SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 1998
Commission File Number: 2-96976-D
DCI TELECOMMUNICATIONS, INC.
-------------------------------
(Exact name of Registrant as specified in its charter)
Colorado 84-1155041
- ------------------------------- ----------------------------
(State or other Jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
611 Access Road, Stratford, Connecticut 06615
-------------------------------------------------
(Address of principle executive offices, including zip code)
Registrant's telephone number, including area code: (203) 380-0910
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.0001 par value)
Indicate by check mark whether the company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
The aggregate market value of voting stock held by nonaffiliates of the
Company was approximately $36,869,000 as of June 11, 1998.
19,770,793
(Number of shares of Common Stock outstanding as of June 11, 1998)
PART I
ITEM 1 - BUSINESS
General
- -------
DCI Telecommunications, Inc. (the Company) was originally incorporated on
February 4, 1985, as ALFAB, Inc., and subsequently became Fantastic Foods
International, Inc. (Fantastic Foods) after a reorganization in 1991. The
shareholders of Fantastic Foods International, Inc., at a shareholders
meeting on December 30, 1994, approved the acquisition of the assets of Sigma
Telecommunications, Inc. in a stock for asset purchase. Concurrent with the
merger, the name was changed to DCI Telecommunications, Inc.
On January 5, 1995, the Board of Directors approved the acquisition of
certain assets of Sigma Industries, Inc. (Alpha Products) in a stock-for-
asset purchase, with DCI exchanging 850,000 common shares valued at $672,400
for the assets of Alpha Products, Inc., which totaled $672,400. The above
acquisitions were accounted for using the purchase method of accounting.
On June 19, 1995, DCI entered into an agreement to acquire the common stock
of R&D Scientific Corp. (R&D), a New Jersey Corporation that develops
computer software programs. The Company's previously issued financial
statements included the operations of R&D from June 19, 1995, the date of the
purchase and sale agreement. The accompanying financial statements do not
include any results from R&D, as the Company and R&D terminated the purchase
and sale agreement in the year ended March 31,1998.
On November 26, 1996, DCI entered into a stock purchase agreement with Muller
Media, Inc. (Muller), a New York corporation that distributes syndicated
programming and motion pictures to the television and cable industry. The
Company's financial statements include the operations of Muller from November
26, 1996, the date of the stock purchase agreement. The financial statements
do not include any adjustments that might relate to the method of payment, or
non payment, upon exercise of the option described in Note 3.
In the year ended March 31,1997, the Company acquired The Travel Sources
Ltd., a travel agency, and the assets of Paul Bettencourt Associates (PEL), a
value-added marketing card company. (see Note 3)
In the year ended March 31, 1998, the Company acquired CardCall International
Holdings, Inc., which is primarily in the prepaid phone card business. It
also established DCI UK, a company providing long distance telecommunications
in Europe, and acquired CyberFax Inc., a Canadian company providing real-time
fax capability over the Internet.
Subsequent Events
- -----------------
The former shareholders of Muller completed the exercise of put options as
described in Note 3. DCI repurchased 800,000 shares of common stock from the
former shareholders of Muller on June 9, 1998 for $2,000,000.
On April 30, 1998, DCI, entered into an agreement with Edge Communications
Inc. (Edge) to purchase all of Edge's outstanding common stock for 4,385,715
shares of DCI stock.
In April, 1998 the Company issued $3,000,000 of Series F 8% non -voting
convertible preferred shares . The shares are convertible to common stock 90
days from the issue date at the lesser of 75% of the average closing bid
price of the common stock for the ten days prior to conversion or $4. The
securities must be converted into common shares within two years of the issue
date. In connection with this offering 50,000 warrants exercisable at $1.56
for a period of five years from the issue date were granted to these
preferred shareholders and 50,000 warrants, at the same terms, were granted
to certain individuals as finder fees for the placement of the preferred
shares with investors.
Business Activity
- -----------------
DCI Telecommunications, Inc. (the "Company") is engaged through its operating
subsidiaries in long distance telecommunications, prepaid phone cards,
media distribution, travel agency, and Internet related products and
services.
The Company through DCI UK Limited, a London based company, is involved in
providing long distance telephone service to businesses and individuals
through a private leased line network being established throughout Europe
where deregulation in the telecommunications industry is just now being
implemented. A leased line network from one country to another is one of the
least expensive methods for a small company to gain entry into the long
distance business. The Company currently owns switches in the UK, Denmark,
Spain and Canada.
CardCall International Holdings, Inc. (and its subsidiary CardCaller Canada),
also acquired by the Company, develops and markets standard prepaid phone
cards as well as voice-activated prepaid phone cards through an extensive and
growing distribution network for its products and services throughout Canada.
A prepaid phone card permits the holder of the card to place long distance
and international calls from any touch-tone phone, eliminating the need for
coins and collect calls. The card user, who has prepaid for telephone
minutes, simply dials an 800 number which connects the user to one of the
Company's switching facilities. The caller is then prompted for his or her
personal identification number (PIN) and destination phone number. The call
is then routed through the Company's switch to the ultimate destination via a
long distance carrier. The phone cards are sold through national
distributors in Canada with 3,000 distribution points.
Travel Source operates a travel agency.
Muller Media is engaged in the business of purchasing, selling, distributing,
licensing and otherwise dealing in the acquisition and transfer of motion
picture and other entertainment media principally to major television and
cable networks.
The Company's corporate strategy takes into consideration opportunities the
Internet may provide in the telecommunications area. In this regard, the
Company acquired Cyberfax, Inc. which immediately gives the Company a
product which integrates a communication tool used world-wide with the
Internet. Cyberfax software and hardware allows fax to fax transmission
over the Internet in real-time (not store and forward) with delays which
are virtually nil and with standard confirmation protocols. These products
will be marketed by various Internet Service Providers (ISP's) and
telephone companies throughout the world.
The Company's growth plan is based on internal product development supported
by strategic acquisitions and joint ventures in the telecommunications
area which will immediately and significantly enhance its product offerings,
distribution channels, market penetration and earnings.
Employees
- ----------
The Company has 43 employees.
Competition
- -----------
The Company has numerous competitors, many with substantially more resources
than the Company. Management believes that no single competitor, however,
has a dominant market position. Management believes that the Company is able
to compete successfully on the basis of product efficiency, reliability, and
service to customers.
Major Customers
- ---------------
Four customers accounted for approximately 49% of Muller Media sales in 1998
and 59% in 1997.
ITEM 2 - PROPERTIES
The Company presently has an operating lease agreement for approximately
3,200 square feet of office space in Stratford, Connecticut for its
corporate headquarters. Other leased office space includes 1,000 square feet
for Travel Source in Kingston, Rhode Island, 800 square feet for Muller
Media in New York City, 800 square feet in each of its UK, Denmark and
Spanish facilities and 2,400 square feet in Canada. All properties are
considered in good condition.
ITEM 3 - LEGAL PROCEEDINGS
See Notes to Financial Statements
ITEM 4 - SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is traded in the over-the-counter market on
NASDAQ's electronic bulletin board. Its symbol is "DCTC".
The quotations set forth represent prices between dealers and do not include
retail markups, markdowns or commissions and do not necessarily represent
actual transactions. These quotations were obtained from the National
Association of Securities Dealers.
1998 HIGH LOW
---- ----- ------
First quarter ended
June 30, 1997 $4.00 $ 1.38
Second quarter ended
September 30, 1997 $3.38 $ 1.50
Third quarter ended
December 31, 1997 $4.63 $ 1.72
Fourth quarter ended
March 31, 1998 $2.50 $ 1.56
1997 HIGH LOW
---- ---- ------
First quarter ended
June 30, 1996 $ 1.31 $ .13
Second quarter ended
September 30, 1996 $ 3.81 $ .84
Third quarter ended
December 31, 1996 $ 2.63 $1.00
Fourth quarter ended
March 31, 1997 $ 5.50 $1.56
As of June 11, 1998 there were approximately 2,300 recorded holders of the
Company's stock.
The Company has paid modest cash dividends on its Common Stock in the last
two quarters. Holders of Common Stock are entitled to receive such dividends
as may be declared and paid from time to time by the Board of Directors out
of funds legally available therefore. The Company intends to retain most of
its earnings for the operation and expansion of its business. Any future
determination as to the payment of cash dividends will depend upon future
earnings, results of operations, capital requirements, the Company's
financial condition and such other factors as the Company's Board of
Directors may consider.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Selected Financial Data
- -----------------------
The following table sets forth selected consolidated financial data of the
Company for the years ended March 31, 1994 through 1998.
STATEMENT OF OPERATIONS DATA (a)
Years Ended March 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net sales and
other revenue $8,117,127 $ 1,939,891 $1,297,766 $ 110,385 --
Gross profit 1,502,910 525,181 250,068 63,728 --
(Loss) from
continuing
operations (2,609,274) (24,508) (740,885) (1,095,485) (103,699)
(Loss) from
discontinued
operations (637,512) (122,039) -- -- --
Gain on disposal
of discontinued
operations 4,185,179 -- -- -- --
Net Income (loss) per share:
Continuing operations (.30) (.01) (.40) (1.95) (1.30)
Discontinued operations (.06) (.03) -- -- --
Disposal of
discontinued
operations .38 -- -- -- --
BALANCE SHEET DATA
Working capital $4,263,468 $1,734,426 ($293,431) ($247,357) ($399,369)
Total assets 21,671,073 9,091,681 814,527 3,364,196 1,670
Long-term debt 35,175 14,016 -- -- --
Redeemable
preferred stock 610,050 1,500,000 -- -- --
Stockholders'
equity 11,151,165 4,385,764 219,881 2,842,060 (397,769)
Cash dividends
per shares .01 - -- -- --
(a) Includes the results of purchased businesses from acquisition dates,
except for Travel Source which was treated as a pooling of interest. (Data
for Travel Source not available 1994-1995).
