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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
OR
Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 0-18288
DIRECT CONNECT INTERNATIONAL INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2705223
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(State or other jurisdiction of (IRS Employer
incorporation or organization) I.D. No.)
P.O. Box 14 Hawthorne, New Jersey 07507
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 445-2101
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units consisting of
shares of Common Stock and Class A Warrants, Common Stock, par value $ .001 per
share, Class A Warrants and Class B Warrants.
---------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X N0
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Indicate by check mark if disclosure of delinquent filers 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{}.
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As of July 31, 1998, 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, 1998 was approximately $1,400,000.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS...................................................1
ITEM 2. PROPERTIES.................................................5
ITEM 3. LEGAL PROCEEDINGS..........................................5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................5
ITEM 6. SELECTED FINANCIAL DATA....................................7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................8-15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............16-35
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.....................................38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...............................................41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K..............................................43
SIGNATURES.................................................44
<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 in the past designed, developed, marketed and distributed
a variety of infant, preschool and girls toy products which were 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. In November 1997, the Company entered into a
non-binding letter of intent to enter into a merger with Medical Device
Alliance, Inc., the exclusive world-wide distributor of ultrasonic surgical
systems which are being marketed for the aspiration of soft tissue by plastic
surgeons. The proposed transaction is subject to the execution of a definitive
merger agreement, approval by the Boards of Directors of both companies and
regulatory and shareholder approval.
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 has not developed or marketed any product lines during the fiscal
year ended April 30, 1998. The Company believes that its ability to succeed will
be dependent upon, among other things, entering into a business combination with
a company which may not necessarily be operating in the toy business or the
management of toy properties owned by other companies. There can be no assurance
that the Company will be able to enter into such a business combination or
manage toy properties owned by other companies during the next twelve months.
1
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MANUFACTURING
The Company does not manufacture any toy products. Instead, the Company has
contracted, through Amerawell Products, Ltd., its Hong Kong subsidiary, for the
manufacture of 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
traditional 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 product purchases are
made and paid for in U.S. dollars.
The Company is not a party to any long-term contractual or other arrangements
with any specific supplier. A substantial portion of the Company's products have
been produced by one manufacturer, Well World Toy Co., Ltd. ("Well World"), the
principal owner of which is Y.S. Ling, a principal stockholder of the Company
and one of its executive officers. Well World has provided product development
and contract manufacturing services for the Company. The Company paid Well World
approximately $0, $305,000, and $396,000 during the fiscal years ended April 30,
1998, 1997 and 1996, respectively, for the manufacture of products F.O.B. Far
East port cost, and approximately $18,000, $24,000 and $27,000 during the fiscal
years ended April 30, 1998, 1997, and 1996, respectively, for product
development expenses. The Company does not believe that it will require either
manufacturing services or product development services from Well World during
the current fiscal year. The Company arranged for the making of its products
with various 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's
policy is 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 has not experienced any difficulties in
arranging for the 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 not experienced any 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 eight 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.
2
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ORDER BACKLOG
At April 30, 1998 and 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.
MARKETING AND DISTRIBUTION
The Company has marketed 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 has distributed 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 generally 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. 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. In recent years, the amount of
exchanges or allowances experienced by the Company was 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, 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. In the fiscal year ended
April 30, 1998, there were no sales. No other customer accounted for more than
10% of revenues during fiscal 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, 1998 there were no revenues. 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% of the Company's total sales in the fiscal year ended April
30, 1996.
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 and 1998, the Company did not have any product liability coverage.
3
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COMPETITION
The market for toy products is highly competitive and sensitive to changing
consumer preferences and demands. The Company believes that it will have to
develop and distribute new products to enable it 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 products traditionally
developed and distributed by the Company.
EMPLOYEES
As of April 30, 1998, the Company had five employees, four of whom were
full-time employees. One employee is in administration, one employee is 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 does not have any
employees 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.
TRADEMARKS
The products offered by the Company in the past have generally been licensed on
an exclusive basis whereby the Company paid 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 had 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.
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 have been in
compliance with the aforementioned acts.
The United States government has established a Generalized System of Preferences
which have provided 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 have been
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.
4
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ITEM 2. PROPERTIES
The Company's principal office is located in approximately 1,000 square feet of
space in Wyckoff, New Jersey with the following mailing address: P.O. Box 14
Hawthorne, NJ 07507. Such space has been provided to the Company by its
President at no cost. The Company's facilities are satisfactory for its present
needs, and additional office space is available at reasonable rentals in the
same area to cover any 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 except for a potential claim from a former
customer of Kidsview alleging the Company's responsibility for a credit balance
of approximately $200,000 (see note 12 of notes to consolidated financial
statements).
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, 1998.
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
$4,000,000 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 Datatec Systems, Inc.,
formerly Glasgal Communications, Inc. (Datatec) 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, 1998, there were approximately 110
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 750 beneficial owners of the Common Stock.
On July 31, 1998 the closing bid prices per share of Common Stock and Redeemable
Class A Warrants were $0.22 and $0.22, respectively, as reported on the OTC
Bulletin Board.
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Common Stock High Bid Low Bid
Fiscal Quarter Ended
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
October 31, 1997 7/10 2/5
January 31, 1998 64/100 31/100
April 30, 1998 39/100 19/100
July 31, 1998 28/100 15/100
Redeemable Class A Warrants
Fiscal Quarter Ended
July 31, 1993 11/16 3/8
October 31, 1993 5/8 1/2
January 31, 1994 9/16 3/8
April 30, 1994 1-1/2 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 14/100
January 31, 1997 19/100 14/100
April 30, 1997 18/100 1/10
July 31, 1997 53/100 1/8
October 31, 1997 84/100 1/3
January 31, 1998 68/100 31/100
April 30, 1998 34/100 24/100
July 31, 1998 1/4 1/5
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.
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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, 1998. The data should be
read in conjunction with the financial statements and the notes thereto.
