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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER 0-22636
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DIAL-THRU INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2801677
State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization No.)
700 SOUTH FLOWER STREET, SUITE 2950
LOS ANGELES, CA 90017
(Address of principal executive offices)
(Zip Code)
213-627-7599
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $0.001 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amount to this Form 10-K or any amount to this Form 10-K. [ ]
As of January 23, 2001, 10,034,425 shares of Common Stock were
outstanding. The aggregate market value of the 7,291,426 shares of Common
Stock held by non-affiliates of Dial-Thru International Corporation as of
such date approximated $7,291,426 using the beneficial ownership rules as
adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to
exclude stock that may be beneficially owned by directors, executive
officers or ten percent stockholders, some of whom might not be held to be
affiliates upon judicial determination.
DOCUMENT INCORPORATED BY REFERENCE
Part III of this Annual Report incorporates by reference information in
the Proxy Statement for the Annual Meeting of Stockholders of Dial-Thru
International Corporation to be filed with Securities and Exchange
Commission on or before February 28, 2001.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in
this Annual Report on Form 10-K include "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Forward-looking statements are statements
other than historical information or statements of current condition. Some
forward-looking statements may be identified by the use of such terms as
"expects," "will," "anticipates," "estimates," "believes," "plans" and words
of similar meaning. These forward-looking statements relate to business
plans, programs, trends, results of future operations, satisfaction of
future cash requirements, funding of future growth, acquisition plans and
other matters. In light of the risks and uncertainties inherent in all such
projected matters, the inclusion of forward-looking statements in this Form
10-K should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved or that
operating expectations will be realized. Revenues and results of operations
are difficult to forecast and could differ materially from those projected
in forward-looking statements contained herein, including without limitation
statements regarding the Company's belief of the sufficiency of capital
resources and its ability to compete in the telecommunications industry.
Actual results could differ from those projected in any forward-looking
statements for, among others, the following reasons: (a) increased
competition from existing and new competitors using voice over Internet
protocol ("VoIP") to provide telecommunications services over the Internet,
(b) the relatively low barriers to entry for start-up companies using VoIP
to provide telecommunications services over the Internet, (c) the price-
sensitive nature of consumer demand, (d) the relative lack of customer
loyalty to any particular provider of services over the Internet, (e) the
Company's dependence upon favorable pricing from its suppliers to compete in
the telecommunications industry, (f) increased consolidation in the
telecommunications industry, which may result in larger competitors being
able to compete more effectively, (g) the failure to attract or retain key
employees, (h) continuing changes in governmental regulations affecting the
telecommunications industry and the Internet and (i) changing consumer
demand, technological developments and industry standards that characterize
the industry. The Company does not undertake to update any forward-looking
statements contained herein. For a discussion of these factors and others,
please see "Certain Business Factors" in Item 1 of this Annual Report on
Form 10-K. Readers are cautioned not to place undue reliance on the forward-
looking statements made in, or incorporated by reference into, this Annual
Report on Form 10-K or in any document or statement referring to this Annual
Report on Form 10-K.
PART I
Item 1. Business
THE COMPANY
Throughout this Annual Report, the term "Company" refers to Dial-Thru
International Corporation, a Delaware corporation formerly known as ARDIS
Telecom & Technologies, Inc., successor by merger to Canmax Inc. The
Company was incorporated on July 10, 1986 under Company Act of the Province
of British Columbia, Canada. On August 7, 1992, the Company renounced its
original province of incorporation and elected to continue its domicile
under the laws of the State of Wyoming, and on November 30, 1994 its name
was changed to "Canmax Inc." On February 1, 1999, the Company consummated a
merger into a wholly owned subsidiary to effect the reincorporation of the
Company under the laws of the State of Delaware under the name "ARDIS
Telecom & Technologies, Inc." On November 2, 1999, the Company acquired
(the "DTI Acquisition") substantially all of the business and assets of
Dial-Thru International Corporation, a California corporation, along with
the rights to the name "Dial-Thru International Corporation." On January
19, 2000, the Company changed its name from ARDIS Telecom & Technologies,
Inc. to "Dial-Thru International Corporation." The Company's common stock
currently trades on the OTC Bulletin Board under the symbol "DTIX."
