SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 1999
Commission File Number: 2-96976-D
DCI TELECOMMUNICATIONS, INC.
-------------------------------
(Exact name of Registrant as specified in its charter)
Colorado 84-1155041
- ------------------------------- ----------------------------
(State or other Jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
611 Access Road, Stratford, Connecticut 06615
-------------------------------------------------
(Address of principle executive offices, including zip code)
Registrant's telephone number, including area code: (203) 380-0910
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.0001 par value)
Indicate by check mark whether the company (1) has filed all reports 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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
The aggregate market value of voting stock held by non-affiliates of the
Company was approximately $22,787,270 as of June 28, 1999.
(Number of shares of Common Stock outstanding as of June 11, 1999)
29,843,982
<PAGE>
PART I
ITEM 1 - BUSINESS
General
- -------
DCI Telecommunications, Inc. (the Company) was originally incorporated on
February 4, 1985, as ALFAB, Inc., and subsequently became Fantastic Foods
International, Inc. (Fantastic Foods) after a reorganization in 1991. The
shareholders of Fantastic Foods International, Inc., at a shareholders
meeting on December 30, 1994, approved the acquisition of the assets of Sigma
Telecommunications, Inc. in a stock for asset purchase. Concurrent with the
merger, the name was changed to DCI Telecommunications, Inc.
On January 5, 1995, the Board of Directors approved the acquisition of
certain assets of Sigma Industries, Inc. (Alpha Products) in a stock-for-
asset purchase, with DCI exchanging 850,000 common shares valued at $672,400
for the assets of Alpha Products, Inc., which totaled $672,400. The above
acquisitions were accounted for using the purchase method of accounting.
On November 26, 1996, DCI entered into a stock purchase agreement with Muller
Media, Inc. (Muller), a New York corporation, to acquire 100% of the
outstanding common stock of Muller in a stock-for-stock purchase, with DCI
exchanging 1,200,000 shares of common stock for all of the shares of Muller
capital stock. The DCI stock was valued at $2.50 per share ($3 million in
total) and is included in outstanding common stock for the years ending March
31, 1998 and 1997.
At the closing, the shares of Muller and DCI were placed with escrow agents.
This was done to facilitate a put option which could only be exercised by
Muller subsequent to the closing. DCI must repurchase the shares for
$3,000,000 if Muller exercised the put option, which commenced on the earlier
of 120 days from December 27, 1996, unless an extension was requested by DCI,
which Muller could not unreasonably withhold, or 14 days after DCI had
received an aggregate of $3,000,000 in net proceeds from the sale of its
capital stock. Extensions were granted by Muller through June 3, 1998. The
selling stockholders had an option to keep DCI stock or accept up to
$3,000,000 in cash from DCI.
DCI repurchased 400,000 shares of such common stock on March 16, 1998 for
$1,000,000 and completed the repurchase from the exercising parties on June
9, 1998 upon payment of an additional $2,000,000 for the remaining 800,000
shares.
Muller is a distributor of syndicated programming and motion pictures to the
television and cable industry. The acquisition will be accounted for as a
purchase, effective June 9, 1998.
<PAGE>
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 who owned approximately 72% of the common stock 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 as described in Note 10.
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. The stock
offering agreement called for the exchange of shares by DCI in the
acquisition of CardCall. A condition in the offer was that the number of DCI
shares to be issued would be reduced on a share for share basis by the
difference between 545,455 and the actual number of shares issued in the
Series C preferred stock conversion described in Note 10 to the financial
statements. There was no value assigned to the common stock that would be
distributed per the offering agreement as these shares were not issued due to
the number of common shares issued in the conversion of the series C
preferred stock to common stock. As of March 31, 1999, 6,681,161 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 December 1,
1998.
The accompanying financial statements include the results of operations of
CardCall International, Inc. since May 29, 1997 date of acquisition under the
purchase method of accounting.
<PAGE>
On March 25, 1997, the Company acquired the Travel Source LTD through the
issue of 29,412 shares valued at $3.40 per share or $100,000. Six months
from closing, if DCI shares are less than $3.40 per share, additional shares
must be issued to bring the purchase price back to $100,000. In fiscal 1998
the Company issued an additional 13,260 shares in accordance with this
provision. The acquisition has been accounted for as a purchase effective
March 25, 1997. Travel Source is a travel agency in Rhode Island.
On April 9, 1997 the Company acquired all of the outstanding shares CyberFax
Inc. for 400,000 shares of its common stock valued at $1,000,000. CyberFax,
a Canadian Corporation, is in the business of providing real-time fax
capabilities over the Internet. Goodwill of $1,034,000 was recognized in the
transaction. The acquisition has been accounted for as a purchase and the
financial statements include the operations of CyberFax since April 9, 1997,
the date of acquisition. CyberFax had no material operating activities prior
to the acquisition.
The Company in 1998 also established DCI UK, whose name was subsequently
changed to DCI Time Europe Limited, a company providing long distance
telecommunications in Europe.
On March 31, 1998, the Company and DataWave Systems Inc. (DataWave) formed a
joint Venture for the marketing, sale and service of prepaid long distance
telephone calling cards in Canada. The joint venture company, named PhoneLine
CardCall International, has 100,000 shares outstanding, which are 60% owned
by DCI and 40% owned by DataWave Systems, Inc. PhoneLine has six directors:
three are nominees of DCI, and three are nominees of DataWave.
Under the terms of the agreement, DataWave and CardCaller Canada, Inc., will
contribute all existing Canadian business to the joint venture. In addition
DCI contributed $281,000 to the joint venture on March 31, 1998,which is
recorded in other investments in the financial statements.
The operation was discontinued in 1999, and is in the process of being placed
into insolvency proceedings.
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 under the purchase method of accounting, effective April
30, 1998. The total purchase price consists of 4,385,715 shares of common
stock valued at $6,644,000 and the assumption of the net liabilities of
$296,976. Edge is located in Gaithersburg, Maryland and is in the prepaid
phone card business. Goodwill of $6,940,974 has been recorded on the
transaction and is being amortized over 20 years. The financial statements
include the results of operations since April 30, 1998, the date of
acquisition.
<PAGE>
On November 6, 1998, the Company entered into a merger agreement with Wavetch
International. The agreement called for the exchange of common stock on a one
share for one share basis, with Wavetech being the surviving company. This
agreement was canceled in May 1999.
Discontinued Operations
- -----------------------
In September 1997, DCI agreed in principal with SmarTalk Teleservices, Inc.
to sell its prepaid phone card distribution contract with D Services, a
wholly owned subsidiary of W.H. Smith, for $9,000,000. Under the terms of
the contract DCI was to receive $1,000,000 in cash and $ 8,000,000 of
SmarTalk stock valued on the closing date. The Company believes that it
should have received 355,555 shares of SmarTalk stock based upon the price of
the stock on the closing date. DCI received $1,000,000 in cash at the
closing and 326,531 restricted shares of SmarTalk common stock. The
receivable from SmarTalk in the accompanying balance sheet represents the
value of the shares not received as of March 31, 1998. DCI requested
registration of the 326,531 shares on March 31, 1998, and disposed of its
holdings on May 15, 1998, realizing $8,124,761 of net proceeds. In fiscal
1999 the Company wrote off the $650,000 receivable from SmarTalk since
SmarTalk filed for bankruptcy in the current year. The loss of $650,000 is
included in 1999 continuing operations.
A non-compete clause in the agreement precludes DCI or its subsidiaries from
engaging in the prepaid phone card products business through the distributor
in the UK for a period of seven years. As a result, operations to date for
CardCall UK are shown as discontinued operations. Operations of CardCaller
Canada are shown as continuing operations. The gain on the transaction is
$4,792,315 after the write-off of goodwill and other associated expenses.
The operation of CardCall UK has been shutdown and is in the process of being
liquidated. Management and its legal counsel believe that no liability is
required in the accompanying financial statements as a result of the
liquidation.
In the second quarter ended September 30, 1997, the Company discontinued the
operation of its Alpha Division. Alpha Products was a manufacturer of data
acquisition and control products for personal computers. It attempted to
compete as a low cost provider using antiquated/outdated technology in a
modular setting. However, with the speed at which new technologies are
created, and the speed at which their prices are reduced, Alpha's product
line was quickly becoming obsolete, even on a cost basis. Without sufficient
outlays to upgrade and increase its engineering force coupled with a complete
overhaul of its product line and mission, it was not practical to continue
the operations on an on-going basis.
A third party assumed certain assets and liabilities of Alpha effective
September 30, 1997 for no consideration. Alpha incurred operating losses
through September 30, 1997 of $54,480 net of tax benefit of $11,493 which are
shown as discontinued operations in the accompanying statement of operations.
In addition, a loss on disposition of $337,642 net of tax benefit of $173,936
was recorded, of which $492,985 before tax benefits reflected the write-off
of unamortized customer base. There were no remaining assets or liabilities
at March 31, 1998.
<PAGE>
In December 1997, the Company discontinued the operations of PEL, which had
been in the value-added, card-based marketing program business. The Company
salvaged the usable office furniture and equipment and abandoned the
business. There were no other remaining assets at March 31, 1998 and
liabilities amounted to $8,371. PEL incurred operating losses of $169,807
net of tax benefit of $44,630 and a loss on disposition of $90,193 net of tax
benefit of $30,204.
On March 30, 1999, DCI 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 does become publicly traded prior to March 30,
2000, DCI has the right to demand payment in full, such payments to be made
in Carlyle shares valued at the 13 week average described above.
Under a collateral and security agreement, Carlyle has pledged all the stock
of CyberFax that is held by an escrow agent for this note.
The Company has not recognized revenue or profit for this transaction as of
March 31, 1999. Revenue and profit will be recognized on the cost recovery
method. A loss of $1,098,228 was recorded on this transaction.
CyberFax had sales of $48,145 and operating losses of $404,010 in 1999 before
discontinuance of operations.
Quasi Reorganization
- --------------------
At the Annual Meeting of Shareholders on July 26, 1995, the shareholders
approved a quasi-reorganization of the Company to adjust the carrying value
of assets and liabilities to their fair market value. The Company reduced its
inventory valuation by $63,182. The accumulated deficit of $4,695,587 at
December 31, 1995, the effective date of the reorganization, was eliminated
in full and charged to paid in capital. The retained earnings (deficit)
starting date is January 1, 1996.
Subsequent Events
- -----------------
On May 7, 1999 the Securities and Exchange Commission (SEC) suspended trading
in the Company's stock and is performing an investigation under the authority
of Section 20(a) of the Securities Act of 1933 and Section 21(a) of the
Securities Exchange Act of 1934.
Business Activity
- -----------------
DCI Telecommunications, Inc. (the Company) is engaged through its operating
subsidiaries in long distance telecommunications, prepaid phone cards, media
distribution and travel agency services.
<PAGE>
The Company through its European subsidiaries, is involved in providing long
distance telephone service to businesses and individuals through a private
leased line network being established throughout Europe where deregulation in
the telecommunications industry is just now being implemented. A leased line
network from one country to another is one of the least expensive methods for
a small company to gain entry into the long distance business. The Company
operates its leased lines on a month to month payment basis. The Company
currently owns switches in the UK, Denmark and Spain.
On March 31, 1998, the Company entered a joint venture agreement with
DataWave Systems Inc., which combined the assets and operations of the
Company's CardCaller Canada subsidiary and DataWave's PhoneLine International
subsidiary into a new entity, PhoneLine CardCall International. This joint
venture operated during the fiscal year just completed. Recently, DCI took
action to dissolve the joint venture with DataWave due to the Company's
dissatisfaction with its performance. All future Canadian prepaid phone card
operations will be under the control of Edge Communications.
Edge Communications is a prepaid phone card company who sells a complete
product line of phone cards through multiple distributors located throughout
the United States.
Travel Source operates a full service travel agency providing service to a
wide range of individuals and businesses throughout the New England area of
the United States.
Muller Media is engaged in the business of purchasing, selling, distributing,
licensing and otherwise dealing in the acquisition and transfer of motion
picture and other entertainment media principally to major television and
cable networks in the United States.
Employees
- ----------
The Company has 55 employees.
Competition
- -----------
The Company has numerous competitors, many with substantially more resources
than the Company. Management believes that no single competitor except in
long distance services has a dominant market position. Management believes
that the Company is able to compete successfully on the basis of product
efficiency, reliability, and service to customers as follows:
Long Distance Services
Product Efficiency - The Company is in the business of providing long
distance services via leased lines, but utilizes its own switches throughout
various countries in Europe. Lines are leased from and competitive tariff
rates have been negotiated with various major carriers such as IXC
Communication Services, British Telecom, Frontier, Inter-Route and Telefonica
de Espana. Intelligent switching equipment automatically utilize least cost
routing, based on tariffs to various destinations.
<PAGE>
Product Reliability - Because the Company is leasing lines from reliable
carriers, there are few problems and when problems are encountered, they are
dealt with quickly and efficiently. In the event of a major problem,
alternative carriers can be automatically utilized.
Service to Customers - The Company has a technical staff responsible for the
ongoing monitoring and maintenance of its switching equipment. The carriers
provide line maintenance and service.
PREPAID PHONE CARDS
Product Efficiency - The Company provides prepaid calling cards in the United
States and Europe. Company owned switching equipment, combined with
negotiated arrangements with various carriers, which may be subject to change
from time to time, allow the Company to provide service at extremely
competitive rates in each of our geographic markets.
Product Reliability - The Company's prepaid card platforms are designed to
function within predetermined parameters. There are few, if any, problems due
to the fact that they are software controlled and are monitored remotely.
They can be accessed remotely, via PC for maintenance.
Service to Customers - The Company's technical staff monitors and maintains
its switching platforms and billing services. A dedicated customer service
staff deals with consumer questions and problems which might be encountered
in the use of these cards.
TRAVEL SERVICES
Product Efficiency - The Company's travel division is a full service travel
agency providing services to a wide range of individuals and businesses
throughout the New England area of the United States.
Product Reliability - As a full service travel agency, relationships are
maintained with major airline carriers and cruise lines. Agency management
routinely travels to various locations to check out the facilities for its
customers and only recommends those meeting high quality standards.
Service to Customers - The Company's travel division has been providing
exceptional services for many years, due to the dedication of its management
and staff.
<PAGE>
MEDIA DISTRIBUTION
Product Efficiency - Muller Media Inc. (MMI) is a distributor of programs to
television and cable, and in some cases, ancillary markets such as airlines,
schools and colleges.
