SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - QSB
QUARTERLY REPORT UNDER REGULATION SB OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number:
June 30, 1998 2-96976-D
- ----------------------- ------------------
DCI TELECOMMUNICATIONS, INC.
(Exact Name of Registrant as specified in its charter)
COLORADO 84-1155041
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(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
611 Access Road, Stratford, Connecticut 06615
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(Address and zip code of principal executive offices)
(203) 380-0910
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required by Regulation SB 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 the
filing requirements for at least 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 the last practicable date:
Number of Shares Outstanding Class Date
- ---------------------------- ------- ----------
21,277,689 Common Stock, August 14, 1998
$.0001 par value
DCI TELECOMMUNICATIONS, INC.
Index
PART I FINANCIAL INFORMATION
Balance Sheet June 30, 1998 3
Statements of Operations
Three Months Ended June 30, 1998 and 1997 4
Statements of Cash Flow
Three Months Ended June 30, 1998 and 1997 5
Notes to Unaudited Financial Statements
June 30, 1998 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II
Other Information 13
Signatures 15
2
DCI Telecommunications, Inc.
Consolidated Balance Sheet
(unaudited)
June 30
ASSETS 1998
Current Assets:
Cash $3,611,830
Restricted cash 34,475
Investments 45,632
Accounts receivable 5,013,704
Receivable from SmarTalk 650,000
Prepaid expenses 128,818
Inventory 501,645
---------
Total Current Assets 9,986,104
Fixed Assets 1,974,356
Less: Accumulated depreciation (239,222)
---------
Net Fixed Assets 1,735,134
---------
Accounts receivable 682,253
Deferred costs 271,938
Deposits 113,188
Other investments 89,905
Other Assets
- costs in excess of
net assets acquired:
CardCall International 3,987,523
Muller Media 1,989,931
CyberFax 1,033,975
----------
7,011,429
Less: Accumulated amortization 456,500
----------
Net other assets 6,554,929
----------
Total Assets $19,433,451
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $3,509,313
Participations payable 1,514,780
Preferred stock dividend 278,642
Deferred Revenue 212,650
Due to shareholders 200,370
Income Taxes Payable 138,400
----------
Total Current Liabilities 5,854,155
Participations payable 506,000
Long Term Debt 135,000
Deferred Income Taxes 367,810
Due to joint venture partner 660,157
Redeemable, convertible preferred stock $10,000 and
$1,000 par and redemption value, 2,000,000
shares authorized, 3,019 shares issued and
outstanding (3,000 shares at $1,000 par and 19
shares at $10,000 par) 3,197,550
---------
Total Liabilities 10,720,672
----------
Minority interests 31,213
Commitments and Contingencies
Shareholders' Equity:
9.25% cumulative convertible, preferred stock
$100 par value, 5,000,000 shares authorized,
3,972 shares issued and outstanding; 305,000
Common stock, $.0001 par value,
500,000,000 shares authorized,
20,598,678 shares issued and outstanding 2,060
Paid in capital 12,410,094
Treasury Stock (1,155,000 shares at cost) (4,104,379)
Unrealized capital loss (5,495)
Currency translation adjustment (16,736)
Retained earnings subsequent to 12/31/95, date of
quasi-reorganization (total deficit
eliminated $4,578,587) 91,022
---------
Total Shareholders' Equity 8,681,566
----------
Total Liabilities and Shareholders' Equity $19,433,451
===========
See Accompanying Notes to Consolidated Financial Statements
3
DCI Telecommunications, Inc.
