-----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, T0PPKlCKQwuqFQL9EsTKBBCld0Fma6J49afkb4qTNCBdL/Eq610X3GamUCNIQGcZ eAmq/ndApXbbO0gwrDqgTw== 0000840815-96-000023.txt : 19961217 0000840815-96-000023.hdr.sgml : 19961217 ACCESSION NUMBER: 0000840815-96-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19961216 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: 1934 Act SEC FILE NUMBER: 000-18288 FILM NUMBER: 96681291 BUSINESS ADDRESS: STREET 1: 266 HARRISTOWN RD STREET 2: SUITE 108 CITY: GLEN ROCK STATE: NJ ZIP: 07452 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 OCTOBER 31, 1996. ----------------- 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.) 266 Harristown Road Glen Rock, New Jersey 07452 - --------------------- ----- (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 October 31, 1996: 9,062,066 --------- DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY INDEX PART I. FINANCIAL INFORMATION PAGE NO Item 1. Financial Statements Condensed Consolidated Balance Sheets - October 31, 1996 and April 30, 1996 3 Condensed Statements Of Consolidated Operations - Three Months Ended October 31, 1996 and October 31, 1995 and 4 Six Months Ended October 31, 1996 and October 31, 1995 Condensed Statements Of Consolidated Cash Flows - Six Months Ended October 31, 1996 and October 31, 1995 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 7 - 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Direct Connect International Inc. and Subsidiary Consolidated Balance Sheets ASSETS
October 31, 1996 April 30, 1996 ---------------- -------------- (Unaudited) Current assets Cash and cash equivalents $52,865 $67,886 Accounts receivable 12,361 20,652 Due from Kidsview, Inc. 302,765 194,117 Notes receivable-officers 124,631 111,355 Investments 54,171 54,171 Prepaid financing costs and other expenses 35,356 69,075 ------- ------- Total current assets 582,149 517,256 ------- ------- Property and equipment, at cost Furniture and fixtures 43,912 42,543 Molds, tools and dies 267,498 267,498 ------- ------- 311,410 310,041 Less: accumulated depreciation 247,913 234,813 ------- ------- 63,497 75,228 ------ ------ Investment in Glasgal 1,896,871 2,111,151 Investment in Evolutions Inc. 1,875,000 75,000 Deferred Income taxes 809,287 809,287 Security deposits 700 700 --------- --------- 4,581,858 2,996,138 --------- --------- Total assets $5,227,504 $3,588,622 ========== ========== LIABILITIES and STOCKHOLDERS' EQUITY Current liabilities Accounts payable $326,870 $947,512 Accrued expenses and taxes payable 315,587 49,825 Notes payable-officers and stockholders 463,813 461,716 Notes payable-other, current portion 1,876,696 1,411,424 Investment, warrants to sell Glasgal 300,000 300,000 ------- ------- Total current liabilities 3,282,966 3,170,477 --------- --------- Stockholders' equity 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 5,104,449 5,104,449 Accumulated deficit (3,119,802) (4,646,195) Unrealized loss on investments (54,171) (54,171) ------- ------- Total stockholders' equity 1,944,538 418,145 --------- ------- Total liabilities and stockholders' equity $5,227,504 $3,588,622 ========== ==========
3 Direct Connect International Inc. and Subsidiary Consolidated Statements of Operations
For The For The Three Months Ended Six Months Ended ------------------ ---------------- October 31 October 31 October 31 October 31 1996 1995 1996 1995 ---- ---- ---- ---- (Unaudited) (Unaudited) Revenues: Sales $259,838 $778,664 $431,587 $899,139 Costs and expenses Cost of goods sold 124,713 742,186 288,190 806,135 Royalties/licensing fees 6,881 110,691 22,690 120,916 Product development cost 6,000 1,174 12,000 1,174 Advertising and promotion 4,539 15,004 4,539 80,885 Depreciation 6,549 12,916 13,100 31,120 General and administrative expenses 316,370 1,093,219 551,034 1,418,412 Less: management fees (164,658) 0 (419,658) 0 -------- --------- --------- --------- 300,394 1,975,190 471,895 2,458,642 -------- --------- --------- --------- Operating income (loss) (40,556) (1,196,526) (40,308) (1,559,503) Gain on sale of assets and product lines 0 1,034,494 0 1,034,494 Gain on sale of securities 696,885 1,426,135 1,613,820 1,426,135 Interest income 707 7,033 772 14,199 Other income 1,094 0 3,372 0 Interest expense (25,510) (44,557) (51,263) (193,277) ------- ------- ------- -------- Income before income taxes 632,620 1,226,579 1,526,393 722,048 Deferred income taxes 0 644,436 0 644,436 ------- --------- --------- --------- Net income $632,620 $1,871,015 $1,526,393 $1,366,484 ======== ========== ========== ========== Income per share $0.04 $0.12 $0.10 $0.09 ===== ===== ===== =====
4 Direct Connect International Inc. and Subsidiary Consolidated Statements of Cash Flows
