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, 1999 2-96976-D
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DCI TELECOMMUNICATIONS, INC.
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(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
- ---------------------------- ------- ----------
29,956,263 Common Stock, August 2, 1999
$.0001 par value
DCI TELECOMMUNICATIONS, INC.
Index
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheet June 30, 1999 3
Statements of Operations
Three Months Ended June 30, 1999 and 1998 5
Statements of Cash Flow
Three Months ended June 30, 1999 and 1998 7
Notes to Unaudited Financial Statements
June 30, 1999 9
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II
Other Information 18
Signatures 20
2
DCI Telecommunications, Inc.
Consolidated Balance Sheet
(unaudited)
June 30,
ASSETS 1999
----
Current assets:
Cash $1,389,381
Accounts receivable, net 5,466,065
Other current assets 660,784
Inventory 116,469
Due from shareholders 84,661
---------
Total Current Assets 7,717,360
Fixed assets 789,156
Less: Accumulated depreciation (160,371)
---------
Net Fixed Assets 628,785
Accounts receivable- long term 1,022,542
Deposits 471,405
Other assets 62,555
Master service agreement 15,671,875
Less: accumulated amortization (1,567,188)
---------
Net master service agreement 14,104,687
Cost in excess of assets acquired:
Travel Source 86,379
Muller Media 1,634,436
Edge Communications 6,940,976
- ----------
8,661,791
Less: Accumulated amortization: (491,158)
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Net cost in excess of assets acquired 8,170,633
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Total Assets $32,177,967
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-----------
(continued)
See accompanying notes to consolidated financial statements.
3
LIABILITIES AND SHAREHOLDERS' EQUITY June 30,
1999
Current Liabilities: ----
Accounts payable and accrued expenses $10,433,224
Preferred stock dividend 794,150
Due to shareholders 240,021
Deferred revenue-prepaid phone cards 200,453
Current portion of long term debt 72,592
----------
Total Current Liabilities 11,740,440
Long-term debt 54,040
Accounts payable 709,188
Redeemable, convertible preferred stock,
$1,000 par and redemption
value, 2,000,000 shares authorized,
2302 shares issued & outstanding 2,302,500
----------
Total Liabilities 14,806,168
----------
Commitments and Contingencies (Note 3)
Common stock, $.0001 par value,
500,000,000 shares authorized,
29,862,633 shares issued and outstanding 2,986
Paid-in capital 33,079,183
Treasury stock (780,500 shares at cost) (1,127,439)
Accumulated deficit subsequent to 12/31/95,
date of quasi-reorganization (total
deficit eliminated $4,578,587) (14,582,931)
-----------
Total Shareholders' Equity 17,371,799
-----------
Total Liabilities and Shareholders' Equity $32,177,967
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-----------
4
DCI Telecommunications, Inc.
Consolidated Statements of Operations
(unaudited)
Three Months Ended
June 30,
1999 1998
Sales - travel $ 297,617 $ 331,062
Sales - products 6,191,842 4,599,776
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Net sales 6,489,459 4,930,838
Cost of sales - travel 242,758 284,894
- product 6,851,867 4,105,983
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Cost of sales 7,094,625 4,390,877
Gross profit/Loss (605,166) 539,961
Selling, general and administrative expenses 588,802 362,407
Salaries and compensation 556,892 499,188
Professional and consulting fees 336,356 321,885
Amortization and depreciation 933,414 225,222
--------- ----------
2,415,464 1,408,702
Loss before other (expense) income (3,020,630) (868,741)
Other Income and (expense)
Investment income 78,929 18,187
Interest expense (5,709) (76,992)
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73,220 (58,805)
Loss from continuing operations before
minority interest (2,947,410) (927,546)
Minority interest -- (3,213)
----------- --------
Loss from continuing operations (2,947,410) (930,759)
(continued)
5
Discontinued operations:
Loss from discontinued
CyberFax operations:
(net of applicable income tax
benefit of $0 in 1998) -- (84,160)
----------- ---------
Net (loss) before
dividends on preferred stock (2,947,410)(1,014,919)
Dividends on preferred stock 46,050 543,951
Net (loss) applicable to
common shareholders (2,993,460)(1,558,870)
Basic and diluted net (loss)
per common share:
Loss from continuing operations (.10) (.08)
Loss from discontinued operations -- (.01)
Net loss per common share - basic and diluted (.10) (.09)
Weighted average common
shares outstanding - basic and diluted 29,850,199 17,719,279
See accompanying notes to consolidated financial statements.