Consolidated Statements of Operations
(unaudited)
Three Months Ended
June 30,
1998 1997
---- ----
Sales - travel $ 331,062 $ 298,413
Sales - products 5,974,240 3,897,372
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Net Sales 6,305,302 4,195,785
Cost of sales - travel 284,894 281,033
Cost of sales - products 5,093,677 3,211,291
---------- ----------
Cost of sales 5,378,571 3,492,324
Gross profit 926,731 703,461
Selling, general and administration expenses 510,261 418,942
Salaries and compensation 650,030 230,117
Professional and consulting fees 357,253 106,115
Amortization and depreciation 168,319 45,616
--------- ----------
1,685,863 800,790
Loss from operations (759,132) (97,329)
Other income and (expense):
Investment income 37,020 11,950
Interest expense (80,353) (33,065)
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(43,333) (21,115)
Loss from continuing operations before
minority interest (802,465) (118,444)
Minority interest in earnings of subsidiary (3,213) --
---------- ---------
Loss from continuing operations (805,678) (118,444)
Discontinued operations:
Loss from operations, net of tax:
Computer board - Alpha division -- (49,124)
Privilege card operations - PEL -- 16,145
Prepaid phone card segment - UK -- 359,684
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Net income (loss) before dividends
on preferred stock (805,678) 208,261
Dividends on preferred stock 43,951 9,185
Income (loss) applicable to
common shareholders ($849,629) $199,076
========= =========
Basic and diluted income (loss) per common share
Continuing operations $(0.04) $(0.01)
Discontinued operations:
Gain from operations -- $0.03
Total $(0.04) $0.02
========= =========
Weighted average common shares outstanding 19,181,184 12,508,282
See Accompanying Notes to Consolidated Financial Statements
4
DCI Telecommunications, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
June 30,
1998 1997
Cash flows from (used in) operating activities:
Net loss from continuing operations ($ 805,678) ($118,444)
Adjustment to reconcile net loss from
continuing operations to net cash from
(used in) operating activities:
Depreciation and amortization 168,319 45,916
Stock issued for services -- 800
Minority interest 3,213 --
Changes in assets and liabilities:
(Increase) Decrease in:
Restricted cash (325,771) --
Accounts receivable (1,720,328) (305,121)
Inventory (354,123) (46,547)
Deposits (45,871) (71,743)
Prepaid expenses 9,485 --
Other assets (77,523) (139,767)
Increase (Decrease) in:
Accounts payable and
accrued expenses 1,075,871 550,995
Participations payable (372,338) (228,188)
Income taxes 91,341 35,883
Deferred revenue 212,650 --
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Total Adjustments (1,335,075) (157,772)
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Net cash used in operating activities (2,140,753) (276,216)
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Cash flows from (used in) investing activities:
Additions to fixed assets (265,076) (19,453)
-------- --------
Net cash used in investing activities (265,076) (19,453)
-------- --------
Cash flows from (used in) financing activities:
Proceeds from stock
options exercised 248,589 68,077
Purchase of treasury stock (2,355,318) --
Due to joint venture 688,157 --
Payment of notes payable (4,938,942) (272,800)
Proceeds from sale of
preferred stock 2,750,000 --
Common stock dividend (203,962) --
Advances from shareholders (209,786) 298,979
Sale of equity securities 8,124,761 --
-------- --------
Net cash from financing activities 4,103,499 94,256
-------- --------
Net cash used in discontinued operations -- (24,368)
Net increase (decrease) in cash 1,697,670 (225,781)
Cash, beginning of year 1,914,160 1,295,300
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Cash, end of period $3,611,830 $1,069,519
Three Months Ended
June 30,
1998 1997
Supplemental disclosures of cash flow information:
Cash paid for interest $80,000 $ 33,000
Non cash investing and financing transactions:
Acquisitions by stock issuance:
CardCall International -- $7,254,523
CyberFax -- $1,033,975
Preferred stock dividends $43,951 $ 9,185
Non cash settlements -- $ 40,000
See Accompanying Notes to Consolidated Financial Statements
5
DCI Telecommunications, Inc.
Notes to Unaudited Financial Statements June 30, 1998
NOTE 1.
- -------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the provisions of Regulation SB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. Certain reclassification of prior
year numbers have been made to conform to the current years
presentations, to report the acquisition of Edge Communications, Inc. as
a pooling of interest, and to account for discontinued operations.
The consolidated financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries. Material intercompany
balances and transactions have been eliminated in consolidation.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. The
accompanying financial statements should be read in conjunction with the
Company's form 10-KSB filed for the year ended March 31, 1998.
Income (loss) per share was computed using the weighted average number of
common shares outstanding.
Note 2. Acquisitions
CardCall International Holdings, Inc.
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On March 31, 1997, DCI, entered into an agreement with CardCall
International Holdings, Inc. (CardCall), a Delaware corporation, to
purchase all its outstanding common stock (8,238,125 shares) and
warrants. CardCall's board of directors had approved the agreement on
March 29,1997, subject to shareholder approval.
