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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 [Fee Required]
For the Fiscal Year Ended April 30, 1996
OR
Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 [No Fee Required]
For the transition period from to
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Commision File Number 0-18288
DIRECT CONNECT INTERNATIONAL INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2705223
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(State or other jurisdiction of (IRS Employer
incorporation or organization) I.D. No.)
266 Harristown Road, Glen Rock, New Jersey 07452
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 445-2101
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:Units consisting of
shares of Common Stock and Class A Warrants, Common Stock, par value $ .001 per
share, Class A Warrants and Class B Warrants.
----------------
(Title of Class)
Indicate by check mark whether the Registrant (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 Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X N0
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Indicate by check mark if disclosure of delinquent filers puruant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K{}.
As of July 31, 1996, there were 9,062,066 shares of Common Stock, par value
$ .001 per share, outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of July 31, 1996 was approximately $1,760,000.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
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TABLE OF CONTENTS
PART I
Page Number
ITEM 1. BUSINESS............................................... 3
ITEM 2. PROPERTIES............................................. 9
ITEM 3. LEGAL PROCEEDINGS...................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................ 9
ITEM 6. SELECTED FINANCIAL DATA................................ 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............ 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............ 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..... 51
ITEM 11. EXECUTIVE COMPENSATION................................. 52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................. 56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...................................... 61
SIGNATURES............................................. 64
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PART I
ITEM 1. BUSINESS
The Company has been involved in the toy business since its inception. At the
present time, the Company designs, develops, markets and distributes a variety
of infant, preschool and girls toy products which are manufactured in the Far
East. The Company has entered into an exclusive license agreement to sell
stuffed plush toy/puppets and other products for characters featured in the
Shari Lewis television program "Lamb Chop's Play Along (Registered Trademark)" -
Lamb Chop (Registered Trademark), Charlie Horse (Registered Trademark), and Hush
Puppy (Registered Trademark). The Company recently has developed a new product
line called Tea Bunnies (Registered Trademark). The Company's products are
intended to be sold at retail prices ranging from $1.50 to $30.00 and are being
distributed to major toy, discount department stores, drug chains and catalog
companies, such as Toys R Us, Kmart, WalMart, F.A.O. Schwarz, Ames Department
Stores, Bradlees, Hills Department Stores, Walgreen Drug Stores, Thrift Drug
Stores and KayBee.
SHARI LEWIS' LAMB CHOP (REGISTERED TRADEMARK) PRODUCTS
In October 1991, the Company entered into an exclusive license agreement through
December 31, 1995, as renewed and through December 31, 1996 on a nonexclusive
basis, with Shari Lewis Enterprises, Inc. for stuffed plush toys/puppets and
other products for the characters Lamb Chop (Registered Trademark), Charlie
Horse (Registered Trademark), and Hush Puppy (Registered Trademark) covering the
United States, its territories and possessions and Canada. The agreement, as
amended in February 1993, provides for royalties of between 8% and 10% of net
sales, as defined, of the products covered by such agreement with a total
royalty guaranty aggregating $50,000, which has been met. The agreement is
terminable only for noncompliance and in the event of insolvency or similar
events.
Shari Lewis and Lamb Chop (Registered Trademark) first appeared on television in
the late 1950's. Her television programs have earned her eight Emmy Awards and
are syndicated throughout the world. Shari Lewis is an accomplished singer,
dancer, ventriloquist, symphony conductor and magician, and all of these talents
are demonstrated in her program format to create a variety of children's
entertainment that encourages child participation. In addition to appearing on
television, Shari Lewis often tours the United States performing live shows with
her puppet friends. Shari Lewis' best selling videos have earned the American
Video Conference Award, Parent's Choice Award, Ladies Home Journal Award, the
Video Choice Award, Action for Children's Television Award, among others.
Shari Lewis' Lamb Chop (Registered Trademark) and friends introduced a new
television series on Public Broadcasting Stations (PBS) in January 1992 called
Lamb Chop's (Registered Trademark) Play-Along. The show has won critical acclaim
and won an Emmy Award in 1992 for children's programming.
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Shari Lewis won two Emmy Awards in 1993 for Lamb Chop's (Registered Trademark)
Play-Along as Outstanding Performer in a Children's Series and for Outstanding
Writer in a Children's Series. In 1994 Shari Lewis won an Emmy Award for
Outstanding Performer in a Children's Series. Shari Lewis Enterprises will
provide new shows for "PBS" extending into 1997.
ZOO BORNS (TRADEMARK) AND TEA BUNNIES (TRADEMARK) PRODUCT LINES
In the 1995 fiscal year, the Company introduced a new product line - Zoo Borns
(Trademark). Zoo Borns (Trademark) baby animals are a new range of toys that the
Company believes apply proven traditional, nurturing doll play to a stuffed
animal. Each baby animal features a unique baby animal sound and a pretend
feeding dropper. There are currently eight animals in the line that children
will be able to collect.
In fiscal 1996, the Company introduced a new product line, Tea Bunnies
(Trademark). Tea Bunnies (Trademark) are a group of bunny-like characters that
live in the fantasy town of Sunny Bunny Bay. The Company has developed a range
of toy miniature dolls and play accessories depicting these characters. Tea
Bunnies (Trademark) toy products combine fashion doll and tea party play value.
Each Tea Bunny features a specific flower in its ears and lives in a matching
tea cup house or shop. During the 1996 fiscal year, the Company introduced nine
different Tea Bunny playsets. A thirty(30) second television commercial was
produced and aired beginning February 1996. The Company has licensed the
worldwide rights to the Tea Bunnies (Trademark) from The Beanstalk Group for
several toy product categories and has rights and renewal rights until the year
2000. The Company has been advised that The Beanstalk Group intends to license
the Tea Bunnies (Trademark) characters for use in publishing, party goods,
wearing apparel, stationery, food products and other industries. The Company
will share in the royalties generated by these licenses.
The Zoo Borns(Trademark) and Tea Bunnies(Trademark) product lines were sold
during the fiscal year ended April 30, 1996. See discussion continued herein.
MANUFACTURING
The Company does not manufacture any of its toy products. Instead, the Company
contracts, through Amerawell Products, Ltd., its Hong Kong subsidiary, for the
manufacture of its products by third parties, primarily in China and Hong Kong.
Amerawell Products, Ltd. was organized in January 1987 by Messrs. Peter
Schneider and Y.S. Ling to provide manufacturing and product development
services. Contracting decisions are made on the basis of price (including
freight charges and customs duties), availability of payment terms, quality,
reliability and the ability to meet the Company's timing requirements for
production in relation to delivery schedules. The Company believes that its
present manufacturing arrangements are advantageous to the Company in providing
quality products at reasonable prices, with prompt response to orders. The
Company incurs none of the fixed costs involved in owning its own factories, and
the flexibility provided by this arrangement allows the Company to seek out the
best manufacturing terms available. However, the use of third party
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manufacturers reduces the Company's ability to control directly the timing and
quality of the manufacturing process. Delays in shipments or defects in products
can result in a loss of orders which could have a material adverse effect on the
Company. To date, the Company has not experienced any material delays in the
delivery of its products or any material defects in its products. Substantially
all contracted manufacturing services are paid by either letter of credit or
telegraphic transfer only upon the proper fulfillment of terms established by
the Company such as adhering to product quality, design, packaging and shipping
standards and proper documentation relating thereto. All products purchases are
made and paid for in U.S. dollars.
The Company is not a party to any long-term contractual or other arrangements
with any specific supplier. A substantial portion of the Company's products have
been produced by one manufacturer, Well World Toy Co., Ltd. ("Well World"), the
principal owner of which is Y.S. Ling, a principal stockholder of the Company
and one of its executive officers. Well World has provided product development
and contract manufacturing services for the Company. The Company paid Well World
approximately $396,000, $678,000, and $92,000 during the fiscal years ended
April 30, 1996, 1995 and 1994, respectively, for the manufacture of products
F.O.B. Far East port cost, and approximately $27,000, $49,000 and $0 during the
fiscal years ended April 30, 1996, 1995, and 1994, respectively, for product
development expenses. The Company believes that it will require manufacturing
services from Well World during the current fiscal year. The Company also may
require product development services from Well World during the current fiscal
year. In fiscal 1996, the Company used three manufacturers: Well World,
Tri-State Manufacturing Co. and Guidelink in Hong Kong and China. The Company
arranges for the making of its products with such manufacturers who, in turn,
subcontract for the manufacture of components of these products with
unaffiliated third parties also located in the Far East. These companies use the
Company's tools and molds. The Company intends to utilize more than one
manufacturer to produce a single product if high volume demand exists. The
Company's ability to have its products manufactured in the Far East could be
affected by political or economic disruptions, including labor strikes and
disruptions in the shipping industries. While the Company believes that
alternative sources of supply are available, any serious disruption could
materially impair the Company's ability to deliver products in a timely manner.
The Company is experiencing no difficulties in arranging for the current
manufacture of its products in Hong Kong and China. The Company believes the
current political and economic climate in those countries is such that it is
confident about the efficiency and effectiveness of the manufacturing process.
The Company has experienced no problems as a result of any political or economic
disruptions in the Far East.
The principal raw materials used in the production and sale of the Company's
products are plastics, plush and printed fabrics and paper products, all of
which are currently available at reasonable prices from a variety of sources.
The Company's tools and molds (which are less than six years old and are in good
working condition) and package designs, which are owned by the Company, are
designed both by the Company and by third parties and are engineered and
produced for the Company in the Far East. The Company normally does not purchase
back-up tools and molds because the Company believes that the existing tools and
molds can adequately support the sales volume of the Company's business, and the
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cost of back-up tools and molds is too expensive in view of the level of the
Company's current business. If a tool or mold breaks, the Company's production
could be delayed until a new tool or mold becomes available, generally within 90
to 120 days. Resulting delays in shipments could have a material adverse effect
on the Company. The Company directly, or through its sales representatives,
takes written orders (standard purchase orders) for its products from its
customers and arranges for the manufacture of its products as discussed above.
Cancellations are generally made in writing, and the Company takes appropriate
steps to notify its manufacturers of such cancellations. The manufacturers
generally ship the Company's products by commercial ocean carrier pursuant to
instructions from the Company's customers.
ORDER BACKLOG
At April 30, 1996, the Company had a backlog of confirmed orders from customers
of approximately $10,000. Such orders were shipped in May 1996. At April 30,
1995, the backlog of confirmed orders was approximately $124,670. At April 30,
1994, the backlog was $1,400,000.
MARKETING AND DISTRIBUTION
The Company markets its products to major toy, discount department stores, drug
chains and catalog companies. The Company's products are presently being sold in
approximately 3,000 retail outlets. The primary target market continues to be
the United States. The Company also is currently distributing its products in
Canada. Some of the major accounts which have ordered the Company's products
include Toys R Us, Walmart, Meijer, Hills Department Stores, Kmart, F.A.O.
Schwarz, Bradlees, Ames Department Stores, The Kroger Co., Waldenbooks, Walt
Disney World and KayBee. Substantially all of the Company's sales to date have
been made on a direct import basis to customers, F.O.B. Far East port, and
payments are made by irrevocable letter of credit or telegraphic transfer. As a
result, on these sales the Company does not have to finance inventory or offer
credit terms to the customer. This reduces much of the risk that is commonly
associated with a fashion business such as toys. The Company has established an
office in Hong Kong that is responsible for order processing, documentation,
letter of credit issue and negotiation, bank coordination and accounting. This
office and its systems performed satisfactorily during the fiscal year ended
April 30, 1996. Virtually all of the products manufactured to date have been
tested for safety by independent laboratories contracted by the Company and its
retail customers. The results of these tests indicated that the products shipped
by the Company have met industry and government standards. The Company's
customers have the right to appoint a representative to inspect the Company's
products before shipment. If they do not elect to make an inspection, a
representative of the Company will do so. Generally, payment for the products
under the letter of credit will not be made unless inspection is completed. At
that point the Company's general policy is that such sales are final, and
product returns are not permitted. However, should a defect occur in the product
or if sales of the product do not meet customers' expectations, the Company
intends to support its customers by making a product exchange or providing a
cash allowance. The Company believes that the toy industry generally follows
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this policy. Recently, the amount of exchanges or allowances experienced by the
Company has been significant. However, given the level and nature of the
Company's current business, the Company does not expect such exchanges or
allowances to be significant in the near future. In the fiscal year ended April
30, 1994, sales to Macy's and Toys R Us constituted approximately 17% and 12%,
respectively, of revenues. In the fiscal year ended April 30, 1995, sales to
Toys R Us and Walmart constituted approximately 28% and 11%, respectively, of
revenues. In the fiscal year ended April 30, 1996, sales to Walmart and Avon
Products constituted approximately 49%, and 19%, respectively, of revenues. No
other customer accounted for more than 10% of revenues during fiscal 1994, 1995
or 1996. The Company believes that the loss of a material customer would have a
material adverse effect on the Company's business.
SEASONALITY
The business of the Company is highly seasonal. For the fiscal year ended April
30, 1996, approximately 32 % of the Company's revenues were related to retail
sales, coinciding with the Christmas holiday shopping period. Such sales
accounted for approximately 35% and 46% of the Company's total sales in the
fiscal years ended April 30, 1995 and 1994, respectively.
PRODUCT LIABILITY
The Company maintains product liability coverage in the amount of $1,000,000
which is the amount acceptable to the Company's customers. The Company has not
been the subject of any product liability litigation.
COMPETITION
The market for toy products is highly competitive and sensitive to changing
consumer preferences and demands. The Company believes that the quality of its
products, as well as its ability to develop and distribute new products should
enable it to continue to compete effectively in the future and to continue to
achieve positive product reception and position in retail outlets. However,
there are toy products which are better known than the products developed and
distributed by the Company. There are also many companies which are
substantially larger and more diversified, and which have substantially greater
financial and marketing resources than the Company, as well as greater name
recognition, and the ability to develop and market products similar to, and more
competitively priced than, those developed and distributed by the Company.
EMPLOYEES
As of April 30, 1996, the Company had seven employees,six of whom were full-time
employees. Three employees are in administration, two employees are in
operations management, one employee is in product development, and one employee
is in sales and general management. The Company believes that its relations with
its employees are generally satisfactory. The Company has one employee at the
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Hong Kong office of its subsidiary. The operations of such office are performed
by an independent service company on behalf of such subsidiary.
TRADEMARKS
The products offered by the Company have generally been licensed on an exclusive
basis whereby the Company pays a percentage of sales in return for product
design and development services and an exclusive right to use the copyrighted
art and trademark names of the property. The Company buys the rights to these
copyrights and trademarks for its products in order to protect certain features
of the products and to prevent unauthorized copying of protected features, which
could materially adversely affect the sales volume of such products. Many of the
designers and developers that have such arrangements with the Company have a
history of enforcing their trademarks and copyrights to the extent necessary to
prevent copying. However, it is possible to create artwork and names that convey
a similar concept to a proprietary product that may not infringe on the
Company's rights. Therefore, the Company believes that its continued success
will be dependent upon ongoing development of new products and product concepts
as well as on trademark and copyright protection.
GOVERNMENT REGULATION
The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. These laws
empower the Consumer Product Safety Commission (the "Safety Commission") to
protect children from hazardous toys and other articles. The Safety Commission
has the authority to exclude from the market articles which are found to be
hazardous and can require a manufacturer to repurchase such toys under certain
circumstances. Any such determination by the Safety Commission is subject to
court review. Similar laws exist in some states and cities in the United States
and in Canada and Europe. The Company believes that its products are currently
in compliance with the aforementioned acts.
The United States government has established a Generalized System of Preferences
which now provides favorable duty status to certain of the Company's products
that are imported into the U.S. from certain countries in the Far East. The
Generalized System of Preferences is administered by the Office of the U.S.
Trade Representative . It is possible that these products , which are now
imported on a favorable duty status from certain countries, may lose such
status. In such case, products imported from such location into the U.S. would
be subject to duties ranging from approximately 5% to 30%. While the Company's
competitors whose products are manufactured in the Far East also may be
affected, the Company's profit margins may be materially adversely affected.
