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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, 1999
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.
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(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.)
637 Wyckoff Ave. #194, Wyckoff, New Jersey 07481
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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.
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(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 September 20, 1999, 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 September 20, 1999 was approximately $638,200.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
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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.......................................6
ITEM 6. SELECTED FINANCIAL DATA.......................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................9-16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK........................................16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................17-35
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..............................................44
SIGNATURES...................................................45
<PAGE>
PART I
ITEM 1. BUSINESS
The Company has not developed or marketed any product lines during the fiscal
years ended April 30, 1998 and April 30, 1999. 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.
In that connection, the Company signed a merger agreement, dated as of November
30, 1998 (the Agreement), with Image Technology Corp. (Image) whereby the
Company will merge into a subsidiary of Image, and the Company will become the
surviving corporation. The Company's shareholders are expected to receive,
subject to adjustment, approximately 25% of Image's issued and outstanding
common stock after the merger.
The Agreement is subject to receipt by the Company's Board of Directors of a
fairness opinion by an independent financial consultant or investment banking
firm and shareholder approval. The Agreement is also subject to approval of
Image's shareholders.
In anticipation of the proposed merger, the Company will loan Image, for working
capital purposes, the principal amount of $260,000 with interest at the rate of
six and one-half percent (6-1/2%) per annum. The promissory note, dated November
30, 1998, evidencing the obligation is due, in the event that the Agreement is
terminated, on or before the 30th day after such termination.
The Agreement provides that at the time of filing of the Certificate of Merger
in Delaware, the Company will have at least $1,000,000 of unrestricted free cash
together with a sufficient sum of liquid tangible assets to pay all outstanding
liabilities and all other fees of the Company in connection with the merger. In
addition, Image will use its best efforts to raise a minimum of $2,000,000 of
additional capital during the period ending September 30, 1999. If Image fails
to raise such additional capital, then the holders of Image's common stock, at
the date of execution of the Agreement, will be entitled to increase their
aggregate holdings so as to be equivalent to 85% of the outstanding shares of
Image common stock at the time of filing of the Certificate of Merger, thereby
reducing the holdings of the Company's shareholders of Image common stock after
the merger from 25% to 15%.
Image's principal business is conducted through Court Record Services, Inc.,
which is one of the leading providers of Records and Briefs for the Federal
Courts of Appeal and the U.S. Supreme Court to law libraries and the legal
profession. Image has significant assets in its vast collections of microfilmed
and digitized Records and Briefs of the U.S. Federal Courts of Appeal and the
U.S. Supreme Court. The collection also includes cases for appellate courts of
the states of New York and Pennsylvania. These assets enable Image through its
CourtRecordServices.com web site to offer Records and Briefs instantaneously
through the Internet to the attorney, professor or law librarian who requires
such information.
The assets of the Company will assist Image to achieve its goal of becoming the
proprietary supplier of judicial Records and Briefs over the Internet.
The Company and Omnet Technology Corporation have mutually agreed to terminate
their prior merger agreement.
1
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BUSINESS HISTORY
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 were sold at retail prices ranging from $1.50 to $30.00 and were
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.
MANUFACTURING
The Company does not manufacture any toy products. 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 were 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 believed that its
traditional manufacturing arrangements were advantageous to the Company in
providing quality products at reasonable prices, with prompt response to orders.
The Company incurred none of the fixed costs involved in owning its own
factories, and the flexibility provided by this arrangement allowed the Company
to seek out the best manufacturing terms available. However, the use of third
party manufacturers reduced the Company's ability to control directly the timing
and quality of the manufacturing process. Throughout its history the Company
did not experience any material delays in the delivery of its products or any
material defects in its products. Substantially all contracted manufacturing
services were 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 were 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 were
produced by one manufacturer, either Toy World Company, Ltd. ("Toy World") or
Well World Toy Co., Ltd. ("Well World"), the principal owner of each company is
Y.S. Ling, a principal stockholder of the Company and one of its executive
officers. Either Toy World or Well World provided product development and
contract manufacturing services for the Company. The Company paid either Toy
World or Well World approximately $0, $0, and $305,000, during the fiscal years
ended April 30, 1999, 1998 and 1997, respectively, for the manufacture of
products F.O.B. Far East port cost, and approximately $0, $18,000, and $24,000
during the fiscal years ended April 30, 1999, 1998, and 1997, respectively, for
product development expenses. The Company does not believe that it will require
manufacturing services from either Toy World or Well World during the current
fiscal year. The Company does not believe that it will require product
development services from either Toy World or Well World during the current
fiscal year. The Company arranged for the making of its products with various
manufacturers who, in turn, subcontracted 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 was to
utilize more than one manufacturer to produce a single product if high volume
demand existed. 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. The Company did not
experience 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 did not
experience any problems as a result of any political or economic disruptions
in the Far East.
2
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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 nine years old and are in
good working condition) and package designs, which are owned by the Company,
were designed both by the Company and by third parties and were engineered and
produced for the Company in the Far East. The Company normally did not purchase
back-up tools and molds because the Company believed that the existing tools and
molds could 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 broke, the Company's production
could have been delayed until a new tool or mold became available, generally
within 90 to 120 days. Resulting delays in shipments could have had a material
adverse effect on the Company. The Company directly, or through its sales
representatives, took written orders (standard purchase orders) for its products
from its customers and arranged for the manufacture of its products as discussed
above. Cancellations were generally made in writing, and the Company took
appropriate steps to notify its manufacturers of such cancellations. The
manufacturers generally shipped the Company's products by commercial ocean
carrier pursuant to instructions from the Company's customers.
