UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
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(Mark one)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934
For the quarterly period ended March 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
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Commission File Number: 1-13088
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 65-0014636
(State of incorporation) (IRS Employer ID Number)
16910 Dallas Parkway, Suite 100, Dallas, TX 75248
(Address of principal executive offices)
(972) 248-1922
(Issuer's telephone number)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: May 15, 1998: 745,568
Transitional Small Business Disclosure Format (check one): YES NO X
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DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
Form 10-QSB for the Quarter ended March 31, 1998
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 13
Part II - Other Information
Item 1 Legal Proceedings 15
Item 2 Changes in Securities 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
2
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<TABLE>
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Part 1 - Item 1 - Financial Statements
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and June 30, 1997
(Unaudited) (Audited)
March 31, June 30,
ASSETS 1998 1997
------ -------------- ------------
<S> <C> <C>
Current Assets
Cash on hand and in bank $ 3,126 $ 229,740
Marketable securities 565,478 657,562
Accounts receivable
Trade, net of allowance for doubtful accounts
of approximately $ 1,792 and $1,000,000, respectively 160,627 3,219,433
Recoverable income taxes -- 374,000
Affiliate 152,011 39,678
Inventories -- 1,679,011
Prepaid expenses and other current assets 104,974 128,385
------------ ------------
Total current assets 986,216 6,327,809
------------ ------------
Property and Equipment, net 247,673 5,823,634
------------ ------------
Other Assets 162,363 193,859
------------ ------------
TOTAL ASSETS $1 396,252 $ 12,345,302
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving line of credit $ 436,631 $ 2,485,346
Current portion of long-term debt 246,994 1,564,728
Cash overdraft -- 174,616
Accounts payable 2,803,268 2,577,706
Accrued liabilities 931,588 387,646
------------ ------------
Total current liabilities 4,418,481 7,190,042
------------ ------------
Long-term Debt, net of current maturities -- 509,366
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Common stock - $0.002 par value. 25,000,000 shares authorized
745,568 and 731,502 shares issued and outstanding, respectively 1,491 1,463
Additional paid-in capital 8,605,572 8,511,509
Accumulated deficit (10,394,144) (2,417,237)
Investment in Millennia, Inc. -- (1,529,157)
Unrealized holding loss on marketable securities (1,235,148) 79,316
------------ ------------
Total shareholders' equity (3,022,229) 4,645,894
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,396,252 $ 12,345,302
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements. The financial information presented herein has been prepared by
management without audit by independent certified public accountants.
3
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<TABLE>
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DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine and Three months ended March 31, 1998 and 1997
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C>
Net sales $ 3,415,560 $ 19,795,659 $ 26,719 $ 3,981,243
------------ ------------ ------------ ------------
Costs and Expenses
Cost of goods sold, exclusive
of depreciation and amortization 3,969,699 16,243,305 725,831 3,601,034
Selling expenses, exclusive
of depreciation and amortization 164,570 947,473 17,816 306,313
General and administrative expenses,
exclusive of depreciation
and amortization 2,404,247 1,803,528 1,104,303 615,816
Depreciation and amortization 970,510 1,108,458 240,409 379,477
------------ ------------ ------------ ------------
Total costs and expenses 7,509,026 20,102,764 2,088,359 4,902,640
------------ ------------ ------------ ------------
Income (loss) from operations (4,093,466) (307,105) (2,061,640) (921,397)
------------ ------------ ------------ ------------
Other income (expense)
Realized gains (losses) from
sales of marketable securities (312,840) 99,536 (139,710) 7,454
Gain (loss) on sale of fixed assets (3,452,803) -- (4,010,030) --
Other income (expense) (3,150) (5,393) (180,880) (5,393)
Interest expense (114,648) (317,904) -- (106,212)
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before provision for income taxes (7,976,907) (530,866) (6,392,260) (1,025,548)
Provision (benefit) for income taxes -- (33,311) -- (226,053)
------------ ------------ ------------ ------------
Income (loss) from continuing operations (7,976,907) (497,555) (6,392,260) (799,495)
Discontinued operations
Gain from operations of
discontinued business, net -- (1,722) -- 2,963
------------ ------------ ------------ ------------
Net income (loss) $ (7,976,907) $ (499,277) $ (6,392,260) $ (796,532)
============ ============ ============ ============
Preferred dividends -- 250,000 -- --
------------ ------------ ------------ ------------
Net income (loss) attributable
to common stockholders $ (7,976,907) $ (749,277) $ (6,392,260) $ (796,532)
============ ============ ============ ============
Income (loss) per weighted-average share
of common stock outstanding
From continuing operations $ (10.73) $ (1.16) $ (8.57) $ (1.13)
From discontinued operations -- (0.00) -- (0.00)
------------ ------------ ------------ ------------
Total $ (10.73) $ (1.16) $ (8.57) $ (1.13)
============ ============ ============ ============
Weighted-average number of shares of
common stock outstanding 743,378 646,198 745,568 704,050
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements. The financial information presented herein has been prepared by
management without audit by independent certified public accountants.
