<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
JULY 31, 1998.
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
--------- ---------
COMMISSION FILE NUMBER
0-18288
-------
DIRECT CONNECT INTERNATIONAL INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2705223
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 14
Hawthorne, New Jersey 07507
- --------------------- -----
(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 July 31, 1998: 9,062,066
---------
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
-------------------------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NO
- ------- --------------------- -------
Item 1. Financial Statements
Condensed Consolidated
Balance Sheets -
July 31, 1998 and
April 30, 1998 3
Condensed Statements
Of Consolidated
Operations - Three
Months Ended July 31,
1998 and July 31, 1997 4
Condensed Statements
Of Consolidated Cash
Flows - Three Months
Ended July 31, 1998
and July 31, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion
and Analysis of Results
of Operations and
Financial Condition 7 - 12
PART II. OTHER INFORMATION
-----------------
Item 5. Other Information 13
Item 6. Exhibits and Reports
on Form 8-K 13
Signatures 14
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
Direct Connect International Inc. and Subsidiary
Consolidated Balance Sheets
ASSETS
<CAPTION>
July 31, 1998 April 30, 1998
------------- --------------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $50,289 $437,869
Investment in Datatec, at cost 1,075,724 1,548,107
Prepaid expenses and other current assets 29,233 50,265
------ ------
Total current assets 1,155,246 2,036,241
--------- ---------
Property and equipment , at cost
Furniture and fixtures 7,568 7,568
----- -----
7,568 7,568
Less: accumulated depreciation 7,568 7,568
----- -----
0 0
----- -----
Notes receivable - officers 103,970 99,195
------- ------
103,970 99,195
------- ------
Total assets $1,259,216 $2,135,436
========== ==========
LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $295,205 $355,647
Accrued expenses and taxes payable 175,718 229,573
Notes payable-other 966,900 2,241,362
------- ---------
Total current liabilities 1,437,823 2,826,582
--------- ---------
Stockholders' equity (deficit)
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 5,163,949 5,160,949
Accumulated deficit (5,356,618) (5,866,157)
---------- ----------
Total stockholders' equity (deficit) (178,607) (691,146)
-------- --------
Total liabilities and stockholders'
equity (deficit) $1,259,216 $2,135,436
========== ==========
</TABLE>
3
<PAGE>
Direct Connect International Inc. and Subsidiary
<TABLE>
Consolidated Statements of Operations
For the
Three Months Ended
------------------
<CAPTION>
July 31,1998 July 31,1997
------------ ------------
(uaudited)
<S> <C> <C>
Revenues:
Sales - -
------ ------
Costs and expenses
Depreciation - 6,551
General and administrative expenses 246,058 235,484
Less: management fees - (6,676)
------- --------
246,058 235,359
------- -------
Operating income (loss) (246,058) (235,359)
Gain on sale of securities 813,280 1,522,614
Interest income 1,862 774
Interest expense (59,545) (59,551)
------- -------
Net income $509,539 $1,228,478
======== ==========
Earnings per common share $0.03 $0.08
===== =====
</TABLE>
4
<PAGE>
Direct Connect International Inc. and Subsidiary
<TABLE>
Consolidated Statements of Cash Flows
For Three Months Ended
----------------------
<CAPTION>
July 31, 1998 July 31, 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $509,539 $1,228,478
-------- ----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation - 6,551
Gain on sale of Datatec stock (813,280) (1,522,614)
(Increase) decrease in assets
Accounts receivable - 4,240
Prepaid expenses and other current assets 21,032 (15,210)
Increase (decrease) in liabilities
Accounts payable (60,442) 13,995
Accrued expenses and taxes payable (53,855) 52,655
------- ------
Total adjustments (906,545) (1,460,383)
-------- ----------
Net cash (used in) operating activities (397,006) (231,905)
-------- --------
Cash flows from investing activities
Notes receivable-officers, increases (4,775) (701)
Proceeds from sale of Datatec stock 1,285,663 1,999,547
Acquisition of Datatec stock - (1,856,325)
--------- -----------
Net cash provided by investing activities 1,280,888 142,521
--------- -------
Cash flows from financing activities
Decrease in notes payable-officers and stockholders - (253,680)
Increase in notes payable-other - 391,229
Decrease in notes payable-other (1,274,462) -
Increase in paid in capital 3,000 20,000
----- ------
Net cash (used in) provided by financing activities (1,271,462) 157,549
---------- -------
Net increase (decrease) in cash and cash equivalents (387,580) 68,165
Cash and cash equivalents at beginning of period 437,869 32,939
------- ------
Cash and cash equivalents at end of period $50,289 $101,104
======= ========
Supplemental disclosure of cash flows information
Cash paid during the three months for interest - $59,551
------ -------
</TABLE>
5
<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 July 31, 1998, (b) the results of operations for the three months
ended July 31, 1998 and July 31, 1997 and (c) changes in cash flows for
the three months ended July 31, 1998 and July 31, 1997.
