SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 1998
Commission File Number: 2-96976-D
DCI TELECOMMUNICATIONS, INC.
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(Exact name of Registrant as specified in its charter)
Colorado 84-1155041
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(State or other Jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
611 Access Road, Stratford, Connecticut 06615
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(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 nonaffiliates of the
Company was approximately $36,869,000 as of June 11, 1998.
19,770,793
(Number of shares of Common Stock outstanding as of June 11, 1998)
<PAGE>
PART I
ITEM 1 - BUSINESS
General
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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 June 19, 1995, DCI entered into an agreement to acquire the common stock
of R&D Scientific Corp. (R&D), a New Jersey Corporation that develops
computer software programs. The Company's previously issued financial
statements included the operations of R&D from June 19, 1995, the date of the
purchase and sale agreement. The accompanying financial statements do not
include any results from R&D, as the Company and R&D terminated the purchase
and sale agreement in the year ended March 31,1998.
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 under the put option. 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.
<PAGE>
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.
The previously issued financial statements included the results of operations
of Muller Media, Inc., as of November 26, 1996, the date of the stock
purchase agreement, under the purchase method of accounting. The accompanying
financial statements exclude the results of operations of Muller Media, Inc.
based upon comments and questions by the Securities and Exchange Commission
with respect to the timing of the acquisition of Muller. The Company will
record the purchase of Muller on June 9, 1998, the date the final payment was
made under the put option agreement.
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
<PAGE>
the number of common shares issued in the conversion of the seies C preferred
stock to common stock. As of March 31, 1998, 2,733,063 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 previously issued financial statements included the results of operation
of CardCall International, Inc., as if the acquisition had been completed as
of April 1, 1997, under the purchase method of accounting. The accompanying
financial statements include the results of operations of CardCall
International, Inc. since May 29, 1997 under the purchase method of
accounting based upon comments and questions by the Securities and Exchange
Commission with respect to the timing of the acquisition of CardCall.
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 Company incorrectly accounted for the acquisition using the
pooling of interest method. The accompanying financial statements have been
restated to account for the acquisition as a purchase. 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, a company providing long
distance telecommunications in Europe.
Discontinued Operations
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In September, 1997, DCI Telecommunications, Inc. agreed in principal with
SmartTalk 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 SmartTalk stock valued on the closing date. The
Company believes that it should have received 355,555 shares of SmartTalk
stock based upon the price of the stock on the closing date. DCI received
<PAGE>
$1,000,000 in cash at the closing and 326,531 restricted shares of Smartalk
common stock. The receivable from SmartTalk in the accompanying balance
sheet represents the value of the shares not received as of March 31, 1998.
Management believes this value will be realized based upon the terms of the
agreement with SmartTalk. 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 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 price is reduced, Alpha Products'
product line was quickly becoming obsolete, even on a cost basis. Without
sufficient outlays to upgrade and increase the engineering force coupled with
a complete overhaul of the 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 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.
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.
<PAGE>
Quasi Reorganization
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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
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On April 30, 1998, DCI entered into an agreement with Edge Communications
Inc. (Edge) to purchase all of Edge's outstanding common stock for 4,385,715
shares of DCI stock. Edge is a wholesaler of prepaid phone cards and
reported sales of approximately $14,000,000 and a $270,000 net loss for the
twelve months ended March 31, 1998. Edge is located in Gaithersburg,
Maryland. The acquisition will be accounted for as a pooling of interests.
On May 14, 1998 the Company signed a letter of intent to acquire Locus
Corporation, of Fort Lee, New Jersey. Locus is a global provider of prepaid
phone cards, international call back, long distance and Internet services.
The transaction, which is subject to financing, involves $10,000,000 in cash
and 7,500,000 shares of DCI stock. DCI will have 90 days from the signing of
a definitive agreement to obtain the necessary financing. Locus recorded
sales of over $22,000,000 for the most recent ten months.
The Company also has a letter of intent to acquire Global Telecom, a Fort
Lauderdale, Florida company providing prepaid phone cards and one-plus
service, for $5 million worth of DCI stock.
Acquisition discussions with WorldPass Communications were terminated on
April 7, 1998.
As part of the Muller Media transaction, the former Muller shareholders had
"put options" enabling them to require DCI to transform the closing
consideration of 1,200,000 shares of DCI stock to $3,000,000 cash upon
exercise of the put option. The Company repurchased 400,000 shares in March
for $1,000,000 and completed the repurchase of the additional 800,000 shares
on June 9, 1998 for an additional $2,000,000. This transaction will be
accounted for as a purchase on June 9, 1998.
In April, 1998 the Company issued $3,000,000 of Series F 8% non-voting
convertible preferred shares. The shares are convertible to common stock 90
days from the issue date at the lesser of 75% of the average closing bid
price of the common stock for the ten days prior to conversion or $4. The
securities must be converted into common shares within two years of the issue
<PAGE>
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
Business Activity
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DCI Telecommunications, Inc. (the "Company") is engaged through its operating
subsidiaries in long distance telecommunications, prepaid phone cards,
media distribution, travel agency, and Internet related products and
services.
The Company through DCI UK Limited, a London based company, 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 line on a month to month
payment basis. The Company currently owns switches in the UK, Denmark, Spain
and Canada.
CardCall International Holdings, Inc. (and its subsidiary CardCaller Canada),
also acquired by the Company, develops and markets standard prepaid phone
cards as well as voice-activated prepaid phone cards through an extensive and
growing distribution network for its products and services throughout Canada.
A prepaid phone card permits the holder of the card to place long distance
and international calls from any touch-tone phone, eliminating the need for
coins and collect calls. The card user, who has prepaid for telephone
minutes, simply dials an 800 number which connects the user to one of the
Company's switching facilities. The caller is then prompted for his or her
personal identification number (PIN) and destination phone number. The call
is then routed through the Company's switch to the ultimate destination via a
long distance carrier. The phone cards are sold through national distributors
in Canada with 3,000 distribution points.
On March 31, 1998 the Company entered a joint venture agreement with DataWave
Systems Inc., which will combine the assets and operations of the Company's
CardCall Canada subsidiary and DataWave's Phoneline International subsidiary
into a new entity, Phoneline CardCall International. Phoneline CardCall
International has 100,000 shares outstanding which is 60% owned by DCI, and
40% owned by Datawave. Datawave has an option over the next two years to
purchase 9000 shares for $195,000 from DCI. DCI and DataWave each have the
<PAGE>
right of first refusal upon the others notification that it wants to sell,
assign or transfer all its shares at a stated price. Each company appoints
three members to the Board of Directors.
The joint venture was formed to gain a larger share of the prepaid phonecard
market in Canada and to become more profitable due to the consolidation of
resources and combined volumes which should reduce carrier costs. As per
minute costs drop, Phoneline cards would be more attractive to Canadian
consumers and tourists, leading to an increase in sales volume and
profitability. Phoneline uses Verifone "swipe technology" which enables
cards to be loaded and activated at the point of sale.
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, acquired subsequent to year ending March 31, 1998, 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.
The Company's corporate strategy takes into consideration opportunities the
Internet may provide in the telecommunications area. In this regard, the
Company acquired Cyberfax, Inc. which gives the Company a methodology which
integrates a communication tool used world-wide with the Internet.
Cyberfax software and hardware allows fax to fax transmission over the
Internet in real-time (not store and forward) with delays which are
virtually nil and with standard confirmation protocols. These products will
be marketed by various Internet Service Providers (ISP's) and telephone
companies throughout the world.
