SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - QSB
QUARTERLY REPORT UNDER REGULATION SB OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number:
December 31, 1997 2-96976-D
- ----------------------- ------------------
DCI TELECOMMUNICATIONS, INC.
(Exact Name of Registrant as specified in its charter)
COLORADO 84-1155041
--------------- -----------------------
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
611 Access Road, Stratford, Connecticut 06497
-------------------------------------------------------------
(Address and zip code of principal executive offices)
(203) 380-0910
-----------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required by Regulation SB of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
YES __X__ NO_____
Indicate the number of shares outstanding of each of the issuer/s classes
of common stock, as of the last practicable date:
Number of Shares Outstanding Class Date
- ---------------------------- ------- ----------
14,371,517 Common Stock, February 11, 1998
$.0001 par value
<PAGE>
DCI TELECOMMUNICATIONS, INC.
Index
PART I FINANCIAL INFORMATION
Balance Sheet December 31, 1997 3
Statements of Operations
Three and Nine Months Ended December 31, 1997 and 1996 4
Statements of Cash Flow
Nine Months Ended December 31, 1997 and 1996 5
Notes to Unaudited Financial Statements
December 31, 1997 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II
Other Information 14
Signatures 16
2
<PAGE>
DCI Telecommunications, Inc.
Consolidated Balance Sheet
(unaudited)
December 31
ASSETS 1997
Current Assets:
Cash $1,295,324
Investments 66,807
Accounts Receivable 3,884,177
Investment - SmarTalk, Restricted stock 8,000,000
Prepaid expenses 125,185
Inventory 128,771
Other 112,335
---------
Total Current Assets 13,612,599
Property and Equipment 619,258
Less: Accumulated depreciation 132,142
---------
Net property and equipment 487,116
---------
Accounts receivable 462,717
Deposits 53,350
Other Assets - costs in excess of net assets acquired 4,906,871
Less: Accumulated amortization 96,000
---------
Net other assets 4,810,871
---------
Total Assets $19,426,653
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Loans from Shareholders $ 259,632
Accounts payable and accrued expenses 2,510,409
Participations payable 1,982,974
Income Taxes Payable 130,000
----------
Total Current Liabilities 4,883,015
Participations payable 349,000
Long Term Debt 91,326
Deferred Income Taxes 361,848
Redeemable, convertible preferred stock $1,000 par and
redemption value, 2,000,000 shares authorized, 1,942
shares issued and outstanding 1,742,500
Total Liabilities 7,427,689
Commitments and Contingencies
Shareholders' Equity:
9.25% cumulative convertible, preferred stock
$100 par value, 5,000,000 shares authorized,
3,972 shares issued and outstanding; 305,000
Common stock, $.0001 par value,
500,000,000 shares authorized,
13,735,437 shares issued and outstanding 1,373
Paid in capital 10,529,481
Treasury Stock (13)
Unrealized Capital Loss (5,493)
Retained earnings subsequent to 12/31/95, date of
quasi-reorganization (total deficit
eliminated $4,578,587) 1,168,616
---------
Total Shareholders' Equity 11,998,964
---------
Total Liabilities and Shareholders' Equity $19,426,653
-----------
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
DCI Telecommunications, Inc.
Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
Net Sales $1,887,598 $ 527,273 $6,189,811 $1,086,157
Cost of Sales 1,245,840 292,065 4,936,911 814,722
---------- --------- --------- ----------
Gross Profit 641,758 235,208 1,252,900 271,435
Selling, General &
Admin. Expenses 298,297 (27,754) 921,038 32,680
Salaries and
Compensation 318,203 130,318 938,087 292,374
Amortization &
Depreciation 33,480 3,897 107,152 8,008
Professional and
Consulting Fees 66,037 47,368 332,714 115,914
--------- -------- --------- ----------
716,017 153,829 2,298,991 448,976
Income (Loss)
from Operations ( 74,259) 81,379 (1,046,091) (177,541)
Other Income and (Expense):
Interest Expense -- ( 391) ( 7,913) ( 3,482)
Interest Income 66,014 9,031 202,767 9,031
--------- ---------- --------- ---------
66,014 8,640 194,854 5,549
Net (Loss) - Continuing
Operations ( 8,245) 90,019 (851,237) (171,992)
Loss from discontinued computer
board operations -- (34,773) (559,840) (22,210)
Sale of discontinued operation -
prepaid phone card -
UK segment -- -- 3,078,421 --
Discontinued prepaid phone
card segment - U.K. ( 97,565) -- (322,774) --
Net Income (Loss) ( 105,810) 55,246 1,344,570 (194,202)
Net Income (Loss)
per common share ($0.01) $0.01 $0.13 ($0.05)
Fully diluted Net
Income (Loss) per share ($0.01) $0.01 $0.07 ($0.05)
Weighted average common
shares outstanding 12,715,162 5,058,425 10,560,831 4,038,707
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
DCI Telecommunications, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
December 31,
Cash Flows from Operating Activities: 1997 1996
Net Income (Loss)from operations ($ 851,237) ($171,992)
Loss from discontinued computer
board operations (559,840) ( 22,210)
Loss from discontinued prepaid phone
card segment - UK (322,774) --
Gain on sale of discontinued prepaid
UK segment 3,078,421 --
-------- ----------
Net Income (Loss) 1,344,570 (194,202)
Adjustment to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Gain on contract assignment (2,078,421)
Unamortized customer base 492,985
Depreciation and amortization 127,152 56,640
Stock issued for services 800 10,335
Non-cash settlements -- (150,143)
Changes in assets and liabilities:
(Increase) Decrease in:
Accounts & Contracts Receivable (106,465) 46,377
Inventory 117,141 1,551
Deposits & Prepayments (115,268) (23,863)
Increase (Decrease) in:
Accounts & Contracts Payable (2,205,396) (236,210)
Income taxes 84,600 (21,250)
-------- --------
Total Adjustments (3,682,872) (316,563)
-------- --------
Net cash provided by (used in)
operating activities (2,338,302) (510,765)
-------- --------
Cash flows from (used in) investing activities:
Additions to property,
plant & equipment (331,427) (43,472)
Cash acquired with acquisition 110,259 922,687
Investments (23,232) --
-------- --------
Net cash provided by (used in)
investing activities (244,400) 879,215
-------- --------
Cash flows from (used in) financing activities:
Advances from (to)shareholders 335,042 ( 83,400)
Proceeds from sale of
stock & options 2,260,194 962,166
Bank overdraft -- (42,004)
Payment of notes payable (14,651) (14,045)
Advance to affiliate -- (51,860)
-------- --------
Net cash provided by (used in)
financing activities 2,580,585 770,857
-------- --------
Net Increase (Decrease) in cash (2,117) 1,139,307
Cash, Beginning of Year 1,297,441 2,689
--------- --------
Cash, End of Period $1,295,324 $1,141,996
Nine Months Ended
December 31,
1997 1996
Supplemental disclosures of cash flow information:
Non cash investing and financing transactions:
Acquisition by stock issuance:
CardCall International $7,518,357 --
CyberFax $1,000,000 --
Muller Media -- $3,000,000
Privilege Enterprises -- $ 10,345
Non cash settlements -- $ 151,900
Stock subscriptions receivable -- $ 42,384
Disposition of prepaid phone
segment ($5,700,000) --
See Accompanying Notes to Consolidated Financial Statements
5
<PAGE>
DCI Telecommunications, Inc.
Notes to Unaudited Financial Statements December 31, 1997
NOTE 1.
- -------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the provisions of Regulation SB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. Certain reclassification of prior
year numbers have been made to conform to the current years
presentations, to report the acquisition of The Travel Source, Ltd. as a
pooling of interest, and to exclude R&D Scientific since the merger
agreement terminated.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, (CardCall International, DCI UK
Limited, CyberFax Inc., Privilege Enterprises Limited and The Travel
Source, Limited)and Muller Media as if the stock purchase agreement with
Muller were completed. Material intercompany balances and transactions
have been eliminated in consolidation.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. The
accompanying financial statements should be read in conjunction with the
Company's form 10-K filed for the year ended March 31, 1997.
Income (loss) per share was computed using the weighted average number of
common shares outstanding.
NOTE 2. Acquisition of CardCall International Holdings Inc.
- -----------------------------------------------------------
On March 31, 1997, DCI Telecommunications, Inc. made an offer to CardCall
International Holdings, Inc. ("CardCall"), a Delaware Corporation, to
purchase all its outstanding common stock (8,238,125 shares) and
warrants.
