-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F1uoSz/ISBrCnUxqmm92rCqpk9Zj6maPK3zQy2B9l+TUnJUoe1cNa/vNTa8X+Dta +qZADndnxbySbQd8oU4kUg== 0000840815-99-000004.txt : 19991018 0000840815-99-000004.hdr.sgml : 19991018 ACCESSION NUMBER: 0000840815-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19991001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIRECT CONNECT INTERNATIONAL INC CENTRAL INDEX KEY: 0000840815 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 222705223 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18288 FILM NUMBER: 99721514 BUSINESS ADDRESS: STREET 1: 637 WYCKOFF STREET 2: SUITE 194 CITY: WYCKOFF STATE: NJ ZIP: 07481 BUSINESS PHONE: 2014452101 MAIL ADDRESS: STREET 1: 266 HARRISTOWN RD STREET 2: SUITE 108 CITY: GLEN ROCK STATE: NJ ZIP: 07452 10-K 1 FORM 10-K ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Fiscal Year Ended April 30, 1999 OR Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the transition period from to --- --- Commission File Number 0-18288 DIRECT CONNECT INTERNATIONAL INC. --------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 22-2705223 ------------------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) I.D. No.) 637 Wyckoff Ave. #194, Wyckoff, New Jersey 07481 ------------------------------------------ ----- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (201) 445-2101 -------------- --- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units consisting of shares of Common Stock and Class A Warrants, Common Stock, par value $.001 per share, Class A Warrants and Class B Warrants. ---------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X N0 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K{}. --- As of 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 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 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 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 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 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 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 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 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 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. Balance Sheet Information - -------------------------
Fiscal year Ended April 30 -------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- 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
8 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 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.
Percentage Percentage Percentage 1999 Of Sales 1998 Of Sales 1997 of Sales ---- -------- ---- -------- ---- -------- 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
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 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 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 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.
April 30 -------- 1999 1998 ---- ---- 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
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:
April 30 -------- 1999 1998 ---- ---- 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
Year Ended Year Ended Year Ended April 30, 1999 April 30, 1998 April 30, 1997 -------------- -------------- -------------- Net Sales $93,751,000 $76,804,000 $59,481,000 =========== =========== ============ Net Loss $ (506,000) $(3,986,000) $(5,535,000) =========== ============ ============
13 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 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 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 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 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 DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
ASSETS April 30 -------- 1999 1998 ---- ---- 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 ========= ==========
See notes to consolidated financial statements and auditors' report. 19 DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) April 30 1999 1998 ---- ---- 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 ========= ===========
See notes to consolidated financial statements and auditors' report. 20 DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended April 30 ------------------- 1999 1998 1997 ---- ---- ---- 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) ========== ========== ============
See notes to consolidated financial statements and auditors' report. 21 DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED APRIL 30, 1997, 1998, AND 1999
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 ------ ------ ------ ------ 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) ========= ========== =========== ======= ========== ============ ======== ===========
See notes to consolidated financial statements and auditors' report. 22 DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
Year Ended April 30 ------------------- 1999 1998 1997 ---- ---- ---- 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 ---------- ----------- -----------
See notes to consolidated financial statements and auditors' report. 23 DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Increase (Decrease) in Cash and Cash Equivalents
Year Ended April 30 ------------------- 1999 1998 1997 ---- ---- ---- 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)
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 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 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 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 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:
April 30, ---------- 1999 1998 ---- ---- 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
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:
April 30, ---------- 1999 1998 ---- ---- 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
Year Ended Year Ended Year Ended April 30 April 30, April 30, 1999 1998 1997 ---- ---- ---- Net Sales $93,751,000 $76,084,000 $59,481,000 =========== =========== =========== Net Loss $ (506,000) $(3,986,000) $(5,535,000) =========== ============ ============
28 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 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:
Year Ended April 30, -------------------- 1999 1998 ---- ---- Net operating loss $ 2,136,000 $ 1,904,000 Valuation allowance $(2,136,000) $(1,904,000) ------------ ------------ $ - $ - ============ =============
The following is a reconciliation of the federal income tax rate to the actual effective income tax rate as a percentage of pretax income:
Year Ended April 30, -------------------- 1999 1998 1997 ---- ---- ---- 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% ======= ======= ======
30 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 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 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 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 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 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 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 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 $230,333. Other non-cash compensation such as the use of an automobile provided by the Company and payment of premiums for insurance for the benefit of Mr.Schneider did not exceed 10% of the cash compensation paid to Mr.Schneider or to all executive officers as a group. Other than as described below, the Company has no pension or profit-sharing plan or other contingent forms of remuneration. No employee has a written employment agreement at April 30, 1999. 38 The following table summarizes compensation paid by the Company for services rendered during 1999, 1998, and 1997 by the Principal Executive Officer and all other compensated executives of the Company (collectively, together with the Principal Executive Officer, the "Executive Officers") other than the Principal Executive Officer.
SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation ------------------- ---------------------- Awards Payments ------ -------- Securities Restricted Underlying Other Annual Stock Options/ All Name and Principal Position Year Salary($) Bonus($) Compensation($) Awards($) SARS($) LTIP($) Other(s) - --------------------------- ---- -------- -------- --------------- --------- ------- ------- -------- Joseph M. Salvani 1999 - - - - - - - Chairman of the Board and Principal Executive Officer 1998 - - - - - - - 1997 - - - - - - - Peter L. Schneider 1999 188,333 - - - - - - President and Director 1998 200,000 - - - - - - 1997 179,334 - - - - - - Y.S. Ling 1999 - - - - - - - Executive Vice President 1998 - - - - - - - 1997 - - - - - - -
- -------------------------------- For information regarding Stock Options, see following tables. OPTIONS GRANTED IN LAST FISCAL YEAR There were no stock options granted to the executive officers during the fiscal year ended April 30, 1999. 39 The following table sets forth information with respect to Executive Officers concerning unexercised options held as of the fiscal year ended April 30, 1999. None of the Executive Officers exercised options during the fiscal year ended April 30, 1999. No options were repriced during the fiscal year ended April 30, 1999. AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1999 AND FISCAL YEAR-END OPTION VALUES
Value of Unexercised Number of Unexercised In-the-Money Options at Options at Fiscal Year End Fiscal Year End -------------------------- --------------- Shares Name Exercised(#) Value Realized($) Exercisable Unexercisable* Exercisable Unexercisable* ---- ------------ ----------------- ----------- ------------- ----------- ------------- 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 * Granted subject to stockholder ratification.
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 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.
Title Name and Address of Amount and Nature Percent of Class Beneficial Owner(1) of Beneficial Of - -------- ------------------- Ownership(2) Class ------------ ----- 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)
(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 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 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 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 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 EX-23 2 CONSENT OF INDEPENDENT AUDITORS 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 EX-24 3 POWER OF ATTORNEY 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 EX-27 4 FDS -- YEAR ENDING 04/30/99
5 1 12-MOS APR-30-1999 MAY-01-1998 APR-30-1999 47,004 0 0 0 0 866,200 17,425 8,583 972,704 1,864,408 0 0 5,000 9,062 (905,766) 972,074 0 0 0 943,810 0 0 115,272 (200,558) 0 (200,558) 0 0 0 (200,558) (0.02) (0.02)
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