(b) Adjusted to reflect a one for twenty reverse stock split effected January
25, 1995, a forty for one split effected March 7, 1996 and a one for four
hundred reverse split effected March 14, 1996.
References herein to the years 1998, 1997 and 1996 refer to the Company's
fiscal years ended March 31.
Overview
- --------
The following review of the results of operations and financial condition of
the Company should be read in conjunction with the Consolidated Financial
Statements.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1998, the Company had unrestricted cash of $1,837,000,
$43,000 of marketable securities, and most importantly $8,125,000 of common
stock of Smartalk Teleservices, Inc. The Company received $1,000,000 in cash
and approximately $8,000,000 worth of Smartalk common stock as proceeds from
the sale of its prepaid phone card distribution contract in the United
Kingdom in October 1997. The shares of Smartalk were unregistered and,
pursuant to the contract, on March 31, 1998, the Company requested Smartalk
to register such shares. Subsequent to March 31, 1998, the shares were
registered and ultimately sold for proceeds totaling $8,125,000. The Company
was able to borrow $4,939,000 against its position in Smartalk stock by March
31, 1998. This was the principal source of funds for operations and capital
improvements during the last six months of the fiscal year.
In addition, during the year the Company raised $2,450,000 through the
issue of several series of convertible preferred stock. At March 31, 1998,
all but $610,000 of the preferred stock had converted to common stock.
During the year ended March 31, 1997, the Company used approximately
$650,000 to fund its operations (including subsequently discontinued
operations) and made an initial investment in Cardcall International of
$1,500,000. These were funded by over $1,000,000 from the sale of common
stock and proceeds from the sale of convertible preferred stock of
$1,500,000.
In the year ended March 31, 1998, the Company discontinued operations of
its Alpha Products Division, PEL and Cardcall UK (see note 5). Since these
businesses were cash users it is expected that this will have a positive
effect on liquidity.
Subsequent to March 31, 1998, the Company has acquired Edge
Communications, Inc., has letters of intent to acquire two other
telecommunications companies, and has established a joint venture of its
CardCaller Canada subsidiary and DataWave Systems, Inc., which joint venture
the Company controls. Management believes the Company will need additional
resources to complete the acquisitions, and to fund the future capital needs
of these companies and its existing subsidiaries. The ability of the Company
to finance all new and existing operations will be heavily dependent on
external sources. No assurance can be given that additional financing will
be available or, if available, that it will be on acceptable terms.
Results of Operations
- ---------------------
1998 1997 1996
---- ---- ----
Sales $8,117,127 $1,939,891 $1,028,154
With regard to recurring operations, sales increased $6,177,236 from 1997
levels principally due to the acquisition of Cardcaller Canada in early
fiscal 1998 which contributed $4,046,268 to consolidated sales. In addition,
increased sales of $1,896,672 were due to the inclusion of Muller Media for a
full year, while 1997 included Muller for only four months.
Sales in 1997 increased $911,737 over 1996 almost exclusively due to the
acquisition of Muller Media on November 26, 1996. Muller sales for the four
months amounted to $825,225.
1998 1997 1996
---- ---- ----
Cost of Sales $6,614,217 $1,414,710 $923,619
Cost of sales increased $5,199,507 in fiscal 1998. Cost of sales
associated with newly acquired Cardcaller Canada accounted for $3,589,831 of
the increase. In addition, increased costs due to a full year's inclusion of
Muller Media amounted to $1,411,322.
Cost of sales in fiscal 1997 increased $491,091 over 1996 levels. Costs
associated with Muller for the four months since its acquisition amounted to
approximately $378,000. Travel Source costs increased $115,489 due to higher
sales volume.
1998 1997 1996
---- ---- ----
Selling, General and Administrative $1,488,768 $156,946 $200,040
Selling, general and administrative expenses rose $1,331,822 during 1998.
Expenses associated with CardCaller Canada accounted for $426,420 of the
increase. A full year's inclusion of Muller Media accounted for an
additional $334,789. Expenses associated with the newly acquired companies,
DCI UK and CyberFax, together with administrative costs of the new Denmark
and Spain operations, account for the balance.
Selling, general and administrative expenses declined $43,094 in 1997.
Expenses increased approximately $119,000 as a result of several months of
activity from Muller (acquired November 26, 1996). However, increased debt
settlements, lower director fees and various other reductions entirely offset
the Muller increase.
1998 1997 1996
---- ---- ----
Salaries $1,373,656 $305,398 $173,472
Salaries more than quadrupled in 1998 compared to 1997. $559,000 of the
increase is due to Cardcaller Canada, DCI UK, and CyberFax, all companies
that were acquired or formed in 1998. Inclusion of a full year of Muller
accounted for $280,000, and higher corporate salaries accounted for the
balance of the increase.
Salaries increased $132,000 in 1997 compared to 1996. The inclusion of
Muller for four months in 1997 accounts for the increase.
1998 1997 1996
-------- ------- -------
Professional Fees $543,923 $69,176 $96,716
Professional fees increased $474,747 in 1997. Legal, accounting and other
professional fees associated with the newly acquired or formed companies
(Cardcaller Canada, DCI UK, and CyberFax) account for $157,000 of the
increase. Higher legal, accounting, public relations, stockwatch and other
fees at the corporate level generated the balance of the increase.
Professional fees declined $27,540 in 1997. Limited legal activity and
the expanded use of internal resources resulted in the decline.
1998 1997 1996
---- ---- ----
Amortization and Depreciation $505,207 $32,868 $124,321
Amortization and depreciation increased approximately $472,000 in 1998.
Amortization by Cardcall Canada of licenses and goodwill totaled $107,000.
In addition, increased amortization of goodwill associated with Cardcaller,
CyberFax and Muller amounted to $322,000. Depreciation expense associated
with the new companies accounted for the remainder of the increase.
Amortization and depreciation declined $91,453 in 1997 compared to 1996.
The amortization of Muller goodwill beginning in 1997 resulted in an increase
of $24,000. This was more than offset by the absence of goodwill
amortization of the former Casino Marketing trademarks which totaled $117,000
in 1996.
1998 1997 1996
---- ---- ----
Other Income and Expense
Interest Expense ($66,344) ($4,872) ($9,711)
Investment Income $66,714 $19,571 $120
Interest expense increased $61,472 in 1998. Approximately one-half of the
increase is due to the interest on corporate short term borrowings. The
other half is interest expense incurred by the new companies acquired in
1998.
Investment income increased by $47,143. Higher investment income on
corporate savings combined with Muller interest earned accounted for the
increase.
Interest expense declined $4,839 in 1997 from 1996, principally due to an
overall decline in corporate debt. Investment income in 1997 is almost
entirely due to Muller Media short term investments.
1998 1997 1996
---- ---- ----
Discontinued Operations
- Computer board ($65,973) ($50,344)
- PEL ($214,437) ($71,695)
- CardCall UK ($357,102)
1998 1997 1996
---- ---- ----
Loss on Disposal
- Computer board ($511,578)
- PEL ($120,397)
As described in Note 5 to the Financial Statements, the Company
discontinued the operations of CardCall UK, PEL, and the Alpha Products
division in the year ended March 31, 1998. The losses in 1998 reflect
operating losses up to the date of discontinuance. 1997 amounts are
operating losses in the fiscal year that have been restated as losses from
discontinued operations.
The loss on disposal represents the write off of remaining assets and
liabilities. Included in computer board is the write off net customer base,
which totaled $492,985.
1998 1997 1996
---- ---- ----
Gain on sale of prepaid phone
card contract - UK $4,817,154
As more fully described in note 5 to the financial statements, the Company
sold a contract with a distributor in the UK to Smartalk Teleservices, Inc.
for $9,000,000, realizing a net gain of $4,817,154 after expenses and write
off of goodwill and remaining assets and liabilities at disposal.
1998 1997 1996
---- ---- ----
Preferred dividends $734,166 $36,741 $27,921
Preferred dividends increased $697,425 in 1998. The increase is primarily
related to the presumed incremental yield the investor may derive from the
discounted conversion rate of preferred stock issued by the Company during
this year. Management believes that the related amount of dividends recorded
by the Company is not necessarily the true cost to the Company of the
instruments it issued and that it may be reasonable to conclude that the fair
value of the common stock into which these securities may be converted was
less than such stock's quoted market price at the date the convertible
securities were issued (considering factors such as the period for which sale
of the stock is restricted, large block factors, lack of sufficiently-active
market into which the stock can be quickly sold, time value, etc.). However,
generally accepted accounting principles require that an "intrinsic value" of
the conversion feature at the date of issuance should be accounted for and
that such incremental yield should be measured based on the stock's quoted
market price at the date of issuance, regardless if such yield is assured.
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income
and SFAS No. 131 Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and display of
comprehensive income, its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements and requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS
No. 130 is required to be adopted for the Company's fiscal year ending March
31, 1999. The adoption of this pronouncement is expected to have no impact
on the Company's financial position or results of operations. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is required to be
adopted for the Company's 1999 year-end financial statements. The Company is
evaluating the impact, if any, of the adoption of this pronouncement on the
Company's existing disclosures.
Risks Associated with the Year 2000
- -----------------------------------
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among others, a
temporary inability to process transactions, send invoices or engage in
similar normal business activities.
The Company intends to conduct an analysis in 1998 to determine the extent
to which its major suppliers' systems (insofar as they relate to the
Company's business) are subject to the Year 2000 issue. The Company is
currently unable to predict the extent to which the Year 2000 issue will
affect the Company and its suppliers, or the extent to which it would be
vulnerable to its suppliers' failure to remediate any Year 2000 issues on a
timely basis.
