<PAGE>
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
For the Fiscal Year Ended April 30, 1997
OR
Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from to
---- ----
Commission File Number 0-18288
DIRECT CONNECT INTERNATIONAL INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2705223
- ----------------------------- -----------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) I.D. No.)
266 Harristown Road, Glen Rock, New Jersey 07452
- ------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 445-2101
--------------
------
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant 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, 1997, 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, 1997 was approximately $2,500,000.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
<PAGE>
TABLE OF CONTENT
PART I
ITEM 1. BUSINESS..........................................................1
ITEM 2. PROPERTIES........................................................4
ITEM 3. LEGAL PROCEEDINGS.................................................4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............4
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................4
ITEM 6. SELECTED FINANCIAL DATA...........................................6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 7-14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................15-35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............36
ITEM 11. EXECUTIVE COMPENSATION...........................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...................................................42
SIGNATURES.......................................................43
<PAGE>
PART I
ITEM 1. BUSINESS
Direct Connect International Inc. (together with its subsidiary hereinafter
referred to as the Company) has been involved in the toy business since its
inception. 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 had 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) which expired on December 31, 1996. The Company's products are
intended to be sold at retail prices ranging from $1.50 to $30.00 and have been
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.
PRODUCT LINES
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, provided 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 was met. The agreement terminated on
December 31, 1996.
In September 1993, the Company entered into an exclusive world wide license
agreement with Morgan, Inc. a designer of children's bedding products for Little
Sleepy Eyes toy products which are velour stuffed animals in different pastel
colored sleeping attire. Each 14" velour toy came with a music cassette, playing
a lullaby titled "Little Sleepy Eyes", which was created by a third party, to
support and enhance the appeal of the toy. The agreement provided for a royalty
of six percent. In November 1996, with the consent of the Company, the license
was assigned to an independent company.
The Company believes that its ability to succeed will be dependent upon, among
other things, ongoing development of new products and product concepts.
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
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.
1
<PAGE>
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 $305,000, $396,000, and $678,000 during the fiscal years ended
April 30, 1997, 1996 and 1995, respectively, for the manufacture of products
F.O.B. Far East port cost, and approximately $24,000, $27,000 and $49,000 during
the fiscal years ended April 30, 1997, 1996, and 1995, 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 1997, the Company used two manufacturers: Well World and
Tri-State Manufacturing Co. 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 areas
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 seven 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
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, 1997, the Company did not have a backlog of confirmed orders from
customers. At April 30, 1996, the backlog of confirmed orders was approximately
$10,000. At April 30, 1995, the backlog was approximately $125,000.
MARKETING AND DISTRIBUTION
The Company markets its products to major toy, discount department stores, drug
chains and catalog companies. 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
2
<PAGE>
office and its systems performed satisfactorily during the fiscal year ended
April 30, 1997. 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
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, 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. In the fiscal year ended April 30, 1997 sales to K-Mart and
Walgreens constituted approximately 75% and 11%, respectively, of revenues. No
other customer accounted for more than 10% of revenues during fiscal 1995, 1996
or 1997. 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, 1997, approximately 38 % of the Company's revenues were related to retail
sales, coinciding with the Christmas holiday shopping period. Such sales
accounted for approximately 32% and 35% of the Company's total sales in the
fiscal years ended April 30, 1996 and 1995, respectively.
PRODUCT LIABILITY
The Company maintained in past years product liability coverage in the amount of
$1,000,000 which was the amount acceptable to the Company's customers. The
Company has not been the subject of any product liability litigation.
At April 30, 1997, the Company did not have any product liability coverage.
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, 1997, the Company had six employees, five of whom were full-time
employees. Two 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 Hong
Kong office of its subsidiary. The operations of such office are performed by an
independent service company on behalf of such subsidiary.
3
<PAGE>
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 ability to succeed
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 repurhcase 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.
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. 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.
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, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'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
<PAGE>
$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, 1997, 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.
On July 31, 1997 the closing bid prices per share of Common Stock and Redeemable
Class A Warrants were $ .45 and $ .36, respectively, as reported on the OTC
Bulletin Board.
<TABLE>
Common Stock
<CAPTION>
Fiscal Quarter Ended High Bid Low Bid
-------------------- -------- -------
<S> <C> <C>
July 31, 1992 1 1/16 1/32
October 31, 1992 1 1/4 1
January 31, 1993 1 1/2 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
October 31, 1996 1/5 1/5
January 31, 1997 17/100 17/100
April 30, 1997 27/100 23/100
July 31, 1997 74/100 24/100
</TABLE>
<TABLE>
Redeemable Class A Warrants
<CAPTION>
Fiscal Quarter Ended High Bid Low Bid
-------------------- -------- -------
<S> <C> <C>
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
October 31, 1996 19/100 7/50
January 31, 1997 19/100 7/50
April 30, 1997 9/50 1/10
July 31, 1997 53/100 1/8
</TABLE>
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.
5
<PAGE>
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, 1997. The data should be
read in conjunction with the financial statements and the notes thereto.