CardCall is the parent company of CardCaller Canada, Inc., a Canadian
corporation, and CardCall (UK) Limited, incorporated under the laws of
the United Kingdom. CardCall is in the business of designing, developing
and marketing, through distributors, prepaid phone cards that provide the
cardholder access to long distance service through switching facilities.
DCI had previously invested $1,500,000 in CardCall, for which it received
$1,200,000 in notes payable 120 days from demand. The remaining $300,000
did not have any stipulated repayment terms. The Company raised this
money through the issuance of DCI convertible preferred stock to certain
shareholders of CardCall.
6
By May 29, 1997, the shareholders of CardCall had approved the
transaction. For each 100 shares of common stock of CardCall held by a
shareholder, DCI will issue a warrant to purchase nine shares of common
stock for $4.00 per share on or before February 28, 2001. In addition,
each shareholder of CardCall may acquire 85 shares of DCI common stock
under a subscription agreement, for each 100 shares of CardCall held by
such shareholder, at a purchase price of $.20 per share. 7,002,406
options to purchase DCI stock at $.20 per share were granted as a result
of this transaction. As of June 30, 1998, 4,023,685 of these options for
shares of DCI stock had been exercised.
Such options expire on April 30, 2002. In accordance with the agreement,
shares of DCI stock received from the exercise of options have
restrictions as to when they can be sold ranging from September 1, 1997
to November 1, 1998.
The transaction was recorded under the purchase method of accounting,
effective April 1, 1997. The total purchase price includes the $1,500,000
in cash, $2,545,000 assigned value for the stock and stock options, and
assumption of net liabilities of $3,210,000. Goodwill was recorded at
$7,255,000. The financial statements include the results of operations of
CardCall since April 1, 1997, the effective date of acquisition. The
goodwill is being amortized over 20 years. Revenue from the sale of
prepaid phone cards is recognized upon first usage of the card by the
customers.
Edge Communications, Inc.
- -------------------------
On April 30,1998 the Company issued 4,385,715 shares of common stock for
all of the outstanding shares of Edge Communications, Inc. The
acquisition has been accounted for as a pooling of interests, and
accordingly, the accompanying financial information has been restated to
include the accounts of Edge for all periods presented. Net sales and net
(loss) earnings of the separate companies prior to date of acquisition
are as follows:
April 1, 1998 Three Months Ended
through June 30,
April 30, 1998 1997
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Net Sales:
DCI $ 737,836 $2,367,522
Edge Communications, Inc. 1,092,500 1,828,263
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Combined $1,830,336 $4,195,785
========= ==========
Net(Loss) From Continuing Operations:
DCI ($301,528) ($166,246)
Edge Communications, Inc. (56,492) 47,802
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Combined ($358,020) ($118,444)
========== ==========
7
NOTE 3. Common and Preferred Stock
- -----------------------------------
In April, 1998 the Company issued $3,000,000 of Series F 8% non-voting
convertible preferred shares. The shares are convertible to common stock
90 days from the issue date at the lesser of 75% of the average closing
bid price of the common stock for the ten days prior to conversion or $4.
The securities must be converted into common shares within two years of
the issue date. In connection with this offering 50,000 warrants
exercisable at $1.56 for a period of five years from the issue date were
granted to these preferred shareholders and 50,000 warrants, at the same
terms, were granted to certain individuals as finder fees for the
placement of the preferred shares with investors.
During the three months ended June 30, 1998, the holders of $412,500 of
preferred shares of Series E Convertible Preferred Stock and deemed
dividends of $98,959 were converted to 368,304 common shares. In
addition, options to purchase 1,691,122 common shares were exercised from
which the Company received $248,589.
NOTE 4. PhoneLine CardCall International
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On March 31, 1998 the Company and DataWave Systems Inc. (DataWave) formed
a Canadian company, PhoneLine CardCall International ("PhoneLine") for
the marketing, sale and service of prepaid long distance telephone
calling cards in Canada. DataWave and CardCaller Canada, Inc. contributed
fixed assets, Canadian business, and certain liabilities to PhoneLine.
DCI owns 60% and DataWave 40% of the company.
