<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
OCTOBER 31, 1997.
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
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COMMISSION FILE NUMBER
0-18288
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DIRECT CONNECT INTERNATIONAL INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2705223
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
266 Harristown Road
Glen Rock, New Jersey 07452
- --------------------- -----
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code - (201) 445-2101
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) 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 such filing
requirements for 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 October 31, 1997: 9,062,066
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<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION PAGE NO
Item 1. Financial Statements
Condensed Consolidated
Balance Sheets -
October 31, 1997 and
April 30, 1997 3
Condensed Statements
Of Consolidated
Operations - Three
Months Ended October 31,
1997 and October 31, 1996 and
Six Months Ended October 31,
1997 and October 31, 1996 4
Condensed Statements
Of Consolidated Cash
Flows - Six Months
Ended October 31, 1997
and October 31, 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion
and Analysis of Results
of Operations and
Financial Condition 7 - 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports
on Form 8-K 13
Signatures 14
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
Direct Connect International Inc. and Subsidiary
Consolidated Balance Sheets
ASSETS
<CAPTION>
October 31, 1997 April 30, 1997
---------------- --------------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $59,710 $32,939
Accounts receivable 18,617 22,857
Notes receivable 269,270 ---
Notes receivable-officers 93,390 90,404
Investments --- 13,001
Prepaid financing costs and other expenses 12,324 56,314
------ ------
Total current assets 453,311 215,515
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Property and equipment , at cost
Furniture and fixtures 42,543 42,543
Molds, tools and dies 267,498 267,498
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310,041 310,041
Less: accumulated depreciation 276,183 263,083
------- -------
33,858 46,958
------ ------
Investment in Glasgal 3,003,970 1,694,395
Security deposits 700 700
--------- ---------
3,004,670 1,695,095
--------- ---------
Total assets $3,491,839 $1,957,568
========== ==========
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $495,372 $534,901
Accrued expenses and taxes payable 138,926 85,564
Notes payable-officers and stockholders --- 253,680
Notes payable-other, current portion 2,119,999 1,404,661
Investment, warrants to sell Glasgal --- 300,000
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Total current liabilities 2,754,297 2,578,806
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Stockholders' equity
Convertible preferred stock:
Authorized 5,000,000 shares, $.001
par value; issued and outstanding-
5,000,000 shares 5,000 5,000
Common stock:
Authorized 15,000,000 shares, $.001
par value; issued and outstanding-
9,062,066 shares 9,062 9,062
Capital in excess of par value 5,148,449 5,128,449
Accumulated deficit (4,424,969) (5,668,408)
Accumulated other comprehensive income --- (95,341)
--------- ---------
Total stockholders' equity 737,542 (621,238)
------- --------
Total liabilities and stockholders'
equity $3,491,839 $1,957,568
========== ==========
</TABLE>
<PAGE>
<TABLE>
Direct Connect International Inc. and Subsidiary
Consolidated Statements of Operations
<CAPTION>
For The For The
Three Months Ended Six Months Ended
------------------ ----------------
October 31, 1997 October 31, 1996 October 31, 1997 October 31, 1996
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Sales $ --- $259,838 $ --- $431,587
--------- -------- --------- --------
Costs and expenses
Cost of goods sold --- 124,713 --- 288,190
Royalties/licensing fees --- 6,881 --- 22,690
Product development cost --- 6,000 --- 12,000
Advertising and promotion --- 4,539 --- 4,539
Depreciation 6,549 6,549 13,100 13,100
General and administrative expenses 332,218 316,370 567,702 551,034
Less: management fees (35,731) (164,658) (42,407) (419,658)
------- -------- ------- --------
303,036 300,394 538,395 471,895
------- ------- ------- -------
Operating income (loss) (303,036) (40,556) (538,395) (40,308)
Gain on sale of securities 352,934 696,885 1,875,548 1,613,820
Interest income 5,954 707 6,728 772
Other income 277 1,094 277 3,372
Interest expense (41,168) (25,510) (100,719) (51,263)
------- ------- -------- -------
Net income $14,961 $632,620 $1,243,439 $1,526,393
======= ======== ========== ==========
Income per common share $0.00 $0.04 $0.08 $0.10
======= ======== ========== ==========
</TABLE>
<PAGE>
<TABLE>
Direct Connect International Inc. and Subsidiary
Consolidated Statements of Cash Flows
<CAPTION>
For The Six Months Ended
------------------------