<TABLE>
Balance Sheet Information
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<CAPTION>
Fiscal Year Ended April 30
--------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working Capital $ (790,341) $ (759,300) $(2,653,221) $(2,649,327) $ (913,962)
(Deficit)
Total Assets $ 2,135,436 $ 1,957,568 $ 3,588,622 $ 3,328,583 $ 5,844,135
Total Liabilities $ 2,826,582 $ 2,578,806 $ 3,170,477 $ 4,376,657 $ 2,715,514
Stockholders' $ (691,146) $ (621,238) $ 418,145 $(1,048,074) $ 3,128,621
Equity (Deficit)
Stockholders' Equity $ (0.08) $ (0.07) $ 0.05 $ (0.11) $ 0.35
(Deficit) Per Outstanding
Common Share
Statements of Operations Information
- ------------------------------------
Net Sales $ -0- $ 464,212 $ 1,094,584 $ 3,899,152 $ 9,583,286
Operating Expenses $ 1,347,266 $ 879,398 $ 2,537,180 $ 6,699,365 $ 9,521,276
Net Profit (Loss) $ (197,749) $ (1,022,213) $ 1,414,342 $ (4,165,235) $ 1,320,502
Net Profit (Loss) Per $ (0.02) $ (0.11) $ 0.09 $ (0.46) $ 0.09
Common Share/
Common Share
Equivalent
</TABLE>
7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Fiscal Years Ended April 30, 1998, 1997, and 1996.
NET SALES
Net sales for the fiscal year ended April 30, 1998 were $ -0- as compared to
$464,212 for the fiscal year ended April 30, 1997 and $1,094,584 for the fiscal
year ended April 30, 1996.
GROSS PROFIT
Gross Profit percentage for the fiscal year ended April 30, 1998 was 0% as
compared to 26% and 8% for the fiscal years ended April 30, 1997 and 1996,
respectively. The increase in fiscal 1997 over 1996 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, 1998 was a net gain of $1,399,705
from sales of shares of the Company's investment in Datatec and a loss of
$74,469 from the sale of the Company's shares of Mark Solutions common stock.
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 Datatec 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
Datatec, 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 $29,792 for the fiscal year ended April 30, 1998.
Interest income for fiscal 1997 was $5,662 as compared to $28,708 for fiscal
1996. The increase of $24,130 in fiscal 1998 was primarily due to the addition
of notes which were subsequently written off. The decrease of $23,046 in fiscal
1997 was primarily attributable to the reduction of notes receivable.
ROYALTIES/LICENSING FEES
Royalties/Licensing fees are variable expenses which increase as sales increase.
In the fiscal years ended April 30, 1998, 1997 and 1996 the Company paid
approximately -0-, $27,658 (or 6% of sales) and $156,875 (or 14% 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.
PRODUCT DEVELOPMENT COSTS
In fiscal 1998, the Company did not incur any 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.
ADVERTISING COSTS
Advertising costs amounted to $ -0- for the fiscal year ended April 30, 1998 as
compared to $244,225 and $71,312 for the fiscal years ended April 30, 1997 and
April 30, 1996, 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.
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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, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
Percentage Percentage Percentage
1998 of Sales 1997 of Sales 1996 of Sales
---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Salaries, payroll taxes and
employee benefits ..................... $ 637,753 N/A $ 542,101 116.8 $ 833,386 76.1
Professional fees ....................... 139,084 N/A 139,157 30.0 115,192 10.5
Financing cost .......................... - 0 - N/A - 0 - - 0 - 598,278 54.7
Sales commissions ....................... - 0 - N/A 12,344 2.7 53,828 4.9
Letter of credit charges ................ 722 N/A 3,250 0.7 27,614 2.5
Rent and office expenses ................ 102,770 N/A 61,838 13.3 71,601 6.5
Travel and entertainment ................ 90,412 N/A 130,283 28.1 123,845 11.3
Insurance ............................... 57,263 N/A 71,589 15.4 79,779 7.3
Other ................................... 17,865 N/A 27,289 5.9 47,338 4.3
Warehouse expense ....................... - 0 - N/A - 0 - - 0 - 11,285 1.0
Stockholder expense ..................... 10,994 N/A 14,059 3.0 20,502 1.9
Telephone charges ....................... 20,867 N/A 23,787 5.1 21,842 2.0
Bad debts ............................... 275,354 N/A - 0 - - 0 - 7,793 0.7
------- --- ---------- ----- ---------- ----
$1,353,084 $1,025,697 221.0 $2,012,283 183.7
</TABLE>
For the fiscal year ended April 30, 1998 salaries, payroll taxes and employee
benefits increased by $95,652 primarily due to the rehiring of the Company's
Executive Vice President for a short period and termination payments in
connection with staff reduction. 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.
Decreases for the fiscal years ended April 30, 1998 and April 30, 1997 in letter
of credit charges were due to the sale of product lines.
Sales commissions for the fiscal year ended April 30, 1998, April 30, 1997 and
April 30, 1996 decreased to $-0-, $12,344 and $53,828, respectively, as a result
of the significant decrease in sales due to the sale of product lines.
- ---------
N/A means not applicable.
9
<PAGE>
Financing costs of $598,278 were incurred during the fiscal year ended April 30,
1996 as a result of refinancing the Company's debt.
In fiscal 1998, the Company earned a management fee of $52,776 as compared to
$815,158 and $690,000 for fiscal 1997 and 1996 respectively 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 increased to $102,770 for the fiscal year ended April
30, 1998 from $61,838 and $71,601 for the fiscal year ended April 30, 1997 and
April 30, 1996, respectively. This increase is due to the fact that the Company
paid certain costs previously paid by a third party under a management
arrangement.
Professional fees were $139,084 as compared to $139,157 and $115,192 for the
fiscal years ended April 30, 1997 and April 30, 1996, respectively.
OTHER
At April 30, 1998 the Company had available carryforward losses to offset future
taxable income of approximately $4,760,000 which expire during the years 2005 to
2012.
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 $2,241,000 becoming
due. 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. 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
one principal source. The Company, at April 30, 1998, owned approximately
728,000 shares of common stock of Datatec and may, from time to time, sell a
portion of such shares. For additional information regarding prior dispositions
of Datatec shares, see the description of such transactions contained herein.
There can be no assurance that the Company will be able to 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, 1998, the Company had a cash
equivalent balance of $437,869 as compared to $32,939 at April 30, 1997.
For the fiscal year ended April 30, 1998 the Company used cash from operations
in the amount of $1,449,167 as compared to $917,034 from operations for fiscal
1997. The Company provided $583,021 as compared to using $214,799 from its
financing activities for the fiscal years ended April 30, 1998 and 1997,
respectively. The amount in fiscal 1998 resulted from the increase in borrowing.
