given that an active trading market for the
Warrants will develop following their distribution to DCT's Common Stock holders
or, if developed, that it will be sustained over the exercise periods of the
Warrants. See "Description of Securities--Warrants--Transfer, Exchange and
Exercise."
Current Prospectus and State "Blue Sky" Registration or Exemption Required to
- -------------------------------------------------------------------------------
Exercise the Warrants
- ---------------------
In addition to the terms under which the Warrants are issued (See "Description
of Securities--Warrants"), holders of the Warrants will have the right to sell
the Warrants or to exercise the Warrants to purchase Common Stock only if the
Warrants and the Common Stock underlying the Warrants qualify for sale under
state securities laws or are exempt from qualification under applicable
securities or "blue sky" laws of the states in which the various holders of the
Warrants then reside and there is available a current Prospectus permitting the
sale of the Warrants and the Common Stock underlying the Warrants. The Company
has undertaken and intends to use reasonable efforts to keep current a
prospectus which will permit the sale of the Warrants and the Common Stock
underlying the Warrants, but there can be no assurance that the Company will be
able to do so. The Company is not required to qualify for sale the Warrants or
the Common Stock in any state. The Warrants and the underlying Common Stock may
lose some or all of their value if a prospectus covering the Warrants and the
underlying Common Stock is not kept effective or if the Warrants and the
underlying Common Stock are not, or cannot be, qualified in an applicable state.
USE OF PROCEEDS
The Warrants are issued as a dividend to the holders of the Company's
Common Stock and for which the Company will receive no proceeds. DCT will
realize the exercise price for the Common Stock if and when the Warrants are
exercised by the warrantholders. Any net proceeds derived from the exercise of
the Warrants will be added to working capital for general corporate purposes.
The Company's issuance of the Warrants is intended by the Board of
Directors and management to immediately increase shareholder value by providing
to the Company's shareholders as of the Record Date Warrants separately
tradeable from the Company's Common Stock and, over the three years following
the date of this Prospectus, reward the holders of Common Stock as of the Record
Date who retain the Warrants should the market price for the Common Stock return
to historical levels. See "Market for Common Stock and Related Stockholder
Matters."
9
<PAGE>
DIVIDEND POLICY
The Company currently intends to retain all earnings 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.
DESCRIPTION OF SECURITIES
Warrants
- ---------
The following is a brief summary of the material provisions of the
Warrants, but such summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Warrant Agreement between
the Company and Securities Transfer Corporation (the "Warrant Agent"). A copy of
the Warrant Agreement is filed as an exhibit to the Registration Statement of
which this Prospectus is a part. See "Available Information."
Exercise Periods, Prices and Terms
Each Class A Warrant entitles the holder thereof to purchase at any time
over a two year period commencing on the Effective Date of the Registration
Statement of which this Prospectus is a part, one share of Common Stock at a
price of $3.50, subject to adjustment in accordance with the anti-dilution and
other provisions referred to below. Each Class B Warrant entitles the holder
thereof to purchase at any time over a three year period commencing on the
Effective Date of the Registration Statement of which this Prospectus is a part,
one share of Common Stock at a price of $5.00, subject to adjustment in
accordance with the anti-dilution and other provisions referred to below. The
holder of any Warrant may exercise such Warrant by surrendering the certificate,
in whole or in part, representing the Warrant (the "Warrant Certificate") to the
Warrant Agent, with the Election to Purchase Form on the reverse side of the
Warrant Certificate properly completed and executed, together with payment of
the exercise price. Each Warrant may be exercised at the applicable exercise
price until the expiration of the Warrant. No fractional shares of Common Stock
will be issued upon exercise of the Warrants. Upon expiration, the Warrants
become null and void and of no value.
The exercise price of the Warrants bear no relation to any objective
criteria of value, and should in no event be regarded as an indication of any
future market price of the Common Stock.
Adjustments
The exercise price and the number of shares of Common Stock purchaseable
upon exercise of the Warrants are subject to adjustment upon the occurrence of
certain events, including stock dividends, stock splits, combinations and
reclassification of the Common Stock. Additionally, an adjustment would be made
in the case of a reclassification or exchange of the Common Stock, consolidation
or merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the surviving corporation) or
sale of all or substantially all of the assets of the Company in order to enable
warrantholders to acquire the kind and number of shares of stock or other
securities or property receivable in such event by the holder of the number of
shares of Common Stock that might otherwise have been purchased upon exercise of
the Warrant. No adjustment will be made until the cumulative adjustments in the
exercise price per share amount to $.25 or more. No adjustment to the number of
shares and exercise price of the shares subject to the Warrants will be made for
dividends (other than stock dividends), if any, paid on the Common Stock or for
securities issued pursuant to the Company's 1990 Employee Stock Option Plan or
other employee benefit plans of the Company, or upon exercise of the Warrants or
any other option or warrant outstanding as of the Effective Date of the
Registration Statement of which this Prospectus is a part.
10
<PAGE>
Redemption Provisions
Commencing one year from the Effective Date of the Registration Statement
of which this Prospectus is a part, the Warrants are subject to redemption at
$.01 per Warrant on 30 days' prior written notice to the warrantholders if the
closing bid price of the Common Stock as reported by the Amex averages in excess
of $3.50 per share as to the Class A Warrants and $5.00 per share as to the
Class B Warrants for a period of five consecutive trading days ending within 15
days of the notice of redemption. In the event the Company exercises the right
to redeem the Warrants, such Warrants will be exercisable until the close of
business on the date for redemption fixed in such notice. If any Warrant called
for redemption is not exercised by such time, it will cease to be exercisable
and its holder will be entitled only to the redemption price. Since it is the
Company's present intention to exercise such right, warrantholders should
presume that the Company would call the Warrants for redemption if such criteria
are met.
Transfer, Exchange and Exercise
The Warrants are immediately and separately tradeable upon issuance. The
Warrants are in registered, certificate form and may be presented to the Warrant
Agent for transfer, exchange or exercise at any time on or prior to their
expiration date or redemption date. Upon exercise, the Warrants become null and
void and of no value. Although the Company has applied to list the Class A
Warrants and Class B Warrants separately on the Amex, no assurance can be given
that an active trading market for the Warrants will develop following their
distribution to DCT's Common Stock holders or, if developed, that it will be
sustained over the exercise periods of the Warrants.
Modification of Warrant
The Company and the Warrant Agent may make such modifications to the
Warrants as they deem necessary and desirable that do not adversely affect the
interests of the warrantholders. No other modifications may be made to the
Warrants without the consent of the majority of the warrantholders. Modification
of the number of securities purchaseable upon the exercise of any Warrant, the
exercise price and the expiration date with respect to any Warrant requires the
consent of the holder of such Warrant.
Warrantholder not a Shareholder
The Warrants do not confer upon holders any voting, dividend or any other
rights as stockholders of the Company.
Warrant Agent
The Warrant Agent for the registration, distribution, transfer, exercise
and redemption of the Warrants is Securities Transfer Corporation. See "Plan of
Distribution."
11
<PAGE>
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 been filed with the Commission and are incorporated by reference into
the Registration Statement of which this Prospectus is a part. See "Available
Information."
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, and the shares of
Common Stock issuable upon exercise of the Warrants offered by the Company
hereby when issued will be, fully paid and nonassessable.
Stock Options for Common Stock
- -------------------------------
As of the Effective Date of the Registration Statement of which this
Prospectus is a part, the Company had outstanding 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. See "Executive
Compensation--1990 Employees' 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.See "Executive Compensation--Incentive Stock
Options."
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.
12
<PAGE>
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.
See "Available Information."
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.
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.
PLAN OF DISTRIBUTION
The Company is issuing the Warrants as a dividend to holders of its Common
Stock. Common Stock holders of record as of the Record Date, April 30, 1997,
will receive one Class A Warrant for each seven shares of Common Stock held as
of the Record Date and one Class B Warrant for each four shares of Common Stock
held as of the Record Date. No fractional warrants will be issued as the number
of Warrants of each class due each holder of Common Stock will be rounded up to
the nearest whole number.
The Warrants will be distributed in certificate form to the holders of
Common Stock by the Warrant Agent as soon as practicable after the date of this
Prospectus. The address of the Warrant Agent is: Securities Transfer
Corporation, 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248. The telephone
number for the Warrant Agent is (972) 447-9890, and the facsimile number for the
Warrant Agent is (972) 248-4797.
The Common Stock underlying the Warrants will be sold by the Company and
distributed by the Warrant Agent to warrantholders upon exercise pursuant to
instructions contained in the Warrant Certificates.
13
<PAGE>
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock has been listed on the Amex since May 23, 1994 under the
symbol DCT. The following table sets forth the high and low sales prices of the
Common Stock on the Amex for the periods indicated.