October 31, 1997 October 31, 1996
---------------- ----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $1,243,439 $1,526,393
---------- ----------
Adjustments to reconcile net income
to net cash (used in) operating activities:
Depreciation 13,100 13,100
Gain on sale of Glasgal stock (1,950,018) (1,613,820)
Loss on sale of Mark Solutions Stock 74,469 ---
Decrease (increase) in assets
Accounts receivable 4,240 8,291
Prepaid financing costs and expenses 43,990 33,719
Increase (decrease) in liabilities
Accounts payable (39,529) (620,642)
Accrued expenses and taxes payable 53,362 265,762
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Total adjustments (1,800,386) (1,913,590)
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Net cash (used in) operating activities (556,947) (387,197)
---------- ----------
Cash flows from investing activities
Notes receivable-officers, increase (2,986) (13,276)
Increase in Due from Kidsview, Inc. --- (108,648)
Increase in investment in Evolutions, Inc. --- (1,800,000)
Increase in due from IBN Inc. (219,270) ---
Increase in due from Funatics Inc. (50,000) ---
Acquisition of property and equipment --- (1,369)
Proceeds from sale of Glasgal stock 2,196,768 1,828,100
Acquistion of Glasgal stock (1,856,325) ---
Proceeds from sale of Mark Solutions stock 33,873 ---
--------- ---------
Net cash provided by (used in) investing activities 102,060 (95,193)
--------- ---------
Cash flows from financing activities
Increase in notes payable-officers and stockholders --- 2,097
Decrease in notes payable-officers and stockholders (253,680) ---
Increase in notes payable-other 755,178 1,624,129
Decrease in notes payable-other (39,840) (1,158,857)
Increase in paid in capital 20,000 ---
------- -------
Net cash provided by financing activities 481,658 465,272
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Net increase (decrease) in cash and cash equivalents 26,771 (17,118)
Cash and cash equivalents at beginning of period 32,939 67,886
------- -------
Cash and cash equivalents at end of period $59,710 $50,768
======= =======
Supplemental disclosures of cash flows information
Cash paid during the six months for interest $100,719 $51,263
-------- -------
</TABLE>
<PAGE>
DIRECT CONNECT INTERNATIONAL INC.
AND SUBSIDIARY
Notes to Financial Statements
1. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly (a) the financial position as
of October 31, 1997, (b) the results of operations for the three and
six months ended October 31, 1997 and October 31, 1996 and (c) changes
in cash flows for the six months ended October 31, 1997 and October 31,
1996.
2. Refer to the audited financial statements for the fiscal year ended
April 30, 1997 for details of accounting policies and accounts, none of
which have changed significantly in composition since that date.
3. Financial results for the interim period ended October 31, 1997 may not
be indicative of the financial results for the fiscal year ending April
30, 1998.
4. The Company has available carry forward losses applicable to the
reduction of future Federal income taxes aggregating approximately
$2,400,000 at October 31, 1997 and which expire during various years
through 2011.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
- -------
The Company had no revenues from operations for the three and six months ended
October 31, 1997, and unless the Company develops additional product lines or
enters into management arrangements with other companies, as it has done in the
past but which have terminated, the Company will have to sell assets to continue
its operations. In November 1997, the Company entered into a non-binding letter
of intent to merge with Medical Device Alliance, Inc., a company engaged in the
business of distributing ultrasonic surgical systems which are being marketed
for the aspiration of soft tissue by plastic surgeons.
Net Sales
- ---------
Net sales for the three and six month periods ended October 31, 1997 amounted to
$0 and $0, respectively, as compared to $259,838 and $431,587 respectively, for
the same periods in the prior fiscal year.
The Company intends to develop additional product lines; however, there can be
no assurance that it will be able to do so on a commercially viable basis given
the limited resources of the Company. If such product lines are so developed,
the Company may be required to sell or license such product lines, depending on,
among other factors, its financial resources.
At October 31, 1997, the Company did not have a backlog of confirmed orders from
its customers.
Gross Profit
- ------------
Gross Profit percentage for the three months ended October 31, 1997 was 0% as
compared to 52% for the three months ended October 31, 1996. Gross Profit
percentage for the six months ended October 31, 1997 was 0% as compared to 33%
for the six months ended October 31, 1996. Such decrease for the three and six
months ended October 31, 1997 was a result of no sales during the three and six
months ended October 31, 1997.