Prior to December 7, 1998, the Company operated distinct businesses in
each of the software and telecommunications industries. On December 7, 1998,
the Company sold its retail automation software business (the "Software
Business") to Affiliated Computer Services, Inc. Therefore, the Company no
longer engages in the Software Business, and is now operating only in the
telecommunications industry (the "Telecommunications Business").
The Company's principal executive offices are located at 700 South
Flower Street, Suite 2950, Los Angeles, California 90017, and its telephone
number is (213) 627-7599.
General Description of Business
From its inception until 1998, the Company provided retail automation
software and related services to the retail petroleum and convenience store
industries. In late 1996, the Company determined to expand its business
operations beyond the single vertical market and one large customer
that dominated its Software Business. After evaluating a number of
alternative strategies, the Company decided that the rapidly expanding
telecommunications market presented an opportunity to utilize some of the
technology and support capabilities that it had developed, and chose to make
its entry into the telecommunications industry via the pre-paid long
distance market.
On January 30, 1998, the Company acquired USCommunication Services,
Inc. ("USC") in a private stock transaction. USC provided a number of
telecommunication and internet products and services, including prepaid
phone cards, public internet access kiosks, and pay telephones. USC
primarily marketed its products and services to individuals and businesses
in the transportation industry through national and regional truckstops and
trucking fleets. USC's products were sold at selected locations throughout
the U.S., such as locations operated by Pilot Travel Centers, Petro Stopping
Centers, and All American Travel Centers. USC also marketed its services
directly through prepaid phone card recharge sales. The Company concluded
its acquisition of USC believing that it would provide the Company with
access to the telecommunications market. Certain capabilities of USC, along
with distribution channels, failed to meet the expectations of the Company.
On June 15, 1998, the Company executed an agreement with the former
principals of USC to rescind the USC acquisition effective May 27, 1998.
During its experience with USC, the Company decided to develop its in-
house capabilities to expand its telecommunications operations and continued
to focus on the rapidly growing prepaid phone card market. In August of
1998, the Company entered into an agreement (the "PT-1 Agreement") with PT-1
Communications, Inc. ("PT-1") to acquire long distance telecommunications
and debit services for use in the Company's marketing and distribution of
domestic and international prepaid phone cards. The Company conducted its
domestic prepaid phone card business through RDST, Inc., a wholly owned
subsidiary, by purchasing services from PT-1 until mid-1999 when it launched
its facilities-based telecommunication operations. In the second quarter of
fiscal 1999, the Company purchased telecommunications switching equipment
and an enhanced services platform. Following a period of development,
implementation and testing, the Company commenced operations as a
facilities-based carrier in the fourth quarter of 1999. Calls made with the
Company's prepaid phone cards could then be routed through the Company's
switching facilities, giving the Company better control over costs and
quality of service.
On November 2, 1999, the Company acquired the assets and business of
Dial-Thru International Corporation, an international facilities-based
carrier. The Company continued operations of the acquired business through
its subsidiary, Dial-Thru.com.
During the first quarter of fiscal 2000, the Company appointed John
Jenkins (founder of the acquired business) to the position of President and
Chief Operating Officer. The Company also announced the creation of its
"Bookend Strategy," to allow it to effectively compete in the international
telecommunications market (see "Business Strategy" below), and began the
merger of operations of the two businesses with an increased emphasis on the
international business and a reduced focus on the prepaid domestic market.
In the third quarter of fiscal 2000, the Company relocated all its domestic
operations, including its switching facilities, to its Los Angeles location.
The Company now operates as a facilities-based global Internet Protocol
("IP") communications company providing connectivity to international
markets experiencing significant demand for IP enabled services. The
Company provides a variety of international telecommunications services
targeted to small and medium sized enterprises (SME's) that include the
transmission of voice and data traffic and the provision of Web-based and
other communications services. The Company utilizes Voice over Internet
Protocol (VoIP) packetized voice technology (and other compression
techniques) to improve both cost and efficiencies of telecommunication
transmissions, and is developing a private IP telephony network. The Company
utilizes state-of-the-art digital fiber optic cable, oceanic cable
transmission facilities, international satellites and the Internet to
transport its communications. The Company believes that it will be a strong
competitor in the international telecommunications markets where it chooses
to compete.