For The Six Months Ended ------------------------ October 31, 1996 October 31, 1995 ---------------- ---------------- (Unaudited) ----------- Cash flows from operating activities Net income $ 1,526,393 $ 1,366,484 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,100 31,120 Gain on sale of Glasgal stock (1,613,820) (1,426,135) Financing fees-general and administrative expense 0 348,720 Decrease (increase) in assets Accounts receivable-trade 8,291 (122,818) Prepaid royalties 0 57,500 Prepaid financing costs and expenses 33,719 237,410 Inventories 0 32,297 Deferred income taxes 0 (644,436) Increase (decrease) in liabilities Accounts payable (620,642) 271,671 Accrued expenses and taxes payable 265,762 (3,160) ------- ------ Total adjustments (1,913,590) (1,217,831) ---------- ---------- Net cash provided by (used in) operating activities (387,197) 148,653 -------- ------- Cash flow from investing activities Notes receivable-officers, increase (13,276) 258,790 Investment in Glasgal Communications, Inc. 1,828,100 1,871,066 Increase in Due from Kidsview, Inc. (108,648) 0 Decrease in Due from Kidsview, Inc. 0 244,337 Increase in Investment in Evolutions, Inc. (1,800,000) 0 Sale of molds, tools, and dies 0 69,977 Acquisition of property and equipment (1,369) (104,113) Investment in security 0 (500,000) ---------- ---------- Net cash provided by (used in) investing activities (95,193) 1,840,057 ---------- ---------- Cash flows from financing activities Increase in notes payable-officers and stockholders 2,097 348 Increase in notes payable-other 1,624,129 (2,191,677) Decrease in notes payable-other (1,158,857) 350,000 ---------- ------- Net cash provided by (used in) financing activities 467,369 (1,841,329) ------- ---------- Net decrease in cash and cash equivalents (15,021) 147,381 Cash and cash equivalents at beginning of period 67,886 171,677 ------ ------- Cash and cash equivalents at end of period $ 52,865 $ 319,058 =========== =========== Supplemental disclosures of cash flow information Cash paid during the six months for interest $ 51,263 $ 160,277 ----------- -----------
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 October 31, 1996, (b) the results of operations for the three and six months ended October 31, 1996 and October 31, 1995 and (c) changes in cash flows for the three and six months ended October 31, 1996 and October 31, 1995. 2. Refer to the audited financial statements for the fiscal year ended April 30, 1996 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, 1996 may not be indicative of the financial results for the fiscal year ending April 30, 1997. 4. The Company has available carry forward losses applicable to the reduction of future Federal income taxes aggregating approximately $4,869,000 at December 31, 1995 and which expire during the years 2003 to 2010. 5. The Company has made an investment in Evolutions, Inc. (EVO), an apparel and toy products company, aggregating approximately $1,800,000 at October 31, 1996 for which the Company has received shares of EVO common stock representing approximately 11% of EVO's outstanding common stock. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Sales Net sales for the three and six month periods ended October 31, 1996 amounted to $259,838 and $431,587, respectively, as compared to $899,139 and $778,664, respectively, for the same periods in the prior fiscal year. The Company intends to develop additional product lines; however, there can be no assurance that it will be able to do so on a commercially viable basis. If such product lines are so developed, the Company may be required to sell or license such product lines, depending on, among other factors, its financial resources. At October 31, 1996, the Company did not have a backlog of confirmed orders from its customers. Gross Profit Gross Profit percentage for the three months ended October 31, 1996 was 52% as compared to 5% for the three months ended October 31, 1995. Gross Profit percentage for the six months ended October 31, 1996 was 33% as compared to 10% for the six months ended October 31, 1995. Such increase for the three and six months ended October 31, 1996 did not require any adjustments, such as credits and other charges, which were included in the three months and six months ended October 31, 1995. Royalties/Licensing Fees Royalties/Licensing fees are variable expenses which increase as sales increase. For the three and six month periods ended October 31, 1996, the Company paid approximately $6,881 (or 3% of sales) and $22,690 (or 5% of sales), respectively, as compared to $110,691 (or 14% of sales) and $120,916 (or 13% of sales) for the three