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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, 1999.
----------------
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.)
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 October 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 -
October 31, 1999 and
April 30, 1999 3
Condensed Consolidated Statements of
Operations - Three months Ended October 31,
1999 and October 31, 1998; Six months ended
October 31, 1999 and October 31, 1998 4
Condensed Consolidated Statements
of Cash Flows - Six Months
ended October 31, 1999 and October 31, 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion
and Analysis of Results
of Operations and
Financial Condition 7 - 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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Part 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
Direct Connect International Inc. and Subsidiary
Consolidated Balance Sheets
ASSETS
<CAPTION>
October 31, 1999 April 30, 1999
---------------- --------------
(Unaudited)
-----------
<S> <C> <C>
Current assets
Cash and cash equivalents $34,474 $47,004
Notes receivable, including accrued interest-Image 317,657 307,827
Technology Inc.
Note receivable, including accrued interest-Omnet Corp. 172,289 313,463
Investments in Datatec, at cost 63,888 191,414
Prepaid expenses and other current assets 16,738 6,492
-------------
--------------
Total current assets 605,046 866,200
------------- --------------
Property and equipment , at cost
Furniture and fixtures 17,425 17,425
Less: accumulated depreciation 9,103 8,583
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8,322 8,842
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Notes receivable -officers 103,767 97,662
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Total assets $717,135 $972,704
============= ==============
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $355,027 $339,207
Accrued expenses and taxes payable 269,269 285,005
Notes payable-officers and stockholders 30,000 30,000
Notes payable, including accrued interest-other 1,180,070 1,210,196
------------- --------------
Total current liabilities 1,834,366 1,864,408
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Total liabilities 1,834,366 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 (6,292,242) (6,066,715)
------------- --------------
Total stockholders' equity (deficit) (1,117,231) (879,704)
------------- --------------
Total liabilities and stockholders'
equity $717,135 $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 For the Six Months Ended
-------------------------- ------------------------
October 31, 1999 October 31,1998 October 31, 1999 October 31, 1998
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $0 $0 $0 $0
------------- ------------- -------------- ---------------
Costs and expenses
Depreciation 260 --- 520 ---
General and administrative expenses 220,669 218,163 458,520 464,221
------------- -------------- -------------- ---------------
220,929 218,163 459,040 464,221
------------- -------------- -------------- ---------------
Operating loss (220,929) (218,163) (459,040) (464,221)
Gain (loss) on sale of securities 148,325 (106,918) 252,795 706,362
Interest income 10,593 5,568 22,164 7,430
Other income --- 15,000 --- 15,000
Interest expense (20,367) (14,650) (41,446) (74,195)
------------- -------------- -------------- ---------------
Net income (loss) ($82,378) ($319,163) ($225,527) $190,376
============= ============== ============== ===============
Earnings (loss) per common share ($0.01) ($0.04) ($0.02) $0.01
============= ============== ============== ===============
</TABLE>
4
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<TABLE>
Direct Connect International Inc. and Subsidiary
Consolidated Statements of Cash Flows
<CAPTION>
For The Six Months ended
------------------------
October 31, 1999 October 31, 1998
---------------- ----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ($225,527) $190,376
---------------- ----------------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation 520 ---
Gain on sale of Datatec stock (252,795) (706,362)
(Increase) decrease in assets
Prepaid expenses and other current assets (10,246) 43,463
Increase (decrease) in liabilities
Accounts payable 15,820 (26,208)
Accrued expenses and taxes payable (15,736) (34,823)
================= ================
Total adjustments (262,437) (723,930)
================= =================
Net cash used in operating activities (487,964) (533,554)
------------------ -----------------
Cash flows from investing activities
Notes receivable-officers, increases (12,105) (7,109)
Notes receivable-officers, decreases 6,000 ---
Increase in due from Omnet (8,826) (303,793)
Decrease in due from Omnet 150,000 ---
Proceeds from sale of Datatec stock 380,321 1,776,969
Increase in notes receivable-Image (9,830) ---
Acquisition of equipment --- (9,857)
------------------ ------------------
Net cash provided by investing activities 505,560 1,456,210
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Cash flows from financing activities
Increase in notes payable-other 96,552 5,300
Decrease in notes payable-other (126,678) (1,270,663)
------------------ ------------------
Net cash used in financing activities (30,126) (1,265,363)
------------------ ------------------
Net decrease in cash and cash equivalents (12,530) (342,707)
Cash and cash equivalents, beginning of period 47,004 437,869
------------------ ------------------
Cash and cash equivalents at end of period $34,474 $95,162
================== ==================
Supplemental disclosures of cash flows information
Cash paid during the six 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 October 31, 1999, (b) the results of operations for the three months
and six months ended October 31, 1999 and October 31, 1998 and (c)
changes in cash flows for the six months ended October 31, 1999 and
October 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 October 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
$5,340,000 at December 31, 1998 and which expire during various years
through 2012.