The failure of a major supplier subject to the Year 2000 issue to convert
its systems on a timely basis or a conversion that is incompatible with the
Company's systems could have a material adverse effect on the Company.
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report
commencing on page F-1.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The present and nominated Directors and Executive Officers of the Company
are set forth below.
DIRECTOR AGE DIRECTOR
SINCE
Joseph J. Murphy 59 1995
Chairman of the Board, President and CEO for the Company. Within the past
five years, he was president and CEO of Alpha Products. Prior to that he
was executive vice president, member of the Board of Directors, and chief
financial officer for Aquarion, a New York Stock Exchange Company.
Larry Shatsoff 44 1995
Director, Vice president and Chief Operations Officer for the Company.
Within the past five years he has been vice president and chief
operations officer for Alpha Products. Prior to that, he was executive
vice president of Kalon Systems (a data processing services company),
manager of information systems for Aquarion, a New York Stock Exchange
Company.
John J. Adams 59 1995
Director, Chief Marketing Officer for the Company. During the last five years
Mr. Adams has been Vice President for R&D Scientific Corp. and founder and
President of Validation Services Corp. Mr. Adams was previously President of
Prevent Chemicals, Ltd., a publicly traded manufacturer of specialty
chemicals.
Carter Hills 67 1995
Director, retired diplomat. Extensive experience in economic development and
management planning under auspices of Department of State and major
international organizations. Directs such programs in countries of Near East
and Vietnam. Served as financial advisor and delegate for U.S. at key
international conferences.
Lois S. Morris 47 1997
Director, Chief Executive Officer of The Travel Source Limited, a position
she has held for the last five years. Ms. Morris is on the Board of
Directors of the Ocean State Business School, and a member of the Town of
Richmond, Rhode Island Economic Development Commission.
ITEM 10 - EXECUTIVE COMPENSATION
Executive Compensation
|Annual Compensation| Long Term Compensation|
Name Other Restricted
and Annual Stock LTIP All Other
Principal Salary Bonus Compensation Awards Options Payouts Compensation
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
- -------------- ------ ----- ------------ ------ -------- ----- ----------
Joseph
J. Murphy 1995 100,000
CEO 1996 100,000 5,872
1997 100,000 600,000
1998 100,000 172,727
Options/SAR Grants in Last Fiscal Year
% of Total
Options/SARs
Options/SARs Granted to Employees Exercise or Base
Name Granted (#) in Fiscal Year Price ($/Sh) Expiration Date
- -------- ------------ -------------------- ---------------- ---------------
Joseph
J. Murphy 172,727 16.7 $1.59 9/08/2002
CEO
Options Exercised in Last Fiscal Year
Shares Value of Unexercised
Acquired on Value Unexercised Options In the Money Options
Name Exercise Realized at Fiscal Year End Fiscal Year End
- -------- ----------- -------- ------------------ --------------------
Joseph
J. Murphy -- -- 772,727 $1,156,091
The Company entered into an employment agreement dated January 1, 1995 with
Mr. Murphy for services rendered the Company as its President and Chief
Executive Officer for an annual base salary of $100,000.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
the Company as of June 11, 1998 by: (i) each of the Company's executive
officers and directors, (ii) each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, and
(iii) all of the Company's officers and directors as a group:
Name of Amount and Nature of
Beneficial Owner Beneficial Ownership(a) Percent of Class
- ---------------- -------------------- ----------------
(i)Joseph J. Murphy 2,771,836 14.0%
Larry Shatsoff 526,545 2.7%
John J. Adams 253,840 1.3%
Carter H. Hills 187,167 .9%
Lois Morris 21,336 .1%
(ii) Donald Gross (b) 1,750,533 8.8%
Steven Gross (b) 1,750,533 8.8%
Whyteburg Limited (b) 1,249,831 6.3%
(iii) All executive officers and
directors as a group 4,439,814 22.5%
NOTES:
(a) Included in shares owned above are shares which the beneficial owner has
the right to acquire from options within sixty days as follows: J. Murphy,
1,041,817 shares; L. Shatsoff, 454,545 shares; J. Adams, 224,090 shares; C.
Hills, 152,272 shares
(b) Donald Gross
c/o Edge Communications
19225 Orbit Drive
Gaithersburg, MD 20879
Steven Gross
c/o Edge Communications
19225 Orbit Drive
Gaithersburg, MD 20879
Whyteburg Limited
PO Box 2149
Pasea Estate
Road Town, Tortola BVI
ITEMS 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company engaged in certain related party transactions in the ordinary
course of business during the last fiscal year. See Notes to Financial
Statements.
PART IV
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to this portion is submitted as a
separate Section of this report commencing on page F-1.
(a) (3) and (c) Exhibit (numbered in accordance with Item 601 of
Regulation S-K)
Exhibit No. Description Page No.
- ----------- ---------------------- --------
(1) NA
(3a) Articles of Incorporation (a)
(3b) By-Laws (a)
(4) NA
(9) NA
(10) NA
(11) NA
(12) NA
(13) NA
(16) Change in Certifying Accountant (b)
(18) NA
(19) NA
(21) Subsidiaries Travel Source, Ltd.,
Privilege Enterprises Ltd.
(22) NA
(23) NA
(24) NA
(25) NA
(28) NA
(29) NA
(a) - Filed with Registration Statement on Form S-18 (File 2-96976-D) and
incorporated by reference herein.
(b) - Filed with Form 8K dated June 28, 1995
During the quarter ended March 31, 1998, the following Form 8k's were
filed: None
Subsequent to March 31, 1998:
May 14, 1998 - Acquisition of Edge Communications
May 19, 1998 - Terminate Discussions with World Pass Communications
Corporation
- Dividend Declaration
- Letter of Intenet with Locus Corporation
June 15, 1998 - Exercise of put options - Muller Media
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.
DCI TELECOMMUNICATIONS, INC.
Date: June 30, 1998 By: Joseph J. Murphy
Joseph J. Murphy
President and Chief
Executive Officer,
Director
Pursuant to the requirement 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.
Date: June 30, 1998 Joseph J. Murphy
Joseph J. Murphy
President and Chief
Executive Officer, Director
Date: June 30, 1998 Russell B. Hintz
Russell B. Hintz
Chief Financial and
Accounting Officer
Date: June 30, 1998 Larry Shatsoff
Larry Shatsoff, Director
Date: June 30, 1998 /s/John J. Adams, Director
Date: June 30, 1998 /s/Carter Hills, Director
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
DCI Telecommunications, Inc.
Report of Independent Auditor(s) F-1, F-1A
Balance Sheets - March 31, 1998 and 1997 F-2, F-2A
Statements of Operations
Years Ended March 31, 1998 and 1997 F-3, F-3A
Statements of Changes in Stockholders' Equity
Years Ended March 31, 1998 and 1997 F-4, F-4A, F-4B, F-4C
Statements of Cash Flows
Years Ended March 31, 1998 and 1997 F-5, F-5A
Notes to Financial Statements F-6 through F-29
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
DCI Telecommunications, Inc.
We have audited the accompanying consolidated balance sheets of DCI
Telecommunications, Inc. and subsidiaries as of March 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended March 31, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
CardCaller Canada, Inc., a wholly-owned subsidiary, which statements reflect
total assets and revenues constituting 1 percent and 50 percent,
respectively, of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for CardCaller Canada,
Inc., is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates 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, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of DCI Telecommunications, Inc. and
subsidiaries as of March 31, 1998 and 1997 and the results of their
operations, and their cash flows for each of the two years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 2 to the financial statements, the Company's 1997
and 1996 financial statements included the results of operations of R&D
Scientific Corporation as if the stock purchase agreement between the Company
and R&D Scientific was completed. The stock purchase agreement was terminated
in the year ended March 31, 1998. The financial statements have been restated
to reflect this correction.
Schnitzer & Kondub, P.C.
Harrison, New York
June 25, 1998 F-1
GREENWOOD SILVERSTEIN HERLICK & COHEN
CHARTERED ACCOUNTANTS
- ---------------------------------------------------------------------
Auditors' Report
To the Shareholder
We have audited the balance sheet of CardCaller Canada Inc. as of March 31,
1998 and the statements of deficit, operations and changes in financial
position for the year then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these financial statements present fairly, in all material
respect, the financial position of the company as at March 31, 1998 and the
results of its operations and the changes in its financial position for the
period then ended in accordance with generally accepted accounting
principles.
GREENWOOD SILVERSTEIN HERLICK & COHEN
Chartered Accountants
Toronto, Ontario
June 8, 1998
F-1A
DCI TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
March 31,
ASSETS 1998 1997
---- ----
Current Assets:
Cash $1,837,041 $1,287,441
Restricted cash 60,246 10,000
Investments 8,168,436 43,575
Accounts receivable 2,311,956 2,182,196
Receivable from SmarTalk 650,000 -
Due from shareholders - 4,160
Due from affiliate - 85,000
Prepaid expenses 138,303 42,818
Inventory - 27,685
---------- ----------
Total Current Assets 13,165,982 3,682,875
Fixed Assets 577,988 245,196
Less: accumulated depreciation 144,647 116,207
---------- ----------
Net Fixed Assets 433,341 128,989
Investment in CardCall
International Holdings, Inc. - 1,500,000
Accounts receivable 928,942 1,114,389
Deferred costs 154,533 175,242
Deposits 50,510 15,034
Other investments 296,336 -
Other Assets
- customer base - 653,752
- costs in excess of
net assets acquired :
CardCall International 3,987,523 -
Muller Media 1,989,931 1,989,823
CyberFax 1,033,975 -
----------- -----------
7,011,429 2,643,575
Less: Accumulated amortization 370,000 168,423
----------- ------------
Net other assets 6,641,429 2,475,152
----------- ------------
Total Assets $21,671,073 $ 9,091,681
====== ======
See accompanying notes to consolidated financial statements.
