<PAGE>
DCI Telecommunications, Inc.
611 Access Road
Stratford, CT 06615
July 26, 2000
Securities and Exchange Commission
Attn: Document Control
Judiciary Plaza
450 Fifth Street, N.W.
Room 1004 1-4
Washington, DC 20549
Re: DCI Telecommunications, Inc.
Dear Sir/Madam:
Enclosed please find one electronically transmitted copy of Form 10-KSB, dated
July 26,2000 for the year ended March 31, 2000. Our Commission File Number is
2-96976-D.
Sincerely,
/s/ John J. Adams
----------------
President
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 2000
Commission File Number: 2-96976-D
DCI TELECOMMUNICATIONS, INC.
-------------------------------
(Name of Small Business Issue as specified in its charter)
Colorado 84-1155041
------------------------------- ----------------------------
(State or other Jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
611 Access Road, Stratford, Connecticut 06615
-------------------------------------------------
(Address of principle executive offices, including zip code)
Issuer'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 ___
---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
(Number of shares of Common Stock outstanding as of March 31, 2000)
30,775,644
<PAGE>
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
General
-------
DCI Telecommunications, Inc. ("DCI" or the "Company") was incorporated on
February 4, 1985, under the laws of the State of Colorado under the name ALFAB,
Inc. In 1991 after a reorganization, the Company changed its name to Fantastic
Foods International, Inc. On December 30, 1994, the Company merged with Sigma
Telecommunications, Inc and changed its name to DCI Telecommunications, Inc. The
Company's operations are conducted principally through its wholly owned
subsidiaries.
On November 26, 1996 the Company entered into a stock purchase agreement to
acquire 100% of the outstanding common stock of Muller Media, Inc ("Muller"), a
then unaffiliated New York Corporation, for 1,200,000 shares of DCI common
stock. The DCI stock was valued by both parties at $ 2.50 per share or
$3,000,000. Per the agreement Muller exercised its option to put the stock back
to the Company for $3,000,000. The Company repurchased the shares in March and
June 1998.Goodwill of $1,634,436 was recognized in this transaction. Muller is a
distributor of syndicated programming and motion pictures to the television and
cable industry. The acquisition was accounted for as a purchase, effective June
9, 1998.
On March 25, 1997, DCI acquired The Travel Source, Ltd ("Travel Source") for
29,412 shares of common stock valued at $3.40 per share or $100,000. Per
agreement, if the Company's shares fell below $ 3.40 per share six months after
the acquisition, the Company was required to issue additional shares to make up
for such shortfall. In fiscal 1998 the Company issued an additional 13,260
shares in accordance with this provision. The acquisition was accounted for as a
purchase effective March 25, 1997. Goodwill of $ 86,379 was recorded in this
transaction. Travel Source is a travel agency located in Rhode Island.
In the year ended March 31, 1998, the Company established DCI UK, whose name was
subsequently changed to DCI Europe Limited, a company providing long distance
telecommunications in Europe. On September 1, 1999 the entity, which had been
served an Involuntary Winding Up Order, was placed in liquidation. At September
30, 1999, the remaining assets and liabilities were written off resulting in a
gain of $1,389,654. Concurrent with the closing of DCI UK, the Company ceased
telecommunication operations in Spain and Denmark.
2
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On April 30, 1998, the Company issued 4,385,715 shares of common stock and
assumed net liabilities of $296,976 for all of the outstanding shares of EDGE
Communications, Inc ("EDGE"). The acquisition was accounted for under the
purchase method of accounting effective April 30, 1998. The shares were valued
at $6,644,000. EDGE, located in Gaithersburg, Maryland, is in the prepaid phone
card business. Goodwill of $6,940,976 was initially recognized in this
transaction.
On June 2, 1999 the Company established Fone.Com, Limited ("Fone"), a London
based company involved in providing long distance telephone service to business
and individuals, through a multi-switched-based private leased network.
Effective May 31, 2000, (closing date June 2, 2000) the Company sold all of the
common stock of Fone to Tanners Restaurant Group, Inc. ("Tanners") in exchange
for 40,000,000 shares of Tanners and the assumption by Tanners of $3,453,652 of
debt of the Company. DCI now owns 62.67% of the outstanding shares of Tanners.
Discontinued Operations
-----------------------
In September 1997, DCI agreed in principal with SmarTalk Teleservices, Inc. to
sell its prepaid phone card distribution contract with D Services, a wholly
owned subsidiary of W.H. Smith, for $9,000,000. Under the terms of the contract
DCI was to receive $1,000,000 in cash and $ 8,000,000 of SmarTalk stock valued
on the closing date. DCI received $1,000,000 in cash at the closing and 326,531
restricted shares of SmarTalk common stock.
DCI sold the 326,531 shares on May 15, 1998, realizing $8,124,761 of net
proceeds. In fiscal 1999 the Company wrote off a $650,000 receivable from
SmarTalk since SmarTalk filed for bankruptcy. The loss of $650,000 is included
in 1999 discontinued operations.
On March 30, 1999, DCI sold all of the outstanding shares of common stock of its
subsidiary, CyberFax Inc. to Carlyle Corporation ("Carlyle"). DCI received a
$5,000,000 promissory note payable on March 30, 2000, bearing interest at 9%,
payable quarterly. Interest payments, were to be made in shares of Carlyle
stock.
In June 1999, with the agreement of DCI and with some modifications to the
agreement, Carlyle assigned all its rights and obligations to SmartFax, Inc., a
Canadian corporation. At the closing SmartFax, Inc. paid off the promissory note
by issuing 5,000,000 shares of its common stock to DCI. No value has been placed
on these shares and no revenue or profit has been recorded.
Edge ceased operations in the third calendar quarter of the year 2000. The write
off of goodwill and all results of operations are included in discontinued
operations.
In 1999 the Company formed Coast To Coast Wireless, Inc. ("Coast"). Coast is in
the prepaid phone card business. Coast's operations were discontinued during the
year ended March 2000.
Effective May 31, 2000, (closing date June 2, 2000) the Company sold all of the
common stock of Fone to Tanners Restaurant Group, Inc. ("Tanners") in exchange
for 40,000,000 shares of Tanners and the assumption by Tanners of $3,453,652 of
debt of the Company. DCI now owns 62.67% of the outstanding shares of Tanners.
Quasi Reorganization
--------------------
At the Annual Meeting of Shareholders on July 26, 1995, the shareholders
approved a quasi-reorganization of the Company to adjust the carrying value of
assets and liabilities to their fair market value. The Company reduced its
inventory valuation by $63,182. The accumulated deficit of $4,695,587 at
December 31, 1995, the effective date of the reorganization, was eliminated in
full and charged to paid in capital. The retained earnings (deficit) starting
date is January 1, 1996.
3
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Securities and Exchange Commission Proceedings
----------------------------------------------
On May 7, 1999 the Securities and Exchange Commission (SEC) suspended trading in
the Company's stock and commenced an investigation under the authority of
Section 20(a) of the Securities Act of 1933 and Section 21(a) of the Securities
Exchange Act of 1934.