<TABLE>
Balance Sheet Information
<CAPTION>
Fiscal Year Ended April 30
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working Capital ............. ($2,363,291) ($2,653,221) ($2,649,327) ($ 913,962) $ 1,723,845
(Deficit)
Total Assets ................ $1,957,568 $ 3,588,622 $ 3,328,583 $ 5,844,135 $ 3,475,538
Total Liabilities ........... $ 2,578,806 $ 3,170,477 $ 4,376,657 $ 2,715,514 $ 1,614,831
Stockholders' ............... ($ 621,238) $418,145 ($1,048,074) $ 3,128,621 $ 1,860,707
Equity (Deficit)
Stockholders' Equity ........ ($ .07) $ .05 ($ .11) $ .35 $ .21
(Deficit) Per Outstanding
Common Share
Statements of Operations
Information
Net Sales ................... $ 464,212 $ 1,094,584 $ 3,899,152 $ 9,583,286 $ 3,019,152
Operating Expenses .......... $ 879,398 $ 2,537,180 $ 6,699,365 $ 9,521,276 $ 3,896,471
Net Profit (Loss) ........... ($1,022,213) $ 1,414,342 ($4,165,235) $ 1,320,502 ($ 529,947)
Net Profit (Loss) Per ....... ($ .11) $ .09 ($ .46) $ .09 ($ .03)
Common Share/
Common Share
Equivalent
</TABLE>
6
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations for the Fiscal Years Ended April 30, 1997, 1996, and 1995.
NET SALES
Net sales for the fiscal year ended April 30, 1997 were $464,212 as compared to
$1,094,584 for the fiscal year ended April 30, 1996 and $3,899,152 for the
fiscal year ended April 30, 1995.
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.
Sales from such sold product lines represent approximately 50 % of the Company's
revenues for the fiscal year ended April 30, 1996. Sales from the Shari Lewis
product line represent approximately 29% of the Company's revenues for the
fiscal year ended April 30, 1996.
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, 1997, 1996 and 1995 approximately 0%, 32%, and 35%,
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, 1995 the Company's sales were hampered,
among other things, 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.
GROSS PROFIT
Gross Profit percentage for the fiscal year ended April 30, 1997 was 26% as
compared to 8% and 34% for the fiscal years ended April 30, 1996 and 1995,
respectively. This increase in fiscal 1997 resulted primarily from discounts and
other direct product costs relating to the product line which was sold in the
prior period.
OTHER INCOME
Included in non operating income for April 30, 1997 was a gain of $2,337,000
from sales of shares of the Company's investment in Glasgal and a loss of
$1,875,000 from a write off of its investment in Evolutions, Inc. and a write
off of advances to Kidsview Inc.of $72,286. Included in non operating 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 in
1996 approximately $1,450,000 of gain from sales of shares of its investment in
Glasgal, a company which provides network design, hardware and software, carrier
facilities and support services for organizations in a diverse range of
industries.
Interest income amounted to $5,662 for the fiscal year ended April 30, 1997.
Interest income for fiscal 1996 was $28,708 compared to $28,533 for fiscal 1995.
The decrease of $23,046 in fiscal 1997 was primarily attributable to the
reduction of notes receivable.
7
<PAGE>
ROYALTIES/LICENSING FEES
Royalties/Licensing fees are variable expenses which increase as sales increase.
In the fiscal years ended April 30, 1997, 1996 and 1995 the Company paid
approximately $27,658 (or 6% of sales), $156,875 (or 14% of sales) and $477,201
(or 12% 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. For
fiscal 1997 the amount of royalties paid as a percentage of sales decreased due
to the decrease in sales of licensed products. For fiscal 1995, the Company
made, pursuant to minimum license agreements, minimum royalty payments
aggregating approximately $125,000. The Company made no such payments in fiscal
1997 or 1996.
PRODUCT DEVELOPMENT COSTS
In fiscal 1997 the company incurred $23,484 of 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 of such costs
in fiscal 1995. The decrease in costs in fiscal 1997 and 1996 as compared to
fiscal 1995 resulted from the sale of product lines in fiscal 1996.
ADVERTISING COSTS
Advertising costs amounted to $244,225 for the fiscal year ended April 30, 1997
as compared to $71,312 and $758,142 for the fiscal years ended April 30, 1996
and April 30, 1995, respectively. The increase in advertising costs for fiscal
1997 was due to the realization of a contingent obligation that came due. The
reduction of advertising costs for fiscal 1996 was due to the sale of product
lines. Fiscal 1995 advertising costs were 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, 1997, 1996 and
1995.