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ITEM 2. PROPERTIES
The Company's principal office is located in approximately 3,000 square feet of
office space at 266 Harristown Road, Glen Rock, New Jersey. These premises are
being used by the Company under its management agreement with Evolutions, Inc.
described herein. The Company's facilities are satisfactory for its present
needs, and additional office space is available at reasonable rentals in the
same location to cover the Company's growth for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the knowledge of the
Company, threatened to which the property of the Company is subject or to which
the Company is or may be a party. For information regarding potential litigation
with respect to certain indebtedness of the Company, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
last quarter of the fiscal year ended April 30, 1996.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Common Stock and Redeemable Class A Warrants were traded on The National
Association of Securities Dealers automated Quotation System ("NASDAQ") Small
Cap Market under the symbols KIDZ and KIDZW, respectively, through September 12,
1995. The following table sets forth the quarterly high and low bid quotations
as reported by NASDAQ for the periods indicated. The figures shown represent
"inter-dealer" prices without adjustment or mark-ups, mark-downs or commissions.
They do not necessarily represent actual transactions. Currently, the Company,
which is unable to meet the NASDAQ maintenance criteria: minimum assets of
$4,000,000 and minimum capital and surplus of $2,000,000 has its securities
traded in the over-the-counter market on the OTC Bulletin Board. Like NASDAQ,
this market is electronic and screen-based and provides a market for companies
until they requalify for NASDAQ. However, for the Company, such criteria is
primarily tied to the value of its equity holdings in Glasgal Communications,
Inc. ("Glasgal") which may fluctuate with the result that the Company absent an
infusion of new capital and/or an increase in the value of its investment
holdings will not satisfy such NASDAQ listing criteria for future relisting. As
of July 31, 1996, there were approximately 130 and 40 holders of record of
Common Stock and Redeemable Class A Warrants, respectively. The Company
believes, based on information provided by brokers, that there are in excess of
1000 beneficial owners of the Common Stock.
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On July 31, 1996 the closing bid prices per share of Common Stock and Redeemable
Class A Warrants were $.28, and $.28 , respectively, as reported on the OTC
Bulletin Board.
<TABLE>
<CAPTION>
Common Stock High Bid Low Bid
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<S> <C> <C>
Fiscal Quarter Ended
July 31, 1991 2 3/8 1 1/8
October 31, 1991 2 1 1/4
January 31, 1992 1 3/4 7/8
April 30, 1992 15/32 3/8
July 31, 1992 1 1/16 1/32
October 31, 1992 1 1/4 1
January 31, 1993 11/2 13/16
April 30, 1993 1 1/4 1
July 31, 1993 15/16 5/8
October 31, 1993 27/32 1/2
January 31, 1994 7/8 7/16
April 30, 1994 1 7/16
July 31, 1994 13/16 5/16
October 31, 1994 19/32 9/32
January 31, 1995 13/32 3/16
April 30, 1995 11/32 3/16
July 31, 1995 2/3 7/25
October 31, 1995 15/32 11/32
January 31, 1996 1/2 5/16
April 30, 1996 15/32 7/25
July 31, 1996 11/32 9/32
</TABLE>
<TABLE>
<CAPTION>
Redeemable Class A Warrants High Bid Low Bid
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<S> <C> <C>
Fiscal Quarter Ended
July 31, 1991 2 1/4 5/8
October 31, 1991 2 7/8 1 5/8
January 31, 1992 21/2 11/16
April 30, 1992 1 3/8
July 31, 1992 3/8 1/32
October 31, 1992 1/2 1/4
January 31, 1993 3/4 1/4
April 30, 1993 11/16 1/2
July 31, 1993 11/16 3/8
October 31, 1993 5/8 1/2
January 31, 1994 9/16 3/8
April 30, 1994 11/2 3/32
July 31, 1994 1 3/32 3/8
October 31, 1994 5/8 7/32
January 31, 1995 5/16 1/8
April 30, 1995 11/32 5/32
July 31, 1995 1/2 1/6
October 31, 1995 7/16 1/4
January 31, 1996 3/8 1/6
April 30, 1996 15/32 1/4
July 31, 1996 11/32 9/32
</TABLE>
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The Company has never paid cash dividends and does not currently intend to pay
cash dividends. The Company intends to retain earnings, if any, to finance the
growth of its business.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain financial data relating to the
Company's operations for the five fiscal years ended April 30, 1996. The data
should be read in conjunction with the financial statements and the notes
thereto.
Balance Sheet Information
<TABLE>
Fiscal Year Ended April 30
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working Capital ......($ 292,984) $ 1,723,845 ($ 913,962) ($2,649,327) ($2,653,221)
(Deficit)
Total Assets .........$ 919,793 $ 3,475,538 $ 5,844,135 $ 3,328,583 $ 3,588,622
Total Liabilities ....$ 969,164 $ 1,614,831 $ 2,715,514 $ 4,376,657 $ 3,170,478
Stockholders' Equity .($ 49,371) $ 1,860,707 $ 3,128,621 ($1,048,074) $ 418,145
(Deficit)
Stockholders' Equity .($ .01) $ .21 $ .35 ($ .11) $ .05
(Deficit) Per
Outstanding Common
Share
Statements of
Operations Information
- ----------------------
Net Sales ............$ 1,602,804 $ 3,019,152 $ 9,583,286 $ 3,899,152 $ 1,094,584
Operating Expenses ...$ 2,883,723 $ 3,896,471 $ 9,521,276 $ 6,699,365 $ 2,537,180
Net Profit (Loss) ....($1,307,769) ($ 529,947) ($1,320,502) ($4,165,235) $ 1,414,342
Net Profit (Loss) Per ($ .17) ($ .03) $ .09 ($ .46) $ .09
Common Share/
Common Share
Equivalent
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Fiscal Years Ended April 30, 1996, 1995, and 1994
NET SALES
Net sales for the fiscal year ended April 30, 1996 were $1,094,584 as compared
to $3,899,152 for the fiscal year ended April 30, 1995 and $9,583,286 for the
fiscal year ended April 30, 1994.
Sales for the fiscal year ended April 30, 1994 consisted primarily of the Shari
Lewis Lamb Chop (Registered Trademark) product line. The 10% royalty payable
under the Shari Lewis license is currently the highest royalty being paid by the
Company for any of its licensed properties. Sales for the fiscal year ended
April 30, 1995 consisted primarily of the Zoo Borns (Registered Trademark) and
Tea Bunnies (Registered Trademark) product lines which were sold to a third
party in September 1995, accounting for the decrease in sales for the fiscal
year ended April 30, 1996 as compared to the fiscal year ended April 30, 1995.
For additional information regarding such sale, see Liquidity and Capital
Resources herein.
Sales from such sold product lines represent approximately 50 % and 35% of the
Company's revenues for the fiscal years ended April 30, 1996 and 1995,
respectively. Sales from the Shari Lewis product line represent approximately
29% and 24%, respectively, of the Company's revenues for the fiscal years ended
April 30, 1996 and April 30, 1995, respectively.
The Company continues to seek licensed properties to add to its product lines.
The business of the Company is highly seasonal, due to increased consumer demand
for toy products during the Christmas holiday season. During the fiscal years
ended April 30, 1996, 1995 and 1994 approximately 32%, 35%, and 46%,
respectively, of the Company's revenues for retail sales related to the final
quarter of the calender year. The seasonality of sales may cause a significant
variation in quarterly operating results, and a significant decrease in fourth
quarter sales relating to the holiday season may have a material adverse effect
upon the Company's profitability.
After the fiscal year ended April 30, 1994 the Company's sales were hampered by
economic uncertainties and a cautious retail environment. The principal market
for the Company's products is the retail sector where certain customers have
been experiencing economic difficulties including bankruptcy and reorganization
filings. The Company's operations have not been significantly affected by
inflation.
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GROSS PROFIT
Gross Profit percentage for the fiscal year ended April 30, 1996 was 8% as
compared to 34% and 34% for the fiscal years ended April 30, 1995 and 1994,
respectively. This decrease resulted primarily from discounts and other direct
product costs relating to the product line which was sold.
ROYALTIES/LICENSING FEES
Royalties/Licensing fees are variable expenses which increase as sales
increase. In the fiscal years ended April 30, 1996, 1995, and 1994 the Company
paid approximately $156,875 (or 14% of sales), $477,201 (or 12% of sales) and
$1,016,984 (or 11% of sales) respectively, in royalties on sales of products. In
order to match revenues with expenses, minimum royalty guarantees are treated as
prepaid expenses and are charged against income as the related products are
sold. In fiscal 1995 the amount of royalties paid as a percentage of sales
increased due to the fact that any minimum guaranty paid or accrued in excess
of earned royalties was charged against income at the point that it was known
that earned royalties would not cover minimum royalties. For fiscal 1995, the
Company made, pursuant to such license agreements, minimum royalty payments
aggregating approximately $125,000. The Company made no such payments in fiscal
1996.
OTHER INCOME
Other income amounted to approximately $2,300,000 for the fiscal year ended
April 30, 1996. In fiscal 1995 other income amounted to $80,804. In fiscal 1994
other income amounted to $10,697. Included in other income for April 30, 1996
was $845,705 from the sale of the Zoo Borns and Tea Bunnies product lines. See
Liquidity and Capital Resources. Also the Company recorded approximately
$1,450,000 of net income from sales of shares of its investment in Glasgal.
Interest income amounted to $28,708 for the fiscal year ended April 30, 1996.
Interest income for fiscal 1995 was $28,533 compared to $106,302 for fiscal
1994. The decrease of $77,769 in fiscal 1995 was primarily attributable to the
conversion of a note receivable into an investment in Glasgal in January 1994.
PRODUCT DEVELOPMENT COSTS
In fiscal 1996 the Company recovered approximately $67,000 in development costs
in connection with the sale of product lines as compared to incurring $545,202
and $114,038 of such costs in fiscal 1995 and 1994, respectively. The increase
in fiscal 1995 over 1994 was due primarily to development costs incurred with
regard to the Zoo Borns (Trademark) product line.
13
<PAGE>
ADVERTISING COSTS
Advertising costs amounted to $71,312 for the fiscal year ended April 30, 1996
as compared to $758,142 and $58,852 for the fiscal years ended April 30, 1995
and April 30, 1994, respectively. The reduction of advertising costs for fiscal
1996 was due to the sale of product lines. The increase in fiscal 1995 was
primarily attributable to the Company's advertising requirements in connection
with the introduction and television promotion of the Zoo Borns (Trademark)
product line.
GENERAL AND ADMINISTRATIVE EXPENSES
The following is a breakdown of the principal components of general and
administrative expenses for the fiscal years ended April 30, 1996, 1995 and
1994.
<TABLE>
<CAPTION>
Percentage Percentage Percentage
1996 of Sales 1995 of Sales 1994 of Sales
---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Salaries, payroll taxes and
employee benefits ......... $833,386 76.1 $615.723 15.8 $564,331 5.9
Professional fees ......... 115,192 10.5 360,560 9.3 $119,281 1.2
Financing cost ............ 598,278 54.7 424,660 10.9 0 0
Sales commissions.......... 53,828 4.9 187,986 4.8 469,658 4.9
Letter of credit charges... 27,614 2.5 177,958 4.6 168,476 1.8
Rent and office expenses .. 71,601 6.5 139,553 3.6 179,725 1.9
Travel and entertainment .. 123,845 11.3 115,024 2.9 188,801 2.0
Insurance.................. 79,779 7.3 80,981 2.1 29,447 0.3
Other...................... 47,338 4.3 52,237 1.3 19,363 0.2
Warehouse expense ......... 11,285 1.0 41,950 1.1 130,870 1.4
Stockholder expense ....... 20,502 1.9 29,967 0.8 29,454 0.3
Telephone charges.......... 21,842 2.0 28,484 0.7 31,333 0.3
Bad debts.................. 7,793 0.7 24,293 0.6 7,646 0.1
Consulting fees ........... 0 0 0 0 30,000 0.3
--------- ------ ---------- ---- ---------- ----
$2,012,283 183.7 $2,279,376 58.5 $1,968,385 20.6
</TABLE>
For the fiscal year ended April 30, 1996 salaries, payroll taxes and employee
benefits increased by approximately $218,000 primarily due to the payment to an
Executive Vice President for his services in connection with the sale of Company
product lines. For the fiscal year ended April 30, 1995, salaries increased to
$615,723, an increase of 9% over fiscal 1994. This increase was attributable
primarily to additional compensation of $25,000 paid to an Executive Vice
President, for services rendered in Taiwan and for general salary increases.
Decreases for the fiscal year ended April 30, 1996 in letter of credit charges
was due to the sale of product lines. Increases for the fiscal year ended April
30, 1995 from April 30, 1994 in letter of credit charges were due to an increase
in the Company's costs of overseas quality control, which was allocated to the
letter of credit budget, and the costs of lower unit orders.
Due to the decrease in sales volume and the sale of product lines in fiscal
1996, warehousing expenses decreased to $11,285 for the fiscal year ended April
30, 1996 and to $41,950 for the fiscal year ended April 30, 1995 from $130,870
for the fiscal year ended April 30, 1994.
14
<PAGE>
Sales commissions for the fiscal year ended April 30, 1996 decreased to $53,828
as a result of the significant decrease in sales due to the sale of product
lines. Sales commissions for the fiscal year ended April 30, 1995 decreased to
$187,986 from $469,658 for the fiscal year ended April 30, 1994 as sales
significantly decreased over the prior year.
Consulting fees for the fiscal year ended April 30, 1995 decreased to $0 from
fiscal 1994. Consulting fees for the fiscal year ended April 30, 1994 was
$30,000 primarily due to consulting services rendered to the Company in
connection with the termination of the proposed merger with Glasgal.
Bad debt expenses increased to $24,293 for the fiscal year ended April 30, 1995
from $7,646 for the fiscal year ended April 30, 1994.
Financing costs of $598,278 and $424,660 were incurred during the fiscal years
ended April 30, 1996 and April 30, 1995, respectively, as a result of
refinancing the Company's debt.
In fiscal 1996, the Company earned a management fee of $690,000 which covers the
monthly reinbursement of the costs incurred by the Company in connection with
its operations as it relates to supporting the product lines which were sold.
Set forth below are the principal components. Such reimbursement relates, in
part, to salaries , payroll taxes and employee benefits referred to above.
For the fiscal years ended April 30, 1996 and 1995, decreases in telephone and
travel and entertainment costs resulted from the decrease in sales.
Rent and office expenses decreased to $71,601 for the fiscal year ended April
30, 1996. Rent and office expenses decreased to $139,553 for the fiscal year
ended April 30, 1995 from $179,725 for the fiscal year ended April 30, 1994.
Professional fees decreased by approximately $245,000 for the fiscal year ended
April 30, 1996 due to the reduction in activity relating to regulatory matters.
Professional fees increased to $360,560 for the fiscal year ended April 30, 1995
from $119,281 for fiscal 1994 due primarily to professional services required in
connection with regulatory matters.
Insurance costs increased to $80,981 for the fiscal year ended April 30, 1995,
from $29,447 for fiscal 1994 due to increased product liability insurance
coverage based upon prior years sales volume. There were also additional
insurance coverages during the fiscal year ended April 30, 1995 which were not
in place during fiscal 1994.
OTHER
At April 30, 1996 the Company had available carryforward losses to offset future
taxable income of approximately $4,500,000 which expire during the years 2004 to
2010.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the next twelve months, the Company in addition to meeting its operating
needs will have notes payable, as discussed below, in the amount of
approximately $1,870,000 becoming due. The Company does not believe that it will
be able to pay these obligations out of operating revenues, and, accordingly, it
will have to seek additional financing or sell assets to do so. The Company
anticipates funding its obligations from two principal sources. First, the
Company intends to develop additional product lines which would be promoted and
marketed in a manner similar to the manner in which the Company has utilized for
its Zoo Borns and Tea Bunnies product lines which involved the transfer of such
product lines to Evolutions, Inc. (EVO) as decribed herein. Second, the Company
owns approximately 1,400,000 shares of common stock of Glasgal and may, from
time to time, sell a portion of such shares. For additional information
regarding prior dispositions of Glasgal shares, see the description of such
transactions contained herein. There can be no assurance that the Company will
be able to develop additional product lines, obtain such financing or sell
assets, in which event such obligations will have a material adverse effect upon
the Company's operations. The Company expects to support its operations over the
next five months through funds generated from its management contract with EVO
as described herein. At April 30, 1996, the Company had a cash equivalent
balance of $67,886 as compared to $171,677 at April 30, 1995.