The process for such distribution starts with negotiating the acquisition of
such rights (usually for U.S. distribution) for both over-the-air and cable
telecasts, with producers or owners of programming (in most cases, feature
films), or in conjunction with companies that own or purchase programming
that usually do not have their own distribution in place. In some cases, MMI
obtains the right to license the programming for home video and other
ancillary markets.
Product Reliability - The film library is maintained under modern storage
standards to protect the integrity of the films.
Service to Customers - Muller Media has a long history of providing superior
service by making films available when and where needed, when contracted for.
ITEM 2 - PROPERTIES
The Company presently has an operating lease agreement for approximately
3,200 square feet of office space in Stratford, Connecticut for its
corporate headquarters. Other leased office space includes 1,000 square feet
for Travel Source in Kingston, Rhode Island, 800 square feet in each of its
UK and Spanish facilities, 800 square feet for Muller Media and approximately
1,200 square feet for Edge Communications in Maryland. All properties are
considered in good condition.
ITEM 3 - LEGAL PROCEEDINGS
See Notes to Financial Statements
ITEM 4 - SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5 - MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is traded in the over-the-counter market on
NASDAQ's electronic bulletin board. Its symbol is "DCTC".
The quotations set forth represent bid prices between dealers and do not
include retail markups, markdowns or commissions and do not necessarily
represent actual transactions. These quotations were obtained from the
National Association of Securities Dealers.
1999 HIGH LOW
---- ----- ------
First quarter ended
June 30, 1998 $2.94 $1.31
Second quarter ended
September 30, 1998 $2.81 $0.81
Third quarter ended
December 31, 1998 $4.31 $0.67
Fourth quarter ended
March 31, 1999 $3.81 $1.88
1998 HIGH LOW
---- ---- ------
First quarter ended
June 30, 1997 $ 4.00 $ 1.38
Second quarter ended
September 30, 1997 $ 3.38 $ 1.50
Third quarter ended
December 31, 1997 $ 4.63 $ 1.59
Fourth quarter ended
March 31, 1998 $ 2.53 $ 1.59
As of June 11, 1999 there were approximately 5,000 recorded holders of the
Company's stock.
The Company has paid modest cash dividends on its Common Stock in the last
two years. Holders of Common Stock are entitled to receive such dividends as
may be declared and paid from time to time by the Board of Directors out of
funds legally available therefore. The Company intends to retain most of its
earnings for the operation and expansion of its business. Any future
determination as to the payment of cash dividends will depend upon future
earnings, results of operations, capital requirements, the Company's
financial condition and such other factors as the Company's Board of
Directors may consider.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Selected Financial Data
- -----------------------
The following table sets forth selected consolidated financial data of the
Company for the years ended March 31, 1995 through 1999.
STATEMENT OF OPERATIONS DATA (a)
Years Ended March 31,
1999 1998 1997 1996 1995(b)
---- ---- ---- ---- ----
Continuing operations
Net sales and
other revenue $34,050,004 $4,487,659 $ -- $ -- $ --
Gross profit 3,125,155 403,061 -- -- --
(Loss) from
continuing
operations (10,425,714) (2,359,479) (389,024) (799,468)(1,063,213)
(Loss) from
discontinued
operations ( 404,010) (1,154,677) (153,592) (53,514) (32,272)
Gain (loss) on disposal
of discontinued
operations (1,098,228) 4,364,480 -- -- --
Net Income (loss) (11,927,952) 850,324 (542,516) (746,324)(1,095,485)
Per share
Continuing operations (.51) (.28) (.09) (0.43) (1.89)
Discontinued operations (.02) (.11) .03 .03 (0.06)
Disposal of
discontinued
operations (.05) .40 -- -- --
BALANCE SHEET DATA
Working capital $(2,021,520) $2,832,587 $499,127 ($128,670 (247,357)
Total assets 36,738,332 $16,368,954 $2,835,592 666,785 1,564,196
Long-term debt 71,363 35,175 14,016 -- --
Redeemable
preferred stock 2,312,500 610,050 1,500,000 -- --
Shareholders'
equity 20,263,981 8,776,152 1,098,920 229,050 1,042,060
Cash dividends
per shares 0.01 0.01 -- -- --
(a) Includes the results of purchased businesses from acquisition dates.
References herein to the years 1995 through 1999 refer to the Company's
fiscal years ended March 31.
(b) Adjusted to reflect a one-for-twenty reverse stock split effected January
25, 1995, a forty-for-one split effected March 7, 1996 and a one-for-four
hundred reverse split effected March 14, 1996.
<PAGE>
Overview
- -------
The following review of the results of operations and financial condition of
the Company should be read in conjunction with the Consolidated Financial
Statements.
Other
- ----
The Company had inventory of $119,833 at March 31, 1999.
Foreign Exchange
- --------------
Through the fiscal year ended March 31, 1999, the Company operated in the
United States, Canada, United Kingdom, Spain and Denmark. Balance sheet
accounts denominated in foreign currencies are translated generally at the
current rate of exchange as of the balance sheet date, while revenues and
expenses are translated at average rates of exchange during the periods
presented. The cumulative foreign currency adjustments resulting from such
translation adjustments have been determined by the Company to be immaterial.
There have been no adjustments or modifications made in the financial
statements for such foreign currency translation adjustments.
Liquidity and Capital Resources
- --------------------------
Year Ended March 31, 1999
- -------------------------
At March 31, 1999, the Company had $1,631,186 of unrestricted cash.
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 10 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.
On May 15, 1998, the Company sold its shares of SmarTalk for $8,124,761 and
repaid its note payable of $4,938,942.
The issuance of the preferred stock and the sale of securities were the
primary source of cash in 1999.
<PAGE>
On June 9, 1998, the Company completed the repurchase of the 800,000 shares
issued to Muller shareholders for $2,000,000. See Note 1 to the Financial
Statements.
The Company acquired $1,475,000 of cash in the Muller and Edge acquisitions.
Year Ended March 31, 1998
- -------------------------
At March 31, 1998, the Company had unrestricted cash of $704,991 and
$8,125,000 of common stock of SmarTalk Teleservices, Inc. In September 1997,
the Company agreed in principal with SmarTalk Teleservices Inc. to sell DCI's
prepaid phone card distribution contract with D Services, a wholly owned
subsidiary of W.H. Smith, for $9,000,000. At the closing, DCI received
$1,000,000 in cash and was to receive $8,000,000 worth of unregistered shares
of SmarTalk. The gain on the transaction was $4,972,315 after write-off of
$3,159,973 of goodwill and $787,446 of other expenses associated with the
transaction. In order to protect the approximately $8,000,000 worth of
SmarTalk stock from the time it was received until it was finally registered,
the Company bought put options to sell SmarTalk at various prices at a cost
of $775,000. In accordance with the terms of the agreement, on March 31,
1998,the Company requested SmarTalk to register the shares. After receipt of
the registered shares, DCI disposed of its holdings on May 15, 1998,
realizing $8,124,761. A non-compete clause in the agreement precludes DCI or
its subsidiaries from engaging in the prepaid phone card products business
through the distributor in the UK for a period of seven years. As a result,
the operations of CardCall UK was shut down and is in the process of being
liquidated.
The Company was able to borrow $4,939,000 against its position in SmarTalk
stock by March 31, 1998. This was the principal source of funds for
operations and capital improvements during the last six months of the fiscal
year.
On March 31, 1998, the Company invested $281,080 in its new joint venture,
PhoneLine CardCall International, which became operational April 1, 1998. The
joint venture company has 100,000 shares outstanding which are 60% owned by
DCI and 40% owned by DataWave Systems, Inc. PhoneLine has six directors;
three are nominees of DCI, and three are nominees of DataWave. DataWave has
an option over the next two years to purchase 9,000 shares for approximately
$175,000 from DCI. As the initial contribution to the capital of PhoneLine,
DCI provided $280,000, of which $42,000 was payment for PhoneLine shares and
$238,000 was a loan to the joint venture. DataWave contributed $448,000, of
which $28,000 was payment for PhoneLine shares and $420,000 was a loan to the
joint venture. The proceeds from the loans were used to buy certain assets
of CardCaller Canada and PhoneLine International (wholly owned subsidiary of
DataWave Systems, Inc.). DCI and DataWave each have the right of first
refusal upon the other's notification that it wants to sell, assign or
transfer all its shares at a stated price.
<PAGE>
In addition, during the fiscal year the Company raised $2,450,000 through the
issue of several series of convertible preferred stock. At March 31, 1998,
all but $610,000 of the preferred stock had converted to common stock.
On January 21, 1998, the Company announced a common stock repurchase program,
whereby the Company was authorized to buy back up to $5,000,000 of its common
stock. As of March 31, 1998, the Company had bought back 380,500 shares for
$374,048, which were put into treasury. The Company purchased 198,000 shares
in the year ended March 31, 1999 for $378,378.
As part of the Muller Media transaction, Muller shareholders had a put
option, enabled them to put back the 1,200,000 shares of DCI they received at
closing to the Company for $3,000,000 in cash. The put option commenced on
the earlier of 120 days from December 27, 1996 or 14 days after DCI had
received an aggregate of $3,000,000 in net proceeds from the sale of its
capital stock. DCI could request extensions, which Muller could not
unreasonably withhold. On March 16, 1998, DCI repurchased 400,000 of such
common shares for $1,000,000 and completed the repurchase of the additional
800,000 shares on June 9, 1998 for an additional $2,000,000.
In the year ended March 31, 1998, the Company discontinued operations of its
Alpha Products Division, PEL and CardCall UK.
In the years ended March 31, 1999 and 1998, the Company paid $193,462 and
$143,715 in common stock dividends.
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.
Results of Operations
- ---------------------
Year Ended March 31, 1999
- -------------------------
In April 1998, CardCaller Canada, which developed and marketed standard
prepaid phone cards through an extensive distribution network throughout
Canada, was rolled into a joint venture with PhoneLine, a wholly owned
subsidiary of DataWave Systems. The joint venture company, named PhoneLine
CardCall International, Ltd., was 60% owned by DCI Telecommunications. Due
to DCI's dissatisfaction with its performance, the Company took actions to
dissolve this joint venture. All future Canadian prepaid phone card
operations will be under the control of Edge Communications.
<PAGE>
Edge Communications was acquired in April 1998, and quickly fulfilled its
potential by realizing substantial gains in both sales and earnings. Since
its founding in 1994, this Maryland-based company has been engaged in the
prepaid telephone card business. It has achieved success by targeting its
marketing activities primarily in urban and ethnic markets throughout the
United States. An on-site customer service division is equipped with a state-
of-the-art interactive voice response system. It is staffed exclusively with
multi-lingual representatives in order to service its customers most
efficiently. Edge has successfully marketed different prepaid phone card
brands of its own design, customized to specific markets.
In December 1998, through an alliance with IXC Communications, Inc., DCI was
elevated to the status of a global carrier. Under the terms of the alliance,
IXC acquired a 13% ownership position (4,250,000 shares) in DCI, and DCI was
granted a five-year master service agreement to utilize specified IXC
facilities to support its expanding long distance business.
Under the agreement, DCI may lease E1 lines from IXC to carry its traffic,
including four E1s between Madrid and London and two E1s from London to the
United States. DCI will install two new switches in Europe, one in London
and the other in Madrid. The existing switch in London will be relocated to
either Denmark or Sweden and linked directly to London via dedicated E1
connections. An E1 connection, the European standard that is equivalent to
an American T1, is a 32-channel leased line. All of the switches will be
utilized. In addition, DCI will lease dedicated lines from IXC to originate
traffic in London and terminate in other high-volume countries throughout
Europe and the Far East. This affords DCI the needed capacity to ramp up
traffic at a quicker pace.
Through a February 1999 agreement with Retevision, Spain's national cable
television service provider, DCI began operating as a Competitive Local
Exchange Carrier (CLEC) throughout Spain. The agreement allows DCI to offer
its telecommunications services utilizing Retevision's government license as
a CLEC. In effect, DCI will become an alternative local carrier to
Telefonica de Espana. DCI customers will be able to place phone calls
anywhere in Spain at rates that are competitive with and in some cases
significantly lower than, those currently obtainable from other carriers.
Retevision, based in Madrid, has the capability to provide service throughout
the country. By establishing a network of wireless transmission facilities,
over which its signal can be broadcast countrywide, it has implemented a
creative solution to the costly process of running wire across the
mountainous topography that is prevalent throughout much of Spain. This
arrangement will also allow DCI to "collect" long distance traffic from
anywhere in Spain and route it worldwide while offering significant cost
savings to the caller. Retevision's wireless network has been modified to
allow DCI to seamlessly transmit its telecommunications services.
<PAGE>
In March 1999, DCI sold its CyberFax subsidiary to Carlyle Corporation Group
for $5 million. Under the terms of the agreement, DCI received a note that
can be converted into shares of a planned initial public offering for
CyberFax. The transaction allows management to further concentrate its
efforts on developing the Company's strategic shift toward long distance
service. The transaction will be recorded at the time the note is paid.
Year Ended March 31, 1998
- -------------------------
The airline industry has reduced the percentage of travel agency commission
per airline ticket domestically from 10% to 8%, with a maximum commission cap
of $50 per round-trip ticket. International air fares have not been effected
to date. The Travel Source, Ltd., has increased the use of tour companies
and wholesales to compensate for this reduction in revenue. Travel Source
has also instituted a service/processing fee on airline tickets of $10 per
transaction to offset the loss in commission structure. The further
promotion of group tours, cruises and travel packages with value-added
features has become more of the focus of restoring and increasing revenue
sales.
Beginning mid-summer 1997, CardCaller Canada faced increased competition as a
number of new companies entered the Canadian prepaid phone card market. Many
of these new companies tried to position themselves as low-cost providers in
an attempt to gain market share by reducing prices. This action depressed
profitability in this market.
In September 1997, DCI agreed in principal with SmarTalk Teleservices, Inc.
to sell its prepaid phone card distribution contract with D Services, a
wholly owned subsidiary of W.H. Smith, for $9,000,000. Under the terms of
the contract, DCI was to receive $1,000,000 in cash and $8,000,000 of
SmarTalk stock valued on the closing date. The Company believes that it
should have received 355,555 shares of SmarTalk stock based upon the price of
the stock on the closing date. DCI received $1,000,000 in cash at the
closing and 326,531 restricted shares of SmarTalk common stock. The
receivable from SmarTalk in the accompanying balance sheet represents the
value of the shares not received as of March 31, 1998. This receivable was
written off in 1999. DCI requested registration of the 326,531 shares on
March 31, 1998, and disposed of its holdings on May 15, 1998, realizing
$8,124,761 of net proceeds.