<TABLE>
<CAPTION>
Percentage Percentage Percentage
1997 of Sales 1996 of Sales 1995 of Sales
---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Salaries, payroll taxes and
employee benefits .......... $ 542,101 116.8 $833,386 76.1 $615,723 15.8
Professional fees ........... 139,157 30.0 115,192 10.5 360,560 9.3
Financing cost .............. 0 0 598,278 54.7 424,660 10.9
Sales commissions............ 12,344 2.7 53,828 4.9 187,986 4.8
Letter of credit charges .... 3,250 .7 27,614 2.5 177,958 4.6
Rent and office expenses .... 61,838 13.3 71,601 6.5 139 3.6
Travel and entertainment .... 130,283 28.1 123,845 11.3 115,024 2.9
Insurance.................... 71,589 15.4 79,779 7.3 80,981 2.1
Other........................ 27,289 5.9 47,338 4.3 52,237 1.3
Warehouse expense ........... - 0 - 0 11,285 1.0 41,950 1.1
Stockholder expense ......... 14,059 3.0 20,502 1.9 29,967 .8
Telephone charges............ 23,787 5.1 21,842 2.0 28,484 .7
Bad debts ................... - 0 - 0 7,793 .7 24,293 .6
---------- ----- ---------- ----- ---------- ----
$1,025,697 221.0 $2,012,283 183.7 $2,279,376 58.5
</TABLE>
For the fiscal year ended April 30, 1997 salaries, payroll taxes and employee
benefits decreased by $291,285 primarily due to a reduction in staff. 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.
8
<PAGE>
Decreases for the fiscal years ended April 30, 1997 and April 30, 1996 in letter
of credit charges were due to the sale of product lines.
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 from $41,950 for the fiscal year ended April 30, 1995.
Sales commissions for the fiscal year ended April 30, 1997 and April 30, 1996
decreased to $12,344 and $53,828, respectively, 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 were $187,986.
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 1997, the Company earned a management fee of $815,158 as compared to
$690,000 for fiscal 1996 which covers the monthly reimbursement 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.
Rent and office expenses decreased to $61,838 and $71,601 for the fiscal year
ended April 30, 1997 and April 30, 1996, respectively, from $139,553 for the
fiscal year ended April 30, 1995 due to the decrease in business and cost
cutting measures.
Professional fees decreased to $139,157 and $115,192 for the fiscal years ended
April 30, 1997 and April 30, 1996, respectively, due to the reduction in
activity relating to regulatory matters from $360,560 for the fiscal year ended
April 30, 1995.
OTHER
At April 30, 1997 the Company had available carryforward losses to offset future
taxable income of approximately $3,700,000 which expire during the years 2005 to
2010.
LIQUIDITY AND CAPITAL RESOURCES
During the next twelve months, the Company in addition to meeting its operating
needs will have notes payable in the amount of approximately $1,660,000 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. as decribed herein. Second, the Company, at April 30, 1997,
owned approximately 1,000,000 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. At April 30, 1997, the Company had a cash equivalent
balance of $32,939 as compared to $67,886 at April 30, 1996.
For the fiscal year ended April 30, 1997 the Company used cash from operations
in the amount of $917,034 as compared to $1,048,880 from operations for fiscal
1996. The Company used $214,799 and $890,399 from its financing activities for
the fiscal years ended April 30, 1997 and 1996, respectively. These amounts
resulted primarily from the repayment of secured promissory notes.
9
<PAGE>
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
and Class B 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 5% and 10% at April 30, 1997 and 1996, 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 became 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.
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, 1996 and April 4, 1996, respectively, and have not been paid.
During the years ended April 30, 1997, and 1996, as an inducement for loan
extensions and loan agreements, the Company paid processing and financing fees
of 28,571 and 130,000 shares, respectively, of common stock of Glasgal held by
the Company.
<TABLE>
<CAPTION>
April 30
--------
1997 1996
---- ----
<S> <C> <C>
Investment in Glasgal consists of:
Common Stock:
Number of Shares 1,002,840 1,433,973
Cost $969,395 $1,386,151
Fair market value based on current
price per share of registered Glasgal
shares. $3,008,520 $12,905,575
Options to purchase
580,000 shares of common stock $725,000 $725,000
</TABLE>
10
<PAGE>
Approximately 302,000 shares of Glasgal common stock owned by the Company were
held at April 30, 1997 by noteholders as collateral. 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
--------
1997 1996
---- ----
<S> <C> <C>
Current assets $20,820,000 $17,198,000
Noncurrent assets 6,984,000 6,296,000
Current liabilities 23,777,000 24,862,000
Long-term obligations 6,027,000 2,338,000
Shareholders' equity (deficit) (2,000,000) (3,706,000)
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
April 30, April 30, April 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales $59,481,000 $59,169,000 $55,876,000
=========== =========== ===========
Net Loss ($4,960,000) ($13,418,000) ($2,393,000)
============ ============= ============
</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
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.
11
<PAGE>
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 terminated in April 1997. The Company
received fees from EVO in connection with this management arrangement amounting
to approximately $815,000 and $690,000 during the fiscal years ended April 30,
1997 and April 30, 1996, respectively.
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
-------------------
1997 1996 1995
---- ---- ----
<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>
In addition, the Company incurred general and administrative expenses in
connection with these product lines.
During the fiscal years ended April 30, 1997 and 1996, the Company invested
$1,800,000 and $75,000, respectively, in common stock, and warrants to purchase
common stock of EVO. As of April 30, 1997, the Company has written off such
investments as worthless.
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.
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
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, after giving effect to partial
repayments, approximately $181,300 at April 30, 1997. 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.