4
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME Nine months ended March 31, 1998 and
1997
(Unaudited)
Nine months Nine months
ended ended
March 31, March 31,
1998 1997
----------- ------------
Net Loss $(7,976,907) $ (749,277)
Other comprehensive income
Unrealized loss on marketable securities (1,314,464) (209,457)
----------- -----------
Other comprehensive income before income taxes (9,291,371) (958,734)
Income tax provision on other comprehensive income -- --
----------- -----------
Comprehensive income $(9,291,371) $ (958,734)
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements. The financial information presented herein has been prepared by
management without audit by independent certified public accountants.
5
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<TABLE>
<CAPTION>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 31, 1998 and 1997
(Unaudited)
Nine months Nine months
ended ended
March 31, March 31,
1998 1997
----------- -------------
<S> <C>
Cash Flows from Operating Activities
Net income (loss) $(7,976,907) $ (499,277)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Depreciation and amortization 970,510 1,108,458
Gain (loss) on disposition of fixed assets 3,452,803 --
(Gain) Loss on sale of marketable securities 312,840 (99,536)
Compensation settlement paid with common stock 94,091 --
Provision for bad debts -- 105,833
(Increase) decrease in:
Accounts receivable 3,058,806 (661,183)
Recoverable income taxes 374,000 --
Inventories 1,679,011 692,385
Prepaid expenses and other 54,907 (426,267)
Increase (decrease) in:
Accounts payable 225,562 (2,270,305)
Accrued liabilities 543,942 56,690
Deferred tax liability -- 260,456
----------- -----------
Net cash provided by (used in) operating activities 2,789,565 (1,732,746)
----------- -----------
Cash Flows from Investing Activities
Cash received from or (advanced to) affiliates (112,333) (931)
Cash used to purchase marketable securities (624,665) --
Cash received from sale of marketable securities 618,602 903,042
Proceeds from sale of property and equipment 1,890,899 --
Purchases of property and equipment (738,251) (1,089,463)
----------- -----------
Net cash used in investing activities 1,034,252 (187,352)
----------- -----------
Cash Flows from Financing Activities
Cash advances from shareholder -- --
Decrease in cash overdraft (174,616) --
Sale of common stock -- 32,378
Net long-term debt repayments (1,827,100) (224,792)
Net short-term borrowings (repayments) (2,048,715) 1,272,170
----------- -----------
Net cash provided by (used in) financing activities (4,050,431) 1,079,756
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (226,614) (840,342)
Cash and cash equivalents at beginning of period 229,740 615,037
----------- -----------
Cash and cash equivalents at end of period $ 3,126 $ (225,305)
=========== ===========
Supplemental Disclosures of Interest and Income Taxes Paid
Interest paid during the period $ 114,648 $ 286,006
=========== ===========
Income taxes paid (refunded) $ (374,000) $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements. The financial information presented herein has been prepared by
management without audit by independent certified public accountants.