A non-compete clause in the agreement precludes DCI or its subsidiaries from
engaging in the prepaid phone card products business through the distributor
in the UK for a period of seven years. As a result, operations to date for
CardCall UK are shown as discontinued operations. Operations of CardCaller
Canada are shown as continuing operations. The gain on the transaction is
$4,792,315 after the write-off of goodwill and other expenses associated with
the transaction. The operation of CardCall UK has been shut down and is in
the process of being liquidated. Management and its legal counsel believe
that no liability is required in the accompanying financial statements as a
result of the liquidation.
<PAGE>
In the second quarter ended September 30, 1997, the Company discontinued the
operation of its Alpha Division. Alpha Products was a manufacturer of data
acquisition and control products for personal computers. It attempted to
compete as a low-cost provider using antiquated, outdated technology in a
modular setting. However, with the speed at which new technologies are
created, and the speed at which their prices are reduced, Alpha's product
line was quickly becoming obsolete, even on a cost basis. Without sufficient
outlays to upgrade and increase its engineering force coupled with a complete
overhaul of its product line and mission, it was not practical to continue
the operations.
A third party assumed certain assets and liabilities of Alpha effective
September 30, 1997 for no consideration. Alpha incurred operating losses
through September 30, 1997 of $54,480 net of tax benefit of $11,493, which
are shown as discontinued operations in the accompanying statements of
operations. In addition, a loss on disposition of $337,642, net of tax
benefit of $173,936, was recorded, of which $492,985 before tax benefits
reflected the write-off of unamortized customer base. There were no
remaining assets or liabilities at March 31, 1998.
In December 1997, the Company discontinued the operations of PEL, which had
been in the value-added, card-based marketing program business. The Company
salvaged the usable office furniture and equipment and abandoned the
business. There were no other remaining assets at March 31,1998 and
liabilities amounted to $8,371. PEL incurred net operating losses of
$169,807 and a net loss on disposition of $90,193.
Comparative operating results are as follows:
Years Ended
March 31,
1999 1998 1997
---- ---- ----
Net Sales $34,050,004 $ 4,487,659 $ -
Net sales increased by approximately $29,600,000 in fiscal 1999, compared to
the comparable 1998 period. Edge sales of prepaid phone cards since its
April 30, 1998, acquisition amounted to $20,000,000 due to rapid growth and
new contracts. Muller Media, which was acquired as of June 9, 1998,
accounted for approximately $3,562,000 of the increase. The prepaid phone
card sales of PhoneLine in 1999 exceeded CardCaller Canada 1998 sales by
$484,000. Travel Source sales were up $213,000 in 1999 and European sales
were up $3,147,000 due to new contracts.
With regard to recurring operations, 1998 sales of CardCaller Canada amounted
to $3,140,000 for the 10 months of ownership. Travel Source sales were
$1,194,000, and the start-up operations in Europe had sales of approximately
$154,000. There were no sales from recurring operations in 1997.
<PAGE>
1999 1998 1997
---- ---- ----
Cost of Sales $30,924,849 $ 4,084,598 $ --
Cost of sales in 1999 exceeded 1998 by approximately $26,840,000. Edge cost
of sales associated with sales since acquisition resulted in $19,233,000 of
the increase. Costs associated with newly acquired Muller Media accounted
for $2,327,000 of the increase. PhoneLine 1999 costs exceeded CardCaller
Canada's by $322,000. Cost of sales for European operations were up
$3,095,000 on increased volume. Travel Source costs increased $217,000 on
increased sales.
Cost of sales for CardCaller Canada amounted to $2,902,931 in 1998 and Travel
Source recorded costs of $1,087,207. Start-up operations in Europe accounted
for the balance. There were no costs of sales from recurring operations in
1997.
1999 1998 1997
---- ---- ----
Selling, General & Administrative $2,317,082 $903,924 $23,086
Selling, general and administrative expenses in fiscal 1999 increased
$1,413,000 over the 1998 period. Expenses of the newly acquired Muller Media
contributed $269,000 to the increase. SG&A expenses of PhoneLine, a much
larger operation than CardCaller Canada was in 1998, accounted for $235,000
in increased costs. SG&A expenses of Edge since acquisition were $606,000.
Expenses in 1999 also include a bad debt write-off of $650,000 due to the
bankruptcy of SmarTalk, the company to which DCI sold its distribution
contract last year. Corporate increases account for the balance.
SG&A expenses in 1998 increased $951,000 over 1997 levels. CardCaller Canada,
acquired May 29,1997, accounted for $288,000 of the increase, while Travel
Source, acquired March 25, 1997, registered $55,000 of costs in 1998. SG&A
expenses of the new company and DCI UK totaled $185,000, while administrative
expenses of the new Denmark and Spain operations totaled $30,000. Rising
administrative costs at the corporate level account for the balance.
1999 1998 1997
---- ---- ----
Salaries $2,385,387 $865,500 $274,584
Salaries in 1999 increased $1,520,000 over 1998 levels. Salaries at the
corporate level increased $253,000 due to wage increases and additional
personnel added to accommodate growth. The acquisition of Muller Media
accounts for $524,000 of the increase. Salaries in Europe have increased
$133,000 as operations have now increased. Salaries at Edge have amounted to
$492,000, principally due to expanded operations. PhoneLine's nine-month
salaries were $110,000 higher than CardCaller's 1998 seven months.
<PAGE>
Salaries increased $591,000 in 1998 compared to 1997. The CardCaller Canada
acquisition accounted for approximately $170,000, the startup of European
operations caused $353,000 of the increase, and Travel Source accounted for
$63,000.
1999 1998 1997
---- ---- ----
Professional Fees $1,169,346 $525,755 $76,623
Professional fees in fiscal 1999 increased $644,000 over the 1998 period.
Professional fees at corporate were $441,000 higher than 1998 charges
principally due to outside legal expenses as the Company expands and
additional accounting charges for restatements. Professional fees of newly
acquired Edge amounted to $218,000 as a result of its dramatic growth. Legal
and accounting fees of the newly acquired Muller Media of $45,000 was more
than offset by lower legal fees in Canada.
Professional fees increased $449,000 in 1998. Legal, accounting and other
professional fees associated with the newly acquired or formed companies
(CardCaller Canada and DCI UK) accounted for $138,000 of the increase.
Higher legal, accounting, public relations, stockwatch and other fees at the
corporate level generated the balance of the increase.
1999 1998 1997
---- ---- ----
Amortization and Depreciation $1,633,366 $353,784 $18,720
The 1999 increase of $1,280,000 is principally due to amortization of the new
IXC master service agreement of $784,000 and amortization of goodwill for
Edge and Muller of $313,000 and $65,000 respectively. The balance of the
increase is due to additional depreciation on new equipment and furnishings.
Amortization and depreciation increased approximately $335,000 in 1998.
Amortization by CardCaller Canada of licenses and goodwill totaled $307,000.
In addition, increased amortization of goodwill associated with Travel Source
amounted to $4,000. Depreciation expense associated with the new companies
accounted for the remainder of the increase.
1999 1998 1997
---------- --------- ------
BAD DEBT EXPENSE $2,281,944 $ 70,482 $ --
Bad debt expense increased in 1999 compared to 1998 due to the increase in
operations and the write-off of approximately $1,800,000 from two customers.
Bad debt expense increased in 1998 from 1997 due to an increase in sales and
expanded operations.
<PAGE>
1999 1998 1997
---- ---- ----
Other Income and Expense
Disposition of Canadian
operations $(3,185,558) -- --
Interest Expense (94,405) $(60,133) $(883)
Investment Income 166,219 $ 17,038 $4,872
Loss on SmarTalk Receivable (650,000) -- --
------------------ ------------ --------- -------
$(3,763,744) $ (43,095) $ 3,989
In 1999 the Company recorded a loss of $3,185,588 for the discontinuance of
its Canadian operation. The loss includes the net remaining balance of the
CardCall International, Inc., goodwill allocated to CardCaller Canada, Inc.
The loss on SmarTalk receivable represents the write-off of the receivable
from 1998 due to SmarTalk becoming bankrupt in fiscal 1999.
Interest expense increased in 1998 principally due to corporate short-term
borrowing earlier in the year.
The $149,000 increase in 1999 investment income is a result of $27,000 more
earned by DCI on short-term investments, plus $122,000 of interest earned on
short-term investments of the newly acquired Muller Media.
Interest expense increased $59,250 in 1998. Approximately one-half of the
increase was due to the interest on corporate short-term borrowings. The
other half is interest expense incurred by the new companies acquired in
1998.
Investment income increased by $12,166 in 1998. Higher investment income on
corporate savings accounted for the increase.
1999 1998 1997
---- ---- ----
Discontinued Operations
- Computer board -- ($54,480) ($81,897)
- Prepaid Phone - UK -- ($682,276) --
- Privilege Card -- ($169,807) ($71,695)
- CyberFax ($404,010) ($248,114) --
Disposition Gains(Losses)
- Gain on Phone
Card Contract -- $4,792,315 --
- Privilege Card -- ($90,193) --
- Computer board -- ($337,642) --
- CyberFax sale $(1,098,228) -- --
As described in Note 5 to the Financial Statements, the Company discontinued
the operations of CyberFax in fiscal 1999, CardCall UK, PEL, and the Alpha
Products Division in the year ended March 31, 1998. The losses in 1999
reflect operating losses net of tax benefit up to the date of discontinuance.
The losses in 1998 reflect operation losses net of tax benefit up to the date
of discontinuance and the restatement for CyberFax. The 1997 amounts are
operating losses in the fiscal year that have been restated as losses from
discontinued operations.
<PAGE>
The loss on disposal represents the write-off of remaining assets and
liabilities. Included in computer board is the write-off of net customer
base, which totaled $492,985, before tax implications.
As more fully described in Note 5 to the Financial Statements, the Company
sold a contract with a distributor in the UK to SmarTalk Teleservices, Inc.,
for $9,000,000, realizing a net after-tax gain of $4,792,315 after expenses
and write-off of goodwill and remaining assets and liabilities at disposal.
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
payments to be made in Carlyle shares valued at the 13-week average described
above.
Under a collateral and security agreement, Carlyle has pledged all the stock
of CyberFax that is held by an escrow agent for this note.
The Company has not recognized revenue or profit for this transaction as of
March 31, 1999. Revenue and profit will be recognized on the cost recovery
method. A loss of $1,098,228 was recorded on this transaction.
CyberFax had sales of $48,145 and operating losses of $404,010 in 1999 before
discontinuance of operations.
1999 1998 1997
---- ---- ----
Preferred Dividends $949,101 $734,166 $36,741
Preferred dividends are related to the various convertible preferred stock
issues outstanding in each year. Dividends are primarily related to the
presumed incremental yield the investor may derive from the discounted
conversion rate of preferred stock issued by the Company during the year.
Management believes that the related amount of dividends recorded by the
Company is not necessarily the true cost to the Company of the instruments it
issued and that it may be reasonable to conclude that the fair value of the
common stock into which these securities may be converted was less than such
stock's quoted market price at the date the convertible securities were
issued (considering factors such as the period for which sale of the stock is
restricted, large block factors, lack of a sufficiently active market into
which the stock can be quickly sold, time value, etc.). However, generally
accepted accounting principles require that an intrinsic value of the
conversion feature at the date of issuance should be accounted for, and that
such incremental yield should be measured based on the stock's quoted market
price at the date of issuance, regardless if such yield is assured.
<PAGE>
Recent Accounting Pronouncements
- ---------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, and SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information. SFAS No. 130 establishes standards for reporting and
display of comprehensive income, its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements and
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The adoption of this pronouncement had no impact on the
Company's financial position or results of operations. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company believes that it has
complied with these pronouncements.
Risks Associated with the Year 2000
- -----------------------------------
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.
<PAGE>
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 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.
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report
commencing on page F-1.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The present and nominated Directors and Executive Officers of the Company
are set forth below.
DIRECTOR AGE DIRECTOR
SINCE
Joseph J. Murphy 60 1995
President and CEO of DCI Telecommunications. Prior to that he was executive
vice president, member of the Board of Directors, and chief financial officer
for Aquarion Company, a New York Stock Exchange Company, from 1979 to 1990.
Formerly, he was chief financial officer for Connecticut Energy Corp. from
1971 to 1979, a member of Price Waterhouse from 1964 to 1967 and an officer
in the United States Marine Corps from 1961 to 1964. He was a member of the
Board of Directors of Boys/Girls Club of Bridgeport and served on the
Economic advisory board for Fairfield University and Sudden Death Syndrome
(SIDS) for Fairfield County. He was also a member of the FBI/Marine Corps
Association.
Larry Shatsoff 45 1995
Vice President and Chief Operations Officer of DCI Telecommunications. Within
the past five years he has been vice president and chief operations officer
for Alpha Products. Prior to that, he was executive vice president of Kalon
Systems (a data processing services company), manager of information systems
for Aquarion Company, a New York Stock Exchange Company.
John J. Adams 60 1995
Vice President Marketing DCI Telecommunications, Inc. Mr. Adams was formerly
vice president for R&D Scientific Corp. from 1993 to 1997 and founder and
president of Validation Services Corp. from 1993 to 1997. Mr. Adams was
previously president of Prevent Chemicals, Ltd., a publicly traded
manufacturer of specialty chemicals.
Carter Hills 77 1995
Retired diplomat with extensive experience in economic development and
management planning under auspices of Department of State and major
international organizations. Mr. Hills directed such programs in countries
of Near East and Vietnam. Served as financial adviser and delegate for U.S.
at key international conferences.
Clifford Postelnik 55
Director of Sales and Marketing, DCI Time Europe. Prior to his recent
appointment, he was with wholly-owned subsidiary Edge Communications. Mr.
Postelnik joined Edge after a 30-year career in bilateral carrier contract
negotiations and marketing to the tour and travel industry, airlines and
hotels in Europe, Africa and the Orient.
