DCI TELECOMMUNICATIONS
611 Access Road
Stratford, CT 06615
(203) 380-0910
================================================================
February 16,2000
Securities and Exchange Commission
Attn: Document Control
Judiciary Plaza
450 Fifth Street, N.W.
Room 1004 1-4
Washington, DC 20549
RE: DCI Telecommunications, Inc.
Dear Sir/Madam:
Enclosed is Form 10QSB for the period ending December 31, 1999
Sincerely,
/s/Joseph J. Murphy
- ----------------
Chairman
<PAGE>
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, 1999 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 06615
-------------------------------------------------------------
(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
- ---------------------------- ------- ----------
30,775,644 Common Stock, December 31, 1999
$.0001 par value
<PAGE>
DCI TELECOMMUNICATIONS, INC.
Index
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheet December 31, 1999 3
Statements of Operations
Nine Months Ended December 31, 1999 and 1998 5
Statements of Cash Flow
Nine Months Ended December 31, 1999 and 1998 7
Notes to Unaudited Financial Statements
December 31, 1999 9
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II
Other Information 17
Signatures 19
2
<PAGE>
DCI Telecommunications, Inc.
Consolidated Balance Sheet
(unaudited)
December 31,
ASSETS 1999
----
Current assets:
Cash $ 1,221,432
Accounts receivable, net 3,424,970
Other current assets 300,399
Inventory 99,722
Due from shareholders 84,661
---------
Total Current Assets 5,131,184
Fixed assets 1,632,161
Less: Accumulated depreciation (192,696)
---------
Net Fixed Assets 1,439,465
Accounts receivable- long term 972,201
Deposits 148,573
Other assets 10,308
Cost in excess of assets acquired:
Travel Source 89,379
Muller Media 1,634,436
---------
1,723,815
Less: Accumulated amortization: (134,671)
----------
Net cost in excess of assets acquired 1,589,144
-----------
Total Assets $ 9,290,875
==========
(continued)
3
See accompanying notes to consolidated financial statements.
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY December 31
1999
Current Liabilities: ----
Accounts payable and accrued expenses $ 8,452,594
Preferred stock dividend 881,970
Due to shareholders 145,460
Current portion of long term debt 75,997
Capital lease payable 289,828
Short term note payable 80,000
----------
Total Current Liabilities 9,925,849
Long-term debt 2,715,966
Accounts payable 1,147,463
Capital lease payable 558,031
Redeemable, convertible preferred stock,
$1,000 par and redemption
value, 2,000,000 shares authorized,
2,188 shares issued & outstanding 2,187,500
----------
Total Liabilities 16,534,809
----------
Commitments and Contingencies
Common stock, $.0001 par value,
500,000,000 shares authorized,
30,775,644 shares issued and outstanding 3,077
Paid-in capital 33,276,344
Treasury stock (1,356,547 shares at cost) (1,127,439)
Accumulated deficit subsequent to 12/31/95,
date of quasi-reorganization (total
deficit eliminated $4,578,587) (39,395,916)
-----------
Total Shareholders' Equity (7,243,934)
-----------
Total Liabilities and Shareholders' Equity $ 9,290,875
===========
4
See accompanying notes to consolidated financial statements.
<PAGE>
DCI Telecommunications, Inc.
