<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, 1999.
-------------
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
637 Wyckoff Avenue #194
Wyckoff, New Jersey 07481
- ------------------- -----
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code -(201) 445-2101
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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, 1999: 9,062,066
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DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
------------------------------------------------
INDEX
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PART I. FINANCIAL INFORMATION PAGE NO
Item 1. Financial Statements
Condensed Consolidated
Balance Sheets -
July 31, 1999 and
April 30, 1999 3
Condensed Statements
Of Consolidated
Operations - Three
Months Ended July 31,
1999 and July 31, 1998 4
Condensed Statements
Of Consolidated Cash
Flows - Three Months
Ended July 31, 1999
and July 31, 1998 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 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
Direct Connect International Inc. and Subsidiary
Consolidated Balance Sheets
<CAPTION>
ASSETS
July 31, 1999 April 30, 1999
-------------- --------------
<S> <C> <C>
(Unaudited)
Current assets
Cash and cash equivalents $14,078 $47,004
Notes Receivable, including accrued interest-Image Technology Inc. 312,742 307,827
Notes Receivable, including accrued interest-Omnet Corp 318,378 313,463
Investment in Datatec, at cost 143,109 191,414
Prepaid expenses and other current assets 39,168 6,492
------- -------
Total current assets 827,475 866,200
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Property and equipment , at cost
Furniture and fixtures 17,425 17,425
Less: accumulated depreciation 8,843 8,583
------ ------
8,582 8,842
------ ------
Notes receivable - officers 96,369 97,662
------ ------
Total assets $932,426 $972,704
======== ========
LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $342,013 $339,207
Accrued expenses and taxes payable 325,573 285,005
Notes payable-officers and stockholders 30,000 30,000
Notes payable, including accrued interest-other 1,269,692 1,210,196
--------- ---------
Total current liabilities 1,967,278 1,864,408
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Total liabilities 1,967,278 1,864,408
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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 5,160,949 5,160,949
Accumulated deficit (6,209,863) (6,066,715)
----------- -----------
Total stockholders' equity (deficit) (1,034,852) (891,704)
----------- -----------
Total liabilities and stockholders'
equity (deficit) $932,426 $972,704
=========== ===========
</TABLE>
3
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<TABLE>
Direct Connect International Inc. and Subsidiary
Consolidated Statements of Operations
<CAPTION>
For the Three Months Ended
--------------------------
July 31,1999 July 31,1998
------------ ------------
(Unaudited)
-----------
<S> <C> <C>
Sales $0 $0
--- ---
Costs and expenses
General and administrative expenses 238,111 246,058
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238,111 246,058
------- -------
Operating loss (238,111) (246,058)
Gain on sale of securities 104,470 813,280
Interest income 11,571 1,862
Interest expense (21,079) (59,545)
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Net income (loss) $(143,149) $509,539
========== =========
Earnings (loss) per common share $(0.02) $0.03
========== =========
</TABLE>
4
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<TABLE>
Direct Connect International Inc. and Subsidiary
Consolidated Statements of Cash Flows
<CAPTION>
For Three Months Ended
----------------------
July 31, 1999 July 31, 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(143,149) $509,539
---------- --------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation 260 ---
Gain on sale of Datatec stock (104,469) (813,280)
(Increase) decrease in assets
Prepaid expenses and other current assets (32,676) 21,032
Increase (decrease) in liabilities
Accounts payable 2,806 (60,442)
Accrued expenses and taxes payable 40,568 (53,855)
---------- ---------
Total adjustments (93,511) (906,545)
---------- ---------
Net cash (used in) operating activities (236,660) (397,006)
---------- ---------
Cash flows from investing activities
Notes receivable-officers, increases (1,707) (4,775)
Notes receivable-officers, decreases 3,000 ---
Proceeds from sale of Datatec stock 152,775 1,285,663
Increase in notes receivable-Image (4,915) ---
Increase in notes receivable-Omnet (4,915) ---
---------- -----------
Net cash provided by investing activities 144,238 1,280,888
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Cash flows from financing activities
Increase in notes payable-other 76,185 ---
Decrease in notes payable-other (16,689) (1,274,462)
Increase in paid in capital --- 3,000
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Net cash (used in) provided by financing activities 59,496 (1,271,462)
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Net increase (decrease) in cash and cash equivalents (32,926) (387,580)
Cash and cash equivalents at beginning of period 47,004 437,869
---------- -----------
Cash and cash equivalents at end of period $14,078 $50,289
========== ===========
Supplemental disclosure of cash flows information
Cash paid during the three months for interest $0 $0
---------- -----------
</TABLE>
5
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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, 1999, (b) the results of operations for the three months
ended July 31, 1999 and July 31, 1998 and (c) changes in cash flows for
the three months ended July 31, 1999 and July 31, 1998.
2. Refer to the audited financial statements for the fiscal year ended
April 30, 1999 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, 1999 may
not be indicative of the financial results for the fiscal year ending
April 30, 2000.
4. The Company has available carry forward losses applicable to the
reduction of future Federal income taxes aggregating approximately
$5,340,260 at December 31, 1998 and which expire during various years
through 2012.
5. As reported, the Company holds shares of common stock of Datatec
Systems, Inc.
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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,
1999, 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,
although there can be no assurance that there will be sufficient assets to do
so.
Net Sales
- ---------
Net sales for the three months ended July 31, 1999 and July 31, 1998 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, 1999, the Company did not have a backlog of orders from its
customers.
Gross Profit
- ------------
Gross Profit percentage for the three months ended July 31, 1999 and July
31,1998 was 0%.