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
Executive Compensation
|Annual Compensation| Long Term Compensation|
Name Other Restricted
and Annual Stock LTIP All Other
Principal Salary Bonus Compensation Awards Options Payouts Compensation
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
- -------------- ------ ----- ------------ ------ -------- ----- ----------
Joseph
J. Murphy 1997 100,000 600,000
CEO 1998 115,000 172,727
1999 126,000 592,727
Larry 1997 55,800 400,000
Shatsoff 1998 63,000 154,545
V.P., COO 1999 90,000 759,545
John J. 1997 -- 250,000
Adams 1998 6,000 84,090
V.P., CMO 1999 75,000 214,574
Options/SAR Grants in Last Fiscal Year
% of Total
Options/SARs
Options/SARs Granted to Employees Exercise or Base
Name Granted (#) in Fiscal Year Price ($/Sh) Expiration Date
- -------- ------------ -------------------- ---------------- --------------
Joseph
J. Murphy 592,727 17.33 $0.68 10/15/2003
CEO
Larry 759,545 22.21 $0.68 10/15/2003
Shatsoff
V.P., COO
John J. 214,574 6.27 $0.68 10/15/2003
Adams
V.P., CMO
Options Exercised in Last Fiscal Year
Shares Value of Unexercised
Acquired on Value Unexercised Options In the Money Options
Name Exercise Realized at Fiscal Year End Fiscal Year End
- -------- ----------- -------- ------------------ -------------------
Joseph
J. Murphy 200,000 $375,000 992,727 $2,748,308
Larry Shatsoff 75,000 $160,934 1,009,545 $2,717,656
John J. Adams 60,000 $ 94,938 314,574 $ 857,705
Effective October 15, 1998 the exercise price with respect to an aggregate of
209,545 options for Mr. Shatsoff, 109,574 options for Mr. Adams, and 247,727
options for Mr. Murphy, to purchase common stock previously granted was
amended in connection with the cancellation of such previously outstanding
options in exchange for a new grant of an equal number of options under the
Company's stock option plan. The exercise price of the new options is equal
to the fair market value of the Company's common stock on the date of the
grant.
<PAGE>
The Company entered into an employment agreement dated January 1, 1995 with
Mr. Murphy for services rendered the Company as its President and Chief
Executive Officer for an annual base salary of $100,000.
Automatic Renewal Provision:
The term of the renewed employment agreement with Joseph J. Murphy commenced
on June 10, 1997 and shall end on June 10, 2002. This agreement shall be
renewed automatically on June 1, of each year thereafter for one (1)
additional term unless and until terminated.
Annual Salary Adjustment:
The amount of the Employee's Base Salary in all subsequent years during the
term of this Agreement, and renewals thereof, will be increased on January 1
of each year. During the term of this Agreement, and renewals thereof, the
then, current Base Salary shall be increased as of each January 1, beginning
January 1, 1998, by a rate equivalent to any percentage increase in the
Consumer Price Index for the twelve month period occurring prior to the date
of the scheduled change, plus five percent (5%). As used in this section, the
Consumer Price INDEX shall mean(i) the "CONSUMER PRICE INDEX FOR URBAN WAGE
EARNINGS AND CLERICAL WORKERS", currently published by the Bureau of Labor
Statistics of the United States Department of Labor for the Greater New York
Metropolitan Area on a bimonthly basis, or (ii) if the publication of the
Consumer Price Index shall be discontinued, and/or the Consumer Price Index
is published more or less frequently at the time of the foregoing
determinations are made, the comparable index most clearly reflecting
diminuation of the real value of the Base Salary and/or the publication
periods most comparable to those specified above. In the event of a change in
the base for the Consumer Price Index, the numerator of the fraction referred
to above shall be appropriately adjusted to reflect continued use of the base
period in effect at the time of its adoption for use hereunder. At the
request of either party hereto, the other from time to time shall execute an
appropriate instrument supplemental to this Agreement evidencing the then
current Base Salary payable by the employer hereunder.
Severance:
In the event that this Agreement is either (i) Terminated by the Employer for
any reason other than the willful misconduct of the Employee, or (ii)
terminated by the Employee for Employee Cause, then the Employer shall pay
Employee the following:
(a) A severance bonus from the general funds of the Employer, consisting of:
(i) The present value of the Employee's salary, less amounts the Employee
would have paid under the benefits set forth in another section of the
contract or the greater of the unexpired term of this agreement or two (2)
years;
(ii) At the Employee's election either the payment of the present value
as a lump sum, or payment in any form and manner provided for in the
Employer's retirement plan, of the pension benefits which the Employee would
have received at the end of the term hereof, calculated on the assumptions of
full vesting and compensation for the unexpired portion of the term hereof at
the rate in effect at the time of termination;
<PAGE>
(iii) The present value of the payments the Employer would have made
during the unexpired portion of the term hereof to any ESOP and Thrift Plan
for the Employee; and
(iv) A termination payment equal to ten percent (10%) of the gross
amount of any billings in excess of three million dollars invoiced and
collected in the previous year.
The severance bonus due shall be paid to the Employee in a single lump sum
within thirty (30) days after the termination of the Employee;
(b) The Employee's then-effective Base Salary for a period of six (6) months
or until Employee obtains new employment, to be paid to the Employee on the
dates when such salary would have been payable had such employment not been
terminated; and
(c) Reasonable expenses pursuant to terms of this agreement for a period of
six (6) months for health and life insurance in the amounts and coverages
existing at the time of termination for a period of one year or until
Employee obtains new coverage in the course of new employment.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
the Company as of June 11, 1998 by: (i) each of the Company's executive
officers and directors, (ii) each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, and
(iii) all of the Company's officers and directors as a group:
Name of Amount and Nature of
Beneficial Owner Beneficial Ownership(a) Percent of Class
- ---------------- -------------------- ----------------
(i)Joseph J. Murphy 7,112,145(b) 20.54%
Larry Shatsoff 1,131,744 3.27%
John J. Adams 320,574 0.93%
Carter H. Hills 379,273 1.10%
Russell Hintz 437,090 1.26%
Daniel J. Murphy 654,545 1.89%
Lois Morris 86,703 0.25%
IXC Communications, Inc. 4,250,000 14.24%
(ii) All executive officers and
directors as a group 10,122,074 29.23%
<PAGE>
NOTES:
(a) Included in shares owned above are shares which the beneficial owner has
the right to acquire from options within sixty days as follows: J. Murphy,
1,392,727 shares; L. Shatsoff, 1,009,545 shares; J. Adams, 314,574 shares;
and C. Hills, 217,272 shares. Shares beneficially owned directly or
indirectly.
(b) Included in Joseph Murphy ownership are shares issued for the Edge
Communications acquisition of which Mr. Murphy exercises sole voting power as
follows: Donald Gross, 1,750,533 (5.8%); Stephen Gross, 1,750,533 (5.8%);
Robert Cefail, 263,143; DCP Holding, LLC, 150,000; Lori Gross, 62,500; and
Tibor Vas, 20,000.
(c) Donald Gross
c/o Edge Communications
19225 Orbit Drive
Gaithersburg, MD 20879
Steven Gross
c/o Edge Communications
19225 Orbit Drive
Gaithersburg, MD 20879
ITEMS 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company engaged in certain related party transactions in the ordinary
course of business during the last fiscal year.
During the year ended March 31, 1999 and 1998, Mr. Joseph J. Murphy,
President of the Company, made cash advances to the Company and had certain
of his personal liabilities paid on his behalf as follows:
3/31/98 3/31/99
Cash Advances to -------- --------
the Company $552,300 $118,597
Liabilities Paid on Behalf of Mr. Murphy:
-----------------------------------------
Personal Indebtedness 81,478 97,147
Credit Card Payments 50,425 --
Legal Fees 1,020 --
Cash Withdrawals 45,500 --
Payments For Stock Options 71,250 --
Mr. Donald Gross and Mr. Steven Gross became principal shareholders as a
result of the acquisition of Edge Communications Inc. for 4,385,715 DCI
common shares. They were the largest shareholders of Edge.
<PAGE>
PART IV
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to this portion is submitted as a
separate Section of this report commencing on page F-1.
(a) (3) and (c) Exhibit (numbered in accordance with Item 601 of
Regulation S-K)
Exhibit No. Description Page No.
- ----------- ---------------------- --------
(1) NA
(3a) Articles of Incorporation (a)
(3b) By-Laws (a)
(4) NA
(9) NA
(10) NA
(11) NA
(12) NA
(13) NA
(16) Change in Certifying Accountant (b)
(18) NA
(19) NA
(21) Subsidiaries Travel Source, Ltd.,
Muller Media, Inc.,
Edge Communications, Inc.,
DCI Time Europe Ltd.,
DCI Telecomunicaciones S.L.
(22) NA
(23) NA
(24) NA
(25) NA
(28) NA
(29) NA
(a) - Filed with Registration Statement on Form S-18 (File 2-96976-D) and
incorporated by reference herein.
(b) - Filed with Form 8K dated June 28, 1995
During the quarter ended March 31, 1998, the following Form 8k's were
filed:
January 14, 1999 - Agreement with IXC Communications, Inc.
Subsequent to March 31, 1998:
April 12, 1999 - Sale of CyberFax, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: July 1, 1999 By: /s/ Joseph J. Murphy
Joseph J. Murphy
President and Chief
Executive Officer,
Director
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: July 1, 1999 By: /s/ Joseph J. Murphy
Joseph J. Murphy
President and Chief
Executive Officer, Director
Date: July 1,1999 By:
Russell B. Hintz
Chief Financial and
Accounting Officer
Date: July 1, 1999 By: /s/ Larry Shatsoff
Larry Shatsoff, Director
Date: July 1, 1999 By: /s/ John J. Adams
John J. Adams, Director
Date: July 1, 1999 By: /s/ Carter Hills
Carter Hills, Director
<PAGE>
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
DCI Telecommunications, Inc.
Report of Independent Auditor(s) F-1
Balance Sheets - March 31, 1999 and 1998 F-2
Statements of Operations F-3
Years Ended March 31, 1999 and 1998
Statements of Changes in Shareholders' Equity F-4
Years Ended March 31, 1999 and 1998
Statements of Cash Flows F-5
Years Ended March 31, 1999 and 1998
Notes to Financial Statements F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
DCI Telecommunications, Inc.
We have audited the accompanying consolidated balance sheets of DCI
Telecommunications, Inc. and subsidiaries as of March 31, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the two years in the period ended March 31, 1999.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DCI
Telecommunications, Inc. and subsidiaries as of March 31, 1999 and 1998 and
the results of their operations, and their cash flows for each of the two
years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Schnitzer & Kondub, P.C.
- ----------------------------
Schnitzer & Kondub, P.C.
Harrison, New York
June 25, 1999
F-1
<PAGE>
DCI Telecommunications, Inc.
Consolidated Balance Sheets
March 31,
ASSETS 1999 1998
---- ----
Current Assets:
Cash $ 1,631,186 $ 704,991
Restricted cash -- 60,246
Investments -- 8,124,761
Accounts receivable, net 3,905,714 150,227
Note Receivable- SmarTalk -- 650,000
CyberFax 5,000,000 --
Other current assets 291,906 89,939
Inventory 119,833 --
Due from shareholders 87,436 --
---------- ---------
Total Current Assets 11,036,075 9,780,164
Fixed Assets 724,043 470,641
Less: Accumulated depreciation (124,868) (57,410)
---------- ---------
Net Fixed Assets 599,175 413,231
Accounts receivable- long term 1,402,201 --
Investment in Muller Media -- 1,000,000
Deposits 425,147 40,210
Other Assets 108,549 450,869
Master service agreement 15,671,875 --
Less: accumulated amortization (783,594) --
---------- ---------
Net master service agreement 14,888,281 --
Cost in excess of assets acquired:
Travel Source 86,379 86,329
CardCall International -- 3,818,476
CyberFax -- 1,033,975
Muller Media 1,634,436 --
Edge Communications 6,940,976 --
--------- ----------
8,661,791 4,938,780
Less: Accumulated amortization: (382,887) (254,300)
---------- ----------
Cost in excess of assets acquired: 8,278,904 4,684,480
----------- -----------
Total Assets $36,738,332 $16,368,954
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY March 31,
1999 1998
Current Liabilities: ---- ----
Notes payable $ -- $4,938,942
Accounts payable and accrued expenses 6,561,580 1,132,123
Preferred stock dividend 748,100 361,356
Due to shareholders 195,305 410,156
Deferred revenue-prepaid phone cards 267,943 105,000
Deferred revenue- sale of CyberFax 5,000,000 --
Income tax payable 212,075 --
Current portion of long term debt 72,592 --
---------- ----------
Total Current Liabilities 13,057,595 6,947,577
Long-term debt 71,363 35,175
Accounts payable 1,032,893 --
Redeemable, convertible preferred stock,
$10,000 par and redemption
value, 2,000,000 shares authorized,
231 and 61 shares issued & outstanding 2,312,500 610,050
Total Liabilities 16,474,351 7,592,802
---------- ---------
Commitments and Contingencies (Note 13)
Shareholders' Equity:
9.25% cumulative convertible preferred
stock, $100 par value, 5,000,000 shares
authorized, 3,972 shares issued and
outstanding in 1998 -- 305,000
Common stock, $.0001 par value,
500,000,000 shares authorized,
29,681,782 and 14,092,625 shares
issued and outstanding 2,968 1,409
Paid-in capital 33,023,973 8,927,173
Treasury stock
(780,500 shares at cost) (1,127,439) (749,061)
Retained earnings subsequent to 12/31/95,
date of quasi-reorganization (total
deficit eliminated $4,578,587) (11,635,521) 291,631
----------- -----------
Total Shareholders' Equity 20,263,981 8,776,152
----------- -----------
Total Liabilities and
Shareholders' Equity $36,738,332 $16,368,954
----------- -----------
----------- -----------
F2(a)
<PAGE>
DCI TELECOMMUNICATIONS, INC,
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
1999 1998
---- ----
Sales - travel $ 1,406,801 $ 1,194,199
Sales - products 32,643,203 3,293,460
---------- ----------
Net sales 34,050,004 4,487,659
Cost of sales- travel 1,304,260 1,094,062
Cost of sales- products 29,620,589 2,990,536
---------- ----------
Cost of sales 30,924,849 4,084,598
Gross profit 3,125,155 403,061
Selling, general &
administrative expenses 2,317,082 903,924
Salaries and compensation 2,385,387 865,500
Professional and consulting fees 1,169,346 525,755
Amortization and depreciation 1,633,366 353,784
Bad debt expense 2,281,944 70,482
---------- ----------
9,787,125 2,719,445
Loss before other(expense) income (6,661,970) (2,316,384)
Other income and (expense):
Disposition of Canadian operations (3,185,558) --
Loss on SmarTalk receivable (650,000) --
Investment income 166,219 17,038
Interest expense (94,405) (60,133)
---------- ----------
(3,763,744) (43,095)
---------- ----------
Loss from continuing operations before
Income tax expense (10,425,714) (2,359,479)
Income tax expense -- --
------------ -----------
Loss from continuing operations (10,425,714) (2,359,479)
Discontinued operations:
Loss from operations, net of tax:
Computer board -Alpha Division -- (54,480)
(net of applicable income tax
benefit of $11,493 in 1998)
Privilege card operations - PEL -- (169,807)
(net of applicable income tax
benefit of $44,630 in 1998)
F-3
<PAGE>
Prepaid phone card segment - UK -- (682,276)
(net of applicable income tax
benefit $0 in 1998)
CyberFax operations: (404,010) (248,114)
(net of applicable income tax
benefit of $0 in 1999 and 1998)
Disposition of discontinued operations, net of tax:
CyberFax loss: (1,098,228) --
(net of applicable income tax
benefit of $0 in 1999 and 1998)
Computer board -Alpha Division -- (337,642)
(net of applicable income tax
benefit of $173,936 in 1998)
Privilege card operations -- ( 90,193)
(net of applicable income tax
benefit of $30,204 in 1998)
Prepaid phone card contract -
UK segment -- 4,792,315
(net of applicable income tax
provision of $1,717,876 and
applicable income tax benefit of
$1,457,614 in 1998)
----------- ----------
Net income (loss) before
dividends on preferred stock (11,927,952) 850,324
Dividends on preferred stock
Dividends (199,101) (96,866)
Deemed dividends (750,000) (637,300)
------------ ----------
Total dividends on preferred stock (949,101) (734,166)
Income (loss) applicable to
common shareholders $(12,877,053) $ 116,158
------------ ----------
Basic and diluted income (loss)
per common share
Continuing operations $ (.51) $ (.28)
Discontinued operations:
(Loss) Gain from disposal of operations $ (.05) $ .40
Loss from operations $ (.02) $ (.11)
------------ ----------
Total $ (.58) $ (.01)
------------ ----------
Weighted average common
shares outstanding 22,121,515 10,874,513
----------- ----------
See accompanying notes to consolidated financial statements.