High Low
---- ---
Fiscal 1995:
------------
First Quarter $3.94 $2.19
Second Quarter 3.94 2.19
Third Quarter 2.75 1.75
Fourth Quarter 2.25 1.25
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
On June 30, 1997, the closing price of the Common Stock was $0.69 per
share. On June 30, 1997, there were 571 stockholders of record of the Common
Stock. Additionally, the Company believes there are approximately 1,885
additional beneficial holders of the Common Stock held in brokerage accounts.
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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ----------------------
Nine Months Ended March 31, 1997
- --------------------------------
Overview
Digital Communications Technology Corporation ("the Company") experienced a
significant drop in net sales for the quarter, but was still above prior year
levels for the nine month period ended March 31, 1997. Net sales for the three
months ended March 31, 1997 decreased approximately 33%, while net sales for the
nine month period ended March 31, 1997 increased approximately 3% in comparison
to the respective periods of the prior year. The large operating loss for the
quarter also produced an operating loss for the nine months ended March 31,
1997. Increases in cost of goods sold and general and administrative expenses
contributed to the operating losses.
Liquidity
The Company utilized approximately $1,733,000 and $536,000 in cash from
operating activities for the nine months ended March 31, 1997 and 1996,
respectively. The Company's operating cash position is due primarily to the
large decrease in accounts payable and an increase in accounts receivable which
was partially offset by a decrease in the level of inventory.
Accounts payable decreased approximately $2,270,000 for the nine months
ended March 31, 1997 as compared to a decrease of approximately $1,001,000 for
the same period ended March 31, 1996. The decrease in accounts payable in the
current period is due primarily to the decline in raw material purchases which
is a result of the declining sales volume.
Accounts receivable increased approximately $661,000 from the balance at
June 30, 1996, while the Company's accounts receivable collection period
(measuring how quickly, on average, the Company collects its accounts
receivable) increased from approximately 61 days at June 30, 1996 to
approximately 65 days at March 31, 1997. The slight increase in the collection
period can be attributed to slower payments from some of the Company's
customers. However, the collection period for the nine months represents a
dramatic improvement from the 85 day period for the six month period ended
December 31, 1996. Management will continue to focus on this area to improve
credit and collections efforts, although there can be no assurances that these
efforts will be successful.
Overall inventory levels declined by $692,000 from June 30, 1996 to March
31, 1997. The reduction is primarily due to the decrease in sales volume that
has slowed the level of raw material purchases. Management has been successful
in its efforts to ensure that the least amount of operating cash is invested in
inventory by insisting that shipments of raw materials are made on a
just-in-time basis. Inventory levels, particularly in the work-in-process and
finished goods categories, will fluctuate somewhat depending on the size and
number of video tape duplicating orders processed at any given time. Typically,
the Company does not stock significant quantities of finished products, shipping
orders immediately upon completion.
Approximately $187,000 in net cash was used in investing activities for the
nine month period ended March 31, 1997 as compared to approximately $2,072,000
in cash provided by investing activities for the corresponding period of the
prior year. The primary reason for this change in position is the increase in
capital expenditures in the current period. See"-- Capital Resources".
15
<PAGE>
The Company utilized its line of credit to provide approximately $1,080,000
for working capital needs during the nine months ended March 31, 1997 and repaid
approximately $225,000 in long-term debt. Management intends to selectively
utilize its line of credit to fund working capital requirements when needed.
During the nine month period ended March 31, 1997, the Company's cash needs
were met primarily through operations and draws on the Company's line of credit.
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. As of March 31, 1997 the collateral base was approximately
$3,370,000. This left approximately $470,000 of available funds for working
capital needs.
The Company anticipates that it will continue to utilize the line of credit
to fund working capital needs over the next twelve months. Predicted increases
in sales should provide the additional collateral base necessary. 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 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 March 31, 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 March 31, 1997 the Company failed to meet the covenant
requirements for the tangible net worth and the fixed charge coverage ratios.
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, if terminated. The Company is currently reporting the financial
performance covenants on a monthly basis and is involved in ongoing, frequent
discussions with the bank to either cure any events of non-compliance or obtain
a waiver of the covenants. See "Risk Factors--Credit Facility and the Company's
Default on Certain of Its Covenants" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Capital Resources."
The negative cash balance at March 31, 1997 is the result of a controlled
disbursement account that was initiated with the new financing relationship with
Bank One. This type of account will always have a negative balance as checks are
not cleared or funded until the day they are presented to the bank. As such, the
account will normally have a negative book balance and a zero or slightly
positive bank balance.
Capital Resources
The Company invested approximately $1,089,000 in equipment and leasehold
improvements for the nine month period ended March 31, 1997. These larger
capital outlays related primarily to expenditures for duplication, loading,
packaging, and leasehold improvements at both the Company's Indianapolis and Ft.
Lauderdale facilities. The Company recently announced the expansion and
relocation of the entire Indianapolis facility into a new 172,000 square foot
building. The Indianapolis plant is scheduled to open in June with an increased
capacity of approximately 20%. The new facility layout is designed to optimize
process flow, to reduce product handling and to minimize the total cycle time of
productions from order entry to delivery. In addition, the Company intends to
make capital expenditures in excess of $2,000,000 in the coming fiscal year.
These anticipated expenditures include the acquisition of duplication, packaging
and distribution equipment that may be required to meet future demand. 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.
16
<PAGE>
Results of Operations
Overall growth in the Company's target markets led to continued sales
growth of approximately 3% in the current fiscal year to date. Net sales of
$19,796,000 for the nine month period ended March 31, 1997 were the highest in
the Company's history, compared with $19,212,000 for the same period last year.
However, net sales for the three months ended March 31, 1997 decreased sharply
by approximately 33% to $3,981,000, down from $5,930,000, the highest ever sales
for the quarter in the same period ended March 31, 1996. The significant sales
decrease in the quarter ended March 31, 1997 can be attributed to an industry
wide decline in the quarter that is the result of a severe retail backlog caused
by the closure of many stores in several large retail chains. Product from these
chain stores went back into the market, providing other chains with the
opportunity to buy distressed merchandise at significantly reduced cost, and
thus slowing further the third fiscal quarter sales which are traditionally very
slow. At the same time, other chains achieved sharp, margin-driven reductions in
inventory levels by reducing in store quantities and by returning significant
amounts of unsold product to their vendors, our customers. In addition, releases
of theatrical product into video outlets lacked any real hits to draw people
into retail, and generally mild winter weather across the country reduced rental
and sell-through activity. It is important to note that the decline in sales
volume is not attributable to a loss of any major accounts to competitors, nor
have any of the Company's key customers gone out of business. The industry
consensus is that the first few months of 1997 have been significantly slower
than expected.
Operating profit also fell sharply, declining from a profit of
approximately $397,000 (6.7% of net sales) to a loss of approximately $921,000
(-23.1% of net sales) for the three months ended March 31, 1996 and 1997,
respectively. A lesser decline was experienced for the nine months ended March
31, 1997 as operating profit for this period declined from a profit of
approximately $1,202,000 (6.3% of net sales) in the previous year to a loss of
$307,000 (-1.6% of net sales). Approximately $98,000 of the total operating loss
(31.9%) for the nine months ended March 31, 1997 is attributable to losses from
one of the Company's subsidiaries, DCT-Internet Corporation ("DCTI"). DCTI has
experienced start up losses in its first year of operation as sales have not yet
covered its operating expenses. The Company fully anticipates that DCTI's sales
will continue to increase and that DCTI will provide operating profit for the
Company by the end of the calendar year. There can be no assurances, however,
that actual results will meet these projections. The remaining decline for the
Company is due to increases in cost of goods sold as a percentage of sales and
general and administrative expenses.
Cost of goods sold, as a percentage of sales, increased to 82% for the nine
months ended March 31, 1997 as compared to 77% for the nine months ended March
31, 1996. The increased cost of goods sold is directly attributable to increased
usage of temporary labor and the cost of offloading excess production volumes to
other duplicators during the first and second fiscal quarters. Use of these
outside sources was unavoidable in order to complete customer orders that
exceeded existing capacity at both facilities. The lack of sufficient capacity
was due to severely limited space in the current buildings and unexpected delays
in the installation of new equipment. Management has already taken the steps
necessary to provide for the increase in sales volume by providing for new
duplication and packaging equipment. In addition, due to the fixed nature of
several direct overhead components, particularly depreciation, the cost of goods
sold percentage will increase in periods where sales severely decline - such as
the third quarter of fiscal 1997. Management recognizes that cost containment
through efficiency gains and productivity improvements is essential to the
Company's continued profitable growth and will continue to implement actions to
improve the Company's performance in this area. There can be no assurances,
however, that any such actions will be successful.
