Good Morning everyone...
I mentioned last night that I had spoken with Cheryl Mitchell on the phone yesterday
about Digitcom... for quite some time. I found her warm, personable and interestingly
enough, willing to pass on and discuss some of the negatives surrounding Digitcom.
Most importantly, she was quite willing to indicate she did not know the answer when
that was the case. Some of her answers were framed about a memo from Jimmy Chin
that addressed the specific question I had.
For those of you that don't know, Cheryl was associated with Liberty Capital a while
back and worked on the DGIV account. I think one could safely say that a conflict in
values was at the heart of her separation from the company. She is not an employee of
DGIV and describes herself as an "Independant"... best I could gather, this is similar to
consultant.
She believes that she works for the investors more than for Digitcom. In addition to
passing information to investors, she also passes investor concerns to Jimmy Chin and
quite frankly, it seemed she was taking as many notes as I during the conversation.
Now to the meat of the matter...
The Louis International contract (March 13 PR) stated that the company would receive
$1M in revenue within 90 days of signing through the marketing of callback cards and
other services. Many of us assumed that the signing was imminent and expected
revenues to be in place for the 3rd quarter. The contract has never been signed and has
been delayed until at least the first of the year. It appears that Digitcom needed some
time to come up with pricing that was a bit more competitive. There may be other
reasons as well, but this is the one Cheryl gave me.
The deal to acquire the Indonesian telephone company, PT. Erakomindo Puranusa
(May 1 PR) has also been delayed. The PR stated a letter of intent had been signed and
the acquisition expected to bring in $40 to $50M in net earnings over a 10 year period.
The PR stated that the offer would be in cash and stock. It appears that $19M was
offerred, but later rescinded by Digitcom due to currency valuation issues. Again, there
may be other reasons as well, but this is the one Cheryl Gave to me. DGIV does have
an offer on the table for the company of $5M, which has been declined for now.
Apparently, Jimmy Chin's memo emphasized the "for now" part.
During the conversation we did keep getting muddled about whether we were talking
about the Indonesian telco or the Indonesian ISP - they are two separate entities.
Neither of us could pronounce the company names. :-)
The best we figured out is that the ISP acquisition went through. That makes sense in
light of the August 17 PR that announced the linkage of the 5 Indonesian cities. Cheryl is
going to confirm this for me. If I find out something different, I will pass it on.
(Note: The September 14 PR, clarifying the Egyptian deal is still an MOU becomes
much more understandable in light of the information above.)
Anyway, in response to the question if there were any IP Telephony revenues expected
in the 3rd quarter, the answer was, "I don't know, I will get back to you." However, I
was able to ascertain that the mechanisms that generated the ~$300,000 of net income
in 1997 were still in place. I assume that the sorce of this revenue is from its LA-based
long distance operation. However, I do not expect that net income would hold during
the 1998 period... they have incurred an awful lot of additional expense in trying to get
deals... frequent flyer miles don't come cheap.
We then moved on to the 10-SB... the holdup was described as a difference in opinion
between Jimmy Chin and the lawyer reviewing the filing as to whether 1996 financials
for DiV-N should be included in the filing. The lawyer wants this, Jimmy Chin thinks
they do not need to be there. Apparently, DiV-N is a corporation that is / was (? don't
know which or if it is both) run by Jimmy and his wife. The lawyer is taking a very
conservative stance (afterall, his reputation is at stake) and Jimmy just doesn't see the
need. It appears that he sees them as 2 very separate entities. I can see the quandry
here... Jimmy may have strongly held beliefs that DiV-N does not belong in the filing,
but then again, why pay an expert in such matters if you are not going to heed their
advice.
At this point Cheryl asked me what I want to see. I responded with a the idea that I
want to see the 10-SB tomorrow, but I want it to be accurate. I don't believe it would
do at all to have it filed and then ammended later. In lieu of the 10-SB, I would like to
see the financials for the 1st and 2nd quarters that are supposedly done and audited by
a very reputable accounting firm.
I explained that investor confidence was at a very low point... almost gone and that they
needed to show strong, positive movement toward NASDAQ listing. The audited
financials would at least be a step in this direction.
Answers to a couple of other questions...
Q: What is the strategy for determining what information is released to the public. We
hear that there are many releases lined up and ready to go.
A: The strategy is to slowly move the price along rather than move it all at once.
(Note: This made me laugh a bit and the conversation took another track for a while)
Q: What is DGIV doing to restore investor confidence?