6
<PAGE>
CardCall is the parent company of CardCaller Canada, Inc., a Canadian
corporation, and CardCall (UK) Limited incorporated under the Laws of the
United Kingdom. CardCall is in the business of designing, developing and
marketing, through distributors, prepaid phone cards which provide the
cardholder access to long distance service through switching facilities.
DCI had previously invested $1,500,000 in CardCall for which it received
$1,200,000 in notes payable 120 days from demand. The remaining $300,000
did not have any stipulated repayment terms.
In June 1997, the Board of Directors and shareholders of CardCall
approved the transaction. For each 100 shares of common stock of CardCall
held by a shareholder, DCI will issue a warrant to purchase 9 shares of
common stock for $4.00 per share on or before February 28, 2001. In
addition, each shareholder of CardCall may acquire 85 shares of DCI
common stock under a subscription agreement for each 100 shares of
CardCall held by such shareholder on or before July 31, 1997 at a
purchase price of $.20 per share. As of December 31, 1997, options for
2,079,290 shares of DCI stock had been exercised.
Such options expire on April 30, 2002. In accordance with the agreement,
shares of DCI stock received from the exercise of options has
restrictions on its ability to be sold ranging from September 1, 1997 to
November 1, 1998.
The transaction was recorded under the purchase method of accounting,
effective April 1, 1997. The total purchase price, including goodwill,
was recorded at $7,518,357. See Note 3 for explanation of sale of a
distribution contract of CardCall (UK) and discontinuation of a portion
of the operations.
NOTE 3. Gain from Sale of Distribution Contract
- ------------------------------------------------
In September, 1997, DCI Telecommunications, Inc. agreed in principal with
SmarTalk Teleservices, Inc. to sell its prepaid phone card distribution
contract with D Services, a wholly owned subsidiary of W.H. Smith, for
$9,000,000. DCI received $1,000,000 in cash at the closing and 326,531
restricted shares of SmarTalk common stock worth $8,000,000 based on the
price of SmarTalk stock on the closing date. DCI can request registration
of the shares on March 31, 1998.
A non-compete clause in the agreement will preclude DCI or its
subsidiaries from engaging in the prepaid phone card products business
through the distributor for a period of seven years. As a result,
operations to date for CardCall UK are shown as discontinued operations.
Operations of CardCaller Canada are shown as continuing operations.
7
<PAGE>
The gain of the transaction is $3,078,421, after the write-off of
goodwill associated with the CardCall acquisition.
NOTE 4. Discontinuance of Computer Board Division
- --------------------------------------------------
In the second quarter ended September 30, 1997 the Company discontinued
the operation of its division that assembled computer boards that were
sold to a number of industries including education and government. In
conjunction with this event, unamortized customer base totaling $492,985
was written off and operating losses through September 30, 1997 of
$65,973 are shown as discontinued operations.
NOTE 5. Acquisition of R&D Scientific Corporation
- ---------------------------------------------------
On June 19, 1995, DCI entered into an agreement to acquire the common
stock of R&D Scientific Corp. (R&D), a New Jersey Corporation, for 106,
250, shares (to be adjusted on or before December 31, 1997 for a value of
$1,700,000).
The Company had included R&D operations as part of the consolidated group
since June 19, 1995 as if the acquisition has been completed under the
purchase method of accounting. In the quarter ending December 31, 1997,
the parties mutually agreed to terminate the agreement, with R&D
reverting back to its original owners. As a result, no operations of R&D
are included in the financial statements, and all prior periods have been
restated to exclude the operations of R&D.
NOTE 6. Acquisition of Muller Media, Inc.
- ------------------------------------------
On November 26, 1996, DCI entered into a stock purchase agreement with
Muller Media, Inc. (Muller), a New York corporation, to acquire 100% of
the outstanding common stock of Muller in a stock for stock purchase,
with DCI exchanging one million two hundred thousand (1,200,000) shares
of common stock for all of the shares of Muller capital stock. The DCI
stock was valued at two dollars and fifty cents ($2.50) per share ($3
million in total).
The shares of both companies have been deposited with an escrow agent.
DCI must repurchase the shares, if Muller exercises a "put" option which
commences on the earlier of 120 days from December 27, 1996, unless an
extension is requested by DCI, which Muller cannot unreasonably withhold,
or 14 days after DCI has received an aggregate of $3,000,000 in net
8
<PAGE>
proceeds from the sale of its capital stock. An extension was granted by
Muller through December 31, 1997. The selling stockholders have an
option to keep DCI stock or accept up to $3,000,000 in cash from DCI.