ORDER BACKLOG
At April 30, 1999 and 1998, the Company did not have a backlog of confirmed
orders from customers.
MARKETING AND DISTRIBUTION
The Company has marketed its products to major toy, discount department stores,
drug chains and catalog companies. The primary target market was 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 were made by
irrevocable letter of credit or telegraphic transfer. As a result, on these
sales the Company did not have to finance inventory or offer credit terms to the
customer. This reduced 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 was 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. 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 years ended
April 30, 1998 and April 30, 1999, there were no sales. No other customer
accounted for more than 10% of revenues during fiscal 1997.
3
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SEASONALITY
The business of the Company was highly seasonal. For the fiscal years ended
April 30, 1998 and April 30, 1999 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.
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, 1998 and 1999, the Company did not have any product liability coverage.
COMPETITION
The market for toy products is highly competitive and sensitive to changing
consumer preferences and demands. The Company believes that 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 traditionally 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, 1999, the Company had five employees, serving in the areas of
administration, operations management, product development and 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 repurchase such toys under certain
circumstances. Any such determination by the Safety Commission is subject to
court review. Similar laws exist in some states and cities in the United States
and in Canada and Europe. The Company believes that its products have been in
compliance with the aforementioned acts.
4
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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 have been 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.
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: 637 Wyckoff
Avenue #194, Wyckoff, NJ 07481. 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 customer of
Kidsview, Inc. alleging the Company's responsibility for a credit balance of
approximately $200,000.
In addition, in June 1998, the Company's subsidiary, Amerawell Products, Limited
(Amerawell) commenced a lawsuit in the Superior Court of New Jersey against Toys
R Us (TRU) for products shipped and delivered to TRU amounting to approximately
$185,000, which has not been paid. TRU has answered the complaint, denying
liability. TRU, in the same proceeding, named the Company as a third party
defendant alleging, among other things, that the Company breached its contract
with TRU regarding advertising such products and that the Company because of its
relationship to Amerawell or as a result of its own conduct was liable for all
the damages suffered by TRU, allegedly amounting to approximately $250,000. The
Company's management believes that the Company has a meritorious defense.
In December 1998, the Company was also served with a complaint through its
designated agent in Delaware by Chieftain LLC, a California limited liability
corporation, and Leonard Mahowa in connection with a lawsuit brought in the
State of California. The complaint was primarily directed against Medical Device
Alliance, Inc. (MDA) a Nevada corporation engaged in the business of marketing,
selling and leasing an ultrasonic liposuction system. The case generally
involves the issuance of securities by MDA in a private placement. The Company
is a named defendant for alleged conspiracy to defraud, conspiracy to divert
assets and for undetermined damages for alleged ultra vires transactions which
allegedly arose out of MDA's purchase of stock and notes from the Company's
preferred stockholders and noteholders in the aggregate amount of approximately
$2,475,000 at September 20, 1999. The Company believes that such allegations
are without merit and has retained California counsel to defend it in this
matter.
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, 1999.
5
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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, markdowns 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 re-qualify 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, given the need to sell a portion of such
securities from time to time, will not satisfy such NASDAQ listing criteria for
future re-listing. As of September 20,1999, there were approximately 200 and 60
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.
6
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As of September 20,1999 the closing bid prices per share of Common Stock and
Redeemable Class A Warrants were $.10 and $.06, respectively, as reported on
the OTC Bulletin Board.
Common Stock High Bid Low Bid
Fiscal Quarter Ended
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
October 31, 1998 32/100 11/100
January 31, 1999 49/100 11/100
April 30, 1999 51/100 1/5
July 31, 1999 34/100 1/8
October 31, 1999 (through September 20) 12/100 1/10
Redeemable Class A Warrants
Fiscal Quarter Ended
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
October 31, 1998 32/100 1/8
January 31, 1999 47/100 11/100
April 30, 1999 27/100 1/10
July 31, 1999 15/100 1/16
October 31, 1999 (through September 20) 1/16 6/100
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.
7
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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, 1999. 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
--------------------------
1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Working Capital $ (998,208) $ (790,341) $ (759,300) $(2,653,221) $(2,649,327)
(Deficit)
Total Assets $ 972,704 $ 2,135,436 $ 1,957,568 $ 3,588,622 $ 3,328,583
Total Liabilities $ 1,864,408 $ 2,826,582 $ 2,578,806 $ 3,170,477 $ 4,376,657
Stockholders' $ (891,704) $ (691,146) $ (621,238) $ 418,145 $(1,048,074)
Equity (Deficit)
Stockholders' Equity $ (0.10) $ (0.08) $ (0.07) $ 0.05 $ (0.11)
(Deficit) Per Outstanding
Common Share
Statements of Operations Information
- ------------------------------------
Net Sales $ -0- $ -0- $ 464,212 $ 1,094,584 $ 3,899,152
Operating Expenses $ 943,810 $ 1,347,266 $ 879,398 $ 2,537,180 $ 6,699,365
Net Profit (Loss) $ (200,558) $ (197,749) $ (1,022,213) $ 1,414,342 $ (4,165,235)
Net Profit (Loss) Per $ (0.02) $ (0.02) $ (0.11) $ 0.09 $ (0.46)
Common Share/
Common Share
Equivalent
</TABLE>
8
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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, 1999, 1998, and 1997.
NET SALES
Net sales for the fiscal years ended April 30, 1999 and April 30, 1998 were $-0-
as compared to $464,212 for the fiscal year ended April 30, 1997.
GROSS PROFIT
Gross Profit percentage for the fiscal years ended April 30, 1999 and April 30,
1998 were 0% as compared to 26% for the fiscal year ended April 30, 1997.