Royalties/Licensing Fees
- ------------------------
Royalties/licensing fees are variable expenses which increase as sales increase.
For the three and six month periods ended October 31, 1997, the Company paid $0
and $0, respectively, as compared to $6,881 (or 3% of sales) and $22,690 (or 5%
of sales) for the three and six month periods ended October 31, 1996,
respectively. The decrease in royalties was a result of no sales during the
three and six months ended October 31, 1997.
<PAGE>
Other Income
- ------------
Other income amounted to approximately $360,000 and $1,880,000 for the three and
six months ended October 31, 1997 as compared to approximately $700,000 and
$1,615,000 for the three and six months ended October 31, 1996. Other income for
the six months ended October 31, 1997 is primarily comprised of the gain on the
sale of 221,667 shares of common stock of Glasgal Communications, Inc. (Glasgal)
held by the Company.
General and Administrative Expenses
- -----------------------------------
For the three and six months ended October 31, 1997, the Company received from
its management arrangement with Evolutions, Inc. (EVO) $35,731 and $42,407,
respectively, as compared to $164,658 and $419,658, respectively, for the three
and six months ended October 31, 1996, which covers the monthly reimbursement of
the back office costs incurred by the Company in connection with its operations
as it relates to supporting the product lines which were sold to EVO. The reason
for the decrease was the reduction in activity in connection with the Company's
management arrangements on behalf of EVO, which terminated in May 1997.
Additional costs were incurred by the Company after the termination date for
which the Company was reimbursed during this period. Set forth below are the
principal components.
General and administrative expenses for the three and six month periods ended
October 31, 1997 were $332,218 and $567,902, respectively, as compared to
$316,370 and $551,034, respectively, for the three month and six month periods
ended October 31, 1996. For the three month and six month periods ended October
31, 1997 there were no commissions as compared to $0 and $8,469, respectively,
for the three month and six month periods ended October 31, 1996. This decrease
resulted because there were no sales upon which commissions are based.
Professional fees were $36,459 and $73,983, respectively, for the three and six
month periods ended October 31, 1997 as compared to $59,100 and $71,149,
respectively, for the three and six month periods ended October 31, 1996. This
decrease for the three months ended October 31, 1997 was due primarily to the
timing of the Company's annual audit and fees associated with the Company's
financing activities. Letter of credit and foreign office expenses amounted to
$34,069 and $34,069, respectively, for the three month and six month periods
ended October 31, 1997 as compared to $10,344 and $23,343, respectively, for the
three month and six month periods ended October 31, 1996. This increase was due
primarily to the activity by Amerawell Products, Ltd., the Company's
wholly-owned subsidiary, in connection with the terminated management
arrangement with EVO.
For the three and six month periods ended October 31, 1997, salaries were
$191,883 and $274,690, respectively, as compared to $138,288 and $247,563,
respectively, for the three and six month periods ended October 31, 1996. Such
increases resulted from additions to payroll in anticipation of the Company's
development of new business opportunities.
<PAGE>
Travel and entertainment expenses amounted to $9,637 and $46,844 for the three
and six month periods ended October 31, 1997 as compared to $37,506 and $70,725
for the three and six month periods ended October 31, 1996. Such decreases
resulted from the reduction of activity caused by the termination of the
management arrangement referred to above
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the next twelve months, in addition to meeting its operating needs, the
Company will have notes payable in the amount of approximately $2,100,000. The
Company does not believe that it will be able to pay these obligations out of
operating revenues, and, accordingly, it will have to seek additional financing
or sell assets to do so. The Company owns approximately 900,000 shares of common
stock of Glasgal and may, from time to time, sell a portion of such shares.
There can be no assurance that the Company will be able to obtain such financing
or sell assets, in which event such obligations will have a material adverse
effect upon the Company's operations.
For the six months ended October 31, 1997 the Company used cash from operations
in the amount of $556,947 as compared to using $387,197 from operations for the
six months ended October 31, 1996. The Company obtained $481,658 from its
financing activities for the six months ended October 31, 1997 as compared to
obtaining approximately $465,272 for the six months ended October 31, 1996.
These amounts resulted primarily from borrowings using the Company's Glasgal
shares as collateral.