F-3(a)
<PAGE>
DCI TELECOMMUNICATIONS, INC.
CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999 AND 1998
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
------- --------- --------- ------ -----------
Balances,
April 1, 1997 3,972 $ 305,000 7,931,118 $793 $1,351,833
Preferred stock
converted to common -- -- 2,384,822 238 3,139,712
Deemed dividend on
preferred stock issuance-- -- -- -- (637,300)
Conversion of dividends
to common stock -- -- -- -- 513,786
Shares issued for
options exercised -- -- 3,561,254 356 666,963
Shares issued for
Services -- -- 40,568 4 30,796
Shares issued for
stock of CyberFax -- -- 400,000 40 999,960
Shares issued for
stock of Travel
Source -- -- 13,260 1 (1)
Options issued for stock
of CardCall -- -- -- -- 2,545,722
Purchase of treasury
stock (582,500 shares) -- -- -- -- --
Shares canceled -- -- (545,453) (54) 54
Shares exchanged for
liabilities -- -- 307,056 31 556,229
Preferred stock
dividend -- -- -- -- (96,866)
Common stock
dividend -- -- -- -- (143,715)
Net Income -- -- -- -- --
------ --------- ---------- ------ ----------
Balances
March 31, 1998 3,972 $305,000 14,092,625 $1,409 $8,927,173
------ -------- ---------- ------ -----------
------ -------- ---------- ------ -----------
F-4
<PAGE>
Paid-In
Shares Amount Shares Amount Capital
------ --------- ---------- ------ ---------
Balances
April 1, 1998 3,972 $305,000 14,092,625 $1,409 8,927,173
Preferred stock
(Series A) converted
to common (3,972) (305,000) 321,537 32 304,968
Preferred stock
(Series E and F)
converted to common -- -- 1,603,120 160 1,297,390
Deemed dividend on
preferred stock
issuance -- -- -- -- (750,000)
Conversion of dividends
to common stock -- -- -- -- 562,357
Shares issued for
options and warrants
exercised -- -- 4,394,014 439 651,343
Shares issued for
services -- -- 37,200 4 57,996
Shares issued for
stock of Edge -- -- 4,385,715 439 6,643,919
Shares issued for
master service
agreement -- -- 4,250,000 425 15,671,450
Purchase of treasury
stock (198,000 shares)-- -- -- -- --
Shares issued for
deposits -- -- 21,524 2 49,998
Shares issued for
stock of Wavetech -- -- 576,047 58 (58)
Preferred stock
dividend -- -- -- -- (199,101)
Common stock
dividend -- -- -- -- --
Net loss -- -- -- -- (193,462)
------- -------- --------- ------ ----------
Balances
March 31, 1999 -- -- 29,681,782 $2,968 $33,023,973
------- --------- ---------- ----- ----------
------- --------- ---------- ----- ----------
F-4(a)
<PAGE>
Treasury Accumulated
Stock Deficit Total
---------- ----------- ----------
Balances,
April 1, 1998 $(749,061) $291,631 $8,776,152
Preferred stock
(Series A) converted
to common -- -- --
Preferred stock
(series E and F)
converted to common -- -- 1,297,550
Deemed dividend on
preferred stock issuance -- -- (750,000)
Conversion of dividends
to common stock -- -- 562,357
Shares issued for
options and warrants
exercised -- -- 651,782
Shares issued for
services -- -- 58,000
Shares issued for
stock of Edge -- -- 6,644,358
Shares issued for
master service
agreement -- -- 15,671,875
Purchase of treasury
stock (198,000)
shares (378,378) -- (378,378)
Shares issued for
deposits -- -- 50,000
Preferred stock
dividend -- -- (199,101)
Common stock
dividend -- -- (193,462)
Net loss -- (11,927,152) (11,927,152)
-------- ------------ ------------
Balances
March 31, 1999 $(1,127,439) $(11,635,521) $20,263,981
------------ ------------- ------------
------------ ------------- ------------
F-4(b)
<PAGE>
Treasury Accumulated
Stock Deficit Total
-------- ----------- ----------
Balances
April 1, 1997 $(13) $(558,693) $1,098,920
Preferred stock
converted to common -- -- 3,139,950
Deemed dividend on
preferred stock issuance-- -- (637,300)
Conversion of dividends
to common stock -- -- 513,786
Shares issued for
options exercised -- -- 667,319
Shares issued for
services -- -- 30,800
Shares issued for
stock of CyberFax -- -- 1,000,000
Shares issued for
stock of Travel
Source -- -- --
Acquisition of
CardCall -- -- 2,545,722
Purchase of
treasury stock
(582,500 shares) (749,048) -- (749,048)
Shares canceled -- -- --
Shares exchanged for
liabilities -- -- 556,260
Preferred stock
dividend -- -- (96,866)
Common stock
dividend -- -- (143,715)
Net income -- 850,324 850,324
------- -------- --------
Balances
March 31, 1998 $ (749,061) $ 291,631 $ 8,776,152
---------- --------- ---------
---------- --------- ---------
F-4(c)
<PAGE>
DCI TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
1999 1998
---- ----
Cash flows from (used in) operating activities:
Net loss from continuing operations $(10,425,714) $(2,359,479)
Adjustment to reconcile net loss from
continuing operations to net cash from
(used in) operating activities:
Depreciation and amortization 1,633,366 353,784
Stock issued for services 5,500 30,800
Loss on property disposition -- 31,729
Disposition of Canadian operations 3,185,558 --
Changes in assets and liabilities:
(Increase) Decrease in:
Restricted cash 60,426 (50,246)
Accounts receivable (1,366,749) 500,691
Inventory 60,161 127,951
Deposits (307,830) (30,306)
Other current assets 74,509 9,937
Receivable from SmarTalk 650,000 --
Increase (Decrease):
Accounts Payable & accrued expenses 2,713,920 (238,019)
Deferred revenue 96,851 82,920
Income tax payable (260,287) --
--------- --------
Total adjustments: 6,545,425 819,241
---------- ---------
Net cash (used in) operating activities (3,880,289) (1,540,238)
Cash flows from (used in) investing activities:
Additions to fixed assets (175,719) (237,339)
Cash acquired with acquisitions 1,475,103 64,756
Investment in CardCall
International -- (110,000)
Investment in Muller Media (2,000,000) (1,000,000)
Purchase of investment securities -- (775,000)
Increase in other long term assets 129,709 (296,336)
---------- -----------
Net cash (used in) investing activities $ (570,907) $(2,353,919)
F-5
<PAGE>
Cash flows from (used in) financing activities:
Proceeds from stock
options exercised 651,782 356,956
Purchase of treasury stock (378,378) (749,048)
Payment of notes payable (4,938,942) (215,966)
Proceeds from sale of preferred
stock 2,750,000 2,250,000
Due from affiliate -- 85,000
Common stock dividend (193,462) (143,715)
Advances from shareholders (398,128) 485,566
Proceeds from issuance
of notes payable -- 4,938,942
Proceeds from long-term debt 42,955 --
Sale of equity securities 8,124,761 --
--------- ---------
Net cash from financing activities 5,660,588 7,007,735
Net cash used in discontinued operations (283,197) (2,759,055)
---------- ---------
Net increase in cash 926,195 354,532
Cash, beginning of year 704,991 350,468
--------- ----------
Cash, end of year $1,631,186 $ 704,991
--------- ----------
Supplemental disclosures of cash flow information:
Cash paid for interest $94,000 $ 67,000
Cash paid for Income Taxes $260,000 --
Non-cash investing and financing transactions:
Acquisitions by stock and option issuance:
CardCall International -- 6,956,452
CyberFax -- 1,033,975
Edge Communications 6,940,976 --
IXC master service agreement 15,671,875 --
Stock issued for liabilities -- 556,260
Stock issued for deposits 50,000 --
Stock issued for services in
discontinued operations $52,500 $ --
See accompanying notes to consolidated financial statements.
F-5(a)
<PAGE>
DCI Telecommunications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 31, 1999 and 1998
Note 1. Organization and Significant Accounting Policies
DCI Telecommunications, Inc. (the Company) originally was incorporated on
February 4, 1985 as ALFAB, Inc., and subsequently became Fantastic Foods
International, Inc. (Fantastic Foods) after a reorganization in 1991. The
shareholders of Fantastic Foods International, Inc., at a shareholders
meeting on December 30, 1994, approved the acquisition of the assets of Sigma
Telecommunications, Inc. in a stock-for-asset purchase. Concurrent with the
merger, the name was changed to DCI Telecommunications, Inc.
On January 5, 1995, the Board of Directors approved the acquisition of
certain assets of Sigma Industries, Inc. (Alpha Products) in a stock-for-
asset purchase, with DCI exchanging 850,000 common shares valued at $672,400
for the assets of Alpha Products, Inc., which totaled $672,400. The above
acquisitions were accounted for using the purchase method of accounting.
On November 26, 1996, DCI entered into a stock purchase agreement with Muller
Media, Inc. (Muller), a New York corporation, to acquire 100% of the
outstanding common stock of Muller in a stock-for-stock purchase, with DCI
exchanging 1,200,000 shares of common stock for all of the shares of Muller
capital stock. The DCI stock was valued at $2.50 per share ($3 million in
total) and is included in outstanding common stock.
At the closing, the shares of Muller and DCI were placed with escrow agents.
This was done to facilitate a put option, which could only be exercised by
Muller subsequent to the closing under the put option. DCI was required to
repurchase the shares for $3,000,000 if Muller exercised the put option,
which commenced on the earlier of 120 days from December 27, 1996, unless an
extension was requested by DCI, which Muller could not unreasonably withhold,
or 14 days after DCI had received an aggregate of $3,000,000 in net proceeds
from the sale of its capital stock. Extensions were granted by Muller
through June 3, 1998. The selling stockholders had an option to keep DCI
stock or accept up to $3,000,000 in cash from DCI.
DCI repurchased 400,000 shares of such common stock on March 16, 1998 for
$1,000,000 and completed the repurchase from the exercising parties on June
9, 1998 upon payment of an additional $2,000,000 for the remaining 800,000
shares.
Muller is a distributor of syndicated programming and motion pictures to the
television and cable industry. The acquisition has been accounted for as a
purchase, effective June 9, 1998.
On March 25, 1997, the Company acquired the Travel Source, Ltd. through the
issuance of 29,412 shares valued at $3.40 per share, or $100,000. Six months
from closing, if DCI shares were less than $3.40 per share, the agreement
required that additional shares be issued to bring the purchase price back to
$100,000. In fiscal 1998 the Company issued an additional 13,260 shares in
accordance with this provision. The acquisition has been accounted for as a
purchase effective May 25, 1997. Travel Source is a travel agency in Rhode
Island.
F-6
<PAGE>
In the year ended March 31, 1997, the Company acquired the assets of Paul
Bettencourt Associates (PEL), a value-added marketing card company.
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, whose members owned approximately 72% of the common stock,
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, as described in Note 10.
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 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. The stock offering agreement
called for the exchange of shares by DCI in the acquisition of CardCall. A
condition in the offer was that the number of DCI shares to be issued would
be reduced on a share-for-share basis by the difference between 545,455 and
the actual number of shares issued in the Series C preferred stock conversion
described in Note 10 to the financial statements. There was no value
assigned to the common stock that would be distributed per the offering
agreement as these shares were not issued due to the number of common shares
issued in the conversion of the Series C preferred stock to common stock. As
of March 31, 1999, 6,681,161 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 had restrictions as
to when they can be sold, ranging from September 1, 1997 to December 1, 1998.
The accompanying financial statements include the results of operations of
CardCall International, Inc. since May 29, 1997, the date of acquisition
under the purchase method of accounting.
In the year ended March 31, 1998, the Company established DCI UK, a company
providing long distance telecommunications in Europe, and acquired CyberFax
Inc., a Canadian company providing real-time fax capability over the
Internet.