OTHER INCOME
Included in non operating income for April 30, 1999 was a gain of $771,202 from
the sale of shares in the Company's investment in Datatec, and $60,000 collected
from a prior note receivable that had been written off. 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 approximately $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.
Interest income amounted to $27,324 for the fiscal year ended April 30, 1999.
Interest income amounted to $29,792 for the fiscal year ended April 30, 1998, as
compared to $5,662 for fiscal 1997. The increase of $24,130 in fiscal 1998 was
primarily attributable to the addition of notes receivable which were
subsequently written off.
ROYALTIES/LICENSING FEES
Royalties/Licensing fees are variable expenses which increase as sales increase.
In the fiscal years ended April 30, 1999, 1998 and 1997 the Company paid
approximately $0, $0, and $27,628 (or 6% 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 1999 and 1998 the amount of royalties
decreased because there were no sales of licensed products.
PRODUCT DEVELOPMENT COSTS
In fiscal 1999 and 1998, the Company did not incur any product development
costs. In fiscal 1997, the Company incurred $23,484 of development costs.
ADVERTISING COSTS
Advertising costs amounted to $0 for the fiscal years ended April 30, 1999 and
April 30, 1998 as compared to $244,225 for the fiscal year ended April 30, 1997.
The increase in advertising costs for fiscal 1997 was due to the realization of
a contingent obligation that came due.
9
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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, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
Percentage Percentage Percentage
1999 Of Sales 1998 Of Sales 1997 of Sales
---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Salaries, payroll taxes and
Employee benefits................ $432,441 N/A $637,753 N/A $542,101 116.8
Professional fees.................. 142,770 N/A 139,084 N/A 139,157 30.0
Sales commissions................ - 0 - N/A - 0 - N/A 12,344 2.7
Letter of credit charges.......... - 0 - N/A 722 N/A 3,250 0.7
Rent and office expenses........ 32,643 N/A 102,770 N/A 61,838 13.3
Travel and entertainment........ 71,065 N/A 90,412 N/A 130,283 28.1
Insurance.......................... 54,459 N/A 57,263 N/A 71,589 15.4
Other............................... 40,149 N/A 17,865 N/A 27,289 5.9
Consulting fee..................... 143,000 N/A - 0 - N/A - 0 - - 0 -
Stockholder expense............. 12,222 N/A 10,994 N/A 14,059 3.0
Telephone charges............... 14,046 N/A 20,867 N/A 23,787 5.1
Bad debts.......................... - 0 - N/A 275,354 N/A - 0 - - 0 -
------------- --- --------------- --- -------------- -----
942,795 1,353,084 1,025,697 221.0
</TABLE>
For the fiscal year ended April 30, 1999 salaries, payroll taxes and employee
benefits decreased by $205,312 primarily due to the termination of employment of
the Company's Executive Vice President. 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
approximately $291,285 primarily due to a reduction in staff.
Sales commissions for the fiscal year ended April 30, 1997 was $12,344. As a
result of the significant decrease in sales due to the sale of product lines, no
sales commissions were incurred during fiscal 1998 and 1999.
N/A means not applicable.
10
<PAGE>
In fiscal 1999, the Company did not earn a management fee. In fiscal 1998, the
Company earned a management fee of $52,776 as compared to $815,158 for fiscal
1997 which covers the monthly reimbursement of the costs incurred by the Company
in connection with its operations as it relates to supporting the product lines
which were sold. Set forth below are the principal components. Such
reimbursement relates, in part, to salaries , payroll taxes and employee
benefits referred to above .
Rent and office expenses decreased to $32,643 for the fiscal year ended April
30, 1999 from $102,770 and $61,838 for the fiscal years ended April 30, 1998 and
April 30, 1997, respectively. The decrease from fiscal 1998 to fiscal 1999 was
due to the Company's efforts to reduce overhead. The increase from fiscal 1997
to fiscal 1998 was due to the fact that the Company paid certain costs
previously paid by a third party under a management arrangement.
Consulting fees were $143,000 for the fiscal year ended April 30,1999 and 0 for
the fiscal years ended April 30, 1998 and April 30, 1997. These fees were
incurred in order to identify and develop business or merger opportunities
for the Company.
OTHER:
At April 30, 1999 the Company had available carry forward losses to offset
future taxable income of approximately $5,340,000 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 $1,240,196 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 a 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, 1999, owned
179,213 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, 1999, the Company had a cash
equivalent balance of $47,004 as compared to $437,869 at April 30, 1998.
For the fiscal year ended April 30, 1999 the Company used cash from operations
in the amount of $887,980 as compared to $1,449,167 from operations for fiscal
1998. The Company used $1,001,166 as compared to providing $583,021 from its
financing activities for the fiscal years ended April 30, 1999 and 1998,
respectively. The amount in fiscal 1999 resulted from the decrease in
borrowings. The amount in Fiscal 1998 resulted from the increase in borrowings.
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 1% and 3% at April 30, 1999 and 1998, 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.
11
<PAGE>
On October 31, 1995 the Company completed a private placement involving a stock
purchase agreement whereby the Company delivered to eight purchasers an
aggregate of 580,000 shares of the common stock of 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 19,440 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.
12
<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 acquired by
Medical Device Alliance, Inc. and the collateral supporting such notes was
subsequently sold to pay off the obligations.