2. Refer to the audited financial statements for the fiscal year ended
April 30, 1998 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 July 31, 1998 may not be
indicative of the financial results for the fiscal year ending April
30, 1999.
4. The Company has available carry forward losses applicable to the
reduction of future Federal income taxes aggregating approximately
$4,760,000 at December 31, 1997 and which expire during various years
through 2011.
5. As reported, the Company holds shares of common stock of Glasgal
Communications, Inc., now Datatec Systems, Inc. (Datatec).
6
<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 months ended July 31,
1998, and unless the Company develops business opportunities or enters into
management arrangements with other companies, as it has done in the past, the
Company will have to sell assets to pay its obligations as they become due.
Net Sales
- ---------
Net sales for the three months ended July 31, 1998 and July 31, 1997 were $0.
The Company will have to develop business opportunities; however, there can be
no assurance that it will be able to do so on a commercially viable basis.
At July 31, 1998, the Company did not have a backlog of orders from its
customers.
Gross Profit
- ------------
Gross Profit percentage for the three months ended July 31, 1998 and July 31,
1997 was 0%.
7
<PAGE>
Other Income
- ------------
Other income amounted to approximately $800,000 for the three months ended July
31, 1998 as compared to approximately $1,500,000 for the three months ended July
31, 1997. The decrease for the three month period ended July 31, 1998 was due to
the difference in the number of shares and selling price in connection with the
sale of Datatec shares held by the Company.
General and Administrative Expenses
- -----------------------------------
For the three months ended July 31, 1998, the Company received from its
management arrangement with Evolutions, Inc. (EVO) $ 0 as compared to $6,676 for
the three months ended July 31, 1997, 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 during April 1997.
General and administrative expenses for the three months ended July 31, 1998
were $246,058 as compared to $235,484 for the three months ended July 31, 1997.
Professional fees were $31,745 for the three months ended July 31, 1998 as
compared to $37,524 for the three months ended July 31, 1997.
For the three months ended July 31, 1998, salaries were $64,036 as compared to
$82,807 for the three months ended July 31, 1997. Such decrease resulted from
reductions in payroll.
Travel and entertainment expenses amounted to $19,224 for the three months ended
July 31, 1998 as compared to $37,200 for the three months ended July 31, 1997.
Such decrease resulted from the reduction in business activity.
8
<PAGE>
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 $967,000. 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 434,000 shares of common
stock of Datatec 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.
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 business opportunities. In August 1998, the
Company entered into a merger agreement with Omnet Technology Corp. Under such
agreement Omnet will merge into a merger-sub of the Company, and the Company
will change its name to Omnet Technology Holding Corp. Each Omnet shareholder
will receive for each of its Omnet shares a combination of cash, notes and the
pro-rata share of 60% of the Company's issued and outstanding common stock on a
fully diluted basis. The agreement is subject to receipt by the Company's Board
of Directors of a fairness opinion by an independent financial consultant or
investment banking firm, adequate financing to be raised (expected to
approximate $8,000,000) and regulatory and shareholder approval. The Company has
determined that it was not in the best interests of its shareholders to continue
negotiations with Medical Device Alliance, Inc. (MDA) regarding a proposed
merger between them, and, accordingly, the Company has terminated such
negotiations under a non-binding letter of intent with MDA.
For the three months ended July 31, 1998 the Company used cash from operations
in the amount of $397,006 as compared to using $231,905 from operations for the
three months ended July 31, 1997. The Company used $1,271,467 from its financing
activities for the three months ended July 31, 1998 as compared to obtaining
approximately $157,549 from its financing activities for the three months ended
July 31, 1997. These amounts also reflect a reduction of the Company's notes
payable.
For the three months ended July 31, 1998, the Company provided $1,280,888 from
its investing activities as compared to providing $142,521 for the three months
ended July 31, 1997. Included in the amount for the three months ended July 31,
1998 were proceeds in the amount of $1,285,663 from the sale of 294,318 shares
of Datatec stock. Cash flows for the three months ended July 31, 1997 included
$1,999,547 from the sale of 493,300 shares of Datatec stock held by the Company.
The Company also used $1,856,325 of such proceeds to acquire 480,000 shares of
Datatec stock. In connection with the transactions involving the Datatec stock,
Datatec relinquished certain options regarding the purchase of shares of such
stock from the Company, and the option granted to the Company by Datatec to
purchase additional shares of Datatec stock was increased.