On March 31, 1998, the Company and DataWave Systems Inc. (DataWave) formed a
joint venture for the marketing, sale and service of prepaid long distance
telephone calling cards in Canada. The joint venture company, named
PhoneLine CardCall International, has 100,000 shares outstanding, which are
F-7
<PAGE>
60% owned by DCI and 40% owned by DataWave Systems, Inc. PhoneLine has six
directors: three are nominees of DCI, and three are nominees of DataWave.
The operation was discontinued in the year ended 1999, and is in the process
of being placed into insolvency proceedings.
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 under the purchase method of accounting, effective
April 30, 1998. The total purchase price consists of 4,385,715 shares of
common stock valued at $6,644,000 and the assumption of the net liabilities
of $296,976. Edge is located in Gaithersburg, Maryland and is in the prepaid
phone card business. Goodwill of $6,940,976 has been recorded on the
transaction and is being amortized over 20 years. The financial statements
include the results of operations since April 30, 1998, the date of
acquisition.
On November 6, 1998, the Company entered into a merger agreement with
Wavetech International. The agreement called for the exchange of common
stock on a one-share-for-one-share basis, with Wavetech being the surviving
company. This agreement was canceled in May 1999.
Quasi-Reorganization
- -----------------
At the Annual Meeting of Shareholders on July 26, 1995, the shareholders
approved a quasi-reorganization of the Company to adjust the carrying value
of assets and liabilities to their fair market value. The accumulated
deficit of $4,695,587 at December 31, 1995, the effective date of the
reorganization, was eliminated in full and charged to paid-in capital. The
retained earnings (deficit) starting date is January 1, 1996.
Principles of Consolidation
- ----------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Material intercompany balances and
transactions have been eliminated in consolidation.
Cash
- ----
For purposes of the statement of cash flows, the Company considers cash as
cash held in operating accounts and all highly liquid investments with a
maturity of three months or less to be cash equivalents.
Restricted cash in 1998 includes $34,475, which is pledged as a guarantee for
payment of trade creditors in Denmark, and $25,771 pledged as security for
bank loans in Canada.
The Company maintains its cash balances at several financial institutions.
Accounts at these institutions are secured by the Federal Deposit Insurance
Corporation up to $100,000. Uninsured balances were approximately $1,221,000
at March 31, 1999.
F-8
<PAGE>
Revenue Recognition and Deferred Revenue
- ----------------------------------------
Revenue is recorded when goods are shipped or when services are rendered to
the customer. Wireline services revenue is recognized, based upon minutes of
traffic processed. Accounts receivable are recorded net of allowances for
doubtful accounts of $1,239,000 and $0 at March 31, 1999 and 1998. The
Company utilized the direct write-off method for valuing accounts receivable
prior to 1999. Bad debt expense was $2,281,944 and $70,482 in 1999 and 1998,
respectively.
Travel
- -----
Travel agency revenues are recorded when a customer makes a reservation for a
trip. Reservations are accepted upon payment by the agency's customers with
a credit card or check. Returns on cancellations are recorded as incurred.
Prepaid Phone Cards
- ----------------
The Company sells its prepaid phone cards to retailers and distributors at
fixed prices. Deferred revenue is recognized when the retailers and
distributors are invoiced. The Company recognizes revenue and reduces the
deferred revenue as the end user utilizes calling time and upon expiration of
such cards. Deferred revenue at March 31, 1999 and 1998 was $267,943 and
$105,000, respectively.
Investments
- ---------
The Company accounts for investments under SFAS No. 115, which requires that
fixed maturities and equity securities that have readily determined fair
values be segregated into categories based upon the Company's intention for
those securities. Equity securities classified as available for sale are
stated at fair value, with unrealized gains and losses, net of related
deferred income taxes, reported as a separate component of shareholders'
equity. Securities that are classified as trading securities are stated at
fair value, with unrealized gains and losses included in earnings.
Realized investment gains and losses, accounted for by the specific
identification method, are included in the statements of income. Investment
income is recognized when earned.
Inventory
- --------
Inventory of $119,833 at March 31, 1999, stated at the lower of cost or
market (first in, first out), consists of prepaid phone cards.
F-9
<PAGE>
Fixed Assets
- ----------
Fixed assets are stated at cost. Major additions are capitalized;
expenditures for repairs and maintenance are charged against operations.
Depreciation is calculated under the straight-line method over the
anticipated useful lives of the assets, which range from five to seven years.
Cost in Excess of Net Assets Acquired
- -------------------------------
Cost in excess of net assets acquired (goodwill) represents the consideration
paid in excess of net assets acquired in the acquisitions of CardCall
International, Travel Source, Muller, Edge and CyberFax. Goodwill is being
amortized over 20 years.
Customer Base
- -----------
The customer base of $653,752, as of March 31, 1997, relates to the value of
the customer list acquired with the asset acquisition of Alpha Products in
1995 and was being amortized over 10 years. Accumulated amortization at
March 31, 1997 was $144,423. During the year ended March 31, 1998, the
Company discontinued its Alpha Products Division and wrote off the remaining
net balance of $492,985 as part of discontinued operations.
Income Taxes
- ----------
The Company accounts for income taxes under Financial Accounting Standards
Board (FASB) No. 109, entitled Accounting for Income Taxes. The Company
files a consolidated tax return with its domestic subsidiaries.
Earnings Per Share
- ---------------
Earnings per share are based on the weighted average number of shares
outstanding. Common stock equivalents have not been considered, as their
effect would be anti-dilutive. The Financial Accounting Standard Board
issued Statement Financial Accounting Standards (SFAS) No. 128, entitled
Earnings Per Share, during February 1997. The new statement, which is
effective for financial statements issued after December 15, 1997, including
interim periods, establishes standards for computing and presenting earnings
per share. It requires retroactive restatement of all prior-period earnings
per share data presented. SFAS No. 128 did not have a material impact upon
previously presented earnings per share information. Earnings per share in
the accompanying statements of operations were determined in accordance with
SFAS No. 128.
Convertible preferred stock, stock options and stock warrants are excluded
from the computations of net loss per share because the effect of their
inclusion would be anti-dilutive.
F-10
<PAGE>
Stock-based Compensation
- --------------------
SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair-value-
based method of accounting for an employee stock option or similar equity
instrument or plan. However, SFAS No. 123 allows an entity to continue to
measure compensation costs for these plans using the current method of
accounting. The Company has elected to account for employee stock
compensation plans as provided for under Accounting Principles Board (APB)
Opinion No. 25. For disclosure purposes, pro forma net income (loss) and per
share impacts are provided as if the fair value method had been applied.
Use of Estimates
- -------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and affect the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Translation of Foreign Currencies
- ---------------------------
Balance sheet accounts denominated in foreign currencies are translated
generally at the current rate of exchange as of the balance sheet date, while
revenues and expenses are translated at average rates of exchange during the
periods presented. The cumulative foreign currency adjustments resulting
from such translation are included in the accumulated translation adjustment
account in the shareholders' equity (deficit) section of the consolidated
balance sheets. In 1999 and 1998, the effect of the foreign currency
translation was not material.
Master Service Agreement
- --------------------
In December of 1998, the Company formed an alliance with IXC Communications
Services, a public company listed on Nasdaq. IXC received 4,250,000 shares
valued at $15,671,875, the fair market value of the shares at date of
issuance, and the Company received a master service agreement fixing rates
and various leases for a five-year period. DCI may lease dedicated lines in
England, Spain, Italy and other countries, and install switches in IXC
facilities in the U.S. and abroad. The master service agreement will be
amortized over five years, the term of the agreement. Accumulated
amortization at March 31, 1999 was $783,594.
Reclassifications and Restatements
- ----------------------------
Certain reclassifications and restatements have been made to prior years'
financial statements to conform with the current year's presentation, and to
account for CyberFax as a discontinued operation.
F-11
<PAGE>
New Accounting Standards
- --------------------
The FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 131 did not have an impact on the
1998 and 1999 financial statements. SFAS No. 131 supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements, and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic areas
and major customers. SFAS No. 131 defines operating segments as components
of a company about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company believes that
its financial statements conform to SFAS No. 131.
Note 2. Acquisitions
CardCall International Holdings, Inc.
- -------------------------------
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 cardholders
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, as described in Note 10.
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 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
F-12
<PAGE>
$.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 March 31, 1999,
6,681,161 of these options 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 had restrictions as to when they can be sold,
ranging from September 1, 1997 to December 1, 1998.
The transaction has been recorded under the purchase method of accounting,
effective May 29, 1997. The total purchase price includes the $1,610,000 in
cash, $2,545,000 assigned value for the stock options, and assumption of net
liabilities of $2,801,000. Goodwill was recorded at $6,956,000. The
financial statements include the results of operations of CardCall since May
29, 1997, the effective date of acquisition. The goodwill is being amortized
over 20 years. The stock offering agreement called for the exchange of
shares by DCI in the acquisition of CardCall. A condition in the offer was
that the number of DCI shares to be issued would be reduced on a share-for-
share basis by the difference between 545,455 and the actual number of shares
issued in the Series C preferred stock conversion described in Note 10 to the
financial statements. There was no value assigned to the common stock that
would be distributed per the offering agreement, as these shares were not
issued due to the number of common shares issued in the conversion of the
Series C preferred stock to common stock. There was no value assigned to the
common stock warrants as the exercise price of $4 was greater than the market
value of the common stock. The Company valued the options issued at $.30 per
option ($.50-.20 exercise price). The difference ($1.60) between the
exercise price of $.20 and the stock valuation price of $1.80 was reduced by
$1.30 for a 50% dilution factor, a 10% factor because the shares issued upon
exercise of the options would be restricted, and a 10% factor based upon the
time limitation as to when the shares could be exercised and tradable.
See Note 5 for an explanation of sale of a distribution contract of CardCall
UK and discontinuance of a portion of the operations.
Muller Media, Inc.
- ----------------
On November 26, 1996, DCI entered into a stock purchase agreement with Muller
Media, Inc. (Muller), a New York corporation, to acquire 100% of the
outstanding common stock of Muller in a stock-for-stock purchase, with DCI
exchanging 1,200,000 shares of common stock for all of the shares of Muller
capital stock. The DCI stock was valued at $2.50 per share ($3 million in
total) and is included in outstanding common stock.
At the closing, the shares of Muller were transferred to DCI, and DCI shares
were issued to Muller shareholders and then placed with escrow agents. This
was done to facilitate a put option, which could only be exercised by Muller
subsequent to the closing under the put option. DCI agreed to repurchase the
shares for $3,000,000 if Muller exercised the put option, which was to
commence on the earlier of 120 days from December 27, 1996, unless an
extension was requested by DCI, which Muller could not unreasonably withhold,
or 14 days after DCI had received an aggregate of $3,000,000 in net proceeds
from the sale of its capital stock. Extensions were granted by Muller
through June 3, 1998. The selling stockholders had an option to keep DCI
stock or accept up to $3,000,000 in cash from DCI.
F-13
<PAGE>
DCI repurchased 400,000 shares of such common stock in March 16, 1998 for
$1,000,000 and completed the repurchase from the exercising parties on June
9, 1998 upon payment of an additional $2,000,000. The acquisition was
accounted for as a purchase, effective June 9, 1998. The total purchase
price consisted of $3,000,000 in cash. Cost in excess of net assets acquired
was recorded at $1,634,436 and is being amortized over 20 years. The
financial statements include the results of operations since June 9, 1998,
the date of acquisition.
Muller is a distributor of syndicated programming and motion pictures to the
television and cable industry.
Privilege Enterprises Limited
- ------------------------
On November 5, 1996, DCI acquired the assets of Paul Bettencourt Associates
in exchange for 6,897 shares of DCI stock valued at approximately $10,000.
Privilege Enterprises Limited (PEL), a New Hampshire corporation, was formed
by the Company to continue the business of Bettencourt Associates. The
acquisition has been accounted for as a purchase. PEL was in the business of
value-added, card-based and other marketing programs. In March 1998, the
Company discontinued PEL, and operations for the period of ownership are
shown as discontinued operations.
The Travel Source, Ltd.
- --------------------
On March 25, 1997, the Company acquired the Travel Source, Ltd. through the
issue of 29,412 shares valued at $3.40 per share, or $100,000. Six months
from closing, if DCI shares were less than $3.40 per share, additional shares
were to be issued to bring the purchase price back to $100,000. In fiscal
1998, the Company issued an additional 13,260 shares in accordance with this
provision. The acquisition was accounted for as a purchase. Effective March
25, 1997, goodwill of $86,379 was recorded on this transaction and is being
amortized over 20 years. Travel Source is a travel agency in Rhode Island.
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 under the purchase method of accounting, effective
April 30, 1998. The total purchase price consists of 4,385,715 shares of
common stock valued at $6,644,000 and the assumption of net liabilities of
$296,976. Edge is located in Gaithersburg, Maryland, and is in the prepaid
phone card business. Goodwill of $6,940,974 has been recorded on the
transaction and is being amortized over 20 years. The financial statements
include the results of operations since April 30, 1998, the date of
acquisition.
CyberFax, Inc.
- ------------
On April 9, 1997, the Company acquired all of the outstanding shares of
CyberFax, Inc. for 400,000 shares of its common stock valued at $1,000,000.
F-14
<PAGE>
CyberFax, a Canadian corporation, is in the business of providing real-time
fax capabilities over the Internet. Goodwill of $1,034,000 was recognized in
this transaction and is being amortized over 20 years. The acquisition has
been accounted for as a purchase. The financial statements include the
results of operations of CyberFax since April 9, 1997, the date of
acquisition. CyberFax had no material operating activities prior to the
acquisition. See Note 5 for an explanation of the sale of CyberFax.
PhoneLine CardCall International
- ---------------------------
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 PhoneLine.
In the year ended March 31, 1999, the Company liquidated CardCaller Canada,
Inc., since it no longer had operations as a result of forming PhoneLine.
The Company's previously issued interim financial statements included 100% of
the assets, liabilities and operations of PhoneLine. The ownership interest
of DataWave was recorded as a minority interest in the accompanying financial
statement. Subsequent to March 31, 1999, the Company instituted insolvency
proceedings against PhoneLine.
Due to the impending insolvency proceedings, all assets and liabilities of
PhoneLine have been written off in the financial statements. Net sales and
loss from operations of PhoneLine included in the 1999 financial statements
were $3,624,094 and $371,264, respectively.
The Company realized a loss of $3,185,558, including the write-off of
remaining goodwill of approximately $3,400,000 allocated to CardCaller
Canada, Inc. when the Company acquired CardCall International Inc., upon
discontinuance of the Canadian operations (PhoneLine and CardCaller Canada,
Inc.).