6
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation
Digital Communications Technology Corporation (DCT or Company) is an integrated
communications company, primarily engaged in large quantity duplication of
prerecorded videocassettes for customers in the entertainment and a wide range
of other industries. Through September 1997, the Company also provided mobile
satellite uplink services of breaking news stories and of entertainment,
sporting and other events for both domestic and international major television
networks and news gathering organizations. Additionally, DCT-Internet
Corporation (a wholly-owned subsidiary) provides professional internet website
design, maintenance and hosting for corporate clients worldwide.
DCT, a Delaware corporation, was incorporated on November 12, 1987 under the
name MagneTech Corporation as a wholly-owned subsidiary of S.O.I. Industries,
Inc. (now Millennia, Inc.). The Company's shareholders changed the name to
Digital Communications Technology Corporation on April 29, 1994. DCT's Common
Stock was traded on the American Stock Exchange from May 23, 1994 until April
27, 1998. As of December 31, 1997, Millennia, Inc. owned approximately 9.7% of
the Company's issued and outstanding Common Stock.
Through December 31, 1997, DCT offered video tape 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 and Canada. DCT purchased 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 majority of the Company's video duplication equipment was
manufactured by several major manufacturers in Japan and was purchased from
domestic distributors. The Company purchased its materials and equipment from
several major manufacturers and believed 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.
The accompanying consolidated financial statements include the accounts of
Digital Communications Technology Corporation (d/b/a Magnatech Corporation) and
its wholly-owned subsidiary, DCT-Internet Corporation. All significant
intercompany transactions have been eliminated in consolidation. The
consolidated entities are referred to as Company.
During interim periods, the Company follows the accounting policies set forth in
its Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act
of 1934 on Form 10-KSB filed with the Securities and Exchange Commission. The
June 30, 1997 consolidated balance sheet data was derived from audited financial
statements of the Company, but does not include all disclosures required by
generally accepted accounting principles. Users of financial information
provided for interim periods should refer to the annual financial information
and footnotes contained in its Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 on Form 10-KSB when reviewing the interim
financial results presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the instructions for Form 10-QSB, are unaudited and
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, results of
operations and cash flows of the Company for the respective interim periods
presented. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full fiscal year
ending June 30, 1998.
7
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The costs of the Company's products are subject, from time-to-time, to
inflationary pressures and commodity price fluctuations. In addition, the
Company from time-to-time experiences increases in 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 monitoring and controlling these costs.
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
Note 1 - Basis of Presentation - continued
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 and disclosure of
contingent 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.
Note 2 - Liquidity uncertainty
On August 21, 1997, the Company's lending institution, Bank One, Texas, N. A.,
notified the Company that the lending institution intended, 120 days subsequent
to the notice, to stop making further advances on the Company's line of credit
and accelerate the maturity of the debt then owed.
On December 1, 1997, the Company announced that it had filed a lender liability
lawsuit in Dallas County, Texas against Bank One, Texas, N. A. (Bank) in
connection with the Bank's commitment in November 1996 to lend up to
approximately $9 million for working capital and funds needed to permit the
relocation and expansion of the Company's business. In the lawsuit, the Company
has alleged that the Bank's conduct constitutes breach of contract, fraud in the
inducement and several violations of the Bank's statutory duties of good faith
and fair dealings which have resulted in damages exceeding $5 million to the
Company.
During the first quarter of 1998, funds to reduce the Bank debt were generated
from the collection of accounts receivable and the sale of video tape
duplication equipment and all of the Company's other tangible assets. The
inability to draw upon the Bank credit facility left the Company with few
alternatives other than to retire the outstanding bank debt and seek the release
of existing liens in favor of the Bank, which cover all of the Company's assets.
As a result of these events, the Company effectively ceased all video tape
duplication activities on December 31, 1997 and laid off a significant portion
of its workforce. During the third quarter of Fiscal 1998, the Company exchanged
various inventory and capital assets to various creditors in settlement of
various litigation and open trade payables. Further, the Company has sold
various capital assets with the net proceeds going directly to the Company's
financial institution for settlement of outstanding debts.