The amount in fiscal 1997 resulted primarily from the repayment of secured
promissory notes.
10
<PAGE>
On January 31, 1994, notes receivable from Datatec in the amount of $1,900,000,
plus interest and costs totaling $733,131, were converted into 840.11 shares of
Datatec common stock pursuant to a stock purchase agreement between Datatec and
the Company. In addition, subject to the exercise of the Company's Class A and
Class B Warrants, Datatec 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, Datatec 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 Datatec
common stock were converted into 2,723,973 shares of Sellectek, which
represented approximately 28% of Sellectek's common stock (reduced to
approximately 3 % and 5% at April 30, 1998 and 1997, respectively). Sellectek's
corporate name was subsequently changed to Glasgal Communications, Inc. whose
corporate name was changed to Datatec Systems, Inc. This investment has been
accounted for at cost as the Company's interest in Datatec was reduced below 20%
and because the Company does not exercise control or influence over Datatec.
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 Datatec 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 Datatec 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 Datatec common stock held
by the Company at an exercise price of $3.00 per share of which warrants to
purchase 52,778 shares were exercised in fiscal 1998; the time for exercise of
the balance of such warrants has expired and (b) warrants to purchase for a
period of twenty-four months an aggregate of 161,110 shares of the Company's
common stock at an exercise price of $ .20 per share. The time for exercise of
such warrants has expired. The Company in 1996 and 1998 recognized a gain of
approximately $1,261,000 and $1,300,000, respectively, 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 Datatec 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 19,444 shares of Datatec 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 19,444 shares of Datatec common
stock held by the Company at an exercise price of $2.00 per share, as adjusted,
which were exercised and (b) warrants to purchase for a period of twenty-four
months an aggregate of 38,880 shares of the Company's common stock at an
exercise price of $ .20 per share. The time for exercise of such warrants has
been extended for an indefinite period. The Company in 1998 recognized a gain of
approximately $100,000 as a result of these transactions.
11
<PAGE>
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 Datatec common stock held by the Company. The notes were due on March
20 and April 4, 1996, respectively, and have not been paid.
During the year ended April 30, 1997 as an inducement for loan extensions and
loan agreements, the Company paid processing and financing fees of 28,571 shares
of common stock of Datatec held by the Company.
<TABLE>
<CAPTION>
April 30
--------
1998 1997
---- ----
<S> <C> <C>
Investment in Datatec consists of:
Common Stock:
Number of Shares
728,318 1,002,840
Cost $1,548,107 $ 969,395
Fair market value based on current
price per share of registered Datatec shares $4,005,749 $3,008,520
Options to purchase 580,000 shares of
common stock -- $ 725,000
</TABLE>
Approximately 349,000 and 312,000 shares of Datatec common stock owned by the
Company were held at April 30, 1998 and April 30, 1997, respectively, by
noteholders as collateral. Such shares are subject to certain restrictions
regarding transferability and sale.
Summary financial information of Datatec as presented in its financial
statements (audited by independent certified public accountants), is as follows:
<TABLE>
<CAPTION>
April 30
--------
1998 1997
---- ----
<S> <C> <C>
Current assets $25,475,000 $20,820,000
Noncurrent assets $14,588,000 $ 6,984,000
Current liabilities $24,003,000 $23,777,000
Long-term obligations $ 3,342,000 $ 6,027,000
Shareholders' equity (deficit) $12,718,000 $(2,000,000)
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
April 30, 1998 April 30, 1997 April 30, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net Sales $ 76,804,000 $ 59,481,000 $ 59,169,000
============ ============ ============
Net Loss $ (1,486,000) $ (4,960,000) $(13,418,000)
============ ============ ============
</TABLE>
12
<PAGE>
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 Datatec stock held by
the Company and by an interest in certain accounts receivable and was due on
September 1, 1996. In July and August 1995, the Company also borrowed from EVO
an aggregate of $350,000 with interest at the annual rate of 12%. Such
obligations were secured by certain accounts receivable and were due on October
31, 1995. Upon consummation of the agreement, all these obligations were
cancelled.
The Company recognized a gain of approximately $846,000 as a result of this
transaction.
As part of the agreement, the Company managed these product lines and received
an amount equal to its monthly operating costs, up to $100,000, for such period
of time as the Company managed such product lines. The Company provided 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
$52,700, $815,000 and $690,000 during the fiscal years ended April 30, 1998,
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,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales $ - $ - $549,000
======= ====== ========
Cost of Goods Sold $ - $ - $630,000
Royalties/Licensing fees - - 84,000
Product Development Costs - - (66,000)
Advertising and Promotions - - 71,000
---- ---- --------
$ - $ - $719,000
==== ==== ========
</TABLE>
In addition, the Company incurred general and administrative expenses in
connection with these product lines.
13
<PAGE>
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 continue 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.
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 Datatec 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.
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
acquired 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
$1,600,000 of the Company's outstanding notes have been acquired by Medical
Device Alliance, Inc.
14
<PAGE>
The Company entered into a common stock purchase agreement (the "Agreement")
with Datatec governing certain equity investments which the Company has made,
and in the future intends to make, in Datatec common stock. Pursuant to the
Agreement, in January 1994 the Company converted outstanding indebtedness of
Datatec owed to the Company into equity of Datatec which, upon consummation of
the Datatec merger with Sellectek, resulted in the Company owning approximately
28% of the outstanding shares of Datatec or 18.5% on a fully diluted basis. In
addition, the Agreement gives Datatec the right to require the Company to
purchase an additional number of shares of common stock of Datatec 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"). Datatec 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 March 31, 1999, as extended. The
Company has the right to retain the first $500,000 of warrant exercise proceeds;
however, such amount must be used by the Company to purchase shares of Common
Stock of Datatec if the aggregate amount of warrant exercise proceeds applied to
the purchase of Datatec 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 1997, 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 Datatec equity), equity financings or some combination thereof. If
Datatec 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 Datatec to fulfill certain commitments to
Datatec. Such loan to Datatec was made on the same terms as the previous loans
to Datatec 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
THE YEAR 2000 ISSUE
A Staff Legal Bulletin issued by the Securities and Exchange Commission's
Divisions of Corporation Finance and Investment Management Staff addressed The
Year 2000 Issue. According to the Bulletin, many existing computer programs use
only two digits to identify a year in the date field. These programs were
designed and developed without considering the impact of the upcoming change in
the century. In the case of the Company, the costs or the consequences of
incomplete or untimely resolution of the year 2000 issue does not represent a
known material event or uncertainty that is reasonably expected to affect the
Company's future financial results or cause its reported financial information
not to be necessarily indicative of future operating results, or future
financial condition.