The Company wrote off the minority interest due from DataWave because of its
collectibility.
The Company does not expect to incur any material liability due to the
insolvency proceedings with PhoneLine or CardCaller Canada, Inc.
DCI UK
- ------
In the fiscal year ended March 31, 1998, the Company established DCI UK,
whose name was subsequently changed to DCI Time Europe Limited, a company
engaged in the business of providing long distance telecommunications
throughout Europe via a private leased-line network.
Note 3. Pro Forma Financial Information (Unaudited)
The following table summarizes the unaudited pro forma results of operations
of the Company for the fiscal years ended March 31, 1999, and 1998, assuming
F-15
<PAGE>
the acquisitions of CardCall, CyberFax, Muller, PEL, Travel Source, Edge
Communications and PhoneLine had occurred on April 1, 1997. The unaudited pro
forma financial information presented is not necessarily indicative of the
results of operations that would have occurred had the acquisitions taken
place on April 1, 1997 or of future results of operations.
1999 1998
Net sales $35,422,964 $ 18,701,644
----------- ------------
Income (loss):
Continuing operations $(10,474,506) $( 2,951,296)
Gain (loss) on disposal of
operations $ (1,098,228) $ 4,364,480
Discontinued operations (404,010) $( 906,503)
----------- ------------
Net income (loss) before
preferred dividends $(11,976,744) $ 506,681
----------- ------------
Net income (loss) per share:
Continuing operations $ (.47) $ (.16)
Loss from disposal of
operations $ (.05) $ .21
Discontinued operations $ (.02) $ (.04)
--------- ------------
Net income (loss) $ (.54) $ (.01)
--------- ------------
Weighted average shares
outstanding 24,336,390 21,289,441
---------- ------------
NOTE 4. IXC COMMUNICATIONS, INC.
On November 25, 1998, the Company, IXC Communications, Inc. (IXC) and
Discount Communications, Inc. (Discount) entered into an agreement whereby
the Company assumed management control of Discount's operations. On
November 23, 1998, IXC terminated local and long distance carrier services to
Discount and Discount's customers, which included Edge Communications, due to
non-payment by Discount of its outstanding liabilities to IXC.
Discount owed IXC approximately $15,760,000 under a note payable and
$6,784,000 in accounts payable for prior services (purchase of time). In
consideration for providing access to Edge's customers previously shut off by
IXC on November 23, 1998, as described above, the sale of Discount's switch
to the Company (for assumption of Discount's $15,760,000 note to IXC) and the
co-location of the Company's switch at IXC's facility in New York, the
Company entered into a master service agreement that provides for fixing
rates and various leases for a five-year period, and agreed to issue
3,750,000 shares of its common stock to IXC to be valued at $4 per share,
giving IXC a 13% ownership interest in the Company. These shares also
satisfied the note payable that Discount had with IXC.
F-16
<PAGE>
On December 3, 1998, the Company and IXC entered into a stock acquisition
agreement whereby IXC agreed to accept 3,750,000 shares of the Company's
stock in settlement of the $15,760,000 note payable described above and
500,000 shares (valued at $4 per share) of the Company's stock in settlement
of $2,000,000 of the $6,784,000 in accounts payable owed by Discount to IXC.
The agreement calls for additional shares to be issued to IXC if the
4,250,000 shares held by IXC did not have a market value of $17,760,000 on
June 1, 1999. The shares of the Company did not have a market value of
$17,760,000 on June 1, 1999 since trading in the stock had been suspended.
The Company has not issued any additional shares under this agreement and
does not intend to, because certain aspects of the November 25, 1998
agreement have not taken place. The Company did not obtain the switch from
Discount because Discount did not own the switch and co-location of switches
between IXC and the Company have not yet occurred. The Company believes that
it will resolve the share issue with IXC without any material adverse effect
on the results of operations or financial position of the Company. The
accompanying financial statements do not give effect to any potential shares
that may have to be issued.
On December 3, 1998, the Company recorded as an asset its master service
agreement with IXC, valued at $15,671,875, which represented the fair market
value of the 4,250,000 shares issued on that day. The Company is amortizing
the asset over five years, the term of the master service agreement, on the
straight-line method. Accumulated amortization at March 31, 1999 was
$738,594. The asset will be adjusted in accordance with SFAS No. 121 based
upon the Company's anticipated benefit from the master service agreement.
The primary benefit derived is based upon the volume growth in the Edge
subsidiary. The Company' s position in the market is enhanced by its
relationship with IXC, a prominent worldwide telecommunications company. The
agreement establishes a $3,000,000 credit line with IXC and does not require
the Company to maintain security deposits with IXC which could be up to one
month's usage volume with other carriers.
Note 5. Discontinued Operations
In September, 1997, DCI agreed in principal with SmarTalk Teleservices, Inc.
to sell DCI's prepaid phone card distribution contract with D Services, a
wholly owned subsidiary of W.H. Smith, for $9,000,000. Under the terms of
the contract, DCI was to receive $1,000,000 in cash and $8,000,000 of
SmarTalk stock valued on the closing date. The Company believes that it
should have received 355,555 shares of SmarTalk stock based upon the price of
the stock on the closing date. DCI received $1,000,000 in cash at the
closing and 326,531 restricted shares of SmarTalk common stock. The
receivable from SmarTalk in the accompanying balance sheet represents the
value of the shares not received as of March 31, 1998. DCI requested
registration of the 326,531 shares on March 31, 1998, and disposed of its
holdings on May 15, 1998, realizing $8,124,761 of net proceeds. In fiscal
1999 the Company wrote off the $650,000 receivable from SmarTalk since
SmarTalk filed for bankruptcy in the current year. The loss of $650,000 is
included in 1999 continuing operations.
F-17
<PAGE>
A non-compete clause in the agreement precludes DCI or its subsidiaries from
engaging in the prepaid phone card products business through the distributor
in the UK for a period of seven years. As a result, operations to date for
CardCall UK are shown as discontinued operations. Operations of CardCaller
Canada are shown as continuing operations. The gain on the transaction is
$4,792,315 after the write-off of goodwill and other expenses associated with
the transaction. The operation of CardCall UK has been shut-down and is in
the process of being liquidated. The loss from discontinued operations of
this segment was $682,276. Management and its legal counsel believe that no
liability is required in the accompanying financial statements as a result of
the liquidation.
In the second quarter ended September 30, 1997, the Company discontinued the
operation of its Alpha Products Division. Alpha Products was a manufacturer
of data acquisition and control products for personal computers. It
attempted to compete as a low-cost provider using antiquated, outdated
technology in a modular setting. However, with the speed at which new
technologies are created, and the speed at which their prices are reduced,
Alpha's product line was quickly becoming obsolete, even on a cost basis.
Without sufficient outlays to upgrade and increase its engineering
capabilities coupled with a complete overhaul of its product line and
mission, it was not practical to continue the operations.
Alpha had sales in 1998, before discontinuance in September 1997, totaling
approximately $76,000, and operating losses of approximately $54,000 after
tax.
A third party assumed certain assets and liabilities of Alpha effective
September 30, 1997 for no consideration. Alpha incurred operating losses
through September 30, 1997 of $65,973 which are shown as discontinued
operations in the accompanying statement of operations. In addition, a loss
on disposition of $337,642 after tax was recorded, resulting from a pretax
loss of $492,985, reflecting the write-off of unamortized customer base.
There were no remaining assets or liabilities at March 31, 1998.
In December 1997, the Company discontinued the operations of PEL, which had
been in the value-added, card-based marketing program business. The Company
salvaged the usable office furniture and equipment and abandoned the
business. There were no other remaining assets at March 31, 1998 and
liabilities amounted to $8,371. PEL incurred operating losses of $169,807
after tax, and a loss on disposition of $90,193 after tax.
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.
Under a collateral and security agreement, Carlyle has pledged all the stock
of CyberFax that is held by an escrow agent for this note.
F-18
<PAGE>
The Company has not recognized revenue or profit for this transaction as of
March 31, 1999. Revenue and profit will be recognized on the cost recovery
method. A loss of $1,098,228 and deferred revenue of $5,000,000 were
recorded on this transaction.
CyberFax had sales of $48,145 and operating losses of $404,010 in 1999 before
discontinuance of operations.
Information related to the discontinued operations of CardCall UK, CyberFax,
PEL and Alpha for the years ended March 31, 1999 and 1998 are as follows:
1999 1998
Net sales 48,145 1,153,240
Cost of sales and
other expenses 452,155 2,038,866
---------- ---------
Loss from
discontinued operations (404,010) (885,626)
---------- ---------
The net assets and liabilities of the discontinued operations of CardCall UK,
CyberFax, PEL and Alpha included in the accompanying consolidated balance
sheets as of March 31, 1999 and 1998 are as follows:
1999 1998
Current assets - 52,561
Total assets - 290,951
Current liabilities - 46,441
Total liabilities - 73,245
Net assets of discontinued operations - 217,706
Note 6. Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired (goodwill), which is being amortized
over 20 years is as follows:
Accumulated Net Book
Acquisition Goodwill amortization Value
Muller Media $1,634,436 $( 65,825) $1,568,611
Edge Communications $6,940,976 $(312,743) $6,628,233
Travel Source 86,379 $(4,319) 82,060
--------- ---------- -----------
$8,661,791 $(382,887) $8,278,904
---------- --------- ----------
F-19
<PAGE>
Note 7. Common Stock
On January 21, 1998, the Company announced a common stock repurchase program,
whereby the Company was authorized to buy back up to $5,000,000 of its common
stock. As of March 31, 1999, the Company had bought back 380,500 shares
under this program, which were put into treasury.
On March 16, 1998, the Company paid $1,000,000 to repurchase 400,000 of its
common shares under a put option exercised by the former Muller Media
shareholders.
On June 9, 1998, DCI purchased the remaining 800,000 common shares under the
Muller put option for $2,000,000.
Also during 1998, the Company issued 225,450 shares of common stock in
settlement for $439,360 of current liabilities of CardCall UK.
In the year ended March 31, 1995, the Company established an incentive stock
option plan reserving 10,000,000 shares of common stock for certain
employees, officers and directors. The exercise price must be at least the
fair market value of the stock on the date of the grant, and the term of each
option granted will not be more than 10 years from the date of the grant.
Where options are granted to shareholders owning more than 10% of the
outstanding common stock, the exercise price must be at least 110% of the
fair market value of the stock, and the term is limited to five years. The
Company has placed an annual limit on options of $100,000 per calendar year
per employee. To the extent that the above limit is not used in any calendar
year, 50% of the excess for an individual may be carried over for up to three
years.
The Company accounts for stock options under APB Opinion No. 25, entitled
Accounting for Stock Issued to Employees, under which no compensation expense
is recognized. In the year ended March 31, 1996, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation for disclosure purposes.
For disclosure purposes, the fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes option pricing model,
with the following weighted average assumptions used for stock options
granted in 1999 and 1998: Annual dividends $0, expected volatility 72%, risk-
free interest rate of 4.58%, and expected life of five years for all grants.
F-20
<PAGE>
Under the above model, the total value of stock options granted in 1999 and
1998 was $1,277,789 and $305,531, respectively. Had the Company determined
compensation cost for this plan in accordance with SFAS No. 123, the
Company's pro forma net loss and net loss per share would have been as
follows:
1999 1998
Income (loss):
Continuing operations $(11,702,704) $(2,665,010)
Gain (loss) on disposal of
operation $(1,098,228) $4,364,480
Discontinued operations $(404,010) $(1,154,677)
----------- -----------
Net income (loss) before
preferred dividends $(13,204,942) $544,793
------------ -----------
Net income (loss) per share:
Continuing operations $(.57) $(.31)
Gain (loss) from disposal of
Operations $(.05) $ .40
Discontinued operations $(.02) $(.11)
------------ ----------
Net income (loss) $(.64) $(.02)
------------ ----------
The SFAS No. 123 method of accounting does not apply to options granted prior
to January 1, 1995 and, accordingly, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Summarized information regarding stock options outstanding and exercisable at
March 31, in 1999 and the two prior years is as follows:
Number of shares Average price
Outstanding at April 1,1997 3,871,420 $ .20
Granted 8,539,445 $ .44
Exercised (3,561,254) $ .20
--------- ------
Outstanding at March 31,1998 8,849,611 $ .47
Granted 3,780,443 $ .86
Exercised (4,387,016) $ .20
Canceled (1,474,350) $ .56
--------- ------
Outstanding at March 31, 1999 6,768,688 $ .53
---------
All options are exercisable at the end of each period presented. The options
issued to CardCall shareholders are exercisable, but only become tradable
over a schedule commencing September 1, 1997 through December 1, 1998. These
options are exercisable at $.20 per share under the terms of the acquisition
agreement. The fair market value of the stock at the day of the offering
memorandum to purchase CardCall was $2.10 per share.
F-21
<PAGE>
The following table summarizes information about fixed stock options
outstanding at March 31, 1999
_________ Options Outstanding _________Options Exercisable
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Excersiable Exercise
Prices at 3/31/99 Life Price at 3/31/99 Price
- --------- ----------- ----------- -------- ----------- ---------
$ .50 to
.60 73,000 1 year .58 73,000 .58
.19 2,230,000 2.0 .19 2,230,000 .19
.20 325,245 3.0 .20 325,245 .20
.68 3,535,443 4.5 .68 1,845,443 .68
1.00 to
1.34 605,000 4.5 1.05 605,000 1.05
----------- ------ ----------- -----
6,768,688 .53 5,078,688 .34
On April 1, 1999, 1,690,000 of the options exercisable at $.68 became
exercisable.
At March 31, 1999, 525,391 warrants to purchase common stock through 2003,
with exercise prices from $1.96 to $3.63, were outstanding. In 1999, 100,000
warrants were issued and 6,399 were exercised.
Note 8. Investments
The Company has classified its common stock securities of SmarTalk as trading
securities and accordingly has reported the securities at their net
realizable value, since the securities were sold on May 15, 1998 for
$8,124,761 at a net gain of $ 2,813.
Equity securities at cost $ 8,121,948
Net realizable value 8,124,761
---------
Gain $ 2,813
-----------
Note 9. Notes Payable
In February 1998, the Company placed 326,531 shares of restricted common
stock of SmarTalk with a financial institution. (See Note 5 for description
of SmarTalk transaction.) The Company borrowed against this stock on a short-
term basis, and such borrowings totaled $4,938,942 at March 31, 1998. On May
15, 1998, the SmarTalk stock was sold, and the debt of $4,938,942 was repaid
on June 5, 1998.