Regulatory Environment.
Regulation of Internet Telephony and the Internet.
The use of the Internet to provide telephone service is a recent market
development. Currently, the FCC is considering whether to impose surcharges
or additional regulations upon certain providers of Internet telephony. On
April 10, 1998, the FCC issued its report to Congress concerning the
implementation of the universal service provisions of the Telecommunications
Act. In the report, the FCC indicated that it would examine the question of
whether certain forms of phone-to-phone Internet telephony are information
services or telecommunications services. The FCC noted that it did not
have, as of the date of the report, an adequate record on which to make a
definitive pronouncement, but that the record suggested that certain forms
of phone-to-phone Internet telephony appear to have the same functionality
as non-Internet telecommunications services and lack the characteristics
that would render them information services. If the FCC were to determine
that certain services are subject to FCC regulation as telecommunications
services, the FCC may require providers of Internet telephony services to
make universal service contributions, pay access charges or be subject to
traditional common carrier regulation. It is also possible that PC-to-phone
and phone-to-phone services may be regulated by the FCC differently. In
addition, the FCC sets the access charges on traditional telephony traffic
and if it reduces these access charges, the cost of traditional long
distance telephone calls will probably be lowered, thereby decreasing the
Company's competitive pricing advantage. In May of 2000, the FCC approved
an access charge reduction plan known as CALLS which has resulted in a
reduction of the access charges paid by traditional long distance carriers
to the major local phone companies.
Changes in the legal and regulatory environment relating to the
Internet connectivity market, including regulatory changes which affect
telecommunications costs or that may increase the likelihood of competition
from the regional Bell operating companies or other telecommunications
companies, could increase the Company's costs of providing service. For
example, the FCC determined in 1999 that subscriber calls to Internet
service providers should be classified for jurisdictional purposes as
interstate calls. On appeal, the U.S. Court of Appeals remanded the case to
the FCC, directing the FCC to reconsider this determination. If the FCC
reaffirms its original determination, the determination could affect a
telephone carrier's cost for provision of service to these providers by
eliminating the payment of reciprocal compensation to carriers terminating
calls to these providers.
The FCC has pending a proceeding to encourage the development of cost-
based compensation mechanisms for the termination of calls to Internet
service providers. Meanwhile, state agencies will determine whether
carriers receive reciprocal compensation for these calls. If new
compensation mechanisms increase the costs to carriers of termination calls
to Internet service providers or if states eliminate reciprocal compensation
payments, the affected carriers could increase the price of service to
Internet service providers to compensate, which could raise the cost of
Internet access to consumers.
In addition, although the FCC to date has determined that providers of
Internet services should not be required to pay interstate access charges,
this decision may be reconsidered in the future. This decision could occur
if the FCC determines that the services provided are basic interstate
telecommunications services and no longer subject to the exemption from
access charges that are currently enjoyed by providers of enhanced services.
Access charges are assessed by local telephone companies to long-distance
companies for the use of the local telephone network to originate and
terminate long-distance calls, generally on a per minute basis. The FCC has
stated publicly that it would be inclined to hold the provision of phone-to-
phone Internet protocol telephony to be a basic telecommunications service
and therefore subject to access charges and universal service contribution
requirements. In a Notice of Inquiry released September 29, 1999, the FCC
again asked for comments on the regulatory status of Internet telephony.
Specifically, the FCC asked for comments to address whether Internet
telephony service generally, and phone-to-phone service in particular, may
be regulated as a basic telecommunications service. If the FCC concludes
that any or all Internet telephony should be regulated as basic
communications service, it eventually could require that Internet telephony
providers must contribute to universal service funds and pay access charges
to local telephone companies. The imposition of access charges or universal
service contributions would substantially increase the Company's costs of
serving dial-up customers. Following the election of George W. Bush as
President of the United States, William Kennard resigned from the
chairmanship of the FCC and President Bush appointed Michael Powell as the
new chairman. The FCC's polices may change as a result of this change in
FCC leadership.
State public utility commissions may retain jurisdiction to regulate
the provision of intrastate Internet telephony services. At least one
state public utility commission (the Nebraska Commission) has made a
determination that it will regulate intrastate Internet telephony services.