<TABLE>
<CAPTION>
April 30
--------
1999 1998
---- ----
<S> <C> <C>
Investment in Datatec consists of:
Common Stock:
Number of Shares 179,213 728,318
Cost $191,414 $1,548,107
Fair market value based on current
Price per share of registered Datatec shares $470,434 $4,005,749
</TABLE>
Approximately 40,000 and 349,000 shares of Datatec common stock owned by the
Company were held at April 30, 1999 and April 30, 1998, 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
--------
1999 1998
---- ----
<S> <C> <C>
Current assets $27,564,000 $25,475,000
Noncurrent assets $13,039,000 $14,588,000
Current liabilities $25,267,000 $24,003,000
Long-term obligations $ 607,000 $ 3,342,000
Shareholders' equity (deficit) $14,729,000 $12,718,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
April 30, 1999 April 30, 1998 April 30, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net Sales $93,751,000 $76,804,000 $59,481,000
=========== =========== ============
Net Loss $ (506,000) $(3,986,000) $(5,535,000)
=========== ============ ============
</TABLE>
13
<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 and $815,000 during the fiscal years ended April 30, 1998 and April 30,
1997, respectively. The Company received no fees for the fiscal year ended
April 30, 1999.
14
<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 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. Approximately 60% 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. See Note 2 of Notes to Consolidated Financial Statements
for further information.
15
<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, 2000, as extended during
September 1999.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 1998, 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.
The Year 2000 Issue
A Staff Legal Bulletin issued by the Securities and Exchange Commission's
Division 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not use or hold any derivative financial instruments. The
Company is not exposed to foreign currency or interest rate risk, either of
which could have an adverse effect on the Company's results of operations,
financial position or cash flows. The Company believes that the market risk
associated with its marketable security holdings is not material.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
CONTENTS
Pages
-----
Independent Auditors' Reports 18
Consolidated Financial Statements
Balance Sheets 19 and 20
Statements of Operations 21
Statements of Changes in Stockholders' 22
Equity (Deficit)
Statements of Cash Flows 23 and 24
Notes to Consolidated Financial Statements 25 - 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.
17
<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
637 Wyckoff Avenue, #194
Wyckoff, New Jersey 07481
We have audited the accompanying consolidated balance sheets of Direct Connect
International Inc. and Subsidiary as of April 30, 1999 and 1998 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years ended April 30, 1999,1998 and 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our 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 consoldiated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, 1999 and 1998 and the results
of their operations and their cash flows for the years ended April 30, 1999,
1998 and 1997 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
West Orange, New Jersey
September 10, 1999
18
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
April 30
--------
1999 1998
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 47,004 $ 437,869
Notes receivable, including accrued interest-
Image Technology Inc. 307,827 ---
Note receivable, including accrued interest-
Omnet Corp. 313,463 ---
Investments in Datatec, at cost 191,414 1,548,107
Prepaid expense and other current assets 6,492 50,265
------- ------
Total current assets 866,200 2,036,241
-------- ---------
Property and equipment, at cost
Furniture and fixtures 17,425 7,568
Less: Accumulated depreciation 8,583 7,568
------ -----
8,842 ---
----- -----
Notes receivable, including accrued interest
officers 97,662 99,195
-------- ------
Total assets $972,704 $2,135,436
========= ==========
</TABLE>
See notes to consolidated financial statements and auditors' report.
19
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
April 30
1999 1998
---- ----
<S> <C> <C>
Current liabilities
Accounts payable $339,207 $ 355,647
Accrued expenses and taxes payable 285,005 229,573
Notes payable - officers and stockholders 30,000 ---
Notes payable, including accrued interest-
other 1,210,196 2,241,362
---------- ---------
Total current liabilities 1,864,408 2,826,582
---------- ---------
Total liabilities 1,864,408 2,826,582
---------- ---------
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 5,160,949
Accumulated deficit (6,066,715) (5,866,157)
----------- -----------
Total stockholders' equity (deficit) (891,704) (691,146)
--------- ---------
Total liabilities and stockholders'
Equity (deficit) $972,704 $ 2,135,436
========= ===========
</TABLE>
See notes to consolidated financial statements and auditors' report.
20
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended April 30
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales $ - $ - $ 464,212
------ ------ -----------
Costs and expenses
Cost of goods sold - - 345,222
Royalties/licensing fees - - 27,628
Product development costs - - 23,484
Advertising and promotion - - 244,225
Depreciation 1,015 46,948 28,270
General and administrative expenses 942,795 1,353,084 1,025,697
Less: Management fees - (52,776) (815,158)
-------- ---------- ----------
943,810 1,347,266 879,398
-------- ---------- ----------
Operating (loss) (943,810) (1,347,266) (415,186)
Gain on sale of securities 771,202 1,325,236 2,337,348
Interest income 27,324 29,792 5,662
Other income 60,000 278 -
Loss on advances to Kidsview Inc. - - (72,286)
Loss on write off of investment in Evolutions - - (1,875,000)
Interest expense (115,274) (205,789) (193,464)
--------- --------- -----------
Income (loss) before deferred income taxes (200,558) (197,749) (212,926)
Deferred income taxes - - (809,287)
--------- --------- -----------
Net income (loss) $(200,558) $(197,749) $(1,022,213)
========== ========== ============
Earnings (loss) per common share $ (0.02) $ (0.02) $ (0.11)
========== ========== ============
</TABLE>
See notes to consolidated financial statements and auditors' report.
21
<PAGE>
<TABLE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED APRIL 30, 1997, 1998, AND 1999
<CAPTION>
Capital in Unrealized Total
Preferred Excess of (Accumulated Loss on Stockholders'
Convertible Stock Common Stock Par Value Deficit) Investments Equity(Deficit)
----------------- ------------ ---------- ----------- ----------- ---------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 1,1996 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
stocks 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 - - - - 20,000 - - 20,000
100,000 warrants
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) - (691,146)
---------- ---------- ----------- --------- ----------- ----------- -------- ----------
Net loss - - - - - (200,558) - (200,558)
--------- ---------- ----------- -------- ----------- ----------- -------- ----------
Balance, April 30, 1999 5,000,000 $ 5,000 9,062,066 9,062 $5,160,949 $(6,066,715) - $(891,704)
========= ========== =========== ======= ========== ============ ======== ===========
</TABLE>
See notes to consolidated financial statements and auditors' report.