Consolidated Statements of Operations
(unaudited)
Nine Months Ended
December 31,
1999 1998
Sales - travel $ 908,363 $ 937,295
Sales - products 10,824,755 26,045,792
---------- ----------
Net sales 11,733,118 26,983,087
Cost of sales - travel 796,835 850,919
- product 12,817,582 23,372,310
---------- ----------
Cost of sales 13,614,417 24,223,229
Gross profit (loss) (1,881,299) 2,759,858
Selling, general and
administrative expenses 1,301,096 1,802,018
Salaries and
compensation 1,570,384 1,774,990
Professional and
consulting fees 1,374,976 732,505
Amortization and
depreciation 1,913,608 661,928
---------- ----------
6,160,064 4,971,441
Loss before other (expense) income (8,041,363) (2,211,583)
Other income and (expense):
EDGE goodwill write-off (6,480,048) --
Loss on master service
agreement (13,321,093) --
Gain on dissolution-foreign
subsidiary 1,426,149 --
Investment income 249,000 138,762
Interest expense (1,593,040) (83,162)
---------- ---------
(19,719,032) 55,600
(continued)
5
<PAGE>
Loss from continuing operations
before minority
interest (27,760,395) (2,155,983)
Minority interest -- 148,505
---------- ----------
Loss from continuing
operations (27,760,395) (2,007,478)
Discontinued operations
Loss from discontinued
CyberFax operations
(net of applicable income
tax benefit of $0 in 1998) -- (285,173)
---------- ----------
Net loss before
dividends on preferred
stock (27,760,395) (2,292,651)
Dividends on preferred
Stock (133,870) (902,851)
---------- ----------
Net loss applicable to
common shareholders $(27,894,265) $(3,195,502)
========== ==========
Basic and diluted net loss per common shares:
Loss from continuing
operations $(0.92) $ (0.14)
Loss from discontinued
operations $ -- $ (0.01)
------ -------
Net loss per common
share - basic and diluted $(0.92) $ (0.15)
====== =======
Weighted average common
shares outstanding -
basic and diluted 30,242,819 21,369,670
6
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
DCI Telecommunications, Inc
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
December 31
1999 1998
---- ----
Reconciliation of net loss to net
cash used in operating activities:
Net loss from continuing operations $(27,760,395) $(2,007,478)
---------- ----------
Adjustments to reconcile net loss from
continuing operations to net cash
used in operating activities:
Amortization and depreciation 1,913,608 697,608
Discontinued operations -- (285,173)
Minority interest -- (148,505)
Write off of goodwill 6,480,048 --
Loss on master service agreement 13,321,093 --
Gain on foreign subsidiary
dissolution (1,426,149) --
Accrued interest converted to note 1,348,605 --
Changes in assets and liabilities:
(Increase) Decrease in:
Restricted cash -- 60,246
Accounts receivable (2,979,434) (1,985,096)
Inventory 20,111 (476,943)
Deposits 75,534 (135,624)
Prepaid expenses -- (313,062)
Other current assets 84,939 --
Increase (Decrease):
Accounts payable & accrued expenses 7,645,652 404,426
Deferred revenue (267,943) 208,892
----------- ---------
Net Cash used in operating activites (1,544,331) (3,981,249)
------------ ----------
Cash flows from investing activities:
Additions to fixed assets (202,361) (565,872)
Cash acquired with acquisitions -- 1,548,947
Investment in Muller Media -- (2,000,000)
Disposal of property and equipment 6,277 --
----------- -----------
Net cash used in investing activities (196,084) (1,016,925)
7 (continued)
<PAGE>
Cash flows from financing activities:
Proceeds from stock
options exercised 51,260 690,527
Purchase of treasury stock -- (378,379)
Payment of notes payable (550,000) (4,938,942)
Increase in long term debt -- 93,226
Proceeds from sale of preferred
stock -- 2,750,000
Due to joint venture -- 644,451
Net payments to shareholders (47,070) --
Advances from shareholders -- (375,870)
Proceeds from issuance
of notes payable 1,930,000 --
Payment of long-term debt (53,529) --
Sale of equity securities -- 8,124,761
Common dividend -- (203,962)
--------- ----------
Net cash from financing activities 1,330,661 6,405,812
---------- ----------
Net (decrease) increase in cash (409,754) 1,407,638
Cash, beginning of period 1,631,186 704,991
--------- ----------
Cash, end of period $ 1,221,432 $ 2,112,629
--------- ----------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 44,435 $ 83,000
Non-cash investing and financing
transactions:
Acquisitions by stock
Edge Communications $ -- $ 6,823,586
Preferred stock dividends $ 133,870 $ 902,851
Stock issued for other assets $ 40,000 $ --
Assets acquired by lease $ 705,757 $ --
8
See accompanying notes to consolidated financial statements.
<PAGE>
DCI Telecommunications, Inc.
Notes to Unaudited Financial Statements December 31, 1999
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 restatements of prior year
numbers have been made to conform to the current years presentations and to
account for discontinued operations.
The consolidated financial statements include the accounts of the Company and
its wholly and majority owned subsidiaries. Material inter-company 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-KSB filed for the year ended March 31, 1999.