Further, the Company has been delisted by the American Stock Exchange and
currently has its common stock listed for trading on the NASDAQ Bulletin Board.
Note 3 - Summary of Significant Accounting Policies
a) Marketable securities
Marketable securities consist of equity securities which had an aggregate
cost of approximately $1,800,626 at March 31, 1998. The marketable securities
portfolio contains net unrealized losses of approximately $1,235,148,
resulting in a net carrying amount of approximately $565,478 at March 31,
1998. The unrealized losses are reported as a separate component of
stockholders' equity. The Company's marketable securities portfolio is
classified as "available for sale" securities.
During the first quarter of Fiscal 1998, the Company reclassified its
holdings in Millennia, Inc., then consisting of approximately 730,627 shares
at a historical cost of approximately $1,867,782, to its "available for sale"
portfolio. These costs and related effects of unrealized holding gains are
included in the amounts shown in the preceding paragraph.
8
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DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
Note 3 - Summary of Significant Accounting Policies - continued
b) Accounting principles adopted during the current period
During the first quarter of Fiscal 1998, effective at the beginning of the
quarter, the Company adopted Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of". In accordance with the Standard, the Company adopted the
policy of evaluating all qualifying assets as of the end of each reporting
quarter. No adjustments for impairment were charged to operations during each
of the first three quarters of Fiscal 1998.
Note 4 - Inventory
Inventories are valued at the lower of cost or market using the first-in,
first-out method of accounting. Inventory consists of the following components
as of March 31, 1998 and June 30, 1997, respectively:
March 31, June 30,
1998 1997
Raw materials $ - $1,164,970
Work-in-process - 474,091
Finished goods - 39,950
------- ----------
$ - $2,921,173
======== ==========
Note 5 - Property and equipment
Property and equipment consists of the following at March 31, 1998 and June 30,
1997, respectively:
March 31, June 30,
1998 1997
Machinery and equipment $ - $ 9,794,616
Buildings and improvements - 332,440
Leasehold improvements - 973,608
Computer equipment 455,643 447,087
Furniture and fixtures 196,075 304,055
Transportation equipment - 269,966
------- ------------
651,718 12,121,772
Accumulated depreciation (404,045) (6,371,138)
------- ---------
247,673 5,750,634
Land - 73,000
-------- ------------
Net property and equipment $247,673 $ 5,823,634
======== ============
Note 6 - Bank credits
Starting in November 1996, Bank One, Texas, N. A. (Bank) had extended, pursuant
to its commitments in a loan agreement, various credits to the Company under a
secured line of credit and a secured term loan, whereby the Bank was to provide
up to $5.0 million of working capital on a revolving basis and up to $4.0
million to permit the relocation and expansion of the Company's business. These
credits are secured by all of the Company's accounts receivable and inventory
and substantially all of its other assets.
9
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DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
Note 6 - Bank credits - continued
On August 21, 1997, the Bank notified the Company that it intended, 120 days
after the notice, to stop making advances under the line of credit and to
accelerate the maturity of the debt then owed. Although the Company continued to
negotiate with the Bank for several months with a goal of maintaining the
availability of needed working capital under the line of credit, the Company
determined that, as a result of the Bank's actions, it was in the Company's best
interests to attempt to secure replacement financing from other sources.
On December 1, 1997, the Company announced that it had filed a lender liability
lawsuit against the Bank in Dallas County, Texas resulting from the Bank's
refusal to continue making advances under the line of credit and the Bank's
failure to continue to negotiate in good faith. In this lawsuit, the Company
alleges that the Bank's conduct constitutes breach of contract, fraud in the
inducement, and several violations of the Bank's statutory duties of good faith
and fair dealing, all of which have resulted in damages to the Company exceeding
$5.0 million. This lawsuit is pending.