22
<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
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $(200,558) $(197,749) $(1,022,213)
---------- ---------- ------------
Adjustments to reconcile net income
(loss) to net cash (used in) operating activities:
Depreciation 1,015 46,958 28,270
Deferred income taxes - - 809,287
Gain on sale of Datatec stock (771,202) (2,124,706) (2,337,348)
Loss on Sale of Mark Solutions Stock - 74,469 -
Loss on expiration of warrants - 725,000 -
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
Accounts receivable - 22,857 (2,205)
Prepaid expenses and other current assets 43,773 6,049 12,761
Security deposits - 700 -
Increase (decrease) in liabilities
Accounts payable (16,440) (179,254) (388,611)
Accrued expenses and taxes payable 55,432 144,009 35,739
------- -------- ---------
Total adjustments (687,422) (1,251,418) 105,179
--------- ----------- ---------
Net cash (used in) operating activities (887,980) (1,449,167) (917,034)
--------- ----------- ---------
Cash flows from investing activities
Notes receivable - officers, increases (10,467) (8,791) (14,379)
Notes receivable - officers, decreases 12,000 - 35,330
Proceeds from sale of Datatec stock 2,127,950 3,102,346 2,754,104
Acquisition of Datatec stock - (1,856,352) -
Proceeds from sale of Mark Solutions stock - 33,873 -
Investment in Evolutions - - (1,800,000)
Notes receivable Image Tech Inc.-increases (307,827) - -
Notes receivable Omnet Corp-increases (313,463) - -
Decrease in due from Kidsview, Inc. - - 121,831
Acquisition of property and equipment (9,857) - -
---------- ----------- -----------
Net cash provided by investing activities 1,498,281 1,271,076 1,096,886
---------- ----------- -----------
</TABLE>
See notes to consolidated financial statements and auditors' report.
23
<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
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Notes payable-officers and stockholders, increases 50,300 - 41,964
Notes payable-officers and stockholders, decreases (20,300) (253,680) (250,000)
Notes payable-other, increases 364,099 887,705 120,032
Notes payable-other, decreases (1,395,265) (51,004) (126,795)
----------- --------- ---------
Net cash provided by (used in) financing activities (1,001,166) 583,021 (214,799)
----------- --------- ---------
Net Increase (decrease) in cash and cash equivalents (390,865) 404,930 (34,947)
Cash and cash equivalents, beginning of year 437,869 32,939 67,886
----------- --------- ---------
Cash and cash equivalents, end of year $ 47,004 $437,869 $ 32,939
=========== ========= =========
Supplemental disclosure of cash flows information:
Cash paid during the year for interest $237,344 $205,789 $ 21,045
=========== ========= =========
Schedule of non-cash 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)
</TABLE>
As an inducement for loan extensions and loan agreements, the Company paid
financing fees by delivering 28,571 shares of Datatec common stock having a cost
basis of $27,618 during the year ended April 30, 1997.
See notes 2 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 and auditors' report.
24
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
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, 1999 consolidated balance sheet reflects a
working capital deficiency of $998,208 and the consolidated statement
of operations for the year ended April 30, 1999 reflects a loss from
operations of $943,810. During the twelve months ending April 30, 2000,
the Company in addition to meeting its operating needs will have notes
payable,as discussed below, in the amount of $1,240,196 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 during the twelve months ending
April 30,2000 from one principal source which is the sale of Datatec
common stock. The Company owns 179,213 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. At April 30, 1999,
the Company had no bank account balances in excess of federally insured
limits. Uninsured cash in a brokerage account totals approximately
$50,000 at April 30, 1999.
(d) Accounts Receivable
An allowance for doubtful accounts is established based on management's
expectation of uncollectables. As of April 30,1999 and 1998, an
allowance for doubtful accounts was not deemed necessary.
(e) 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.
25
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
Note 1 - Continued
(f) 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.
Deferred income tax assets are reduced by a valuation allowance due to
uncertainties concerning their realization. (See Note 4).
(g) 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 during the years ended April 30, 1999, 1998 and
1997.
(h) 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.
26
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
Note 2 -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.
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 1 % and 3 % at April 30, 1999
and 1998, respectively). Sellectek's corporate name was changed to
Glasgal Communications, Inc. and subsequently 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 were
collateralized 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.
27
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
Note 2 - Continued
During the years ended April 30, 1999 and 1998, Datatec common stock
held by the Company was as follows:
<TABLE>
<CAPTION>
April 30,
----------
1999 1998
---- ----
<S> <C> <C>
Investment in Datatec consists of:
Common Stock:
Number of shares 179,213 728,318
Cost $191,414 $1,548,107
Fair market value based on current
price per share of registered Datatec
shares. $470,434 $4,005,749
</TABLE>
Approximately 40,000 and 349,000 shares of Datatec common stock owned
by the Company at April 30, 1999 and April 30, 1998, respectively, were
held by noteholders as collateral. Such shares are subject to certain
restrictions regarding transferability and sale.
228,571 shares of Datatec common stock owned by the Company at April
30, 1998 were held by a noteholder as collateral for a loan
approximating $1,600,000. The collateral was sold by such noteholder
during the year ended April 30, 1999, and the proceeds from such sale
amounted to approximately $976,000 and were used to reduce the
outstanding balance of such notes to approximately $624,000.