On June 23, 2000, a civil complaint was filed in the United States District
Court for the Southern District of New York, by the Securities and Exchange
Commission against the Company and certain of it's then officers in an action
entitled Securities and Exchange Commission v. DCI Telecommunications, Inc.,
under file number 00CIV4664. The complaint alleges amongst other violations
improper accounting, which violates certain sections of the Securities Act of
1933 and the Securities Exchange Act of 1934 and certain rules promulgated
thereunder. The complaint seeks to: (i)permanently enjoin the Company and it's
certain named officers from violating various sections of the Securities Act of
1933 and the Securities Exchange Act of 1934 and certain rules promulgated
thereunder; (ii) have the Company and such officers provide an accounting and
disgorge certain gains together with prejudgment interest and (iii) have the
Company and it's officers pay civil monetary penalties.
While no answer has been filed as of July 26, 2000 the Company and the charged
officers refute these charges and it is DCI's management's intention to contest
this matter vigorously.
Business Activity
-----------------
DCI Telecommunications, Inc. (the Company) is engaged through its operating
subsidiaries in media distribution and travel agency services.
Travel Source operates a full service travel agency providing service to a wide
range of individuals and businesses in the New England area of the United
States.
Muller Media is engaged in the business of purchasing, selling, distributing,
licensing and otherwise dealing in the acquisition and transfer of motion
picture and other entertainment media principally to television and cable
networks in the United States.
Employees
----------
The Company has 11 employees.
Competition
-----------
The Company has numerous competitors, many with substantially more resources
than the Company. Management believes that no single competitor 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:
4
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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 in the
New England area of the United States.
Product Reliability - As a full service travel agency, relationships are
maintained with various 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 services
for many years, through its dedicated 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 of distribution starts with negotiating the acquisition of 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 service by
making films available when and where needed, when contracted for.
ITEM 2 - DESCRIPTION OF PROPERTY
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 for Muller Media and 600
square feet for a corporate location in Hackettstown, New Jersey. All properties
are considered in good condition.
ITEM 3 - LEGAL PROCEEDINGS
See Notes to Financial Statements and section entitled "Securities and Exchange
Commission Proceedings".
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
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PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock was traded in the over-the-counter market on NASDAQ's
electronic bulletin board until May 7, 1999, when the Securities and Exchange
Commission suspended trading to perform an Investigation. Trading since then has
been on the pink sheets and no quotes are available. 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.
1999 HIGH LOW
---- ---- ------
First quarter ended
June 30, 1998 $ 2.94 $ 1.31
Second quarter ended
September 30, 1998 $ 2.81 $ 0.81
Third quarter ended
December 31, 1998 $ 4.31 $ 0.67
Fourth quarter ended
March 31, 1999 $ 3.81 $ 1.88
As of July 12, 2000 there were approximately 5,000 record holders of the
Company's stock.
The Company paid no dividends in Fiscal year 2000 and paid modest cash dividends
on its Common Stock in the Fiscal year 1999. 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 if any 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.
6
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Selected Financial Data
-----------------------
The following table sets forth selected consolidated financial data of the
Company for the years ended March 31, 1996 through 2000.
STATEMENT OF OPERATIONS DATA (a)
Years Ended March 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Continuing operations
Net sales and
other revenue $ 2,882,284 $ 3,664,447 $1,200,667 $ -- $ --
Gross profit 1,215,975 1,201,145 108,368 -- --
(Loss) from
continuing
operations $( 3,618,205) (2,130,063) (1,036,175) (389,024) (799,468)
Gain (loss) from
discontinued
operations (25,000,295) (9,797,889) 1,886,499 (153,592) (53,514)
Net Income (loss) $(28,618,500)$(11,927,952) $ 850,324 $(542,516)$(746,324)
Per share:
Continuing
operations (0.12) (0.10) (0.28) (0.09) (0.43)
Discontinued
operations (0.84) (0.44) 0.29 0.03 0.03
BALANCE SHEET DATA
Working capital $ (5,336,535) $(2,021,520) $ 2,832,587 $ 499,127 $(128,670)
Total assets $ 6,476,800 $29,078,269 $16,368,954 $2,835,592 $666,785
Long-term debt $ 3,004,668 $ -- $ 35,175 $ 14,016 $ --
Redeemable
preferred stock $ 2,187,500 $ 2,312,500 $ 610,050 $1,500,000 $ --
Shareholders'
equity (deficit) $(7,572,029) $20,263,981 $ 8,776,152 $1,098,920 $ 229,050
Cash dividends
per shares -- 0.01 0.01 -- --
7
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(a) Includes the results of purchased businesses from acquisition dates.
References herein to the year 1996 through 2000 refer to the Company's fiscal
years ended March 31.
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.
FOREIGN EXCHANGE
--------------
Through the fiscal year ended March 31, 2000, the Company had operated in the
United States, Canada, United Kingdom, Spain and Denmark. Balance sheet accounts
denominated in foreign currencies are translated generally at the current rate
of exchange as of the balance sheet date, while revenues and expenses are
translated at average rates of exchange during the periods presented. The
cumulative foreign currency adjustments resulting from such translation
adjustments have been determined by the Company to be immaterial.
LIQUIDITY AND CAPITAL RESOURCES
--------------------------
Year Ended March 31, 2000
-------------------------
At March 31, 2000, the Company had $1,154,825 of unrestricted cash.
The Company has incurred significant recurring operating losses at March 31,
2000, has a negative working capital and a capital deficit. These conditions
raise substantial doubt about its ability to continue as a going concern without
the raising of additional debt and/or equity financing to fund operations.
Management is actively pursuing new debt and/or equity financing and continually
evaluating the Company's profitability, however any results of their plans and
actions cannot be assured.
In April 1998, the Company issued $3,000,000 of Series F 8% non-voting
convertible preferred shares. The shares are convertible to common stock 90 days
from the issue date at the lesser of 75% of the average closing bid price of the
common stock for the 10 days prior to conversion or $4.00. 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
8
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to certain individuals as finder fees for the placement of the preferred shares
with investors.
On May 15, 1998, the Company sold its shares of SmarTalk for $8,124,761 and
repaid its note payable of $4,938,942.
The issuance of the preferred stock and the sale of securities were the primary
source of cash in 1999.
On June 9, 1998, the Company completed the repurchase of the 800,000 shares
issued to Muller shareholders for $2,000,000. See Note 1 to the Financial
Statements.
The Company acquired $1,475,000 of cash in the Muller and Edge
acquisitions.
On November 12, 1999, the Company received $1,000,000, as part of a new
financing package. An existing loan of $352,933 interest and penalties
associated with the Series F Preferred Stock totaling $1,348,605 and the new
$1,000,000 proceeds advanced, are all included in new five year notes with
interest at six percent per annum. In addition the Company issued warrants to
purchase up to an aggregate of 566,667 shares of common stock at $.75 per share.
Effective May 31, 2000, (closing date June 2, 2000) the Company sold all of the
common stock of Fone to Tanners Restaurant Group, Inc. ("Tanners") in exchange
for 40,000,000 shares of Tanners and the assumption by Tanners of $3,453,652 of
debt of the Company. DCI now owns 62.67% of the outstanding shares of Tanners.
In the years ended March 31, 2000 and 1999, the Company paid $0 and $193,462 in
common stock dividends.
Results of Operations
---------------------
Year Ended March 31, 2000
-------------------------
Comparative operating results are as follows:
Years Ended
March 31,
--------------------------------
2000 1999 1998
---- ---- ----
Net Sales $2,882,284 $ 3,664,447 $1,200,667
Net sales decreased by approximately $782,000 in fiscal 2000, compared to the
comparable 1999 period. Muller Media, accounted for the decrease.