For the fiscal year ended April 30, 1996 the Company used cash from operations
in the amount of $1,048,880 as compared to $1,899,581 from operations for fiscal
1995. The Company used approximately $890,399 from its financing activities for
the fiscal year ended April 30, 1996. This amount resulted primarily from the
repayment of approximately $1,913,000 of secured promissory notes.
On January 31, 1994, notes receivable from Glasgal in the amount of $1,900,000,
plus interest and costs totaling $733,131, were converted into 840.11 shares of
Glasgal's common stock pursuant to a stock purchase agreement between Glasgal
and the Company. In addition, subject to the exercise of the Company's Class A,
Class B and 1992 Warrants, Glasgal would have the right to sell to the Company
an additional 13.5% of its then outstanding common stock for an aggregate amount
of $8,400,000. During May 1994, subsequent to the completion of the above
transaction, Glasgal merged into a public company, Sellectek Incorporated, and
exchanged each of its shares of Sellectek common stock for 3,242.4 shares of
common stock. Pursuant to the merger, the Company's 840.11 shares of Glasgal
common stock were converted into 2,723,973 shares of Sellectek, which
represented approximately 28% of Sellectek's common stock (reduced to
approximately 10% and 22% at April 30, 1996 and 1995, respectively). Sellectek
subsequently changed its name to Glasgal. This investment has been accounted for
at cost as the Company's interest in Glasgal was reduced below 20% and because
the Company does not exercise control or influence over Glasgal.
16
<PAGE>
On October 31, 1995 the Company completed a private placement involving a stock
purchase agreement whereby the Company delivered to eight purchasers an
aggregate of 580,000 shares of the common stock of Glasgal held by the Company
for $1,450,000 or $2.50 per share. As an inducement for the purchasers to grant
the Company the right to repurchase the shares for a period of twenty-four
months at a price of $2.75 per share, the Company agreed to deliver to such
purchasers an aggregate of 80,560 shares of Glasgal common stock held by the
Company and to deliver to such purchasers (a) warrants to purchase for a period
of twenty-four months an aggregate of 80,560 shares of Glasgal common stock held
by the Company at an exercise price of $3.00 per share and (b) warrants to
purchase for a period of twenty-four months an aggregate of 161,120 shares of
the Company's common stock at an exercise price of $ .20 per share. The Company
recognized a gain of approximately $1,261,000 as a result of these transactions.
In October 1995 the Company issued to two individual lenders promissory notes in
the aggregate principal amount of $350,000. Such notes are secured by a total of
200,000 shares of Glasgal common stock held by the Company and bear interest at
the rate of 10% per annum and become due on October 15, 1996. As an inducement
for the noteholders to make the $350,000 loan to the Company, the Company agreed
to deliver to such holders an aggregate of 19,440 shares of Glasgal common stock
held by the Company and to deliver to such holders (a) warrants to purchase for
a period of twenty-four months an aggregate of 19,440 shares of Glasgal common
stock held by the Company at an exercise price of $3.00 per share and (b)
warrants to purchase for a period of twenty-four months an aggregate of 38,880
shares of the Company's common stock at an exercise price of $ .20 per share.
The Glasgal shares referred to above are subject to a Lock-Up Agreement,
terminating on February 20, 1997, between Glasgal and the Company, among others.
However, such restrictions have been waived with respect to the Company's
delivery of such shares. In connection with such waiver, the Company has granted
to Glasgal the right, under certain circumstances, to purchase, until October
10, 1997, 200,000 shares of Glasgal common stock held by the Company at a price
of $3.00 per share.
In December 1995 and January 1996, the Company issued 8% notes to two individual
lenders each in the principal amount of $100,000. Each note is secured by 35,000
shares of Glasgal common stock held by the Company. The notes were due on March
20 and April 4, 1996, respectively, and have not been paid.
During the years ended April 30, 1996 and 1995, as an inducement for loan
extensions and loan agreements, the Company paid processing and financing fees
of 130,000 and 480,000 shares, respectively, of common stock of Glasgal held by
the Company.
17
<PAGE>
April 30
--------
1996 1995
---- ----
Investment in Glasgal consists of:
Common Stock:
Number of Shares 1,433,973 2,243,973
Cost $1,386,151 $2,169,135
Fair market value based on current
price per share of registered Glasgal
shares. $12,905,575 $4,768,443
Options to purchase
580,000 shares of common stock $725,000 $ - 0 -
Such shares are subject to certain restrictions regarding transferability and
sale.
Summary financial information of Glasgal as presented in its financial
statements (audited by independent certified public accountants), is as follows:
<TABLE>
<CAPTION>
April 30
----------------------------
1996 1995
---- ----
<S> <C> <C>
Current assets $10,480,151 $ 9,121,888
Noncurrent assets 5,771,731 3,471,775
Current liabilities 8,009,864 12,877,976
Long-term obligations 1,088,370 27,107
Stockholders' equity (deficit) 7,153,248 (311,420)
</TABLE>
<TABLE>
<CAPTION>
Four
Month
Year Ended Year Ended Ended
April 30, April 30, April 30,
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Net Sales $41,780,821 $35,161,298 $11,154,560
Net Loss ($1,180,157) ($1,642,789) ($2,145,278)
</TABLE>
The Company in September 1995 entered into an agreement with Evolutions, Inc.
(EVO) whereby the Company transferred all rights and interests to its Zoo Borns
product line, Tea Bunnies product line and Kidsview name to a subsidiary of EVO
18
<PAGE>
for $750,000 and shares of common stock of EVO equal to approximately 7% of
EVO's then outstanding common stock (valued at $75,000) with the right to
receive additional shares of common stock equal to approximately 15% of the
outstanding common stock of EVO based on certain performance levels of the Zoo
Borns and Tea Bunnies product lines over the next three years.
As an inducement for EVO to enter into this agreement, the Company issued to EVO
warrants to purchase 350,000 shares of common stock of the Company at exercise
prices of $ .10 per share with respect to 100,000 shares and $ .20 per share
with respect to 250,000 shares. In anticipation of consummating the agreement,
EVO and the Company entered into a lending arrangement under which the Company
signed a promissory note in March 1995 for $750,000 with interest at the annual
rate of 12%. Such note was secured by 133,973 shares of Glasgal stock held by
the Company and by an interest in certain accounts receivable and was due on
September 1, 1996. In July and August 1995, the Company also borrowed from EVO
an aggregate of $350,000 with interest at the annual rate of 12%. Such
obligations were secured by certain accounts receivable and were due on October
31, 1995. Upon consummation of the agreement, all these obligations were
cancelled.
The Company recognized a gain of approximately $846,000 as a result of this
transaction.
As part of the agreement, the Company will manage these product lines and will
receive an amount equal to its monthly operating costs, up to $100,000, for such
period of time as the Company is managing such product lines. The Company is
providing the services of Peter Schneider, President of the Company, for such
management. This management arrangement may terminate in September 1996 but
could be extended for up to two additional years depending on certain
performance levels of such product lines. At April 30, 1996, the Company
received fees from EVO in connection with this management arrangement amounting
to approximately $690,000.
Revenues and expenses of the Zoo Borns and Tea Bunnies product lines included in
the accompanying statements of operations are approximately as follows:
<TABLE>
<CAPTION>
Year Ended April 30
-------------------
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Sales $549,000 $1,391,000 $ -
-------- ---------- -----
Cost of Goods Sold $630,000 $ 916,000 $ -
Royalties/Licensing fees 84,000 111,000 -
Product Development Costs (66,000) 545,000 -
Advertising and Promotions 71,000 758,000 -
--------------------------------
$719,000 $2,330,000 -
</TABLE>
19
<PAGE>
In addition, the Company incurred general and administrative expenses in
connection with these product lines.
On May 28, 1996, the Company established a margin account with the brokerage
firm of Cowen & Company (Cowen). In that connection, the Company delivered
300,000 shares of common stock of Glasgal held by the Company to Cowen and
borrowed $500,000 against such account.
On June 10, 1996, the Company sold (at $9.00 per share) 115,000 shares of common
stock of Glasgal held by the Company in its margin account. The Company received
net proceeds from such sale aggregating approximately $1,000,000. The Company
used approximately one-half of the proceeds to pay off its margin loan of
approximately $500,000.
The net proceeds from the transactions, referred to above (approximately
$1,000,000) was invested in common stock of Evolutions, Inc. (EVO) at $2.50 per
share, and warrants exercisable at $3.50 per share to purchase common stock of
EVO. The Company also intends to make an additional equity investment in EVO of
approximately $800,000 on the same terms, which will include the transfer by the
Company of 106,667 shares of Glasgal common stock held by the Company in EVO
common stock and warrants to purchase common stock, which is expected to occur
during the fiscal quarter ending October 31, 1996. As an inducement for such
investments, the Company will receive additional warrants to purchase 400,000
additional shares of EVO common stock exercisable at $2.50 per share.
To expand its business, the Company will have to seek additional financing and
there can be no assurance that it will be able to obtain such financing. No
assurance can be given as to the number of outstanding warrants, which represent
potential source of funds, that will be exercised. The Company is exploring
alternatives to utilizing its equity investments in connection with financing
its operations and developing new products. The Company has developed new
products which have generated revenues of approximately $548,657 at April 30,
1996, and $1,388,490 at April 30, 1995, (primarily the Zoo Borns product line)
but has also caused the Company to maintain a level of expense which resulted in
part in operating losses for the fiscal years ended April 30, 1996 and 1995 as
compared to a profit for the fiscal year ended April 30, 1994.
In order to arrive at the completed stage, the Company's products must go
through the following processes: product concept and design, product development
and engineering, pre-production approval and product manufacture and
distribution.
In order to supplement its cash flow, the Company, on March 6, 1991, entered
into loan agreements with several investors whereby the Company borrowed an
20
<PAGE>
aggregate of $282,000 for six months with interest at the semiannual rate of
14.5%. As part of such transaction, the Company issued to such investors, in a
private placement, an aggregate of 17,000 shares of its common stock, on a
restricted basis, for an aggregate consideration of approximately $22,000. In
October 1991, the Company paid off $32,000 (plus accrued interest) with respect
to such loans. At such time the Company renegotiated the balance of such loans
(plus accrued interest) and issued new notes, maturing in one year, amounting to
approximately $290,000 including interest thereon at the annual rate of 10%. In
September 1992 the Company delivered 200,000 shares of common stock to one of
such investors in exchange for the contemplated cancellation of substantially
all the balance of such loans. The Company under the terms of this arrangement
remains contingently liable for the prior obligation depending on the future
stock price and salability of the shares. The investor has been unable to sell
the shares for a price of at least $1.625 and, accordingly, the shares can be
returned to the Company. The Company is obligated to pay such investor the value
of the note, plus accrued interest, aggregating approximately $395,070 at April
30, 1996. If the Company is unable to pay this obligation out of operating
revenues, it will have to seek additional financing or sell a portion of its
equity holdings in Glasgal to do so. There can be no assurance that the Company
will be able to obtain such financing or sell such equity, in which event this
obligation would have a material adverse effect upon the Company's operations.
Given the nature of the Company's business, the length of the typical product
cycle in the toy business, the need to respond rapidly to developments in the
marketplace and to, if necessary, make rapid changes in product lines and
strategic plans to meet the rapid changes in the marketplace, the Company's
planning historically has been limited to approximately a twelve month
time-frame at any given time. It is anticipated that the Company will continue
to operate in a similar fashion in the future. Accordingly, analyses of long
term liquidity and capital requirements are not meaningful.
In 1992, the Company, in order to regain listing on the NASDAQ Small Cap System,
to provide for operating requirements and in contemplation of a possible change
in the nature of the Company's business, completed a private placement of
securities in October 1992, in which investors subscribed for 100 Units, each
Unit consisting of 50,000 shares of Convertible Preferred Stock and 25,000 1992
Warrants to purchase shares of Common Stock, for a total of $3,000,000. Such
private placement was closed in two stages, the first of which involved the
purchase of 52- 1/2 Units and closed in July 1992, with the balance of the Units
offered (47-1/2 Units) being purchased in October 1992. As a result of the
consummation of such private placement, (a) the Redeemable Class A Warrant
exercise price has been adjusted from $1.00 per share to $ .53 per share and the
number of shares of Common Stock issuable upon exercise of Redeemable Class A
Warrants has been increased from 3,438,900 shares to 6,488,517 shares of Common
Stock so that each holder of a Redeemable Class A Warrant will be able to
purchase 1.8868 shares of Common Stock for $1.00 upon exercise of each Warrant
and (b) the Redeemable Class B Warrant exercise price has been adjusted from
$1.50 per share to $ .75 per share and the number of shares of Common Stock
issuable upon exercise of Redeemable Class B Warrants has been increased from
21
<PAGE>
1,719,450 shares to 3,438,900 shares of Common Stock so that each holder of a
Redeemable Class B Warrant will be able to purchase one share of Common Stock
per warrant upon exercise of such Warrant.
In November 1992, the Company signed a merger agreement with Glasgal, a
privately held company which provides network design, hardware and software,
carrier facilities and support services for organizations in a diverse range of
industries. The Company and Glasgal terminated the proposed merger agreement in
December 1993 and entered into a stock purchase agreement described below.
In November 1992, the Company, in contemplation of the Glasgal merger, entered
into a loan agreement with Glasgal whereby the Company loaned Glasgal
$1,000,000, due on December 31, 1993, as extended, at an annual interest rate
equal to two percent above the prime rate. An aggregate of $400,000 (also due on
December 31, 1993 as extended) was loaned to Glasgal in March, June, August and
September 1993. All the loans were secured by 50.1% of the stock of Glasgal held
by Ralph Glasgal, Glasgal's principal stockholder, and a second priority
security interest in, among other things, Glasgal's accounts receivable,
inventory and equipment. The purpose of this loan was to satisfy partially
Glasgal's short-term cash needs pending the proposed merger with the Company
(which was not consummated - see below), which cash needs Glasgal estimated to
be between $2.1 million and 2.6 million. These short-term cash needs related
specifically to (i) Glasgal's financing of the implementation of its business
plan, (ii) its financing of an increased level of inventory, (iii) a reduction
in the average age of its trade payables, (iv) its financing of the shortfall
between a prior mortgage and a new bridge loan, and (v) to meet certain balance
sheet requirements of prospective new lenders.
In order to provide for additional working capital, to meet expenses related to
the Glasgal merger, and to be in position to assist Glasgal in solving its
immediate cash flow problems in contemplation of the merger, the Company entered
into lending arrangements with several individuals under which the Company
issued notes aggregating $780,000 plus interest thereon at the annual rate of 8%
in private placements pursuant to an exemption from registration under Section
4(2) of the Act. Such notes matured between December 31, 1993, as extended, and
December 31, 1995. At April 30, 1996, such notes amounted to $852,000 including
accrued interest thereon. As an inducement for making such loans, it was
intended that the holders would have an opportunity to convert such notes into
equity securities when the Company next undertook a private placement, the terms
of which had not been determined, provided that the holders met suitability
requirements thereof. The Company believes that all of such holders either were
officers of the Company or relatives of officers of the Company who in all cases
were deemed to be suitable investors or other individuals who had preexisting
personal relationships with officers or directors of the Company and, in
addition, would have been deemed "accredited investors" as such term is defined
in Rule 501 of Regulation D under the Act if an exemption had been sought under
Regulation D. In view of the Company's default in payment of its obligations
under the notes and its inability of afford the noteholders an opportunity to
convert such notes into equity securities, several of the noteholders have
recently contacted the Company and have threatened to commence litigation
22
<PAGE>
against the Company to enforce the Company's obligations under the notes. The
Company intends either to pay off the obligations or to convert the notes
(including accrued interest thereon) into Common Stock at a rate of five shares
of Common Stock per dollar subject to stockholder approval of an increase in
authorized shares of Common Stock in connection with a proposed meeting of
stockholders. There can be no assurance that the Company will be able to
effectuate such payment or conversion. Litigation by noteholders to enforce the
notes would materially adversely affect the Company's operations.