5. As reported, the Company holds shares of common stock of Glasgal
Communications, Inc., now Datatec Systems, Inc. (Datatec).
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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 and six months ended
October 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.
The Company estimates that it has sufficient funds to pay general and
administrative expenses, after giving effect to reductions in such expenses,
through April 30,2000, although there can be no assurance that it will be able
to do so.
Net Sales
- ---------
Net sales for the three and six months ended October 31,1999 and October 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 October 31,1999, the Company did not have a backlog of orders from its
customers.
Gross Profit
- ------------
Gross Profit percentage for the three and six months ended October 31,1999 and
October 31,1998 was 0%.
Other Income
- ------------
Other income (loss) amounted to approximately $159,000 and $275,000 for the
three and six months ended October 31,1999 as compared to approximately
($100,000) and $713,000 for the three and six months ended October 31,1998. The
increase for the three months ended October 31, 1999 and the decrease for the
six month ended October 31, 1998 were 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 and six months ended October
31,1999 were $220,669 and $458,520 as compared to $218,163 and $464,221 for the
three and six months ended October 31,1998.
7
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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 $1,180,070. 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 18,000 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 notes, evidencing
the obligation are 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 would 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 was to 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 failed to raise such additional capital, then
the holders of Image's common stock, at the date of execution of the Agreement,
would 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 of microfilmed
8
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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 would assist Image to achieve its
goal of becoming the proprietary supplier of judicial Records and Briefs over
the Internet.
Because conditions precedent to the consummation of the proposed merger have not
yet been satisfied, there can be no assurance that the merger with Image will
occur.
For the six months ended October 31,1999 the Company used cash from operations
in the amount of $335,189 as compared to using $533,554 from operations for the
six months ended October, 1998. The Company used $30,126 from its financing
activities for the six months ended October, 1999 as compared to using
$1,265,363 from its financing activities for the six months ended October 31,
1998. These amounts also reflect a reduction of the Company's notes payable.
For the six months ended October 31,1999, the Company provided $352,785 from its
investing activities as compared to providing $1,456,210 for the six months
ended October 31 1998. Included in the amount for the six months ended October
31, 1999 were proceeds in the amount of $221,546 from the sale of 82,000 shares
of Datatec stock. Cash flows for the six months ended October 31, 1998 included
$1,776,969 from the sale of 448,271 shares of Datatec stock held by the Company.
The Company's payroll tax obligations to the Internal Revenue Service amounted
to approximately $140,000 at October 31, 1999. The Company is attempting to
collect outstanding indebtedness amounting to approximately $150,000 at October
31, 1999 in order to satisfy such payroll tax obligations.
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. In
October 1999, such creditor acknowledged to the Company the value of such
shares in her possession in satisfaction of the obligation.
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
9
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$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 $685,500 at October 31, 1999. 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
if the proposed merger with Image, referred to above, is consummated (and there
can be no assurance that it 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
10
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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 1999, 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.
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.
11
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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
12
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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: December 15, 1999 By /s/Peter L. Schneider
----------------- ---------------------
Peter L. Schneider
President and Chief
Operating Officer
Date: December 15 , 1999 By /s/Barry A. Rosner
------------------ ------------------
Barry A. Rosner
Treasurer and Chief
Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 34,474
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 605,046
<PP&E> 17,425
<DEPRECIATION> 9,103
<TOTAL-ASSETS> 717,135
<CURRENT-LIABILITIES> 1,834,366
<BONDS> 0
0
5,000
<COMMON> 9,062
<OTHER-SE> (1,131,293)
<TOTAL-LIABILITY-AND-EQUITY> 717,135
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 459,040
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,446
<INCOME-PRETAX> (225,527)
<INCOME-TAX> 0
<INCOME-CONTINUING> (225,527)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (225,527)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