Summary financial information (unaudited)of Datatec as presented in its
consolidated financial statements are as follows:
<TABLE>
<CAPTION>
April 30,
----------
1999 1998
---- ----
<S> <C> <C>
Current assets $27,564,000 $25,025,000
Noncurrent assets 13,039,000 12,788,000
Current liabilities 25,267,000 24,003,000
Long-term obligations 607,000 3,342,000
Shareholders' equity 14,729,000 10,468,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
April 30 April 30, April 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Sales $93,751,000 $76,084,000 $59,481,000
=========== =========== ===========
Net Loss $ (506,000) $(3,986,000) $(5,535,000)
=========== ============ ============
</TABLE>
28
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
Note 3 - Notes Receivable
(a) Notes Receivable - Image Technology, Inc.
In November and December 1998 the Company, in contemplation of a
proposed merger, which was not consummated, advanced $300,000 to Image
Technology, Inc., $250,000 of which was evidenced by promissory notes
bearing interest at the rate of 6 1/2 % per annum. The notes are
currently due.
(b) Notes Receivable - Omnet Corp.
In August 1998, the Company in contemplation of a proposed merger,
which was not consummated, advanced $300,000 to Omnet Corp. evidenced
by a promissory note, bearing interest at the rate of 61/2%. The note
is due on August 20, 1999. The Company received principal payments
aggregating $150,000 during August 1999.
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.
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, 1999
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 860,000
2010 1,090,000
2011 630,000
2012 580,000
----------
$5,340,000
==========
The deferred income tax asset as of April 30, 1999 and April 30, 1998
was reduced to zero by a valuation allowance due to uncertainties
concerning their realization at those dates.
The deferred income tax asset consists of the following:
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------
1999 1998
---- ----
<S> <C> <C>
Net operating loss $ 2,136,000 $ 1,904,000
Valuation allowance $(2,136,000) $(1,904,000)
------------ ------------
$ - $ -
============ =============
</TABLE>
The following is a reconciliation of the federal income tax rate to the
actual effective income tax rate as a percentage of pretax income:
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income
tax rate 34.0% 34.0% 34.0%
State and local income taxes,
net of federal tax benefit 6.0 6.0 6.0
------- ------- ------
40.0 40.0 40.0
Less: change in deferred income tax
valuation allowance (40.0) (40.0) 340.1
------- ------- ------
0% 0% 380.1%
======= ======= ======
</TABLE>
30
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
Note 6 - Notes Payable - Officers and Shareholders
During the year ended April 30, 1999 the chairman of the board of the
company advanced $50,300 to the Company of which $20,300 was repaid.
This obligation is unsecured and payable upon demand. No interest
has been accrued on this obligation as of April 30, 1999.
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 which expired in November 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,
---------
1999 1998
---- ----
$ 953,628 $2,196,346
(b) The Company is obligated under a 7% note payable, including accrued
interest, to pay $256,568 to Mark Solutions, Inc. The note is due in
October 1999. Mark Solutions is holding as collateral a security
interest in the notes receivable from Image Technology, Inc. amounting
to $307,827, including interest.
256,568 -
(c) Financing relating to insurance costs bear interest at rates ranging
from 8.17% to 9.5% per annum.
- 45,016
--------- ---------
1,210,196 2,241,362
Less: Current Maturities 1,210,196 2,241,362
--------- ---------
$ - $ -
========= ==========
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 30,1999
Note 8 - Stockholders' Equity
During the years ended April 30, 1999 and 1998, the Company had
6,488,517 outstanding Redeemable Class A Warrants, expiring on
September 30, 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 September 30, 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 initial 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 warrant expired on November 23, 1998. For financial
reporting purposes, no value has been assigned to this transaction.
During 1996, in consideration of an adjustment to outstanding
indebtedness to a law firm for services rendered, such firm agreed to
accept 320,000 shares of the Company's common stock having a value of
$24,000 at the date of the adjustment. The 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, 1999,
the Company's obligation under this line of credit amounted to
approximately $94,370. This obligation is included under notes payable,
other and as secured by 40,000 shares of Datatec common stock owned by
the Company. In consideration of the holder's forbearance for an
initial thirty day period to seek payment of the Note or to sell the
32
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30,1999
Note 8 - Continued
Collateral, the Company has agreed to pay in addition to the required
interest payments, an amount in cash equal to 10% of any increase in
the market price of Datatec common stock in excess of $2.75 multiplied
by the number of shares comprising the Collateral at the time of
repayment of the Note. The Company has also agreed to pay an additional
1% of any such increase for each 30 day period or portion thereof after
the initial 30 day period. The Company has also agreed to issue and
deliver warrants in the surviving entity in connection with any
business combination involving the Company. The holder can terminate
the agreement at any time after August 20, 1999.
During fiscal 1999 and 1998 the President of the Company provided
office space to the Company. The charge for 1999 was $12,000 and
was credited to Notes receivable-officers. For fiscal 1998 the space
was provided at no charge. The value assigned to such 1998 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, 1997 and 1998 and 1999
Outstanding at May 1, 1996,
1997 and 1998 452,809 $ .19 to $1.16 $206,995
Granted - - -
Terminated - - -
Exercised - - -
-------- --------
Outstanding at April 30, 1997,
1998 and 1999 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.
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, 1996,
1997 and 1998 1,000,000 $ .63 to $ .69 $657,700
Granted - - -
Terminated - - -
Exercised - - -
--------- --------
Outstanding at April 30, 1997,
1998 and 1999 1,000,000 $ .63 to $ .69 $657,700
========= ========
Exercisable - - -
========= ========
33
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
Note 9 - continued
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, 1999, 1998 and 1997 the Company
purchased products totaling approximately $0, $0, and $305,000,
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, 1999, 1998 and 1997 the Company
incurred product development expenses of approximately $0, $ 0, and
$24,000, respectively, payable to this corporation.