Note 10. Preferred Stock
The Company has authorized, but unissued shares, of non-voting preferred
stock that may be issued in series with such preferences as determined by the
Board of Directors. The following series of preferred stock have been issued
in the last three fiscal years.
F-22
<PAGE>
Series C
- --------
On February 18, 1997, the Company issued 1,500 shares of Series C non-voting,
non-cumulative convertible preferred stock for $1,500,000 to certain
shareholders of CardCall International, repayable on February 19, 1999. The
holders of these shares are entitled to receive dividends (based upon the
number of common shares the preferred shareholder would have, if a conversion
was effected) when a common stock dividend is declared.
The shares were convertible to common stock 60 days from the issue date at
the lesser of $2.75 per share or 75% of the average closing bid price of the
common stock for the five days prior to conversion. If the conversion took
place 90 days after the issue date, the shares were convertible to common
stock at the lesser of $2.75 or 70% of the average closing bid price of the
common stock for the five days prior to conversion. In connection with this
offering, 545,455 common shares were placed with an escrow agent to
facilitate any conversions. In addition, 140,000 warrants exercisable at
$3.625 for a period of three years from the issue date were granted to these
preferred shareholders. The preferred shares plus deemed dividends of
$445,000 were converted to 1,132,991 common shares in the year ended March
31, 1998. The deemed dividend has been included as a cost of the acquisition
of CardCall International. The 545,455 escrowed common shares were returned
to the Company in 1998.
Series D
- -------
In July 1997, 450 shares of the Series D non-voting convertible preferred
shares, $1,000 par value, were issued by the Company for $450,000. The
shares were convertible to common stock 60 days from the issue date at 75% of
the average closing bid price of the common stock for the five days prior to
conversion. If the conversion took place 90 days after the issue date, the
shares were convertible at 70% of the average closing bid price of the common
stock for five days prior to conversion. The Company recorded a deemed
dividend of $157,500 for the discount upon conversion. In connection with
this transaction, the Company issued to the preferred shareholders 42,189
warrants to purchase common shares exercisable at $2.50 through July 2000.
The preferred shares and deemed dividends were converted to 352,558 common
shares in the year ended March 31, 1998.
Series E
- -------
In the year ended March 31, 1998, the Company issued $2,000,000 of Series E
8% non-voting convertible preferred shares repayable two years from the date
of issuance. The first 22% of the shares are convertible to common stock 60
days from the issue date at 80% of the average closing bid price of the
common stock for the five days prior to conversion. If the conversion takes
place 90 days after the issue date, 45% of the shares are convertible to
common stock at 77% of the average closing bid price of the common stock for
the five days prior to conversion. After 120 days, any remaining shares can
be converted at 74% of the average closing bid price for the five days prior
to conversion. In connection with this offering, 802,000 common shares were
placed with an escrow agent to facilitate any conversions. In addition,
250,000 warrants exercisable at prices ranging from $1.82 to $2.93 through
2003 were granted to these preferred shareholders.
F-23
<PAGE>
The Company recorded a deemed dividend of $479,800 for the discount upon
conversion. Preferred shares of $1,389,950, deemed dividends of $332,866 and
$23,420 of the 8% coupon rate dividends were converted to 899,273 common
shares in the year ended March 31, 1998. The 802,000 escrowed shares were
used in the conversion.
At March 31, 1998, $610,050 of Series E shares remained outstanding and
accrued preferred dividends relating to this issue were $184,179. In 1999,
$610,050 of preferred shares, deemed dividends of $146,934 and $44,557 of the
8% coupon rate dividends were converted to common shares.
Series A
- -------
The holders of Series A preferred shares are entitled to receive dividends at
9.25% per annum at the time legally available. Such dividends are cumulative
from the date of purchase of the stock. The preferred shares are non-voting
and in the event of liquidation of the Company, the preferred shareholders
are entitled to payment of an amount equal to par value of the preferred
shares before any distribution to other shareholders.
There are no stated redemption terms associated with the Company's Series A
preferred stock. No preferred stock dividends have been declared or paid in
the years ended March 31, 1999 and 1998. Accrued preferred stock dividends
at March 31, 1998 were $177,177.
In 1999 the outstanding Series A preferred shares and dividends were
converted to 321,811 common shares.
Series F
- -------
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 10 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.
The Company recorded a deemed dividend of $750,000 for the discount upon
conversion. In 1999, $687,500 of Series F preferred shares, $171,750 of
deemed dividends and $21,400 of 8% coupon rate dividends were converted to
1,110,901 common shares.
F-24
<PAGE>
The activity of the Company's preferred stock issues is as follows:
Series Series Series Series Series
A C D E F Total
Balance --------- --------- --------- --------- --------- ---------
April 1, 1997 $305,000 $ -- $ -- $ -- $ -- $ 305,000
Issued -- (1,500,000) (450,000)(2,000,000) -- (3,950,000)
Converted to
common shares -- (1,500,000) (450,000)(1,389,950) -- (3,339,950)
Balance
March 31, 1998 305,000 -- -- 610,050 -- 915,050
Issued -- -- -- -- 3,000,000 3,000,000
Converted to
common shares (305,000) -- -- (610,050)(687,500)(1,602,550)
Balance
March 31, 1999 $ -- $ -- $ -- $ -- $2,312,500 $2,312,500
Note 11. Long-Term Debt
Long-term debt consists of the following: March 31,
1999 1998
Note payable to bank, bearing interest at 9%
payable in monthly installments of $6,900,
due in February 2001. Note is secured by
all assets of Edge. $143,955 $ --
CyberFax bank loan, bearing interest
at prime plus 1.75%, due in June 2004.
Interest only for years 1998 through
1999, principle and interest for years
2000 through 2005. -- 35,175
---------- ---------
143,955 35,175
Less current portion of long-term debt 72,592 --
--------- ----------
$71,363 $ 35,175
--------- ----------
Aggregate annual principal payments are as follows:
2000, $72,592; 2001, $71,363.
F-25
<PAGE>
Note 12. Related Party Transactions
During the years ended March 31, 1999 and 1998, the Company received advances
from and made payments for liabilities on behalf of certain officers and
shareholders. The amount due to officers and shareholders was $195,305 at
March 31, 1999 and $410,156 at March 31, 1998. The amount due from
shareholders was $87,436 and $0, at March 31, 1999 and 1998, respectively.
Note 13. Commitments and Contingencies
On May 3, 1999 the Securities and Exchange Commission (SEC) suspended trading
in the Company's stock and is performing an investigation under the authority
of Section 20(a) of the Securities Act of 1933 and Section 21(a) of the
Securities Exchange Act of 1934. The Company is fully cooperating in this
investigation.
Leases
The Company has several operating lease agreements for office space.
Aggregate annual minimum future rental payments under current leases are
$150,465 in 1999; $116,715 in 2000; $68,984 in 2001; $57,204 in 2002; $57,204
in 2003; $10,404 in 2004 and $20,808 thereafter. Rent expense was $222,524
and $171,007 in the years ended March 31, 1999 and 1998, respectively.
In February 1998, DCI Spain, the Company's Spanish subsidiary, entered into a
contract for a leased line in Spain. The cost of this line is $11,900 per
month. The contract is on a month-to-month basis and may be canceled by
either party, in writing, with 30-day notice. Prior to entering this
agreement, the Company was operating line usage on an incurred basis.
Employment Agreements
The Company has employment contracts with certain key employees that provide
for minimum annual compensation of $952,000 in 1999 and 2000; $377,000 in
2001 and $50,000 in 2002, plus annual increases based on the consumer price
index.
Litigation
Legal proceedings have been instituted against the Company by a former
employee and various other parties. In addition to this litigation, the
Company is party to legal actions arising during the normal course of
business. In the opinion of management, the ultimate outcome of the above
litigation will have no material effect on the financial position, results of
operations or cash flows of the Company.
Common and Preferred Stock
During the fiscal years ended March 31, 1999 and 1998, the Company issued
shares of its common and preferred stock. These shares were not registered
under the Securities Act of 1933, based on the exemption from registration
thereunder provided by Section 4 (2) for offerings not involving a public
offering.
F-26
<PAGE>
Concentration of Risk
One of the Company's subsidiaries, Edge, purchases primarily all line time
through IXC Communications.
Note 14. Employee Benefit Plans
During 1998, the Company established an Employee Pretax Savings Plan (401K
plan) for its employees. Under this plan the Company contributes up to 50%
of an employee's contribution to the plan. The Company incurred
approximately $5,500 of pension expense in 1998, and $14,174 in 1999 relating
to this plan.
Note 15. Fixed Assets
Fixed assets consist of:
March 31,
1999 1998
Telecommunications switches
and equipment $337,260 $ 205,925
Equipment - furniture and fixtures 340,474 264,716
Leasehold improvements 46,309 --
--------- ---------
724,043 470,641
Accumulated depreciation 124,868 57,410
--------- ---------
$599,175 $413,231
--------- ---------
Note 16. Earnings Per Share
Convertible preferred stock, stock options and stock warrants are excluded
from the computations of net loss per share because the effect of their
inclusion would be anti-dilutive.
Excluded from the computations of net loss per share, diluted at March 31,
1998 and 1999, are:
1999 1998
Convertible preferred stock 979,873 504,194
Stock options 6,768,688 8,849,611
Stock warrants 525,391 432,189
--------- ----------
Total Shares 8,273,952 7,221,632
F-27
<PAGE>
Note 17. Income Taxes
In February 1992, the FASB issued SFAS No. 109, effective for fiscal years
beginning after December 15, 1992. This statement established financial
accounting and reporting standards for the effect of deferred income taxes
using the liability approach, as compared to the concept of matching tax
expense to pre-tax income (deferred method) required under previous
accounting standards. In addition, under previous accounting standards, the
tax benefit of utilizing operating loss carry-forwards was reflected as an
extraordinary item.
Deferred tax assets and liabilities are determined utilizing the enacted tax
rates applicable to the period the temporary differences are expected to be
paid or recovered. Accordingly, the current-period tax provision can be
affected by the enactment of new tax rates. The statement requires a
valuation allowance reducing the deferred tax asset if it is more likely than
not that some portion of the asset will not be realized. DCI and its wholly
owned subsidiaries have a net operating loss carry-forward of approximately
$13,750,000 as of March 31, 1999, which expires through 2014. During 1998,
the Company utilized a net operating loss of $4,287,109, which resulted in a
tax benefit of $1,457,614. A deferred tax benefit has not been recorded with
respect to the remaining net operating loss carry-forward.
The provision for income taxes was different than would result from applying
the U.S. statutory rate to profit before taxes for the reasons set forth in
the following reconciliation.
1999 1998
Taxes computed at U.S. statutory rates $ -- $ 1,717,876
Tax benefit from discontinued operations -- (260,262)
Tax benefit of net operating loss
carryforward -- $(1,457,614)
---------- -----------
Income taxes at the Company's effective
tax rate $ 0 $ 0
---------- -----------
The difference between the statutory federal income tax rate and the
Company's effective income tax rate is as follows:
1999 1998
Statutory federal tax rate -- 34%
Tax benefit from discontinued operations -- ( 5%)
Tax benefit of net operating loss
carryforward -- ( 29%)
Income taxes at the Company's effective
tax rate -- 0%
--------- --------
F-28
<PAGE>
Note 18. Segment Information
The following table shows sales, operating earnings (loss) and other
financial information by industry segment for the years ended March 31,1999
and 1998.
1999 Travel Media Telecom Corporate Consolidated
- ---- --------- ------- --------- --------- ------------
Sales $1,406,801 $3,561,906 $29,081,297 $ -- $34,050,004
Operating
(loss)
earnings (25,027) 186,566 (7,176,825) (3,410,428) (10,425,714)
Identifiable
Assets 114,724 6,718,067 13,623,636 16,281,905 36,738,332
Depreciation 320 6,050 157,088 58,216 221,674
Capital
Expenditures 1,368 -- 41,015 133,336 175,719
1998 Travel Telecom Corporate Consolidated
- ---- --------- -------- --------- ----------
Sales $ 1,194,199 $ 3,294,602 $ -- $ 4,488,801
Operating
(loss)
earnings (28,764) (972,734) (1,407,981) (2,359,479)
Identifiable
assets 46,130 2,071,354 14,251,470 16,368,954
Depreciation 5,861 124,223 13,364 143,448
Capital
expenditures 7,491 207,706 22,142 237,339
The Company's operations are classified into three business segments as
follows:
Travel - Includes a travel agency.
Telecommunications - Includes prepaid phone cards and long distance
communications.
Media, Inc. - Distribution of syndicated programming and motion pictures to
the television and cable industry
F-29
<PAGE>
NOTE 19. WAVETECH INTERNATIONAL MERGER
On November 6, 1998, the Company entered into a merger agreement with
Wavetech International. The agreement called for the exchange of common stock
on a one-share-for-one-share basis, with Wavetech being the surviving
company.
On February 26, 1999, the Company and Wavetech entered into an agreement
whereby DCI issued 568,846 shares of common stock for 568,846 shares of
Wavetech common stock.
In May 1999, the merger agreement was canceled. On June 18, 1999, the Company
and Wavetech agreed to terminate the stock exchange agreement and return the
shares issued. No value was placed on the shares issued by DCI or the
Wavetech shares received by DCI due to the termination agreement.
F-30
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-99
<PERIOD-END> MAR-31-99
<CASH> 1631
<SECURITIES> 0
<RECEIVABLES> 10307
<ALLOWANCES> 0
<INVENTORY> 120
<CURRENT-ASSETS> 11036
<PP&E> 724
<DEPRECIATION> (125)
<TOTAL-ASSETS> 36738
<CURRENT-LIABILITIES> 13058
<BONDS> 71
2313
0
<COMMON> 3
<OTHER-SE> 20264
<TOTAL-LIABILITY-AND-EQUITY> 36738
<SALES> 34050
<TOTAL-REVENUES> 34050
<CGS> 30925
<TOTAL-COSTS> 30925
<OTHER-EXPENSES> 13550
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> (10426)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10426)
<DISCONTINUED> (1502)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11928)
<EPS-BASIC> (.58)
<EPS-DILUTED> (.58)
</TABLE>