The Company's consolidated financial statements include 100% of the
assets, liabilities and operations of PhoneLine. The ownership interest
of DataWave is recorded as a minority interest in the accompanying
financial statements.
8
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
- --------
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of DCI
Telecommunications, Inc. and its subsidiaries (collectively, the
Company), consolidated results of operations and financial condition for
the three months ended June 30, 1998. The discussion should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes.
The Company, since its recent acquisitions, operates predominantly in the
telecommunications industry providing a broad range of communication
service. The Company's services include long distance, prepaid phone
cards, motion picture distribution, a travel agency, as well as real-time
fax over the Internet. Through continued investments and fiscal 1998
business acquisitions, the Company has expanded its business into rapidly
developing markets.
Recent Acquisitions and Dispositions
- ------------------------------------
In the quarter ended June 30, 1997, the Company acquired CardCall
International and CyberFax. CardCall International, through its
subsidiaries CardCall UK and CardCaller Canada, sold prepaid phone cards.
In the third quarter of fiscal 1998, the Company sold its phone card
distribution contract in the U.K. for $9,000,000. Due to a non-compete
clause in the sale agreement, CardCall UK discontinued its operations
after the sale. During fiscal 1998 the Company also discontinued
operations of Privilege Enterprises Limited and its Alpha Products
division due to a lack of profitability.
On March 31, 1998 the Company and DataWave Systems, Inc. formed a new
company, PhoneLine CardCall International ("PhoneLine") for the
marketing, sale and service of prepaid long distance phone cards in
Canada. The accompanying financial statements include the results of
PhoneLine for the quarter ending June 30, 1998. This new company joins
together two of the larger prepaid phone card distributors in Canada, and
the Company is expecting economies of scale by facility and staff
reductions, as well as better long distance rates with carriers. DCI owns
60% and DataWave 40% of PhoneLine.
During the quarter ended June 30, 1998 the Company acquired Edge
Communications, Inc. This acquisition gave the Company a meaningful
entrance into the U.S. prepaid phone card market. Edge had sales of
$8,780,000 for the twelve months ended March 31, 1998 and has been
sustaining rapid growth in the last several months. Edge was accounted
for as a pooling of interests.
9
Liquidity and Capital Resources
- -------------------------------
At March 31, 1998 the Company had unrestricted cash of $1,837,000,
$43,000 of marketable securities, and $8,125,000 of stock of SmarTalk
Teleservices, Inc. During the quarter ended June 30, 1998, the Company
sold the SmarTalk stock realizing net proceeds of $8,125,000. The Company
repaid its loans of $4,939,000 which it had borrowed against its position
in SmarTalk stock.
Also during the quarter ending June 30, 1998, the former shareholders of
Muller Media exercised their put options to receive $2,000,000 in cash,
and the Company repurchased 800,000 shares of its common stock.
Other sources of cash during the quarter included $2,750,000 from the
sale of preferred stock, and $249,000 from the exercise of stock options.
At June 30, 1998 the Company has a current ratio of 1.7 to 1, and has
unrestricted cash of $3,612,000.
The Company has an agreement to acquire Locus Corporation, a facilities
based carrier located in Fort Lee, New Jersey. The Company has also
entered into a Letter of Intent to enter a European joint venture with
TIMEWorldCom, an international provider of long distance services,
located in Gaithersburg, Maryland. Management believes it will need
additional resources to complete the acquisitions, specifically
$10,000,000 for the Locus acquisition, and to fund the future capital
needs of these companies and its existing subsidiaries. The ability of
the Company to finance all new and existing operations will be heavily
dependent on external sources. No assurance can be given that additional
financing will be available, or if available, that it will be on
acceptable terms.
Consolidated Results of Operations
- ----------------------------------
Changes reflected in the following analysis that refer to PhoneLine are
gross changes. It should be noted that the Company owns 60% of the
PhoneLine.
Three Months Ended
June 30,
1998 1997
---- ----
Net Sales $6,305,302 $4,195,785
- ---------
Net sales in the quarter ended June 30, 1998 increased $2,109,517, or
50%, over the 1997 first quarter. Phone card sales by Edge Communications
increased approximately $2,602,000 over 1997 levels. Sales of newly
formed PhoneLine were $345,000 less than CardCaller Canada sales in 1997,
primarily due to the delay in the startup of PhoneLine.