For the six months ended October 31, 1997, the Company provided $102,060 from
its investing activities as compared to using $95,193 for the six months ended
October 31, 1996. Included in the amount for the six months ended October 31,
1997 were proceeds in the amount of $2,196,768 from the sale of 565,522 shares
of Glasgal stock and proceeds in the amount of $33,872 from the sale of 8,334
shares of stock of Mark Solutions, Inc. held by the Company. The Company also
used $1,856,325 of such proceeds to acquire 480,000 shares of Glasgal stock.
Cash flows for the six months ended October 31, 1996 included $1,828,100 from
the sale of 221,667 shares of Glasgal stock. Also included in that amount was
cash used to increase the Company's advances to Kidsview, Inc. by $108,648 and
to increase its investment in EVO by $1,800,000. In connection with the
transactions involving the Glasgal stock, Glasgal relinquished certain options
regarding the purchase of shares of such stock from the Company, and the option
granted to the Company by Glasgal to purchase additional shares of Glasgal stock
was increased.
In June 1997, the Company entered into a lending arrangement with Barbara
Rosner, wife of a director and chief financial officer of the Company, whereby
she agreed to provide funds to the Company in the aggregate amount of $225,000.
The Company agreed to issue to her secured promissory notes, with interest at
the rate of 10% per annum, to cover the loans as made from time to time. As an
inducement for her to make the loans, the Company agreed to issue to her
warrants to purchase an aggregate of 100,000 shares of common stock of the
<PAGE>
Company at an exercise price of $.20 per share. At October 31, 1997 the Company
received $155,110 under such lending arrangement and issued notes for such
amount. Such notes are secured by 69,100 shares of Glasgal common stock. Two
notes aggregating $115,000 became due in November 1997 and two additional notes
issued in August and September 1997 aggregating $40,110, and secured by 11,600
shares of Glasgal common stock, become due in December 1997.
In September 1997, the Company entered into a lending arrangement with an
individual lender whereby the Company issued secured promissory notes in the
aggregate principal amount of $250,000. Such notes are secured by a total of
62,000 shares of Glasgal common stock and bear interest at the rate of 10% per
annum and became due in November 1997, as extended. As an inducement for making
the loans, the Company agreed to pay such lender $25,000 as an inducement fee.
Of the proceeds received from such lending arrangements, $155,000 were used for
the Company's operational expenses and an aggregate of $265,000 was loaned to
two companies, evidenced by 15% and 10% promissory notes and secured by
inventory and receivables. Such lending arrangements provide for an aggregate of
$14,500 to be paid to the Company as an inducement fee. The notes become due in
December 1997, as extended. The purpose of such loans was to develop potential
business opportunities with such companies. Messrs. Peter Schneider and Y. S.
Ling, the President and an Executive Vice President of the Company,
respectively, have an equity interest in one of such companies. In October 1997
the Company received advances aggregating $15,600 from a company controlled by
Peter Schneider.
In October 1995 the Company issued to two individual lenders promissory notes in
the aggregate principal amount of $350,000. Such notes are secured by a total of
200,000 shares of Glasgal common stock held by the Company and bear interest at
the rate of 10% per annum and became due in March 1997, as extended. As an
inducement for the noteholders to make the $350,000 loan to the Company, the
Company agreed to deliver to such holders an aggregate of 19,440 shares of
Glasgal common stock held by the Company and to deliver to such holders (a)
warrants to purchase for a period of twenty-four months an aggregate of 19,440
shares of Glasgal common stock held by the Company at an exercise price of $2.00
per share, as adjusted, and (b) warrants to purchase for a period of twenty-four
months an aggregate of 38,880 shares of the Company's common stock at an
exercise price of $ .20 per share. The Company negotiated with such noteholders
regarding the extension for repayment of the notes and will deliver an
additional 11,666 shares of Glasgal common stock as consideration for such
extension.
To continue its business, the Company will have to seek additional financing and
there can be no assurance that it will be able to obtain such financing. No
assurance can be given as to the number of outstanding warrants, which represent
a potential source of funds, that will be exercised. The Company is exploring
alternatives to utilizing its equity investments in connection with financing
its operations and developing new products.