9
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2000 1999 1998
---- ---- ----
Cost of Sales $ 1,666,309 $ 2,463,302 $ 1,092,299
Cost of sales in 2000 decreased by approximately $797,000 compared to the
comparable 1999 period. Costs associated with Muller Media accounted for the
decrease corresponding to this year's sales decline.
2000 1999 1998
---- ---- ----
SELLING, GENERAL & ADMINISTRATIVE $ 831,842 $1,138,408 $288,557
Selling, general and administrative expenses in fiscal 2000 decreased
approximately $307,000 compared to the 1999 period. SG&A expenses of Muller
Media increased $109,000 and Travel Source also increased $14,000. Corporate
selling, general and administrative expenses decreased $430,000 due to less
European administrative costs and lower travel and entertainment.
2000 1999 1998
---- ---- ----
SALARIES $1,259,289 $1,147,828 $336,515
Salaries in 2000 increased approximately $111,000 over 1999 levels. Salaries at
the corporate level decreased approximately $10,000 due to lower staffing with
Muller Media increasing $110,000 and salaries at Travel Source increasing by
$6,000 principally due to salary increases.
2000 1999 1998
---- ---- ----
PROFESSIONAL FEES $1,208,139 $ 870,995 $379,525
Professional fees in fiscal 2000 increased approximately $337,000 over the 1999
period. Professional fees at corporate were $314,000 higher than 1999 charges
principally due to outside legal expenses in connection with the SEC
investigation and additional accounting charges for restatements. Professional
fees for Muller Media increased by $14,000.
2000 1999 1998
---- ---- ----
AMORTIZATION AND DEPRECIATION $205,964 $263,535 $115,225
The 2000 decrease of approximately $58,000 is principally due to disposal of
assets.
10
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2000 1999 1998
---- ---- ----
OTHER INCOME AND EXPENSE
Interest Expense $(1,654,353) $ (72,372) $(60,133)
Investment Income 325,407 $ 161,930 $ 17,038
------------ ----------- ---------
$(1,328,946) $ 89,558 $(43,095)
Interest expense increased in 2000 principally due to penalties associated with
the Series F Preferred stock.
The $163,000 increase in 2000 investment income is a result of interest earned
on short-term investments of Muller Media.
11
2000 1999 1998
---- ---- ----
PREFERRED DIVIDENDS $ 177,620 $949,101 $734,166
Preferred dividends are related to the various convertible preferred stock
issues outstanding in each year. Dividends are primarily related to the presumed
incremental yield the investor may derive from the discounted conversion rate of
preferred stock issued by the Company during the year. Management believes that
the related amount of dividends recorded by the Company is not necessarily the
true cost to the Company of the instruments it issued and that it may be
reasonable to conclude that the fair value of the common stock into which these
securities may be converted was less than such stock's quoted market price at
the date the convertible securities were issued (considering factors such as the
period for which sale of the stock is restricted, large block factors, lack of a
sufficiently active market into which the stock can be quickly sold, time value,
etc.). However, generally accepted accounting principles require that an
intrinsic value of the conversion feature at the date of issuance should be
accounted for, and that such incremental yield should be measured based on the
stock's quoted market price at the date of issuance, regardless if such yield is
assured.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------
The Company has adopted Statement of Financial Accounting Standard No. 133
("SFAS No. 133"), "accounting for Derivative Instruments and Hedging Activities"
for the year ended March 31, 2000. SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. The application of the new pronouncement did not
have a material impact on the Company's financial statements.
12
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ITEM 7 - FINANCIAL STATEMENTS
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
Schnitzer & Kondub, P.C. ("Schnitzer") audited the books, records and accounts
of the Company for the fiscal year ended March 31, 1999. Schnitzer was dismissed
on May 13, 1999 effective with the completion of the March 31, 1999 audit.
On May 13, 1999 the Board of Directors selected Deloitte & Touche LLP
("Deloitte") as the Company's auditors for the fiscal year ending March 31, 2000
and this action was ratified by the stockholders at the Annual Meeting.
On September 15, 1999 Deloitte advised the Company that it had determined to
cease to represent the Company.
On November 8, 1999, DCI engaged the public accounting firm of Feldman Sherb
Horowitz & Co., P.C. as the Company's independent accountants to audit the
Company's financial statements. Deloitte acknowledged in its required letter to
the SEC that there were no disagreements, as defined by Rule 304 of Regulation
S-K during the period that Deloitte served as the Company's auditors through the
date of Deloitte's resignation.
For further information with respect to change of auditors as indicated in the
preceding paragraphs, reference is herewith made to the Company's Form 8-K and
8-K/A dated October 5, 1999, October 26, 1999 and November 8, 1999.
13
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PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers of the Company during Fiscal year ended March
31, 2000 are set forth below.
DIRECTOR AGE DIRECTOR
SINCE
Joseph J. Murphy 61 1995
Chairman of the Board of DCI Telecommunications, formerly President and CEO.
Prior to that he was executive vice president, member of the Board of Directors,
and chief financial officer for Aquarion Company, a New York Stock Exchange
Company, from 1979 to 1990. Formerly, he was chief financial officer for
Connecticut Energy Corp. from 1971 to 1979, a member of Price Waterhouse from
1964 to 1967 and an officer in the United States Marine Corps from 1961 to 1964.
He was a member of the Board of Directors of Boys/Girls Club of Bridgeport and
served on the Economic advisory board for Fairfield University and Sudden Death
Syndrome (SIDS) for Fairfield County. He was also a member of the FBI/Marine
Corps Association.
Larry Shatsoff 46 1995
Co-President of DCI from November 23, 1999 until his resignation on May 31,
2000. Prior to his appointment as president he was Vice President and Chief
Operations Officer of DCI Telecommunications. Within the past five years he has
been vice president and chief operations officer for Alpha Products. Prior to
that, he was executive vice president of Kalon Systems (a data processing
services company), manager of information systems for Aquarion Company, a New
York Stock Exchange Company.
John J. Adams 60 1995
President and CEO and formerly Vice President of Marketing of DCI
Telecommunications, Inc. Mr. Adams was formerly vice president for R&D
Scientific Corp. from 1993 to 1997 and founder and president of Validation
Services Corp. from 1993 to 1997. Mr. Adams was previously president of Prevent
Chemicals, Ltd., a publicly traded manufacturer of specialty chemicals.
Carter Hills 78 1995
Retired diplomat with extensive experience in economic development and
management planning under auspices of Department of State and major
international organizations. Mr. Hills directed such programs in countries of
Near East and Vietnam. Served as financial adviser and delegate for U.S. at key
international conferences. Mr. Hills resigned his directorship July 3, 2000.
Clifford Postelnik 56 2000
Director. Prior to his recent appointment, he was with wholly-owned subsidiary
Edge Communications. Mr. Postelnik joined Edge after a 30-year career in
bilateral carrier contract negotiations and marketing to the tour and travel
industry, airlines and hotels in Europe, Africa and the Orient.
14
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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 ($) ($) ($) ($) SARs(#) ($) ($)
-------------- ------ ----- ------------ ------ -------- ----- ----------
Joseph
J. Murphy 1998 115,000 172,727
CEO 1999 126,000 592,727
2000 127,000 -
Larry 1998 63,000 154,545
Shatsoff 1999 90,000 759,545
V.P., COO 2000 91,000 -
John J. 1998 6,000 84,090
Adams 1999 75,000 214,574
V.P., CMO 2000 76,000 -
Options/SAR Grants in Last Fiscal Year
% of Total
Options/SARs
Options/SARs Granted to Employees Exercise or Base
Name Granted (#) in Fiscal Year Price ($/Sh) Expiration Date
-------- ------------ -------------------- ---------------- --------------
Joseph
J. Murphy
CEO none
Larry
Shatsoff
V.P., COO none
John J.