F-2
LIABILITIES AND SHAREHOLDERS' EQUITY March 31,
1998 1997
Current Liabilities: ---- ----
Notes payable $4,938,942 $6,479
Accounts payable and accrued expenses 1,356,242 274,935
Participations payable 1,675,118 1,533,966
Preferred stock dividend 361,356 -
Due to shareholders 410,156 -
Income taxes payable 160,700 133,069
--------- ----------
Total Current Liabilities 8,902,514 1, 948,449
Participations payable 718,000 888,307
Long-term debt 35,175 14,016
Preferred stock dividend - 140,976
Deferred income taxes 254,169 214,169
Redeemable, convertible preferred stock,
$10,000 and $1,000 par and redemption
value, 2,000,000 shares authorized,
61 and 1,500 shares issued & outstanding 610,050 1,500,000
-------- ----------
Total Liabilities 10,519,908 4,705,917
---------- ----------
Commitments and contingencies (Note 13)
Shareholders' Equity:
9.25% cumulative convertible preferred
stock, $100 par value, 5,000,000 shares
authorized, 3,972 shares issued and
outstanding 305,000 305,000
Common stock, $.0001 par value,
500,000,000 shares authorized,
14,092,625 and 7,931,118 shares
issued and outstanding 1,409 793
Paid-in capital 12,856,030 4,402,809
Treasury stock
(582,500 shares at cost) (1,749,061) (13)
Unrealized capital loss (5,395) (5,495)
Retained earnings subsequent to 12/31/95,
date of quasi-reorganization (total
deficit eliminated $4,578,587) (256,818) (317,330)
------------ --------
Total Shareholders' Equity 11,151,165 4,385,764
------------ ----------
Total Liabilities and
Shareholders' Equity $21,671,073 $ 9,091,681
=========== ============
See accompanying notes to consolidated financial statements
F-2A
DCI TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
1998 1997
---- ----
Sales - travel $1,194,199 $1,088,713
Sales - products 6,922,928 851,178
---------- ----------
Net sales 8,117,127 1,939,891
Cost of sales - travel 1,094,062 978,573
Cost of sales - products 5,520,155 436,137
---------- ----------
Cost of sales 6,614,217 1,414,710
Gross profit 1,502,910 525,181
Selling, general &
administrative expenses 1,488,768 156,946
Salaries and compensation 1,373,656 305,398
Professional and consulting fees 543,923 69,176
Amortization and depreciation 505,207 32,868
--------- --------
3,911,554 564,388
Loss from operations (2,408,644) (39,207)
Other income and (expense):
Investment income 66,714 19,571
Interest expense (66,344) ( 4,872)
---------- --------
370 14,699
----------- --------
Loss from continuing operations before
income tax expense (2,408,274) (24,508)
Income tax expense (201,000) -
----------- --------
Loss from continuing operations (2,609,274) (24,508)
Discontinued operations:
Loss from operations, net of tax:
Computer board -Alpha division (65,973) (50,344)
Privilege card operations - PEL (214,437) (71,695)
Prepaid phone card segment - UK (357,102) -
F-3
Disposition of discontinued operations - net of tax:
Computer board -Alpha division (511,578) -
Privilege card operations (120,397) -
Prepaid phone card contract -
UK segment 4,817,154 -
--------- ---------
Net income (loss) before
dividends on preferred stock 938,393 (146,547)
Dividends on preferred stock
Deemed dividends 637,300 -
Dividends 96,866 36,741
----------- ---------
Total dividends on preferred stock 734,166 36,741
Income (loss) applicable to
common shareholders $ 204,227 $ (183,288)
========== ===========
Basic and diluted income (loss)
common share
Continuing operations $ (.30) $ (.01)
Discontinued operations:
Gain from disposal of operations .38
Loss from operations (.06) (.03)
-------- ------
Total $ .02 $ (.04)
======= =======
Weighted average common
shares outstanding 10,874,513 4,879,889
========= =========
See accompanying notes to consolidated financial statements.
F-3A
DCI TELECOMMUNICATIONS, INC.
CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998 AND 1997
Additional
-Preferred Stock- -Common Stock- Paid In
Shares Amount Shares Amount Capital
--------- --------- --------- ------ -----------
Balances,
April 1, 1996 3,972 $ 305,000 2,299,176 $ 230 $ 48,722
Shares issued for
options exercised - - 678,700 68 140,736
Shares issued for
Services - - 176,211 18 93,402
Shares issued for
stock of Muller
Media - - 1,200,000 120 2,999,880
Shares issued for
stock of
Bettencourt &
Associates - - 6,897 1 10,344
Shares sold - - 3,195,181 319 1,026,454
Shares issued for
settlements - - 42,000 4 83,320
Shares issued for
investment in
CardCall - - 545,453 54 (54)
Shares canceled - - (212,500) (21) 5
Change in
unrealized capital
loss - - - - -
Net (Loss) - - - - -
Preferred stock
dividend - - - - -
----- ------ --------- ------ ------
Balances
March 31, 1997 3,972 305,000 7,931,118 793 4,402,809
F-4
Additional
-Preferred Stock- -Common Stock- Paid In
Shares Amount Shares Amount Capital
--------- --------- --------- ------ -----------
Preferred stock
converted to common - - 2,384,822 238 3,139,712
Deemed dividend on
preferred stock issuance - - - - -
Conversion of dividends
to common stock - - - - 513,786
Shares issued for
options exercised - - 3,561,254 356 666,963
Shares issued for
services - - 122,174 12 147,688
Shares issued for
stock of Cyberfax - - 400,000 40 999,960
Shares issued for
stock of Travel
Source - - 13,260 1 (1)
Acquisition of
CardCall - - - - 2,545,722
Purchase of treasury
stock (582,500 shares) - - - - -
Change in unrealized
capital loss - - - - -
Shares canceled - - (545,453) (54) 54
Shares exchanged for
debt - - 225,450 23 439,337
Preferred stock
dividend - - - - -
Common stock
dividend - - - - -
Net income - - - - -
----- ------ --------- ------ ------
Balances
March 31, 1998 3,972 $305,000 14,092,625 $1,409 $12,856,030
===== ======= ========== ====== ===========
F-4A
Unrealized
Capital
Treasury Accumulated (Losses)
Stock Deficit Gains Total
--------- --------- --------- ------
Balances,
April 1, 1996 $ (29) $(134,042) $ - $ 219,881
Shares issued for
options exercised - - - 140,804
Shares issued for
Services - - - 93,420
Shares issued for
stock of Muller
Media - - - 3,000,000
Shares issued for
stock of
Bettencourt &
Associates - - - 10,345
Shares sold - - - 1,026,773
Shares issued for
settlements - - - 83,324
Shares issued for
investment in
CardCall - - - -
Shares canceled 16 - - -
Change in
unrealized capital
loss - - (5,495) (5,495)
Net (Loss) - (146,547) - (146,547)
Preferred stock
dividend - (36,741) - (36,741)
----- ------ --------- ------
Balances
March 31, 1997 (13) (317,330) (5,495) 4,385,764
F-4B
Unrealized
Capital
Treasury Accumulated (Losses)
Stock Deficit Gains Total
--------- --------- --------- ------
Preferred stock
converted to common - - - 3,139,950
Deemed dividend on
preferred stock issuance - (637,300) - (637,300)
Conversion of dividends
to common stock - - - 513,786
Shares issued for
options exercised - - - 667,319
Shares issued for
services - - - 147,700
Shares issued for
stock of Cyberfax - - - 1,000,000
Shares issued for
stock of Travel
Source - - - -
Shares issued for
stock of CardCall - - - 2,545,722
Purchase of
treasury stock
(582,500 shares) (1,749,048) - - (1,749,048)
Change in unrealized
capital loss - - 100 100
Shares canceled - - - -
Shares exchanged for
debt - - - 439,360
Preferred stock
dividend - (96,866) - (96,866)
Common stock
dividend - (143,715) - (143,715)
Net income - 938,393 - 938,393
----- ------ --------- ------
Balances
March 31, 1998 $(1,749,061) $(256,818) $ (5,395) $11,151,165
=========== ======= ========== ===========
F-4C
DCI TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
1998 1997
---- ----
Cash flows from (used in) operating activities:
Net loss from continuing operations $ (2,609,274) $ (24,508)
Adjustment to reconcile net loss from
continuing operations to net cash from
(used in) operating activities:
Depreciation and amortization 505,207 32,868
Stock issued for services 30,800 11,120
Loss on property disposition 31,729 -
Changes in assets and liabilities:
(Increase) Decrease in:
Restricted cash (50,246) -
Investments - 526
Accounts receivable 474,871 371,736
Inventory 127,625 (516)
Deposits (35,476) (1,284)
Prepaid expenses (103,303) (27,353)
Deferred costs (154,533) (175,242)
Increase (Decrease):
Accounts payable & accrued expenses (309,330) (324,264)
Participations payable (29,155) (319,563)
Income taxes 67,631 (137,661)
--------- ----------
Total Adjustments: 555,820 (569,633)
--------- ----------
Net cash used in operating activities (2,053,454) (594,141)
Cash flows from (used in) investing activities:
Additions to fixed assets (375,082) (40,082)
Cash acquired with acquisitions 110,259 878,586
Investment in CardCall
International - (1,500,000)
Investment in Muller Media - (98,962)
Purchase of investment securities (775,000) -
Increase in other investments (296,336) -
----------- ----------
Net cash used in investing activities (1,336,159) (760,458)
F-5
Cash flows from (used in) financing activities:
Proceeds from stock
options exercised 356,956 140,804
Proceeds from sale of common stock - 1,026,773
Purchase of treasury stock (1,749,048) -
Bank overdraft - (42,004)
Payment of notes payable (85,845) (2,843)
Proceeds from sale of preferred
stock 2,250,000 1,500,000
Due from affiliate - (85,000)
Common stock dividend (143,715) -
Note payable - shareholder - 23,962
Advances from shareholders 485,566 129,543
Proceeds from issuance
of notes payable 4,938,942 -
--------- ---------
Net cash from financing activities 6,052,856 2,691,235
Net cash used in discontinued operations (2,113,643) (52,009)
----------- --------
Net increase in cash 549,600 1,284,627
Cash, beginning of year 1,287,441 2,814
---------- ----------
Cash, end of year $1,837,041 $1,287,441
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $67,000 $21,000
Non-cash investing and financing transactions:
Acquisitions by stock and option issuance:
CardCall International $ 7,254,523 -
Cyberfax $ 1,033,975 -
Muller Media - $3,000,000
Bettencourt and Associates - $10,345
Non-cash settlements $ 556,260 $165,624
Fixed assets acquired by debt - $ 22,195
See accompanying notes to consolidated financial statements.