<PAGE>
In order to supplement its cash flow, the Company, on March 6, 1991, entered
into loan agreements with several investors whereby the Company borrowed an
aggregate of $282,000 for six months with interest at the semiannual rate of
14.5%. As part of such transaction, the Company issued to such investors, in a
private placement, an aggregate of 17,000 shares of its common stock, on a
restricted basis, for an aggregate consideration of approximately $22,000. In
October 1991, the Company paid off $32,000 (plus accrued interest) with respect
to such loans. At such time the Company renegotiated the balance of such loans
(plus accrued interest) and issued new notes, maturing in one year, amounting to
approximately $290,000 including interest thereon at the annual rate of 10%. The
Company is obligated to pay such investor the value of the note, plus accrued
interest, aggregating, after giving effect to partial repayments, approximately
$196,000 at October 31, 1997. Such obligation was acquired by Medical Device
Alliance, Inc. If the Company is unable to pay this obligation out of operating
revenues, it will have to seek additional financing or sell a portion of its
equity holdings in Glasgal to do so. There can be no assurance that the Company
will be able to obtain such financing or sell such equity, in which event this
obligation would have a material adverse effect upon the Company's operations.
Given the nature of the Company's business, the length of the typical product
cycle in the toy business, the need to respond rapidly to developments in the
marketplace and to, if necessary, make rapid changes in product lines and
strategic plans to meet the rapid changes in the marketplace, the Company's
planning historically has been limited to approximately a twelve month
time-frame at any given time. It is anticipated that the Company will continue
to operate in a similar fashion in the future. Accordingly, analyses of long
term liquidity and capital requirements are not meaningful.
In 1992, the Company, in order to regain listing on the NASDAQ Small Cap System,
to provide for operating requirements and in contemplation of a possible change
in the nature of the Company's business, completed a private placement of
securities in October 1992, in which investors subscribed for 100 Units, each
Unit consisting of 50,000 shares of Convertible Preferred Stock and 25,000 1992
Warrants to purchase shares of Common Stock, for a total of $3,000,000. The
warrants expired on June 30, 1997. Such private placement was closed in two
stages, the first of which involved the purchase of 52-1/2 Units and closed in
July 1992, with the balance of the Units offered (47-1/2 Units) being purchased
in October 1992. As a result of the consummation of such private placement, (a)
the Redeemable Class A Warrant exercise price has been adjusted from $1.00 per
share to $.53 per share and the number of shares of Common Stock issuable upon
exercise of Redeemable Class A Warrants has been increased from 3,438,900 shares
to 6,488,517 shares of Common Stock so that each holder of a Redeemable Class A
Warrant will be able to purchase 1.8868 shares of Common Stock for $1.00 upon
exercise of each Warrant and (b) the Redeemable Class B Warrant exercise price
has been adjusted from $1.50 per share to $ .75 per share and the number of
shares of Common Stock issuable upon exercise of Redeemable Class B Warrants has
been increased from 1,719,450 shares to 3,438,900 shares of Common Stock so that
each holder of a Redeemable Class B Warrant will be able to purchase one share
of Common Stock per warrant upon exercise of such Warrant.
<PAGE>
In order to provide for additional working capital, to meet expenses related to
a proposed, but not consummated, merger with Glasgal, and to be in position to
assist Glasgal in solving its cash flow problems in contemplation of the merger,
the Company entered into lending arrangements with several individuals under
which the Company issued notes aggregating $780,000 plus interest thereon at the
annual rate of 8% in private placements pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended (the
Act). Such outstanding notes matured between December 31, 1993, as extended, and
December 31, 1995. At October 31, 1997, such outstanding notes amounted to
approximately $650,000 including accrued interest thereon after giving effect to
certain repayments. As an inducement for making such loans, it was intended that
the holders would have an opportunity to convert such notes into equity
securities when the Company next undertook a private placement, the terms of
which had not been determined, provided that the holders met suitability
requirements thereof. The Company believes that all of such holders either were
officers of the Company or relatives of officers of the Company who in all cases
were deemed to be suitable investors or other individuals who had preexisting
personal relationships with officers or directors of the Company and, in
addition, would have been deemed "accredited investors" as such term is defined
in Rule 501 of Regulation D under the Act if an exemption had been sought under
Regulation D. In view of the Company's default in payment of its obligations
under the notes and its inability to afford the noteholders an opportunity to
convert such notes into equity securities, several of the noteholders have
recently contacted the Company and have threatened to commence litigation
against the Company to enforce the Company's obligations under the notes. The
Company intends either to pay off the obligations or to convert the notes
(including accrued interest thereon) into Common Stock at a rate of five shares
of Common Stock per dollar subject to stockholder approval of an increase in
authorized shares of Common Stock in connection with a proposed meeting of
stockholders. There can be no assurance that the Company will be able to
effectuate such payment or conversion. Litigation by noteholders to enforce the
notes would materially adversely affect the Company's operations. Approximately
$1,500,000 of the Company's total outstanding notes have been acquired by
Medical Device Alliance, Inc.