In addition, the Company in February 1993 accepted a subscription from an
unaffiliated non-U.S investor to purchase 1,500,000 shares of Common Stock, in a
private placement, for an aggregate consideration of $300,000. The Company
believes that such private placement did not result in any further adjustments
of any outstanding warrants, options or convertible stock.
The Company, after termination of the Glasgal merger, entered into a common
stock purchase agreement (the "Agreement") with Glasgal governing certain equity
investments which the Company has made, and in the future intends to make, in
Glasgal common stock. Pursuant to the Agreement, in January 1994 the Company
converted outstanding indebtedness of Glasgal owed to the Company into equity of
Glasgal which, upon consummation of the Glasgal merger with Sellectek, resulted
in the Company owning approximately 28% of the outstanding shares of Glasgal or
18.5% on a fully diluted basis. In addition, the Agreement gives Glasgal the
right to require the Company to purchase an additional number of shares of
common stock of Glasgal equal to 13.5% of the then outstanding shares (the
"Additional Shares"), or 10% on a fully diluted basis, for an aggregate of
approximately $8.4 million after giving effect to certain warrant solicitation
fees (the "Additional DCI Investment"). Glasgal may require this purchase if,
and then only to the extent that, the Company receives proceeds from the
exercise of existing Company warrants. There can be no assurance that any or all
of such warrants will be exercised. The Company has issued warrants to the
public to purchase 6,448,517 shares of Common Stock at $ .53 per share, warrants
to purchase 3,438,900 shares of Common Stock at $ .75 per share, and warrants to
purchase 2,500,000 shares of Common Stock at $1.00 per share. Such warrants will
expire in 1997, as extended. The Company has the right to retain the first
$500,000 of warrant exercise proceeds; however, such amount must be used by the
Company to purchase shares of Common Stock of Glasgal if the aggregate amount of
warrant exercise proceeds applied to the purchase of Glasgal common stock, after
the earlier of the expiration of exercise of all warrants or 24 months after the
effectiveness of the registration statement covering the Common Stock underlying
the warrants, is less than $8.4 million. In view of the fact that, at the
present time and throughout 1995, the price of the Common Stock has been
substantially below the exercise price of the warrants, it is impossible to
predict the timing of exercise of any of the outstanding warrants, or if such
warrants will ever be exercised. The Company anticipates such an event will not
arise for at least two years and that, should such eventuality arise, the
Company will attempt to meet such obligation either through loans (which may be
secured by all or a portion of its Glasgal equity), equity financings or some
combination thereof. If Glasgal does not require the Additional DCI Investment,
the Company may still purchase, on the same terms, up to one-half of the
Additional Shares.
23
<PAGE>
In November 1993, the Company issued to several investors secured promissory
notes aggregating $500,000 with interest thereon at the annual rate of 8%. Such
notes were secured by all the assets of the Company and matured on September 30,
1994, as extended, and were paid off on October 6, 1994. As an inducement for
such investors to make such loan, the Company issued to such investors warrants,
which expire on November 23, 1998, to purchase an aggregate of 750,000 shares of
Common Stock at an exercise price of $ .05 per share, as adjusted. The proceeds
from such transaction were loaned to Glasgal to fulfill certain commitments to
Glasgal. Such loan to Glasgal was made on the same terms as the previous loans
to Glasgal referred to hereinabove. As an inducement to extend the maturity date
of such notes to September 30, 1994, the Company issued an aggregate of 500,000
additional warrants ("1994 Warrants") to the holders of such notes on the same
terms and conditions as the 1993 Warrants except that the exercise price of the
1994 Warrants is $ .20 per share.
Because of its inability prior to April 30, 1993 to finance any significant
diversification of its toy business, the Company agreed to allow Peter Schneider
at his expense to organize and to arrange for the financing of separate
companies (Gift Connect International, Inc. for the gift business and P.J. Toy
Company, Inc. for generic stuffed toy products) to explore the marketing of the
Company's products through gift outlets and to create generic stuffed toy
products for distribution through mass market and gift outlets. As an inducement
for the Company to explore such marketing of such products, the Company would
manufacture all products for these entities and receive pro rata reimbursement
for any overhead expenses incurred by the Company, including allocation for
salaries and related expenses and office expenses, with payment guaranteed by
Mr. Schneider, and a percentage of the profits from these operations. At April
30, 1993, the Company began its review of the operations relating to such
businesses. At such date sales to gift outlets approximated $200,000. The
Company had made interest-free advances of $372,893 to the gift company to be
repaid as soon as practicable out of available funds, of which $140,000 was
repaid by May 31, 1993, in connection with the operations of the gift business.
Included in this advance was $76,380 representing overhead costs, described
above, incurred by the Company on behalf of the gift business. The business
purpose of the advances was to permit the Company, with limited exposure, to
participate (as contract manufacturer) in the development of these ancillary
businesses and to share in the profits resulting from sales. Based upon the
Company's levels of business for fiscal 1994 which reflected substantial sales
of the Lamb Chop(Registered Trademark) product line, Mr. Schneider relinquished
and transferred to the Company all of his interest in such businessses at no
additional cost to the Company which in effect returned all outstanding advances
to the Company with neither a loss to the Company nor a profit to Mr. Schneider.
During the fiscal year ended April 30, 1994, the Company had revenues from the
gift business approximating $800,000 and approximating $600,000 from the sale of
generic stuffed toy products. However, the gift business was not profitable
operating at such levels because of the high adminstrative costs involved in
selling to large groups of small customers instead of the large customers served
by the Company's toy business. It was also determined that the generic stuffed
toy business would not provide acceptable margin levels and significant growth
potential. Accordingly, after April 30, 1994, the Company determined that
because of the costs involved in developing those businesses and the extensive
capital requirements (for inventory, receivables and marketing) for developing
24
<PAGE>
such businesses, the Company could better apply its limited resources to its
core toy business. At the present time, the Company has virtually terminated its
activities in connection with these businesses.
On October 6, 1994, the Company consummated a lending arrangement with BW
Capital Corporation ("BW"), an independent lender organized to invest in
unregistered securities and small capitalization companies which was the largest
shareholder of Sellectek prior to its merger with Glasgal. The Company, which
was introduced to BW in connection with the Glasgal/Sellectek merger, has no
relationship with BW other than in connection with such lending arrangement.
Under the terms of such arrangement, the Company issued to BW a secured
promissory note in the principal amount of $1,600,000 bearing interest at the
rate of 11% per annum (the "Note"). The Note was secured by collateral
consisting of 2,000,000 shares of Glasgal common stock owned by the Company and
all dividends and other distributions of any kind in respect of such shares. The
Note matured on October 6, 1995 and was subsequently paid. As an inducement for
BW to make such loan to the Company, the Company transferred to BW 270,000
shares of Glasgal common stock owned by the Company. The Company also paid an
investment banker, Brookehill Equities, $100,000 as compensation for its
services in connection with arranging the loan. Under the terms of the lending
arrangement, because the Note was not prepaid in full on or before July 6, 1995,
the Company transferred to BW an additional 270,000 shares of Glasgal common
stock owned by the Company. The Company used the proceeds from such loan to pay
off existing secured indebtedness aggregating $750,000 including $30,000 paid to
Joseph Salvani, the Company's Chairman, and for general corporate purposes.
Prior to entering into the lending arrangement with BW, the Company sought
alternative financing for several months and had discussions with other
potential sources of financing. In the opinion of management, the BW proposal
offered the Company the best financing terms of the limited alternatives then
available to the Company. In establishing the collateral for the loan, BW took
into account the fact that, notwithstanding a market price at that date of
approximately $4 per share for Glasgal common stock, in view of the fact that
the shares to be delivered as collateral were restricted and that the market for
Glasgal common stock generally was then illiquid, if it were forced to liquidate
the collateral it was unlikely that BW would realize an amount close to the
reported per share market value for such stock. From the Company's standpoint,
the BW Loan, while not on favorable terms, represented the best terms available
to the Company and management believed that it was in the best interest of the
Company to proceed with such borrowing in order to be able to develop its
product lines and to reduce outstanding debt that was then due.
Among the alternatives considered by the Company at the time of the BW loan was
the sale of a portion of its Glasgal stock. In view of the restrictions on the
transfer of such stock as well as the illiquidity of the market for the shares,
the Company's options with respect to any such sale were limited. The Company
did receive a verbal offer to purchase approximately two million shares of the
Glasgal common stock, to be accomplished through a private placement exempt from
registration under Regulation S under the Federal securities laws, at a price
per share of approximately $ .80. The Company rejected such an offer as less
25
<PAGE>
favorable than the BW alternative. Similarly, the inducement fees incurred in
connection with the BW transaction, while onerous, viewed in the context of the
overall BW transaction, were deemed the best alternative available to the
Company in order for it to continue to fund the development of its toy business
and preserve as much of its Glasgal equity as possible.
The Company in transferring 270,000 shares of Glasgal common stock as a fee for
the loan, will recognize an expense equal to the cost of such shares ($261,900).
This cost will be expended over the life of the loan (12 months). Consequently
for fiscal 1995 and 1996 the Company will charge $147,812 and $114,088,
respectively, against income. In addition, the transfer at April 6, 1995 of an
additional 160,000 shares of Glasgal common stock resulted in the recognition of
an additional expense in the amount of $155,200 for fiscal 1995. The transfer at
July 6, 1995 of an additional 110,000 shares of Glasgal common stock to BW will
result in an additional charge against income in the amount of $106,700 for
fiscal 1996.
The Company used the proceeds from these transactions to satisfy the BW
indebtedness referred to herein in the principal amount of $1,600,000 together
with interest thereon, to satisfy other obligations amounting to approximately
$100,000 principal amount together with interest thereon and for working capital
purposes.
DEFERRED INCOME TAX ASSETS
Deferred income tax assets as of April 30, 1996 have been reduced to $809,287 by
a valuation allowance of $983,802 due to uncertainties concerning their
realization.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
CONTENTS
Pages
Independent Auditors' Reports 28 & 29
Consolidated Financial Statements
Balance Sheets 30 & 31
Statements of Operations 32
Statements of Changes in Stockholders' 33 & 34
Equity (Deficit)
Statements of Cash Flows 35 & 36
Notes to Consolidated Financial Statements 37 - 49
Financial Statement Schedules
All schedules are omitted, because the required information is either
inapplicable or is presented in the financial statements or related notes.
27
<PAGE>
BEDERSON & COMPANY LLP
405 Northfield Avenue
West Orange, NJ 07052
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Direct Connect International Inc. and Subsidiary
266 Harristown Road, Suite #108
Glen Rock, NJ 07452
We have audited the accompanying consolidated balance sheet of Direct Connect
International Inc. and Subsidiary as of April 30, 1996 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the year then ended. 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 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 Direct Connect
International Inc. and Subsidiary as of April 30, 1996 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered a substantial loss
from operations, has negative cash flows from operating activities and has a
working capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Bederson & Company LLP
Certified Public Accountants
August 6, 1996
28
<PAGE>
TODMAN & CO., CPA's, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
New York, NY 10271
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Direct Connect International Inc. and Subsidiary
266 Harristown Road, Suite #108
Glen Rock, NJ 07452
We have audited the accompanying consolidated balance sheets of Direct Connect
International Inc. and Subsidiary as of April 30, 1995 and the related
consolidated statements of operations, changes in stockholders' (deficit)
equity, and cash flows for the years ended April 30, 1995 and 1994. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 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 Direct Connect
International Inc. and Subsidiary as of April 30, 1995 and the results of their
operations and their cash flows for the years ended April 30, 1995 and 1994 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered a substantial loss
from operations, has negative cash flows from operating activities and has a
working capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
TODMAN & CO., CPA's, P.C.
Certified Public Accountants
July 26, 1995
29
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
------
April 30
-----------------------
1996 1995
---------- ---------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 67,886 $ 171,677
Accounts receivable 20,652 10,495
Inventories --- 86,955
Due from Kidsview, Inc. 194,117 ---
Notes receivable - officers 111,355 348,967
Investments 54,171 32,294
Prepaid royalties --- 57,500
Prepaid financing costs 69,075 269,442
and other expenses ---------- ---------
Total current assets 517,256 977,330
---------- ---------
Property and equipment, at cost
Furniture and fixtures 42,543 42,543
Molds, tools and dies 267,498 399,502
-------- ---------
310,041 442,045
Less: Accumulated depreciation 234,813 260,627
-------- ---------
75,228 181,418
------- --------
Investment in Glasgal 2,111,151 2,169,135
Investment in Evolutions, Inc. 75,000 ---
Deferred income taxes 809,287 ---
Security deposits 700 700
---------- ----------
2,996,138 2,169,835
----------- ----------
Total assets $3,588,622 $3,328,583
----------- ----------
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<CAPTION>
April 30
--------
1996 1995
----------- ------------
<S> <C> <C>
Current liabilities
Accounts payable $947,512 $752,452
Accrued expenses and taxes payable 49,825 110,666
Notes payable - officers and stockholders 461,716 398,305
Notes payable - other, current portion 1,411,424 2,365,234
Investments, warrants to sell Glasgal 300,000 ---
---------- ----------
Total current liabilities 3,170,477 3,626,657
Notes payable - other, less current portion --- 750,000
--------- ----------
Total liabilities 3,170,477 4,376,657
--------- -----------
Commitments and contingencies
Stockholders' equity (deficit)
Convertible preferred stock:
Authorized 5,000,000 shares,
$ .001 par value; issued and outstanding -
5,000,000 shares 5,000 5,000
Common stock:
Authorized 15,000,000 shares,
$ .001 par value, issued and outstanding -
9,062,066 shares 9,062 9,062
Capital in excess of par value 5,104,449 5,074,449
Accumulated deficit (4,646,195) (6,060,537)
Unrealized loss on investments (54,171) (76,048)
----------- ------------
Total stockholders' equity (deficit) 418,145 (1,048,074)
----------- -------------
Total liabilities and stockholders'
equity (deficit) $3,588,622 $3,328,583
---------- -----------
</TABLE>
. See notes to consolidated financial statements.