10
1998 1997
---- ----
Cost of Sales $5,378,571 $3,492,324
- -------------
Cost of sales increased $1,886,247 in the 1998 first quarter. Cost of
sales for Edge increased $2,455,000, principally due to increased sales.
PhoneLine cost of sales dropped by $449,000, due to lower sales as
compared to CardCaller Canada alone in 1997. Muller cost of sales also
declined slightly as a result of lower sales.
1998 1997
-------- --------
Selling, General & Administration Expense $510,261 $418,942
- -----------------------------------------
Selling, general and administrative costs increased $91,000 in 1998.
Travel and entertainment costs increased $37,000 as the Company became
more globally diverse. In connection with its growth, Edge incurred
$30,000 more in SG&A in 1998, and the balance of the increase is due to
general corporate growth.
1998 1997
---- ----
Salaries and Compensation $650,030 $230,117
- -------------------------
Salaries were $420,000 higher in the 1998 first quarter. Of the increase,
$156,000 was associated with the European operations which were not
operational in 1997 and $133,000 was due to corporate staff increases.
Increases are also associated with PhoneLine (2 companies) versus
CardCaller Canada alone in 1997.
1998 1997
---- ----
Professional and Consulting Fees $357,253 $106,115
- --------------------------------
Professional and consulting fees increased $251,000 over 1997 levels.
Acquisitions, dispositions and general corporate growth all contributed
to an increase of $180,000 at the corporate level. Legal, accounting and
management fees associated with PhoneLine accounted for an additional
$51,000, while professional fees for the Edge acquisition and audit
accounted for $20,000.
1998 1997
---- ----
Amortization and Depreciation $168,319 $45,616
- -----------------------------
Amortization and depreciation rose $122,703 in 1998 as compared to the
1997 first quarter. Amortization of goodwill associated with CyberFax and
11
CardCall International accounted for $62,500 of the increase. Increased
depreciation on added equipment at all the subsidiaries accounted for the
balance.
1998 1997
---- ----
Interest Income $ 37,020 $11,950
Interest Expense ($80,353) ($33,065)
- ---------------
The $25,000 increase in investment income is a result of $8,000 earned by
DCI on short-term investments plus $7,000 increased earnings from Muller
Investments.
Interest expense increased $47,000 in 1998. Interest expense on short-
term debt borrowed by DCI against the SmarTalk stock resulted in a
$72,000 increase. This was partially offset by lower interest for
CardCaller Canada which had paid off debt it had in the 1997 first
quarter.
1998 1997
---- ----
Discontinued operations - Alpha -- ($49,124)
- Privilege Card -- $16,145
- CardCall U.K. -- $359,684
These balances in 1997 represent the net operating gains (losses) of
operations that were discontinued in 1998.
12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Page 14
13
ITEM 6 - Exhibits and Reports on Form 8K
On May 14, 1998 the Company filed a Form 8K which described the
acquisition of Edge Communications, Inc.
On May 19, 1998 the Company filed a Form 8K which described the
termination of acquisition discussions with WorldPass Communications
Corporation, the declaring of a $.01 per common share cash dividend, and
the signing of a Letter of Intent with Locus Corporation.
On June 16, 1998 the Company filed a Form 8K which described the
exercising of put options under the stock purchase agreement among the
Company, Muller Media, Inc., and Robert Muller and Daniel Mulholland.
On July 7, 1998 the Company filed a Form 8K which included a copy of the
Escrow Agreement among the selling shareholders of Muller Media, Inc. and
the Company.
On July 27, 1998 the Company filed a Form 8K which described the signing
of a definitive agreement to acquire privately owned Locus Corporation.
Also described was the activity of stock options issued through July 22,
1998.
On August 17, 1998 the Company filed a Form 8K which included the audited
financial statements for Edge Communications, Inc.
14
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.
DCI TELECOMMUNICATIONS, INC.
(Registrant)
Dated: August 17, 1998 By: Joseph J. Murphy
----------------
Joseph J. Murphy
President
By: Russell B. Hintz
----------------
Russell B. Hintz
Chief Financial Officer
15