12
<PAGE>
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. The
warrants expired on June 30, 1997. 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. At July 31, 1997 approximately 53% of such Preferred Stock was
aquired by Medical Device Alliance, Inc. 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 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.
The Company intends either to pay off its note 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. Approximately
$1,000,000 of the Company's outstanding notes have been acquired by Medical
Device Alliance, Inc.
The Company 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 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 and warrants to purchase 3,438,900 shares of Common Stock at
$ .75 per share. Such warrants will expire on November 8, 1997, as extended.
13
<PAGE>
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 1996, 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, the Additional Shares.
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
DEFERRED INCOME TAX ASSETS
Deferred income tax assets as of April 30, 1997 have been reduced to zero due to
uncertainties concerning their realization.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
CONTENTS
Pages
-----
Independent Auditors' Reports 16 and 17
Consolidated Financial Statements
Balance Sheets 18 and 19
Statements of Operations 20
Statements of Changes in Stockholders' 21
Equity (Deficit)
Statements of Cash Flows 22 and 23
Notes to Consolidated Financial Statements 24 - 35
Financial Statement Schedules
All schedules are omitted because the required information is either
inapplicable or is presented in the financial statements or related notes.
15
<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 sheets of Direct Connect
International Inc. and Subsidiary as of April 30, 1997 and 1996 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates 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, 1997 and 1996 and the results
of their operations and their cash flows for the years 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
July 18, 1997
16
<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 statements of operations, changes
in stockholders' (deficit) equity, and cash flows of Direct Connect
International Inc. and Subsidiary for the year ended April 30, 1995. 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 results of operations and cash flows for
the year ended April 30, 1995 of Direct Connect International Inc. and
Subsidiary 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
17
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
April 30
--------
1997 1996
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $32,939 $67,886
Accounts receivable 22,857 20,652
Due from Kidsview, Inc. --- 194,117
Notes receivable - officers 90,404 111,355
Investments 13,001 54,171
Prepaid financing costs and other expenses 56,314 69,075
------ ------
Total current assets 215,515 517,256
------- -------
Property and equipment, at cost
Furniture and fixtures 42,543 42,543
Molds, tools and dies 267,498 267,498
------- -------
310,041 310,041
Less: Accumulated depreciation 263,083 234,813
------- -------
46,958 75,228
------ ------
Investment in Glasgal 1,694,395 2,111,151
Investment in Evolutions, Inc. --- 75,000
Deferred income taxes --- 809,287
Security deposits 700 700
--------- ---------
1,695,095 2,996,138
--------- ---------
Total assets $1,957,568 $3,588,622
========== ==========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<CAPTION>
April 30
--------
1997 1996
---- ----
<S> <C> <C>
Current liabilities
Accounts payable $534,901 $947,512
Accrued expenses and taxes payable 85,564 49,825
Notes payable - officers and stockholders 253,680 461,716
Notes payable - other, current portion 1,404,661 1,411,424
Investments, warrants to sell Glasgal 300,000 300,000
------- -------
Total current liabilities 2,578,806 3,170,477
--------- ---------
Total liabilities 2,578,806 3,170,477
--------- ---------
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 5,128,449 5,104,449
Accumulated deficit (5,668,408) (4,646,195)
Unrealized loss on investments (95,341) (54,171)
------- -------
Total stockholders' equity (deficit) (621,238) 418,145
-------- -------
Total liabilities and stockholders'
equity (deficit) $1,957,568 $3,588,622
========== ==========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended April 30
-------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues
Sales $464,212 $1,094,584 $3,899,152
-------- ---------- ----------
Costs and expenses
Cost of goods sold 345,222 1,008,972 2,560,406
Royalties/licensing fees 27,658 156,875 477,201
Product development costs 23,484 (66,482) 545,202
Advertising and promotion 244,225 71,312 758,141
Depreciation 28,270 44,220 79,039
General and administrative
expenses 1,025,697 2,012,283 2,279,376
Less: Management fees (815,158) (690,000) ---
-------- -------- ---------
879,398 2,537,180 6,699,365
------- --------- ---------
Operating loss (415,186) (1,442,596) (2,800,213)
Gain on sale of securities 2,337,348 1,456,802 80,804
Gain on sale of assets and product
lines --- 845,705 ---
Interest income 5,662 28,708 28,533
Other income --- 94 ---
Loss on advances to Kidsview Inc. (72,286) --- ---
Loss on write off of investment in Evolutions (1,875,000) --- ---
Interest expense (193,464) (283,658) ( 229,429)
-------- -------- --------
Income (loss) before deferred
income taxes (212,926) 605,055 (2,920,305)
Deferred income taxes (809,287) 809,287 (1,244,930)
-------- ------- ----------
Net income (loss) $(1,022,213) $1,414,342 $(4,165,235)
=========== ========== ===========
Earnings (loss) per common
share ($0.11) $0.09 ($0.46)
======= ===== =======
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED APRIL 30, 1995,1996, AND 1997
<CAPTION>
Convertible Preferred Stock Common Stock
--------------------------- ------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, May 1,1994 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
Valuation reserve ---- ---- ---- ----