Muller is a distributor of syndicated programming and motion pictures to
the television and cable industry. The acquisition has been accounted for
as a purchase.
NOTE 7. Common and Preferred Stock
- -----------------------------------
During the nine months ended December 31, 1997, the holders of 11,950
shares of Series C Convertible Preferred Stock elected to convert into
common shares, resulting in the issue of 1,303,513 common shares. In
addition, options to purchase 2,756,564 common shares were exercised.
During the first nine months the Company has raised approximately
$2,450,000 through the sale of its Convertible Preferred Stock.
NOTE 8. Subsequent Events
- --------------------------
On January 21, 1998, the Company announced a common stock buy-back
program of up to five million dollars ($5,000,000). The buy-back is being
handled by A.G. Edwards.
On January 26, 1998, the Company disclosed a special, $.01 per
common share cash dividend, the first in its history to shareholders of
record on February 23, 1998, payable March 23, 1998.
On February 3, 1998, the Company announced a definitive agreement to
acquire World Pass Communications Corporation (WPCC). The agreement which
is scheduled to close in late February calls for $3.0 million in cash at
the closing and $6.0 million in common stock for 100% of the shares of
WPCC. As part of the agreement, the Company guarantees to repurchase up
to $3.0 million of the common stock upon the Company's Canadian prepaid
phone card operations being sold.
On February 4, 1998, the Company terminated the Purchase and Sale
agreement with R&D Scientific whereby ownership reverted back to its
original owners. Under the terms of the transaction, Richard Sheppard
will resign as a member of the Company's Board of Directors and will be
allowed to keep certain stock options he received as a Board Member.
9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
- --------
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of DCI
Telecommunications, Inc. and its subsidiaries (collectively, the
Company), consolidated results of operations and financial condition for
the nine months ended December 31, 1997. The discussion should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes.
The Company, since its recent acquisitions, operates predominantly in the
telecommunications industry providing a broad range of communication
service. The Company's services include long distance, prepaid phone
cards, cellular as well as real-time fax over the Internet. Through
continued investments and fiscal 1997 business acquisitions, the Company
has expanded its business into rapidly developing markets.
Recent Acquisitions
- -------------------
The acquisition of CardCall International and CyberFax in the quarter
ended June 30, 1997 were accounted for under the purchase method of
accounting under both U.S. and United Kingdom generally accepted
accounting principles. The Company believes that CardCall International,
CyberFax and DCI UK Limited, operating with the combined networks,
financial resources, management, personnel and technical expertise of the
Company, will be better able to capitalize on the world wide growth
opportunities in the telecommunications industry. In addition, the
Company expects these companies will be able to derive significant
advantages from the more efficient utilization of their combined assets,
management and personnel.
10
<PAGE>
Liquidity and Capital Resources
- -------------------------------
On December 30, 1994 and January 5, 1995 the Company acquired the assets
of Sigma Telecommunications and Alpha Products through the issue of
1,330,000 shares of common stock, and renamed the Company DCI
Telecommunications, Inc. The liabilities remaining from the former
Fantastic Foods International, Inc. at acquisition left the Company with
negative working capital and little financing capability. In November
1996 acquired Muller Media through the issue of common stock. The
acquisition greatly improved the Company's financial position and at
March 31, 1997 the current ratio was a positive 1.9 to 1 and cash on hand
was $1,300,000. However, with the acquisition of CardCall International
in the quarter ended June 30, 1997, the Company's current ratio dropped
to a negative position.
The most significant event was the sale of the prepaid phone card
distribution contract in the United Kingdom to SmarTalk Teleservices,
Inc., a U.S. company trading on NASDAQ, for $1,000,000 in cash and
$8,000,000 in SmarTalk common stock. The stock will be registered upon
DCI's request six months from the closing. While the gain was booked as
of September 30, 1997, the proceeds were received after that date and
therefore was of little benefit to liquidity during the nine months ended
December 31. Due to a non-compete clause in the sales contract, CardCall
UK has discontinued its phone card sales through W.H. Smith in the UK.
Since CardCall UK was a net user of cash, it is expected that this will
not have a negative impact on liquidity. The current ratio at December
31, 1997 was 2.8 to 1.
Cash used in operations was $2,338,000 in the nine months ended December
31, 1997. The Company was able to pay down a significant amount of
liabilities, principally funded by proceeds from the sale of preferred
stock and exercise of stock options totaling $2,338,000 and advances from
shareholders totaling $335,000.