Adams
V.P., CMO none
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 none
Larry Shatsoff none
John J. Adams none
15
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Effective October 15, 1998 the exercise price with respect to an aggregate of
209,545 options for Mr. Shatsoff, 109,574 options for Mr. Adams, and 247,727
options for Mr. Murphy, to purchase common stock previously granted was amended
in connection with the cancellation of such previously outstanding options in
exchange for a new grant of an equal number of options under the Company's stock
option plan. The exercise price of the new options is equal to the fair market
value of the Company's common stock on the date of the grant.
The Company entered into an employment agreement dated January 1, 1995 with Mr.
Murphy for services rendered the Company as its President and Chief Executive
Officer for an annual base salary of $100,000.
Automatic Renewal Provision:
The term of the renewed employment agreement with Joseph J. Murphy commenced on
June 10, 1997 and shall end on June 10, 2002. This agreement shall be renewed
automatically on June 1, of each year thereafter for one (1) additional term
unless and until terminated.
Annual Salary Adjustment:
The amount of the Employee's Base Salary in all subsequent years during the term
of this Agreement, and renewals thereof, will be increased on January 1 of each
year. During the term of this Agreement, and renewals thereof, the then, current
Base Salary shall be increased as of each January 1, beginning January 1, 1998,
by a rate equivalent to any percentage increase in the Consumer Price Index for
the twelve month period occurring prior to the date of the scheduled change,
plus five percent (5%). As used in this section, the Consumer Price INDEX shall
mean(i) the "CONSUMER PRICE INDEX FOR URBAN WAGE EARNINGS AND CLERICAL WORKERS",
currently published by the Bureau of Labor Statistics of the United States
Department of Labor for the Greater New York Metropolitan Area on a bimonthly
basis, or (ii) if the publication of the Consumer Price Index shall be
discontinued, and/or the Consumer Price Index is published more or less
frequently at the time of the foregoing determinations are made, the comparable
index most clearly reflecting diminution 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:
16
<PAGE>
(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 coverage
existing at the time of termination for a period of one year or until
Employee obtains new coverage in the course of new employment.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table set forth the beneficial ownership of Common Stock of the
Company as of June 12, 2000 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 2,623,482 (b) 7.8%
John J. Adams 500,574 1.4%
Clifford Postelnik 200,000 .6%
IXC Communications, Inc. 4,250,000 12.6%
Donnie Gross 1,743,033 5.2%
Steven Gross 1,743,033 5.2%
(ii) All executive officers and
directors as a group 3,324,056 9.8%
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, 1,599,417
shares; J. Adams, 414,574 shares; and C. Postelnik, 200,000 shares. Shares
beneficially owned directly or indirectly.
17
<PAGE>
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, 2000 and 1999, Mr. Joseph J. Murphy, President
of the Company, made cash advances to the Company and had certain advances
repaid as follows:
3/31/99 3/31/00
Cash Advances to -------- --------
the Company $118,597 $ 78,500
Liabilities Paid on Behalf of Mr. Murphy:
-----------------------------------------
Advances Repaid 97,147 60,798
18
<PAGE>
PART IV
ITEM 13 - EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to this portion is submitted as a separate
Section of this report commencing on page F-1.
(a) (3) and (c) Exhibit (numbered in accordance with Item 601 of
Regulation S-K)
Exhibit No. Description Page No.
----------- ---------------------- --------
(1) NA
(3a) Articles of Incorporation (a)
(3b) By-Laws (a)
(4) NA
(9) NA
(10) NA
(11) NA
(12) NA
(13) NA
(16) Change in Certifying Accountant (b)
(18) NA
(19) NA
(21) Subsidiaries Travel Source, Ltd.,
Muller Media, Inc.,
Edge Communications, Inc.,
DCI Time Europe Ltd.,
DCI Telecomunicaciones S.L.
(22) NA
(23) NA
(24) NA
(25) NA
(28) NA
(29) NA
(a) - Filed with Registration Statement on Form S-18 (File 2-96976-D) and
incorporated by reference herein.
(b) - Filed with Form 8K dated June 28, 1995
During the quarter ended March 31, 2000, the following Form 8k's were filed:
None
Subsequent to March 31, 2000:
8K dated June 15, 2000.
8k dated June 19, 2000.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DCI TELECOMMUNICATIONS, INC.
Date: July 26, 2000 By: /s/ John J. Adams
John J. Adams,
President
Director
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: July 26, 2000 By: /s/ Joseph J. Murphy
Joseph J. Murphy
Chairman
Date: July 26, 2000 By: /s/ John J. Adams
John J. Adams,
President
Director
Date: July 26, 2000 By: /s/ Clifford Postelnik
Clifford Postelnik,
Director
<PAGE>
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
DCI Telecommunications, Inc.
Report of Independent Auditor(s) F-1 - F-2
Balance Sheets - March 31, 2000 and 1999 F-3
Statements of Operations F-4
Years Ended March 31, 2000 and 1999
Statements of Changes in Shareholders' Equity F-5
Years Ended March 31, 2000 and 1999
Statements of Cash Flows F-6
Years Ended March 31, 2000 and 1999
Notes to Financial Statements F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
DCI Telecommunications, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of DCI
Telecommunications, Inc. and Subsidiaries as of March 31, 2000, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 September 30, 1999, and the
results of its operations and its cash flows for the six months then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements the Company has a stockholder deficit and
negative working capital of $4,187,736 at September 30, 1999, and has incurred
significant recurring operating losses which raise substantial doubt about its
ability to continue as a going concern without the raising of additional debt
and/or equity financing to fund operations. Management's plans in regard to
these matters are described in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/Feldman Sherb Horowitz & Co., P.C.
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
July, 20, 2000
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
DCI Telecommunications, Inc.
We have audited the accompanying consolidated balance sheets of DCI
Telecommunications, Inc. and subsidiaries as of March 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended March 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DCI
Telecommunications, Inc. and subsidiaries as of March 31, 1999 and 1998 and the
results of their operations, and their cash flows for each of the two years in
the period ended March 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Schnitzer & Kondub, P.C.
Schnitzer & Kondub, P.C.