31
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended April 30
-------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues
Sales $ 1,094,584 $ 3,899,152 $ 9,583,286
------------ ------------ -----------
Costs and expenses
Cost of goods sold 1,008,972 2,560,406 6,308,488
Royalties/licensing fees 156,875 477,201 1,016,984
Product development costs (66,482) 545,202 114,038
Advertising and promotion 71,312 758,141 58,852
Depreciation 44,220 79,039 54,529
General and administrative
expenses 2,012,283 2,279,376 1,968,385
Less: Management fees (690,000) --- ---
----------- ---------- -----------
2,537,180 6,699,365 9,521,276
--------- --------- ---------
Operating income (loss) (1,442,596) (2,800,213) 62,010
Gain on sale of securities 1,456,802 80,804 ---
Gain on sale of assets and
product lines 845,705 --- ---
Interest income 28,708 28,533 106,302
Other income 94 --- 10,696
Interest expense (283,658) (229,429) (103,436)
-------- -------- --------
Income (loss) before deferred
income taxes 605,055 (2,920,305) 75,572
Deferred income taxes 809,287 (1,244,930) 1,244,930
------- ---------- ---------
Net income (loss) $1,414,342 $(4,165,235) $1,320,502
---------- ----------- ----------
Earnings (loss) per common
share $ .09 $ (.46) $ .09
---------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED APRIL 30, 1994, 1995, AND 1996
<CAPTION>
Convertible Common Stock
preferred stock
--------------- --------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, May 1993 5,000,000 $5,000 9,062,066 $ 9,062
Reversal of overaccrual
of private placement cost --- --- --- ---
Valuation reserve --- --- --- ---
Net income --- --- --- ---
--------- ------ --------- -------
Balance, April 30, 1994 5,000,000 5,000 9,062,066 9,062
Valuation reserve --- --- --- ---
Net loss --- --- --- ---
--------- ------ --------- -------
Balance, April 30, 1995 5,000,000 5,000 9,062,066 9,062
Valuation reserve --- --- --- ---
Issuance of options --- --- --- ---
Net income --- --- --- ---
---------- ------ --------- -------
Balance, April 30, 1996 5,000,000 $5,000 9,062,066 $9,062
--------- ------ --------- ------
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED APRIL 30, 1994, 1995, AND 1996
<CAPTION>
Capital in Unrealized Total
Excess of Accumulated Loss on Stockholders'
Par Value (Deficit) Investments Equity
(Deficit)
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, May 1993 $5,062,449 $(3,215,804) $ --- $1,860,707
Reversal of overaccrual
of private placement
cost 12,000 --- --- 12,000
Valuation reserve --- --- (64,588) (64,588)
Net income --- 1,320,502 --- 1,320,502
---------- ------------ ----------- -------------
Balance, April 30, 1994 5,074,449 (1,895,302) (64,588) 3,128,621
Valuation reserve --- --- (11,460) (11,460)
Net loss --- (4,165,235) --- (4,165,235)
---------- ------------- ----------- --------------
Balance, April 30, 1995 5,074,449 (6,060,537) (76,048) (1,048,074)
Valuation reserve --- --- 21,877 21,877
Issuance of options 30,000 --- --- 30,000
Net income --- 1,414,342 --- 1,414,342
--------- --------- ---------- ---------
Balance, April 30, 1996 $5,104,449 $(4,646,195) $( 54,171) $ 418,145
---------- ----------- -- ------ ----------
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended April 30
-------------------
1996 1995* 1994*
---- ----- -----
<S> <C> <C> <C>
Cash flow from operating activities $1,414,342 $(4,165,235) $1,320,502
---------- ----------- ----------
Net income (loss)
Adjustments to reconcile net income (loss) to
Net cash provided by (used in) operating activities
Depreciation 44,220 79,039 55,529
Deferred income taxes (809,287) 1,244,930 (1,244,930)
Financing fees, reduction in investment 98,720 463,996 ---
in Glasgal
Management fee income (200,000) --- ---
Gain on sale of Glasgal (1,456,802) --- ---
Other costs, sale of Glasgal (3,931) --- ---
Gain on sale of product lines (845,705) --- ---
and related assets
Increase (decrease) in assets
Accounts receivable (10,157) 158,627 348,325
Inventories 86,955 236,644 (34,434)
Prepaid royalties 47,500 215,919 (157,321)
Prepaid financing costs and expenses 80,371 44,263 (288,220)
Increase (decrease) in liabilities
Accounts payable 195,060 (100,680) 491,989
Accrued expenses and taxes payable 9,834 (77,084) (24,208)
---------- ---------- ---------
Total adjustments (2,463,222) 2,265,654 (853,270)
----------- --------- ---------
Net cash provided by (used in) operating (1,048,880) (1,899,581) 467,232
---------- ---------- -------
activities
Cash flows from investing activities
Notes receivable - officers, increases 237,612 (113,755) (1,424,554)
Notes receivable - officers, decreases --- 16,872 1,943,071
Proceeds from sale of Glasgal 1,800,000 --- ---
Investment in Glasgal --- --- (1,498,149)
Increase in Due from Kidsview Inc. (994,117) --- ---
Decrease in Due from Kidsview Inc. 800,000 --- ---
Acquisition of property and equipment (8,007) (65,789) (114,099)
Decrease in security deposits --- 154 ---
---------- ---------- ---------
Net cash provided by (used in) investing 1,835,488 (162,518) (1,093,731)
activities --------- -------- ----------
<FN>
* Reclassified for comparative purposes.
</FN>
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Increase (Decrease) in Cash and Cash Equivalents
<CAPTION>
Year Ended April 30
-------------------
1996 1995* 1994*
<S> <C> <C> <C>
---- ---- ----
Cash flows from financing activities
Notes payable-officers and stockholders, increases 63,411 34,225 34,225
Notes payable-officers and stockholders, decreases --- (3,054) (35,778)
Notes payable-other, increases 959,445 2,601,133 678,120
Notes payable-other, decreases (1,913,255) (793,397) (43,755)
Expenses incurred with warrant registration --- --- 12,000
---------- ---------- -------
Net cash provided by (used in) financing activities (890,399) 1,838,907 644,812
-------- --------- -------
Net increase (decrease) in cash and cash equivalents (103,791) (223,192) 18,313
Cash and cash equivalents, beginning of year 171,677 394,869 376,556
------- ------- -------
Cash and cash equivalents, end of year $67,886 $171,677 $394,869
------- -------- --------
Supplemental disclosure of cash flows information:
Cash paid during the year for interest $111,506 $123,892 $ 16,588
Schedule of noncash investing and financing activities:
Notes receivable - other; converted to investment --- --- $1,134,982
Unrealized loss on investments 21,877 11,460 64,588
<FN>
* Reclassified for comparative purposes
</FN>
</TABLE>
During the fiscal year ended April 30, 1996, the Company had non-cash investing
and financing activities in connection with the sale of Glasgal common stock;
sale of product lines and certain assets to Evolutions, Inc; and Glasgal common
stock issued as financing costs as follows:
<TABLE>
<CAPTION>
Year ended April 30
-------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sale of Glasgal common stock
Cash proceeds $1,800,000 - -
Investment in Glasgal options 725,000 - -
Financing costs incurred 73,720 - -
Note payable, increase (350,000) - -
Decrease in investment in Glasgal (657,323) - -
Increase in warrants to sell Glasgal (300,000) - -
Increase in capital in excess of par value (30,000) - -
Gain on sale of Glasgal (1,261,397) - -
Sale of product Lines and certain
assets to Evolutions, Inc.
Increase in investment in Evolutions, Inc. 75,000 - -
Reduction in notes payable 1,100,000 - -
Decrease in interest payable 70,678 - -
Management fees (200,000) - -
Decrease in prepaid royalties (10,000) - -
Decrease in prepaid expenses (119,994) - -
Decrease in property and equipment (69,979) - -
Gain on sale (845,705) - -
</TABLE>
As an inducement for loan extensions and loan agreements, the Company paid
financing fees by delivering $325,000 of Glasgal common stock having a cost
basis of $125,665.
See notes 3 and 4 regarding noncash investing and financing activities with
respect to the sale of Glasgal common stock and sale of product lines.
See notes to consolidated financial statements.
36
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 1 - Summary of Significant Accounting Policies
(a) General
Direct Connect International Inc. was incorporated under the laws
of the State of Delaware in March 1986 to design, develop, market and
distribute a variety of infant, preschool and general soft toy
products principally in the United States. Substantially all of the
Company's purchases are from suppliers in the Far East.
The accompanying April 30, 1996 consolidated balance sheet
reflects a working capital deficiency of $2,653,221, and the
consolidated statement of operations for the year ended April 30, 1996
reflects a loss from operations of $1,442,596. During the next twelve
months, the Company in addition to meeting its operating needs will
have notes payable, as discussed below, in the amount of approximately
$1,870,000 becoming due. The Company does not believe that it will be
able to pay these obligations out of operating revenues, and,
accordingly, it will have to seek additional financing or sell assets
to do so. The Company anticipates funding its obligations over the
next twelve months from two principal sources. First, the Company
intends to develop additional product lines which would be promoted
and marketed in a manner similar to the manner in which the
Company has utilized for its Zoo Borns and Tea Bunnies product lines
which involved the transfer of such product lines to Evolutions, Inc.
(EVO) as described herein. Second, the Company owns approximately
1,400,000 shares of common stock of Glasgal Communications, Inc.
(Glasgal) and may, from time to time, sell a portion of such shares.
For additional information regarding prior dispositions of Glasgal
shares, see the description of such transactions contained herein.
There can be no assurance that the Company will be able to develop
additional product lines, obtain such financing or sell assets, in
which event such obligations will have a material adverse effect upon
the Company's operations. The Company expects to support its
operations over the next five months through funds generated from its
management contract with EVO as described herein.
(b) Consolidation
The consolidated financial statements include the faccounts of Direct
Connect International Inc. and its wholly-owned subsidiary, Amerawell
Products, Ltd. ("Amerawell") (collectively, the "Company"). All
intercompany balances and transactions have been eliminated in
consolidation.
(c) Cash and Cash Equivalents
Cash and cash equivalents include highly liquid debt instruments
purchased with a maturity of three months or less. At April 30, 1996,
the Company had no checking account balances in excess of federally
insured limits.
(d) Accounts Receivable
An allowance for doubtful accounts is established based on
management's expectations of uncollectables. As of April 30, 1996 and
April 30, 1995, an allowance for doubtful accounts was not deemed
necessary.
(e) Inventories
Inventories are valued at the lower of cost (first-in, first-out
method) or market and consist principally of finished goods. Cost of
goods sold for the fiscal year ended April 30, 1996 includes a lower of
cost or market adjustment of approximately $34,000.
37
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 1 - Continued
(f) Investments
Effective May 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("FASB 115"). Pursuant to FASB 115, the
Company classified its investments in equity securities as
available-for-sale. Investments available-for-sale are recorded on the
balance sheet at fair market value, with unrealized gains and losses
excluded from earnings and presented as a separate component of
shareholders' equity until realized.
Prior to May 1, 1994 the Company classified its investments in
marketable securities at lower of cost or market, pursuant to Statement
of Financial Accounting Standards No. 12 "Accounting for Certain
Marketable Securities."
(g) Prepaid Royalties
The Company has entered into license agreements and royalty
arrangements for the use of certain famous-name characters for its toys
and is obligated to pay nonrefundable advances over the terms of these
agreements, which are charged to operations to the extent royalties
are owed on products sold. In order to match revenues with expenses,
these minimum guarantees are treated as prepaid expenses and are
charged against income as the related products are sold. Any minimum
guaranty paid in excess of earned royalties is charged against income
at such point that it is known that earned royalites will not cover
minimum royalties.
(h) Property and Equipment
Property and equipment are recorded at cost and are being depreciated
over their estimated useful lives (five to seven years) on the
straight-line basis. Maintenance and minor repairs and replacements
are charged directly to operations. Major renewals and improvements
are capitalized. Costs and accumulated depreciation applicable to
assets sold are removed from the accounts and any gain or loss on
disposition is charged or credited to income.
(i) Income Taxes
For income tax purposes, the Company has a fiscal year ending December
31.
Certain income and expense items are accounted for in different periods
for income tax purposes than for financial reporting purposes.
Provisions for deferred taxes are made in recognition of these
temporary differences.
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes". This statement requires a
liability approach for measuring deferred taxes based on temporary
differences between the financial statement and tax bases of assets and
liabilities existing at each balance sheet date using enacted tax
rates for the years in which taxes are expected to be paid or
recovered.
38
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 1 - Continued
Deferred income tax assets are reduced by a valuation allowance due to
uncertainties concerning their realization. (See Note 4).
(j) Earnings (Loss) Per Share
Earnings (Loss) per share are based on the weighted average number of
common shares outstanding and common stock equivalents during each
period, limited to the number of authorized shares of common stock.
Fully diluted earnings (loss) per share have not been computed because
the result would be anti-dilutive or the effect on earnings per share
would be less than 3%.
The weighted average number of common shares and common stock
equivalents that were used in computing earnings (loss) per share were
15,000,000 (1996), 9,062,066 (1995), and 15,000,000 (1994).
(k) Accounting 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 disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results
could differ from those estimates.
Note 2 - Investments
Investments are summarized as follows:
<TABLE>
<CAPTION>
April 30
-------------------------------
1996 1995
------------- -----------
<S> <C> <C>
Cost $ 108,342 $ 108,342
Unrealized loss (54,171) (76,048)
----------- -----------
Fair market value $ 54,171 $ 32,294
----------- ----------
</TABLE>
During the year ended April 30, 1993, the Company received 8,334
shares of common stock of Mark Solutions, Inc. from an officer of the
Company, in connection with the loans made to him by the Company. The
Company recorded these shares at $13.00 per share, which approximated
the market value of the shares at the date of the transaction.
Note 3 - Investment in Glasgal
On January 31, 1994, notes receivable from Glasgal in the amount of
$1,900,000 plus interest and costs totaling $733,131, were converted
into 840.11 shares of Glasgal's common stock pursuant to a stock
purchase agreement between Glasgal and the Company. In addition,
subject to the exercise of the Company's Class A, Class B, and 1992
warrants, Glasgal would have the right to sell to the Company an
additional 13.5% of its then outstanding common stock for an aggregate
amount of $8,400,000. During May 1994, subsequent to the completion of
the above transaction, Glasgal merged into a public company, Sellectek
Incorporated, and exchanged each of its shares of common stock for
3,242.4 shares of Sellectek Incorporated common stock.
39
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 3 - Continued
Pursuant to the merger, the Company's 840.11 shares of Glasgal
common stock were converted into 2,723,973 shares of Sellectek
Incorporated, which represented approximately 28% of Sellectek's common
stock (subsequently reduced to approximately 10 % and 22 % at April 30,
1996 and 1995, respectively). Sellectek subsequently changed its name
to Glasgal. This investment has been accounted for at cost as the
Company's interest in Glasgal was reduced below 20% and because the
Company does not exercise control or influence over Glasgal.
On October 31, 1995, the Company completed a private placement
involving a stock purchase agreement whereby the Company delivered to
eight purchasers an aggregate of 580,000 shares of the common stock of
Glasgal held by the Company for $1,450,000 or $2.50 per share. As an
inducement for the purchasers to grant the Company the right to
repurchase the shares for a period of twenty-four months at a price of
$2.75 per share, the Company agreed to deliver to such purchasers an
aggregate of 80,560 shares of Glasgal common stock held by the Company
and to deliver to such purchasers (a) warrants to purchase for a period
of twenty-four months an aggregate of 80,560 shares of Glasgal common
stock held by the Company at an exercise price of $3.00 per share
and (b) warrants to purchase for a period of twenty-four months an
aggregate of 161,120 shares of the Company's common stock at an
exercise price of $ .20 per share. The Company recognized a gain
of approximately $1,261,000 as a result of these transactions.
In October 1995 the Company issued to two individual lenders promissory
notes in the aggregate principal amount of $350,000. Such notes are
secured by a total of 200,000 shares of Glasgal common stock held by
the Company and bear interest at the rate of 10% per annum and become
due on October 15, 1996. As an inducement for the noteholders to make
the $350,000 loan to the Company, the Company agreed to deliver to such
holders an aggregate of 19,440 shares of Glasgal common stock held by
the Company and to deliver to such holders (a) warrants to purchase for
a period of twenty-four months an aggregate of 19,440 shares of Glasgal
common stock held by the Company at an exercise price of $3.00 per
share and (b) warrants to purchase for a period of twenty-four months
an aggregate of 38,880 shares of the Company's common stock at an
exercise price of $ .20 per share.
The Glasgal shares referred to above are subject to a Lock-Up
Agreement, terminating on February 20, 1997, between Glasgal and the
Company, among others. However, such restrictions have been waived
with respect to the Company's delivery of such shares. In connection
with such waiver, the Company has granted to Glasgal the right, under
certain circumstances, to purchase, until October 10, 1997, 200,000
shares of Glasgal common stock held by the Company at a price of $3.00
per share.
In December 1995 and January 1996, the Company issued 8% notes to two
individual lenders each in the principal amount of $100,000. Each note
is secured by 35,000 shares of Glasgal common stock held by the
Company. The notes became due on March 20 and April 4, 1996,
respectively, and are past due as of April 30, 1996.
40
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 3 - Continued
During the years ended April 30, 1996 and 1995, as an inducement for loan
extensions and loan agreements, the Company paid processing and financing fees
by delivering 130,000 and 480,000 shares, respectively, of Glasgal common stock
held by the Company.
<TABLE>
<CAPTION>
April 30
---------
1996 1995
---- ----
<S> <C> <C>
Investment in Glasgal consists of:
Common Stock:
Number of shares $1,433,973 $ 2,243,973
Cost $1,386,151 $ 2,169,135
Fair market value based on current
price per share of registered Glasgal
shares. $12,905,575 $4,768,443
Options to purchase 580,000 shares
of common stock, at cost $725,000 $ - 0 -
</TABLE>
Such shares are subject to certain restrictions regarding
transferability and sale.