The Company's growth plan is based on internal product development supported
by strategic acquisitions and joint ventures in the telecommunications
area which will immediately and significantly enhance its product offerings,
distribution channels, market penetration and earnings.
Employees
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The Company has 39 employees.
<PAGE>
Competition
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The Company has numerous competitors, many with substantially more resources
than the Company. Management believes that no single competitorexcept 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 British
Telecom, Frontier, Inter-Route and Telefonica de Espana. Intelligent, PC-
based switches automatically utilize least cost routing, based on tariffs to
various destinations.
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, Canada 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.
<PAGE>
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.
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.
INTERNET FAX SOFTWARE
Product Efficiency - The Company utilizes proprietary software upon which the
proposed new ITU worldwide fax standard will be based. This software,
combined with the custom hardware configured specifically for fax over the
Internet, positions the Company uniquely to provide real-time fax services
over a worldwide network which is currently being developed.
Product Reliability - The network is designed to utilize both Internet
service providers (ISPs) and major telecommunication companies around the
globe. Alternative routing is automatically provided for in the event of any
major problem.
<PAGE>
Service to Customers - A dedicated engineering and customer service staff is
on hand and on line constantly to answer questions and to handle any problems
which may arise.
Major Customers
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None.
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, Denmark and Spanish facilities and 2,400 square feet in Canada. 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.
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.
<PAGE>
1998 HIGH LOW
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First quarter ended
June 30, 1997 $3.88 $ 1.31
Second quarter ended
September 30, 1997 $3.25 $ 1.50
Third quarter ended
December 31, 1997 $4.56 $ 1.72
Fourth quarter ended
March 31, 1998 $2.50 $ 1.56
1997 HIGH LOW
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First quarter ended
June 30, 1996 $ 1.38 $ .13
Second quarter ended
September 30, 1996 $ 3.56 $ .81
Third quarter ended
December 31, 1996 $ 2.31 $1.00
Fourth quarter ended
March 31, 1997 $ 5.40 $1.56
As of June 11, 1998 there were approximately 2,300 recorded holders of the
Company's stock.
The Company has paid modest cash dividends on its Common Stock in the last
two quarters. 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
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The following table sets forth selected consolidated financial data of the
Company for the years ended March 31, 1994 through 1998.
STATEMENT OF OPERATIONS DATA (a)
Years Ended March 31,
Restated Restated Restated
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Continuing Operations
Net sales and
other revenue $4,488,801 $ -- $ -- $ -- $ --
Gross profit 404,203 -- -- -- --
(Loss) from
continuing
operations (2,607,593) (389,024) (799,468) (1,063,213)(103,699)
(Loss) from
discontinued
operations (906,563) (153,592) 53,144 (32,272) --
Gain on disposal
of discontinued
operations 4,364,480 -- -- -- --
Net Income (loss) 850,324 (542,616) (746,324) (1,095,485)(103,699)
Per share
Continuing operations (.31) (.09) (.43) (1.89) (1.30)
Discontinued operations (.08) (.03) .03 (.06) --
Disposal of
discontinued
operations .40 -- -- -- --
<PAGE>
BALANCE SHEET DATA
Working capital $2,832,587 $ 499,127 ($128,670) ($247,357) (399,369)
Total assets 16,368,954 2,835,592 666,785 1,564,196 1,670
Long-term debt 35,175 14,016 -- -- --
Redeemable
preferred stock 610,050 1,500,000 -- -- --
Stockholders'
equity 8,776,152 1,098,920 229,050 1,042,060 (397,769)
Cash dividends
per shares .01 - -- -- --
(a) Includes the results of purchased businesses from acquisition dates.
(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.
References herein to the years 1998, 1997 and 1996 refer to the Company's
fiscal years ended March 31.
The years 1998, 1997 and 1996 have been restated to remove any effect of R&D
Scientific and Muller Media; to change the acquisition date of CardCall
International from April 1, 1997 to June 1, 1997, and to account for the
Travel Source acquisition using the purchase method of accounting.
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.
Subsequent Events
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On April 30, 1998, DCI entered into an agreement with Edge Communications
Inc. (Edge) to purchase all of Edge's outstanding common stock for 4,385,715
shares of DCI stock. Edge is a wholesaler of prepaid phone cards and
reported sales of approximately $14,000,000 and a $270,000 net loss for the
twelve months ended March 31, 1998. Edge is located in Gaithersburg,
Maryland. The acquisition will be accounted for as a pooling of interests.
<PAGE>
On May 14, 1998 the Company signed a letter of intent to acquire Locus
Corporation, of Fort Lee, New Jersey. Locus is a global provider of prepaid
phone cards, international call back, long distance and Internet services.
The transaction, which is subject to financing, involves $10,000,000 in cash
and 7,500,000 shares of DCI stock. DCI will have 90 days from the signing of
a definitive agreement to obtain the necessary financing. Locus recorded
sales of over $22,000,000 for the most recent ten months.
The Company also has a letter of intent to acquire Global Telecom, a Fort
Lauderdale, Florida company providing prepaid phone cards and one-plus
service, for $5 million worth of DCI stock.
Acquisition discussions with WorldPass Communications were terminated on
April 7, 1998.
As part of the Muller Media transaction, the former Muller shareholders had
"put options" enabling them to require DCI to transform the closing
consideration of 1,200,000 shares of DCI stock to $3,000,000 cash upon
exercise of the put option. The Company repurchased 400,000 shares in March
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 April, 1998 the Company issued $3,000,000 of Series F 8% non-voting
convertible preferred shares. The shares are convertible to common stock 90
days from the issue date at the lesser of 75% of the average closing bid
price of the common stock for the ten days prior to conversion or $4. The
securities must be converted into common shares within two years of the issue
date. In connection with this offering 50,000 warrants exercisable at $1.56
for a period of five years from the issue date were granted to these
preferred shareholders and 50,000 warrants, at the same terms, were granted
to certain individuals as finder fees for the placement of the preferred
shares with investors.
The acquisition of Edge and the proposed acquisitions of Locus and Global
Telecom would immediately make the Company a major player in the prepaid
phone market both domestically and internationally. Each of these
acquisitions will also provide the Company its first presence in the U.S.
telecom industry. Not only will the acquisitions provide a very large
increase in sales, but it is expected there could be cost savings and
economies of scale such as consolidation of carriers for cheaper rates.
While the Edge acquisition and the proposed Global Telecom transaction both
involve exchanges of common stock, the proposed Locus deal would mean the
Company must raise $10 million in cash as well as common stock exchange.
Other
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The Company did not have any inventory at March 31, 1998 due to the fact that
the CardCaller Canada inventory was sold to the new joint venture with
<PAGE>
DataWave Systems which is reflected as other investments, and the Alpha
inventory was assumed by a third party upon discontinuance of the operation.
Foreign Exchange
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Through the fiscal year ended March 31, 1998, the Company operated in 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
- -------------------------------
At March 31, 1998, the Company had unrestricted cash of $704,991, and most
importantly $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 operation of CardCall UK was shutdown 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.
<PAGE>
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, named PhoneLine CardCall International has 100,000
shares outstanding which is 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 9000 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 was 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 others
notification that it wants to sell, assign or transfer all its shares at a
stated price.
In addition, during the 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 182,500 shares for
$374,048, which were put into treasury.
As part of the Muller Media transaction, the Muller shareholders had a "put
option", which 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.
During the year ended March 31, 1997, the Company used approximately $650,000
to fund its operations (including subsequently discontinued operations) and
made an initial investment in CardCall International of $1,500,000. These
were funded by over $1,000,000 from the sale of common stock and proceeds
from the sale of convertible preferred stock of $1,500,000. The $1,500,000 of
preferred stock was converted to common stock in fiscal 1998.