June 25, 1999
F-2
<PAGE>
DCI TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
ASSETS
CURRENT ASSETS:
Cash $ 1,154,825
Accounts receivable,
net of allowance for doubtful accounts of $162,213 2,303,522
Other current assets 61,779
----------------
TOTAL CURRENT ASSETS 3,520,126
PROPERTY AND EQUIPMENT 529,995
ACCOUNTS RECEIVABLE - LONG TERM 849,310
DEPOSITS 15,356
GOODWILL, net of accumulated amortization of $161,802 1,562,013
----------------
TOTAL ASSETS $ 6,476,800
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,053,574
Preferred stock dividends 347,470
Due to shareholders 126,292
Deferred revenue 107,216
Current portion of long term debt 222,109
----------------
TOTAL CURRENT LIABILITIES 8,856,661
LONG TERM DEBT 1,200,000
OTHER LONG TERM LIABILITY 1,348,605
ACCOUNTS PAYABLE 456,063
REDEEMABLE CONVERTIBLE PREFERRED STOCK 2,187,500
----------------
TOTAL LIABILITIES 14,048,829
----------------
STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value 500,000,000 shares authorized
30,775,644 shares issued and outstanding 3,077
Additional paid-in capital 33,810,831
Treasury stock (1,356,547 shares at cost) (1,127,439)
Accumulated deficit (40,254,021)
Other comprhensive loss (4,477)
----------------
TOTAL STOCKHOLDERS' DEFICIT (7,572,029)
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 6,476,800
================
See notes to consolidated financial statements
F-3
<PAGE>
DCI TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended March 31,
-------------------------------------
2000 1999
-------------------------------------
Net sales $ 2,882,284 $ 3,664,447
Cost of sales 1,666,309 2,463,302
------------- ----------------
Gross profit 1,215,975 1,201,145
Operating expenses:
Selling general and administrative 831,842 1,138,408
Salaries and compensation 1,259,289 1,147,828
Professional and consulting fees 1,208,139 870,995
Amortization and depreciation 205,964 263,535
------------- ----------------
3,505,234 3,420,766
------------- ----------------
Loss from continuing operations
before other (expenses) income (2,289,259) (2,219,621)
------------- ----------------
Other income and (expense):
Investment income 325,407 161,930
Interest expense (1,654,353) (72,372)
------------- ----------------
(1,328,946) 89,558
------------- ----------------
Net loss from continuing operations (3,618,205) (2,130,063)
Net loss from discontinued operations (25,000,295) (9,797,889)
------------- ----------------
Net loss (28,618,500) (11,927,952)
Comprehensive loss - unrealized loss on
investments (net of taxes) 4,477 -
Dividends on preferred stock 177,620 949,101
------------- ----------------
Net loss applicable to common
shareholders $(28,800,597) $ (12,877,053)
============== ================
Net loss per common share -
basic and diluted:
Continuing operations $ (0.12) $ (0.10)
Discontinued operations (0.84) (0.44)
-------------- ----------------
$ (0.96) $ (0.54)
============== ================
Weighted average common shares
outstanding - basic and diluted 29,870,015 22,121,515
============== ================
See notes to consolidated financial statements
F-4
<PAGE>
DCI TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Other
------------------ ------------------ Paid - In Treasury Accumulated Comprehensive
Shares Amount Shares Amount Capital Stock Deficit Loss Total
------ ---------- --------- ------- ---------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances March 31, 1998 3,972 305,000 14,092,625 1,409 8,927,173 (749,061) 291,631 - 8,776,152
Preferred stock (Series A)
converted to common stock (3,972) (305,000) 321,537 32 304,968 - - - -
Preferred stock (Series E and F)
converted to common stock - - 1,603,120 160 1,297,390 - - - 1,297,550
Deemed dividend on preferred
stock issuance - - - - (750,000) - - - (750,000)
Conversion of dividends to
common stock - - - - 562,357 - - - 562,357
Shares issued for options
exercised - - 4,394,014 439 651,343 - - - 651,782
Shares issued for services - - 37,200 4 57,996 - - - 58,000
Shares issued for stock of Edge - - 4,385,715 439 6,643,919 - - - 6,644,358
Shares issued for master
service agreement - - 4,250,000 425 15,671,450 - - - 15,671,875
Purchase of treasury stock
(198,000 shares) - - - - - (378,378) - - (378,378)
Shares issued for deposits - - 21,524 2 49,998 - - - 50,000
Shares issued for stock of
Wavetech - - 576,047 58 (58) - - - -
Preferred stock dividend - - - - (199,101) - - - (199,101)
Common stock dividend - - - - (193,462) - - - (193,462)
Net loss - - - - - - (11,927,152) - (11,927,152)
------ ---------- --------- ------- ---------- --------- ----------- ------------- ----------
Balances March 31, 1999 - - 29,681,782 2,968 33,023,973(1,127,439) (11,635,521) - 20,263,981
------ ---------- --------- ------- ---------- --------- ----------- ------------- ----------
Preferred stock dividends - - - - (177,620) - - - (177,620)
Proceeds from stock
options exercised - - 2,200 - 51,275 - - - 51,275
Conversion of preferred stock - - 306,386 31 125,000 - - - 125,031
Common stock issued for preferred
stock penalty - - 625,276 63 170,000 - - - 170,063
Beneficial conversion feature - - - - 578,250 - - - 578,250
Shares for services - - 160,000 16 39,953 - - - 39,969
COMPREHENSIVE LOSS:
Net loss - - - - - - (28,618,500) - (28,618,500)
Write down of investment to market
net of taxes of $0 - - - - - - - (4,477) (4,477)
-----------
TOTAL COMPREHENSIVE LOSS (28,622,977)
-----------
------ ---------- --------- ------- ---------- --------- ----------- ------------- -----------
Balances March 31, 2000 - $ - 30,775,644 $ 3,077 $33,810,831$1,127,439)$(40,254,021) $ (4,477) $(7,572,029)
------ ---------- --------- ------- ---------- --------- ----------- ------------- -----------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
DCI TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------
2000 1999
---------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (28,618,500) $ (11,927,952)
------------------ ------------------
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization and depreciation 1,914,290 1,633,366
Stock issued for services 210,032 5,500
Disposition of Canadian operations - 3,185,558
Write-off of shareholder loan 87,436 -
Gain on dissolution 1,389,654 1,098,228
Goodwill write-off 6,454,709 -
Accrued interest converted to note 1,348,605 -
Loss on master service agreement 13,321,093 -
Changes in assets and liabilities:
(Increase) decrease in:
Restricted cash - 60,426
Accounts receivable 765,429 (1,366,749)
Inventories 119,833 60,161
Deposits 409,791 (307,830)
Other assets 338,676 204,218
Receivable from SmarTalk - 650,000
Increase (decrease) in:
Accounts payable and accrued expenses 703,089 2,834,733
Deferred revenue (160,727) 96,851
Income tax payable - (260,287)
------------------ ------------------
Net cash used in operating activities (1,716,590) (4,033,777)
------------------ ------------------
Cash flows from investing activities:
Additions to property and equipment (20,187) (175,719)
Cash acquired with acquisitions - 1,475,103
Investment in Muller Media - (2,000,000)
------------------ ------------------
Net cash used in investing activities (20,187) (700,616)
------------------ ------------------
Cash flows from financing activities:
Proceeds from stock options exercised 51,275 651,782
Purchase of treasury stock - (378,378)
Payment of notes payable - (4,938,942)
Proceeds from sale of preferred stock - 2,750,000
Common stock dividend - (193,462)
Payments to shareholders (69,013) (398,128)
Proceeds from long - term debt 1,572,500 42,955
Repayment of long - term debt (294,346) -
Sale of equity securities - 8,124,761
------------------ ------------------
Net cash from financing activities 1,260,416 5,660,588
------------------ ------------------
Net decrease in cash (476,361) 926,195
Cash, beginning of period 1,631,186 704,991
------------------ ------------------
Cash, end of period $ 1,154,825 $ 1,631,186
================== ==================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 252,000 $ 94,000
================== ==================
Cash paid for income taxes $ 45,000 $ 260,000
================== ==================
Non - cash investing and financing transactions:
Preferred stock dividends $ 177,620 $ -
================== ==================
Conversion of preferred stock $ 125,000 $ -
================== ==================
Beneficial conversion $ 578,250 $ -
================== ==================
Stock issued for deposits $ - $ 50,000
================== ==================
Stock issued for services in discontinued operations $ - $ 52,000
================== ==================
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
DCI TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000 AND 1999
1. ORGANIZATION
DCI Telecommunications, Inc. ("DCI" or the "Company") was incorporated
on February 4, 1985 under the laws of the State of Colorado under the
name ALFAB, Inc. In 1991, after a reorganization, the Company changed
its name to Fantastic Foods International, Inc. On December 30, 1994,
the Company merged with Sigma Telecommunications, Inc. and changed its
name to DCI Telecommunications, Inc. The Company's operations are
conducted principally through its wholly owned subsidiaries.