Selling expenses as a percentage of net sales increased slightly from 4.5%
to 4.8% for the nine months ended March 31, 1996 and 1997, respectively. The
increase is due to sales commissions paid.
General and administrative expenses increased for the nine months ended
March 31, 1997 to approximately $1,804,000 (9.1% of net sales) as compared to
approximately $1,368,000 (7.1%) for the corresponding period of the prior year.
The increase in the percentage of general and administrative expenses to net
sales is attributable to salary increases and additional legal fees incurred in
connection with the shareholder derivative lawsuit.
17
<PAGE>
The Company realized income from securities transactions of approximately
$99,000 for the nine months ended March 31, 1997 as compared to approximately
$368,000 for the corresponding period of the prior year. The gains were from
investment transactions associated with the Company's marketable securities
portfolio. The Company invests funds in equity securities, mainly listed on the
New York and American Stock Exchanges, and by policy, limits the amount of
exposure in any one equity investment. Such investments are continually
monitored to reduce the risk of any adverse stock market volatility. Cash not
invested in securities is placed on account with brokerage firms, which is swept
daily into a federally insured money market account, or placed on account with a
federally insured national bank.
Interest expense decreased sharply from approximately $530,000 to $318,000
for the nine months ended March 31, 1996 and 1997, respectively and from
approximately $150,000 to $106,000 for the three months ended March 31, 1996 and
1997, respectively. This decrease is due to reduced borrowings on the Company's
line of credit and the lack of interest expense related to any borrowings from
the Company's marketable securities portfolio.
During June 1995, the Company's management decided to discontinue the
operations of Tapes Unlimited, Inc. (TU). Management believed that the cost of
maintaining the TU subsidiary outweighed the benefits provided to the Company.
The effect on net income of the operations of TU is segregated on the face of
the income statement as discontinued operations, and totaled approximately
$95,000 net of income taxes, for the six months ended December 31, 1995.
Although all operations at TU have ceased, certain collection efforts are still
conducted by the Company on behalf of TU. These efforts, along with debt
forgiveness resulting from settlements with TU creditors, resulted in recoveries
which is reflected, net of related expenses, in the income from discontinued
operations for the nine months ended March 31, 1996. Such efforts are still
ongoing, but did not produce significant recoveries for the nine months ended
March 31, 1997.
Management's Plans for Addressing Financial Results for the Third Quarter
- -------------------------------------------------------------------------
The Company's two video duplicating facilities differ dramatically in the
kind of customer served by each. At its Fort Lauderdale, Florida facility, the
Company handles regional "short run" or low volume duplication onto
videocassettes for advertising agencies, television stations, direct selling
organizations, educational groups and individuals. See "Business--Products." 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. The Company has entered
into a contract to sell the now vacated 12,000 square foot building owned in
Fort Lauderdale, and the closing on this sale is expected to occur before
September 30, 1997. See "Description of Property." All accounting, electronic
data processing and customer service operations were consolidated at the
Company's plant in Indianapolis. As a result of these measures, the Fort
Lauderdale plant is now operating at a profit, and management projects continued
profitability at this plant.
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. See
"Business--Products." These operations contributed heavily to the overall losses
the Company experienced for the quarter ended March 31, 1997. Even with the
consolidation at Indianapolis of all of the Company's accounting, electronic
data processing and customer service operations, the work force at the plant has
been reduced from about 105 in April 1997 to approximately 50 as of July 25,
1997, 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 cashflows and level
out duplicating demand which typically peaks during the fall months. These
incentives are expected by management to favorably impact the financial results
18
<PAGE>
to be reported for the quarter ending September 30, 1997. There can be no
assurance, however, 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 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.
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.
19
<PAGE>
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. See
"Legal Proceedings". 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.
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.
20
<PAGE>
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. See "Description of Securities--Preferred Stock."
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.
21
<PAGE>
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 Company plans to continue to expand its current operating facilities at
both the Indianapolis and Ft. Lauderdale facilities in order to continue to meet
the volume demands of its sales growth. The capital expansion has included the
acquisition of 482 real-time duplicators in the Ft. Lauderdale facility and the
purchase of additional tape loading and high-speed automatic packaging equipment
is planned.
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 9% 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 March 31, 1997, the Company failed to meet the covenant
requirements for tangible net worth and fixed charge coverage ratio. 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 to the bank on a monthly basis its performance
under the financial covenants. 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.
22
<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," is 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 is not expected to have 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" is 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 anticipates adopting the disclosure
provisions of SFAS No. 123, however, the effect of adopting this pronouncement
is not expected to have a material effect on the financial position and results
of operations of the Company.
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.
23
<PAGE>
BUSINESS
General
- --------
DCT incorporated in the State of Delaware on November 12, 1987. The address
of the Company's principal executive office is 16910 Dallas Parkway, Suite 100,
Dallas, Texas 75248 and its telephone number is (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.
"Sell-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.
* "Advertising 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.
* "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, network and cable television operators, primarily in
the Southeastern United States.
Customers
- ----------
During the year ended June 30, 1996, the Company's largest customer, Madacy
Entertainment Group, accounted for approximately 17.6% of its sales. During the
year ended June 30, 1995, two of the Company's largest customers, Madacy
Entertainment Group and Atlantic Recording Corporation, accounted for 16.3% and
12% respectively, of its sales.
24
<PAGE>
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
- -----------
The Company duplicates videotapes at two facilities, one located in Ft.
Lauderdale, Florida and one located in Indianapolis, Indiana. The Ft. Lauderdale
facility, which is made up of two adjacent buildings and covers a total of
approximately 22,000 square feet, is a real-time duplication facility with the
capacity to duplicate an average of approximately 15,000 videos per day. The
current Indianapolis facility, which covers approximately 172,000 square feet,
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 this new 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.
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.
25
<PAGE>
DESCRIPTION OF PROPERTY
Set forth below is certain information with respect to the Company's
principal properties. The Company believes that all of these properties are
adequately insured, in good condition and suitable for the uses described below.
<TABLE>
<CAPTION>
<S> <C> <C>
Approximate Sum Owned/
Location Primary Use (Square Feet) Leased Lease Expiration
Date
- ------------------------ ---------------------- ------------- ---------- -----------------
Ft. Lauderdale, Florida Duplication & Office 10.000 Leased August 2000
Ft. Lauderdale, Florida Warehouse 12,000 Owned (1)
Indianapolis, Indiana Duplication & Warehouse 172,000 Leased May 2007
</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 closing on the sale
is expected to occur by September 30, 1997. The mortgage balance on
this property is approximately $250,000.
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:
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.
26
<PAGE>
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.
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 casused
plaintiff to lose the business of a certain account, as well as the prospective
business of other, unspecified persons. The plaintiff has since ceased doing
business.
The Company currently has pending a motion to dismiss the matter and,
therefore, has not filed a substantive response to plaintiff's complaint.
Minimal discovery and some settlement discussions occurred in summer of 1996.
Until the court rules on the Company's motion to dismiss, it is uncertain
whether the Company must even defend the action. Even assuming that the motion
to dismiss is denied, the validity or depth of the claim is unknown to the
Company. Similarly, the probability of judgment, if any, and the potential range
of monetary award thereon, cannot be evaluated until substantive, formal
discovery is undertaken. Meanwhile, the Company intends to vigorously defend
this matter, procedurally and substantively.
The Company does not believe that it is currently involved in any pending
actions that will have a material adverse effect on its business, financial
condition and results of operations.
27
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information about the executive officers
and directors of the Company.
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 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
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
("AQM") Corporation 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. Between March and May 1997, Mr. Weinberg was
President of Millennia Entertainment, Inc. 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 has served as Vice President and Chief Financial Officer
of the Company since February 1996. 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.
28
<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 principals used by the Company in financial reporting, internal
auditing procedures and the adequacy of the Company's internal control
procedures. The Compensation Committee, composed of Kevin B. Halter, Gary C.
Evans and James Smith, 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.
29
<PAGE>
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,
1996, 1995, and 1994. None of the Company's other executive officers and
directors received cash or non-cash compensation in excess of $100,000 for the
fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Long Term
Compensation
------------
Annual Awards Payout
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted Securities
Name and Prinicpal Other Annual Stock underlying LTIP All Other
Position Year Salary($) Bonus($) Compensation Award(s)($) Options/SARs(#) Payouts(S) Compensation($)
- ----------------------------------------------------------------------------------------------------------------------
Hugh C. Coppen
President & CEO (1) 1996 $ 19,230 - - - - - -
1995 - - - - - - -
1994 - - - - - - -
Jack D. Brown, Jr.