In the year ended March 31, 1998, the Company discontinued operations of its
Alpha Products Division, PEL and CardCall UK. Since these businesses were
cash users it is expected that this will have a positive effect on liquidity.
Subsequent to March 31, 1998, the Company has acquired Edge Communications,
Inc., has letters of intent to acquire two other telecommunications
<PAGE>
companies, and has established a joint venture of its CardCaller Canada
subsidiary and DataWave Systems, Inc., which joint venture the Company
controls. Management believes the Company will need additional resources to
complete the acquisitions, and to fund the future capital needs of these
companies and its existing subsidiaries. While the Edge acquisition and the
proposed Global Telecom transaction both involve exchanges of common stock,
the proposed Locus deal would mean the Company must raise $10 million in cash
as a well as common stock exchange.
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
- ---------------------
The airline industry has reduced the percentage of travel agency commission
per airline ticket domestically from 10 percent to 8 percent, with maximum
commission cap of $50.00 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.
The company has also instituted a service/processing fee on airline tickets
of $10.00 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, CardCall 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.
The new joint venture of CardCaller Canada and PhoneLine International
created a company which currently controls approximately 40% of the prepaid
calling market in Canada. The new entity PhoneLine CardCall International,
Inc. (PCI) is expected to be profitable, largely due to the consolidation of
resources and combined volumes which have reduced carrier costs.
International costs will be further reduced in November/December of this year
when upgrades to the present switch located in Toronto are complete and a new
"international gateway" switch is installed in the U.S. At that time, PCI
will be able to utilize "least-cost routing" on international calls
originating in Canada. As per minute costs are reduced, PCI prepaid
telephone cards become an even more attractive option to Canadian consumers,
which should lead to an increase in sales volume and profitability.
<PAGE>
In September, 1997, DCI Telecommunications, Inc. agreed in principal with
SmartTalk 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 SmartTalk stock valued on the closing date. The
Company believes that it should have received 355,555 shares of SmartTalk
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 SmartTalk in the accompanying balance
sheet represents the value of the shares not received as of March 31, 1998.
Management believes this value will be realized based upon the terms of its
agreement with SmartTalk. 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 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 price is reduced, Alpha Products'
product line was quickly becoming obsolete, even on a cost basis. Without
sufficient outlays to upgrade and increase the engineering force coupled with
a complete overhaul of the 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 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.
In December 1997, the Company discontinued the operations of PEL, which had
been in the value-added card-based marketing program business. The Company
<PAGE>
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:
1998 1997 1996
---- ---- ----
Sales $4,488,801 $ -- $ --
With regard to recurring operations, 1998 sales of CardCall Canada amounted
to $3,139,839 for the ten months of ownership. Travel Source sales were
$1,194,199, and the start up operations in Europe had sales of approximately
$160,000. There were no sales from recurring operations in 1997 or 1996.
1998 1997 1996
---- ---- ----
Cost of Sales $4,084,598 $ -- $ --
Cost of sales for CardCall 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 in 1997 or 1996.
1998 1997 1996
---- ---- ----
Selling, General and Administrative $1,156,278 $ 23,086 $200,040
Selling, General and Administrative expenses increased $1,156,278 over 1997
levels. CardCall Canada, acquired May 29,1997, accounted for $288,580 of the
increase while Travel Source, acquired March 25, 1997, registered $98,752 of
costs in 1998. Selling, General and Administrative expenses of the new
companies, DCI UK and CyberFax, totaled $586,298 and $14,329 respectively,
while administrative expenses of the new Denmark and Spain operations totaled
$71,442.
Selling, General and Administrative expenses declined $176,954 in 1997
compared to 1996. The resolution of liabilities for less than stated value
accounted for $146,819 of the decline. In addition, lower directors fees and
various other reductions account for the balance of the decline.
1998 1997 1996
---- ---- ----
Salaries $868,957 $274,584 $173,472
Salaries increased $594,373 in 1997 compared to 1996. The CardCall 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.
<PAGE>
Salaries increased $101,000 in 1997 over 1996. Increased corporate salaries
and staff accounted for the difference.
1998 1997 1996
-------- ------- -------
Professional Fees $533,249 $76,623 $96,716
Professional fees increased $456,626 in 1998. Legal, accounting and other
professional fees associated with the newly acquired or formed companies
(Cardcaller Canada, DCI UK, and CyberFax) account for $154,000 of the
increase. Higher legal, accounting, public relations, stockwatch and other
fees at the corporate level generated the balance of the increase.
Professional fees declined $20,093 in 1997. Limited legal activity and the
expanded use of internal resources resulted in the decline.
1998 1997 1996
---- ---- ----
Amortization and Depreciation $404,006 $18,720 $7,321
Amortization and depreciation increased approximately $385,286 in 1998.
Amortization by Cardcall Canada of licenses and goodwill totaled $307,000.
In addition, increased amortization of goodwill associated with CardCaller
Canada, CyberFax and Travel Source amounted to $54,000. Depreciation expense
associated with the new companies accounted for the remainder of the
increase.
Amortization and depreciation increased $11,399 in 1997 compared to 1996 due
to increased property additions.
1998 1997 1996
---- ---- ----
Other Income and Expense
Interest Expense $(66,344) $(883) $(9,711)
Investment Income $17,038 $4,872 $120
Interest expense increased $65,461 in 1998. Approximately one-half of the
increase is 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.
Interest expense declined $8,828 in 1997 from 1996, principally due to an
overall decline in corporate debt.
<PAGE>
1998 1997 1996
---- ---- ----
Discontinued Operations
- Computer board ($54,480) ($81,897)
- PEL ($169,807) ($71,695)
- CardCall UK ($682,276)
1998 1997 1996
---- ---- ----
Loss on Disposal
- Computer board ($337,642)
- PEL ($90,193)
As described in Note 5 to the Financial Statements, the Company discontinued
the operations of CardCall UK, PEL, and the Alpha Products division in the
year ended March 31, 1998. The losses in 1998 reflect operating losses net
of tax benefit up to the date of discontinuance. 1997 amounts are operating
losses in the fiscal year that have been restated as losses from discontinued
operations.
The loss on disposal represents the write off of remaining assets and
liabilities. Included in computer board is the write off net customer base,
which totaled $492,985, before tax implications.
1998 1997 1996
---- ---- ----
Gain on sale of prepaid phone
card contract - UK $4,792,315
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.
1998 1997 1996
---- ---- ----
Preferred dividends $734,166 $36,741 $27,921
Preferred dividends increased $697,425 in 1998. The increase is primarily
related to the presumed incremental yield the investor may derive from the
discounted conversion rate of preferred stock issued by the Company during
this 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 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
<PAGE>
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.
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. SFAS
No. 130 is required to be adopted for the Company's fiscal year ending March
31, 1999. The adoption of this pronouncement is expected to have 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. SFAS No. 131 is required to be
adopted for the Company's 1999 year-end financial statements. The Company is
evaluating the impact, if any, of the adoption of this pronouncement on the
Company's existing disclosures.
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.
The Company intends to conduct an analysis in 1998 to determine the extent to
which its major suppliers' systems (insofar as they relate to the Company's
business) are subject to the Year 2000 issue. The Company is currently
unable to predict the extent to which the Year 2000 issue will affect the
Company and its suppliers, or the extent to which it would be vulnerable to
its suppliers' failure to remediate any Year 2000 issues on a timely basis.
<PAGE>
The failure of a major supplier subject to the Year 2000 issue to convert its
systems on a timely basis or a conversion that is incompatible with the
Company's systems could have a material adverse effect on the Company.