During the fiscal year ended April 30, 1999, the Company incurred
consulting fees totaling $143,000 in connection with activities taken
on its behalf by its Chairman to develop new business or merger
opportunities. In addition, during the year ended April 30, 1999, the
Chairman also advanced $50,300 to the Company of which $20,300 was
repaid prior to April 30, 1999.
During each of the years ended April 30, 1999, 1998 and 1997, the
Company paid approximately $72,000 to an officer for legal services
rendered.
As of April 30, 1999 and April 30, 1998 the Company held 8% notes
receivable from certain officers aggregating approximately $97,600,
and $99,000, respectively, including interest. Interest income for the
years ended April 30, 1999, 1998, and 1997 on officers' loans totaled
approximately $6,700, $4,900, and $6,000, respectively.
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, 1999, 1998, and 1997 approximately 0, 0
and 77%, respectively, of sales were the licensed products, Little
Sleepy Eyes and Lamb Chop.
34
<PAGE>
DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
Note 11 - continued
(b) Major Customers
The Company had sales to major customers during the years ended April
30, 1999, 1998, and 1997 as follows:
% of Total Sales
Year Ended Number of Attributable to
April 30 Major Customers Major Customers
-------- --------------- ---------------
1999 0 0
1998 0 0
1997 2 86
Note 12 - Subsequent Events
(a) In June 1998, the Company's subsidiary, Amerawell Products, Limited
(Amerawell) commenced a lawsuit in the Superior Court of New Jersey
against Toys R Us (TRU) for products shipped and delivered to TRU
amounting to approximately $185,000, which has not been paid. TRU has
answered the complaint, denying liability. TRU, in the same proceeding,
named the Company as a third party defendant alleging, among other
things, that the Company breached its contract with TRU regarding
advertising such products and that the Company because of its
relationship to Amerawell or as a result of its own conduct was liable
for all the damages suffered by TRU allegedly amounting to
approximately $250,000. The Company's management believes that the
Company has a meritorious defense.
In December 1998 the Company was also served with a complaint through
its designated agent in Delaware by Chieftain LLC, a California limited
liability corporation, and Leonard Mahowa in connection with a lawsuit
brought in the State of California. The complaint was primarily
directed against Medical Device Alliance, Inc. (MDA) a Nevada
corporation engaged in the business of marketing, selling and leasing
an ultrasonic liposuction system. The case generally involves the
issuance of securities by MDA in a private placement. The Company is a
named defendant for alleged conspiracy to defraud, conspiracy to divert
assets and for undetermined damages for alleged ultra vires
transactions which allegedly arose out of MDA's purchase of stock and
notes from the Company's preferred stockholders and noteholders in the
aggregate amount, at September 10, 1999, of approximately $2,475,000.
The Company believes that such allegations are without merit and has
retained California counsel to defend it in this matter.
(b) From May 1, 1999 through September 10, 1999, the Company sold 70,000
shares of Datatec stock for an aggregate sales price of $218,822. The
proceeds from such sales were used to fund the Company's operating
activities.
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, 1999.
NAME AGE POSITION
---- --- --------
Joseph M. Salvani 42 Chairman of the Board and
Principal Executive Officer
Peter L. Schneider 47 President and Director
Barry A. Rosner 56 Vice President, Treasurer,
Director and Principal
Financial Officer
Y.S. Ling 54 Executive Vice President,
International Operations
William B. Rodman 60 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 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
devotes approximately 65% of his time to the Company's affairs.
36
<PAGE>
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 Company's affairs.
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.
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.
37
<PAGE>
During the fiscal year ended April 30, 1999, the Board of Directors of the
Company held three meetings. No member of the Board of Directors attended fewer
than 75% of the meetings of the Board in the fiscal year ended April 30, 1999.
There is no Executive Committee or Audit Committee. The Board as a whole serves
as a Nominating Committee, Compensation Committee and Stock Option Committee.
Directors receive no compensation for serving in such capacity.
ITEM 11. EXECUTIVE COMPENSATION
The Company's Board of Directors does not have a Compensation Committee. The
Company's three directors 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 1999 and determined that, in its opinion, the
compensation of such officers was reasonable.
The only officer or director who received aggregate remuneration in excess of
$60,000 during the fiscal year ended April 30, 1999 was Peter Schneider, who
received $188,333. The total aggregate remuneration received during such period
by all of the officers and directors as a group was $230,333. Other non-cash
compensation such as the use of an automobile provided by the Company and
payment of premiums for insurance for the benefit of Mr.Schneider did not exceed
10% of the cash compensation paid to Mr.Schneider or to all executive officers
as a group.
Other than as described below, the Company has no pension or profit-sharing plan
or other contingent forms of remuneration. No employee has a written employment
agreement at April 30, 1999.
38
<PAGE>
The following table summarizes compensation paid by the Company for services
rendered during 1999, 1998, and 1997 by the Principal Executive Officer and all
other compensated executives of the Company (collectively, together with the
Principal Executive Officer, the "Executive Officers") other than the Principal
Executive Officer.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payments
------ --------
Securities
Restricted Underlying
Other Annual Stock Options/ All
Name and Principal Position Year Salary($) Bonus($) Compensation($) Awards($) SARS($) LTIP($) Other(s)
- --------------------------- ---- -------- -------- --------------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph M. Salvani 1999 - - - - - - -
Chairman of the
Board and Principal
Executive Officer 1998 - - - - - - -
1997 - - - - - - -
Peter L. Schneider 1999 188,333 - - - - - -
President and
Director
1998 200,000 - - - - - -
1997 179,334 - - - - - -
Y.S. Ling 1999 - - - - - - -
Executive Vice President
1998 - - - - - - -
1997 - - - - - - -
</TABLE>
- --------------------------------
For information regarding Stock Options, see following tables.