State regulation of intrastate Internet telephony services may result in the
requirement that Internet telephony providers pay intrastate access charges
to local phone companies and pay into state universal service funds.
Local phone companies seeking to require that providers of Internet
telephony services pay access charges to them have the option of filing suit
as well as initiating regulatory proceedings. In January of 2001, a state
trial court in Colorado ruled that one provider of Internet telephony
services must pay intrastate access charges to the local phone company.
The Colorado litigation result may encourage local phone companies to file
more such suits. Courts in such suits may award substantial damages for
past periods of time in which the Internet telephony provider did not pay
access charges as well as require that access charges be paid prospectively.
State and federal regulators are in some cases authorized to award damages
as well as prospective relief.
To the Company's knowledge, there are currently no domestic and few
foreign laws or regulations that prohibit voice communications over the
Internet. A number of countries that currently prohibit competition in the
provision of voice telephony have also prohibited Internet telephony. Other
countries permit but regulate Internet telephony. If Congress, the FCC,
state regulatory agencies of foreign governments begin to regulate Internet
telephony, such regulation may materially adversely affect the Company's
business, financial condition or results of operations.
In addition, access to the Company's services may also be limited in
foreign countries where laws and regulations otherwise do not prohibit voice
communication over the Internet. The Company has negotiated agreements to
provide its services in various countries. No assurances can be given that
the Company will continue to be successful in these negotiations.
Congress has recently adopted legislation that regulates certain
aspects of the Internet, including on-line content, user privacy and
taxation. For example, the Internet Tax Freedom Act prohibits certain taxes
on Internet uses through October 21, 2001. The Company cannot predict
whether substantial new taxes will be imposed on our services after that
date. In addition, Congress and other federal entities are considering
other legislative and regulatory proposals that would further regulate the
Internet. Congress is, for example, currently considering legislation on a
wide range of issues including Internet spamming, database privacy,
gambling, pornography and child protection, Internet fraud, and privacy.
Congress has enacted digital signature legislation. Various states have
adopted and are considering Internet-related legislation. Increased United
States regulation of the Internet may slow its growth, particularly if other
governments follow suit, which may negatively impact the cost of doing
business over the Internet and materially adversely affect the Company
business, financial condition, results of operations and future prospects.
The European Union's European Commission (EC) in early January 2001
recommended that member countries refrain from regulating Internet telephony
service. However, the EC qualified its recommendation by noting that
regulation is appropriate when an Internet telephony company provides levels
of quality and reliability equal to those provided by traditional phone
companies, makes a separate voice-only service offering, and meets several
other conditions.
The European Union has also enacted several directives relating to the
Internet. The European Union has, for example, adopted a directive on data
protection that imposes restrictions on the processing of personal data
which are more restrictive than current United States privacy standards.
Under the directive, personal data may not be collected, processed or
transferred outside the European Union unless certain specified conditions
are met. In addition, persons whose personal data is processed within the
European Union are guaranteed a number of rights, including the right to
access and obtain information about their data, the right to have inaccurate
data rectified, the right to object to the processing of their data for
direct marketing purposes and in certain other circumstances, and rights of
legal recourse in the event of unlawful processing. The Directive will
affect all companies that process personal data in, or receive personal data
processed in, the European Union, and may affect companies that collect or
transmit information over the Internet from individuals in the European
Union Member States. In particular, companies with establishments in the
European Union may not be permitted to transfer personal data to countries
that do not maintain adequate levels of data protection.
In addition, the European Union has adopted a separate, complementary
directive which pertains to privacy and the processing of personal data in
the telecommunications sector. This directive establishes certain
requirements with respect to, among other things, the processing and
retention of subscriber traffic and billing data, subscriber rights to non-
itemized bills, and the presentation and restriction of calling and
connected line identification. In addition, a number of European countries
outside the European Union have adopted, or are in the process of adopting,
rules similar to those set forth in the European Union directives. Although
the Company does not engage in the collection of data for purposes other
than routing calls and billing for our services, the data protection
directives are quite broad and the European Union Privacy standards are
stringent. Accordingly, the potential effect of these data protection rules
on the development of the Company's business is uncertain.