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 59 1995
Chairman of the Board, President and CEO for the Company. Within the past
five years, he was president and CEO of Alpha Products. Prior to that he
was executive vice president, member of the Board of Directors, and chief
financial officer for Aquarion, a New York Stock Exchange Company.
Larry Shatsoff 44 1995
Director, Vice president and Chief Operations Officer for the Company.
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, a New York Stock Exchange
Company.
John J. Adams 59 1995
Director, Chief Marketing Officer for the Company. During the last five years
Mr. Adams has been Vice President for R&D Scientific Corp. and founder and
President of Validation Services Corp. Mr. Adams was previously President of
Prevent Chemicals, Ltd., a publicly traded manufacturer of specialty
chemicals.
Carter Hills 67 1995
Director, retired diplomat. Extensive experience in economic development and
management planning under auspices of Department of State and major
international organizations. Directs such programs in countries of Near East
and Vietnam. Served as financial advisor and delegate for U.S. at key
international conferences.
Lois S. Morris 47 1997
Director, Chief Executive Officer of The Travel Source Limited, a position
she has held for the last five years. Ms. Morris is on the Board of
Directors of the Ocean State Business School, and a member of the Town of
Richmond, Rhode Island Economic Development Commission.
<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 ($) ($) ($) ($) SARs(#) ($) ($)
- -------------- ------ ----- ------------ ------ -------- ----- ----------
Joseph
J. Murphy 1995 100,000
CEO 1996 100,000 5,872
1997 100,000 600,000
1998 100,000 172,727
Options/SAR Grants in Last Fiscal Year
% of Total
Options/SARs
Options/SARs Granted to Employees Exercise or Base
Name Granted (#) in Fiscal Year Price ($/Sh) Expiration Date
- -------- ------------ -------------------- ---------------- --------------
Joseph
J. Murphy 172,727 16.7 $1.59 9/08/2002
CEO
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 -- -- 772,727 $1,156,091
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 employment agreement with Joseph J. Murphy commences 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.
<PAGE>
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;
(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.
<PAGE>
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 6,768,545(b) 34.2%
Larry Shatsoff 526,545 2.7%
John J. Adams 253,840 1.3%
Carter H. Hills 187,167 .9%
Lois Morris 21,336 .1%
(ii) Donald Gross (b)(c)
Steven Gross (b)(c)
Whyteburg Limited (c) 1,249,831 6.3%
(iii) All executive officers and
directors as a group 8,436,523 42.6%
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,
1,041,817 shares; L. Shatsoff, 454,545 shares; J. Adams, 224,090 shares; C.
Hills, 152,272 shares
(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 8.8%
Stephen Gross 1,750,533 8.8%
Robert Cefail 263,143
DCP Holding, LLC 150,000
Lori Gross 62,500
Tibor Vas 20,000
<PAGE>
(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
Whyteburg Limited
PO Box 2149
Pasea Estate
Road Town, Tortola BVI
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, 1998 and 1997, 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:
3/31/97 3/31/98
Cash Advances to
the Company $300,000 $552,300
Liabilities Paid on Behalf of Mr. Murphy:
Personal Indebtedness 207,131 81,798
Credit Card Payments 9,267 50,425
Legal Fees 21,328 1,020
Cash Withdrawals 45,500
Payments For Stock Options 71,250
In addition, payments for personal indebtedness totaling $21,882 were made
since March 31, 1998.
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.
Whyteburg became a principal shareholder after exercising options it received
as part of the acquisition of CardCall International. Whyteburg was the
largest shareholder of CardCall.
<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.,
Privilege Enterprises Ltd.
(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: None
Subsequent to March 31, 1998:
May 14, 1998 - Acquisition of Edge Communications
May 19, 1998 - Terminate Discussions with World Pass Communications
Corporation
- Dividend Declaration
- Letter of Intent with Locus Corporation
June 15, 1998 - Exercise of put options - Muller Media
<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: February 3, 1999 By:
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: February 3, 1999
Joseph J. Murphy
President and Chief
Executive Officer, Director
Date: February 3, 1999
Russell B. Hintz
Chief Financial and
Accounting Officer
Date: February 3,1999
Larry Shatsoff, Director
Date: February 3, 1999 /s/John J. Adams, Director
Date: February 3, 1999 /s/Carter Hills, Director
<PAGE.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
DCI Telecommunications, Inc.
Report of Independent Auditor(s) F-1
Balance Sheets - March 31, 1998 and 1997 F-2
Statements of Operations F-3
Years Ended March 31, 1998 and 1997
Statements of Changes in Stockholders' Equity F-4
Years Ended March 31, 1998 and 1997
Statements of Cash Flows F-5
Years Ended March 31, 1998 and 1997
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, 1998 and 1997 and
the related consolidated statement of operations, shareholders' equity, and
cash flows for each of the two years in the period ended March 31, 1998.
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, 1998 and 1997 and
the results of their operations, and their cash flows for each of the two
years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles.
We previously audited and reported on the consolidated balance sheets of DCI
Telecommunications, Inc. and subsidiaries as of March 31, 1998, and 1997 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended March 31, 1998. As
described in Note 1, to the financial statements, the Company has: (1)
adjusted the financial statements to exclude the results of operations for
Muller Media, Inc., for the years ended March 31, 1998 and 1997, previously
recorded by the Company since November 26, 1996; (2)adjusted the financial
statements to exclude the results of operations of CardCall International,
Inc., from April 1, 1997 through May 29, 1997, an acquisition previously
recorded by the Company as of April 1, 1997 and (3) corrected the accounting
method for the acquisition of Travel Source, Inc. In the year ended March 31,
1997, the Company acquired Travel Source, Inc., and incorrectly accounted for
the acquisition using the pooling of interest method of accounting. The
Company has corrected the method of accounting for this acquisition, using
the purchase method of accounting. The combined aggregate effect on the
statement of operations is to reduce net income by $35,569 for the year ended
March 31, 1998 and increase net loss by $396,070 for the year ended March 31,
1997.
As discussed in Notes 1 and 2 to the financial statements, the Company's 1997
and 1996 financial statements included the results of operations of R&D
Scientific Corporation as if the stock purchase agreement between the Company
and R&D Scientific was completed. The stock purchase agreement was terminated
in the year ended March 31, 1998. The financial statements have been restated
to reflect this correction.
Schnitzer & Kondub, P.C.