On November 26, 1996 the Company entered into a stock purchase
agreement to acquire 100% of the outstanding common stock of Muller
Media, Inc. ("Muller"), a New York Corporation, for 1,200,000 shares of
DCI common stock. The DCI stock was valued at $2.50 per share or
$3,000,000. Per the agreement Muller exercised its option to put the
stock back to the Company for $3,000,000. The Company repurchased the
shares in March and June 1998. Goodwill of $1,634,436 was recognized in
this transaction. Muller is a distributor of syndicated programming and
motion pictures to the television and cable industry. The acquisition
was accounted for as a purchase, effective June 9, 1998.
On March 25, 1997, DCI acquired the Travel Source, Ltd. ("Travel
Source") for 29,412 shares of common stock valued at $3.40 per share or
$100,000. Per the agreement if the Company's shares fell below $3.40
per share six months after the acquisition, the Company was required to
issue additional shares to make up for such shortfall. In fiscal 1998
the Company issued an additional 13,260 shares in accordance with this
provision. The acquisition was accounted for as a purchase effective
March 25, 1997. Goodwill of $86,379 was recorded in this transaction.
Travel Source is a travel agency located in Rhode Island.
On June 2, 1999 the Company established Fone.Com, Limited. ("Fone"), a
London based company involved in providing long distance telephone
service to businesses and individuals, through a multi-switched-based,
private leased network. Fone was sold on May 31, 2000.
In the year ended March 31, 1998, the Company established DCI UK, whose
name was subsequently changed to DCI Europe Limited, a company
providing long distance telecommunications in Europe. On September 1,
1999 the entity, which had been served an Involuntary Winding Up Order,
was placed in liquidation. During the fiscal year ended March 31, 2000,
the remaining assets and liabilities were written off resulting in a
gain of $1,389,654.
F-7
<PAGE>
On April 30, 1998, the Company issued 4,385,715 shares of common stock
and assumed net liabilities of $296,976 for all of the outstanding
shares of Edge Communications, Inc. ("Edge"). The acquisition was
accounted for under the purchase method of accounting, effective April
30, 1998. The shares were valued at $6,644,000. Edge, located in
Gaithersburg, Maryland, is in the prepaid phone card business. Goodwill
of $6,940,976 was initially recognized in this transaction. In fiscal
2000, the Company discounted the operations of Edge.
In 1999 the Company formed Coast To Coast Wireless, Inc. ("Coast").
Coast is in the prepaid phone card business. Coast's operations were
discontinued during the year ended March 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION - The accompanying consolidated
financial statements include the accounts of the Company and its wholly
owned subsidiaries. All material inter- company transactions have been
eliminated in consolidation.
B. REVENUE RECOGNITION - Travel agency revenues are recorded
when a reservation is made. Revenue from the distribution of motion
pictures and other entertainment events is recognized upon commencement
of the station's licensing period. Muller has executed license
agreements totaling approximately $3,145,000 whose license period
begins after March 31, 2000. The related expense is recorded as the
revenue is recognized. In addition Muller advances funds to producers
of motion pictures and entertainment events. These advances are charged
to operations by amortizing them over their estimated revenue streams.
C. PROPERTY AND EQUIPMENT - Property and equipment are carried
at cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the asset which range from 5 to 7 years.
D. GOODWILL - Goodwill represents the consideration paid in
excess of the net assets acquired in the acquisitions of Travel Source
and Muller. Goodwill is being amortized over 20 years.
E. USE OF ESTIMATES - The preparation of the financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
F. INCOME TAXES - Deferred income taxes are determined on
the liability method in accordance with the Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
F-8
<PAGE>
G. IMPAIRMENT OF LONG LIVED ASSETS - The Company reviews long
- lived assets, certain identifiable assets and goodwill related to
those on a quarterly basis for impairment whenever circumstances and
situations change such that there is an indication that the carrying
amounts may not be recovered. During fiscal 2000, the Company wrote off
certain assets associated with its discontinued operations (See Note
16).
H. EARNINGS PER SHARE - The Company has adopted SFAS, No. 128,
Earnings per Share. Net income (loss) per common share has been
restated for all periods presented to conform to the provisions of SFAS
No. 128. Basic earnings (loss) per share is computed by dividing net
income (loss) available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted earnings
per share reflects the per share amount that would have resulted if
diluted potential common stock had been converted to common stock, as
prescribed by SFAS No. 128.
I. RECENT ACCOUNTING PRONOUNCEMENTS - The Company will adopt
Statement of Financial Accounting Standard No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities" for the
year ended March 31, 2000. SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and
amends a number of existing standards. The application of the new
pronouncement did not have a material impact on the Company's financial
statements.
J. FAIR VALUE OF FINANCIAL INSTRUMENTS - The respective
carrying value of certain on- balance-sheet financial instruments
approximated their fair values. Fair value estimates discussed herein
are based upon certain market assumptions and pertinent information
available to management. These financial instruments include cash,
accounts receivable, accounts payable and accrued expenses. Fair values
were assumed to approximate carrying values for these financial
instruments since they are short term in nature and their carrying
amounts approximate fair values or they are receivable or payable on
demand. The fair value of the Company's long-term debt, which
approximates its carrying value, is estimated based upon the quoted
market prices for the same or similar debt instruments or on the
current rates offered to the Company for debt of the same remaining
maturities.
K. STOCK BASED COMPENSATION - The Company accounts for stock
transactions in accordance with APB Opinion No. 25, "Accounting For
Stock Issued To Employees." In accordance with Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting For Stock-Based
Compensation," the Company adopted the pro forma disclosure
requirements of SFAS 123.
L. FOREIGN CURRENCY TRANSLATION - Assets and liabilities of
subsidiaries operating in foreign countries are translated into U.S.
dollars using both the exchange rate in effect at the balance sheet
date or historical rate, as applicable. Results of operations are
translated using the average exchange rates prevailing throughout the
year. The effects of exchange rate fluctuations on translating foreign
currency assets and liabilities into U.S. dollars are included in
stockholders equity (Accumulated other comprehensive loss), while gains
and losses resulting from foreign currency transactions are included in
operations.
F-9
<PAGE>
3. BASIS OF PRESENTATION
The Company has incurred significant recurring operating losses and at
March 31, 2000 has a negative working capital and a capital deficit.
These conditions raise substantial doubt about its ability to continue
as a going concern without the raising of additional debt and/or equity
financing to fund operations. Management is actively pursuing new debt
and/or equity financing and continually evaluating the Company's
profitability, however any results of their plans and actions cannot be
assured. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
4. MASTER SERVICE AGREEMENT WRITE OFF
On November 23, 1998, IXC terminated local and long distance carrier
services to Discount Communications , Inc. ("Discount") and Discount's
customers which included Edge, due to non-payment by Discount of its
outstanding liabilities to IXC. Such liabilities included a note for
approximately $15,760,000 and accounts payable of approximately
$6,784,000.