While CyberFax had limited operations during the period, it has secured
nine contracts in four countries for its real time fax to fax
transmission packages. Required hardware and software are currently being
installed and tested, and sales are expected to begin in the fourth
quarter. DCI UK also has limited operations in the first nine months and
is currently developing its leased line network in Europe and is
installing new switches in Denmark and Spain as well as replacing its
existing switch in London with one with newer technology and more
capacity. All of these programs will require significant cash to finance
the expansion plans.
11
<PAGE>
The Company is actively pursuing several acquisition opportunities in the
telecommunications field. It is expected that the Company will ask
SmarTalk to register the $8,000,000 worth of SmarTalk stock it owns on
March 31, 1998, which would provide a liquid investment to help support
its acquisition and expansion program.
The Company is continuing to pursue long-term financing for its
acquisition and expansion program. However, no assurance can be given
that additional financing will be available or, if available, that it
will be on acceptable terms. The ability to finance all new and existing
operations will be heavily dependent on external sources.
Consolidated Results of Operations
- ----------------------------------
Nine Months Ended
December 31,
1997 1996
---- ----
Net Sales $6,189,811 $1,086,157
- ---------
Net sales for the nine months ended December 31, 1997 increased
$5,103,654 over the comparable 1996 period. Muller sales increased
$2,045,000 due to the fact that sales included only one month in 1996
since it was acquired in November, 1996. CardCaller Canada contributed
$3,261,000 to the increase in 1997 sales, and was not part of the Company
in 1996.
1997 1996
---- ----
Cost of Sales $4,936,911 $814,722
- -------------
Cost of sales increase $4,122,189 in the 1997 period. Mullers cost
of sales increased $1,231,000 while CardCaller Canada increased
$2,962,000 since both companies were not part of consolidated group in
1996, except Muller for one month.
12
<PAGE>
1997 1996
---- ----
Selling, General & Administration Expense $921,038 $ 36,680
- -----------------------------------------
SG&A expense rose $884,358 in the 1997 nine month period. Muller
expenses increased $289,000 and CardCaller Canada increased $298,000 due
to full inclusion in the 1997 period. Debt settlements by DCI parent of
$146,000 in 1996, together with SG&A expenses of newly acquired DCI UK,
CyberFax and inclusion of PEL for a full nine months in 1997 account for
the remainder of the increase.
1997 1996
---- ----
Salaries and Compensation $938,087 $292,374
- -------------------------
Salaries increase $645,713 in the first nine months of 1997 compared
to the 1996 period. Muller salaries increased $342,000 and CardCaller
$150,000 due to the inclusion periods stated above. Salaries associated
with newly acquired DCI UK and CyberFax principally account for the
remaining increase.
1997 1996
---- ----
Amortization and Depreciation $107,152 $8,000
- -----------------------------
Amortization of Muller goodwill in 1997 totaling $72,000 accounts
for most of the increase, with the balance attributable to depreciation
of the newly acquired companies.
1997 1996
---- ----
Professional and Consulting Fees $332,714 $115,914
- --------------------------------
Consulting fees increased $216,800 in the 1997 period. Fees
increased $115,000 at DCI parent level due to corporate relations
programs, stock services and other outside services, while legal and
accounting fees from the newly acquired companies account for the
balance.
1997 1996
---- ----
Interest Income $202,767 $9,031
- ---------------
The increase in interest income is almost entirely due to interest
earned by Muller Media, which is included for the full nine months in
1997 and only one month in 1996.
13
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Page 15
14
<PAGE>
ITEM 6 - Exhibits and Reports on Form 8K
On April 18, 1997 the Company filed a Form 8K which described the
acquisition of CyberFax Inc.
On September 23, 1997 the Company filed a Form 8K which described the
acquisition of CardCall International Holdings.
On October 20, 1997 the Company filed a Form 8K which described the
change in independent accountants.
On November 4, 1997 the Company filed a Form 8K which described the sale
of CardCall UK's distribution contract to SmarTalk.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DCI TELECOMMUNICATIONS, INC.
(Registrant)
Dated: February 17, 1998 By: Joseph J. Murphy
----------------
Joseph J. Murphy
President
By: Russell B. Hintz
----------------
Russell B. Hintz
Chief Financial Officer
16
<PAGE>
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