The Company, after termination of the proposed Glasgal merger, entered into a
common stock purchase agreement (the "Agreement") with Glasgal governing certain
equity investments which the Company has made, and in the future intends to
make, in Glasgal common stock. Pursuant to the Agreement, in January 1994 the
Company converted outstanding indebtedness of Glasgal owed to the Company into
equity of Glasgal which, upon consummation of the Glasgal merger with Sellectek
Incorporated, resulted in the Company owning approximately 28% of the
outstanding shares of Glasgal or 18.5% on a fully diluted basis. In addition,
the Agreement gives Glasgal the right to require the Company to purchase an
additional 1,337,239 of shares of common stock of Glasgal at November 30, 1997
(the "Additional Shares"), for an aggregate of approximately $8.4 million after
giving effect to certain warrant solicitation fees (the "Additional DCI
Investment"). Glasgal may require this purchase if, and then only to the extent
that, the Company receives proceeds from the exercise of existing Company
warrants. There can be no assurance that any or all of such warrants will be
exercised. The Company has issued warrants to the public to purchase 6,448,517
<PAGE>
shares of Common Stock at $ .53 per share and warrants to purchase 3,438,900
shares of Common Stock at $ .75 per share. Such warrants will expire March 31,
1998, as extended. The Company has the right to retain the first $500,000 of
warrant exercise proceeds; however, such amount must be used by the Company to
purchase shares of Common Stock of Glasgal if the aggregate amount of warrant
exercise proceeds applied to the purchase of Glasgal common stock, after the
earlier of the expiration of exercise of all warrants or 24 months after the
effectiveness of the registration statement covering the Common Stock underlying
the warrants, is less than $8.4 million. In view of the fact that, at the
present time and throughout 1996, the price of the Common Stock has been below
the exercise price of the warrants, it is impossible to predict the timing of
exercise of any of the outstanding warrants, or if such warrants will ever be
exercised. The Company anticipates such an event will not arise for at least two
years and that, should such eventuality arise, the Company will attempt to meet
such obligation either through loans (which may be secured by all or a portion
of its Glasgal equity), equity financings or some combination thereof. If
Glasgal does not require the Additional DCI Investment, the Company may still
purchase, on the same terms, the Additional Shares.
In November 1993, the Company issued to several investors secured promissory
notes aggregating $500,000 with interest thereon at the annual rate of 8%. Such
notes were secured by all the assets of the Company and matured on September 30,
1994, as extended, and were paid off on October 6, 1994. As an inducement for
such investors to make such loan, the Company issued to such investors warrants,
which expire on November 23, 1998, to purchase an aggregate of 750,000 shares of
Common Stock at an exercise price of $ .05 per share, as adjusted ("1993
Warrants"). The proceeds from such transaction were loaned to Glasgal to fulfill
certain commitments to Glasgal. As an inducement to extend the maturity date of
such notes to September 30, 1994, the Company issued an aggregate of 500,000
additional warrants ("1994 Warrants") to the holders of such notes on the same
terms and conditions as the 1993 Warrants except that the exercise price of the
1994 Warrants is $ .20 per share.
DEFERRED INCOME TAX ASSETS
Deferred income tax assets as of April 30, 1997 and October 31, 1997 have been
reduced to zero due to uncertainties concerning their realization.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Financial Data Schedule
Reports on Form 8-K:
Form 8-K, dated November 17, 1997, regarding a
proposed merger between the Company and Medical
Device Alliance, Inc.
<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.
DIRECT CONNECT INTERNATIONAL INC.
(Registrant)
Date: December 12, 1997 By /s/Peter L. Schneider
----------------- ---------------------
Peter L. Schneider
President and Chief
Operating Officer
Date: December 12, 1997 By /s/Barry A. Rosner
---------------- ------------------
Barry A. Rosner
Treasurer and Chief
Financial Officer
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0
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