President (2) 1996 $ 67,019 $20,946 - - - - $17,981
1995 $ 85,000 - - - - - -
1994 $ 64,667 $50,000 $15,217 - - - -
Kevin B. Halter
Chairman 1996 $ 114,538 - - - - - -
1995 $ 72,000 - - - - - -
1994 $ 0 - - - - - -
</TABLE>
(1) 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. Mr. Coppen's employment was terminated May 20, 1997.
(2) 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>
<CAPTION>
<S> <C>
Individual Grants
-----------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SAR's
Underlying Options/ Granted to Employees In Exercise or Expiration on
Name SAR's Granted (#) Fiscal Year Base Price ($/Sh) Date
- --------------------------------------------------------------------------------------------------
Hugh C. Coppen 50,000 12% $2.00/share June 30, 1998
Kevin B. Halter 65,000 15% $1.31/Share July 1, 2002
</TABLE>
(1) The Company granted former President and Chief Executive Officer Hugh
C. Coppen options to purchase up to 50,000 shares of the Company's
Common Stock. The stock options are exercisable for a period of one
year, and became vested and exercisable July 1, 1997. The exercise
price is $2.00 per share.
30
<PAGE>
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 $1.00 per share.
<TABLE>
<CAPTION>
<S> <C> <C>
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Shares Acquired on Options/SARs at FY-End SARs at FY-End ($)
Name Exercise (#) Value Realized($) (#) Exercisable/Unexercisable
Exercisable/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.
31
<PAGE>
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.
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.
32
<PAGE>
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.
Name and Address Number of Shares Percent of Class
of Beneficial Owner Beneficially Owned
- - ----------------------------------------------------------------------
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%
(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. See "Executive
Compensation--Incentive Stock Options."
33
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company paid to Millennia $180,000 and $340,800 for administrative
services for the years ended June 30, 1996 and 1995, respectively. Management
fees payable to Millennia were discontinued in December 1995 as certain
administrative functions were taken over by the Company.
LEGAL MATTERS
Legal matters in connection with the Warrants and the underlying shares of
Common Stock being offered hereby will be passed on for the Company by Rudolph
L. Ennis, General Counsel of the Company.
EXPERTS
The consolidated balance sheets as of June 30, 1996 and 1995 and the
consolidated statements of income, retained earnings, and cash flows for each of
the two year period ended June 30, 1996 included in this prospectus, have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Article XI of the Company's Certificate of Incorporation limits, to the
fullest extent permitted by the Delaware General Corporation Law, the personal
liability of the Company's incorporator, directors, officers, employees and
agents to the Company, its stockholders and others for monetary damages or
breach of fiduciary duty. Section 145 of the Delaware General Corporation Law
enables a corporation to eliminate or limit personal liability of members of its
board of directors for violations of their fiduciary duty of care. However,
Delaware law does not permit the elimination of a director's liability for
engaging in intentional misconduct or fraud, knowingly violating a law, for any
transaction from which the director derived an improper personal benefit or for
unlawfully paying a distribution. The Delaware statute has no effect on the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty.
Article XI of the Company's Certificate of Incorporation requires
indemnification of the Company's directors, officers, employees and agents to
the fullest extent permitted by the Delaware General Corporation Law for claims
against them in their official capacities, including stockholders' derivative
actions.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions of Article XI of the Company's Certificate
of Incorporation and the Delaware General Corporation Law, or otherwise, the
Company has been advised that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of Digital Communications Technology
- -------------------------------------------------------------------------------
Corporation ( Audited)
- -----------------------
Report of Independent Accountants F-1
Balance Sheet as of June 30, 1996 F-2
Statement of Operations for the Years Ended June 30, 1996 and 1995 F-3
Statement of Shareholders' Equity for Years Ended June 30, 1996 and 1995 F-4
Statement of Cash Flows for the Years Ended June 30, 1996 and 1995 F-5
Notes to Financial Statements F-7
Interim Consolidated Financial Statements of Digital Communications Technology
- -------------------------------------------------------------------------------
Corporation (Unaudited)
- ------------------------
Balance Sheets as of March 31, 1997 and June 30, 1996 F-19
Statements of Income for the Three Months and Nine Months
Ended March 31, 1997 and 1996 F-20
Statements of Cash Flows for the Nine Months Ended March 31, 1997 and
1996 F-21
Notes to Financial Statements F-22
35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Digital Communications Technology Corporation
Dallas, Texas:
We have audited the accompanying consolidated balance sheet of Digital
Communications Technology Corporation and Subsidiaries as of June 30, 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended June 30, 1996. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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, 1996, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended June 30, 1996 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
- - ----------------------------
COOPERS & LYBRAND L.L.P.
Miami, Florida
August 23, 1996
F-1
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
1996
Current assets:
Cash and cash equivalents $ 615,037
Marketable securities 1,900,050
Accounts receivable, net of allowance for doubtful accounts of $414,000 3,719,265
Inventories 2,862,911
Prepaid expenses and other current assets 614,210
----------
Total current assets 9,711,473
Property, plant and equipment, net 5,469,304
Other assets 81,343
Loans receivable, related parties, non-interest bearing 413,369
----------
$15,675,489
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 1,625,325
Current portion of long-term debt 935,127
Accounts payable 3,032,236
Accrued liabilities 362,520
----------
Total current liabilities 5,955,208
Long-term debt, less current portion 1,666,063
Deferred tax liability 157,216
Commitments (Notes 8 and 14)
Shareholders' Equity:
Series A convertible preferred stock, 10,000,000 shares of $.0001 par value
per share authorized; 100,000 shares issued and
outstanding, 1,000,000 liquidation preference 10
Common stock, 25,000,000 shares of $.0002 par value per share
authorized; 6,332,116 shares issued, 6,125,162 shares outstanding 1,266
Additional paid-in capital 8,479,318
Retained earnings 1,030,152
Investment in S.O.I. Industries, Inc. (1,084,983)
Net unrealized holding loss on securities (528,761)
----------
Total shareholders' equity 7,897,002
----------
$15,675,489
==========
</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, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Net sales $24,807,244 $20,894,025
---------- ----------
Costs and expenses:
Cost of goods sold (exclusive of depreciation) 20,272,614 16,094,788
Selling expenses 1,215,082 1,040,280
General and administrative expenses 1,733,482 1,93,171
Depreciation and amortization 1,157,917 1,154,880
---------- ----------
Total costs and expenses 24,379,095 20,083,119
---------- ----------
Operating income 428,149 810,906
Interest expense (639,517) (700,251)
Realized gain on sales of marketable securities 360,512 512,971
Other income 51,166 142,208
Income from continuing operations before provision for
income taxes 200,310 765,834
Provision for income taxes 109,003 283,167
---------- ----------
Income from continuing operations 91,307 482,667
Discontinued operations (Note 16):
Income (loss) from discontinued operations, net of related
income taxes 131,737 (321,140)
Loss on disposal of discontinued operations, net of related
income taxes 0 (443,400)
---------- ----------
Net Income (loss) $ 223,044 $ (281,873)
Weighted average shares of common stock outstanding 5,553,415 5,264,773
========== ============
Net income (loss) per common share:
Income from continuing operations $ 0.02 $ 0.09
Income (loss) from discontinued operations 0.02 (0.06)
Loss on disposal of discontinued operations 0 (0.08)
--------- ------------
Net income (loss) per common share $ 0.04 $ (0.05)
========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARIES Consolidated
Statements of Shareholders' Equity for the years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Preferred Stock Common Stock
--------------- ------------ Additional Investment Net Unrealized
Paid-In Retained in S.O.I. Holding Loss
Shares Amount Shares Amount Capital Earnings Industries,Inc. on Securities
------ ------ ------ ------- --------- ----------- ---------------- --------------
Balance, June 30,1994,
as restated 0 $ 0 5,790,557 $ 1,158 $6,297,697 $2,315,369 $ 1,170,787) $ (517,238)
Purchase of S.O.I.
Industries, Inc. shares 0 0 0 0 0 0 (27,371) 0
Excess over book value of
amounts paid for shares of
S.O.I. Industries, Inc. 0 0 0 0 0 (322,629) 0 0
Exercise of options 0 0 142,705 28 179,377 0 0 0
Shares issued 0 0 27,926 6 89,988 0 0 0
Net depreciation of securitie 0 0 0 0 0 0 0 (96,751)
Net loss 0 0 0 0 0 (281,873) 0 0
------ ------ --------- ------- --------- --------- ---------- ----------
Balance, June 30, 1995 0 $ 0 5,961,188 $ 1,192 $6,567,062 $1,710,867 (1,198,158) $ (613,989)
Exercise of option 0 0 57,500 12 60,613 0 0 0
5% Stock dividend 0 0 301,253 60 903,699 (903,759) 0 0
Sale of preferred stock 100,000 10 0 0 929,990 0 0 0
Shares Issued 0 0 12,175 2 17,954 0 0 0
Sale of S.O.I.