Net loss ---- ---- ---- ----
--------- ------ --------- ------
Balance, April 30, 1997 5,000,000 $5,000 9,062,066 $9,062
========= ====== ========= ======
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
Capital in Unrealized Total
Excess of (Accumulated Loss on Stockholders'
Par Value Deficit) Investments Equity (Deficit)
--------- --------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance, May 1, 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
Valuation reserve ---- ---- (41,170) (41,170)
Rights to acquire
common stock issued in
conjunction with
adjustments to legal fees 24,000 ---- ---- 24,000
Net loss ---- (1,022,213) ---- (1,022,213)
--------- ---------- --------- ----------
Balance, April 30, 1997 $5,128,449 ($5,668,408) ($95,341) ($621,238)
========== =========== ======== =========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<CAPTION>
Year ended April 30
-------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) ($1,022,213) $1,414,342 ($4,165,235)
------------ ---------- -----------
Adjustments to reconcile net income (loss) to
net cash (used in) operating activities
Depreciation 28,270 44,220 79,039
Deferred income taxes 809,287 (809,287) 1,244,930
Financing fees, reduction in investment in Glasgal --- 398,720 463,996
Management fee income --- (200,000) ---
Gain on sale of Glasgal (2,337,348) (1,456,802) ---
Other costs, sale of Glasgal --- (3,931) ---
Gain on sale of product lines and related assets -- (845,705) ---
Loss on write off of advances to Kidsview Inc. 72,286 --- ---
Loss on write off of Evolutions investment 1,875,000 --- ---
(Increase) decrease in assets
Accounts receivable (2,205) (10,157) 158,627
Inventories --- 86,955 236,644
Prepaid royalties --- 47,500 215,919
Prepaid financing costs and expenses 12,761 80,371 44,263
Increase (decrease) in liabilities
Accounts payable (388,611) 195,060 (100,680)
Accrued expenses and taxes payable 35,739 9,834 (77,084)
------ ----- -------
Total adjustments 105,179 (2,463,222) 2,265,654
------- ---------- ---------
Net cash (used in) operating activities (917,034) (1,048,880) (1,899,581)
-------- ---------- ----------
Cash flows from investing activities
Notes receivable - officers, increases (14,379) (46,728) (113,755)
Notes receivable - officers, decreases 35,330 284,340 16,872
Proceeds from sale of Glasgal 2,754,104 1,800,000 ---
Investment in Evolution (1,800,000) --- ---
Increase in due from Kidsview, Inc. --- (994,117) ---
Decrease in due from Kidsview, Inc. 121,831 800,000 ---
Acquisition of property and equipment --- (8,007) (65,789)
Decrease in security deposits --- --- 154
--------- --------- ----------
Net cash provided by (used in) investing activities 1,096,886 1,835,488 (162,518)
---------- ---------- ---------
</TABLE>
See notes to consolidated financial statements.
22
<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
-------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Notes payable - officers and stockholders, increases 41,964 63,411 34,225
Notes payable - officers and stockholders, decreases (250,000) --- (3,054)
Notes payable - other, increases 120,032 959,445 2,601,133
Notes payable - other, decreases (126,795) (1,913,255) (793,397)
-------- ---------- --------
Net cash provided by (used in) financing activities (214,799) (890,399) 1,838,907
-------- -------- ---------
Net (decrease) in cash and cash equivalents (34,947) (103,791) (223,192)
Cash and cash equivalents, beginning of year 67,886 171,677 394,869
------ ------- -------
Cash and cash equivalents, end of year $32,939 $67,886 $171,677
======= ======= ========
Supplemental disclosure of cash flows information:
Cash paid during the year for interest $21,045 $111,506 $123,892
======= ======== ========
Schedule of noncash investing and financing activities:
Rights to acquire common stock in conjunction
with satisfaction of accrued legal fees $24,000 $ --- $ ---
======= ======== ========
Unrealized gain (loss) on investments ($41,170) $ 21,877 $ 11,460
======== ========= ========
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:
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 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 28,571 and 130,000 shares of Glasgal common stock
having a cost basis of $27,618 and $125,665 during the fiscal years ended April
30, 1997 and 1996, respectively.
See notes 3 and 4 regarding non-cash investing and financing activities with
respect to the sale of Glasgal common stock and sale of product lines.
See notes to consolidated financial statements.
23
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
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, 1997 consolidated balance sheet
reflects a working capital deficiency of $2,363,291 and the
consolidated statement of operations for the year ended April 30, 1997
reflects a loss from operations of $415,186. 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
$1,660,000 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 1,000,000
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.
(b) Consolidation
The consolidated financial statements include the accounts 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, 1997,
the Company had no bank account balances in excess of federally
insured limits.
(d) Accounts Receivable
An allowance for doubtful accounts is established based on management's
expectation of uncollectables. As of April 30, 1997 and 1996, 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 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.
24
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
Note 1 - Continued
(f) Investments
The Company classifies 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
stockholders' equity until realized.
(g) Prepaid Royalties
The Company 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. 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 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 utilizes an asset and liability approach for measuring
deferred income 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.