OPTIONS GRANTED IN LAST FISCAL YEAR
There were no stock options granted to the executive officers during the fiscal
year ended April 30, 1999.
39
<PAGE>
The following table sets forth information with respect to Executive Officers
concerning unexercised options held as of the fiscal year ended April 30, 1999.
None of the Executive Officers exercised options during the fiscal year ended
April 30, 1999. No options were repriced during the fiscal year ended April 30,
1999.
<TABLE>
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1999
AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options at
Options at Fiscal Year End Fiscal Year End
-------------------------- ---------------
Shares
Name Exercised(#) Value Realized($) 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
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 ratification.
</FN>
</TABLE>
LONG TERM INCENTIVE PLANS-AWARDS IN FISCAL YEAR 1999
There were no long term incentive plans-awards granted to the Executive Officers
during the fiscal year ended April 30, 1999.
40
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At September 20, 1999, the directors and officers of the Company and their
affiliates owned 2,680,068 shares of Common Stock representing approximately
30% of the issued and outstanding shares of Common Stock.
The following table sets forth, as of September 20, 1999, 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 2,680,068 shs.(7) 30%
as a Group (6 Persons)
Convertible Medical Device Alliance, Inc. 3,000,000 shs.(8) 60%
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
637 Wyckoff Avenue #194 Wyckoff, NJ 07481.
(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 options to purchase 55,000 shares of Common Stock
which became exercisable in May 1993.
(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 363,890 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, and which, after giving effect to
the receipt of proceeds from the sale of collateral, amounted to
approximately $673,000 at September 20,1999.See "Certain Relationships
and Related Transactions."
41
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended April 30, 1999, 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 1998 and 1997, there were purchases totaling
approximately $0, and $305,000, respectively. During the fiscal years ended
April 30, 1999, 1998 and 1997, the Company incurred product development expenses
of approximately $0, $18,000, and $24,000, 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, was $97,652.81 at April 30, 1999.
At April 30, 1996, Howard Peretz, a former 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 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, 1999, the Company's obligation under this line of credit
amounted to approximately $94,375.00. Such obligation is secured by 40,000
shares of Datatec common stock owned by the Company. In consideration of such
holder's forbearance for an initial thirty day period to seek payment of the
Note or to sell the collateral, the Company has agreed to pay her, in addition
to the required interest payments, an amount in cash equal to 10% of any
increase in the market price of Datatec common stock in excess of $2.75
multiplied by the number of shares comprising the collateral at the time of
repayment of the Note. The Company has also agreed to pay such holder an
additional 1% of any such increase for each thirty day period or portion thereof
after the initial thirty day period. The Company has also agreed to issue and
deliver to such holder warrants in the surviving entity in connection with any
business combination involving the Company. Such holder can terminate the
agreement at any time after August 20, 1999.
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. Currently, the Company is not considering making any such loans.
The Company paid Mr.Rodman for professional services rendered $68,000 for fiscal
year 1999 and $72,000 for the fiscal years ended April 30, 1998 and 1997.
42
<PAGE>
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, 1999 such loans, after giving effect to partial repayments,
amounted to $0. Such notes, which are past due, were acquired by MDA and the
collateral for such loans consisting of 228,571 shares of Datatec common stock
owned by the Company and pledged to MDA were sold by MDA and the proceeds from
such sale amounting to approximately $976,000 were used to reduce the
outstanding and past due notes purchased by MDA from various noteholders. For
information regarding the holdings of such company of the Company's Convertible
Preferred Stock see "Security Ownership of Certain Beneficial Owners and
Management."
43
<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)
*10.1 - 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)
*10.2 - 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)
*10.3 -Agreement and Plan of Merger and Reorganization, dated as of November 30,
1998, by and among the Company, Image Technology Corp. and Image Acquisition
Corp. (filed as an exhibit to Form 8-K, dated December 1, 1998)
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
Form 8-K, dated June 15, 1999, regarding the nonpayment of payroll taxes.
44
<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 30th day of September 1999.
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 September 30, 1999
Principal Executive Officer
Peter L. Schneider President and Director September 30, 1999
Barry A. Rosner Vice President-Finance, September 30, 1999
Treasurer and Principal
Financial and Accounting
Officer and Director
Joseph M. Salvani
Peter L. Schneider All of the Directors September 30, 1999
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
45
<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, 1999, of our Report, dated September 10, 1999, in
connection with our audit of the Financial Statements of Direct Connect
International Inc. and Subsidiary as of April 30, 1999 and 1998 and for the
years ended April 30, 1999, 1998 and 1997.
/s/ Bederson & Company LLP
West Orange, New Jersey
September 10, 1999
<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 30th day of September 1999.
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
<CASH> 47,004
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 866,200
<PP&E> 17,425
<DEPRECIATION> 8,583
<TOTAL-ASSETS> 972,704
<CURRENT-LIABILITIES> 1,864,408
<BONDS> 0
0
5,000
<COMMON> 9,062
<OTHER-SE> (905,766)
<TOTAL-LIABILITY-AND-EQUITY> 972,074
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 943,810
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,272
<INCOME-PRETAX> (200,558)
<INCOME-TAX> 0
<INCOME-CONTINUING> (200,558)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (200,558)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