DEFERRED INCOME TAX ASSETS
Deferred income tax assets as of April 30, 1997 have been reduced to zero due to
uncertainties concerning their realization.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
CONTENTS
Pages
-----
Independent Auditors' Report 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.
16
<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
P. O. Box 14
Hawthorne, New Jersey 07481
We have audited the accompanying consolidated balance sheets of Direct Connect
International Inc. and Subsidiary as of April 30, 1998 and 1997 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years ended April 30, 1998, 1997 and 1996.
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, 1998 and 1997 and the results
of their operations and their cash flows for the years ended April 30, 1998,
1997 and 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered a substantial loss
from operations, has negative cash flows from operating activities and has a
working capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Bederson & Company LLP
Certified Public Accountants
August 11, 1998
17
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
April 30
--------
1998 1997
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 437,869 $ 32,939
Accounts receivable - 22,857
Investment in Datatec, at cost 1,548,107 1,694,395
Investments - 13,001
Prepaid expenses and other current assets 50,265 56,314
------ ------
Total current assets 2,036,241 1,819,506
--------- ---------
Property and equipment, at cost
Furniture and fixtures 7,568 42,543
Molds, tools and dies - 267,498
----- -------
7,568 310,041
Less: Accumulated depreciation 7,568 263,083
----- -------
- 46,958
----- -------
Notes receivable - officers 99,195 90,404
Security deposits - 700
------ ------
99,195 91,104
------ ------
Total assets $2,135,436 $1,957,568
========== ==========
</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
--------
1998 1997
---- ----
<S> <C> <C>
Current liabilities
Accounts payable $ 355,647 $ 534,901
Accrued expenses and taxes payable 229,573 85,564
Notes payable - officers and stockholders - 253,680
Notes payable - other 2,241,362 1,404,661
Investments, warrants to sell Datatec - 300,000
--------- ---------
Total current liabilites 2,826,582 2,578,806
--------- ---------
Total liabilities 2,826,582 2,578,806
--------- ---------
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 5,160,949 5,128,449
Accumulated deficit (5,866,157) (5,668,408)
Unrealized loss on investments - (95,341)
----------- -----------
Total stockholders' equity (deficit) (691,146) (621,238)
----------- -----------
Total liabilities and stockholders'
Equity (deficit) $ 2,135,436 $ 1,957,568
============ ============
</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
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues
Sales $ - $ 464,212 $ 1,094,584
------ ------------- ------------
Costs and expenses
Cost of goods sold - 345,222 1,008,972
Royalties/licensing fees - 27,658 156,875
Product development costs - 23,484 (66,482)
Advertising and promotion - 244,225 71,312
Depreciation 46,958 28,270 44,220
General and administrative expenses 1,353,084 1,025,697 2,012,283
Less: Management fees (52,776) (815,158) (690,000)
------- ------- --------
1,347,266 879,398 2,537,180
--------- ------- ---------
Operating (loss) (1,347,266) (415,186) (1,442,596)
Gain on sale of securities 1,325,236 2,337,348 1,456,802
Gain on sale of assets and product lines - - 845,705
Interest income 29,792 5,662 28,708
Other income 278 - 94
Loss on advances to Kidsview Inc. - (72,286) -
Loss on write off of investment in Evolutions - (1,875,000) -
Interest expense (205,789) (193,464) (283,658)
--------- --------- ---------
Income (loss) before deferred income taxes (197,749) (212,926) 605,055
Deferred income taxes - (809,287) 809,287
--------- --------- -------
Net income (loss) $ (197,749) $ (1,022,213) $ 1,414,342
========== ============ ============
Earnings (loss) per common share $ (0.02) $ (0.11) $ 0.09
========= ========= =========
</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, 1996, 1997, AND 1998
<CAPTION>
Preferred Capital in Unrealized Total
Convertible Stock Common Stock Excess of (Accumulated Loss on Shockholders'
----------------------- ---------------------- Par Value Deficit) Investment Equity(Deficit)
Shares Amount Shares Amount ----------- ----------- ----------- --------------
----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 1, 1995 5,000,000 $ 5,000 9,062,066 $9,062 $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 5,000,000 5,000 9,062,066 9,062 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 5,000,000 5,000 9,062,066 9,062 5,128,449 (5,668,408) ( 95,341) (621,238)
Cost of issue of
100,000 warrants - - - - 20,000 - - 20,000
Imputed cost of rent
provided by corporate
Officer - - - - 12,500 - - 12,500
Sale of investment - - - - - - 95,341 95,341
Net loss - - - - - (197,749) - (197,749)
--------- ------- ---------- ------- ---------- ----------- ------- -----------
Balance, April 30, 1998 5,000,000 $ 5,000 9,062,066 $ 9,062 $5,160,949 $(5,866,157) $ 0 $ (691,146)
========= ======= ========== ======= ========== =========== ======= ==========
</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
-------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $(197,749) $(1,022,213) $ 1,414,342
--------- ----------- -----------
Adjustments to reconcile net income
(loss) to net cash (used in) operating activities
Depreciation 46,958 28,270 44,220
Deferred income taxes - 809,287 (809,287)
Financing fees, reduction in investment in Datatec stock - - 398,720
Management fee income - - (200,000)
Gain on sale of Datatec stock (2,124,706) (2,337,348) (1,456,802)
Loss on Sale of Mark Solutions stock 74,469 - -
Other costs, sale of Datatec - - (3,931)
Loss on expiration of warrants 725,000 - -
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 -
Warrants to purchase common stock
issued in satisfaction of financing fees 20,000 - -
Imputed cost of rent provided by corporate officer 12,500 - -
(Increase) decrease in assets 22,857 (2,205) (10,157)
Accounts receivable
Inventories - - 86,955
Prepaid royalties - - 47,500
Prepaid expenses and other current assets 6,049 12,761 80,371
Decrease in security deposits 700 - -
Increase (decrease) in liabilities
Accounts payable (179,254) (388,611) 195,060
Accrued expenses and taxes payable 144,009 35,739 9,834
------- ------ -----
Total adjustments (1,251,418) 105,179 (2,463,222)
---------- ------- ----------
Net cash (used in) operating activities (1,449,167) (917,034) (1,048,880)
---------- -------- ----------
Cash flows from investing activities
Notes receivable - officers, increases (8,791) (14,379) (46,728)
Notes receivable - officers, decreases - 35,330 284,340
Proceeds from sale of Datatec stock 3,102,346 2,754,104 1,800,000
