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
JANUARY 31,2000.
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.)
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
--------------
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 January 31, 2000: 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 -
January 31, 2000 and
April 30, 1999 3
Condensed Consolidated
Statements of
Operations - Three
Months Ended January 31,
2000 and January 31, 1999
and Nine months ended
January 31, 2000 and
January 31 ,1999 4
Condensed Consolidated
Statements of Cash
Flows - Nine Months
Ended January 31, 2000
and January 31, 1999 5
Notes to Financial Statements 6
Item 2. Management's Discussion
and Analysis of Results
of Operations and
Financial Condition 7 - 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports
on Form 8-K 11
Signatures 12
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
Direct Connect International Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
ASSETS
<CAPTION>
January 31, 2000 April 30, 1999
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 65,311 $ 47,004
Notes receivable, including accrued interest-Image 322,572 307,827
Technology Inc.
Note receivable, including accrued interest-Omnet Corp. 145,102 313,463
Investments in Datatec, at cost 1,610 191,414
Prepaid expenses and other current assets 8,238 6,492
------- -------
Total current assets 542,833 866,200
------- -------
Property and equipment , at cost
Furniture and fixtures 17,425 17,425
Less: accumulated depreciation 9,363 8,583
------- -------
8,062 8,842
------- -------
Notes receivable -officers 94,419 97,662
------- -------
Total assets $645,314 $972,704
======== ========
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 367,337 $339,207
Accrued expenses and taxes payable 220,088 285,005
Notes payable-officers and stockholders 30,000 30,000
Notes payable, including accrued interest-other 1,176,454 1,210,196
--------- ---------
Total current liabilities 1,793,879 1,864,408
--------- ---------
Total Liabilities 1,793,879 1,864,408
--------- ---------
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 (6,323,576) (6,066,715)
---------- ----------
Total stockholders' equity (deficit) (1,148,565) (879,704)
---------- ----------
Total liabilities and stockholders' equity $645,314 $972,704
=========== ===========
</TABLE>
<PAGE>
<TABLE>
Direct Connect International Inc. and Subsidiary
Consolidated Statements of Operations
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
January 31, 2000 January 31, 1999 January 31,2000 January 31, 1999
---------------- ---------------- --------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $0 $0 $0 $0
--------- --------- --------- ---------
Costs and expenses
Depreciation 260 --- 780
General and administrative expenses 147,071 253,509 605,591 717,730
------- ------- ------- -------
147,331 253,509 606,371 717,730
------- ------- ------- -------
Operating loss (147,331) (253,509) (606,371) (717,730)
Gain (loss) on sale of securities 125,172 (10,754) 377,967 695,608
Interest income 9,503 6,810 31,667 14,240
Other income --- 45,000 --- 60,000
Interest expense (18,678) (17,296) (60,124) (91,491)
------- ------- ------- -------
Net income (loss) ($31,334) ($229,749) $(256,861) ($39,373)
======== ========= ========= ========
Earnings (loss) per common share ($0.00) ($0.03) ($0.03) ($0.00)
======== ========= ========== ========
</TABLE>
<PAGE>
<TABLE>
Direct Connect International Inc. and Subsidiary
Consolidated Statements of Cash Flows
<CAPTION>
For The Nine Months ended
January 31, 2000 January 31, 1999
---------------- ----------------
(Unaudited)
Cash flows from operating activities
<S> <C> <C>
Net income (loss) $(256,861) $ (39,373)
---------- ----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
Depreciation 780 ---
Gain on sale of Datatec stock (377,967) (695,608)
(Increase) decrease in assets
Prepaid expenses and other current assets (1,746) 50,165
Increase (decrease) in liabilities
Accounts payable 28,130 (37,958)
Accrued expenses and taxes payable (64,917) (9,098)
---------- ----------
Total adjustments (415,720) (692,499)
========== ==========
Net cash (used in) operating activities (672,581) (731,872)
---------- ----------
Cash flows from investing activities
Notes receivable-officers, increases (5,757) (9,390)
Notes receivable-officers, decreases 9,000 ---
Increase in due from Omnet (11,639) (358,708)
Decrease in due from Omnet 180,000 ---
Proceeds from sale of Datatec stock 567,771 1,978,900
Increase in notes receivable-Image (14,745) ---
Acquisition of equipment --- (9,857)
---------- ----------
Net cash provided by investing activities 724,630 1,600,945
---------- ----------
Cash flows from financing activities
Decrease in notes payable-officer and stockholders --- ---
Increase in notes payable-officer --- 30,000
Increase in notes payable-other 115,229 91,440
Decrease in notes payable-other (148,971) (1,377,041)
---------- ----------
Net cash provided by (used in) financing activities (33,742) (1,255,601)
---------- ----------
Net increase (decrease) in cash and cash equivalents 18,307 (386,528)
Cash and cash equivalents, at beginning of period 47,004 437,869
---------- ----------
Cash and cash equivalents at end of period $ 65,311 $ 51,341
========== ==========
Supplemental disclosures of cash flows information
Cash paid during the nine months for interest $ 7,720 $ 237,344
========== ==========
</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 January
31,2000, (b) the results of operations for the three months and nine months
ended January 31, 2000 and January 31, 1999 and (c) changes in cash flows
for the nine months ended January 31, 2000 and January 31, 1999.