Industries, Inc. shares 0 0 0 0 0 0 113,175 0
Net appreciation of
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)
======= ====== ========= ====== ========== ========= ========== =========
</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, 1996 and 1995
<TABLE>
<CAPTION>
<C> <C> <C>
1996 1995
Cash flows from operating activities:
Net income (loss) $ 223,044 $ (281,873)
------------ ------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization (including $74,068
in 1995 from discontinued operations) 1,157,917 1,228,948
Gain on sale of marketable securities (360,512) (512,971)
Loss on sale of property, plant and equipment 0 106,272
(Recovery) provision for bad debts (651,133) 745,776
Loss on disposal of subsidiary 0 530,637
Increase (decrease) deferred tax liability 148,824 (87,282)
Decrease (increase) in accounts receivable 75,557 (890,666)
Decrease (increase) in inventories 1,195,382 (842,355)
Increase in prepaid expenses and other assets (269,084) (313,772)
Increase in other assets (50,185) (13,798)
Increase in accounts payable 866,511 404,154
(Decrease) in accrued liabilities (55,856) (12,904)
(Decrease) in income taxes payable (0) (169,077)
----------- -----------
Net cash provided by (used in) operating activities 2,280,465 (108,911)
----------- -----------
Cash flows from investing activities:
Sales of marketable securities 11,545,079 13,912,305
Purchases of marketable securities (10,424,763) (14,011,648)
Acquisition of property, plant and equipment (1,387,657) (1,226,568)
Proceeds from sales of property, plant and equipment 0 24,000
Net repayments (advances) to affiliates 188,367 (352,736)
Sale (purchase) of S.O. I. Industries, Inc. shares 113,175 (350,000)
----------- -----------
Net cash provided by (used in) investing activities 34,201 (2,004,647)
----------- -----------
</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, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Cash flows from financing activities:
Borrowings from bank $ 0 $ 838,932
Repayment to bank (778,372) (625,790)
(Repayments) proceeds from revolving lines of credit, net (2,214,675) 1,290,433
Proceeds from sale of preferred stock 930,000 0
Proceeds from issuance of common stock 78,581 269,399
------------ -----------
Net cash (used in) provided by financing activities (1,984,466) 1,772,974
------------ -----------
Net increase (decrease) in cash and cash equivalents 330,200 ( 340,584)
Cash and cash equivalents, beginning of year 284,837 625,421
------------ -----------
Cash and cash equivalents, end of year $ 615,037 $ 284,837
============ ===========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 691,677 $ 686,559
============ ===========
Income taxes $ 252,243 $ 380,247
============ ===========
</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:
------------
On April 29, 1994, the shareholders of MagneTech Corporation approved a
resolution to change the name of the Company to Digital Communications
Technology Corporation (the "Company"). The Company was incorporated on November
12, 1987, under the laws of the State of Delaware, as a wholly-owned subsidiary
of S.O.I. Industries, Inc. ("Millennia"). As of June 30, 1996, Millennia owned
approximately 18% of the Company.
The Company is an integrated video communications company which offers video
tape duplication and satellite communications services. Sales for the years
ended June 30, 1996 and 1995 were generated from video tape duplicating at the
Ft. Lauderdale and Indianapolis facilities, as well as satellite broadcasting.
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 band 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 band 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.
F-7
<PAGE>
2. Summary of Significant Accounting Policies:
------------------------------------------
Principles of Consolidation
- ----------------------------
The accompanying consolidated financial statements for the years ended June 30,
1996 and 1995 include the accounts of Digital Communications Technology
Corporation, (dba 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.
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 accounts for marketable securities in accordance with the provisions
of Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115).
Under SFAS 115, debt securities and equity securities that have readily
determinable fair values are to be classified in three categories:
Held to Maturity - the positive intent and ability to hold to maturity.
----------------
Amounts are reported at amortized cost, adjusted for amortization of
premiums and accretion of discounts.
Trading Securities - bought principally for purpose of selling them in the
-------------------
near term. Amounts are reported at fair value, with unrealized gains and
losses included in earnings.
Available for Sale - not classified in one of the above categories. Amounts
------------------
Marketable securities consist of equity securities in the health care and
technology industries, with an aggregate cost, based upon specific
indentification, of $2,428,811 as of June 30, 1996. The gross unrealized holding
losses as of June 30, 1996 were $533,701, and the gross unrealized holding gains
were $4,940. All of the Company's securities are classified as available for
sale securities.
Gains or losses on dispositions of securities are based on the net
difference of the proceeds and the adjusted carrying amounts of the securities
sold, using the specific identification method.
F-8
<PAGE>
2. Summary of Significant Accounting Policies, Continued:
-----------------------------------------------------
Investment in S.O.I. Industries (now Millennia, Inc.)
- -----------------------------------------------------
As of June 30, 1996, the Company owns 383,336 shares of Millennia common
stock with a book value of $1,084,983 and a market value of $383,336. This
investment represents 19% of Millennia's outstanding common stock. Management
does not believe that this investment has been permanently impaired. Subsequent
to June 30, 1996, the market value has increased by approximately $360,000.
Inventories
- ------------
Inventories are valued at the lower of cost (weighted average) 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.
Income Taxes
- -------------
The Company uses the asset and liability method of accounting for income taxes
as prescribed by SFAS No. 109, Accounting for Income Taxes". Under this method,
deferred income taxes are recognized for the tax consequences in future years
for differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the time period in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in the deferred tax asset and liability.
Revenue Recognition
- --------------------
Revenues are recognized when a product is shipped or a service is performed.
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
207,000 and 659,400 at June 30, 1996 and 1995, respectively.
F-9
<PAGE>
2. Summary of Significant Accounting Policies, Continued:
-----------------------------------------------------
Change in Accounting Standards
- -------------------------------
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," is
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 is not expected to have 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" is 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 anticipates adopting the disclosure
provisions of SFAS No. 123, although the impact of such disclosure has not been
determined.
Reclassifications
- ------------------
Certain amounts reflected in the 1995 consolidated financial statements have
been reclassified to conform to the 1996 presentation.
3. Inventory:
---------
Inventories consist of the following at June 30:
1996 1995
Raw materials $ 1,891,393 $ 3,008,167
Work-in-process 769,254 885,976
Finished goods 202,264 164,150
----------- ----------
$ 2,862,911 $ 4,058,293
=========== ==========
F-10
<PAGE>
4. Property, Plant and Equipment:
-----------------------------
Property, plant and equipment consists of the following:
Land $ 73,000
Buildings and improvements 333,040
Machinery and equipment 8,779,665
Leasehold improvements 213,663
Furniture and fixtures 145,050
Transportation equipment 369,030
Computer equipment 319,122
----------
10,232,570
Less accumulated depreciation (4,763,266)
----------
Net property, plant and equipment $ 5,469,304
Depreciation expense was $1,157,917 and $1,189,449 for the years ended June 30,
1996 and 1995, respectively.
5. Related Party Transactions:
---------------------------
Loans Receivable
- - ----------------
These amounts represent advances to affiliates and are due on demand. Advances
are non-interest bearing.
Management Fees
- - ---------------
The Company paid to Millennia $180,000 and $340,800 for administrative services
for the years ended June 30, 1996 and 1995, 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 are 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 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-11
<PAGE>
6. Revolving Lines of Credit:
-------------------------
The Company has a revolving line of credit agreement for aggregate borrowings of
up to $4,000,000. Interest is payable on all outstanding cash advances at the
bank's prime lending rate plus 3/8% (8.625% at June 30, 1996). Any unpaid
principal and accrued interest is due on demand, but no later than August 1996.
The line of credit is collateralized by accounts receivable, inventory and
equipment. The terms of the agreement require, among other provisions, that the
Company comply with requirements for maintaining certain cash flow and other
financial ratios and restricts the payment of cash dividends. As of June 30,
1996, $1,625,000 has been drawn upon the line of credit.
Average short-term borrowings under this revolving credit agreement were
$3,699,194, at an average interest rate of 8.87%.
Subsequent to June 30, 1996 the Company signed a commitment letter, subject to
certain conditions, with Bank One, N.A. ( Bank") which would provide a new
credit facility to replace the existing facility with NBD Bank, N.A. 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 $2,500,000 secured term loan and a capital
expenditure term loan facility for up to $1,250,000, based upon 80% of the
acquisition costs of new machinery and equipment. The long term lease agreement
is collateralized with new equipment in excess of $700,000. All of the above
agreements are collateralized by accounts receivable, inventory and equipment.
The facility has a two year term and includes interest rates at .25% and .50%
above the Bank's base rate (closely related to the Bank's prime interest rate).