Acquisition of Datatec stock (1,856,352) - -
Proceeds from sale of Mark Solutions stock 33,873 - -
Investment in Evolutions - (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)
--------- ---------- ----------
Net cash provided by investing activities 1,271,076 1,096,886 1,835,488
--------- ---------- ---------
</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
-------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Notes payable-officers and stockholders, increases - 41,964 63,411
Notes payable-officers and stockholders, decreases (253,680) (250,000) -
Notes payable-other, increases 887,705 120,032 959,445
Notes payable-other, decreases (51,004) (126,795) (1,913,255)
------- -------- ----------
Net cash provided by (used in) financing activities 583,021 (214,799) (890,399)
------- -------- --------
Net Increase (decrease) in cash and cash equivalents 404,930 (34,947) (103,791)
Cash and cash equivalents, beginning of year 32,939 67,886 171,677
------ ------ -------
Cash and cash equivalents, end of year $ 437,869 $ 32,939 $ 67,886
========== ========= =========
Supplemental disclosure of cash flows information:
Cash paid during the year for interest $ 205,789 $ 21,045 $ 111,506
========== ========= ==========
Schedule of noncash investing and financing activities:
Warrants to purchase common stock issued
in satisfaction of financing fees $ 20,000 - -
Imputed cost of rent provided by corporate officer $ 12,500 - -
Rights to acquire common stock in conjunction
with satisfaction of accrued legal fees - $ 24,000 -
Unrealized gain (loss) on investments - $ (41,170) $ 21,877
During the fiscal year ended April 30, 1996 the Company had non-cash investing
and financing activities in connection with the sale of Datatec common stock;
sale of product lines and certain assets to Evolutions, Inc.; and Datatec common
stock issued as financing costs, as follows:
Sale of Datatec common stock:
Cash proceeds - - $1,800,000
Investment in Datatec options - - 725,000
Financing costs incurred - - 73,720
Note payable, increase - - (350,000)
Decrease in investment in Datatec - - (657,323)
Increase in warrants to sell Datatec - - (300,000)
Increase in capital in excess of par value - - (30,000)
Gain on sale of Datatec - - (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 Datatec common stock
having a cost basis of $27,618 and $125,665 during the 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 Datatec 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, 1998
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, 1998 consolidated balance sheet reflects a
working capital deficiency of $790,341 and the consolidated statement
of operations for the year ended April 30, 1998 reflects a loss from
operations of $1,347,266. 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 $2,241,000 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
one principal source. The Company owns approximately 728,000 shares of
common stock of Datatec Systems Inc., formerly Glasgal Communications
Inc., (Datatec) and may, from time to time, sell a portion of such
shares. For additional information regarding prior dispositions of
Datatec shares, see the description of such transactions contained
herein. There can be no assurance that the Company will be able to
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.
(d) Accounts Receivable
An allowance for doubtful accounts is established based on management's
expectation of uncollectables. As of April 30,1998 and 1997, an
allowance for doubtful accounts was not deemed necessary.
24
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Note 1 - Continued
(e) 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.
(f) 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.
(g) 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 a 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.
25
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Note 1 - Continued
Deferred income tax assets are reduced by a valuation allowance due to
uncertainties concerning their realization. (See Note 4).
(h) 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 (1998), 9,062,066 (1997), and 15,000,000 (1996).
(i) 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:
April 30,
---------
1998 1997
---- ----
Cost - 0 - $108,342
Unrealized loss - 0 - (95,341)
----- -------
Fair market value - 0 - $13,001
===== =======
During the year ended April 30, 1998, such investment was sold for
approximately $34,000 , resulting in a realized loss of approximately
$74,000.
Note 3 - Investment in Datatec
On January 31, 1994, notes receivable from Datatec in the amount of
$1,900,000 plus interest and costs totaling $733,131, were converted
into 840.11 shares of Datatec's common stock pursuant to a stock
purchase agreement between Datatec and the Company. Datatec 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, Datatec 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, Datatec 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.
26
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Note 3 - Continued
Pursuant to the merger, the Company's 840.11 shares of Datatec 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 3 % and 5 % at April 30, 1998
and 1997, respectively). Sellectek's corporate name was subsequently
changed to Glasgal Communications, Inc. whose corporate name was
changed to Datatec. This investment has been accounted for at cost as
the Company's interest in Datatec was reduced below 20% and because the
Company does not exercise control or influence over Datatec.
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
Datatec 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 Datatec 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 Datatec common
stock held by the Company at an exercise price of $3.00 per share of
which warrants to purchase 52,778 shares were exercised in fiscal 1998;
the time for exercise of the balance of such warrants has expired and
(b) warrants to purchase for a period of twenty-four months an
aggregate of 161,110 shares of the Company's common stock at an
exercise price of $ .20 per share. The time for exercise of such
warrants has expired. The Company in 1996 and 1998 recognized a gain of
approximately $1,261,000 and $1,300,000, respectively, as a result of
these transactions. With respect to the Company's option to repurchase
580,000 shares of common stock of Datatec, as set forth above, the time
for exercise of such option has expired. At that time the Company did
not have the financial ability to exercise such option because it was
unable to sell its restricted Datatec shares for such purpose. The
Company in July 1997 purchased 480,000 shares of Datatec common stock
in a private placement by Datatec at a price of $3.87 per share. As an
inducement for the Company to participate in such private placement,
Datatec registered such shares.