BUSINESS STRATEGY
The Company's core business operations are in the telecommunications
industry, and are concentrated on the marketing of IP telephony services,
including voice, fax, data, Web-based and other enhanced services. The
Company has coined the term "Bookend Strategy" to describe its primary
focus, which is to establish markets for telecommunication services
originating in foreign countries and in the corresponding ethnic segment of
the domestic market in the United States, and to provide these services via
direct private line circuits between those markets, utilizing Voice over
Internet Protocol (VoIP) and other digitized voice technologies.
Furthermore, the "Bookend Strategy" calls for filling as much of these
circuits as possible with retail traffic, and selling the remainder into the
international wholesale market to fully utilize all capacity. Products are
primarily dial around products that include international dial-thru, re-
origination, fax over the Internet, and other enhanced services targeted at
small and medium sized businesses, such as unified messaging, follow-me
numbers, and DSL. In essence the Company is selling a bundled solution
of communication services to these small to medium size businesses. The
Company sells telecommunications services for both foreign and domestic
origination of international long distance into the wholesale market,
primarily on a short-term basis to keep capacity available for Company
produced retail revenues. The primary objective of the Company in selling
into the wholesale market is to fill its direct routes with wholesale
traffic while it is developing revenue from its retail marketing operations
so that no capacity is wasted. The Company plans to expand services in
both foreign and domestic markets to include additional telecommunications
products as well as Internet related services.
A key part of the "Bookend Strategy" is the establishment of direct
routes for telecommunications traffic to and from a target country. Once
the Company has judged that a candidate country meets the requirements for
availability of retail revenue opportunities, it then must determine the
best manner in which to establish some form of dedicated connectivity. This
is usually accomplished by first establishing a licensing agreement within
the country whereby we are licensed to sell these communication products and
then putting into place International Private Leased Circuits (IPLC). In
order to effectively utilize the IPLC lines, the Company must apply the
appropriate technology to provide for compression of the telecommunications
traffic. The emerging technology that seems best suited for the majority of
installations is VoIP or packetized voice and data. This allows us to
legally enter markets that have not deregulated in a manner similar to the
way Sprint and MCI entered the market in the United States in the late
1970's and early 1980's prior to deregulation in the United States in 1984.
The explosive growth of the Internet has accelerated the rapid merger
of the worlds of voice-based and data-based communications. By first
digitizing voice signals, then utilizing the same packetizing technology
that makes the Internet possible (Internet Protocol or IP), IP Telephony was
born. IP Telephony not only provides for a cost effective manner in which
to perform the signal compression needed to maximize the return from the
use of the IPLC lines, but in certain cases allows for the use of
public Internet circuits for at least a portion of the calls or other
communications being made. In this way, not only has efficiency of
the dedicated circuits been improved, but also some of signaling and
communications can be accomplished utilizing the public Internet.
The Company currently operates its domestic telecommunications
switching facility in Los Angeles, California, providing for long distance
services worldwide. Development of the private IP Telephony network and the
use of VoIP technology is expected to improve both cost and quality of
telecommunications services, as well as facilitate the Company's expansion
into other Internet related opportunities.
The Company continues to review an acquisition strategy within its
current industries and other related markets. Any material acquisitions may
result in significant changes in the Company's business.
PRODUCTS AND SERVICES
Dial Thru and Re-origination Services
The Company provides a variety of international dial-thru and re-
origination services. The Company began offering these services in fiscal
2000 following the completion of the DTI Acquisition. In fiscal 2000, these
services accounted for approximately 68% of the Company's revenues. The
Company expects that these services will account for an increasing
percentage of the Company's total revenues as the Company shifts its focus
away from domestic prepaid phone cards. Generally, these services are
provided to customers that establish deposits with the Company to be used
for long-distance calling. By using the Company's dial-thru or re-
origination services, a caller outside of the United States can place a long
distance telephone call which appears to have originated from the Company's
switch in Los Angeles to the Customer's location, and then connects the call
through the Company's network to anywhere in the world. By completing the
calls in this manner, the Company is able to provide very competitive rates
to the customer. Wherever possible, the Company routes calls over its
private network. By using VoIP and other technologies to compress voice and
data transmissions across its international private lines and public
Internet circuits, the Company can offer its voice and data services at
costs that are substantially less than traditional communications services.