6
DCI Telecommunications, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
June 30
1999 1998
Reconciliation of net loss to net cash
used in operating activities:
Net loss from continuing operations $ (2,947,410) $( 930,759)
Adjustments to reconcile net loss from
continuing operations to net cash
used in operating activities:
Amortization and depreciation 933,414 225,222
Discontinued operations -- (84,160)
Minority interest -- 3,213
Changes in assets and liabilities:
(Increase) Decrease in:
Restricted cash -- 25,771
Accounts receivable (1,180,692) (1,997,214)
Inventory 3,364 (259,669)
Deposits (46,258) (56,171)
Prepaid expenses -- (38,879)
Other current assets (368,878) 57,885
Increase (Decrease):
Accounts payable & accrued expenses 3,335,864 565,526
Deferred revenue (67,490) 104,545
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Total adjustments: 2,609,324 (1,453,931)
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Net cash (used in) operating activities ( 338,086) (2,384,690)
Cash flows from (used in) investing activities:
Additions to fixed assets ( 65,113) (265,076)
Cash acquired with acquisitions -- 1,548,947
Investment in Muller Media -- (2,000,000)
Decrease in long term assets 79,951 --
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Net cash from (used in) investing activities $ 14,838 $ (716,129)
(continued)
7
Cash flows from (used in) financing activities:
Proceeds from stock
options exercised 51,275 248,589
Purchase of treasury stock -- (355,318)
Payment of notes payable -- (4,938,942)
Proceeds from sale of preferred
stock -- 2,750,000
Due to joint venture -- 688,157
Due to shareholders 2,775 (203,962)
Advances from shareholders 44,716 (305,627)
Proceeds from issuance
of notes payable -- --
Payment of long-term debt (17,323) --
Sale of equity securities -- 8,124,761
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Net cash from financing activities 81,443 6,007,658
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Net (decrease) increase in cash (241,805) 2,906,839
Cash, beginning of period 1,631,186 704,991
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Cash, end of period $1,389,381 $ 3,611,830
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Supplemental disclosures of cash flow information:
Cash paid for interest $ 5,709 $ 78,000
Cash paid for income taxes $ -- --
Non-cash investing and financing transactions:
Acquisitions by stock and option issuance:
Edge Communications -- 6,823,586
Preferred stock dividends 46,050 543,951
Stock issued for other assets 40,000 --
See accompanying notes to consolidated financial statements.
8
DCI Telecommunications, Inc.
Notes to Unaudited Financial Statements June 30, 1999
NOTE 1.
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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 restatements of prior year
numbers have been made to conform to the current years presentations and
to account for discontinued operations.
The consolidated financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries. Material inter-company
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, 1999.
Loss per share was computed using the weighted average number of common
shares outstanding.
NOTE 2. 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.
During the three months ended June 30, 1999, the holders of $10,000 of
preferred shares of Series F Convertible Preferred Stock were converted
to 18,651 common shares. In addition, options to purchase 2,200 common
shares were exercised.
9
NOTE 3. Commitments and Contingencies
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In the quarter ended June 30, 1999 the Company entered into a commitment
to lease from Harris Digital Telephone Systems a debit card platform and
switching equipment valued at $806,287. The Company advanced $100,000,
and monthly lease payments of $24,152 are expected to commence in August
or September. The lease term is thirty-six months after which DCI can buy
the switch for $1.
At June 30, 1999 the $100,000 advance is included in the caption Deposits
on the accompanying balance sheet.
NOTE 4. Sale of CyberFax
- ------------------------
On March 30, 1999, DCI Telecommunications sold all of the outstanding
shares of common stock of its CyberFax, Inc. subsidiary to Carlyle
Corporation, a Nevada corporation. DCI received a $5,000,000 promissory
note from Carlyle that is payable on March 30, 2000, and bears interest
at 9%, paid and compounded quarterly. Interest payments will be made in
shares of Carlyle stock, initially valued at $3 per share. If Carlyle
becomes publicly traded, interest payment shares will be revalued at the
average closing price for the first 13 weeks of trading. In the event
Carlyle becomes publicly traded prior to March 30, 2000, DCI has the
right to demand payment in full, such payment to be made in Carlyle
shares valued at the 13-week average described above.
In June 1999, with the agreement of DCI and some modifications of the
agreement, Carlyle assigned all its rights and obligations to SmartFax,
Inc., a private Canadian corporation. At the closing, SmartFax paid off
its promissory note by issuing 5,000,000 shares of its common stock to
DCI. No value has been placed on the SmartFax shares and no revenue or
profit has been recorded.
CyberFax had sales of $48,145 and operating losses of $404,010 in fiscal
year ended March 31, 1999 before discontinuance of operations. A loss of
$1,098,228 was recorded on this transaction at March 31, 1999.
NOTE 5. DCI Europe Limited
- --------------------------
On July 23, 1999, DCI Europe Limited (since renamed Gloucester
Communications Limited) was served a Petition for issuance of an
10
Involuntary Winding Up Order. Given the current summer recess of the
court, the Company expects the petition to be granted in October 1999.
DCI Telecommunications is still operating in the UK using different corporate
entities. The accompanying financial statements do not reflect any
adjustments that might result from this matter.