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 Datatec 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 19,444 shares of Datatec 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 19,444 shares of Datatec
common stock held by the Company at an exercise price of $2.00 per
share, as adjusted, which were exercised during the fiscal year ended
April 30, 1998 and (b) warrants to purchase for a period of twenty-four
months an aggregate of 38,880 shares of the Company's common stock at
an exercise price of $ .20 per share. The time for exercise of such
warrants has been extended for an indefinite period. The Company in
1998 recognized a gain of approximately $100,000 as a result of these
transactions.
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 Datatec 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, 1998. The notes were
acquired by Medical Device Alliance, Inc.
27
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Note 3 - Continued
During the years ended April 30, 1998 and 1997, as an inducement for
loan extensions and loan agreements, the Company paid processing and
financing fees by delivering 0 and 28,571 shares, respectively, of
Datatec common stock held by the Company.
April 30,
----------
1998 1997
---- ----
Investment in Datatec consists of:
Common Stock:
Number of shares 728,318 1,002,840
Cost $1,548,107 $ 969,395
Fair market value based on current
price per share of registered Datatec
shares. $4,005,749 $ 3,008,520
Options to purchase 580,000 shares
of common stock, at cost $ - 0 - $ 725,000
Approximately 349,000 and 312,000 shares of Datatec common stock owned
by the Company at April 30, 1998 and April 30, 1997, respectively were
held by noteholders as collateral. Such shares are subject to certain
restrictions regarding transferability and sale.
Summary financial information of Datatec as presented in its
consolidated financial statements (audited by independent certified
public accountants) are as follows:
April 30,
---------
1998 1997
---- ----
Current assets $25,475,000 $20,820,000
Noncurrent assets 14,588,000 6,984,000
Current liabilities 24,003,000 23,777,000
Long-term obligations 3,342,000 6,027,000
Shareholders' equity 12,718,000 (2,000,000)
Year Ended Year Ended Year Ended
April 30 April 30, April 30,
1998 1997 1996
---- ---- ----
Net Sales $76,804,000 $59,481,000 $59,169,000
=========== =========== ===========
Net Loss $(1,486,000) $(4,960,000) $(13,418,000)
=========== =========== ============
28
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
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 Datatec held
by the Company and by an interest in certain accounts receivable and
was due on September 1, 1996. In July and August 1995, the Company also
borrowed from EVO an aggregate of $350,000 with interest at the annual
rate of 12%. Such obligations were secured by certain accounts
receivable and were due on October 31, 1995. Upon consummation of the
agreement, all these obligations were cancelled.
The Company recognized a gain of approximately $846,000 as a result of
these transactions.
As part of the agreement, the Company managed these product lines and
received an amount equal to its monthly operating costs, up to
$100,000, for such period of time as the Company managed such product
lines. The Company provided 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
$53,000 and $815,000 during the fiscal years ended April 30, 1998 and
1997, respectively.
Revenues and expenses of the Zoo Borns and Tea Bunnies product lines,
included in the accompanying statements of operations, are
approximately as follows:
Year Ended April 30,
--------------------
1998 1997 1996
---- ---- ----
Sales $ - $ - $549,000
---------- -------- --------
Cost of Goods Sold - - 630,000
Royalties/Licensing Fees - - 84,000
Product Development Costs - - (66,000)
Advertising and Promotions - - 71,000
---------- -------- --------
- - 719,000
---------- -------- --------
$ - $ - $(170,000)
========== ========= =========
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, 1998
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:
Approximate
Year Ending Amount
----------- ------
2005 $ 450,000
2006 1,010,000
2007 900,000
2009 680,000
2010 1,090,000
2011 630,000
-------
$4,760,000
==========
The deferred income tax asset as of April 30, 1998 and April 30, 1997
was reduced to zero by a valuation allowance of approximately
$2,100,000 due to uncertainties concerning their realization at those
dates. At April 30, 1996 , due to the sale by the Company of some of
its equity interest in Datatec and the significant increase in the
market value of the Company's equity interest in Datatec, the Company
recognized a deferred income tax asset of $809,287.
The deferred income tax asset consists of the following:
Year Ended April 30,
--------------------
1998 1997
---- ----
Net operating loss $1,904,000 $2,092,089
Valuation allowance (1,904,000) (2,092,089)
------------ -----------
$ - $ -
============ ==========
The following is a reconciliation of the federal income tax rate to the
actual effective income tax rate as a percentage of pretax income:
Year Ended April 30,
--------------------
1998 1997 1996
---- ---- ----
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 (40.0) 340.1 93.8
----- ----- ----
0% 380.1% 133.8%
==== ===== =====
30
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
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. This obligation was acquired by Medical Device
Alliance, Inc. and is included as part of notes payable - other. See
Note 7.
April 30,
---------
1998 1997
---- ----
$ -0- $181,365
(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. As of April 30, 1998 all
such loans were paid off.
April 30,
---------
1998 1997
---- ----
$ -0- $ 72,315
---- --------
$ -0- $253,680
==== ========
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.
April 30,
---------
1998 1997
---- ----
$2,196,346 $1,353,657
(b) Financings relating to insurance costs bear interest at rates ranging
from 8.17% to 9.5% per annum.
April 30,
---------
1998 1997
---- ----
$ 45,016 $ 51,004
------ ------
Sub-total 2,241,362 1,404,661
Less: Current Maturities 2,241,362 1,404,661
--------- ---------
$ - 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 30,1998
Note 8 - Stockholders' Equity
During the years ended April 30, 1998 and 1997, the Company had
6,488,517 outstanding Redeemable Class A Warrants, expiring on March
31, 1999, 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 March 31, 1999, 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.
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.
32
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Note 8 - Continued
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 issuance of such shares is
subject to availability. During 1998 in consideration of providing an
open line of credit of $225,000 to the Company, the Company issued to
the wife of one of its officers warrants to purchase 100,000 shares of
the Company's common stock at an exercise price of $ .20 per share. The
time for exercise of such warrants expires in 2002. At April 30, 1998,
the Company's obligation under this line of credit amounted to
approximately $166,900. This obligation is included under notes
payable, other and is secured by 40,000 shares of Datatec common stock
owned by the Company
During 1998 the President of the Company provided office space to the
Company at no charge. The value assigned to such gift was $12,500 and
was credited to capital in excess of par value.
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. Such options expire on May 27,2002.