Summary financial information of Glasgal as presented in its financial
statements (audited by independent certified public accountants) are
as follows:
<TABLE>
<CAPTION>
April 30
----------------------------------
1996 1995
---- ----
<S> <C> <C>
Current assets $10,480,151 $9,121,888
Noncurrent assets 5,770,731 3,471,775
Current liabilities 8,009,864 12,877,976
Long-term obligations 1,088,370 27,107
Stockholders' equity (deficit) 7,153,248 (311,420)
</TABLE>
<TABLE>
<CAPTION>
Four Months
Year Ended Year Ended Ended
April 30, April 30, April 30,
1996 1995 1994
-------------- -------------- ----------
<S> <C> <C> <C>
Net Sales $41,780,821 $35,161,298 $11,154,560
Net Loss ($1,180,157) (1,642,789) (2,145,278)
</TABLE>
41
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 4 - Investment in Evolutions, Inc.
The Company in September 1995, entered into an agreement with
Evolutions, Inc. ( EVO), whereby the Company transferred all rights
and interests to its Zoo Borns product line, Tea Bunnies product line
and Kidsview name to a subsidiary of EVO for $750,000 and shares of
common stock of EVO equal to approximately 7% of EVO's then
outstanding common stock (valued at $75,000) with the right to receive
additional shares of common stock equal to approximately 15% of the
outstanding common stock of EVO based on certain performance levels of
the Zoo Borns and Tea Bunnies product lines over the next three years.
As an inducement for EVO to enter into this agreement, the Company
issued to EVO warrants to purchase 350,000 shares of common stock of
the Company at exercise prices of $ .10 per share with respect to
100,000 shares and $ .20 per share with respect to 250,000 shares. In
anticipation of consummating the agreement, EVO and the Company entered
into a lending arrangement under which the Company signed a promissory
note in March 1995 for $750,000 with interest at the annual rate of
12%. Such note was secured by 133,973 shares of stock of Glasgal held
by the Company and by an interest in certain accounts receivable and
was due on September 1, 1996. In July and August 1995, the Company also
borrowed from EVO an aggregate of $350,000 with interest at the annual
rate of 12%. Such obligations were secured by certain accounts
receivable and were due on October 31, 1995. Upon consummation of the
agreement, all these obligations were cancelled.
The Company recognized a gain of approximately $846,000 as a result of
these transactions.
As part of the agreement, the Company will manage these product lines
and will receive an amount equal to its monthly operating costs, up to
$100,000, for such period of time as the Company is managing such
product lines. The Company will provide the services of Peter
Schneider, President of the Company, for such management. This
management arrangement may terminate in September 1996 but could be
extended for up to two additional years depending on certain
performance levels of such product lines. At April 30, 1996, the
Company received fees from EVO in connection with this management
arrangement amounting to approximately $690,000.
Revenues and expenses of the Zoo Borns and Tea Bunnies product lines,
included in the accompanying statements of operations, are
approximately as follows:
<TABLE>
<CAPTION>
Year Ended April 30
------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales $549,000 $1,391,000 $ -
-------- ---------- --------
Cost of Goods Sold 630,000 916,000 -
Royalties/Licensing Fees 84,000 111,000 -
Product Development Costs (66,000) 545,000 -
Advertising and Promotions 71,000 758,000 -
------- --------- --------
719,000 2,330,000 -
------- --------- --------
$(170,000) $(939,000) -
----------- ---------- ---------
</TABLE>
In addition, the Company incurred general and administrative expenses
in connection with these product lines.
42
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 5 - Deferred Income Taxes
For federal income tax reporting purposes the Company has net operating
losses which are available to offset future federal and state taxable
income. Such losses expire as follows:
Approximate
Year Ending Amount
----------- ------------
2003 $300,000
2004 200,000
2005 700,000
2006 1,000,000
2007 800,000
2009 700,000
2010 800,000
----------
$4,500,000
----------
Deferred income tax assets as of April 30, 1995, were reduced to zero
by a valuation allowance of approximately $1,500,000 due to
uncertainties concerning their realization at that date. However, due
to the sale by the Company of some of its equity interest in Glasgal
and the significant increase in the market value of the Company's
equity interest in Glasgal, the Company has recognized a deferred
income tax asset of approximately $809,280 at April 30, 1996.
Deferred income tax assets consist of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended April 30
--------------------------
1996 1995
---- ----
<S> <C> <C>
Net Operating Loss $1,792,089 $1,510,643
Valuation allowance (982,802) (1,510,643)
----------- -----------
$809,287 $ 0
----------- -----------
</TABLE>
The following is a reconciliation of the federal income tax rate to the
actual effective income tax rate as a percentage of pretax income:
<TABLE>
<CAPTION>
Fiscal Year Ended April 30
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal income
tax rate 34.0% 34.0% 34.0%
State and local income taxes,
net of federal tax benefit 6.0 6.0 6.0
--- --- ---
40.0 40.0 40.0
Less: Change in deferred income tax
valuation allowance (167.9) (82.6) (1687.3)
------ ----- --------
(127.9%) (42.6%) (1647.3%)
-------- ------- ---------
</TABLE>
43
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 6 - Notes Payable - Officers and Shareholders
Notes payable - officers and shareholders consist of the following:
(a) During September 1992, 200,000 shares of common stock of the Company
were issued to an investor as settlement of an obligation in the amount of
$291,784, plus accrued interest. Should the investor be unable to sell the
shares for a price of at least $1.625 by August 1, 1993, the holder had the
right to return the shares to the Company. The Company was also obligated
to pay to the investor the difference between the proceeds of the sale and
the value of the note plus accrued interest. To date, the individual has
not returned such shares to the Company; however, the note is still shown
as outstanding as the price of the shares never exceeded $1.625. As of
April 30, 1996 and 1995, the Company is obligated in the amount of $291,784
(plus accrued interest of $103,286 and $53,415 at April 30, 1996 and 1995,
respectively). April 30
--------
1996 1995
---- ----
$395,070 $345,199
(b) During December 1992, officers of the Company loaned $52,000 to the
company. Additional sums were later advanced. The loans currently bear
interest at a rate of 8% and were payable on December 31, 1995, unless
prior thereto the holder at his option demanded that the notes, or a
portion thereof, be converted into and exchanged for 260,000 shares and
warrants to purchase shares of common stock at a price of $.20 per share
and warrants to purchase 130,000 shares of common stock at a price of $1.00
per share. Balances due under these loans, including unpaid interest
totaled $66,646 and $53,106 at April 30, 1996 and 1995, respectively.
April 30
--------
1996 1995
---- ----
$ 66,646 $ 53,106
-------- --------
$461,716 $398,305
-------- --------
Notes 7 - Notes Payable - Other
(a) The Company is obligated under 8% notes payable aggregating $1,388,696
and $856,555 at April 30, 1996 and 1995, respectively, including accrued
interest. In addition, the holders of certain of these notes received
warrants expiring November 23, 1998, to purchase 750,000 shares of common
stock exercisable at $ .05 per share and 500,000 shares exercisable at
$.20 per share. Other holders can convert their notes into equity
securities under certain conditions on terms which have not yet been
determined. For additional information regarding obligations incurred
during the fiscal year ended April 30, 1996, see Note 3.
April 30
--------
1996 1995
---- ----
$1,388,696 $856,555
(b) On October 6, 1994, the Company executed a promissory note in favor of
BW Capital Corporation for $1,600,000 at the rate of 11% per annum. Unpaid
interest totaled $14,466 at April 30, 1995. The note was paid off in
October 1995 from the proceeds of the sale of Glasgal securities (see Note
3) April 30
--------
1996 1995
---- ----
- $1,614,466
(c) On March 2, 1995, the Company executed a loan agreement with EVO
for $750,000 at an interest rate of 12% per annum and is due September 1,
1996. Rights to certain revenues from product lines and 133,973 shares of
Glasgal stock owned by the Company were collateral for the note. At April
30, 1995, the Company had received $575,000 of the note proceeds with the
balance received May 4, 1995. Unpaid interest totaled $10,843. The note was
paid off in September 1995 (see Note 4).
April 30
--------
1996 1995
---- ----
- $ 585,843
44
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 7 - Continued
(d) Financings relating to insurance costs of $22,728 and $58,370 at April
30, 1996 and 1995, respectively, bear interest at rates ranging from 8.17%
to 9.5% per annum
April 30
--------
1996 1995
---- ----
22,728 58,370
---------- --------
1,411,424 3,115,234
Less: Current Maturities 1,411,424 2,365,234
--------- ---------
$ - 0 - $750,000
--------- ---------
The carrying value of the Company's long-term debt approximates its
fair value.
Note 8 - Stockholders' Equity
During the years ended April 30, 1996 and 1995, the Company had
6,488,517 outstanding Redeemable Class A Warrants, expiring on
November 8, 1996, as extended. Each warrant entitles the holder to
purchase one share of common stock and receive a Redeemable Class B
Warrant which also expires on November 8, 1996, as extended. As a
result of a private placement of Convertible Preferred Stock which was
completed in October 1992, the exercise prices of the Class A and Class
B Warrants were adjusted so that for $1.00 and the exercise of one
Class A Warrant the holder will receive 1.8868 shares of the Company's
common stock ($ .53 per share) and a Class B Warrant. For $ .75 and the
exercise of a Class B Warrant, the holder will receive one share of the
Company's common stock.
During October 1992, the Company completed a private placement of 100
units, each unit consisted of 50,000 shares of Convertible Preferred
Stock and 25,000 warrants each to purchase one share of common stock at
$1 per share through June 1997, as extended. The Convertible Preferred
Stock is convertible into common stock (the "conversion shares") at any
time on or after January 1, 1993, at the election of the holders,
provided that the conversion shares are registered, or an exemption
from registration is available, at an intitial conversion rate of three
shares of common stock for each share of convertible preferred stock, a
conversion price of $ .20. The conversion price is subject to
adjustment from time to time in the event of (i) the issuance of common
stock as a dividend or distribution of any class of capital stock of
the Company; (ii) the combination, subdivision or reclassification of
the common stock; (iii) the issuance to all holders of common stock of
rights or warrants to subscribe for or purchase common stock at a price
per share less than the then current conversion price and the then
current market price of the common stock; (iv) the distribution to all
holders of common stock of evidence of the Company's indebtedness or
assets (including securities, but excluding cash dividends or
distributions paid out of earned surplus); (v) the issuance of common
stock, or securities convertible into common stock, at a price per
share less than the then current conversion price and the then current
market price of common stock (excluding dividends on preferred stock
paid in common stock). No adjustment in the conversion price is
required until cumulative adjustments require an adjustment of at least
1% in such conversion price.
In the case of any consolidation of the Company with, or merger of the
Company into, any other entity, any merger of another entity into the
Company (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of common stock of the Company) or any sale or transfer of all
or substantially all of the assets of the Company, each holder of a
share of Convertible Preferred Stock then outstanding shall have the
right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such consolidation,
merger, sale or transfer by a holder of the number of shares of Common
Stock of the Company into which such share of Convertible Preferred
Stock might have been converted immediately prior to such
consolidation, merger, sale or transfer. Depending upon the terms of
such transaction, the aggregate amount of cash so received on
conversion could be more or less than the liquidation preference of
such shares of Convertible Preferred Stock.
In September 1994, the Company, in consideration of services rendered,
granted to Capital Vision Group, Inc. a warrant to purchase 95,000
shares of the Company's common stock at an exercise price of $ .20 per
share. Such warrants expire on November 23, 1998. For financial
reporting purposes, no value has been assigned to this transaction.
45
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 9 - Incentive Stock Option Plan
In 1988, the Company adopted an Incentive Stock Option Plan under which
options may be granted to officers and other key employees. An
aggregate of 750,000 common shares are authorized for issuance under
the Plan. The option price may not be less than the fair market value
(or for owners of more than 10% of the outstanding stock, 110% of the
fair market value) of the common stock on the date of the grant of the
option. Options granted under the Plan are intended to be "incentive
stock options" within the meaning of Section 422A of the Internal
Revenue Code.
Options granted are exercisable in such installments and during such
period as are determined by the board of directors, but in no event is
an option exercisable more than ten years from the date the option is
granted.
The status of the options granted under the Incentive Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
Aggregate
Exercise
Fiscal Year Ended April 30, 1994 Options Exercise Price Price
------------------------------- ------- -------------- ----------
<S> <C> <C> <C>
Outstanding at April 30, 1993 374,809 $ .19 to $1.16 $ 156,055
Granted 78,000 .63 to .69 50,940
Terminated - - -
Exercised - - -
------- ---------
Outstanding at April 30, 1994 452,809 .19 to 1.16 206,995
------- --- ---- ---------
Exercisable 374,809 .19 to 1.16 $ 156,055
------- ----------
Fiscal Years Ended April 30, 1995 and 1996
------------------------------------------
Outstanding at April 30, 1994 452,809 $ .19 to $1.16 $ 206,995
Granted - - -
Terminated - - -
Exercised - - -
------- -------
Outstanding at April 30, 1996 452,809 .19 to 1.16 206,995
------- -------
Exercisable 452,809 .19 to 1.16 $ 206,995
------- -------
</TABLE>
In March 1994, the board of directors voted to adopt a new Incentive Stock
Option Plan, which is subject to stockholder approval, under which options may
be granted to officers and other key employees. An aggregate of 2,000,000 common
shares are expected to be authorized for issuance under the New Plan. The option
price may not be less than the fair market value (or for owners of more than 10%
of the outstanding stock, 110% of the fair market value) of the common stock on
the date of the grant of the option. Options granted under the New Plan are
intended to be "incentive stock options" within the meaning of Section 422A of
the Internal Revenue Code.
Options granted are exercisable in such installments and during such period as
are determined by the board of directors, but in no event is an option
exercisable more than ten years from the date the option is granted. The
stockholders have not yet approved the granting of any options under this Plan.
No accounting recognition is given to stock options until they are exercised, at
which time the proceeds are credited to the stockholders' equity accounts.
46
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 9 - Continued
The status of the options granted under the New Incentive Stock Option Plan,
which is subject to stockholder approval, is as follows:
Aggregate
Exercise
Fiscal Year Ended April 30, 1994 Options Exercise Price Price
------- -------------- ---------
Outstanding at April 30, 1993 - $ - $ -
Granted 1,000,000 .63 to .69 657,000
Terminated - - -
Exercised - - -
--------- ---------
Outstanding at April 30, 1994 1,000,000 .63 to .69 $ 657,000
--------- ---------
Exercisable - - $ -
--------- ---------
Fiscal Years Ended April 30, 1995
and 1996
Outstanding at April 30, 1994 1,000,000 .63 to .69 $ 657,700
Granted - - -
Terminated - - -
Exercised - - -
--------- ----------
Outstanding at April 30, 1995 1,000,000 .63 to .69 657,700
and 1996 --------- ----------
Exercisable - - -
--------- ----------
In March 1994, the board of directors voted, subject to stockholder approval, to
grant options to purchase 1,000,000 shares of common stock to certain officers
at a per share price ranging from $ .63 to $ .69. This grant was not connected
with the incentive stock option plans.
The board also voted, subject to stockholder approval, to grant options to
purchase shares of common stock to certain officers based on the Company
achieving either specified gross sales or stock price goals as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending Options to Purchase Gross Sales Stock Price
April 30 Shares of Common Stock Goals Goals*
- ------------------ ---------------------- ----------- -----------
<S> <C> <C> <C>
1997 511,500 $12,500,000 $1.50
1998 558,000 14,000,000 1.75
1999 604,500 15,500,000 2.00
<FN>
* Average over last 90 days of fiscal year.
</FN>
</TABLE>
Note 10 - Related Party Transactions
During the fiscal years ended April 30, 1996, 1995 and 1994, the
Company purchased products totaling approximately $396,000 , $678,000,
and $92,000, respectively, from a corporation which is owned and
operated by a principal stockholder and executive vice president of the
Company. During the fiscal years ended April 30, 1996, 1995 and 1994
the Company incurred product development expenses of approximately
$27,000, $49,000 and $ - 0 - , respectively, payable to this
corporation.
47
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
Note 10 - Continued
During the fiscal years ended April 30, 1996, 1995 and 1994, the
Company paid approximately $72,000, $66,000, and $85,000, respectively,
to an officer for legal services rendered.