On December 12, 1997, the Company announced that it had been forced to curtail
its video tape duplication operations and lay off most of its employees due to
severe cash flow problems which had been caused by its inability to draw funds
under the Bank line of credit.
On January 22, 1998, the Company announced that it had raised approximately $1.5
million from the sale of equipment on which the Bank had a lien and that the
proceeds had been used to retire outstanding Bank debt, thereby reducing the
amount owed to the Bank to approximately $2.0 million. As a result of the Bank's
actions, the Company determined that its only course of action was to pay the
Bank in full, thereby obtaining a release of the Bank's liens on its excess
collateral. To accomplish this goal, the Company pursued a program of collecting
accounts receivable and selling tangible assets in order to pay the Bank in full
as quickly as possible. As of this filing, the Company still owes the Bank
approximately $180,000.
Note 7 - 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:
(a) 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.
10
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DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
Note 7 - Litigation - continued
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 denying all of the material allegations and
claims in the Petition, disputing the plaintiffs' contention that it is a proper
shareholder derivative action, denying 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.
The Company does not believe that the results of this lawsuit will have a
material impact on the financial condition of the Company beyond its
expenditures for legal and professional fees.
(b) 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, Tapes Unlimited, in February
1995, duplicated certain videotapes for the plaintiff from videotape masters
provided by the plaintiff. The plaintiff has alleged that the videotape
duplicates delivered by Tapes Unlimited contained, in part, extraneous and
pornographic material which caused plaintiff to lose the business of a certain
account, as well as the prospective business of other, unspecified persons. The
plaintiff has since ceased doing business.
The Company currently has pending a motion to dismiss the matter and, therefore,
has not filed a substantive response to plaintiff's complaint. Discovery and
settlement discussions have commenced. 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.
(c) In March 1998, Infiniti Cassettes, Inc. obtained a judgment against the
Company on an open account arising from its sale of raw materials to the Company
in the approximate amount of $792,000, plus interest and court costs. This case
was filed in the Superior Court of the State of California, for the County of
Los Angeles, Central District as Case No. BC180727. This plaintiff has obtained
title to 150,000 shares of the common stock of Millennia, Inc. which was pledged
to secure this obligation.
11
<PAGE>
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
Note 7 - Litigation - continued
(d) Numerous other lawsuits have been filed against the Company by creditors
alleging non-payment of open or unsecured accounts. These have been filed in
various state courts located in Florida and Indiana where the Company has
maintained offices and done business. The State of Florida has filed liens in
Florida in an effort to collect sales tax assessments of approximately $300,000,
which it alleges are due and payable. The Company is in the process of reviewing
all pending litigation, as well as certain threatened claims for money which
have been received, and will vigorously defend those in which it believes its
creditors are trying to collect more than is rightfully owed. The Company does
not believe that it currently has any assets available to satisfy any of these
judgments and obligations.
(e) On December 1, 1997, the Company filed a lender liability lawsuit against
Bank One, Texas, N. A. (Bank) in State District Court in Dallas County, Texas
resulting from the Bank's refusal to continue making advances under the line of
credit and the Bank's failure to continue to negotiate in good faith. In this
lawsuit, the Company alleges that the Bank's conduct constitutes breach of
contract, fraud in the inducement and several violations of the Bank's statutory
duties of good faith and fair dealing, all of which have resulted in damages to
the Company exceeding $5.0 million.
This suit is pending, discovery has not yet begun and no trial date has been
set.
Note 8 - Common Stock Transactions
Effective December 9, 1997, the Company, with the approval of its stockholders,
effected a one-for-ten reverse split of the issued and outstanding shares of the
Company's common stock. The effect of this reverse split is reflected in the
accompanying financial statements as if the reverse split had occurred on the
first day of the earliest period presented.
Note 9 - Earnings per share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (FAS 128) to be effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. 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 made a number of changes to
former disclosure requirements. There has been no effect on the Company's
presentation of basic earnings per share in the implementation of this standard.