Loss per share was computed using the weighted average number of common shares
outstanding.
NOTE 2. Common and Preferred Stock
- -----------------------------------
During the nine months ended December 31, 1999, the holders of $125,000 of
preferred shares of Series F Convertible Preferred Stock were converted to
306,386 common shares. Interest and penalties totaling $170,000 were converted
into 625,276 common shares.
On November 12, 1999, the Company received $1,000,000, as part of a new
financing package. An existing loan of $400,000, interest and penalties
associated with the Series F Preferred Stock totaling $1,348,605, and the new
$1,000,000 proceeds advanced, are all included in new five year notes with
interest at six percent per annum. In addition the Company issued warrants to
purchase up to an aggregate of 566,667 shares of its common stock at $.75 per
share. The lenders have various methods of redemption to choose from, including
cash from VAT refunds from the United Kingdom, a portion of the cash proceeds
from the possible sale of Muller Media if any, redemption into DCI common stock
at $0.25 per share subject to certain conditions or the redemption into common
stock from the possible spinoff of DCI's Fone.com subsidiary into a public
entity. A majority of the remaining Series F Convertible Preferred Stock can
also be converted at these same terms.
In addition, options to purchase 2,200 common shares were exercised, during the
last nine months.
9
<PAGE>
NOTE 3. EDGE Goodwill Write-off.
- --------------------------------
In December 1999, the Company evaluated the recoverability of goodwill from the
acquisition of EDGE Communications by the Company. As a result of such
evaluation the Company has written off the remaining goodwill of $6,480,048
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, 1999. The discussion should be read in conjunction with the
Company's consolidated financial statements and accompanying notes.
The Company operates predominantly in the telecommunications industry providing
a range of communication service. The Company's services include long distance,
prepaid phone cards, motion picture distribution and a travel agency. The
Company is attempting to expand its business into rapidly developing markets in
Europe.
Recent Dispositions
- ---------------------
DCI Europe Limited
- ------------------
On September 1, 1999, DCI Europe Limited (a subsidiary of DCI subsequently
renamed Gloucester Communications Limited) was placed in liquidation. At
September 30, 1999, the remaining assets and liabilities were written off,
resulting in a $1,426,149 gain which is included in the December 31, 1999
Statement of Operations.
Master Service Agreement Write Off
- ----------------------------------
As more fully described in footnotes to Financial Statements in the March 31,
1999 Form 10K, on December 3, 1998 the Company and IXC Communications Inc,
entered into a stock acquisition agreement whereby IXC received 3,750,000 shares
of DCI common stock in return for a Master Service Agreement valued at
$15,671,875.
As of September 30, 1999, the Company has suspended all business with IXC. As a
result, the Company has written off the remaining unamortized investment
totaling $13,321,093 at September 30, 1999.
The Company is currently in discussion with IXC to resolve any and all remaining
issues.
10
<PAGE>
EDGE Goodwill Write-off
- -----------------------
In December 1999, the Company evaluated the recoverability of goodwill from the
acquisition of EDGE Communications by the Company. As a result of such
evaluation the Company has written off the remaining goodwill of $6,480,048
Liquidity and Capital Resources
- -------------------------------
At December 31, 1999 the Company had unrestricted cash of approximately
$1,221,000. Net cash declined $ 410,000 during the last six months. Cash used in
operating activities was about $1,544,000 and cash invested in fixed assets
totaled $ 202,000
The Company supported those needs by raising $1,930,000 from issuance of notes,
of which $550,000 was paid back by December 31, 1999.
The write off of the Master Service Agreement, $13,321,000, the write off of
$6,480,000 of EDGE goodwill, and the $1,426,000 gain on dissolution of DCI
Europe were all non-cash transactions and had no impact on liquidity.
The Company is planning on further expansion in Europe and the ability of the
Company to finance all new and existing operations will be heavily dependent on
external sources. No assurance can be given that additional financing will be
available or, if available, that will be on acceptable terms.
Year 2000 Issues
- ----------------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
COMPANY'S STATE OF READINES
- -----------------------------------------------------------
One of the Company's critical internal areas is its information technology
systems, including general ledger, accounts receivable, payable, inventory and
related packages for DCI and each of its subsidiaries. In this regard, the
parent Company has installed new software and has installed or upgraded the
financial systems in each of its subsidiaries to be year 2000 compliant.