On December 3, 1998, for settlement of Discount's note of $15,760,000
and reduction of Discount's liabilities of $2,000,000 and in
consideration for providing access to Edge's customers previously shut
off by IXC, the sale of Discount's switch to DCI and the co- location
of the Company's switch at IXC's facility, the Company entered into a
master service agreement that provided for fixing rates and various
leases for a five year period, and issued 4,250,000 shares of its
common stock to IXC valued at $4 per share giving IXC a 13% ownership
interest in the Company.
If such shares did not have a market value of $17,760,000 on June 1,
1999 the Company was required to issue additional shares. The shares
did not have this value at June 1, 1999 since trading in the stock had
been suspended. The Company has not issued additional shares and does
not intend to issue additional shares because certain aspects of the
agreement have not taken place. The Company believes it did not receive
rates which are competitive, has not received the switching equipment,
and has suspended business with IXC. As a result the Company has
written off, as of March 31, 2000, the remaining balance of its
capitalized asset entitled "master service agreement". The balance
written off was $13,321,093 and is shown as part of discontinued
operations.
5. CYBERFAX DISPOSITION
On March 30, 1999, DCI sold all of the outstanding shares of common
stock of its subsidiary, CyberFax, Inc. to Carlyle Corporation
("Carlyle"). DCI received a $5,000,000 promissory note payable on March
30, 2000 bearing interest at 9% payable quarterly. Interest payments
were to be made in shares of Carlyle stock.
In June 1999, with the agreement of DCI and with some modifications to
the agreement, Carlyle assigned all its rights and obligations to
SmartFax, Inc., a Canadian corporation. At the closing SmartFax, Inc.
paid off the promissory note by issuing 5,000,000 shares of its common
stock to DCI. No value has been placed on these shares and no revenue
or profit has been recorded.
F-10
<PAGE>
6. WAVETECH INTERNATIONAL MERGER TERMINATION
On November 6, 1998, the Company entered into a merger agreement with
Wavetech International ("Wavetech"). The agreement called for the
exchange of common stock on a one to one basis, with Wavetech becoming
the surviving entity.
On February 26, 1999, the Company and Wavetech exchanged 576,047 shares
of common stock each. In May 1999, the merger agreement was canceled
and on June 18, 1999 the companies agreed to cancel the agreement and
the common stock was returned to the respective companies. No value has
been placed on these shares.
7. PROPERTY AND EQUIPMENT
At March 31, 2000 property and equipment is comprised of the following:
Telecommunications switches
and equipment $ 470,349
Furniture and fixtures 228,372
Leasehold improvements 46,309
------------------
745,030
Less: Accumulated depreciation (215,035)
------------------
$ 529,995
==================
8. OTHER LONG TERM LIABILITY
Other long term liability consists of accrued dividend and penalties
associated with the Series F 8% non-voting convertible preferred
shares. This debt was converted into long term notes in November 1999
(See Note 9a).
F-11
<PAGE>
9. LONG-TERM DEBT
At March 31, 2000, long-term debt consists of the following:
Note payable to bank payable monthly with interest at 9%
due in February 2001, collateralized by all assets of Edge.
The note is currently in default and is classified as current. $ 71,661
Note payable to Sherman LLC executed November 12, 1999
with an interest rate of 6% per annum payable semi-
annually (a) 1,000,000
Note payable to Triton Private Equities Fund, Ltd.
("Triton"), executed September 15, 1999 due and payable
within 90 days with an interest rate of 2.75% per month for
the first 90 days and 3% per month thereafter. The note
was restructured in November 1999 (see (a) below). 350,448
--------------
1,422,109
Less current maturities (222,109)
--------------
$ 1,200,000
==============
(a) On November 12, 1999, the Company received $1,000,000, as part of a
new financing package. An existing loan of $352,933, interest and
penalties associated with the Series F Preferred Stock totaling
$1,348,605 (see Note 8), and the new $1,000,000 proceeds advanced, are
all included in new five year notes with interest at six percent per
annum. In addition the Company issued warrants to purchase up to an
aggregate of 566,667 shares of its common stock at $.75 per share. The
lenders have various methods of redemption to choose from, including
cash from VAT refunds from the United Kingdom, a portion of the cash
proceeds from the possible sale of Muller Media if any, redemption into
DCI common stock at $0.25 per share subject to certain conditions or
the redemption into common stock from the possible spinoff of Fone into
a separate public entity.
On May 31, 2000, $200,000 owed to Triton and the $1,348,605 of other
long term liability were assumed by the purchaser of Fone (see note
16).
10. DUE TO SHAREHOLDERS
As of March 31, 2000 the Company had payables to shareholders of
$126,292. The payables are due on demand and are non-interest bearing.
F-12
<PAGE>
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amountsused for income tax
purposes. Significant components of the Company's deferred tax assets
(liabilities) are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 8,400,000
Less valuation allowance (8,400,000)
---------------------
Net deferred tax $ -
=====================
The reconciliation of the income tax computed at the U.S. federal
statutory rate to income tax expense for the year ended March 31, 2000
is as follows:
Tax (benefit) at federal statutory rate (34.00)%
Effect of permanent difference 10.00 %
Income tax benefit not utilized 24.00 %
---------
Total -
=========
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on weight of the evidence , it is more likely
than not that some portion or all of the deferred tax assets will not
be realized. After consideration of all the evidence, both positive and
negative, management has determined that a full valuation allowance at
March 31, 2000 is necessary to reduce the deferred tax assets to the
amount that will more likely than not be realized. At March 31, 2000
the Company has available net operating loss carryforwards of
approximately $24,000,000 which expire in the year 2015.
12. PREFERRED STOCK
The Company has authorized, but unissued shares, of non-voting
preferred stock that may be issued in series with such preferences as
determined by the Board of Directors. The following series of preferred
stock are outstanding at March 31, 2000:
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 lessor of 75% of the average
closing bid price of the common stock for the 10 days prior to
conversion or $4. The securities must be converted in 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-13
<PAGE>
The Company recorded a deemed dividend of $750,000 for the discount
upon conversion. In fiscal 1999, $687,500 of Series F preferred shares,
$171,750 of deemed dividends and $21,400 of 8% coupon rate dividends
were converted to 1,110,901 common shares.
During the year ended March 31, 2000 $125,031 of Series F preferred
shares were converted into 306,836 common shares and $170,062 of
penalties were converted to 625,276 shares.
On May 31, 2000 a portion of the Series F was assumed by the purchaser
of Fone (see note 16).
13. COMMITMENTS
LEASES
The Company leases office space, vehicles and equipment under
noncancelable operating leases expiring in various years through 2004.
Future minimum rental commitments under long-term noncancellable
operating leases are as follows:
Year ending March 31,
2001 $ 133,443
2002 75,777
2003 47,942
2004 11,700
During the year ended March 31, 2000 and 1999 rent expense was $109,462
and $222,524, respectively.
EMPLOYMENT AGREEMENTS
On October 1, 1999, the Company entered into five year employment
agreements with certain officers that requires the Company to pay
minimum compensation of approximately $600,000 per year. Compensation
is increased annually by the rise in the consumer price index plus 5%.