Due to the Company's net operating loss position, all outstanding stock options
are considered anti-dilutive and no fully diluted earnings per share is
presented.
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12
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(1) Caution Regarding Forward-Looking Information
This quarterly report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward- looking statements. Such statements reflect the current view
of the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
(2) Results of Operations
Overview
On August 21, 1997, the Company's lending institution, Bank One, Texas, N. A.,
notified the Company that the lending institution intended, 120 days subsequent
to the notice, to stop making further advances on the Company's line of credit
and accelerate the maturity of the debt then owed.
On December 1, 1997, the Company announced that it had filed a lender liability
lawsuit in Dallas County, Texas against Bank One, Texas, N. A. (Bank) in
connection with the Bank's commitment in November 1996 to lend up to
approximately $9 million for working capital and funds needed to permit the
relocation and expansion of the Company's business. In the lawsuit, the Company
has alleged that the Bank's conduct constitutes breach of contract, fraud in the
inducement and several violations of the Bank's statutory duties of good faith
and fair dealings which have resulted in damages exceeding $5 million to the
Company.
During the first quarter of 1998, funds to reduce the Bank debt are being
generated from the collection of accounts receivable and the sale of video tape
duplication equipment and all of the Company's other tangible assets. The
inability to draw upon the Bank credit facility left the Company with few
alternatives other than to retire the outstanding bank debt and seek the release
of existing liens in favor of the Bank which cover all of the Company's assets.
As a result of these events, the Company effectively ceased all video tape
duplication activities on December 31, 1997 and laid off a significant portion
of its workforce. During the third quarter of Fiscal 1998, the Company exchanged
various inventory and capital assets to various creditors in settlement of
various litigation and open trade payables. Further, the Company has sold
various capital assets with the net proceeds going directly to the Company's
financial institution for settlement of outstanding debts. On March 26, 1998, a
public auction was held in Indianapolis, Indiana at which virtually all of the
Company's remaining tangible assets were sold. The net proceeds reduced the
amount owed to the Bank to approximately $180,000 as of this filing.
Further, the Company has been delisted by the American Stock Exchange and
currently has its common stock listed for trading on the NASDAQ Bulletin Board.
Results of operations
Due to the actions of Bank One, Texas, N. A., and the resultant cessation of
operations, the Company realized net revenues of approximately $27,000 during
the third quarter of Fiscal 1998 as compared to approximately $4.0 million for
the comparable quarter of Fiscal 1997. Gross year to date revenues for Fiscal
1998 and 1997 were approximately $3.4 million and $19.8 million, respectively.
Due to the lack of available funding on its existing credit facilities, the
Company effectively ceased all video tape duplication operations, effective
December 31, 1997. The full impact of this curtailment was realized in the
current quarter, and by April 1, 1998, the Company ceased operations completely
and terminated its few remaining employees.
13
<PAGE>
The industry consensus is that the overall industry sales activity during
Calendar 1997 was significantly slower than expected. The Company has
experienced severe cash flow problems caused by its inability to access its line
of credit from its lending institution which negatively impacted its ability to
solicit sales to customers and forced the Company to cease operations.
The Company incurred costs of sales of approximately $966,000 and $4.9 million,
respectively, for the three and nine month periods ended March 31, 1998 as
compared to approximately $3.6 million and $16.2 million for the comparable
periods ended March 31, 1997. The primary component of these expenses are the
Company's fixed costs related to its production facility in Indianapolis,
Indiana and its former production facility in Ft. Lauderdale, Florida. These
costs during the third quarter of Fiscal 1998 relate to the abandonment of
unsalable inventory that could not be liquidated due to the actions of Bank One,
Texas, N. A. Had the Bank not taken the actions taken, this inventory would have
been usable by the Company in its on-going operations.
Due to the cessation of videotape duplication efforts, the Company's selling
expenses declined to approximately $18,000 for the quarter ended March 31, 1998.
It is anticipated that the Company will incur only nominal selling expenses
related to the operation of DCT-Internet Corporation, a wholly-owned subsidiary
of the Company.