F-5A
DCI Telecommunications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 31, 1998 and 1997
Note 1. Organization and Significant Accounting Policies
DCI Telecommunications, Inc. (the Company) was originally incorporated on
February 4, 1985, as ALFAB, Inc., and subsequently became Fantastic Foods
International, Inc. (Fantastic Foods) after a reorganization in 1991. The
shareholders of Fantastic Foods International, Inc., at a shareholders
meeting on December 30, 1994, approved the acquisition of the assets of Sigma
Telecommunications, Inc. in a stock-for-asset purchase. Concurrent with the
merger, the name was changed to DCI Telecommunications, Inc.
On January 5, 1995, the Board of Directors approved the acquisition of
certain assets of Sigma Industries, Inc. (Alpha Products) in a stock-for-
asset purchase, with DCI exchanging 850,000 common shares valued at $672,400
for the assets of Alpha Products, Inc., which totaled $672,400. The above
acquisitions were accounted for using the purchase method of accounting.
On June 19, 1995, DCI entered into an agreement to acquire the common stock
of R&D Scientific Corp. (R&D), a New Jersey Corporation that develops
computer software programs. The Company's previously issued financial
statements included the operations of R&D from June 19, 1995, the date of the
purchase and sale agreement. The accompanying financial statements do not
include any results from R&D, as the Company and R&D terminated the purchase
and sale agreement in the year ended March 31,1998.
On November 26, 1996, DCI entered into a stock purchase agreement with Muller
Media, Inc. (Muller), a New York corporation that distributes syndicated
programming and motion pictures to the television and cable industry. The
Company's financial statements include the operations of Muller from November
26, 1996, the date of the stock purchase agreement. The financial statements
do not include any adjustments that might relate to the method of payment, or
non payment, upon exercise of the option described in Note 3.
In the year ended March 31,1997, the Company acquired The Travel Source Ltd.,
a travel agency, and the assets of Paul Bettencourt Associates (PEL), a value-
added marketing card company. (see Note 3)
In the year ended March 31, 1998, the Company acquired CardCall International
Holdings, Inc., which is primarily in the prepaid phone card business. It
also established DCI UK, a company providing long distance telecommunications
in Europe, and acquired CyberFax Inc., a Canadian company providing real-time
fax capability over the Internet.
F-6
Stock Splits
- ------------
The Company's Board of Directors approved a one-for-twenty reverse split of
its common stock on January 25, 1995, a forty-for-one split on March 7, 1996
and a one-for-four hundred reverse split on March 14, 1996. Accordingly, the
financial statements and related footnotes have been restated to reflect
these transactions as of April 1, 1995.
Quasi-Reorganization
- --------------------
At the Annual Meeting of Shareholders on July 26, 1995, the shareholders
approved a quasi-reorganization of the Company to adjust the carrying value
of assets and liabilities to their fair market value. The Company reduced its
inventory valuation by $63,182 and wrote off its Casino Marketing
investment of $1,507,000. The accumulated deficit of $4,695,587 at
December 31, 1995, the effective date of the reorganization, was eliminated
in full and charged to paid in capital. The retained earnings (deficit)
starting date is January 1, 1996.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Material intercompany balances and
transactions have been eliminated in consolidation.
Cash
- ----
For purposes of the statement of cash flows, the Company considers cash as
cash held in operating accounts and all highly liquid investments with a
maturity of three months or less to be cash equivalents.
Restricted cash in 1998 includes $34,475, which is pledged as a guarantee for
payment of trade creditors in Denmark and $25,771, as security for bank loans
in Canada. Restricted cash in 1997 included $10,000 which was collateral for
a $10,000 letter of credit with a commercial bank.
The Company maintains its cash balances at several financial institutions.
Accounts at these institutions are secured by the Federal Deposit Insurance
Corporation up to $100,000. Uninsured balances were approximately $ 1,289,000
at March 31, 1998.
F-7
Revenue Recognition
- -------------------
Revenue is recorded when goods are shipped or when services are rendered to
the customer. The Company utilizes the direct write-off method for valuing
accounts receivable. Bad debt expense was $70,482 and $0 in 1998 and 1997
respectively.
Revenues and expenses from the distribution of motion pictures and other
entertainment events are recognized in accordance with Financial Accounting
Standards (FASB) No. 53. Revenues are recognized upon the commencement of
the television and cable station's license period. The related expense
incurred in the distribution of motion pictures and other entertainment
events is recognized as revenue is earned. The primary expense (cost of
sales) incurred in the distribution of motion pictures and other
entertainment events is the amount due the producers of the motion pictures
(reflected as participations payable in the financial statements).
Travel agency revenues are recorded when a customer makes a reservation for a
trip. Reservations are accepted upon payment by the agency's customers with a
credit card or check.
Revenue from the distribution of the prepaid phone cards is recorded upon the
first usage of the cards by the customer.
Investments
- -----------
The Company accounts for investments under FASB No. 115, which requires that
fixed maturities and equity securities that have readily determined fair
values be segregated into categories based upon the Company's intention for
those securities. Equity securities classified as available for sale are
stated at fair value, with unrealized gains and losses, net of related
deferred income taxes, reported as a separate component of shareholders'
equity. Securities that are classified as trading securities are stated at
fair value, with unrealized gains and losses included in earnings.
Realized investment gains and losses, accounted for by the specific
identification method, are included in the statements of income. Investment
income is recognized when earned.
Inventory
- ---------
Inventory of $27,685, stated at the lower of cost or market (first in, first
out), consists of microchips, data acquisition and telecommunications
components.
F-8
Fixed Assets
- ------------
Fixed assets are stated at cost. Major additions are capitalized;
expenditures for repairs and maintenance are charged against operations.
Depreciation is calculated under the straight-line method over the
anticipated useful lives of the assets, which range from five to seven years.
Cost in Excess of Net Assets Acquired
- -------------------------------------
Cost in excess of net assets acquired (goodwill) represents the consideration
paid in excess of net assets acquired in the acquisitions of Muller Media,
CardCall International and CyberFax. Goodwill is being amortized over 20
years.
Customer Base
- -------------
The customer base of $653,752, relates to the value of the customer list
acquired with the asset acquisition of Alpha Products in 1995 and was being
amortized over 10 years. Accumulated amortization at March 31, 1997 was
$144,423. During the year ended March 31, 1998, the Company discontinued its
Alpha Products division and wrote off the remaining net balance of $492,985
as part of discontinued operations.
Income Taxes
- ------------
The Company accounts for income taxes under FASB No. 109, entitled Accounting
for Income Taxes. The Company files a consolidated tax return with its
domestic subsidiaries. Muller files a separate tax return based upon its
individual financial results. Foreign subsidiaries file separate tax returns
in their respective countries.
Earnings Per Share
- ------------------
Earnings per share are based on the weighted average number of shares
outstanding. Common stock equivalents have not been considered, as their
effect would be anti-dilutive. The FASB issued statement No. 128, entitled
Earnings Per Share, during February 1997. The new statement, which is
effective for financial statements issued after December 15, 1997, including
interim periods, establishes standards for computing and presenting earnings
per share. The new statement requires retroactive restatement of all prior-
F-9
period earnings per share data presented. The new statement did not have a
material impact upon previously presented earnings per share information.
Earnings per share in the accompanying statements of operations were
determined in accordance with Statement of Financial Accounting Standards
(SFAS) 128.
Stock-based Compensation
- ------------------------
SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value
based method of accounting for an employee stock option or similar equity
instrument or plan. However, SFAS No. 123 allows an entity to continue to
measure compensation costs for these plans using the current method of
accounting. The Company has elected to account for employee stock
compensation plans as provided under Accounting Principles Board (APB)
Opinion No. 25. For disclosure purposes, pro forma net income (loss) and per
share impacts are provided as if the fair value method had been applied.
Use of 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 the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Translation of Foreign Currencies
- ---------------------------------
Balance sheet accounts denominated in foreign currencies are translated
generally at the current rate of exchange as of the balance sheet date, while
revenues and expenses are translated at average rates of exchange during the
periods presented. The cumulative foreign currency adjustments resulting
from such translation are included in the accumulated translation adjustment
account in the stockholders' equity (deficit) section of the consolidated
balance sheets. For foreign subsidiaries operating in highly inflationary
economies, monetary balance sheet accounts and related revenue and expenses
are translated at current rates of exchange while non-monetary balance sheet
accounts and related revenues and expenses are translated at historical
exchange rates.