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, 1996 and 1997 and 1998
Outstanding at May 1, 1995,
1996 and 1997 452,809 $ .19 to $1.16 $206,995
Granted - - -
Terminated - - -
Exercised - - -
------- -------
Outstanding at April 30,
1996, 1997 and 1998 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, 1998
Note 9 - Continued
The status of the options granted under the New Incentive Stock Option
Plan, which is subject to stockholder approval, is as follows:
Outstanding at April 30, 1995,
1996 and 1997 1,000,000 $ .63 to $ .69 $657,700
Granted - - -
Terminated - - -
Exercised - - -
---------- --------
Outstanding at April 30,
1996, 1997 and 1998 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:
Year Ending Options to Purchase Gross Sales Stock Price
April 30 Shares of Common Stock Goals Goals*
-------- ---------------------- ----- ------
1997 511,500 $12,500,000 $1.50
1998 558,000 14,000,000 1.75
1999 604,500 15,500,000 2.00
* Average over last 90 days of fiscal year.
Note 10 - Related Party Transactions
During the years ended April 30, 1998, 1997 and 1996 the Company
purchased products totaling approximately $ -0-, $305,000 and $396,000,
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, 1998, 1997 and 1996 the Company
incurred product development expenses of approximately $ -0-, $24,000
and $27,000, respectively, payable to this corporation.
During each of the years ended April 30, 1998, 1997 and 1996, the
Company paid approximately $72,000 to an officer for legal services
rendered.
As of April 30, 1998 and April 30, 1997 the Company held 8% notes
receivable from certain officers aggregating approximately $99,000 and
$90,000, respectively, including interest. Interest income for the
years ended April 30, 1998, 1997, and 1996 on officers' loans totaled
approximately $4,900, $6,000, and $26,000, respectively.
34
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
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, 1998, 1997, and 1996 approximately -0-,
77% and 29 % , respectively, of sales were licensed products Little
Sleepy Eyes and Lamb Chop. Approximately 50% (1996) 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, 1998, 1997, and 1996 as follows:
% of Total Sales
Year Ended Number of Attributable to
April 30 Major Customers Major Customers
-------- --------------- ---------------
1998 0 0
1997 2 86
1996 2 68
(c) Uninsured cash
The Company maintains its cash in various bank accounts. Accounts at
each bank are guaranteed by the Federal Deposit Insurance Corporation
up to $100,000. As of April 30, 1998, uninsured cash approximated
$330,000.
Note 12 - Subsequent Events
(a) The Company has been advised by a customer of Kidsview, Inc., that it is
seeking approximately $200,000 relating to credits associated with Tea
Bunnies product sales by Kidsview in a prior year. The Company believes
it has meritorious defenses to such claim. To date there is no
litigation relating to this matter.
(b) In connection with the acquisition of certain outstanding notes of the
Company by Medical Device Alliance Inc.(MDA), all of which are past due,
aggregating approximately $1,600,000 at April 30, 1998, the Company
delivered 228,751 shares of its Datatec stock in May 1998, in
transferable form, as collateral for such obligations. The Company has
been advised that all such shares were subsequently sold resulting in
proceeds to MDA of approximately $976,000 (unaudited) in reduction of
such obligations. The Company recognized a gain of approximately
$750,000 (unaudited) in connection with the sale of these shares.
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 at April 30, 1998.
NAME AGE POSITION
---- --- --------
Joseph M. Salvani 41 Chairman of the Board and
Principal Executive Officer
Peter L. Schneider 45 President and Director
Barry A. Rosner 55 Vice President, Treasurer,
Director and Principal
Financial Officer
Y.S. Ling 53 Executive Vice President,
International Operations
Howard G. Peretz 59 Executive Vice President
William B. Rodman 59 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 Datatec Systems, 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 65% 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.
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.
36
<PAGE>
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, 1998, the Board of Directors of the
Company held three meetings. No member of the Board of Directors attended fewer
than 75% of the three meetings of the Board in the fiscal year ended April 30,
1998. 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.
37
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The Company's Board of Directors does not have a Compensation Committee. The
Company's three directors determine 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.
The Board of Directors has reviewed the compensation for each of the executive
officers for fiscal year 1998 and determined that, in its opinion, the
compensation of such officers was reasonable.
The only officers or directors who received aggregate remuneration in excess of
$60,000 during the fiscal year ended April 30, 1998 were Peter Schneider, who
received $200,000, Howard Peretz who received $175,000 and Barry Rosner who
received $60,800. The total aggregate remuneration received during such period
by all of the officers and directors as a group was $435,800 . Other non-cash
compensation such as the use of an automobile provided by the Company and
payment of premiums for insurance for the benefit of Mr. Schneider did not
exceed 10% of the cash compensation paid to Mr. Schneider or to all executive
officers as a group.
Other than as described below, the Company has no pension or profit-sharing plan
or other contingent forms of remuneration. No employee has a written employment
agreement at April 30, 1998.
38
<PAGE>
The following table summarizes compensation paid by the Company for services
rendered during 1998, 1997, and 1996 by the Principal Executive Officer and all
other compensated executives of the Company (collectively, together with the
Principal Executive Officer, the "Executive Officers") other than the Principal
Executive Officer.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payments
------ --------
Securities
Restricted Underlying
Other Annual Stock Options/ All
Name and Principal Position Year Salary($) Bonus($) Compensation($) Awards($) SARS($) LTIP($) Other(s)
- --------------------------- ---- --------- -------- --------------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph M. Salvani 1998 - - - - - - -
Chairman of the
Board and Principal
Executive Officer 1997 - - - - - - -
1996 - - - - - - -
Peter L. Schneider 1998 200,000 - - - - - -
President and
Director
1997 179,334 - - - - - -
1996 151,831 - - - - - -
Howard Peretz 1998 175,000 - - - - - -
Executive Vice President
1997 87,500 - - - - - -
1996 131,831 - - - - - -
Y.S. Ling 1998 - - - - - - -
Executive Vice President
1997 - - - - - - -
1996 - 284,340 - - - - -
</TABLE>
- -------------------------------
For information regarding Stock Options, see following tables.
OPTIONS GRANTED IN LAST FISCAL YEAR
There were no stock options granted to the executive officers during the fiscal
year ended April 30, 1998.
39
<PAGE>
The following table sets forth information with respect to Executive Officers
concerning unexercised options held as of the fiscal year ended April 30, 1998.