A: Strong moves toward NASDAQ.
(Note: There may be strong moves, but we have not seen evidence of them... it could
be that there is a tremendous amount of work going on behind the scenes.)
That is the end of the hard data section. I also have some observations, comments and
gut-reactions to share.
First and foremost, this thing about being able to offer $19M for the Indonesian telco...
it is mind-boggling to me that a company with only about $300K in net income would
be able to offer such a figure to the company... that they would be able to raise so much
capital through a combination of debt and equity. Draw your own conclusions, but it
says to me that the rumors of having some deep pockets that believe in Digitcom are
absolutely true. Even $5M is an impressive figure for such a small company. The likely
debt service on such figures would indicate that somebody thinks that DGIV will be able
to generate a lot of cash through its future operations.
Similarly, the German deal, the granting of approximately $25M in low cost loans and
GRANTS to establish a network are tremendously impressive for such a small
company. This is huge and also mentioned a time or two in our conversation.
Cheryl confirmed that Jimmy Chin was in NYC to discuss DGIV with analysts. This,
IMO, can not be as fruitful as it if they had the 10-SB in hand, but is still encouraging.
The various analysts have various restrictions on when they can invest in a micro cap
company, but it would be safe to say that we probably meet the minimum requirements
of only a very few, if any.
A common theme of the conversation is that Jimmy cares about the shareholders a great
deal and is trying to be responsive to them. In fact, may be too responsive. Cheryl was
quite impressed with the number of calls she receives on DGIV and all those that are
more than willing to tender their advice. BTW, she was also impressed with the general
level of technical knowledge displayed by most callers. But, in way of making the point
about Jimmy's responsiveness to shareholders, she mentioned that using counsel to
review the 10-SB was such an example. The problem I see here is that we didn't see a
PR explaining the delay in either of the 2 contracts I have been talking about. That does
not fit with the aura of responsiveness to shareholders that Jimmy seems to desire and
otherwise strives toward. And though I still firmly believe in the integrity of Jimmy Chin
and the company, it is a huge hole that absolutely needs to be plugged.
Though the news about Louis International and the Indonesian telco are disappointing,
to say the least, they are not the death knell of DGIV. It appears that the revenue
schedule may have been pushed back some (neither is dead yet)... they are important
deals to a fledgling company, but they are not nearly as big as the Egyptian or German
deals appear to be.
No, the biggest problem that I see with DGIV right now is not the failure to close on
those 2 deals. The biggest problem seems to be with the management infrastructure.
Jimmy seems to be a super salesman with a tremendous vision, with an apparent ability
to move toward making that vision a reality. The problem seems to be that he holds the
reigns of power very, very tightly. When he is out of town, the company seems to be
hamstrung. It appears that nobody has decision making power in the company except
for Jimmy Chin. (Point in case: getting contracts and getting the 10-SB together should
not be mutually exclusive events... they should be able to happen at the same time)
What is Bob Cummings (sp?) role? Cheryl could not find a CFO (Chief Financial
Officer) listed, who IMO should be the one in charge of ramrodding the 10-SB
through... not JC. Roles do not seem to be well defined, etc., etc.
From the management issues I have thought through, my reaction is that the majority of
these things are probably symptoms of an immature management team... a common
malaise among small companies. For most small companies management can continue to
muddle through, but it can be very serious for a company bound on a path of growth
such as DGIV has charted out for itself. These issues must be addressed.
This has gone on entirely too long, so I will conclude:
1) I am thoroughly convinced we are not involved in a scam.
2) IP Telephony revenues have been delayed, but it does not mean the death knell for
DGIV
3) I am convinced that Jimmy wants to do the right thing... he just may not know how in
some cases
4) The management infrastructure is not in place to allow Jimmy to do what he does
best and back him up while he is gone.
5) It is obvious to me that there are some huge backers of DGIV... people that have
access to a lot more information than we about the company's ability to pay debt service
and generate income.
6) I am still optimistic about DGIV's long term potential. It just appears that long term
may further out than I thought. :-)
7) The 10-SB could be filed anytime if Jimmy decides to do that. Likewise, rumors have
been flying around about a reverse merger to get to the NASDAQ. Either of those
could happen at any time and cause DGIV's stock price to immediately find a new
norm. I have my own opinions on the likelihood of this happening and what the norm
might be in each case, but it is pure speculation... everyone needs to think that bit of
"what if" through on their own.
Well, that's it folks...
Lazarus, thinking it was indeed a "Long" post |