and six month periods ended October 31, 1995, respectively. The decrease in royalties was primarily attributable to the decrease in sales. In order to match revenues with expenses, minimum royalty guarantees are treated as prepaid expenses and are charged against income as the related products are sold. For fiscal 1996, the Company is not obligated to make minimum royalty payments pursuant to any license agreements. Other Income Other income amounted to approximately $698,686 and $1,617,964 for the three and 7 six months ended October 31, 1996 as compared to approximately $2,467,000 and $2,474,000 for the three and six months ended October 31, 1995. This decrease for the three and six months ended October 31, 1996 is due to the sale of shares of Glasgal stock by the Company in the prior periods and the gain in the sale of assets and product line in the 1995 period. General and Administrative Expenses Advertising and promotion expenses amounted to $4,539 and $4,539 for the three and six month periods ended October 31, 1996 as compared to $15,004 and $80,885, respectively, for the three and six month periods ended October 31, 1995. This decrease was due to the sale of product lines in 1995. For the three and six months ended October 31, 1996, the Company earned a management fee of $164,658 and $419,658, respectively, which covers the monthly reimbursement of the costs incurred by the Company in connection with its operations as it relates to supporting the product lines which were sold. Set forth below are the principal components. General and administrative expenses for the three and six month periods ended October 31, 1996 were $316,370 and $551,034, respectively, as compared to $1,093,219 and $1,418,412, respectively, for the three month and six month periods ended October 31, 1995. Included in such amount for the three month and six month periods ended October 31, 1996 were commissions of $ 0 and $8,469, respectively, as compared to $38,688 and $45,451, respectively, for the three month and six month periods ended October 31, 1995. This decrease resulted primarily from the decline in the amount of sales upon which commissions are based. Professional fees were $59,100 and $71,149, respectively, for the three and six month periods ended October 31, 1996 as compared to $56,473 and $94,852, respectively, for the three and six month periods ended October 31, 1995. This decrease for the six months ended October 31, 1996 was due primarily to having incurred no professional fees in connection with the sale of certain assets and product lines and investment securities and financing activities. Letter of credit and foreign office expenses amounted to $10,344 and $23,343, respectively, for the three month and six month periods ended October 31, 1996 as compared to $24,720 and $26,764, respectively, for the three month and six month periods ended October 31, 1995. This decrease was due primarily to the decline in purchases resulting from the decrease in sales and the decline in the cost of goods purchased. For the three and six month periods ended October 31, 1996, salaries were $138,288 and $247,563, respectively, as compared to $414,857 and $508,290, respectively, for the three and six month periods ended October 31, 1995. Such decrease was due to a reduction in the number of employees in the three and six months ended October 31, 1996 and lower salary levels for certain employees in such periods. Travel and entertainment expenses increased to $37,506 and $66,630 for the three and six month periods ended October 31, 1996 as compared to $19,662 and $38,137 8 for the three and six month periods ended October 31, 1995. This increase resulted from the Company's efforts to expand sales. LIQUIDITY AND CAPITAL RESOURCES During the next twelve months, the Company in addition to meeting its operating needs will have notes payable, as discussed below, in the amount of approximately $2,340,000 becoming due. 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 anticipates funding its obligations from two principal sources. First, the Company intends to develop additional product lines which would be promoted and marketed in a manner similar to the manner in which the Company has utilized for its Zoo Borns and Tea Bunnies product lines which involved the transfer of such product lines to Evolutions, Inc. (EVO) as decribed herein. Second, the Company owns approximately 1,178,333 shares of common stock of Glasgal Communications, Inc. (Glasgal) and may, from time to time, sell a portion of such shares. For additional information regarding prior dispositions of Glasgal shares, see the description of such transactions contained herein. There can