7. Long-Term Debt:
--------------
Long-term debt as of June 30, 1996 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Loan payable to a bank in monthly installments of $3,198 including interest
at 8.75%, maturing April 2007; collateralized by real estate. $ 269,899
Loan payable to a bank in monthly principal installments of $7,440 plus
interest at prime plus 1% (9.25% at June 30, 1996), maturing June 1997;
collateralized by accounts receivable, inventory, and equipment. The terms
of the agreement require, among other provisions, that the Company comply
with requirements for maintaining certain cash flow and other financial
ratios. 297,619
Loans payable to a bank in monthly installments of $18,868 plus interest at
prime plus 1/4% (8.5% at June 30, 1996), maturing through June 2000;
collateralized by the accounts receivables, inventory and equipment. The
terms of the agreement require, among other provisions, that the Company
comply with requirements for maintaining certain cash flow and other
financial ratios. 813,810
F-12
<PAGE>
7. Long-Term Debt, Continued
-------------------------
Loan payable to a bank in monthly installments of $29,000 plus interest at
prime plus 1/4% (8.5% at June 30, 1996), maturing December 1998;
collateralized by accounts receivables, inventory, and equipment. The terms
of the agreement require, among other provisions, that the Company comply
with requirements for maintaining certain cash flow and other financial
ratios. 847,125
Loan payable to a bank in monthly installments of $6,149 including interest
at 7.63%, maturing January 2003; collateralized by machinery and equipment;
guaranteed by Millennia. 372,737
---------
2,601,190
Less current portion (935,127)
---------
$1,666,063
=========
</TABLE>
The contractual maturities on long-term debt are as follows:
Years ending June 30,
- - ---------------------
1997 $ 935,127
1998 641,786
1999 450,262
2000 212,633
2001 83,854
Thereafter 277,528
---------
$2,601,190
8. Commitments:
-----------
The Company leases its office facilities under operating leases expiring through
May 1999. The leases provide for increases based on real estate taxes and
operating expenses. The Company also leases facilities and equipment on a
month-to-month basis.
Aggregate future minimum rental payments under the above leases are as follows:
Year ending June 30,
- - --------------------
1997 $ 306,127
1998 297,852
1999 273,031
---------
$ 877,010
=========
Rent expense under the above leases for the years ended June 30, 1996 and 1995
was $414,075 and $412,568, respectively.
F-13
<PAGE>
9. Preferred Stock:
---------------
On May 6, 1996 the Company sold 100,000 shares of Class 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. 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. As of June 30, 1996 no shares of Preferred Stock were converted.
Through September 1996, 20,000 shares of Series A Preferred Stock had been
converted, pursuant to their original terms, into 133,494 shares of Common Stock
at an average per share conversion price of $1.57. 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 $7,825 related to the shares converted in 1996. 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.
Accordingly, management believes that the value of shares issued should be
recorded at the carrying amount of the Preferred Stock converted. If such
treatment is ultimately determined to be inappropriate, all or a portion of the
difference could be accounted for as a Preferred Stock dividend which although
would not impact the Company's statements of operations or total shareholders'
equity, would adversely impact the Company's earnings per share calculations in
periods of conversions. If these shares had been converted at the beginning of
fiscal year 1996, the net income per share would have been $0.04.
10. Sales to Major Customers:
------------------------
During the year ended June 30, 1996, one customer accounted for approximately
17.6% of the Company's sales. During the year ended June 30, 1995, two customers
accounted for approximately 28% 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, 1996. Such
amounts have not been comprehensively reviewed or updated since that date and,
therefore may not represent current estimates of fair value. The fair value of
debt has been estimated using discounted cash flow models incorporating discount
rates based on current market interest rates for similar types of instruments.
At June 30, 1996, the difference between the fair value and the carrying value
of debt instruments was not material.
12. Stock Option Plan:
-----------------
On January 22, 1990, the Board of Directors adopted the MagneTech Corporation
1990 Employees' Stock Option Plan. As of June 30, 1996, there were 9,370 shares
reserved for future issuance at exercise prices which range from $1.00 to $3.44
per share.
F-14
<PAGE>
There was no compensation expense as of June 30, 1996 and June 30, 1995. The
following is a summary of all option transactions:
Shares Option Price
Outstanding July 1, 1994 244,375 $1.00 - $1.50
Granted 35,000 $2.25 - $3.44
Exercised (141,250) $1.00 - $1.50
Canceled (15,000) $1.50
--------- ------------
Outstanding June 30, 1995 123,125 $1.00 - $3.44
Granted 204,500 $1.00 - $1.50
Exercised (57,500) $1.00 - $2.25
--------- ------------
Outstanding June 30, 1996 270,125 $1.00 - $3.44
========= ============
13. Income Taxes:
------------
The provision for income taxes is as follows:
1996 1995
Current:
Federal $ 23,784 $ 294,762
State 21,109 76,724
---------- ---------
44,893 371,486
---------- ---------
Deferred:
Federal 54,395 (70,077)
State 9,715 (18,242)
---------- ---------
64,110 (88,319)
---------- ---------
$ 109,003 $ 283,167
========== =========
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and consolidated provisions for income taxes are as follows:
1996 1995
Tax at federal statutory rate 34.0% 34.0 %
State income tax - net of federal benefit 5.5% 8.8 %
Other 15.0% (4.9)%
---- ----
54.4% 37.9%
==== ====
F-15
<PAGE>
The tax effects of temporary differences which comprise the deferred tax assets
and liabilities are as follows:
1996
Assets:
Allowance for doubtful accounts $ 163,596
Investments - unrealized holding losses 208,861
Loss and credit carryforwards 185,816
Reserve for inventory obsolescence 7,900
---------
566,173
Liabilities:
Property and equipment - depreciation (507,322)
Deferred state tax benefit (7,206)
---------
Net asset 51,645
Less: Valuation allowance (208,861)
---------
Deferred tax liability $ (157,216)
=========
14. Employment Agreements:
---------------------
The Company has entered into employment agreements with four 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) for the
years ending June 30, are as follows:
1997 $ 478,000
1998 345,500
1999 191,700
----------
$ 1,015,200
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, 1996, the Company exceeded the insured limit by approximately $388,600.
At June 30, 1996 two equity investments accounted for approximately 67% of total
investments. Approximately 41% of the Company's accounts receivable, before
allowances, was due from three customers at June 30, 1996.
F-16
<PAGE>
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. Prior years
consolidated financial statements have been reclassified to conform with the
current year presentation.
Summarized results of operations of the discontinued operations of Tapes for
1996 and 1995 are as follows:
1996 1995
Net sales $ 0 $ 2,658,516
========== ===========
Operating income (loss) 0 $ 37,926
Gain (loss ) before income taxes $ 230,511 $ (561,924)
Income tax expense (benefit) 98,774 $ (240,784)
---------- -----------
Gain (loss) from discontinued
operations $ 131,737 $ (321,140)
========== ===========
In connection with the shutdown of operations of Tapes, in 1995 the Company
recorded a charge of $443,400, net of tax of $87,237, to write-off the goodwill
recorded in connection with the acquisition of tapes.
The assets and liabilities of Tapes, which have not been reclassified on the
consolidated balance sheets, are as follows:
1996 1995
Current assets, principally cash, accounts
receivable and inventories $16,649 $ 133,790
Plant and equipment - 3,839
------ --------
Total assets $16,649 $ 137,629
====== ========
Accounts payable and accrued liabilities, net
of amounts due to the Company of $100,967
in 1996 and $40,700 in 1995 $71,856 $ 423,114
------ --------
Total liabilities $71,856 $ 423,114
====== ========
F-17
<PAGE>
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 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 - 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. The Plaintiffs have
brought this lawsuit allegedly to vindicate the wrongs that the Plaintiffs claim
were done to the Company and Millennia by the individual defendants and their
affiliated companies, and 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 Brown, 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 Temporary Restraining Order caused the
Company damages. However, the Company does not believe that the lawsuit will
have any further material impact on the operations or financial condition of the
Company.
The Company does not believe that it is currently involved in any pending
actions that will have a material adverse effect on its business, financial
condition and results of operations.