F-10
Reclassifications and Restatements
- ----------------------------------
Certain reclassifications and restatements have been made to prior years'
financial statements to conform with the current year's presentation, and to
exclude R&D Scientific since the purchase and sales agreement was terminated
by mutual consent.
New Accounting Standards
- ------------------------
The FASB also issued SFAS No. 130, Reporting Comprehensive Income and SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 131 supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements, and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic areas
and major customers. SFAS No. 131 defines operating segments as components
of a company about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997, and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of these standards.
Note 2. R&D Scientific Corp.
On June 19, 1995, DCI entered into an agreement to acquire the common stock
of R&D Scientific Corp (R&D), a New Jersey Corporation, for 106,250 shares
(to be adjusted on or before December 31, 1997, for a value of $1,700,000).
F-11
The Company had included R&D operations as part of the consolidated group
since June 19, 1995, as if the acquisition has been completed under the
purchase method of accounting. In the quarter ending December 31, 1997, the
parties mutually agreed to terminate the agreement, with R&D reverting back
to its original owners. As a result, no operations of R&D are included in
the financial statements, and all prior periods have been restated to exclude
the operations of R&D.
Note 3. Acquisitions
CardCall International Holdings, Inc.
- -------------------------------------
On March 31, 1997, DCI, entered into an agreement with CardCall
International Holdings, Inc. (CardCall), a Delaware corporation, to purchase
all its outstanding common stock (8,238,125 shares) and warrants. CardCall's
board of directors had approved the agreement on March 29,1997, subject to
shareholder approval.
CardCall is the parent company of CardCaller Canada, Inc., a Canadian
corporation, and CardCall (UK) Limited, incorporated under the laws of the
United Kingdom. CardCall is in the business of designing, developing and
marketing, through distributors, prepaid phone cards that provide the
cardholder access to long distance service through switching facilities. DCI
had previously invested $1,500,000 in CardCall, for which it received
$1,200,000 in notes payable 120 days from demand. The remaining $300,000 did
not have any stipulated repayment terms. The Company raised this money
through the issuance of DCI convertible preferred stock to certain
shareholders of CardCall as described in Note 10.
By May 29,1997, the shareholders of CardCall had approved the transaction.
For each 100 shares of common stock of CardCall held by a shareholder, DCI
will issue a warrant to purchase nine shares of common stock for $4.00 per
share on or before February 28, 2001. In addition, each shareholder of
CardCall may acquire 85 shares of DCI common stock under a subscription
agreement, for each 100 shares of CardCall held by such shareholder, at a
purchase price of $.20 per share. 7,002,406 options to purchase DCI stock at
$.20 per share were granted as a result of this transaction. As of March 31,
1998, 2,733,063 of these options for shares of DCI stock had been exercised.
Such options expire on April 30, 2002. In accordance with the agreement,
shares of DCI stock received from the exercise of options have restrictions
as to when they can be sold ranging from September 1, 1997 to November 1,
1998.
The transaction was recorded under the purchase method of accounting,
effective April 1, 1997. The total purchase price includes the $1,500,000 in
F-12
cash, $2,545,000 assigned value for the stock and stock options, and
assumption of net liabilities of $3,210,000. Goodwill was recorded at
$7,255,000. The financial statements include the results of operations of
CardCall since April 1, 1997, the effective date of acquisition. The goodwill
is being amortized over 20 years. See Note 5 for explanation of sale of a
distribution contract of CardCall UK and discontinuance of a portion of the
operations. Revenue from the sale of prepaid phone cards is recognized upon
first usage of the card by the customers.
Muller Media, Inc.
- ------------------
On November 26, 1996, DCI entered into a stock purchase agreement with Muller
Media, Inc. (Muller), a New York corporation, to acquire 100% of the
outstanding common stock of Muller in a stock-for-stock purchase, with DCI
exchanging 1,200,000 shares of common stock for all of the shares of Muller
capital stock. The DCI stock was valued at $2.50 per share ($3 million in
total) and is included in outstanding common stock for the years ending March
31, 1998 and 1997.
At the closing, the shares of Muller were transferred to DCI, and DCI shares
were issued to Muller shareholders and then placed with escrow agents. This
was done to facilitate a "put" option which could only be exercised by Muller
subsequent to the closing under the put option. DCI must repurchase the
shares for $3,000,000 if Muller exercised the "put" option, which commenced
on the earlier of 120 days from December 27, 1996, unless an extension was
requested by DCI, which Muller could not unreasonably withhold, or 14 days
after DCI had received an aggregate of $3,000,000 in net proceeds from the
sale of its capital stock. Extensions were granted by Muller through June 3,
1998. The selling stockholders had an option to keep DCI stock or accept up
to $3,000,000 in cash from DCI.
DCI repurchased 400,000 shares of such common stock in March, 1998 for
$1,000,000 and completed the repurchase from the exercising parties on June
9, 1998 upon payment of an additional $2,000,000.
Muller is a distributor of syndicated programming and motion pictures to the
television and cable industry. The acquisition has been accounted for as a
purchase.
F-13
Summarized financial data of Muller included in the financial statements
since the November 26, 1996, date of the stock purchase agreement, is as
follows:
1998 1997
---------- --------
Net sales $ 2,721,897 $ 825,225
Cost of sales 1,665,767 378,631
----------- ---------
Gross profit 1,056,130 446,594
Selling, general and
administrative expenses 366,445 119,506
Salaries and compensation 478,677 133,361
Professional fees 7,874 23,348
Depreciation 6,499 2,106
----------- ----------
859,495 278,321
----------- ----------
Income from operations 196,635 168,273
Interest income 49,676 18,313
Income taxes (201,000) -
------------ --------
Net income $ 45,311 $ 186,586
====== =====
Cash $1,132,050 $ 936,973
Accounts receivable - current 2,161,729 2,095,375
Investments 43,675 43,575
Fixed assets, net 20,110 26,608
Long-term accounts receivable 928,942 1,114,389
Other 58,664 33,645
----------- ---------
Total assets $ 4,345,170 $4,250,565
====== ======
Accounts payable and accrued expenses $ 206,621 $ 196,151
Participations payable - current 1,675,116 1,533,966
Income taxes 160,700 132,819
Participations payable - long-term 718,000 888,307
Deferred income taxes 254,169 214,169
----------- ----------
Total liabilities $ 3,014,606 $2,965,412
====== ======
Four customers accounted for approximately 49% of Muller sales in 1998 and
59% of sales in 1997.
F-14
Privilege Enterprises Limited
- -----------------------------
On November 5, 1996, DCI acquired the assets of Paul Bettencourt Associates
in exchange for 6,897 shares of DCI stock valued at approximately $10,000.
Privilege Enterprises Limited (PEL) a New Hampshire corporation, was formed
by the Company to continue the business of Bettencourt and Associates. The
acquisition has been accounted for as a purchase. PEL was in the business of
value-added card-based and other marketing programs. In March 1998, the
Company discontinued PEL, and operations for the period of ownership are
shown as discontinued operations.
The Travel Source, Ltd.
- -----------------------
On March 25 ,1997 the Company issued 29,412 shares (and 13,260 shares in
1998) of common stock for all of the outstanding shares of The Travel Source
Ltd. (Travel Source), a travel agency. The acquisition has been accounted
for as a pooling of interests, and accordingly, the accompanying financial
information has been restated to include the accounts of Travel Source for
all periods presented. No adjustments were necessary to the net assets or
income (loss) of the combining companies as a result of the pooling of
interest. Since Travel Source was acquired on March 25, 1997, all operations
were considered prior to date of acquisition. Net sales and net (loss)
earnings of the separate companies are as follows:
Year ended March 31,
1997
Net sales:
DCI $ 851,178
Travel Source 1,088,713
-----------
Combined $ 1,939,891
=======
Net(loss) earnings:
DCI $ ( 41,909)
Travel Source 17,401
Discontinued operations (122,039)
-----------
Combined $( 146,547)
=======
CyberFax, Inc.
- --------------
On April 9, 1997, the Company acquired all of the outstanding shares of
CyberFax, Inc. for 400,000 shares of its common stock valued at $1,000,000.
F-15
CyberFax, a Canadian Corporation, is in the business of providing real-time
fax capabilities over the Internet. Goodwill of $1,034,000 was recognized in
this transaction and is being amortized over 20 years. The acquisition has
been accounted for as a purchase. The financial statements include the
results of operations of CyberFax since April 9, 1997, the date of
acquisition. CyberFax had no material operating activities prior to the
acquisition.
DCI UK
- ------
In fiscal year ended March 31, 1998, the Company established DCI UK, a
company engaged in the business of providing long distance telecommunications
throughout Europe via a private leased-line network.
Note 4. Pro Forma Financial Information (Unaudited)
The following table summarizes the unaudited pro forma results of operations
of the Company for the fiscal years ended March 31, 1998 and 1997, assuming
the acquisitions of CardCall, CyberFax, Muller, Travel Source and Edge
Communications (see Note 19) had occurred on April 1, 1996. The unaudited pro
forma financial information presented is not necessarily indicative of the
results of operations that would have occurred had the acquisitions taken
place on April 1, 1996 or of future results of operations.
