-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IywP9m/oWJx2BrGgJwAHpmj9ArbIwPI/uKYKITKf7F7OzVB2PsumBoVHugFObGKR 7kIa0RsWYxHZgVNZHkaZ1w== 0000840815-98-000006.txt : 19980918 0000840815-98-000006.hdr.sgml : 19980918 ACCESSION NUMBER: 0000840815-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980917 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIRECT CONNECT INTERNATIONAL INC CENTRAL INDEX KEY: 0000840815 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 222705223 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18288 FILM NUMBER: 98711009 BUSINESS ADDRESS: STREET 1: P O BOX 14 STREET 2: SUITE 108 CITY: HAWTHORNE STATE: NJ ZIP: 07507 BUSINESS PHONE: 2014452101 MAIL ADDRESS: STREET 1: 266 HARRISTOWN RD STREET 2: SUITE 108 CITY: GLEN ROCK STATE: NJ ZIP: 07452 10-Q 1 FORM 10-Q QUARTERLY REPORT 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 --------- 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 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Direct Connect International Inc. and Subsidiary Consolidated Balance Sheets ASSETS
July 31, 1998 April 30, 1998 ------------- -------------- (Unaudited) 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 ========== ==========
3 Direct Connect International Inc. and Subsidiary Consolidated Statements of Operations For the Three Months Ended ------------------
July 31,1998 July 31,1997 ------------ ------------ (uaudited) 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 ===== =====
4 Direct Connect International Inc. and Subsidiary Consolidated Statements of Cash Flows For Three Months Ended ----------------------
July 31, 1998 July 31, 1997 ------------- ------------- (Unaudited) 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 ------ -------
5 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 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 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 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 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 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 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 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 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 EX-27 2 FDS -- 07/31/1998
5 1 3-MOS APR-30-1999 MAY-01-1998 JUL-31-1998 50,289 0 0 0 0 1,155,246 7,568 7,568 1,259,216 1,437,823 0 0 5,000 9,062 (192,669) 1,259,216 0 0 0 246,058 0 0 59,545 509,539 0 509,539 0 0 0 509,539 0.03 0.03
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