NOTE 6. Investment Banking Firm Engaged
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On July 15, 1999 DCI announced the engagement of the investment banking
firm of Trenwith Securities to evaluate the Company, identify potential
purchasers of some or all of its businesses, and assist in a transaction
if DCI's Board of Directors believed it to be in the best interests of
shareholders.
11
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, 1999. 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 and a travel agency. Through continued
investments and business acquisitions, the Company is expanding its
business into rapidly developing markets in Europe.
Recent Acquisitions and Dispositions
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CYBERFAX, INC.
- --------------
On March 30, 1999, DCI Telecommunications sold all of the outstanding
shares of common stock of its CyberFax, Inc. subsidiary to Carlyle
Corporation, a Nevada corporation. DCI received a $5,000,000 promissory
note from Carlyle that is payable on March 30, 2000, and bears interest
at 9%, paid and compounded quarterly. Interest payments will be made in
shares of Carlyle stock, initially valued at $3 per share. If Carlyle
becomes publicly traded, interest payment shares will be revalued at the
average closing price for the first 13 weeks of trading. In the event
Carlyle becomes publicly traded prior to March 30, 2000, DCI has the
right to demand payment in full, such payment to be made in Carlyle
shares valued at the 13-week average described above.
In June 1999, with the agreement of DCI and some modifications of the
agreement, Carlyle assigned all its rights and obligations to SmartFax,
Inc., a private Canadian corporation. At the closing, SmartFax paid off
its promissory note by issuing 5,000,000 shares of its common stock to
DCI. No value has been placed on the SmartFax shares and no revenue or
profit has been recorded. It is expected that SmartFax will attempt an
initial public offering in the next six months.
CyberFax had sales of $48,145 and operating losses of $404,010 in fiscal
year end March 31, 1999 before discontinuance of operations. A loss of
$1,098,228 was recorded on this transaction at March 31, 1999.
12
Liquidity and Capital Resources
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At June 30, 1999 the Company had unrestricted cash of approximately
$1,389,000 and approximately $39,000 of marketable securities.
During the quarter ended June 30, 1998, the Company sold SmarTalk stock
realizing net proceeds of $8,125,000. The Company repaid its loans of
$4,939,000 that it had borrowed against its position in SmarTalk stock.
Also, on June 9, 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. The Company received
$1,170,000 of Muller Media's cash with the acquisition.
Year 2000 Issues
- ----------------
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. In other
words, date-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures
or miscalculations causing disruptions of operations, including, among
others, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
COMPANY'S STATE OF READINESS
One of the Company's critical internal areas is its information
technology systems, including general ledger, accounts receivable,
payable, inventory and related packages for DCI and each of its
subsidiaries. In this regard, the parent Company has installed new
software that is Year 2000 compliant and plans to install the same
systems in each of its subsidiaries prior to September 30, 1999.
All of the Company-owned switches, used to direct and monitor long
distance telephone traffic, currently are Year 2000 compliant according
to the manufacturer. Other less critical internal systems such as
telephone and voice mail systems are in the process of being evaluated.
The Company also has relationships with outside third parties that could
impact its business. The most important are the carriers that process
and monitor the Company's long distance and prepaid phone card calls.
All the carriers expect to be Year 2000 compliant and are in various
stages of readiness. The Company's travel business is partially dependent
on an outside reservation system representing many airlines which is Year
2000 compliant.
COSTS
The Company is addressing Year 2000 issues in-house and, at the present
time, the only other costs involve the purchase of financial software
13
packages. Total costs are estimated at $75,000. Costs incurred to-date
are approximately $40,000.
RISKS
The Company believes that its most reasonable likely worst-case Year 2000
scenario would be if any of its third party long distance telephone
carriers were unable to properly monitor or admit authorized personal
identification numbered prepaid phone card calls through their systems.
The time frame for the carrier to fix the problem, or the ability of the
Company to recall prepaid phone cards and switch to another carrier with
competitive rates, could cause a material business interruption.
The risks associated with the failure of the Company's financial
software, or third party payroll preparation and stock transfer system,
are considered less severe in that the Company believes switching to
other vendors or using other methods would be relatively easy.
The risk of failure of the third party airline reservation system is that
the Company would have to secure its travel arrangements by methods that
would be more cumbersome and time-consuming than the current automated
system.
CONTINGENCY PLAN
The Company, based upon a survey conducted with major suppliers,
especially for financial reporting and telecommunication services, is
satisfied that these suppliers are able to meet all Year 2000
requirements and therefore will not be preparing a contingency plan. The
Company has upgraded its internal accounting systems to meet these
requirements.