Harrison, New York
June 25, 1998
(except for Notes 1 & 2 for which the date is October 14, 1998)
F-1
<PAGE>
DCI TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
March 31,
ASSETS 1998 1997
---- ----
Current Assets:
Cash $ 704,991 $ 350,468
Restricted cash 60,246 10,000
Investments 8,124,761 -
Accounts receivable 150,227 86,821
Receivable from SmarTalk 650,000 -
Due from shareholders - 4,160
Due from affiliate - 85,000
Prepaid expenses 89,939 16,673
Inventory - 27,685
---------- ----------
Total Current Assets 9,780,164 580,807
Fixed Assets 470,641 137,849
Less: accumulated depreciation 57,410 35,468
---------- ----------
Net Fixed Assets 413,231 102,381
Investment in CardCall
International Holdings, Inc. - 1,500,000
Investment in Muller Media 1,000,000 -
Accounts receivable - -
Deferred costs 154,533 46,842
Deposits 40,210 9,904
Other investments 296,336-
Other Assets
- customer base - 653,752
- costs in excess of
Net assets acquired:
Travel Source 86,329 86,329
CardCall International 3,818,476 -
CyberFax 1,033,975 -
----------- -----------
4,938,780 740,081
Less: Accumulated amortization 254,300 144,423
----------- ------------
Net other assets 4,684,480 595,658
----------- ------------
Total Assets $16,368,954 $ 2,835,592
====== ======
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY March 31,
1998 1997
Current Liabilities: ---- ----
Notes payable $4,938,942 $6,479
Accounts payable and accrued expenses 1,132,123 75,201
Preferred stock dividend 361,356 -
Due to shareholders 410,156 -
Deferred Revenue 105,000 -
--------- ----------
Total Current Liabilities 6,947,577 81,680
Long-term debt 35,175 14,016
Preferred stock dividend - 140,976
-------- ----------
Total Liabilities 6,982,752 236,672
---------- ----------
Commitments and contingencies (Note 13)
Redeemable, convertible preferred stock,
$10,000 and $1,000 par and redemption
value, 2,000,000 shares authorized,
61 and 1,500 shares issued & outstanding 610,050 1,500,000
Shareholders' Equity:
9.25% cumulative convertible preferred
stock, $100 par value, 5,000,000 shares
authorized, 3,972 shares issued and
outstanding 305,000 305,000
Common stock, $.0001 par value,
500,000,000 shares authorized,
14,092,625 and 7,931,118 shares
issued and outstanding 1,409 793
Paid-in capital 8,927,173 1,351,833
Treasury stock
(582,500 shares at cost) (749,061) (13)
Retained earnings subsequent to 12/31/95,
date of quasi-reorganization (total
deficit eliminated $4,578,587) 291,631 (558,693)
------------ --------
Total Shareholders' Equity 8,776,152 1,098,920
------------ ----------
Total Liabilities and
Shareholders' Equity $16,368,954 $ 2,835,592
=========== ===========
See accompanying notes to consolidated financial statements
F-2
<PAGE>
DCI TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
1998 1997
---- ----
Sales - travel $1,194,199 $ -
Sales - products 3,294,602 -
---------- ----------
Net sales 4,488,801 -
Cost of sales - travel 1,094,062 -
Cost of sales - products 2,990,536 -
---------- ----------
Cost of sales 4,084,598 -
Gross profit 404,203 -
Selling, general &
administrative expenses 1,156,278 23,086
Salaries and compensation 868,957 274,584
Professional and consulting fees 533,249 76,623
Amortization and depreciation 404,006 18,720
--------- --------
2,962,490 393,013
Loss from operations (2,558,287) (393,013)
Other income and (expense):
Investment income 17,038 4,872
Interest expense (66,344) ( 883)
---------- --------
(49,306) 3,989
----------- --------
Loss from continuing operations before
income tax expense (2,607,593) (389,024)
Income tax expense - -
----------- --------
Loss from continuing operations (2,607,593) (389,024)
Discontinued operations:
Loss from operations, net of tax:
Computer board -Alpha division (54,480) (81,897)
(net of applicatable income tax
benefit of $11,493 in 1998 and
$0 in 1997)
Privilege card operations - PEL (169,807) (71,695)
(net of applicatable income tax
benefit of $44,630 in 1998 and
$0 in 1997)
Prepaid phone card segment - UK (682,276) -
(net of applicable income tax
benefit $0 in 1998 and 1997)
F-3
<PAGE>
Disposition of discontinued operations - net of tax:
Computer board -Alpha division (337,642) -
(net of applicable income tax
benefit of $173,936 in 1998
and $0 in 1997)
Privilege card operations ( 90,193) -
(net of applicable income tax
benefit of $30,204 in 1998
and $0 in 1997)
Prepaid phone card contract -
UK segment 4,792,315 -
(net of applicable income tax
provision $1,717,876 and net
of applicable income tax benefit
of $1,457,614 in 1998 and
$0 in 1997) --------- ---------
Net income (loss) before
dividends on preferred stock 850,324 (542,616)
Dividends on preferred stock
Dividends (96,866) (36,741)
Deemed dividends (637,300)
----------- ---------
Total dividends on preferred stock (734,166) 36,741
Income (loss) applicable to
common shareholders $ 116,158 $ (579,357)
========== ===========
Basic and diluted income (loss)
common share
Continuing operations $ (.31) $ (.09)
Discontinued operations:
Gain from disposal of operations .40
Loss from operations (.08) (.03)
-------- ------
Total $ .01 $ (.12)
======= =======
Weighted average common
shares outstanding 10,874,513 4,850,477
========= =========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DCI TELECOMMUNICATIONS, INC.
CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998 AND 1997
Additional
-Preferred Stock- -Common Stock- Paid In
Shares Amount Shares Amount Capital
--------- --------- --------- ------ -----------
Balances,
April 1, 1996 3,972 $ 305,000 2,057,264 $ 206 $ (65,505)
Shares issued for
options exercised - - 678,700 68 140,736
Shares issued for
Services - - 50,200 5 11,115
Shares issued for
stock of Muller
Media - - 1,200,000 120 (120)
Shares issued for
stock of
Bettencourt &
Associates - - 6,897 1 10,344
Shares sold - - 3,195,181 319 1,026,454
Shares issued for
Liabilities - - 168,011 17 165,607
Shares issued for
investment in
CardCall - - 545,453 54 (54)
Shares issued for
Travel Source - - 29,412 3 99,997
Net (Loss) - - - - -
Preferred stock
dividend - - - - (36,741)
----- ------ --------- ------ ------
Balances
March 31, 1997 3,972 305,000 7,931,118 793 1,351,833
F-4
<PAGE>
Additional
-Preferred Stock- -Common Stock- Paid In
Shares Amount Shares Amount Capital
--------- --------- --------- ------ -----------
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>
Unrealized
Capital
Treasury Accumulated (Losses)
Stock Deficit Gains Total
--------- --------- --------- ------
Balances,
April 1, 1996 $ (13) $( 16,077) $ - $ 223,611
Shares issued for
options exercised - - - 140,804
Shares issued for
services - - - 11,120
Shares issued for
stock of
Bettencourt &
Associates - - - 10,345
Shares sold - - - 1,026,773
Shares issued for
liabilities - - - 165,624
Shares issued for
investment in
CardCall - - - -
Shares issued for
Travel Source - - - 100,000
Net (Loss) - (542,616) - (542,616)
Preferred stock
dividend - - - (36,741)
----- ------ --------- ------
Balances
March 31, 1997 (13) (558,693) - 1,098,920
F-4
<PAGE>
Unrealized
Capital
Treasury Accumulated (Losses)
Stock Deficit Gains Total
--------- --------- --------- ------
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 - - - -
Shares issued for
stock 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
<PAGE>
DCI TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
1998 1997
---- ----
Cash flows from (used in) operating activities:
Net loss from continuing operations $ (2,607,593) $(389,024)
Adjustment to reconcile net loss from
continuing operations to net cash from
(used in) operating activities:
Depreciation and amortization 404,006 18,720
Stock issued for services 30,800 11,120
Loss on property disposition 31,729 -
Changes in assets and liabilities:
(Increase) Decrease in:
Restricted cash (50,246) -
Accounts receivable 472,461 (38,195)
Inventory 127,951 (516)
Deposits (30,306) (7,654)
Prepaid expenses ( 41,615) (16,673)
Deferred costs (102,781) (46,842)
Increase (Decrease):
Accounts payable & accrued expenses (199,949) (281,824)
Deferred revenue 82,920 --
--------- ----------
Total Adjustments: 672,470 (361,864)
--------- ----------
Net cash used in operating activities (1,882,623) (750,888)
Cash flows from (used in) investing activities:
Additions to fixed assets (332,792) (40,082)
Cash acquired with acquisitions 64,756 12,076
Investment in CardCall
International (110,000) (1,500,000)
Investment in Muller Media (1,000,000) --
Purchase of investment securities (775,000) -
Increase in other investments (296,336) -
----------- ----------
Net cash used in investing activities (2,449,372) (1,528,006)
F-5
<PAGE>
Cash flows from (used in) financing activities:
Proceeds from stock
options exercised 356,956 140,804
Proceeds from sale of common stock - 1,026,773
Purchase of treasury stock (749,048) -
Bank overdraft - (51,868)
Payment of notes payable (180,791) (2,843)
Proceeds from sale of preferred
stock 2,250,000 1,500,000
Due from affiliate 85,000 (85,000)
Common stock dividend (143,715) -
Note payable - shareholder - 23,962
Advances from shareholders 485,566 129,543
Proceeds from issuance
of notes payable 4,938,942 -
--------- ---------
Net cash from financing activities 7,042,910 2,681,371
Net cash used in discontinued operations (2,356,392) (52,009)
----------- --------
Net increase in cash 354,523 350,468
Cash, beginning of year 350,468 -
---------- ----------
Cash, end of year $ 704,991 $ 350,468
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $67,000 $ 1,000
Non-cash investing and financing transactions:
Acquisitions by stock and option issuance:
CardCall International $ 6,956,452 -
Cyberfax $ 1,033,975 -
Travel Source - $ 100,000
Bettencourt and Associates - $10,345
Stock issued for liabilities $ 556,260 $165,624
Fixed assets acquired by debt - $ 22,195
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DCI Telecommunications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 31, 1998 and 1997
Note 1. Organization and Significant Accounting Policies
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 June 19, 1995, DCI entered into an agreement to acquire the common stock
of R&D Scientific Corp. (R&D), a New Jersey Corporation that develops
computer software programs. The Company's previously issued financial
statements included the operations of R&D from June 19, 1995, the date of the
purchase and sale agreement. The accompanying financial statements do not
include any results from R&D, as the Company and R&D terminated the purchase
and sale agreement in the year ended March 31,1998.