be no assurance that the Company will be able to develop additional product lines, obtain such financing or sell assets, in which event such obligations will have a material adverse effect upon the Company's operations. The Company expects to support its operations over the next five months through funds generated from its management contract with EVO as described herein. At October 31, 1996, the Company had a cash and cash equivalent balance of $52,865 as compared to $67,886 at October 31, 1995. For the six months ended October 31, 1996 the Company used cash from operations in the amount of $387,197 as compared to providing $148,653 from operations for the six months ended October 31, 1995. The Company obtained $467,369 from its financing activities for the six months ended October 31, 1996 as compared to using approximately $1,841,000 for the six months ended October 31, 1995. The amount for 1996 resulted primarily from borrowings using the Company's Glasgal shares as collateral. The amount for 1995 resulted primarily from the payment of notes payable amounting to $2,192,000 and the issuance of new notes aggregating $350,000. For the six months ended October 31, 1996, the Company used $95,193 from its investing activities. Included in that amount were proceeds received in the amount of $1,828,100 from the sale of 221,667 shares of Glasgal stock. Also included in that amount was cash used to increase the Company's investment in Evolutions Inc. by $1,800,000 and to increase the Company's advances from Kidsview, Inc. by $108,648. 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 Glasgal 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 19,440 shares of Glasgal common stock 9 held by the Company and to deliver to such holders (a) warrants to purchase for a period of twenty-four months an aggregate of 19,440 shares of Glasgal common stock held by the Company at an exercise price of $3.00 per share 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 Company is negotiating with such noteholders regarding an extension for repayment of the notes. The Company in September 1995 entered into an agreement with EVO whereby the Company transferred all rights and interests to its Zoo Borns product line, Tea Bunnies product line and Kidsview name to a subsidiary of EVO for $750,000 and shares of common stock of EVO equal to approximately 7% of EVO's then outstanding common stock (valued at $75,000) with the right to receive additional shares of common stock equal to approximately 15% of the outstanding common stock of EVO based on certain performance levels of the Zoo Borns and Tea Bunnies product lines over the next three years. As an inducement for EVO to enter into this agreement, the Company issued to EVO warrants to purchase 350,000 shares of common stock of the Company at exercise prices of $ .10 per share with respect to 100,000 shares and $ .20 per share with respect to 250,000 shares. In anticipation of consummating the agreement, EVO and the Company entered into a lending arrangement under which the Company signed a promissory note in March 1995 for $750,000 with interest at the annual rate of 12%. Such note was secured by 133,973 shares of Glasgal stock held by the Company and by an interest in certain accounts receivable and was due on September 1, 1996. In July and August 1995, the Company also borrowed from EVO an aggregate of $350,000 with interest at the annual rate of 12%. Such obligations were secured by certain accounts receivable and were due on October 31, 1995. Upon consummation of the agreement, all these obligations were cancelled. The Company recognized a gain of approximately $1,034,000 as a result of this transaction. As part of the agreement, the Company is managing these product lines and is receiving an amount equal to its monthly operating costs, up to $100,000, for such period of time as the Company is managing such product lines. The Company is providing the services of Peter Schneider, President of the Company, for such management. This management arrangement may be extended for up to two additional years depending on certain performance levels of such product lines. For the six months ended October 31, 1996, the Company received fees from EVO in connection with this management arrangement amounting to $419,658. On May 28, 1996, the Company established a margin account with the brokerage firm of Cowen & Company (Cowen). In that connection, the Company delivered 300,000 shares of common stock of Glasgal held by the Company to Cowen and borrowed $500,000 against such account. On June 10, 1996, the Company sold (at $9.00 per share) 115,000 shares of common stock of Glasgal held by the Company in