1998 1997
Net sales $16,788,127 $9,334,251
----------- ----------
Income (loss):
Continuing operations $(2,539,274) $ (1,352,551)
Gain on disposal of
operations 4,185,179 -
Discontinued operations (637,512) (4,825,224)
------------ ------------
Net income (loss) before
preferred dividends $1,008,393 $ (6,177,775)
======== ========
Net income (loss) per share:
Continuing operations $ (.15) $ (..09)
Gain from disposal of
operations .19 -
Discontinued operations (.03) (.31)
-------- -----------
Net income (loss) $ .01 $ (.40)
======== =========
Weighted average shares
outstanding 21,289,441 15,777,101
======== ========
F-16
Note 5. Discontinued Operations
In September, 1997, DCI Telecommunications, Inc. agreed in principal with
SmartTalk Teleservices, Inc. to sell its prepaid phone card distribution
contract with D Services, a wholly owned subsidiary of W.H. Smith, for
$9,000,000. Under the terms of the contract DCI was to receive $1,000,000 in
cash and $ 8,000,000 of SmartTalk stock valued on the closing date. The
Company believes that it should have received 355,555 shares of SmartTalk
stock based upon the price of the stock on the closing date. DCI received
$1,000,000 in cash at the closing and 326,531 restricted shares of Smartalk
common stock. The receivable from SmartTalk in the accompanying balance
sheet represents the value of the shares not received as of March 31, 1998.
Management believes this value will be realized based upon its negotiations
with SmartTalk. DCI requested registration of the 326,531 shares on March
31, 1998, and disposed of its holdings on May 15, 1998, realizing $8,124,761
of net proceeds.
A non-compete clause in the agreement precludes DCI or its subsidiaries from
engaging in the prepaid phone card products business through the distributor
in the UK for a period of seven years. As a result, operations to date for
CardCall UK are shown as discontinued operations. Operations of CardCaller
Canada are shown as continuing operations. The gain on the transaction is $
4,817,154 after the write-off of goodwill and other expenses associated with
the transaction. The operation of Cardcall UK has been shutdown and is in
the process of being liquidated. Management and its legal counsel believe
that no liability is required in the accompanying financial statements as a
result of the liquidation.
In the second quarter ended September 30, 1997, the Company discontinued the
operation of its Alpha division, which assembled computer boards that were
sold to a number of industries, including education and government. In
conjunction with this event, unamortized customer base totaling $492,985 was
written off and operating losses through September 30, 1997 are shown as
discontinued operations.
In March, 1998, the Company discontinued the operations of PEL, which had
been in the value-added card-based marketing program business.
Information related to the discontinued operations of CardCall UK, PEL and
F-17
Alpha for the years ended March 31, 1998 and 1997 are as follows:
1998 1997
---- ----
Net sales $1,152,098 $226,047
Cost of sales and
other expenses 1,789,610 348,086
---------- ---------
Loss from
discontinued operations $(637,512) $(122,039)
========= =========
The net assets and liabilities of the discontinued operations of CardCall UK,
PEL and Alpha included in the accompanying consolidated balance sheets as of
March 31, 1998 and 1997 are as follows:
1998 1997
Current assets $ - $67,990
Total assets - 109,579
Current liabilities - 17,876
Total liabilities - 37,953
Net assets of
discontinued operations $ - $71,626
Note 6. Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired (goodwill), which is being amortized
over twenty years is as follows:
Accumulated Net Book
Acquisition Goodwill amortization Value
Muller Media $1,989,931 $(120,000) $1,869,931
CardCall 3,987,523 (200,000) 3,787,523
CyberFax 1,033,975 (50,000) 983,975
----------- ------------ --------
$7,011,429 $(370,000) $6,641,429
============ =========== =========
CardCall goodwill reflects the remaining balance of $3,987,523 after
$3,267,000 was written off against the sale of the distribution contract in
October 1997.
F-18
Note 7. Common Stock
During the year ended March 31,1997, the Company raised approximately
$1,026,000 in cash by issuing 3,195,181 common shares under Regulation 504
and 505 of the Securities Act.
In the year ended March 31, 1995, the Company established an incentive stock
option plan reserving 10,000,000 shares of common stock for certain
employees, officers and directors. The exercise price must be at least the
fair market value of the stock on the date of the grant, and the term of each
option granted will not be more than 10 years from the date of the grant.
Where options are granted to stockholders owning more than 10% of the
outstanding common stock, the exercise price must be at least 110% of the
fair market value of the stock, and the term is limited to five years. The
Company has placed an annual limit on options of $100,000 per calendar year
for each employee. To the extent that the above limit is not used in any
calendar year, 50% of the excess for an individual may be carried over for up
to three years.
The Company accounts for stock options under APB Opinion No. 25, entitled
Accounting for Stock Issued to Employees, under which no compensation expense
is recognized. In the year ended March 31, 1996, the Company adopted SFAS No.
123, Accounting for Stock-Based Compensation for disclosure purposes;
accordingly, no compensation expense has been recognized in the results of
operations for its stock option plan, in accordance with APB Opinion No. 25.
For disclosure purposes, the fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes option pricing model,
with the following weighted average assumptions used for stock options
granted in 1998 and 1997: Annual dividends 0, expected volatility 88%, risk-
free interest rate of 5.56%, and expected life of five years for all grants.
Under the above model, the total value of stock options granted in 1998 and
1997 was $296,000 and $3,258,000. Had the Company determined compensation
cost for this plan in accordance with SFAS No. 123, the Company's pro forma
net loss and net loss per share would have been as follows:
F-19
1998 1997
Income (loss):
Continuing operations $(2,905,274) $ (3,282,508)
Gain on disposal of
Operation 4,185,179 -
Discontinued operations (637,512) (122,039)
------------ ------------
Net income (loss) before
preferred dividends $ 642,393 $ (3,404,547)
========= =============
Net income (loss) per share:
Continuing operations $ (.33) $ (.68)
Gain from disposal of
Operations .38 -
Discontinued operations (.06) (.03)
----------- -----------
Net income (loss) $ (.01) $ (.71)
========= =========
The SFAS No. 123 method of accounting does not apply to options granted prior
to January 1, 1995 and, accordingly, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Summarized information regarding stock options outstanding and exercisable at
March 31,1998 is as follows:
Number of shares Average price
Outstanding at April 1,1996 98,000 $ .58
Granted 3,450,000 $ .19
Exercised (678,700) $ .19
---------
Outstanding at March 31,1997 2,869,300 $ .20
Granted 8,539,445 $ .44
Exercised (3,408,337) $ .20
---------
Outstanding at March 31, 1998 8,000,408 $ .46
---------
At March 31, 1998, 532,189 warrants to purchase common stock through 2002,
with exercise prices from $1.96 to $3.63, were outstanding.
Note 8. Investments
At March 31, 1998, the Company has classified its bond mutual fund as
available for sale and, accordingly, has reported the securities at
approximate market value, with unrealized gains and losses, net of applicable
income taxes, excluded from operations and reported as a separate component
of stockholders' equity as follows:
F-20
1998 1997
----- ----
Bond mutual fund, at cost $ 49,070 $ 49,070
Unrealized loss (5,395) (5,495)
------------- --------
Market value $ 43,675 $ 43,575
======= =======
No sales of securities took place during the year ended March 31, 1998.
The Company has classified its common stock securities of SmarTalk as trading
securities and accordingly has reported the securities at their net
realizable value, since the securities were sold on May 15, 1998 for $
8,124,761 at a net gain of $ 2,813.
Equity securities at cost $ 8,121,948
Net realizable value 8,124,761
-------------
Gain $ 2,813
======
Note 9. Accounts Receivable
Included in the current accounts receivable are Muller Media accounts
receivable totaling $2,161,729 and $2,095,395 for 1998 and 1997 respectively.
These balances represent those amounts contractually due within one year of
the balance sheet date. Muller also has balances due under these contracts
with contractual payment terms beyond one year of the balance sheet date
totaling $928,942 in 1998 and $1,114,389 in 1997. These balances have been
classified as a long-term receivable. One of Muller's major producers has a
security interest in certain accounts receivable of approximately $801,000 at
March 31, 1998.
Note 10. Preferred Stock
The Company has authorized but unissued shares of non-voting preferred stock
that may be issued in series with such preferences as determined by the Board
of Directors. During fiscal years ended 1998 and 1997, the following series
of preferred stock were issued:
F-21
Series C
- --------
On February 18, 1997 the Company issued $1,500,000 of Series C non- voting
convertible preferred shares repayable on February 28, 1999. The shares were
convertible to common stock 60 days from the issue date at the lesser of
$2.75 per share or 75% of the average closing bid price of the common stock
for the five days prior to conversion. If the conversion took place 90 days
after the issue date, the shares were convertible to common stock at the
lesser of $2.75 or 70% of the average closing bid price of the common stock
for the five days prior to conversion. In connection with this offering,
545,455 common shares were placed with an escrow agent to facilitate any
conversions. In addition, 140,000 warrants exercisable at $3.625 for a
period of three years from the issue date were granted to these preferred
shareholders. The preferred shares plus deemed dividends of $445,000 were
converted to 1,132,991 common shares in the year ended March 31, 1998. The
deemed dividend has been included as a cost of the acquisition of CardCall
International. The 545,455 escrowed common shares were returned to the
Company in 1998.
Series D
- --------
In July 1997, 450 shares of the Series D non-voting convertible preferred
shares $1000 par value were issued by the Company for $450,000. The shares
were convertible to common stock 60 days from the issue date at 75% of the
average closing bid price of the common stock for five days prior to
conversion. If the conversion took place 90 days after the issue date the
shares were convertible at 70% of the average closing bid price of the common
stock for five days prior to conversion. The Company recorded a deemed
dividend of $157,500 for the discount upon conversion of the $450,000
proceeds. In connection with this transaction the Company issued to the
preferred shareholders 42,189 warrants to purchase common shares exercisable
at $2.50 through July 2000. The preferred shares and deemed dividends were
converted to 352,558 common shares in the year ended March 31, 1998.
Series E
- --------
In the year ended March 31, 1998 the Company issued $2,000,000 of Series E 8%
non -voting convertible preferred shares repayable two years from the date of
issuance. The first 22% of the shares are convertible to common stock 60 days
from the issue date at 80% of the average closing bid price of the common
stock for the five days prior to conversion. If the conversion takes place 90
days after the issue date, 45% of the shares are convertible to common stock
at 77% of the average closing bid price of the common stock for the five days
F-22
prior to conversion. After 120 days, any remaining shares can be converted at
74% of the average closing bid price for the five days prior to conversion.