11
<PAGE>
All of the Company-owned switches, used to direct and monitor long distance
telephone traffic, currently are Year 2000 compliant according to the
manufacturer.
The Company also has relationships with outside third parties that could impact
its business. The most important are the carriers that process and monitor the
Company's long distance and prepaid phone card calls. All the carriers expect to
be Year 2000 compliant and are in various stages of readiness. The Company's
travel business is partially dependent on an outside reservation system
representing many airlines which is Year 2000 compliant.
COSTS
- ----------
The Company has addressed Year 2000 issues in-house and, at the present time,
there are no other anticipated costs. Total costs were approximately $ 45,000.
RISK
- ----
The Company believes that its most reasonable likely worst-case Year 2000
scenario would be if any of its third party long distance telephone carriers
were unable to properly monitor or admit authorized personal identification
numbered prepaid phone card calls through their systems.
The time frame for the carrier to fix the problem, or the ability of the Company
to recall prepaid phone cards and switch to another carrier with competitive
rates, could cause a material business interruption.
The risks associated with the failure of the Company's financial software, or
third party payroll preparation and stock transfer system, are considered less
severe in that the Company believes switching to other vendors or using other
methods would be relatively easy.
The risk of failure of the third party airline reservation system is that the
Company would have to secure its travel arrangements by methods that would be
more cumbersome and time-consuming than the current automated system.
CONTINGENCY PLAN
- ----------------
Neither the Company nor any third parties with whom we have material
relationships, suffered any significant adverse consequences resulting from the
transition to Year 2000. However, it is possible that companies including
ourselves and our third-party contractors, will suffer adverse
12
<PAGE>
Year 2000 consequences over the near term. In order to minimize potential
adverse effects, we have designated experienced personnel and consultants to
identify, correct, test and implement solutions to Year 2000 problems, if and
when they arise. The Company has not established any other contingency plan to
address Year 2000 issues should they arise, and the Company does not intend to
do so.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
This report contains or incorporates by reference forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Where any such forward-looking statement includes a statement of the assumptions
or bases underlying such forward-looking statement, the Company cautions that
assumed facts or bases almost always vary from the actual results, and the
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, the
Company or its management expresses an expectation or belief as to future
results, there can be no assurance that the statement of expectation or belief
will result or be achieved or accomplished. The words "believe", "expect",
"estimate", "anticipate", "project" and similar expressions may identify
forward-looking statements.
Consolidated Results of Operations
- ----------------------------------
Nine months Ended
December 31,
1999 1998
---- ----
Net Sales $ 11,733,118 $26,983,087
- --------
Net sales declined $ 15,250,000 in the nine months ending December 31, 1999,
compared to the same period a year ago. Sales of Edge Communications declined
$15,234,000 during this period, principally as a carryover result of shutdown of
prepaid phone cards during the last fiscal year. Due to this shutdown, Edge lost
5 of its top 10 customers, and has incurred a loss at the gross margin level in
its efforts to regain market share. Sales also declined $ 3,624,000 due to the
absence of the Phoneline joint venture, which was written off on March 31, 1999,
but this was almost offset by increased sales in Europe, principally in England.
1999 1998
---- ----
Cost of Sales $ 13,614,417 $24,223,229
- -------------
13
<PAGE>
Cost of sales declined $10,609,000 in the first nine months compared to a year
ago. Edge cost of sales dropped $10,721,000 and Phoneline dropped $3,123,000 due
to the situations described above. However, the costs of sales Edge did incur
was higher than the original sales price and resulted in a negative gross margin
for the company as a whole. Higher cost of sales in Europe, associated with
higher sales, principally accounts for the reminder of the variance.
1999 1998
---- ----
Selling, General & Administration
Expense $ 1,301,096 $ 1,802,018
- ---------------------------------
Selling, general and administrative expenses declined $501,000, in the current
period compared to last year's nine month period.