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 under the put option. 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.
F-6
<PAGE>
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.
The previously issued financial statements included the results of operations
of Muller Media, Inc., as of November 26, 1996, the date of the stock
purchase agreement, under the purchase method of accounting. The accompanying
financial statements exclude the results of operations of Muller Media, Inc.
based upon comments and questions by the Securities and Exchange Commission
with respect to the timing of the acquisition of Muller. The Company will
record the purchase of Muller on June 9, 1998, the date the final payment was
made under the put option agreement.
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 Company incorrectly accounted for the acquisition using the
pooling of interest method. The accompanying financial statements have been
restated to account for the acquisition as a purchase. Travel Source is a
travel agency in Rhode Island.
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 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
F-7
<PAGE>
$.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 seies C preferred
stock to common stock. As of March 31, 1998, 2,733,063 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 previously issued financial statements included the results of operation
of CardCall International, Inc., as if the acquisition had been completed as
of April 1, 1997, under the purchase method of accounting. The accompanying
financial statements include the results of operations of CardCall
International, Inc. since May 29, 1997 under the purchase method of
accounting based upon comments and questions by the Securities and Exchange
Commission with respect to the timing of the acquisition of CardCall.
In the year ended March 31, 1998 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.
Stock Splits
- ------------
The Company's Board of Directors approved a one-for-twenty reverse split of
its common stock on January 25, 1995, a forty-for-one split on March 7, 1996
and a one-for-four hundred reverse split on March 14, 1996. Accordingly, the
financial statements and related footnotes have been restated to reflect
these transactions as of April 1, 1995.
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 and wrote off its Casino Marketing investment
of $1,507,000. 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.
F-8
<PAGE>
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, as security for bank loans
in Canada. Restricted cash in 1997 included $10,000 which was collateral for
a $10,000 letter of credit with a commercial bank.
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 $ at March
31, 1998.
Revenue Recognition
- -------------------
Revenue Recognition and Deferred Revenue
- ----------------------------------------
Revenue is recorded when goods are shipped or when services are rendered to
the customer. The Company utilizes the direct write-off method for valuing
accounts receivable. Bad debt expense was $70,482 and $ -0- in 1998 and
1997, 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.
F-9
<PAGE>
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, 1998 was $105, 000.
Investments
- -----------
The Company accounts for investments under FASB 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 $27,685 at March 31, 1997, stated at the lower of cost or market
(first in, first out), consists of microchips, data acquisition and
telecommunications components.
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
F-10
<PAGE>
CardCall International, Travel Source 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 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 FASB issued statement 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. The new statement requires retroactive restatement of all prior-
period earnings per share data presented. The new statement 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 Statement of Financial Accounting Standards
(SFAS) 128.
F-11
<PAGE>
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.
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 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 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 stockholders' equity (deficit) section of the consolidated
balance sheets. In 1998, the effect of the foreign currency translation was
not material.
F-12
<PAGE>
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
exclude R&D Scientific since the purchase and sales agreement was terminated
by mutual consent, and Muller Media, as if the acquisition was completed on
June 9, 1998 rather than November 26, 1996, to account for Travel Source as a
purchase rather than a pooling, and as if the CardCall acquisition was
completed on May 29, 1997 rather than April 1, 1997.
The following represents the combined effect of such changes:
March 31,
1998 1997
Revenue, as previously reported $ 8,117,127 1,939,891
Adjustments for Muller, Media, Inc.
Travel Source Inc. and CardCall , 3,628,326 1,939,891
Restated revenue $ 4,488,801 $ -0
Net income as previously reported, $ 204,227 $( 183,287)
Net change in income as a result
of restatement, (88,069) (396,070)
Restated net income(loss) $ 116,158 $ (579,357)
Restated earnings (loss) per share
Earnings (loss) per share
as previously reported, $ .02 $( .04)
Net change in as a result
of restatement, (.01) (.08)
Restated net earnings (loss) per share $ .01 $ ( .12)
=========== ========
New Accounting Standards
- ------------------------
The FASB also issued SFAS No. 130, Reporting Comprehensive Income and SFAS
No. 131, Disclosures About Segments of an Enterprise and Related
F-13
<PAGE>
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 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.
SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997, and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of these standards.
Note 2. R&D Scientific Corp.
On June 19, 1995, DCI entered into an agreement to acquire the common stock
of R&D Scientific Corp (R&D), a New Jersey Corporation, for 106,250 shares
(to be adjusted on or before December 31, 1997, for a value of $1,700,000).
The Company had included R&D operations as part of the consolidated group
since June 19, 1995, as if the acquisition has been completed under the
purchase method of accounting. In the quarter ending December 31, 1997, the
parties mutually agreed to terminate the agreement, with R&D reverting back
to its original owners. As a result, no operations of R&D are included in
the financial statements, and all prior periods have been restated to exclude
the operations of R&D.
F-14
<PAGE>
Note 3. 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 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. As of March 31,
1998, 2,886,254 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 transaction was initially recorded under the purchase method of
accounting, effective April 1, 1997, however the Securities and Exchange
Commission has ruled that the effective acquisition date is 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
F-15
<PAGE>
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,
$.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 from when
the shares could be exercised and tradable.
See Note 5 for 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 for the years ending March
31, 1998 and 1997.
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 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 in March, 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.
Muller is a distributor of syndicated programming and motion pictures to the
television and cable industry.
F-16
<PAGE>
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 and 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 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 was accounted for as a purchase. Travel Source
is a travel agency in Rhode Island.