F-18
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
March 31, June 30,
1997 1996
(Unaudited) (Audited)
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ (225,305) $ 615,037
Marketable securities 887,087 1,900,050
Accounts receivable, net of allowance for doubtful accounts of
$520,000 at March 31, 1997 and $414,000 at June 30, 1996 4,274,615 3,719,265
Inventories 2,170,526 2,862,911
Prepaid expenses and other current assets 722,646 614,210
---------------- ---------------
Total current assets 7,829,569 9,711,473
---------------- ---------------
Property, plant and equipment, net 5,450,309 5,469,304
Other assets 399,174 81,343
Loans receivable, related parties 414,300 413,369
---------------- ---------------
Total assets $ 14,093,352 $ 15,675,489
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 2,897,495 $ 1,625,325
Current portion, long-term debt 1,846,588 935,127
Accounts payable 761,931 3,032,236
Accrued liabilities 419,210 362,520
---------------- ---------------
Total current liabilities 5,925,224 5,955,208
---------------- ---------------
Long-term debt, less current portion 529,810 1,666,063
Deferred tax liability 417,675 157,216
Commitments and contingencies
Stockholders' Equity:
Preferred stock, 10,000,000 shares of $.00001 par value per share
authorized; Series A convertible preferred stock, 100,000 shares
authorized and 0 and 100,000 shares issued and outstanding as of
March 31, 1997 and June 30, 1996, respectively 0 10
Common stock, 25,000,000 shares of $.0002 par value per share
authorized; 7,314,922 and 6,332,116 issued and 7,075,457 and
6,125,162 shares outstanding as of March 31, 1997
and June 30, 1996, respectively 1,463 1,266
Additional paid-in capital 8,511,508 8,479,318
Retained earnings 530,873 1,030,152
Investment in Millennia, Inc. (1,084,983) (1,084,983)
Net unrealized holding loss on investment securities (738,218) (528,761)
---------------- ---------------
Total stockholders' equity 7,220,643 7,897,002
---------------- ---------------
Total liabilities and stockholders' equity $ 14,093,352 $ 15,675,489
================ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-19
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<S> <C> <C>
For the three months ended For the nine months ended
March 31, March 31,
--------- ---------
1997 1996 1997 1996
-------------- ------------- ------------- -------------
Net sales $ 3,981,243 $ 5,929,998 $ 19,795,659 $ 19,211,980
-------------- ------------- ------------- -------------
Costs and Expenses:
Cost of goods sold 3,601,034 4,396,183 16,243,305 14,858,921
Selling expenses 306,313 297,762 947,473 861,914
General and administrative expenses 615,816 523,126 1,803,528 1,367,597
Depreciation and amortization 379,477 315,792 1,108,458 921,412
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
Total costs and expenses 4,902,640 5,532,863 20,102,764 18,009,844
-------------- ------------- ------------- ------------
Operating (loss) profit (921,397) 397,135 (307,105) 1,202,136
-------------- ------------- ------------- -------------
Other income (expense):
Realized gains (losses) from investment
transactions 7,454 311,069 99,536 367,989
Interest and other (expense) income (5,393) 10,182 (5,393) 47,312
Interest expense (106,212) (149,775) (317,904) (529,704)
-------------- ------------- ------------- -------------
( 104,151) 171,476 (223,761) (114,403)
-------------- ------------- ------------- -------------
(Loss) income from continuing operations
before (benefit) provision for
income taxes (1,025,548) 568,611 (530,866) 1,087,733
(Benefit) provision for income taxes (226,053) 226,720 (33,311) 427,720
-------------- ------------- ------------- -------------
(Loss) income from continuing operations (799,495) 341,891 (497,555) 660,013
Discontinued operations:
Gain (loss) from operations of
discontinued operation 2,963 6,159 (1,722) 101,519
-------------- ------------- ------------- -------------
Net (loss) income $ (796,532) $ 348,050 $ (499,277) $ 761,532
-------------- ------------- -------------- -------------
Preferred dividends 0 0 250,000 0
------------- ------------- ------------- -------------
Net loss (income) attributable to common
$ (796,532) $ 348,050 $ (749,277) $ 761,532
stockholders
============= ============= ============= =============
Weighted average shares of common stock
outstanding 7,040,497 5,732,182 6,461,977 5,487,449
============== ============= ============= =============
(Loss) earnings per share:
Continuing operations $ (0.11) $ 0.06 $ (0.12) $ 0.12
Discontinued operations 0.00 0.00 0.00 0.02
-------------- ------------- ------------- -------------
Net (loss) income $ (0.11) $ 0.06 $ (0.12) $ 0.14
============== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-20
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<S> <C>
For the nine months ended
March 31,
1997 1996
---------------- ----------------
Cash flows from operating activities:
Net income $ (499,277) $ 761,532
---------------- ----------------
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 1,108,458 921,412
Gain on sale of marketable securities (99,536) (367,989)
Provision for bad debts 105,833 131,417
Increase in accounts receivable (661,183) (1,469,536)
Decrease in inventories 692,385 114,103
(Increase) decrease in prepaid expenses and other (426,267) 183,911
Decrease in accounts payable (2,270,305) (1,007,680)
Increase in accrued liabilities 56,690 197,187
Increase in deferred tax liability 260,456 0
---------------- ----------------
Net cash used in operating activities (1,732,746) (535,643)
---------------- ----------------
Cash flows from investing activities:
(Increase) decrease in loans receivable, related parties (931) 142,158
Sales of marketable securities 8,600,679 9,418,038
Purchases of marketable securities (7,697,637) (6,806,033)
Increase in other assets and other liabilities 0 11,723
Capital expenditures (1,089,463) (693,965)
---------------- ----------------
Net cash (used in) provided by investing activities (187,352) 2,071,921
---------------- ----------------
Cash flows from financing activities:
Net long-term repayments (224,792) (541,973)
Net short-term borrowings (repayments) 1,272,170 (840,000)
Issuance of common stock 32,378 55,000
--------------- ----------------
Net cash provided by financing activities 1,079,756 (1,326,973)
---------------- ----------------
(Decrease) increase in cash and cash equivalents (840,342) 209,305
Cash and cash equivalents at beginning of period 615,037 284,837
---------------- ----------------
Cash and cash equivalents at end of period $ (225,305) $ 494,142
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (non-capitalized) $ 286,006 $ 544,129
================ ================
Income taxes $ $ 146,000
-
================ ================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-21
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
------------------------------------------
The accompanying consolidated financial statements include the accounts
of Digital Communications Technology Corporation and its wholly-owned
subsidiaries, Tapes Unlimited, Inc. and DCT - Internet Corporation. The
operations of Tapes Unlimited, Inc. which were formerly consolidated
with the operations of the Company, have been segregated as
discontinued operations. All significant intercompany transactions have
been eliminated.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from these
unaudited interim financial statements. These financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's annual audited financial statements.
The balance sheet as of June 30, 1996 has been extracted from audited
financial statements not presented herein.
Certain amounts in the prior period financial statements have been
reclassified to conform with current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, (consisting of only normal
recurring accruals) necessary to conform with generally accepted
accounting principles. The results of operations for the periods
presented are not necessarily indicative of the results to be expected
for the full year.
2. Marketable Securities
---------------------
Marketable securities consist of equity securities primarily in the
health care and financial industries, with an aggregate cost, based on
specific identification, of $1,625,314 as of March 31, 1997. The
marketable securities portfolio contains unrealized losses of $738,227,
resulting in a carrying value of $887,087 at March 31, 1997. The
unrealized losses are reported as a separate component of stockholders'
equity. All of the Company's securities are classified as available for
sale securities.
3. Inventory
---------
Inventories are valued at the lower of cost (weighted average) or
market and consisted of the following:
<TABLE>
<S> <C> <C>
March 31, June 30,
1997 1996
------------------ -----------------
Raw materials $ 1,385,262 $ 1,891,393
Work-in-process 609,801 769,254
Finished goods 175,463 202,264
----------------- ----------------
$ 2,170,526 $ 2,862,911
================== =================
</TABLE>
F-22
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
4. Property, Plant and Equipment
-----------------------------
Property, plant and equipment consist of the following:
<TABLE>
<S> <C> <C>
March 31, June 30,
1997 1996
----------------- ----------------
Land $ 73,000 $ 73,000
Buildings and improvements 750,057 546,703
Machinery and equipment 10,447,031 9,612,867
----------------- ----------------
11,270,088 10,232,570
Less accumulated depreciation (5,819,779) (4,763,266)
================= =================
Net property, plant and equipment $ 5,450,309 $ 5,469,304
================= =================
</TABLE>
5. Revolving Lines of Credit
-------------------------
The Company has a revolving line of credit agreement for aggregate
borrowings of up to $5,000,000. Interest is payable on all outstanding cash
advances at the bank's base lending rate (closely related to the bank's
prime interest rate) plus 1/2%. At March 31, $2,897,495 has been drawn upon
the Company's line of credit with an interest rate of 9.0%. Any unpaid
principal and accrued interest is due on demand, but no later than October
31, 1998. The line of credit is collateralized by accounts receivable,
inventory and equipment. The terms of the agreement require, among other
provisions, that the Company comply with requirements for maintaining
certain cash flow and other financial ratios and restricts the payment of
cash dividends. As of March 31, the Company failed to meet certain of these
financial covenants, but is in negotiations with the bank to either cure
any events of non-compliance or obtain a waiver of the covenants.