Deferred income tax assets are reduced by a valuation allowance
due to uncertainties concerning their realization. (See Note 4).
(j) Earnings (loss) Per Common Share
Earnings(loss) per common 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 common share have not been
computed because the result would be anti-dilutive or the effect on
earnings (loss) per common 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 common
share were 9,062,066 (1997), 15,000,000 (1996), and 9,062,066 (1995).
25
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
Note 1 - Continued
(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
--------
1997 1996
---- ----
<S> <C> <C>
Cost $ 108,342 $ 108,342
Unrealized loss (95,341) (54,171)
------- -------
Fair market value $ 13,001 $ 54,171
========= =========
</TABLE>
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. Glasgal provides
network, design, hardware and software, carrier facilities and support
services for organizations in a diverse range of industries. In
addition, subject to the exercise of the Company's Class A and Class B
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.
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 5% and 10 % at April 30, 1997
and 1996, 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.
26
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
Note 3 - Continued
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 became
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 $2.00 per
share, as adjusted, 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.
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, 1997.
During the years ended April 30, 1997 and 1996, as an inducement for
loan extensions and loan agreements, the Company paid processing and
financing fees by delivering 28,571 and 130,000 shares, respectively,
of Glasgal common stock heldby the Company.
<TABLE>
<CAPTION>
April 30
--------
1997 1996
---- ----
<S> <C> <C>
Investment in Glasgal consists of:
Common Stock:
Number of shares 1,002,840 1,433,973
Cost $969,395 $1,386,151
Fair market value based on current
price per share of registered Glasgal
shares. $3,008,520 $12,905,575
Options to purchase 580,000 shares
of common stock, at cost $725,000 $725,000
</TABLE>
Approximately 302,000 shares of Glasgal common stock owned by the
Company at April 30, 1997 were held by noteholders as collateral. Such
shares are subject to certain restrictions regarding transferability
and sale.
27
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
Note 3 - Continued
Summary financial information of Glasgal as presented in its
consolidated financial statements ( audited by independent certified
public accountants) are as follows:
<TABLE>
<CAPTION>
April 30
---------
1997 1996
---- ----
<S> <C> <C>
Current assets $20,820,000 $17,198,000
Noncurrent assets 6,984,000 6,296,000
Current liabilities 23,777,000 24,862,000
Long-term obligations 6,027,000 2,338,000
Shareholders' equity (2,000,000) (3,706,000)
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
April 30 April 30, April 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales $59,481,000 $59,169,000 $55,876,000
=========== =========== ===========
Net Loss ($4,960,000) ($13,418,000) ($2,393,000)
=========== ============ ===========
</TABLE>
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.
28
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
Note 4 - Continued
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 terminated during April 1997. The Company
received fees from EVO in connection with this management arrangement
amounting to approximately $815,000 and $690,000 during the fiscal
years ended April 30, 1997 and 1996, respectively.
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
-------------------
1997 1996 1995
---- ---- ----
<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.
During the fiscal years ended April 30, 1997 and 1996, the Company
invested $1,800,000 and $75,000, respectively, in common stock and
warrants to purchase common stock of EVO. As of April 30, 1997, the
Company has written off such investments as worthless.
29
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
Note 5 - Deferred Income Taxes
For federal income tax reporting purposes the Company has net
operating losses which are available to offset future federal taxable
income. Such losses expire as follows:
<TABLE>
<CAPTION>
Approximate
Year Ending Amount
----------- ------
<S> <C>
2005 $400,000
2006 1,000,000
2007 800,000
2009 700,000
2010 800,000
-------
$3,700,000
==========
</TABLE>
The deferred income tax asset as of April 30, 1997 was reduced to zero
by a valuation allowance of approximately $2,100,000 due to
uncertainties concerning their realization at that date. At April 30,
1996 , 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 recognized a deferred
income tax asset of $809,287.
The deferred income tax asset consists of the following:
<TABLE>
<CAPTION>
Year Ended April 30
-------------------
1997 1996
---- ----
<S> <C> <C>
Net operating loss $2,092,089 $1,792,089
Valuation allowance ($2,092,089) (982,802)
----------- --------
$ - 0 - $809,287
========== ========
</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>
Year Ended April 30
-------------------
1997 1996 1995
---- ---- ----
<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 340.1% 93.8 2.6
----- ---- ---
380.1% 133.8% 42.6%
====== ====== =====
</TABLE>
30
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
Note 6 - Notes Payable - Officers and Shareholders
Notes payable - officers and shareholders, including accrued interest
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, a portion of the obligation is still shown as
outstanding as the price of the shares never exceeded $1.625.
April 30
--------
1997 1996
---- ----
$181,365 $395,070
(b) Officer loans bearing interest at a rate of 8% which can be
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.
April 30
--------
1997 1996
---- ----
72,315 66,646
------ ------
$253,680 $461,716
======== ========
Note 7 - Notes Payable - Other
(a) The Company is obligated under 8% notes payable 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
--------
1997 1996
---- ----
$1,353,657 $1,388,696
(b) Financings relating to insurance costs bear interest at rates ranging
from 8.17% to 9.5% per annum.