None of the Executive Officers exercised options during the fiscal year ended
April 30, 1998. No options were repriced during the fiscal year ended April 30,
1998.
<TABLE>
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options at
Options at Fiscal Year End Fiscal Year End
-------------------------- ---------------
Shares
Name Exercised(#) Value Realized($) 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
<FN>
* Granted subject to stockholder ratificaton.
</FN>
</TABLE>
LONG TERM INCENTIVE PLANS-AWARDS IN FISCAL YEAR 1998
There were no long term incentive plans-awards granted to the Executive Officers
during the fiscal year ended April 30, 1998.
40
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At July 31, 1998, the directors and officers of the Company and their affiliates
owned 2,687,669 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, 1998, 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 2,548,232 shs.(3)(4) 28.0%
Common Y.S. Ling 1,201,616 shs. 13.3%
Common Barry A. Rosner 0 shs.(5) -
Common Joseph Salvani 0 shs.(6) -
Common All Directors and Officers 2,687,669 shs.(7) 30.0%
as a Group (6 Persons)
Convertible Medical Device Alliance, Inc. 2,625,000 shs.(8) 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 mailing address for Messrs. Schneider, Ling, Rosner and Salvani is
P.O. Box 14, Hawthorne, NJ 07507.
(2) All shares are directly held except as otherwise stated.
(3) Includes 1,201,616 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 55,000 shares of Common Stock
which became exercisable since 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 options under the Company's Incentive Stock Option
Plan to purchase an additional 86,505 shares of Common Stock which
became exercisable in September 1993.
(7) Does not include options under the Company's Incentive Stock Option
Plan to purchase an additional 363,809 shares of common stock which
became exercisable in September 1993.
(8) Also acquired approximately $1,600,000 of the Company's outstanding
notes, all of which are past due.
41
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended April 30, 1998, the Company did not purchase any
products from either Toy World or Well World, each of which is owned and
operated by Y.S. Ling, a principal stockholder and Executive Vice President of
the Company. In fiscal 1997 and 1996, there were purchases totaling
approximately $305,000 and $396,000, respectively from Well World. During the
fiscal years ended April 30, 1998, 1997 and 1996, the Company incurred product
development expenses of approximately $18,000, $24,000 and $27,000,
respectively, payable either to Toy World or to Well World.
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 was due on August 10, 1997. Such loan has not yet been repaid. The
amount due, including accrued interest, approximated $87,000 at April 30, 1998.
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.
During 1998 in consideration of the wife of one of the Company's officers
providing an open line of credit of $225,000 to the Company, the Company issued
to her warrants to purchase 100,000 shares of Company's common stock at an
exercise price of $ .20 per share. The time for exercise of such warrants
expires in 2002. At April 30, 1998, the Company's obligation under this line of
credit amounted to approximately $166,900. Such obligation is secured by 40,000
shares of Datatec common stock owned by the Company.
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 for each of the fiscal years ended April 30, 1998, 1997 and
1996.
On March 6, 1991, as part of a private replacement of its securities, the
Company entered into lending agreements with Mr. Charles Lieberman, Mr. Ira
Lamster and Mrs. Barbara Rosner whereby the Company borrowed $230,000, $32,000
and $11,500 from such persons, respectively, for a period of six months at a
semiannual rate of interest of 14.5%. As an inducement for such persons to enter
into such transactions, the Company agreed to sell to such persons on a
restricted basis 14,286, 2,000 and 714 shares of Common Stock, respectively, for
an aggregate consideration of $22,312 or approximately $1.31 per share. In April
1991, the Company entered into negotiations with Mrs. Rosner which resulted in
the reduction of the Company's note to Mrs. Rosner, referred to above, from
$11,500 to $1,233. In October 1991, the Company paid off $32,000 (plus accrued
interest) with respect to such loans. At such time the Company renegotiated the
balance of such loans (plus accrued interest) and issued new notes, maturing in
one year, amounting to $276,000 with interest thereon at the annual rate of 10%.
At April 30, 1998 such loans, after giving effect to partial repayments,
amounted to approximately $236,800 including interest. Such notes, which are
past due, were acquired by Medical Device Alliance, Inc. For information
regarding the holdings of such company of the Company's Convertible Preferred
Stock see "Security Ownership of Certain Beneficial Owners and Management."
42
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS
*2.0 - Common Stock Purchase Agreement between the Company and Glasgal
Communications, Inc. (filed with Annual Report on Form 10-K for the fiscal year
ended April 30, 1995 as Exhibit 2.0)
*3.1 - Certificate of 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 - Loan and Security Agreement between the Company and Datatec Systems,
Inc. (formerly 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
43
<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 Wyckoff,
State of New Jersey on the 13th day of August 1998.
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 13, 1998
Principal Executive Officer
Peter L. Schneider President and Director August 13, 1998
Barry A. Rosner Vice President-Finance, August 13, 1998
Treasurer and Principal
Financial and Accounting
Officer and Director
Joseph M. Salvani
Peter L. Schneider All of the Directors August 13, 1998
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
44
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
Direct Connect International Inc.:
We hereby consent to the inclusion in this Annual Report on Form 10-K, for the
fiscal year ended April 30, 1998, of our Report, dated , August 11,1998, in
connection with our audit of the Financial Statements of Direct Connect
International Inc. and Subsidiary as of April 30, 1998 and 1997 and for the
years ended April 30, 1998, 1997 and 1996.
/s/ Bederson & Company LLP
West Orange, New Jersey
August 13, 1998
<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 13th day of August 1998
----
DIRECT CONNECT INTERNATIONAL INC.
By /S/ PETER L. SCHNEIDER
----------------------
President
[Corporate Seal]
ATTEST:
/S/ WILLIAM B. RODMAN
- ---------------------
Secretary
Principal Executive Officers and
all of the Directors
--------------------
/S/ JOSEPH M. SALVANI Chairman and Principal
- ---------------------
Joseph M. Salvani Executive Officer and Director
/S/ PETER L. SCHNEIDER President and Principal Operating
- ----------------------
Peter L. Schneider Officer and Director
/S/ BARRY A. ROSNER Vice President, Treasurer and
- -------------------
Barry A. Rosner Principal Financial and Accounting
Officer and Director
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