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 March 31, 1997, the Company failed to meet the
covenant requirements for tangible net worth and fixed charge coverage
ratio. 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 to the bank on a monthly basis its
performance under the financial covenants. 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.
F-23
<PAGE>
6. Long Term Debt
--------------
Long term debt consists of the following:
<TABLE>
<S> <C> <C>
March 31, June 30,
1997 1996
------------ -------------
Various mortgages and notes payable with interest rates ranging from
7.63% to 1% over prime. Monthly payments range from $3,198 to $29,000
and expiration dates range from 1997 to 2007.
$ 596,364 $ 2,601,190
</TABLE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Loan payable to bank in monthly installments plus interest at the
bank's base rate (prime) plus 1/2%, maturing October 1998;
collateralized by accounts receivables, inventory and equipment. The
terms of the agreement require, among other provisions, that the
Company comply with certain ratios and covenants.
<TABLE>
<S> <C> <C>
$ 1,780,034 0
------------------ -----------------
2,376,398 2,601,190
Less current portion (1,846,588) (935,127)
================== =================
$ 529,810 $ 1,666,063
================== =================
</TABLE>
Under the terms of certain of the above agreements, the Company is
required to comply with certain ratios and covenants. As of March 31,
the Company failed to meet certain of these financial covenants. As
such, all amounts due under these agreements are classified as current
liabilities until the next measurement date.
7. Preferred Stock
---------------
On May 6, 1996 the Company sold 100,000 shares of Series A Convertible
Preferred Stock ("Preferred Stock") in a private placement. The
Preferred Stock is convertible into Common Stock at the discretion of
the holder at the lesser of (i) 20% discount on the previous five day
average closing bid at conversion, or (ii) previous five day average
closing bid price at closing. The holder may convert up to 20% of the
Preferred Stock every 30 days beginning June 15, 1996. The Preferred
Stock is convertible for a term of three years, and accrues dividends
at a rate of 7% per annum (dividends are rescinded if the shares are
converted in the first year). The holders of the preferred shares do
not have any voting rights.
F-24
<PAGE>
7. Preferred Stock, Continued:
---------------------------
Through March 1997, all 100,000 shares of Series A Preferred Stock had
been converted, pursuant to their original terms, into 968,430 shares
of Common Stock at an average per share conversion price of $1.08. The
terms of the Preferred Stock which provided for a lower conversion
price than the quoted market price of the Common Stock at the time of
conversion resulted in an aggregate difference of $250,000. Such terms
take into account a number of factors affecting value, including the
ability to market a significant number of shares of the underlying
common stock which were negotiated at the time of the issuance of the
Preferred Stock. Due to a recent SEC Staff Announcement regarding the
accounting for convertible debt and preferred stock with discounted
conversion rates, the difference has now been accounted for as a
Preferred Stock dividend. This difference was previously recorded at
the carrying amount of the Preferred Stock converted.
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 state taxes and operating expenses. The
Company also leases facilities and equipment on a month-to-month
basis.
Aggregate future minimum rental payments under the above leases are as
follows:
Year ending June 30,
--------------------
1998 $ 890,046
1999 $ 893,955
2000 $ 898,020
----------
$2,682,021
==========
9. 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 March 31, 1997, the
Company did not exceed the insured limit. At March 31, 1997 four
equity investments accounted for approximately 85% of the total
investments. Approximately 34% of the Company's accounts receivable,
before allowances, was due from two customers at March 31, 1997.
10. 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:
F-25
<PAGE>
10. Litigation, Continued
-----------------------
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 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-26
<PAGE>
10. 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 casused plaintiff to lose the business of
a certain account, as well as the prospective business of other,
unspecified persons. The plaintiff has since ceased doing business.
The Company currently has pending a motion to dismiss the matter and,
therefore, has not filed a substantive response to plaintiff's
complaint. Minimal discovery and some settlement discussions occurred
in summer of 1996. Until the court rules on the Company's motion to
dismiss, it is uncertain whether the Company must even defend the
action. Even assuming that the motion to dismiss is denied, the
validity or depth of the claim is unknown to the Company. Similarly,
the probability of judgment, if any, and the potential range of
monetary award thereon, cannot be evaluated until substantive, formal
discovery is undertaken. Meanwhile, the Company intends to vigorously
defend this matter, procedurally and substantively.
The Company does not believe that it is currently involved in any
pending actions that will have a material adverse effect on its
business, financial condition and results of operations.
11. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128). 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 has not yet determined the
impact of the implementation of SFAS 128.
F-27
<PAGE>
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
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 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 has not yet determined the
impact of the implementation of SFAS 130.
In June 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures 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 "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 has not yet
determined the impact of the implementation of SFAS 131.
F-28
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offering herein contained, and if given or
made, such information or representation must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
any security other than the registered securities to which it relates, or an
offer to or solicitation of any person in any jurisdiction in which such offer
or solicitation would be unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstance, create an implication
that there has been no change in the facts herein set forth since the date
hereof.
-----------------------------------
TABLE OF CONTENTS
Page
Available Information 3
The Company 4
Risk Factors 4
Use of Proceeds 9
Dividend Policy 10
Description of Securities 10 DIGITAL COMMUNICATIONS
Plan of Distribution 13 TECHNOLOGY CORPORATION
Market for Common Stock 14 Prospectus
Management's Discussion and 1,047,448 Redeemable Class A Warrants
Analysis of Financial Condition 1,831,190 Redeemable Class B Warrants
and Results of Operations 15 2,878,638 Shares of Common Stock
Business 24
Description of Property 26
Legal Proceedings 26
Directors and Executive Officers 28
Executive Compensation 30
Security Ownership of Certain
Beneficial Owners and Management 33
Certain Relationships and Related
Transactions 34
Legal Matters 34
Experts 34
Disclosure of Commission Position
On Indemnification for
Securities Act Liabilities 34
Index to Financial Statements 35
- ---------------------------
36
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 27. Exhibits
5 Legal Opinion
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Rudolph L. Ennis (included in Exhibit 5)
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Dallas, State of Texas, on the 1st day of August,
1997.
DIGITAL COMMUNICATIONS
TECHNOLOGY CORPORATION
/s/ Kevin B. Halter
By: ________________________________
Kevin B. Halter
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following person in the capacities and
on the date shown.
/s/ Kevin B. Halter
_____________________________________ August 1, 1997
Kevin B. Halter
Chairman of the Board and Director
(Principal Executive Officer)
and as Attorney-in-Fact for
Douglas L. Miller, Vice President
and Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer); Kevin B. Halter, Jr.,
Vice President, Secretary and Director;
Gary C. Evans, Director; James Smith,
Director; and Don R. Benton, Director.
II-2
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number Numbered Page
5 Legal Opinion
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Rudolph L. Ennis (included in Exhibit 5)
<PAGE>
Exhibit 5
[Letterhead of Rudolph L. Ennis, Esq.]
August 1, 1997
Digital Communications Technology Corporation
16910 Dallas Parkway, Suite 100
Dallas, Texas 75248
Re: Registration Statement on Form SB-2
Class A Warrants, Class B Warrants and Shares of Common Stock
Ladies and Gentlemen:
In connection with your registration on Form SB-2 (the "Registration Statement")
under the Securities Act of 1933, as amended, of 1,047,448 Redeemable Class A
Warrants and 1,831,190 Redeemable Class B Warrants (the "Warrants"), issuable as
a dividend to holders of the Common Stock of the Company, and of 2,878,638
Shares of Common Stock (the "Common Stock"), issuable upon exercise to holders
of the Warrants, it is my opinion that:
(i) the Company has the authority to issue the Warrants and the Common
Stock in the manner and under the terms set forth in the Registration Statement;
(ii) the Warrants have been duly authorized and, when issued and delivered
in accordance with their terms, will be validly issued, fully paid and
non-assessable; and
(iii) the Common Stock has been duly authorized and, when issued, delivered
and paid for upon exercise by holders of the Warrants in accordance with the
terms of the Warrants, will be validly issued, fully paid and non-assessable.
I hereby consent to the filing of this opinion as Exhibit 5 to the Registration
Statement and its use as a part of the Registration Statement.
Very truly yours,
/s/ Rudolph L. Ennis
- ---------------------------------
Rudolph L. Ennis
General Counsel of the Company
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 of our
report dated August 23, 1996 on our audits of the consolidated financial
statements of Digital Communication Technology Corporation and Subsidiaries. We
also consent to the reference to our firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
- - -----------------------------
Coopers & Lybrand L.L.P.
Miami, Florida
August 1, 1997