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.
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.
F-17
<PAGE>
DCI UK
- ------
In fiscal year ended March 31, 1998, the Company established DCI UK, a
company engaged in the business of providing long distance telecommunications
throughout Europe via a private leased-line network.
Note 4. 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, 1998 and 1997, assuming
the acquisitions of CardCall, CyberFax, Muller, PEL, Travel Source and Edge
Communications and the joint venture (see Note 19) had occurred on April 1,
1996. 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, 1996 or of future results of
operations.
1998 1997
Net sales $18,701,644 $10,596,802
----------- ----------
Income (loss):
Continuing operations $(2,604,296) $ (1,316,280)
Gain on disposal of
operations 4,364,480 -
Discontinued operations (906,503) (4,856,777)
------------ ------------
Net income (loss) before
preferred dividends $853,681 $(6,173,057)
======== ========
Net income (loss) per share:
Continuing operations $ (.16) $ (.09)
Gain from disposal of
operations .21 -
Discontinued operations (.04) (.31)
-------- -----------
Net income (loss) $ .01 $ (.40)
======== =========
Weighted average shares
outstanding 21,289,441 15,777,101
======== ========
F-18
<PAGE>
Note 5. Discontinued Operations
In September, 1997, DCI Telecommunications, Inc. agreed in principal with
SmartTalk 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 SmartTalk stock valued on the closing date. The
Company believes that it should have received 355,555 shares of SmartTalk
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 SmartTalk in the accompanying balance
sheet represents the value of the shares not received as of March 31, 1998.
Management believes this value will be realized based upon its negotiations
with SmartTalk. 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 shutdown and is in
the process of being liquidated. The loss from discontinued opeations 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 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 price is reduced, Alpha Products'
product line was quickly becoming obsolete, even on a cost basis. Without
sufficient outlays to upgrade and increase the engineering force coupled with
a complete overhaul of the product line and mission, it was not practical to
continue the operations on an on-going basis.
Alpha had sales in 1998 before discontinuance in September totaling
approximately $76,000 and operating losses of approximately $54,000 after
tax.
F-19
<PAGE>
A third party assumed certain assets and liabilities of Alpha effective
September 30, 1997 for no consideration. Alpha incurred operating losses
through September 30 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, of which $492,985 pre tax 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 operating losses of $169,807
after tax and a loss on disposition of $90,193 after tax.
Information related to the discontinued operations of CardCall UK, PEL and
Alpha for the years ended March 31, 1998 and 1997 are as follows:
1998 1997
---- ----
Net sales $1,152,098 $226,047
Cost of sales and
other expenses 1,789,610 348,086
---------- ---------
Loss from
discontinued operations $(637,512) $(122,039)
========= =========
The net assets and liabilities of the discontinued operations of CardCall UK,
PEL and Alpha included in the accompanying consolidated balance sheets as of
March 31, 1998 and 1997 are as follows:
1998 1997
Current assets $ - $67,990
Total assets - 109,579
Current liabilities 8,371 17,876
Total liabilities - 37,953
Net assets of
discontinued operations $ - $71,626
F-20
<PAGE>
Note 6. Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired (goodwill), which is being amortized
over twenty years is as follows:
Accumulated Net Book
Acquisition Goodwill amortization Value
CardCall 3,818,476 (200,000) 3,670,976
CyberFax 1,033,975 (50,000) 983,975
Travel Source 86,329 (4,300) 82,029
----------- ------------ --------
4,991,280 (254,300) 4,736,980
============ =========== =========
CardCall goodwill reflects the remaining balance of $3,818,476 after
$3,159,973 was written off against the sale of the distribution contract in
October 1997.
Note 7. Common Stock
During the year ended March 31,1997, the Company raised approximately
$1,026,000 in cash by issuing 3,195,181 common shares under Regulation 504
and 505 of the Securities Act.
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 182,500 shares,
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 (see Note 3 for explanation of the put option). The DCI shares
were put into treasury.
Subsequent to March 31, 1998 the Company acquired an additional 173,000
shares under the stock repurchase program and, on June 9, 1998, 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.
F-21
<PAGE>
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 stockholders 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
for each 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;
accordingly, no compensation expense has been recognized in the results of
operations for its stock option plan, in accordance with APB Opinion No. 25.
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 1998 and 1997: Annual dividends 0, expected volatility 88%, risk-
free interest rate of 5.56%, and expected life of five years for all grants.
Under the above model, the total value of stock options granted in 1998 and
1997 was $305,531 and $1,574,700. 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:
1998 1997
Income (loss):
Continuing operations $(2,860,624) $ (1,963,724)
Gain on disposal of
Operation 4,364,480 -
Discontinued operations (906,563) (153,592)
------------ ------------
Net income (loss) before
preferred dividends $ 597,293 $ (2,117,316)
========= =============
Net income (loss) per share:
Continuing operations $ (.33) $ (.41)
Gain from disposal of
Operations .40 -
Discontinued operations (.08) (.03)
----------- -----------
Net income (loss) $ (.01) $ (.44)
========= =========
F-22
<PAGE>
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 31,1998 is as follows:
Number of shares Average price
Outstanding at April 1,1996 98,000 $ .58
Granted 3,450,000 $ .19
Exercised (678,700) $ .19
---------
Outstanding at March 31,1997 2,869,300 $ .20
Granted 8,539,445 $ .44
Exercised (3,561,254) $ .20
---------
Outstanding at March 31, 1998 7,847,491 $ .47
---------
All options are exercisable at the end of each period presented. 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. The options
are exercisable at $.20 per share per 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.
The following table summarizes information about fixed stock options
outstanding at March 31, 1998:
--------- Options Outstanding ---- -- Options Exercisable --
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Excersiable Exercise
Prices at 3/31/98 Life Price at 3/31/98 Price
- -------- ----------- ----------- -------- ---------- --------
$.50 to
.60 98,000 2 years .58 98,000 .58
.19 2,079,076 3.0 .19 2,079,076 .19
.20 4,133,152 4.0 .20 4,133,152 .20
1.38 to
1.75 1,537,039 4.5 1.55 1,537,039 1.55
--------- ---------
7,874,491 .47 7,874,491 .47
At March 31, 1998, 432,189 warrants to purchase common stock through 2002,
with exercise prices from $1.96 to $3.63, were outstanding.
F-23
<PAGE>
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 note5 for description of
Smartalk transaction). The Company was able to borrow against this stock on
a short term basis and had borrowings totaling $4,938,942 at March 31, 1998.
Subsequently, the Smartalk stock was registered and sold, and the entire
short term debt 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. During fiscal years ended 1998 and 1997, the following series
of preferred stock were issued:
F-24
<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 $1000 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 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 of the $450,000
proceeds. 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.
F-25
<PAGE>
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.
The Company recorded a deemed dividend of $479,800 for the discount upon
conversion of the $ 2,000,000 proceeds. 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. Subsequent
to March 31, 1998, $412,500 of preferred shares and deemed dividends of
$98,959 were converted to 368,304 common shares
Series A
- --------
The holders of the 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, 1998 and 1997. Accrued preferred stock dividends at
March 31, 1998 and 1997, are $177,177 and $140, 976, respectively.