its margin account. The Company received net proceeds from such sale aggregating approximately $1,000,000. The Company 10 used approximately one-half of the proceeds to pay off its margin loan of approximately $500,000. In October 1996, the Company placed in its margin account an additional 20,000 shares of common stock of Glasgal held by the Company. The net proceeds from the transactions referred to above (approximately $1,000,000) was invested in common stock of EVO at $2.50 per share, and warrants exercisable at $3.50 per share to purchase common stock of EVO. The Company in August 1996 also made an additional equity investment in EVO of approximately $800,000 on the same terms, which included the transfer by the Company of 106,667 shares of Glasgal common stock held by the Company, in EVO common stock and warrants to purchase common stock. As an inducement for such investments, the Company received additional warrants to purchase 400,000 additional shares of EVO common stock exercisable at $2.50 per share. To expand 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 products. In order to arrive at the completed stage, the Company's products must go through the following processes: product concept and design, product development and engineering, pre-production approval and product manufacture and distribution. 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. 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%. In September 1992 the Company delivered 200,000 shares of common stock to one of such investors in exchange for the contemplated cancellation of substantially all the balance of such loans. The Company under the terms of this arrangement remains contingently liable for the prior obligation depending on the future stock price and salability of the shares. The investor has been unable to sell the shares for a price of at least $1.625 and, accordingly, the shares can be returned to the Company. The Company is obligated to pay such investor the value of the note, plus accrued interest, aggregating approximately $395,100 at October 31, 1996. If the Company is unable to pay this obligation out of operating revenues, it will have to seek additional financing or sell a portion of its equity holdings in Glasgal to do so. There can be no assurance that the Company will be able to obtain such financing or sell such equity, in which event this obligation would have a material adverse effect upon the Company's operations. 11 Given the nature of the Company's business, the length of the typical product cycle in the toy business, the need to respond rapidly to developments in the marketplace and to, if necessary, make rapid changes in product lines and strategic plans to meet the rapid changes in the marketplace, the Company's planning historically has been limited to approximately a twelve month time-frame at any given time. It is anticipated that the Company will continue to operate in a similar fashion in the future. Accordingly, analyses of long term liquidity and capital requirements are not meaningful. 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. 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. 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. In November 1992, the Company signed a merger agreement with Glasgal, a privately held company which provides network design, hardware and software, carrier facilities and support services for organizations in a diverse range of industries. The Company and Glasgal terminated the proposed merger agreement in December 1993 and entered into a stock purchase agreement described below. In November 1992, the Company, in contemplation of the Glasgal merger, entered into a loan agreement with Glasgal whereby the Company loaned Glasgal $1,000,000, due on December 31, 1993, as extended, at an annual interest rate equal to two percent above the prime rate. An aggregate of $400,000 (also due on December 31, 1993 as extended) was loaned to Glasgal in March, June, August and September 1993. All the loans were secured by 50.1% of the stock of Glasgal held by Ralph Glasgal, Glasgal's principal stockholder, and a second priority security interest in, among other things, Glasgal's accounts receivable, inventory and equipment. The purpose of this loan was to satisfy partially Glasgal's short-term cash needs pending the proposed merger with the Company (which was not consummated - see below), which cash needs Glasgal estimated to 12 be between $2.1million and 2.6 million. These short-term cash needs related specifically to (i) Glasgal's financing of the implementation of its business plan, (ii) its financing of an increased level of inventory, (iii) a reduction in the