Cautionary Statement for Purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
- -------------------------------------------------------------------------
This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995. Where any such forward-looking statement includes a
statement of the assumptions or bases underlying such forward-looking
statement, the Company cautions that assumed facts or bases almost always
vary from the actual results, and the differences between assumed facts
or bases and actual results can be material, depending upon the
circumstances. Where, in any forward-looking statement, the Company or
its management expresses an expectation or belief as to future results,
there can be no assurance that the statement of expectation or belief
will result or be achieved or accomplished. The words believe, expect,
estimate, anticipate, project and similar expressions may identify
forward-looking statements.
14
Consolidated Results of Operations
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Three Months Ended
June 30,
1999 1998
---- ----
Net Sales $6,489,459 $4,930,838
- --------
Net sales increased approximately $1,500,000 in the 1999 three months
compared to the corresponding 1998 period. Sales in England and Spain,
principally prepaid phone cards, increased about $2,465,000 due to new
contracts. Muller sales increased $450,000 principally because Muller was
only acquired on June 9 of the 1998 first quarter. Partially offsetting
these increases was a $1,000,000 decline due to the closing of Canadian
operations late in fiscal 1999. Edge sales declined $320,000 due to
residual effects of a shutdown in fiscal year end March 1999.
1999 1998
---- ----
Cost of Sales $ 7,094,625 $4,390,877
- -------------
Cost of sales in the June 30 quarter of 1999 exceeded 1998 by
approximately $2,700,000. Cost of sales associated with the new European
sales contracts noted above resulted in a $2,531,000 increase in 1999.
Edge cost of sales increased $660,000 since it was only included for a
portion of the 1998 quarter (acquired April 30, 1998) and due to the fact
that Edge's margins were lower while trying to regain market share which
was adversely effected by the temporary carrier service interruption in
January and February of 1999. Muller cost of sales rose $365,000 since
it also was only partially included in the 1998 quarter (acquired June 9,
1998). Partially offsetting these increases was a $810,000 decline from
the closing of the Canadian operations late in fiscal year end March
1999.
1999 1998
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Selling, General & Administration Expense $ 588,802 $362,407
- -----------------------------------------
Selling, general and administrative expenses increased approximately
$226,000 in the June 1999 quarter compared to a year ago. Increases in UK
and Spain of about $200,000 was principally the result of $157,000 in bad
debts. Increased Muller and Edge expenses due to their inclusion for a
full quarter in 1999 also contributed to the increase.
15
1999 1998
---- ----
Salaries and Compensation $ 556,892 $ 499,188
- -------------------------
Salaries in the 1999 first quarter increased about $58,000 over the 1998
quarter. Increased salaries at Edge and Muller due to their inclusion for
a full quarter in 1999 resulted in a $216,000 increase. Partially
offsetting this increase was $78,000 lower Canadian salaries due to
discontinued operations and $80,000 less salaries in the UK due to staff
reductions.
1999 1998
---- ----
Professional and Consulting Fees $336,356 $321,885
- --------------------------------
Professional fees increased $14,000 in the 1999 first quarter. Legal and
accounting fees increased approximately $124,000 due primarily to legal
fees involving the SEC investigation and Edge's shutdown of operations in
November and December 1998. The closing of the Canadian operations
resulted in lower professional fees partially offsetting the Edge
increase.
1999 1998
---- -----
Amortization and Depreciation $933,414 $225,222
- -----------------------------
Amortization and depreciation increased $708,000 in the June 1999 quarter
compared to June 1998. The shutdown of Canadian operations resulted in
$134,000 lower costs in 1999. Amortization of the IXC master service
agreement increased 1999 quarterly costs by $784,000. A full quarter of
Edge goodwill amortization and depreciation increases account for the
balance of the increase.
1999 1998
----- ----
Investment Income $78,929 $18,187
Interest Expense ($ 5,709) ($76,992)
The $61,000 increase in investment income in 1999 is due to owning Muller
Media for a full quarter in 1999 and less than one month in 1998.
The $71,000 decline in interest expense is because in the June 1998 first
quarter, DCI parent had interest expense of $72,000 on short term
borrowing against its SmarTalk stock investment.
16
1999 1998
---- ----
Discontinued operations - CyberFax -- ($ 84,160)
- -----------------------
Since CyberFax was sold on March 30, 1999 and classified as discontinued
operations, the $84,000 loss in 1998 June quarter has been reclassified
as discontinued operations.
17
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 19
18
ITEM 6 - Exhibits and Reports on Form 8K
1. Changes in Registrant's Certifying Accountant as filed on Form 8K, May
19, 1999 and as amended on Form 8K/A, July 02, 1999.
2. DCI Telecommunications, Inc. announced the engagement of Trenwith
Securities as filed on Form 8K, July 15, 1999.
19
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 20, 1999 By: /s/Joseph J. Murphy
-------------------
Joseph J. Murphy
President
By: /s/Russell B. Hintz
-----------------------
Russell B. Hintz
Chief Financial Officer
20