F-26
<PAGE>
The activity of the Company's preferred stock issues is as follows:
Series Series Series Series
A C D E Total
Balance ------- --------- ------- ------- ---------
April 1, 1997 305,000 0 0 0 305,000
Issued 1,500,000 1,500,000
Converted to
common shares 0
Balance
March 31, 1997 305,000 1,500,000 0 0 1,805,000
Issued 0 450,000 2,000,000 2,450,000
Converted to
common shares 1,500,000 450,000 1,389,950 3,339,950
Balance
March 31, 1998 305,000 0 0 610,050 915,050
Note 11. Long -Term Debt
Long-term debt consists of the following: March 31,
1998 1997
---- ----
Equipment financing note bearing
interest at 17.17% secured by
the equipment purchased, payable
in monthly installments of $132 due
in March, 2000. $ - $3,620
Equipment financing note bearing
interest at 17.17% secured by
the equipment purchased, payable in
monthly installments of $661 due in
December, 1999. $ - $16,875
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 -
------------ ------------
35,175 20,495
Less current portion of long-term debt - 6,479
----------- -----------
$ 35,175 $ 14,016
====== =======
F-27
<PAGE>
Aggregate annual principal payments are as follows:
2000, $5,273; 2001, $7,030; 2002, $7,030; 2003, $7,030; 2004, $7030 and
thereafter $1,782.
Note 12. Related Party Transactions
During the years ended March 31, 1998 and 1997, the Company received advances
from and made payments for liabilities on behalf of certain officers and
shareholders. The amount due from the officers and shareholders was $4,160 at
March 31, 1997, and the amount due to officers and shareholders was $410,156
at March 31, 1998.
Note 13. Commitments and Contingencies
Leases
- ------
The Company has several operating lease agreements for office space.
Aggregate annual minimum future rental payments under current leases are
$121,029 in 1999; $87,239 in 2000; $68,984 in 2001; $57,204 in 2002; $57,204
in 2003 and $31,212, thereafter. Rent expense was $171,007 and $92,867 in the
years ended March 31, 1998 and 1997, 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 days 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 $1,040,000 in 1999 and 2000; $872,000 in
2001 and $422,000 in 2002 and 2003, plus annual increases based on the
consumer price index.
Litigation
- ----------
Legal proceedings have been instituted against the company by a former long
distance supplier claiming a sum of $140,000. Management has filed a
counterclaim disputing the amount. A provision has not been made in the
financial statements for this claim because an estimate cannot be made and
the outcome is not determinable.
In addition to the aforementioned litigation, the Company is party to legal
actions arising during the normal course of business.
F-28
<PAGE>
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, 1998 and 1997, 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.
Note 14. Employee Benefit Plans
During 1998, the Company established an Employee Pretax Savings Plan (401K
plan) for its employees. For the year ended March 31, 1998, the Company
contributed 25%, up to 6%, of employee's compensation. The Company incurred
approximately $5,500 of pension expense in 1998 relating to this plan.
Note 15. Fixed Assets
Fixed assets consist of:
March 31,
1998 1997
Telecommunications switches
and equipment $ 205,925 $ -
Equipment - furniture and fixtures 264,716 137,849
----------- -------
470,641 137,849
Accumulated depreciation 57,410 35,468
------------ ------------
$413,231 $102,381
===== =====
F-29
<PAGE>
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
31,1997 and 1998 are:
1997 1998
Convertible preferred stock 545,455 504,194
Stock options 2,869,300 8,000,408
Stock warrants 140,000 432,189
Total Shares 3,554,755 8,936,791
The following are transactions that took place subsequent to March 31,1998
that would have changed the number of common shares or potential common
shares outstanding at March 31,1998 if the transactions had taken place
prior to March 31,1998. See Note 20 Subsequent events for further
description of these transactions.
In April 1998, the Company acquired Edge Communications Inc.(Edge) by
issuing 4,385,715 common shares.
In June 1998, the Company purchased 800,000 shares of DCI common stock from
the former shareholders of Muller for $2,000,000.
In April 1998, the Company issued $3,000,000 of Series F non voting
convertible preferred shares convertible 90 days from date of issue at the
lesser of 75% of the average closing price bid price of the common stock for
the ten days prior to conversion or $4.
Note 17. Income Taxes
In February 1992, the FASB issued SFAS 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 carryforwards 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
F-30
<PAGE>
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
$1,866,500 as of March 31,1998 which expires through 2012. 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:
1998 1997
---- ----
Taxes computed at U.S. statutory rates $1,717,876 $ 0
Tax benefit from discontinued operations (260,262) 0
Tax benefit of net operating loss
carryforward (1,457,614) 0
----------- --------
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:
1998 1997
---- ----
Statutory federal tax rate 34% 0
Tax benefit from discontinuted operations ( 5%) 0
Tax benefit of net operating loss
carryforward ( 29%) 0
Income taxes at the Company's effective
tax rate 0% 0
======== =======
F-31
<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 31,1998
and 1997.
1998 Travel Telecom Corporate Consolidated
- ---- -------- ------- --------- ------------
Sales $1,194,199 $ 3,294,602 $ - $ 4,488,801
Operating
(loss)
earnings (28,764) (1,170,848) (1,407,981) (2,607,593)
Identifiable
assets 46,130 2,071,354 14,251,470 16,368,954
Depreciation 5,861 124,223 13,364 143,448
Capital
Expenditures 7,491 365,365 22,142 394,998
1997 Corporate Consolidated
- ---- ---------- ------------
Sales $ - $ -
Operating
(loss)
earnings (389,024) (389,024)
Identifiable
assets 2,835,592 2,835,592
Depreciation 11,469 11,469
Capital
expenditures 46,046 46,046
The Company's operations are classified into two business segments as
follows:
Travel - Includes a travel agency.
Telecommunications - Includes prepaid phone cards, fax over the Internet, and
long distance communications.
F-32
<PAGE>
Note 19. Joint Venture
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 is 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 9000 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 was 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 others notification that it wants to sell, assign or
transfer all its shares at a stated price.
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.
Note 20. Subsequent Events
On April 30, 1998, DCI entered into an agreement with Edge Communications
Inc. (Edge) to purchase all of Edge's outstanding common stock for 4,385,715
shares of DCI stock. Edge is a wholesaler of prepaid phone cards and
reported sales of approximately $14,000,000 and a $270,000 net loss for the
twelve months ended March 31, 1998. Edge is located in Gaithersburg,
Maryland.
On May 14, 1998 the Company signed a letter of intent to acquire Locus
Corporation, of Fort Lee, New Jersey. Locus is a global provider of prepaid
phone cards, international call back, long distance and Internet services.
The transaction, which is subject to financing, involves $10,000,000 in cash
and 7,500,000 shares of DCI stock. DCI will have 90 days from the signing of
a definitive agreement to obtain the necessary financing. Locus recorded
sales of over $22,000,000 for the most recent ten months.
The Company also has a letter of intent to acquire Global Telecom, a Fort
Lauderdale, Florida company providing prepaid phone cards and one-plus
service, for $5 million worth of DCI stock.
Acquisition discussions with WorldPass Communications were terminated on
April 7, 1998.
F-33
<PAGE>
As part of the Muller Media transaction, the former Muller shareholders had
"put options" enabling them to require DCI to transform the closing
consideration of 1,200,000 shares of DCI stock to $3,000,000 cash upon
exercise of the put option. The Company repurchased 400,000 shares in March
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 April, 1998 the Company issued $3,000,000 of Series F 8% non -voting
convertible preferred shares . The shares are convertible to common stock 90
days from the issue date at the lesser of 75% of the average closing bid
price of the common stock for the ten days prior to conversion or $4. The
securities must be converted into common shares within two years of the issue
date. In connection with this offering 50,000 warrants exercisable at $1.56
for a period of five years from the issue date were granted to these
preferred shareholders and 50,000 warrants, at the same terms, were granted
to certain individuals as finder fees for the placement of the preferred
shares with investors.
F-34
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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