General and administrative expenses experienced pressure from general corporate
overhead and legal and professional fees. The Company incurred aggregate costs
of approximately $1.1 million and $2.4 million during the three and nine month
periods ended March 31, 1998 and 1997, respectively. These costs were
approximately $616,000 and $1.8 million for the comparable periods ended March
31, 1997. A component of these expenses occurred during the July- September 1997
quarter as an effect of closing and relocating of the Ft. Lauderdale, Florida
operations to the Indianapolis, Indiana facility. Management was of the opinion
that the closing of the Ft. Lauderdale facility and the sale of the assets of
its satellite uplink operation would significantly contribute to future cost
savings for the Company. Additionally, the actions of Bank One, Texas, N. A.
caused increased legal, appraisal and liquidation expenses to the Company. It is
anticipated that these expense items will continue into future periods until the
litigation associated with the Bank's actions are completed.
The blanket lien held by Bank One, Texas, N. A. caused the Company into a forced
liquidation of various assets and settlement of open accounts receivable and
settlement of open accounts payable. As this situation was an involuntary action
by the Company, the Company was unable to control the orderly and systematic
liquidation of these items and, accordingly, did not receive the highest value
for all of the items disposed. Accordingly, the Company experienced a net loss
on the disposition of assets of approximately $(3.4) million for the nine month
period ended March 31, 1998 and approximately $(4.0) million during the third
quarter of Fiscal 1998.
The Company experienced a year-to-date net loss per share of approximately
$(10.73) per weighted-average share outstanding as of March 31, 1998 as compared
to a net loss per share of approximately $(1.16) per weighted-average share. The
effect of the forced liquidation of various assets contributed approximately
$(4.64) per share for Fiscal 1998.
(3) Liquidity and capital requirements
During the first nine months of Fiscal 1998, the Company experienced net cash
provided by operations of approximately $2.79 million as compared to using net
cash in operations of approximately $(1.72) during the same period of the
preceding year. Included in this net cash flow into the Company was the
collection, and affiliated reduction, of accounts receivable of approximately $3
million and the reduction of inventories of approximately $1.7 million. The
funds provided by these inflows were directly collected by Bank One, Texas, N.
A. and were applied against the outstanding balances on loans payable to the
Bank.
Further liquidity was provided by approximately $1.9 million in proceeds from
the sale various fixed assets including the sale of satellite uplink equipment
and the sale of the closed Ft. Lauderdale facility. These cash inflows were
offset by purchases and upgrading of video duplication equipment and leaseholds
at the Indianapolis facility of approximately $739,000, during the first quarter
of Fiscal 1998. Any residual amounts were collected by Bank One, Texas, N. A.
and were applied against the outstanding balances on loans payable to the Bank.
The net proceeds from the sale of assets and the funds generated from operating
activities reduced the Company's aggregate outstanding bank debt by
approximately $3.875 million.
14
<PAGE>
The Company relocated and expanded the entire Indianapolis facility into a new
172,000 square foot building during Fiscal 1997. The Indianapolis plant opened
in June 1997 with an increased operating capacity of approximately 20%. The new
facility layout was designed to optimize process flow, to reduce product
handling and to minimize the total cycle time of productions from order entry to
delivery. The Company added approximately $739,000 in property and equipment
during the first six months of Fiscal 1998. On April 6, 1998, the Company was
evicted from this facility by the landlord and ownership of all leasehold
improvements passed to the landlord which has filed suit to attempt to recover
more than $400,000 which the landlord alleges is currently due to it.
Part II - Other Information
Item 1 - Legal Proceedings
See the Notes to Consolidated Financial Statements
Item 2 - Changes in Securities
None
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
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15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIGITAL COMMUNICATIONS TECHNOLOGY CORPORATION
May 15 , 1998 /s/ Kevin B. Halter
-------- ----------------------------------------------
Kevin B. Halter
Chairman and Chief Accounting Officer
16
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