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Other Income
- ------------
Gain on sale of Datatec securities amounted to approximately $100,000 for the
three months ended July 31,1999 as compared to approximately $800,000 for the
three months ended July 31, 1998. The decrease for the three month period ended
July 31, 1999 was due to the difference in the number of shares, selling price
and cost basis in connection with the sale of Datatec shares held by the
Company.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses for the three months ended July 31, 1999
were $238,111 as compared to $246,058 for the three months ended July 31, 1998.
Professional fees were $50,729 for the three months ended July 31,1999 as
compared to $31,745 for the three months ended July 31, 1998. The increase was
due to additional services rendered in connection with potential merger
transactions and for services rendered in connection with other legal matters.
For the three months ended July 31,1999, salaries were $96,969 which was
approximately the same amount as the salaries for the three months ended July
31, 1998, after giving effect to the inclusion of $32,933 which was listed, for
the three months ended July 31, 1998, under General and Administrative Expenses,
rather than listed specifically under salaries for that period.
Travel and entertainment expenses amounted to $30,446 for the three months ended
July 31, 1999 as compared to $19,224 for the three months ended July 31, 1998.
Such increase resulted from the Company's efforts to develop business or merger
opportunities.
8
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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 $1,300,000. The
Company will not 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 100,000 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 that connection, the Company signed a merger agreement, dated as of November
30, 1998 (the Agreement), with Image Technology Corp. (Image) whereby the
Company would merge into a subsidiary of Image, and the Company would become the
surviving corporation. The Company's shareholders would receive, subject to
adjustment, approximately 25% of Image's issued and outstanding common stock
after the merger.
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 and shareholder approval. The Agreement is also subject to approval of
Image's shareholders.
In anticipation of the proposed merger, the Company loaned Image, for working
capital purposes, the principal amount of $260,000 with interest at the rate of
six and one-half percent (6-1/2%) per annum. The promissory note, dated November
30, 1998, evidencing the obligation is due, in the event that the Agreement is
terminated, on or before the 30th day after such termination.
The Agreement provides that at the time of filing of the Certificate of Merger
in Delaware, the Company will have at least $1,000,000 of unrestricted free cash
together with a sufficient sum of liquid tangible assets to pay all outstanding
liabilities and all other fees of the Company in connection with the merger. In
addition, Image will use its best efforts to raise a minimum of $2,000,000 of
additional capital during the period ending September 30, 1999, which has not
occurred. If Image fails to raise such additional capital, then the holders of
Image's common stock, at the date of execution of the Agreement, will be
entitled to increase their aggregate holdings so as to be equivalent to 85% of
the outstanding shares of Image common stock at the time of filing of the
Certificate of Merger, thereby reducing the holdings of the Company's
shareholders of Image common stock after the merger from 25% to 15%.
Image's principal business is conducted through Court Record Services, Inc.,
which is one of the leading providers of Records and Briefs for the Federal
Courts of Appeal and the U.S. Supreme Court to law libraries and the legal
profession. Image has significant assets in its vast collections
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of microfilmed and digitized Records and Briefs of the U.S. Federal Courts of
Appeal and the U.S. Supreme Court. The collection also includes cases for
appellate courts of the states of New York and Pennsylvania. These assets enable
Image through its CourtRecordServices.com web site to offer Records and Briefs
instantaneously through the Internet to the attorney, professor or law librarian
who requires such information.
The assets of the Company will assist Image to achieve its goal of becoming the
proprietary supplier of judicial Records and Briefs over the Internet.
For the three months ended July 31,1999 the Company used cash from operations in
the amount of $236,660 as compared to using $397,006 from operations for the
three months ended July 31, 1998. The Company provided $59,496 from its
financing activities for the three months ended July 31, 1999 as compared to
using $1,271,467 from its financing activities for the three months ended July
31, 1998. These amounts also reflect a reduction of the Company's notes payable.
For the three months ended July 31,1999, the Company provided $144,238 from its
investing activities as compared to providing $1,280,888 for the three months
ended July 31, 1998. Included in the amount for the three months ended July 31,
1999 were proceeds in the amount of $152,775 from the sale of 50,000 shares of
Datatec stock. Cash flows for the three months ended July 31, 1998 included
$1,285,663 from the sale of 294,313 shares of Datatec stock held by the Company.
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, 1999, the Company's obligation under this line of credit amounted to
approximately $96,700. This obligation is included under notes payable other,
and is secured by 40,000 shares of Datatec common stock owned by the Company.
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 Medical Device
Alliance, Inc. (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 which total approximately $673,900 at July 31, 1999. The Company
recognized a gain of approximately $750,000 in connection with the sale of these
shares.
10
<PAGE>
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 Image, 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
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, 2000, 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 1998, the price of the Common Stock has been below the exercise price
11
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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.
DEFERRED INCOME TAX ASSETS
Deferred income tax assets as of April 30, 1998 and April 30, 1999 have been
reduced to zero due to uncertainties concerning their realization.
12
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Financial Data Schedule
Reports on Form 8-K:
None
13
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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: October 13, 1999 By /s/Peter L. Schneider
---------------- ---------------------
Peter L. Schneider
President and Chief
Operating Officer
Date: October 13, 1999 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-30-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 14,078
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 827,475
<PP&E> 17,425
<DEPRECIATION> 8,843
<TOTAL-ASSETS> 932,426
<CURRENT-LIABILITIES> 1,967,278
<BONDS> 0
0
5,000
<COMMON> 9,062
<OTHER-SE> (1,048,914)
<TOTAL-LIABILITY-AND-EQUITY> 932,426
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 238,111
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,079
<INCOME-PRETAX> (143,149)
<INCOME-TAX> 0
<INCOME-CONTINUING> (143,149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (143,149)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