9
<PAGE>
During 1998 in consideration of providing an open line of credit of $225,000 to
the Company, the Company issued to the wife of one of its officers warrants to
purchase 100,000 shares of the Company's common stock at an exercise price of
$.20 per share. The time for exercise of such warrants expires in 2002. At July
31, 1998, the Company's obligation under this line of credit amounted to
approximately $116,100. This obligation is included under notes payable other,
and is secured by 40,000 shares of Datatec common stock owned by the Company.
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 Datatec 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 $30,000 as an inducement fee.
Such notes have not been paid.
Of the proceeds received from such lending arrangements, $118,000 were used for
the Company's operational expenses and an aggregate of $287,000 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 became due in
December 1997, as extended, and have not been paid. 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 interest in one of such companies. Y.S. Ling
is a creditor and Peter Schneider is both a creditor and a shareholder, holding
less than 5% of the equity of such company. 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 Datatec common stock held by the Company and bear interest at
the rate of 10% per annum and became due on October 15, 1996. 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 19,444 shares of Datatec 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 19,444 shares of Datatec common
stock held by the Company at an exercise price of $2.00 per share, as adjusted,
which were exercised 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 time for exercise of such warrants has
been extended for an indefinite period. The Company in 1998 recognized a gain of
approximately $100,000 as a result of these transactions.
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.
10
<PAGE>
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.
Such obligation was acquired by MDA, as set forth below.
The Company intends either to pay off its note obligations or to convert the
notes (including accrued interest thereon) into Common Stock at a rate of five
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. In connection with the
acquisition of certain outstanding notes of the Company by MDA, all of which are
past due, aggregating approximately $1,600,000 at April 30, 1998, the Company
delivered 228,571 shares of its Datatec stock in May 1998, in transferable form,
as collateral for such obligations. The Company has been advised that all such
shares were subsequently sold resulting in proceeds to MDA of approximately
$976,000 in reduction of such obligations. The Company recognized a gain of
approximately $750,000 in connection with the sale of these shares.
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. At July 31, 1997 approximately 53% of such Preferred Stock was
acquired by MDA. 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. It is expected that
as a result of the proposed merger with Omnet, referred to above, there will be
a further adjustment in the exercise price and the number of shares issuable
upon such exercise.
The Company entered into a common stock purchase agreement (the "Agreement")
with Datatec governing certain equity investments which the Company has made,
and in the future intends to make, in Datatec common stock. Pursuant to the
Agreement, in January 1994 the Company converted outstanding indebtedness of
Datatec owed to the Company into equity of Datatec which, upon consummation of
11
<PAGE>
the Datatec merger with Sellectek Incorporated, resulted in the Company owning
approximately 28% of the outstanding shares of Datatec or 18.5% on a fully
diluted basis. In addition, the Agreement gives Datatec the right to require the
Company to purchase an additional number of shares of common stock of Datatec
equal to 13.5% of the then outstanding shares (the "Additional Shares"), or 10%
on a fully diluted basis, for an aggregate of approximately $8.4 million after
giving effect to certain fees (the "Additional DCI Investment"). Datatec 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 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 on March 31, 1999, 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 Datatec if the aggregate amount of warrant exercise proceeds applied to
the purchase of Datatec 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 1997, 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
Datatec equity), equity financings or some combination thereof. If Datatec 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 Datatec to fulfill
certain commitments to Datatec. 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 April 30, 1998 have been
reduced to zero due to uncertainties concerning their realization.
12
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
In June 1998, the Company's subsidiary, Amerawell Products
Limited (Amerawell), commenced a lawsuit in the Superior Court
of New Jersey against Toys "R" Us (TRU) for products shipped
and delivered to TRU amounting to approximately $185,000,
which has not been paid. TRU has answered the complaint,
denying liability. TRU, in the same proceeding, named the
Company as a third party defendant alleging, among other
things, that the Company breached its contract with TRU
regarding advertising such products and that the Company
because of its relationship to Amerawell or as a result of its
own conduct was liable for all the damages suffered by TRU,
which were not specified. The Company's management believes
that the Company has a meritorious defense.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Financial Data Schedule
Reports on Form 8-K:
None
13
<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: September 14, 1998 By /s/Peter L. Schneider
------------------ ---------------------
Peter L. Schneider
President and Chief
Operating Officer
Date: September 14, 1998 By /s/Barry A. Rosner
------------------ ------------------
Barry A. Rosner
Treasurer and Chief
Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 50,289
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,155,246
<PP&E> 7,568
<DEPRECIATION> 7,568
<TOTAL-ASSETS> 1,259,216
<CURRENT-LIABILITIES> 1,437,823
<BONDS> 0
0
5,000
<COMMON> 9,062
<OTHER-SE> (192,669)
<TOTAL-LIABILITY-AND-EQUITY> 1,259,216
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 246,058
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,545
<INCOME-PRETAX> 509,539
<INCOME-TAX> 0
<INCOME-CONTINUING> 509,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 509,539
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