As of April 30, 1996 and 1995 the Company held 8% notes receivable from
certain officers aggregating approximately $111,000 and $349,000,
respectively, including interest. Interest income for the years ended
April 30, 1996, 1995, and 1994 on officers' loans totaled approximately
$26,000, $21,000, and $26,000, respectively.
The Company has a non-interest bearing loan receivable from Kidsview,
Inc., a subsidiary of EVO, in the amount of $194,117 at April 30, 1996.
See Note 12 b regarding management's intentions with respect to future
investments in EVO.
Note 11 - Commitments and Contingencies
(a) License Agreements
The Company has the right to use product names and designs under
license agreements with designers. These agreements require the Company
to pay royalties ranging from 5% to 10% of sales.
For the fiscal years ended April 30, 1996, 1995, and 1994 approximately
29 % (1996) , 24% (1995), and 90% (1994) of sales have been of products
licensed by Shari Lewis Enterprises, Inc. Approximately 50% (1996) and
35% (1995) of sales have been of licensed products (the Zoo Borns
product line which was sold in September 1995, see Note 4).
(b) Major Customers
The Company had sales to major customers during the years ended April
30, 1996, 1995, and 1994 as follows:
<TABLE>
<CAPTION>
% of Total Sales
Year Ended Number of Attributable to
April 30 Major Customers Major Customers
-------- --------------- ---------------
<S> <C> <C>
1996 2 68
1995 2 40
1994 2 30
</TABLE>
Note 12 - Subsequent Events
(a) Margin Account and Sale of Glasgal Stock
On May 28, 1996, the Company established a margin account with the
brokerage firm of Cowen & Company (Cowen). In that connection, the
Company delivered 300,000 shares of common stock of Glasgal held by the
Company to Cowen and borrowed $500,000 against such account.
On June 10, 1996, the Company sold (at $9.00 per share) 115,000 shares
of common stock of Glasgal held by the Company in its margin account.
The Company received net proceeds from such sale aggregating
approximately $1,000,000. The Company used approximately one-half of
the proceeds to pay off its margin loan of approximately $500,000.
48
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
(b) Investment in Evolutions, Inc. (Unaudited)
The net proceeds from the transactions referred to above (approximately
$1,000,000) was invested in common stock of EVO at $2.50 per share, and
warrants exercisable at $3.50 per share to purchase common stock of
EVO. The Company also intends to make an additional equity investment
in EVO of approximately $800,000 on the same terms, which will
include the transfer by the Company of 106,667 shares of Glasgal
common stock held by the Company, which is expected to occur during
the fiscal quarter ending October 31, 1996. As an inducement for such
investments, the Company will receive additional warrants to purchase
400,000 additional shares of EVO common stock, exercisable at $2.50 per
share.
Note 13 - Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fiscal year ended
April 30, 1996
Sales $120,475 $778,664 $202,299 $(6,854)
Net income(loss) (504,531) 1,871,015 (141,688) 189,546
Earning(loss) per
common share ( .06) .15 ( .01) ( .01)
Fiscal year ended
April 30, 1995
Sales $526,194 $1,397,235 $1,726,410 $249,313
Net income(loss) (296,078) (283,803) (115,983) (3,469,371)
(Loss) per
common share ( .03) (.03) ( .01) ( .39)
</TABLE>
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective May 1, 1996, the Company's Board of Directors appointed Bederson &
Company LLP ("Bederson") as independent auditors to audit the financial
statements of the Company for the fiscal year ended April 30, 1996. Bederson was
engaged as auditors following the withdrawal of one of the principals in the
accounting firm of Todman & Co. ("Todman"), the auditors of the Company's
financial statements for fiscal years up to and including the fiscal year ended
April 30, 1995, and after his joining Bederson as a partner. During Todman's
engagement there were no disagreements with Todman on any matter of accounting
principle or practices, financial statement disclosure or audit scope or
procedure, which disagreements if not resolved to the satisfaction of Todman
would have caused Todman to make reference to the subject matter of the
disagreement in connection with Todman's report for the fiscal year ended April
30, 1995.
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the executive officers and directors of the
Company as of the date hereof.
NAME AGE POSITION
---- --- --------
Joseph M. Salvani 39 Chairman of the Board and
Principal Executive Officer
Peter L. Schneider 43 President and Director
Barry A. Rosner 53 Vice President, Treasurer,
Director and Principal
Financial Officer
Y.S. Ling 51 Executive Vice President,
International Operations
Howard G. Peretz 57 Executive Vice President
William B. Rodman 57 Secretary
The directors serve until the next annual meeting of stockholders and thereafter
until their successors shall have been elected and qualified. The officers are
elected annually by the directors and serve at the discretion of the Board of
Directors. The following sets forth biographical information as to the business
experience of each director of the Company for at least the past five years. No
family relationships exist among any of the Company's executive officers or
directors.
JOSEPH M. SALVANI has been Chairman of the Board of Directors and Principal
Executive Officer of the Company since August 10, 1992. From 1981 to 1986 Mr.
Salvani was the Senior Chemical Industry Analyst and also held the position of
Senior Vice President at Goldman, Sachs & Co. From 1986 to 1989 he was a general
partner and Hedge Fund Manager of Steinhardt Partners. From 1989 to 1991, he was
a managing partner of EGS Partners with the responsibilities of managing
performance-based hedge funds and raising funds for small companies. Beginning
in early 1991, Mr. Salvani became President of Salvani Investments. In addition,
Mr. Salvani was a registered broker with Brookehill Equities Inc. from March
1991 to July 31, 1992. Mr. Salvani is also a director of Medicis Pharmaceutical,
Inc. a pharmaceutical company, and of Glasgal Communications, Inc. Mr. Salvani
is a graduate of Rutgers College with Bachelor of Science degrees in Accounting,
Economics and Finance. He also holds a Master's degree in Business
Administration from Columbia University. Mr. Salvani spends approximately 30% of
his time in connection with the Company's business.
PETER L. SCHNEIDER has been the President of the Company and a director since
its inception in 1986 and was Chairman of the Board of Directors and Principal
Executive Officer from 1986 to August 10, 1992. He is a founder of the Company.
From 1983 to 1986 Mr. Schneider was the Executive Vice President of Extra
Special, Inc., a toy and giftware company, where he was also Chief Operating
Officer and a director. He has held executive positions of responsibility in
product development, marketing, sales and operations with several toy and
consumer products companies such as Applause/Knickerbocker Toy Co. and Matchbox
USA. He began his career at Procter & Gamble, a consumer products company, in
1974 as part of the Management Training Program. Mr. Schneider is a graduate of
the University of Rhode Island with a Bachelor of Science degree in Business
Administration.
51
<PAGE>
BARRY A. ROSNER is a Vice President and Treasurer of the Company and was elected
a director in 1988. He has been an independent Certified Public Accountant since
1968 and since that date has operated as a sole practitioner. Prior to that he
held positions with various public accounting firms from 1965 to 1968. Mr.
Rosner was graduated from the State University at Buffalo in 1964 with a
Bachelor of Science degree in Business Administration. He is a member of the New
Jersey State Society of Certified Public Accountants. Mr. Rosner devotes a
limited amount of his time to the business of the Company. On November 1, 1989,
Mr. Rosner was served with a summons and complaint from two former clients
alleging, in general, that in connection with his independent accounting
practice he was negligent in rendering certain accounting services to such
clients. Such case has been settled.
Y.S. LING, has been an Executive Vice President of the Company since its
inception in 1986 and is a founder of the Company. Mr. Ling is also the
President of Well World Toy Co., Ltd. Of Taipei, Taiwan. Well World has had two
generations of successful toy development and manufacturing operations. He
joined Well World after his studies at the University of Taipei in 1964 and has
been with Well World since that date.
HOWARD G. PERETZ, joined the Company as Executive Vice President under an
employment agreement, effective for a two year period commencing as of September
1, 1993, with assignments in the areas of strategic planning, new product
acquisition, and distribution expansion. Mr. Peretz was formerly a Vice
President of Marketing at both Hasbro and Knickerbocker Toys. He also headed his
own development group, Packaged Play Development. Mr. Peretz was also a partner
in Starshine, a New Jersey based company specializing in the selling of licensed
stuffed toys to the gift trade. Since 1987, Mr. Peretz has had consulting
assignments with some of the leading companies in the children's field -
Applause, Kenner, Tyco, General Mills Fun Group, CBS toys, Hallmark and Ringling
Bros Barnum & Baily.
WILLIAM B. RODMAN, was elected Secretary of the Company in 1988. He was a
member of the law firm of Reid & Priest for more than ten years. Since 1986 he
has been counsel to several New York law firms.
During the fiscal year ended April 30, 1996, the Board of Directors of the
Company held four meetings. No member of the Board of Directors attended fewer
than 75% of the meetings of the Board in the fiscal year ended April 30, 1996.
There is no Executive Committee or Audit Committee. The Board as a whole serves
as a Nominating Committee, Compensation Committee and Stock Option Committee.
Directors receive no compensation for serving in such capacity.
ITEM 11. EXECUTIVE COMPENSATION
The Company's Board of Directors does not have a Compensation Committee. The
Company's three directors vote on all matters relating to Executive
compensation. No director, however, participates in discussions or any formal
action of the Board relating to matters concerning such director's compensation.
52
<PAGE>
The Board of Directors, pursuant to the method described above, reviews the
reasonableness of compensation paid to executive officers of the Company by
comparison to compensation paid to executives of competing companies, taking
into account the Company's performance.
The Board of Directors has reviewed the compensation for each of the executive
officers for fiscal year 1996 and determined that, in its opinion, the
compensation of such officers was reasonable and appropriate in view of the
Company's performance and the contribution of those officers to such
performance.
The only officers or directors who receive aggregate remuneration in excess of
$60,000 during the fiscal year ended April 30, 1996 were Peter Schneider, who
earned $151,831, Y.S. Ling who received $284,340 and Howard Peretz who received
$131,831. The total aggregate remuneration received during such period by all of
the officers and directors as a group was $617,046. Other non-cash compensation
such as the use of an automobile leased by the Company and payment of premiums
for insurance for the benefit of Mr. Schneider did not exceed 10% of the cash
compensation paid to Mr. Schneider or to all executive officers as a group.
On September 1, 1992, the Company entered into a two-year agreement under which
Joseph M. Salvani received annual cash compensation of $120,000, which was paid
in equal monthly installments. Mr. Salvani has been granted options by principal
stockholders to purchase 1,910,000 shares of Common Stock at an exercise price
of $ .20 per share. The options will expire on June 30, 1997 and if exercised in
full may result in a change of control of the Company. In the event Mr. Salvani
exercises the options while the Company is primarily engaged in its current
business, Mr.Salvani has agreed to grant Mr. Schneider a proxy to vote such
shares for such period of time that the Company is engaged in its current
business. In addition, the Company has agreed to register such shares. No
employee has a written employment agreement at April 30, 1996.
Other than as described below, the Company has no pension or profit-sharing plan
or other contingent forms of remuneration.
53
<PAGE>
The following table summarizes compensation paid by the Company for services
rendered during 1996, 1995, and 1994 by the Principal Executive Officer and all
other compensated executives of the Company (collectively, together with the
Principal Executive Officer, the "Executive Officers") other than the Principal
Executive Officer.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payments
------------------- ------ --------
Name and Principal Year Salary Bonus Other Annual Restricted Securities LTIP All
Position ($) ($) Compensation Stock Underlying Other
($) Awards ($) Options/ ($) ($)
SARS ($)
- ------------------ ---- ------- ------ ------------ ------------ ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph M. Salvani 1996 - - - - - - -
Chairman of the
Board and Principal
Executive Officer 1995 - - - - - - -
1994 120,000 - - - 86,505 - -
Peter L. Schneider 1996 151,831 - - - - - -
President and
Director
1995 145,454 - - - - - -
1994 146,500 - - - 1,930,000 - -
Howard Peretz 1996 131,831 - - - - - -
Executive Vice Presiden
1995 151,206 - - - - - -
1994 83,333 - - - 146,000 - -
Y.S. Ling 1996 - 284,340 - - - - -
Executive
Vice President
1995 - 25,000 - - - - -
1994 - - - - 1,900,000 - -
</TABLE>
For information regarding Stock Options, see following tables.
OPTIONS GRANTED IN LAST FISCAL YEAR
There were no stock options granted to the Executive Officers
during the fiscal year ended April 30, 1996.
54
<PAGE>
The following table sets forth information with respect to Executive Officers
concerning unexercised options held as of the fiscal year ended April 30, 1996.
None of the Executive Officers exercised options during the fiscal year ended
April 30, 1996. No options were repriced during the fiscal year ended April 30,
1996.
<TABLE>
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1996
AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options at
Options at F/Y End Fiscal Year End
Shares Value
Name Exercise(#) ($)realized Exercisable Unexercisable* Exercisable Unexercisable*
---- ----------- ----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph M. Salvani
Chairman of the
Board and Principal
Executive Officer 0 0 86,505 0 0 0
Peter L. Schneider
President 0 0 136,304 1,900,000 0 0
Y.S. Ling
Executive Vice
President 0 0 0 1,900,000 0 0
Howard G. Peretz
Executive Vice
President 0 0 16,000 130,000 0 0
Barry A. Rosner
Vice President,
Treasurer and Principal
Financial Officer 0 0 55,000 230,000 0 0
William B. Rodman
Secretary 0 0 70,000 230,000 0 0
<FN>
* All unexercisable options were granted subject to stockholder ratification
except for options to purchase 30,000 shares, 16,000 shares, 16,000 shares,
16,000 shares granted under the 1988 Incentive Stock Option Plan to Messrs.
Schneider, Peretz, Rosner and Rodman, respectively.
</FN>
</TABLE>
LONG TERM INCENTIVE PLANS-AWARDS IN FISCAL YEAR 1996
There were no long term incentive plans-awards granted to the Executive Officers
during the fiscal year ended April 30, 1996.
55
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At July 31, 1996, the directors and officers of the Company and their affiliates
owned 2,761,669 shares of Common Stock representing approximately 30 % of the
issued and outstanding shares of Common Stock.
The following table sets forth, as of the July 31, 1996, the holdings of voting
securities of the Company by those persons owning of record or known by the
Company to own beneficially or otherwise to have voting or dispositive control
over 5% or more of any class of the Company's securities, the holdings by each
director, and the holdings by all of the officers and directors of the Company
as a group.
<TABLE>
<CAPTION>
Title Name and Address of Amount and Nature Percent
of Class Beneficial Owner(1) of Beneficial Of
Ownership(2) Class
- -------- ---------------------------- ----------------- -------
<S> <C> <C> <C>
Common Peter L. Schneider 2,708,232 shs.(3)(4) 29.9%
Common Y.S. Ling 1,281,616 shs. 14.1%
Common Barry A. Rosner 0 shs.(5) -
Common Joseph Salvani 0 shs.(6) -
Common Pure Tech International Inc. 0 shs.(7) -
Somerset, NJ 08875
Common Edward Lagomarsino 0 shs.(8) -
22 Sunflower Drive
Upper Saddle River, NJ
Common Charles Lieberman 252,551 shs.(9) 2%
400 Canterbury Lane
Wyckoff, NJ 07481
Common A&S Rifkin Partnership 0 shs.(10) -
1400 Sans Souci Parkway
Wilkes Barre, PA 18703
Common All Directors and Officers 2,761,669 shs.(4)(5)(6) 30.5%
as a Group (6 Persons)
Convertible Edward Lagomarsino 250,000 shs. 5%
Preferred See above
Convertible Pure Tech International Inc. 300,000 shs. 6%
Preferred See above
Convertible All Directors and Officers 0 shs. 0%
Preferred as a Group (6 Persons)
</TABLE>
56
<PAGE>
(1) The address for Messrs. Schneider, Ling, Rosner and Salvani is 266
Harristown Road, Suite 108, Glen Rock, NJ 07452.
(2) All shares are directly held except as otherwise stated.
(3) Includes 1,281,616 shares of Common Stock beneficially owned by Mr.
Schneider because of a proxy given to him by Y.S. Ling. Mr. Schneider may
be deemed to be a control person.
(4) Does not include options to purchase 106,304 shares of Common Stock
which became exercisable in May 1993.