average age of its trade payables, (iv) its financing of the shortfall between a prior mortgage and a new bridge loan, and (v) to meet certain balance sheet requirements of prospective new lenders. In order to provide for additional working capital, to meet expenses related to the Glasgal merger, and to be in position to assist Glasgal in solving its immediate cash flow problems in contemplation of the merger, the Company entered into lending arrangements with several individuals under which the Company issued notes aggregating $780,000 plus interest thereon at the annual rate of 8% in private placements pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (the Act). Such notes matured between December 31, 1993, as extended, and December 31, 1995. At October 31, 1996, such notes amounted to approximately $812,000 including accrued interest thereon. As an inducement for making such loans, it was intended that the holders would have an opportunity to convert such notes into equity securities when the Company next undertook a private placement, the terms of which had not been determined, provided that the holders met suitability requirements thereof. The Company believes that all of such holders either were officers of the Company or relatives of officers of the Company who in all cases were deemed to be suitable investors or other individuals who had preexisting personal relationships with officers or directors of the Company and, in addition, would have been deemed "accredited investors" as such term is defined in Rule 501 of Regulation D under the Act if an exemption had been sought under Regulation D. In view of the Company's default in payment of its obligations under the notes and its inability of afford the noteholders an opportunity to convert such notes into equity securities, several of the noteholders have recently contacted the Company and have threatened to commence litigation against the Company to enforce the Company's obligations under the notes. The Company intends either to pay off the obligations or to convert the notes (including accrued interest thereon) into Common Stock at a rate of five shares of Common Stock per dollar subject to stockholder approval of an increase in authorized 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 addition, the Company in February 1993 accepted a subscription from an unaffiliated non-U.S. investor to purchase 1,500,000 shares of Common Stock, in a private placement, for an aggregate consideration of $300,000. The Company believes that such private placement did not result in any further adjustments of any outstanding warrants, options or convertible stock. The Company, after termination of the Glasgal merger, entered into a common stock purchase agreement (the "Agreement") with Glasgal governing certain equity investments which the Company has made, and in the future intends to make, in Glasgal common stock. Pursuant to the Agreement, in January 1994 the Company converted outstanding indebtedness of Glasgal owed to the Company into equity of Glasgal which, upon consummation of the Glasgal merger with Sellectek 13 Incorporated, resulted in the Company owning approximately 28% of the outstanding shares of Glasgal or 18.5% on a fully diluted basis. In addition, the Agreement gives Glasgal the right to require the Company to purchase an additional number of shares of common stock of Glasgal 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 warrant solicitation fees (the "Additional DCI Investment"). Glasgal 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, warrants to purchase 3,438,900 shares of Common Stock at $ .75 per share, and warrants to purchase 2,500,000 shares of Common Stock at $1.00 per share. Such warrants will expire in 1997, 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 Glasgal if the aggregate amount of warrant exercise proceeds applied to the purchase of Glasgal 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 1996, the price of the Common Stock has been substantially 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 Glasgal equity), equity financings or some combination thereof. If Glasgal does not require the Additional DCI Investment, the Company may still purchase, on the same terms, up to one-half of 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. The proceeds from such transaction were loaned to Glasgal to fulfill certain commitments to Glasgal. Such loan to Glasgal was made on the same terms as the previous loans to Glasgal referred to hereinabove. 