The absence of Phoneline Canadian operations which were closed last year
accounted for a reduction in administrative expenses totaling $ 374,000. A
$209,000 reduction at EDGE due to much lower activity was offset by increases in
European operations
1999 1998
---- ----
Salaries and Compensation $ 1,570,384 $ 1,774,990
- -------------------------
Salaries have declined $205,000 in the nine months December 1999 period. The
absence of the Phoneline Joint Venture resulted in a $205,000 decline. Modest
increases and declines in other companies offset each other.
1999 1998
---- ----
Professional and Consulting Fees $ 1,374,976 $ 732,505
- --------------------------------
Professional fees increased $642,000 in the current nine months period. A legal
matter involving Edge's carrier service and switching equipment, the successful
defense of two lawsuits against DCI, and legal and accounting costs associated
with the Securities and Exchange Commission investigation of the Company and
corresponding restatements of financial statements, are the main reasons for
this unfavorable variance.
1999 1998
---- -----
Amortization and Depreciation $ 1,913,608 $ 661,928
- -----------------------------
14
<PAGE>
Amortization and depreciation increased $1,251,680 over the prior year nine
months period. Amortization of the Master Service Agreement through September 30
totaled $1,567,000 ($0 in prior year). Partially offsetting this is the absence
of amortization of goodwill associated with the now closed Canadian operations
totaling $150,000. Depreciation declines resulting from closed operations
principally account for the remaining variance.
1999 1998
---- ----
Loss on Master Service Agreement $(13,321,093) $ -0-
- --------------------------------
This represents the write off of the remaining net value assigned to the Master
Service Agreement purchased with DCI common stock in the last fiscal year. The
Company has suspended operations with the carrier.
1999 1998
---- -----
EDGE Goodwill Write-off $ (6,980,048) $ -0-
- ------------------------
This represents the write off of the remaining goodwill of EDGE Communications
as a result of a recoverability analysis based on future income generation.
1999 1998
---- -----
Gain on Dissolution -Foreign
Subsidiary $ 1,426,749 $ -0-
- ----------------------------
A petition for issuance of an Involuntary Winding Up Order was issued against
one of the Company's subsidiaries in Great Britain. The gain is the result of
the remaining liabilities exceeding assets due to the large bad debt provision
on March 31, 1999
1999 1998
----- ----
Investment Income $ 249,000 $ 138,762
Interest Expense $ (1,593,040) $ (83,162)
- -----------------
The entire investment income of $ 249,000 in 1999 is the result of income from
Muller Media which included all nine months in 1999 and a little less than seven
months in 1998. (Acquired June 9, 1998)
The increase in interest expense of $1,510,000 is principally the result of
interest and penalties associated with the inability of Series F
15
<PAGE>
Preferred holders to convert to common and was converted to a note in November
1999.
1999 1998
---- ----
Discontinued operations - CyberFax $ -0- $ (285,173)
- ----------------------------------
Since CyberFax was sold on March 30, 1999 and classified as discontinued
operations, the $285,000 loss in 1998 first nine months has been reclassified as
discontinued operations.
16
<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 18
17
<PAGE>
ITEM 6 - Exhibits and Reports on Form 8K
1. Changes in Registrant's Certifying Accountant as filed on Form 8K, Oct 11,
1999, and as amended on Form 8K/A, October 26, 1999, and further amended on
November 8, 1999
2. Changes in Registrant's Certifying Accountant as filed on form 8K, November
15, 1999.
18
<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 16, 2000 By: /s/John J. Adams
--------------------
John J. Adams
Co-President
By: /s/Larry Shatsoff
---------------------
Larry Shatsoff
Co-President
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 1221
<SECURITIES> 0
<RECEIVABLES> 3425
<ALLOWANCES> 0
<INVENTORY> 100
<CURRENT-ASSETS> 5131
<PP&E> 1632
<DEPRECIATION> (193)
<TOTAL-ASSETS> 9291
<CURRENT-LIABILITIES> 9926
<BONDS> 0
2187
0
<COMMON> 3
<OTHER-SE> (7247)
<TOTAL-LIABILITY-AND-EQUITY> 9291
<SALES> 11733
<TOTAL-REVENUES> 11733
<CGS> 13614
<TOTAL-COSTS> 13614
<OTHER-EXPENSES> 24286
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1593
<INCOME-PRETAX> (27760)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27760)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27760)
<EPS-BASIC> (.92)
<EPS-DILUTED> (.92)
</TABLE>