April 30
--------
1997 1996
---- ----
51,004 22,728
--------- ---------
1,404,661 1,411,424
Less: Current Maturities 1,404,661 1,411,424
--------- ---------
$ - 0 - $ - 0 -
========= =========
The carrying value of the Company's long-term debt approximates its
fair value.
31
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
Note 8 - Stockholders' Equity
During the years ended April 30, 1997 and 1996, the Company had
6,488,517 outstanding Redeemable Class A Warrants, expiring on
November 8, 1997, 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, 1997, 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, at 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.
32
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
Note 8 - Continued
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.
During 1996, in consideration of an adjustment to outstanding
indebtedness to a law firm for services rendered, such firm agreed to
accept 320,000 shares of the Company's common stock having a value of
$24,000 at the date of the adjustment. The issurance of such shares is
subject to availabilty.
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:
Years Ended April 30, 1995 and 1996 and 1997
--------------------------------------------
Outstanding at April 30, 1994,
1995 and 1996 452,809 $ .19 to $1.16 $206,995
Granted - - -
Terminated - - -
Exercised - - -
Outstanding at April 30, 1995,
------- --------
1996 and 1997 452,809 .19 to 1.16 $206,995
======= ========
Exercisable 452,809 .19 to 1.16 $206,995
======= ========
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.
33
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
Note 9 - continued
No accounting recognition is given to stock options until they are
exercised, at which time the proceeds are credited to the
stockholders' equity accounts.
The status of the options granted under the New Incentive Stock Option
Plan, which is subject to stockholder approval, is as follows:
Outstanding at April 30, 1994,
1995 and 1996 1,000,000 $ .63 to $ .69 $657,700
Granted - - -
Terminated - - -
Exercised - - -
--------- --------
Outstanding at April 30, 1995,
1996 and 1997 1,000,000 .63 to .69 $657,700
========= ========
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>
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 years ended April 30, 1997, 1996 and 1995 the Company
purchased products totaling approximately $305,000, $396,000 and
$678,000, 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, 1997, 1996 and 1995 the Company
incurred product development expenses of approximately $24,000, $27,000
and $49,000 , respectively, payable to this corporation.
During the years ended April 30, 1997, 1996 and 1995, the Company
paid approximately $72,000, $72,000, and $66,000, respectively, to an
officer for legal services rendered.
As of April 30, 1997 and 1996 the Company held 8% notes receivable from
certain officers aggregating approximately $78,000 and $111,000,
respectively, including interest. Interest income for the years ended
April 30, 1997, 1996, and 1995 on officers' loans totaled approximately
$6,000 , $26,000 and $21,000, respectively.
34
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
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 years ended April 30, 1997, 1996, and 1995 approximately 77%,
29 %, and 24%, respectively of sales were licensed products Little
Sleepy Eyes and Lamb Chop. Approximately 50% (1996) and 35% (1995)
of sales were the Zoo Borns licensed 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, 1997, 1996, and 1995 as follows:
<TABLE>
<CAPTION>
% of Total Sales
Year Ended Number of Attributable to
April 30 Major Customers Major Customers
-------- --------------- ---------------
<S> <C> <C>
1997 2 86
1996 2 68
1995 2 40
</TABLE>
35
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the executive officers and directors of
the Company as of the date hereof.
NAME AGE POSITION
---- --- --------
Joseph M. Salvani 40 Chairman of the Board and
Principal Executive Officer
Peter L. Schneider 44 President and Director
Barry A. Rosner 54 Vice President, Treasurer,
Director and Principal
Financial Officer
Y.S. Ling 52 Executive Vice President,
International Operations
Howard G. Peretz 58 Executive Vice President
William B. Rodman 58 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
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.
36
<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 on 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, 1997, 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, 1997.
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.
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 1997 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 received aggregate remuneration in excess of
$60,000 during the fiscal year ended April 30, 1997 were Peter Schneider, who
earned $179,334 and Howard Peretz who received $87,500 . The total aggregate
remuneration received during such period by all of the officers and directors as
a group was $316,221. 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 were to expire on June 30, 1997 but will be
extended to a date not yet determined. If the options are exercised in full, it
37
<PAGE>
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, 1997.
Other than as described below, the Company has no pension or profit-sharing plan
or other contingent forms of remuneration.
The following table summarizes compensation paid by the Company for services
rendered during 1997, 1996, and 1995 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>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payments
------ --------
Name and Principal Position Year Salary($) Bonus($) Other Annual Restricted Securities LTIP All
- --------------------------- ---- --------- ------- Compensation Stock Underlying ($) Other
------------ Awards($) Options/ -- ($)
-------- SAR($) ---
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph M. Salvani 1997 - - - - - - -
Chairman of the
Board and Principal
Executive Officer 1996 - - - - - - -
1995 - - - - - - -
Peter L. Schneider 1997 179,334 - - - - - -
President and
Director
1996 151,831 - - - - - -
1995 145,454 - - - - - -
Howard Peretz 1997 87,500 - - - - - -
Executive Vice President
1996 131,831 - - - - - -
1995 151,206 - - - - - -
Y.S. Ling 1997 - - - - - - -
Executive Vice President
1996 - 284,340 - - - - -
1995 - 25,000 - - - - -
</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, 1997.