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. On October 6, 1994, the Company consummated a lending arrangement with BW Capital Corporation ("BW"), an independent lender organized to invest in unregistered securities and small capitalization companies which was the largest shareholder of Sellectek prior to its merger with Glasgal. The Company, which was introduced to BW in connection with the Glasgal/Sellectek merger, has no 14 relationship with BW other than in connection with such lending arrangement. Under the terms of such arrangement, the Company issued to BW a secured promissory note in the principal amount of $1,600,000 bearing interest at the rate of 11% per annum (the "Note"). The Note was secured by collateral consisting of 2,000,000 shares of Glasgal common stock owned by the Company and all dividends and other distributions of any kind in respect of such shares. The Note matured on October 6, 1995 and was subsequently paid. As an inducement for BW to make such loan to the Company, the Company transferred to BW 270,000 shares of Glasgal common stock owned by the Company. The Company also paid an investment banker, Brookehill Equities, $100,000 as compensation for its services in connection with arranging the loan. Under the terms of the lending arrangement, because the Note was not prepaid in full on or before July 6, 1995, the Company transferred to BW an additional 270,000 shares of Glasgal common stock owned by the Company. The Company used the proceeds from such loan to pay off existing secured indebtedness aggregating $750,000 including $30,000 paid to Joseph Salvani, the Company's Chairman, and for general corporate purposes. Prior to entering into the lending arrangement with BW, the Company sought alternative financing for several months and had discussions with other potential sources of financing. In the opinion of management, the BW proposal offered the Company the best financing terms of the limited alternatives then available to the Company. In establishing the collateral for the loan, BW took into account the fact that, notwithstanding a market price at that date of approximately $4 per share for Glasgal common stock, in view of the fact that the shares to be delivered as collateral were restricted and that the market for Glasgal common stock generally was then illiquid, if it were forced to liquidate the collateral it was unlikely that BW would realize an amount close to the reported per share market value for such stock. From the Company's standpoint, the BW Loan, while not on favorable terms, represented the best terms available to the Company and management believed that it was in the best interest of the Company to proceed with such borrowing in order to be able to develop its product lines and to reduce outstanding debt that was then due. Among the alternatives considered by the Company at the time of the BW loan was the sale of a portion of its Glasgal stock. In view of the restrictions on the transfer of such stock as well as the illiquidity of the market for the shares, the Company's options with respect to any such sale were limited. The Company did receive a verbal offer to purchase approximately two million shares of the Glasgal common stock, to be accomplished through a private placement exempt from registration under Regulation S under the Federal securities laws, at a price per share of approximately $ .80. The Company rejected such an offer as less favorable than the BW alternative. Similarly, the inducement fees incurred in connection with the BW transaction, while onerous, viewed in the context of the overall BW transaction, were deemed the best alternative available to the Company in order for it to continue to fund the development of its toy business and preserve as much of its Glasgal equity as possible. 15 DEFERRED INCOME TAX ASSETS Deferred income tax assets as of October 31, 1996 and April 30, 1996 have been reduced to $809,287 by a valuation allowance of $983,802 due to uncertainties concerning their realization. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Exhibits: Financial Data Schedule Reports on Form 8-K: Form 8-K/A, dated August 19, 1996, regarding changes in registrant's certifying accountant 16 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 12, 1996 By /s/Peter L. Schneider ----------------- --------------------- Peter L. Schneider President and Chief Operating Officer Date: December 12, 1996 By /s/Barry A. Rosner ----------------- ------------------ Barry A. Rosner Treasurer and Chief Financial Officer 17 EX-27 2 10/31/96 FINANCIALS
5 1 6-MOS APR-30-1996 MAY-01-1996 OCT-31-1996 52,865 54,171 315,126 0 0 582,149 311,410 247,913 5,227,504 3,282,966 0 0 5,000 9,062 1,930,476 5,227,504 431,587 431,587 288,190 183,705 0 0 51,263 1,526,393 0 1,526,393 0 0 0 1,526,393 0.17 0.17
-----END PRIVACY-ENHANCED MESSAGE-----