Several resignations and the sale of a subsidiary company combined with
the rewriting of one officer's contract, subsequent to year end, have
reduced the minimum compensation payable per year to $300,000.
F-14
<PAGE>
In addition Muller has employment agreements with certain officers that
requires Muller to pay minimum compensation of approximately $550,000
per year. These contracts expire in June 2001 with a one year extension
at the employee's option.
LEGAL MATTERS
On May 7, 1999 the Securities and Exchange Commission (SEC) suspended
trading in the Company's stock and commenced an investigation under
the authority of Section 20(a) of the Securities Act of 1933 and
Section 21(a) of the Securities Exchange Act of 1934.
On June 23, 2000, a civil complaint was filed in the United States
District Court for the Southern District of New York, by the
Securities and Exchange Commission against the Company and certain of
it's then officers in an action entitled Securities and Exchange
Commission v. DCI Telecommunications, Inc., under file number
00CIV4664. The complaint alleges amongst other violations improper
accounting, which violates certain sections of the Securities Act of
1933 and the Securities Exchange Act of 1934 and certain rules
promulgated thereunder. The complaint seeks to: (i)permanently enjoin
the Company and it's certain named officers from violating various
sections of the Securities Act of 1933 and the Securities Exchange Act
of 1934 and certain rules promulgated thereunder; (ii) have the
Company and such officers provide an accounting and disgorge certain
gains together with prejudgment interest and (iii) have the Company
and it's officers pay civil monetary penalties.
While no answer has been filed as of July 26, 2000 the Company and the
charged officers refute these charges and it is DCI's management's
intention to contest this matter vigorously.
On or about May 7, 1999 the Company along with its subsidiary Edge
Communications was served with a complaint alleging:
Breach of obligations with respect to providing
telecommunications services, including customer service
seeking approximately $2,700,000 in damages and
Slander throughout the telecommunications industry with no
specific damages stated.
Discovery is in its preliminary stages and no opinion can be given as
to the likelihood of a successful defense or the extent of potential
damages if the defense is unsuccessful.
In December 1998, the Company was served with a claim in federal court
in Delaware for a broker's fee with respect to the Company's
acquisition of Cardcall in the amount of $250,000. This matter is in
its preliminary stage and the Company believes it has a complete
defense to this claim.
F-15
<PAGE>
INDEMNIFICATION OF OFFICERS
In September 1999 the Company's Board of Directors voted to indemnify
both the Company's Chief Executive Officer and Chief Financial Officer
for expenses incurred in connection with the SEC investigation and any
subsequent enforcement proceedings resulting therefrom. As of March 31,
2000 approximately $150,000 has been accrued for these liabilities.
14. STOCK OPTION PLAN
In the year ended March 31, 1995, the Company established an incentive
stock option plan (the "Plan"). Under the Plan, the Company has
reserved 10,000,000 shares of common stock for issuance pursuant to
options granted under the Plan.
The exercise price must be at least the market value at the date of
grant, and cannot have a term of more than 10 years. The Company has
placed an annual limit on options of $100,000 per calendar year per
employee. If such limit is not met, 50% of the excess may be carried
over for up to 3 years. In June 1999 the Company issued 200,000 options
to certain officers and employees at an exercise price of $.81 per
share.
The following table summarizes the changes in options and warrants
outstanding, and related exercise price for shares of the Company's
common stock:
Stock Options
---------------------------------------------------------
Weighted
average
Shares exercise price Exercisable
----------- ---------------- -------------------
Outstanding at
March 31, 1998 8,849,611 $0.47 8,849,611
Granted 3,780,443 $0.86 3,780,443
Exercised (4,387,016) $0.20 (4,387,016)
Canceled (1,474,350) $0.56 (1,474,350)
------------ ---------------- -------------------
Outstanding at
March 31, 1999 6,768,688 $0.53 6,768,688
Granted 200,000 $0.81 200,000
Canceled - - -
------------ ---------------- -------------------
Outstanding at March
31, 2000 6,968,688 $0.54 6,968,688
F-16
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes information about exercisable stock
options and warrants at March 31, 2000:
Outstanding Exercisable
---------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
---------------- ----------------- ------------------ ------------- ----------------- -------------
Options: $0.19 to 6,968,688 1 year to $0.54 6,968,688 $0.54
$1.34 4.5 years
Warrants $1.56 to 525,391 1 year to 5 $2.55 525,391 $2.55
$3.63 years
</TABLE>
For disclosure purposes, the fair value of options 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
during the years ended March 31, 2000 and 1999: expected volatility
72%, risk free rate of 4.58%, no expected dividends and weighted
average expected life of the options of 5 years. The weighted average
fair value of stock options granted during the year ended March 31,
2000 and 1999 was $ 81,875 and $1,277,789, respectively. If the
Company had recognized compensation cost of stock options in accordance
with SFAS 123, the Company's pro forma loss and net loss would have
been as follows:
Year Ended March 31,
2000 1999
----------------------------
Net loss to common stockholders:
As reported $ 28,800,597 $12,877,053
Pro forma $ 28,882,472 $14,154,842
Net loss per share to common stockholders:
Basic
As reported $ (0.96) $ (0.54)
Pro forma $ (0.97) $ (0.64)
F-17
<PAGE>
15. SEGMENT INFORMATION
The Company's operations are classified into two business segments as
follows:
Travel: Includes a travel agency
Media, Inc: Distribution of syndicated programming
and motion pictures to the television
and cable industry
No segment information is presented since the travel segment's revenue
and operating profits do not exceed 10% of the consolidated amounts.
16. DISCONTINUED OPERATIONS
In 1999 the Company discontinued the operations of it's Canadian
companies engaged in the telecommunications business which included
Cardcaller Canada, Inc., a company which it acquired in 1997, Phoneline
Cardcall International a company formed on March 31, 1998, and
Cyberfax, Inc. a company it acquired on April 9, 1997. Also included in
discontinued operations for the year ended March 31, 1999 was the
write-off of a receivable of $650,000 from Smartalk Teleservices, Inc.
("Smartalk"). The Company and Smartalk were engaged in the prepaid card
business.
In Fiscal 2000 the Company decided to sell or discontinue its
telecommunications businesses, which included Edge, Fone and Coast. The
Company sold Fone (see Note 17) and ceased operations of Edge and
Coast. The loss from discontinued operations are summarized below:
2000 1999
------------------- ------------------
Revenues $ 8,833,602 $ 29,129,442
Costs and expenses 15,447,749 15,047,767
Loss (gain) on disposition (1,389,654) 1,098,228
Loss on Master Service agreement 13,321,093 -
Write-off of goodwill 6,454,709 3,185,558
------------------- ------------------
Net loss $ 25,000,295 $ 9,797,889
=================== ==================
The Company's 1999 consolidated financial statements have been
reclassified to conform with the 2000.
F-18
<PAGE>
17. SUBSEQUENT EVENTS
Effective May 31, 2000, (closing date June 2, 2000) The Company sold
all of the common stock of Fone to Tanners Restaurant Group, Inc.
("Tanners") in exchange for 40,000,000 shares of Tanners and the
assumption by Tanners of $3,453,652 of debt of the Company. The debt
assumed was $1,348,605 (other long term liability), $1,905,047 of
redeemable convertible preferred stock and $200,000 of notes payable to
Triton Private Equities Fund, Ltd. included in long term debt. After
the transaction DCI will own 62.67% of the outstanding shares of
Tanners.
F-19