In connection with this offering, 802,000 common shares were placed with an
escrow agent to facilitate any conversions. In addition, 250,000 warrants
exercisable at prices ranging from $1.82 to $2.93 through 2003 were granted
to these preferred shareholders.
The Company recorded a deemed dividend of $479,800 for the discount upon
conversion of the $ 2,000,000 proceeds. Preferred shares of $1,389,950,
deemed dividends of $332,866 and $23,420 of the 8% coupon rate dividends were
converted to 899,273 common shares in the year ended March 31, 1998.The
802,000 escrowed shares were used in the conversion.
At March 31, 1998, $610,050 of Series E shares remained outstanding and
accrued preferred dividends relating to this issue were $184,179. Subsequent
to March 31, 1998, $412,500 of preferred shares and deemed dividends of
$98,959 were converted to 368,304 common shares
Series A
- --------
The holders of the preferred shares are entitled to receive dividends at
9.25% per annum at the time legally available. Such dividends are cumulative
from the date of purchase of the stock. The preferred shares are non-voting
and in the event of liquidation of the Company the preferred shareholders are
entitled to payment of an amount equal to par value of the preferred shares
before any distribution to other shareholders.
There are no stated redemption terms associated with the Company's Series A
preferred stock. No preferred stock dividends have been declared or paid in
the years ended March 31, 1998 and 1997. Accrued preferred stock dividends at
March 31, 1998 and 1997, are $177,177 and $140, 976, respectively.
Note 11. Long -Term Debt
Long-term debt consists of the following:
March 31,
1998 1997
---- ----
Equipment financing note bearing
interest at 17.17% secured by
the equipment purchased, payable
in monthly installments of $132 due
in March, 2000. $ - $3,620
F-23
Equipment financing note bearing
interest at 17.17% secured by
the equipment purchased, payable in
monthly installments of $661 due in
December, 1999. $ - $16,875
CyberFax bank loan, bearing interest
at prime plus 1.75% due in June, 2004.
Interest only for years 1998 through
1999, principle and interest for years
2000 through 2005. 35,175 -
------------ ------------
35,175 20,495
Less current portion of long-term debt - 6,479
----------- -----------
$ 35,175 $ 14,016
====== =======
Aggregate annual principal payments are as follows:
2000, $5,273; 2001, $7,030; 2002, $7,030; 2003, $7,030; 2004, $7030 and
thereafter $1,782.
Note 12. Related Party Transactions
During the years ended March 31, 1998 and 1997, the Company received advances
from and made payments for liabilities on behalf of certain officers and
shareholders. The amount due from the officers and shareholders was $4,160 at
March 31, 1997, and the amount due to officers and shareholders was $410,156
at March 31, 1998.
Note 13. Commitments and Contingencies
Leases
- ------
The Company has several operating lease agreements for office space.
Aggregate annual minimum future rental payments under current leases are
$121,029 in 1999; $87,239 in 2000; $68,984 in 2001; $57,204 in 2002; $57,204
in 2003 and $31,212, thereafter. Rent expense was $171,007 and $92,867 in the
years ended March 31, 1998 and 1997, respectively.
F-24
Employment Agreements
- ---------------------
The Company has employment contracts with certain key employees that provide
for minimum annual compensation of $1,040,000 in 1999 and 2000; $872,000 in
2001 and $422,000 in 2002 and 2003, plus annual increases based on the
consumer price index.
Litigation
- ----------
Legal proceedings have been instituted against the company by a former long
distance supplier claiming a sum of $140,000. Management has filed a
counterclaim disputing the amount. A provision has not been made in the
financial statements for this claim because an estimate cannot be made and
the outcome is not determinable.
In addition to the aforementioned litigation, the Company is party to legal
actions arising during the normal course of business.
In the opinion of management, the ultimate outcome of the above litigation
will have no material effect on the financial position, results of operations
or cash flows of the Company.
Common and Preferred Stock
- --------------------------
During the fiscal years ended March 31, 1998 and 1997, the Company issued
shares of its common and preferred stock. These shares were not registered
under the Securities Act of 1933 based on the exemption from registration
thereunder provided by section 4 (2), for offerings not involving a public
offering.
Note 14. Employee Benefit Plans
During 1998, the Company established an Employee Pretax Savings Plan (401K
plan) for its employees. For the year ended March 31, 1998, the Company
contributed 25%, up to 6%, of employee's compensation. The Company incurred
approximately $5,500 of pension expense in 1998 relating to this plan.
F-25
Muller maintains a defined contribution plan for its employees. Pension
expense under this plan was $ -0- and $10,000 for 1998 and 1997.
Note 15. Fixed Assets
Fixed assets consist of:
March 31,
1998 1997
Telecommunications switches
and equipment $ 205,925 $ -
Equipment - furniture and fixtures 372,063 245,196
----------- -------
577,988 245,196
Accumulated depreciation (144,647) (116,207)
------------ ------------
$ 433,341 $ 128,989
===== =====
Note 16. Income Taxes
In February 1992, the FASB issued SFAS 109, effective for fiscal years
beginning after December 15, 1992. This statement established financial
accounting and reporting standards for the effect of deferred income taxes
using the liability approach, as compared to the concept of matching tax
expense to pre-tax income (deferred method) required under previous
accounting standards. In addition, under previous accounting standards, the
tax benefit of utilizing operating loss carryforwards was reflected as an
extraordinary item.
Deferred tax assets and liabilities are determined utilizing the enacted tax
rates applicable to the period the temporary differences are expected to be
paid or recovered. Accordingly, the current period tax provision can be
affected by the enactment of new tax rates. The statement requires a
valuation allowance reducing the deferred tax asset if it is more likely than
not that some portion of the asset will not be realized. DCI and its wholly
owned subsidiaries have a net operating loss carryforward of approximately
$1,986,000 as of March 31,1998 which expires through 2012. A deferred tax
benefit has not been recorded with respect to the remaining net operating
loss carry forward.
F-26
During 1998, the Company utilized net operating loss carryforwards and
related tax benefits as follows:
Net gain on disposal of discontinued operations $ 4,185,179
Tax liability on gain of discontinued operations (1,433,962)
Tax benefit from utilization of net operating
loss carryfoward 1,433,962
-----------
Net gain on disposal of discontinued operations $ 4,185,179
===========
The provision for income taxes is based upon Muller Media's individual
financial results, as it is not included in the company's consolidated tax
return.
The deferred tax liability reported on the accompanying balance sheets
applies to Muller Media, Inc. For income tax reporting, Muller uses the
installment method of accounting. This method recognizes revenue and the
related expense over the installments paid by the television stations to
Muller, usually over 12 to 36 months. Deferred income taxes have been
recorded for the excess of financial statement income over taxable income.
Note 17. Segment Information
The following table shows sales, operating earnings (loss) and other
financial information by industry segment for the years ended March 31,1998
and 1997.
1998 Media Travel Telecom Corporate Consolidated
- ---- ----- -------- ------- --------- ------------
Sales $2,721,897 $1,194,199 $4,201,031 $ - $8,117,127
Operating
(loss)
earnings 45,311 (28,764) (1,151,097)(1,474,724) (2,609,274)
Identifiable
assets 6,215,098 46,130 6,768,827 8,641,018 21,671,073
Depreciation 6,499 5,861 127,225 13,364 152,949
Capital
Expenditures - 7,491 345,449 22,142 375,082
F-27
1997 Media Travel Telecom Corporate Consolidated
- ---- ------ -------- -------- ---------- ---------------
Sales $825,225 $1,088,713 $25,953 $ - $1,939,891
Operating
(loss)
earnings 186,586 17,402 - (228,495) (24,508)
Identifiable
assets 6,216,388 27,122 37,197 2,810,974 9,091,681
Depreciation 2,106 42 - 11,469 13,617
Capital
expenditures - - - 40,082 40,082
The Company's operations are classified into three business segments as
follows:
Media - Includes the national distribution and syndication of feature films
and programs to the broadcast and cable television industry.
Travel - Includes a travel agency.
Telecommunications - Includes prepaid phone cards, fax over the Internet, and
long distance communications.
Note 18. Joint Venture
On March 31, 1998 the Company and DataWave Systems Inc.( DataWave) formed a
joint venture for the marketing, sale and service of prepaid long distance
telephone calling cards in Canada. Under the terms of the agreement,
DataWave and CardCaller Canada, Inc. will contribute all existing Canadian
business to the joint venture. DCI owns 60% and DataWave 40% of the joint
venture.
In addition DCI contributed $281,000 to the joint venture on March 31, 1998,
which is recorded in other investments in the financial statements.
Note 19. Subsequent Events
The former shareholders of Muller completed the exercise of put options as
described in Note 3. DCI repurchased 800,000 shares of common stock from
the former shareholders of Muller on June 9, 1998 for $2,000,000.
On April 30 , 1998, DCI, entered into an agreement with Edge Communications
Inc. (Edge) to purchase all of Edge's outstanding common stock for 4,385,715
shares of DCI stock.
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In April, 1998 the Company issued $3,000,000 of Series F 8% non -voting
convertible preferred shares . The shares are convertible to common stock 90
days from the issue date at the lesser of 75% of the average closing bid
price of the common stock for the ten days prior to conversion or $4. The
securities must be converted into common shares within two years of the issue
date. In connection with this offering 50,000 warrants exercisable at $1.56
for a period of five years from the issue date were granted to these
preferred shareholders and 50,000 warrants, at the same terms, were granted
to certain individuals as finder fees for the placement of the preferred
shares with investors.
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