(5) Does not include (i) options to purchase 39,000 shares of Common Stock
which became exercisable in May 1993 and (ii) 7,601 shares of Common Stock
owned by Barbara Rosner, Mr. Rosner's wife. Mr. Rosner disclaims beneficial
ownership of such shares.
(6) Does not include an option granted by Messrs. Schneider (946,000
shares), Ling (878,000 shares) and Rodman (86,000 shares) exercisable until
June 30, 1997 to purchase 1,910,000 shares of Common Stock at a price of
$.20 per share. Does not include options under the Company's Incentive
Stock Option Plan to purchase an additional 86,505 shares of Common Stock
which became exercisable in September 1993.
(7) Does not include 300,000 shares of Convertible Preferred Stock
convertible into 900,000 shares of Common Stock and 1992 Warrants to
purchase 150,000 shares of Common Stock.
(8) Does not include 250,000 shares of Convertible Preferred Stock
convertible into 750,000 shares of Common Stock and 1992 Warrants to
purchase 125,000 shares of Common Stock.
(9) Does not include 252,551 shares of Common Stock, 100,000 shares of
Convertible Preferred Stock convertible into 300,000 shares of Common Stock
and 1992 Warrants to purchase 50,000 shares of Common Stock.
(10) Does not include 150,000 shares of Convertible Preferred Stock
convertible into 450,000 shares of Common Stock and 1992 Warrants to
purchase 75,000 shares of Common Stock.
57
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended April 30, 1996, the Company purchased products
totaling approximately $396,000 from Well World Toy Company, Ltd., which is
owned and operated by Y.S. Ling, a principal stockholder and Executive Vice
President of the Company. In fiscal 1995 and 1994, there were purchases totaling
approximately $678,000 and $91,560, respectively. During the fiscal years ended
April 30, 1994, 1995 and 1996, the Company incurred product development expenses
of $0, $49,210 and $26,540 respectively, payable to Well World Toy Company, Ltd.
During the year ended April 30, 1993, Peter Schneider, the former Chairman of
the Board of Directors, and currently the President and a principal stockholder
of the Company, borrowed $54,685 from the Company. Mr. Schneider signed a
promissory note for such amount which bears interest at the rate of 8% per annum
(the "Schneider Note"). The Schneider Note was due on April 29, 1994, was rolled
over and is due on August 10, 1997. Such loan has not yet been repaid. The
amount due, including accrued interest, approximated $73,000 at April 30, 1996.
On February 28, 1990, Mr. Ling , a principal stockholder and Executive Vice
President, borrowed $100,000, from the Company. The loan is collateralized by
35,000 shares of Mr. Ling's Common Stock of the Company. Mr. Ling signed a
promissary note which bears interest at the rate of 10% per annum and is payable
upon demand. Because of Mr. Ling's continuing efforts on behalf of the Company
and recognizing his value to the Company in view of his expertise in
manufacturing and sourcing of materials and because the Company did not
otherwise compensate Mr. Ling in any substantial way for his services, on
January 7, 1994, the Company loaned Mr. Ling an additional $150,000. Mr. Ling
signed a promissory note bearing interest at the rate of 8% per annum and
payable on October 6, 1994. As of April 30, 1996, the amount owed to the Company
by Mr. Ling under such notes was $0 as approximately $284,000 of the amount
receivable from Mr. Ling was charged to compensation expense for his services in
connection with the sale of certain Company product lines during fiscal 1996.
In October and November 1992 and February 1993, the Company entered into a
lending arrangement with Joseph Salvani, Chairman of the Board , whereby the
Company, recognizing the positive benefits to the Company resulting from Mr.
Salvani's efforts in connection with the Company's search for a suitable merger
candidate, his identification of Glasgal and his efforts in connection with the
Glasgal transaction, loaned him an aggregate of $350,000 with interest at the
annual rate of 8%. The loans provided for a maturity date of June 30, 1993 and
were secured by an assignment of all the rights and interest of Mr. Salvani in
an option agreement, which expires on June 30, 1997, wherein Mr. Salvani has the
right to acquire for $ .20 per share up to 1,910,000 shares of the Company's
Common Stock from executive officers of the Company. Mr. Salvani repaid all such
loans by May 3, 1993, together with $10,661 interest.
58
<PAGE>
In December 1992, in order to provide additional capital for the Company,
Messrs. Rosner and Rodman loaned the Company $22,000 and $30,000, respectively,
and certain relatives of Mr. Rosner loaned the Company an additional $31,000.
Such loans, which are evidenced by convertible notes, bear interest at the
annual rate of 8% and were due on December 31, 1995. As an inducement for making
such loans, the holders can convert such notes into equity securities in the
event the Company undertakes a future private placement, the terms of which have
yet to be determined. Because of Mr. Rosner's continuing efforts on behalf of
the Company and recognizing his value to the Company as its principal financial
officer, and because the Company does not otherwise compensate Mr. Rosner in any
substantial way for his services, on November 15, 1993 the Company loaned Mr.
Rosner $44,000. Mr. Rosner signed a promissory note bearing interest at the rate
of 6% per annum. The amount has been repaid in full, including accrued interest.
At April 30, 1996, Howard Peretz, an Executive Vice President, had borrowed an
aggregate of approximately $26,000 from the Company. Mr. Peretz has signed
promissory notes which bear interest at the rate of 5% per annum and which are
payable upon demand.
The loans to officers referred to above were made on terms favorable to the
borrowers. The Company considers making loans to its officers on a case-by-case
basis. The Company believes that loans are an important element of incentives
for executives, since the Company does not have the ability to pay compensation
packages to its executives comparable to those paid by other public companies as
additional incentives to attract key people. The Company believes that the
benefit of such loans outweighs the negative effect on the Company of not having
the funds loaned to these executives available to meet the Company's recurring
needs for additional working capital. Currently, the Company is not considering
making any such loans. With respect to amounts paid by the Company to Mr. Rodman
for professional services rendered, see Note 10 of Notes to Consolidated
Financial Statements for the fiscal years ended April 30, 1994, 1995 and 1996.
On March 6, 1991, as part of a private replacement of its securities, the
Company entered into lending agreements with Mr. Charles Lieberman, Mr. Ira
Lamster and Mrs. Barbara Rosner whereby the Company borrowed $230,000, $32,000
and $11,500 from such persons, respectively, for a period of six months at a
semiannual rate of interest of 14.5%. As an inducement for such persons to enter
into such transactions, the Company agreed to sell to such persons on a
restricted basis 14,286, 2,000 and 714 shares of Common Stock, respectively, for
an aggregate consideration of $22,312 or approximately $1.31 per share. In April
1991, the Company entered into negotiations with Mrs. Rosner which resulted in
the reduction of the Company's note to Mrs. Rosner, referred to above, from
$11,500 to $1,233. In October 1991, the Company paid off $32,000 (plus accrued
interest) with respect to such loans. At such time the Company renegotiated the
balance of such loans (plus accrued interest) and issued new notes, maturing in
one year, amounting to $276,000 with interest thereon at the annual rate of 10%.
At April 30, 1996 such loans amounted to approximately $395,000 including
interest.
59
<PAGE>
On September 1, 1993, the Company entered into an employment agreement with
Howard G. Peretz, Executive Vice President of the Company, pursuant to which Mr.
Peretz received an annual salary of $125,000 plus incentive bonuses through
December 31, 1994 not to exceed $50,000. Such employment agreement expired on
December 31, 1995.
Because of its inability prior to April 30, 1993 to finance any diversification
of its toy business, the Company agreed to allow Peter Schneider at his expense
to organize and to arrange for the financing of separate companies (Gift Connect
International, Inc. for the gift business and P.J. Toy Company , Inc. for
generic stuffed toy products) to explore the marketing of the Company's products
through gift outlets and to create generic stuffed toy product for distribution
through mass market and gift outlets. As an inducement for the Company to
explore such marketing of such products, the Company would manufacture all
products for these entities and receive pro rata reimbursement for any overhead
expenses incurred by the Company, including allocation for salaries and related
expenses and office expenses, with payment guaranteed by Mr. Schneider, and a
percentage of the profits from these operations. During the fiscal year ended
April 30, 1993, the Company began its review of the operations relating to such
businesses. At such date sales to gift outlets approximated $200,000. The
Company had made interest-free advances to the gift company of $372,893 to be
repaid as soon as practicable out of available funds, of which $140,000 was
repaid by May 31, 1993, in connection with the operations of the gift business.
Included in this advance was $83,380 representing overhead costs, described
above, incurred by the Company on behalf of the gift business. The business
purpose of the advances was to permit the Company, with limited exposure, to
participate (as contract manufacturer) in the development of these ancillary
businesses and to share in the profits resulting from sales. Based upon the
Company's current and projected levels of business for fiscal 1994, which
reflected substantial sales of the Lamb Chop (Registered Trademark) product
line, Mr. Schneider relinquished and transferred to the Company all of his
interest in such businesses which in effect returned all outstanding advances to
the Company with neither a loss to the Company nor a profit to Mr. Schneider.
During the fiscal year ended April 30, 1994, the Company had revenues from the
gift business approximating $800,000 and revenues approximating $600,000 from
the sale of generic stuffed toy products. However, the gift business was not
profitable operating at such levels because of the high administrative costs
involved in selling to large groups of small customers instead of the large
customers served by the Company's toy business. It was also determined that the
generic stuffed toy business would not provide acceptable margin levels and
significant growth potential. Accordingly, after April 30, 1994, the Company
determined that because of the costs involved in developing those businesses and
the extensive capital requirements (for inventory, receivables and marketing)
for developing such businesses, the Company could better apply its limited
resources to its core toy business. At the present time, the Company has
virtually terminated its activities in connection with these businesses.
60
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A) Exhibits
Copies of any exhibit not contained herein may be obtained by writing to the
Company at 266 Harristown Road, Suite 108, Glen Rock, New Jersey 07452.
(B) Financial Statement Schedules
None
(C) Reports on Form 8-K
None
61
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) EXHIBITS
*2.0 - Common Stock Purchase Agreement between the Company and Glasgal
Communications, Inc. (filed with Annual Report on Form 10-K for the fiscal
year ended April 30, 1995 as Exhibit 2.0)
*3.1 - Certificate of Incorportation of the Company (filed with
Registration Statement on Form S-18, File No. 33-24473-NY, effective
November 9, 1989 as Exhibit 3.1)
*3.2 - Certificates of Amendment of the Certificate of Incorporation (filed
with Registration Statement on Form S-18, File No. 33-24473-NY, effective
November 9, 1989 as Exhibit 3.2)
*3.3 - Certificate of Designations of Convertible Preferred Stock (filed
with Registration Statement on Form SB-2, File No. 33-58592, effectiveness
pending, as Exhibit 3.3)
*3.4 - By laws of the Company, as amended (filed with Annual Report on Form
10-K for the fiscal year ended April 30, 1990 as Exhibit 3.3)
*4.1 - Specimen Common Stock Certificate (filed with Registration Statement
on Form S-18, File No. 33-24473-NY, effective November 9, 1989 as Exhibit
4.1)
*4.2 - Form of Warrant Agreement relating to Redeemable Class A Warrants
and Redeemable Class B Warrants (filed with Registration Statement on Form
S-18, File No. 33-24473- NY, effective November 9, 1989 as Exhibit 4.3)
*4.3 - Specimen Redeemable Class A Warrant Certificate (filed with
Registration Statement on Form S-18, File No. 33-24473-NY, effective
November 9, 1989 as Exhibit 4.4)
*4.4 - Specimen Redeemable Class B Warrant Certificate (filed with
Registration Statement on Form S-18, File No. 33-24473-NY, effective
November 9, 1989 as Exhibit 4.5)
*4.5 - Specimen 1992 Warrant (filed with Registration Statement on Form
SB-2, File No. 33-585-92, effectiveness pending, as Exhibit 4.5)
*10.1 - License Agreement between the Company and Shari Lewis Enterprises,
Inc. (filed with Annual Report on Form 10-K for the fiscal year ended April
30, 1991 as Exhibit 10.11)
*10.2 - License Agreement between the Company and Shari Lewis Enterprises
Inc. as amended (filed with Registration Statement on Form SB-2, File No.
33-58592, effectiveness pending, as Exhibit 10.8)
*10.3 - Incentive Stock Option Plan of the Company (filed with Registration
Statement on Form S-18, File No. 33-24473-NY, effective November 9, 1989 as
Exhibit 10.4)
*10.4 - Employment Agreement between the Company and Howard G. Peretz
(filed with Annual Report on Form 10-K for the fiscal year ended April 30,
1994 as Exhibit 10.10)
*10.5 - Loan and Security Agreement between the Company and Glasgal
Communications, Inc. (filed with Registration Statement on Form SB-2, File
No. 33-58592, effectiveness pending, as Exhibit 10.15)
62
<PAGE>
(a) EXHIBITS - continued
21 - List of Subsidiaries: Amerawell Products, Ltd., a Hong Kong
corporation
23 - Auditors' Consent
24 - Power of Attorney
*Incorporated herein by reference.
(b) FINANCIAL STATEMENT SCHEDULES
None
(c) REPORTS ON FORM 8-K
None
63
<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, in the town of Glen Rock,
State of New Jersey on the 5th day of August 1996.
DIRECT CONNECT INTERNATIONAL INC.
(Registrant)
By:/s/ Peter S. Schneider
-------------------------
(Peter L. Schneider, President)
Pursuant to the requirements 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.
Signature Title Date
- --------- ----- ----
Joseph M. Salvani Chairman of the Board and August 5, 1996
Principal Executive Officer
Peter L. Schneider President and Director August 5, 1996
Barry A. Rosner Vice President-Finance, August 5, 1996
Treasurer and Principal
Financial and Accounting
Officer and Director
Joseph M. Salvani
Peter L. Schneider All of the Directors August 5, 1996
Barry A. Rosner
Peter L. Schneider, by signing his name hereto, does hereby sign this document
on behalf of the registrant and on behalf of each of the above-named persons
pursuant to powers of attorney duly executed by the registrant and such persons,
filed with the Securities and Exchange Commission.
By: /s/ Peter L. Schneider
--------------------------
Peter L. Schneider
Attorney-in-fact
64
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
Direct Connect International Inc.:
We hereby consent to the inclusion in this Annual Report on Form 10-K, for
the fiscal year ended April 30, 1996, of our Report, dated July 26, 1995, in
connection with our audit of the Financial Statements of Direct Connect
International Inc. and Subsidiary as of and for the fiscal years ended April 30,
1995 and 1994.
/S/ Todman & Co., CPAs, P.C.
New York, NY
August 5, 1996
65
<PAGE>
EXHIBIT 24
DIRECT CONNECT INTERNATIONAL INC.
POWER OF ATTORNEY
FORM 10-K
The undersigned, Direct Connect International Inc., a Delaware corporation, and
certain of its officers and/or directors, do each hereby consititute and appoint
Peter L. Schneider, William B. Rodman, and Barry A. Rosner, and each of them, to
act as attorneys-in-fact for and in the respective names, places and stead of
the undersigned, to execute, seal, sign and file with the Securities and
Exchange Commission an annual report of said Direct Connect International Inc.
on Form 10-K and any and all amendments thereto for the purpose of filing under
the Securities Exchange Act of 1934, hereby granting to said attorneys-in-fact,
and each of them, full power and authority to do and perform all and every act
and thing whatsoever requisite, necessary or proper to be done in and about the
premises, as fully to all intents and purposes as the undersigned, or any of
them, might or could do if personally present, hereby ratifying and approving
the acts of said attorneys-in-fact.
Executed the 5th day of August , 1996.
DIRECT CONNECT INTERNATIONAL INC.
By /S/ PETER L. SCHNEIDER
-------------------------
Peter L. Schneider - President
[Corporate Seal]
ATTEST:
/S/ WILLIAM B. RODMAN
Secretary
Principal, Executive Officers
and all of the Directors
-----------------------------
/S/ JOSEPH M. SALVANI Chairman and Principal
Joseph M. Salvani Executive Officer and Director
/S/ PETER L. SCHNEIDER President and Principal Operating
Peter L. Schneider Officer and Director
/S/ BARRY A. ROSNER Vice President, Treasurer and
Barry A. Rosner Principal Financial and Accounting
Officer and Director
66