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 January 31, 2000 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 $5,340,200 at December
31, 1999 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).
<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
January 31, 2000, and unless the Company develops business opportunities or
enters into management arrangements with other companies, as it has done in the
past, the Company's operations will be adversely affected.
Net Sales
- ---------
Net sales for the three and nine months periods ended January 31, 2000 and
January 31, 1999 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 January 31, 2000, the Company did not have a backlog of orders from its
customers.
Gross Profit
- ------------
Gross Profit percentage for the three and nine months ended January 31, 2000 was
0%.
Other Income
- ------------
Other income amounted to approximately $134,000 and $409,000 for the three and
nine months ended January 31, 2000 as compared to approximately $41,000 and
$769,000 for the three and nine months ended January 31, 1999. The increase for
the three months ended January 31, 2000 and the decrease for the nine months
ended January 31, 2000 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 nine months ended January
31, 2000 were $147,071 and $605,591 as compared to $253,509 and $717,730 for the
three and nine months ended January 31, 1999.
<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 $1,176,400. The
Company will not be able to pay these obligations out of operating revenues,
and, accordingly, it will have to seek additional financing to do so. There can
be no assurance that the Company will be able to obtain such financing, 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 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. Shareholders of the Company would receive, subject to
adjustment, an aggregate of approximately 25% of Image's issued and outstanding
common stock.
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 by Image, on
or before the 30th day after such termination.
The Company has assigned such obligations to Mark Solutions, Inc. (Mark) in
connection with its agreement with Mark under which Mark advanced $250,000 to
Image to fulfill the Company's lending obligation to Image referred to above.
Mark has agreed to make every effort to collect the amounts due from Image
before seeking payment of such advance from the Company.
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
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.
<PAGE>
Because conditions precedent to the consummation of the proposed merger have not
been satisfied, there can be no assurance that that the merger with Image will
occur.
For the nine months ended January 31, 2000 the Company used cash from operations
in the amount of $672,581 as compared to using $731,872 from operations for the
nine months ended January 31, 1999. The Company used $33,742 from its financing
activities for the nine months ended January 31, 2000 as compared to using
$1,255,601 from its financing activities for the nine months ended January 31,
1999. These amounts also reflect a reduction of the Company's notes payable.
For the nine months ended January 31, 2000, the Company provided $724,630 from
its investing activities as compared to providing $1,600,945 for the nine months
ended January 31, 1999. Included in the amount for the nine months ended January
31, 2000 were proceeds in the amount of $567,771 from the sale of 127,547 shares
of Datatec stock. Cash flows for the nine months ended January 31, 1999 included
$1,978,900 from the sale of 503,271 shares of Datatec stock held 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 $697,000 at January 31, 2000. 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
<PAGE>
(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) 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,
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. 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"), 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 September 30, 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 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. Should
such eventuality arise, the Company will attempt to meet such obligation either
through loans, 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.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Financial Data Schedule
Reports on Form 8-K:
None
<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: March 20, 2000 By /s/Peter L. Schneider
-------------- ---------------------
Peter L. Schneider
President and Chief
Operating Officer
Date: March 20, 2000 By /s/Barry A. Rosner
-------------- ---------------------
Barry A. Rosner
Treasurer and Chief
Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 65,321
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 542,833
<PP&E> 17,425
<DEPRECIATION> 9,363
<TOTAL-ASSETS> 645,314
<CURRENT-LIABILITIES> 1,793,879
<BONDS> 0
0
5,000
<COMMON> 9,062
<OTHER-SE> (1,148,565)
<TOTAL-LIABILITY-AND-EQUITY> 645,314
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 606,371
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,124
<INCOME-PRETAX> (256,861)
<INCOME-TAX> 0
<INCOME-CONTINUING> (256,861)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (256,861)
<EPS-BASIC> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