38
<PAGE>
The following table sets forth information with respect to Executive Officers
concerning unexercised options held as of the fiscal year ended April 30, 1997.
None of the Executive Officers exercised options during the fiscal year ended
April 30, 1997. No options were repriced during the fiscal year ended April 30,
1997.
<TABLE>
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1997
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 Realized
Name Exercise(#) ($) Exercisable Unexercisable* Exercisable Unexercisable*
---- ----------- -------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Joseph 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
</TABLE>
* 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.
LONG TERM INCENTIVE PLANS-AWARDS IN FISCAL YEAR 1997
There were no long term incentive plans-awards granted to the Executive Officers
during the fiscal year ended April 30, 1997.
39
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At July 31, 1997, 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, 1997, 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 All Directors and Officers 2,761,669 shs.(4)(5)(6) 30.5%
as a Group (6 Persons)
Convertible Medical Device Alliance, Inc. 2,625,000 shs.(7) 52.5%
Preferred 3800 Howard Hughes Parkway
Suite 1800
Las Vegas, NV 89109
Convertible Brookehill Equities, Inc. 275,000 shs. 5.5%
Preferred 545 Madison Avenue
New York, NY 10022
Convertible All Directors and Officers 0 shs. 0%
Preferred as a Group (6 Persons)
</TABLE>
(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 136,304 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,
on a date to be determined by negotiations among the parties, 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) Also acquired approximately $1,000,000 of the Company's outstanding
notes, all of which are past due.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended April 30, 1997, the Company purchased products
totaling approximately $305,000 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 1996 and 1995, there were purchases totaling
approximately $396,000 and $678,000, respectively. During the fiscal years ended
April 30, 1997, 1996 and 1995, the Company incurred product development expenses
of approximately $24,000, $27,000 and $49,000, respectively, payable to Well
World Toy Company, Ltd.
40
<PAGE>
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 $78,395 at April 30, 1997.
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.
At April 30, 1996, Howard Peretz, an Executive Vice President, had borrowed an
aggregate of approximately $26,000 from the Company. Mr. Peretz signed
promissory notes which bear interest at the rate of 5% per annum and which were
payable upon demand. Such obligation was assumed by a third party in October
1996 and has not been paid. The obligation, amounting to approximately $38,800
at April 30, 1997 was written off by the Company at April 30, 1997.
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. The Company paid Mr. Rodman for professional services
rendered $72,000, $72,000 and $66,000 for the fiscal years ended April 30, 1997,
1996 and 1995, respectively.
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, 1997 such loans, after giving effect to partial repayments,
amounted to approximately $181,400 including interest.
41
<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 Compnay 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 Incorporation 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)
21 - List of Subsidiaries: Amerawell Products, Ltd., a Hong Kong corporation
23 - Auditors' Consent
24 - Power of Attorney
27 - Financial Data Schedule
- -------------------------------------------------------------------------------
*Incorporated herein by reference.
(b) FINANCIAL STATEMENT SCHEDULES
None
(c) REPORTS ON FORM 8-K
None 42
<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 12th day of August 1997.
DIRECT CONNECT INTERNATIONAL INC.
(Registrant)
By:/s/ Peter L. 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 12, 1997
Principal Executive Officer
Peter L. Schneider President and Director August 12, 1997
Barry A. Rosner Vice President-Finance, August 12, 1997
Treasurer and Principal
Financial and Accounting
Officer and Director
Joseph M. Salvani
Peter L. Schneider All of the Directors August 12, 1997
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.
/s/ Peter L. Schneider
----------------------
Peter L. Schneider
Attorney-in-fact
43
<PAGE>
EXHIBIT 23 (a)
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, 1997, of our Report, dated July 18, 1997, 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,
1997 and 1996.
/s/ Bederson & Company LLP
----------------------------
West Orange, New Jersey
August 12, 1997
EXHIBIT 23 (b)
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, 1997, 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 year ended April 30,
1995.
/s/ Todman & Co., CPA's, P.C.
-----------------------------
New York, NY
August 12, 1997
<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 12th day of August 1997.
DIRECT CONNECT INTERNATIONAL INC.
By /S/ PETER L. SCHNEIDER
-----------------------
President
[Corporate Seal]
TEST:
/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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 32,939
<SECURITIES> 13,001
<RECEIVABLES> 22,857
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 215,515
<PP&E> 310,041
<DEPRECIATION> 263,083
<TOTAL-ASSETS> 1,957,568
<CURRENT-LIABILITIES> 2,578,806
<BONDS> 0
0
5,000
<COMMON> 9,062
<OTHER-SE> (539,959)
<TOTAL-LIABILITY-AND-EQUITY> 1,957,568
<SALES> 464,212
<TOTAL-REVENUES> 464,212
<CGS> 345,222
<TOTAL-COSTS> 879,398
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193,464
<INCOME-PRETAX> (212,926)
<INCOME-TAX> (809,287)
<INCOME-CONTINUING> (1,022,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,022,213)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
