Rande
DCTC
November 20, 1998
DCI TELECOMMUNICATIONS INC (DCTC)
Quarterly Report (SEC form 10QSB)
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 six months ended September 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 six months ending September 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.
Liquidity and Capital Resources -
At September 30, 1998 the Company had unrestricted cash of $2,697,000 and $43,000 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 which 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.
Other sources of cash during the first six months included $2,750,000 from the sale of preferred stock, and $432,000 from the
exercise of stock options.
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.
Six Months Ended
September 30,
1998 1997
---- ----
Net Sales $17,012,920 $ 5,847,058
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Net sales increased $11,165,862 in the 1998 six months compared to the comparable 1997 period. Edge sales of prepaid
phone cards increased $9,004,000 due to rapid growth and new contracts. Muller Media, which was acquired as of June 9,
1998, accounted for approximately $1,098,000 of the increase. The prepaid phone card sales of PhoneLine in 1998 exceeded
CardCaller Canada 1997 sales by $793,000 in the first six months. Travel Source sales were up $39,000 in 1998, and
European sales were up $113,000.
1998 1997
---- ----
Cost of Sales $15,169,649 $5,045,427
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Cost of sales in 1998 exceeded 1997 by approximately $10,124,000. Edge cost of sales associated with higher sales noted
above resulted in $8,822,000 of the increase. Costs associated with the recently acquired Muller Media accounted for
$741,000 of the increase. PhoneLine 1998 costs exceeded CardCaller Canada by $431,000. Cost of sales for European
operations were up $122,000 on increased sales.
1998 1997
-------- --------
Selling, General & Administration Expense $1,302,256 $543,587
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Selling, general and administrative increased $759,000 over the 1997 period. CyberFax costs increased $173,000 principally
due to higher research and development costs as its product got closer to market. Expenses of the newly acquired Muller
contributed $120,000 to the increase. Increased operations in Europe added $70,000 to the increase. SG&A expenses of
PhoneLine, a much larger operation than CardCaller Canada in 1997, accounted for $114,000 increased costs. SG&A
expenses of DCI corporate and Edge increased $280,000 due to the large growth of both organizations.
1998 1997
---- ----
Salaries and Compensation $1,193,124 $ 580,766
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Salaries increased $612,358 over 1997 levels. Salaries at the corporate level increase $219,000 due to wage increases and
additional personnel added due to growth. The acquisition of Muller accounts for $183,000 of the increase. Salaries in Europe
have increased $146,000 as operations have now increased. Salaries at Edge have increased $82,000 principally due to
expanded operations.
1998 1997
---- ----
Amortization and Depreciation $265,548 $16,463
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The $16,463 in 1997 represents depreciation expense for continuing operations. Included in 1998 is depreciation of $114,048,
amortization of Travel Source goodwill of $2,500, Muller goodwill of $24,000, CyberFax goodwill of $25,000 and CardCaller
Canada goodwill of $100,000.
1998 1997
---- ----
Professional and Consulting Fees $444,097 $287,267
--------------------------------
Professional fees increased $157,000 over the 1997 period. Profession fees at PhoneLine were $71,000 higher than
CardCaller Canada's 1997 charges principally due to the start up of the new joint venture. Edge professional fees also rose
$62,000 due to its dramatic growth. Legal and accounting fees of the newly acquired Muller and increased CyberFax fees
principally account for the remaining difference.
1998 1997
---- ----
Interest Expense ($91,913) ($97,715)
Interest Income $42,933 $ 1,036
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Interest expense did not change materially from 1997.
The $42,000 increase in interest income is a result of $22,000 earned by DCI on short term investments plus $20,000 of
interest earned on short- term investments of the newly acquired Muller Media.
1998 1997
---- ----
Discontinued operations - Computer Board -- ($558,958)
- Prepaid Phone
Card - UK -- ($551,265)
The computer board loss in 1997 reflects the discontinuance of the Alpha Products division at September 30, 1997. Included
in the loss was the write-off of unamortized customer base totaling $493,000. The prepaid phone card discontinued loss was
due to a non-compete clause in the 1997 distribution contract sale to Smartalk for $9,000,000, which necessitated the
shut-down of the UK operations.
Recent Filings: Feb 1998 (Qtrly Rpt) | Jul 1998 (Annual Rpt) | Nov 1998 (Qtrly Rpt)
More filings for DCTC available from EDGAR Online
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