PowerCall[TM]
The Company offers PowerCall[TM] as a web-based e-commerce service that
allows a customer to use Internet signaling to notify a business of their
interest, and to initiate a call to the customer from the business while the
customer continues accessing the business' website. This service allows a
merchant to include a PowerCall[TM] icon on its website in which a customer
may type its telephone number in the PowerCall[TM] box and then click an
icon, prompting a call from the merchant to the customer. This service
allows a customer to talk to the merchant's representative while continuing
to view the website. This service is much more convenient for the customer
than using toll-free access lines which typically require various prompts
through voice activated menus. Also, for access by customers around the
world, a long list of toll-free access numbers would be required. PowerCall
O services, including the associated long distance calls, are paid for by
the merchant, and target markets are focused where the Company's private
network can be utilized. The PowerCallO product has been developed and
tested by the Company.
PC-to-Phone
The Company's PC-to-Phone services enable a user to place a call from a
personal computer to another party who uses a standard telephone. To
utilize this service, the customer's personal computer must be equipped with
a sound card, speakers and a microphone.
FaxThru[TM]
The Company offers FaxThru[TM] and "store and forward" Fax services,
which allow a customer to send a fax to another party utilizing the Internet
without incurring long distance or similar charges. From the customer's
perspective, these products function exactly like traditional fax services,
but with significant savings in long distance charges.
Global Roaming
The Company's Global Roaming service provides customers a single
account number to use to initiate phone-to-phone calls from locations
throughout the world using specific toll-free access numbers. This service
enables customers to receive the cost benefits associated with the Company's
telecommunications network throughout the world.
Netborne[TM]
The Company's NetBorne[TM] product allows a customer to dial a toll
free number to access calling services. Upon entering a personal
identification number assigned to each customer, the Dial-Thru.com
telecommunications switch (in Los Angeles) receives a signal across the
Internet indicating that the customer wishes to initiate a call. The switch
then originates a call to the server which connects to the phone from which
the customer is calling, allowing the customer to then place a call across
the Company's network to anywhere in the world. From the Customer's
perspective, the use of the card is identical to that of a prepaid phone
card; however, this technique allows the Company to offer its services in
countries where the use of prepaid phone cards may be prohibited or
restricted.
Prepaid Phone Cards
During fiscal year 2000, the Company significantly reduced its emphasis
on this segment of the business in favor of other products and services that
offer the opportunity for higher profit margins; however, the Company
currently continues to offer prepaid products for domestic calling, outbound
international long distance calling, as well as enhanced features such as
customized greetings and sequential calling. During fiscal 2000, 1999 and
1998, the services and products accounted for approximately 30%, 100% and
100%, respectively, of revenue from continuing operations. The Company
expects that revenues from these products and services will account for a
decreasing percentage of the Company's total revenues in the future as the
Company shifts its focus towards international services.
Unified Messaging
During the first part of 2001 the Company is adding several products to
its bundled package including Unified Messaging, whereby a customer will
have one phone number for all communication needs. A customer will receive
all calls, faxes, emails and voice mail via one address or phone number.
This will allow customers to access any communications function while on the
road domestically or internationally by simply dialing into the unified
messaging box.
1+ Services and Dial Around Products
The Company is tarriffed in the United States and now has begun selling
it's 1+ long distance service and Dial Around products to ethnic segments in
the United States where it has corresponding facilities in the foreign
country. This allows us to add a complete package of communication services
to the small to medium size business customer, thus allowing the Company to
be its total "Bundled Communications Provider".
SUPPLIERS
The Company's principal suppliers consist of domestic and international
telecommunications carriers. Relationships currently exist with a number of
reliable carriers. Due to the highly competitive nature of the
telecommunications business, the Company believes that the loss of any
carrier would not have a long term material adverse effect on the Company's
financial condition or results of operation.
CUSTOMERS
The Company focuses most of its sales and marketing efforts toward
small to medium sized businesses, particularly those located in foreign
markets where telecommunications deregulation has not taken place or is in
the process of taking place. The Company relies heavily on the use of
commissioned agents in those markets. By doing so, the Company believes
that it is establishing a wide base of customers with little vulnerability
based on lack of customer loyalty. The Company believes the loss of any
individual customers would not materially impact its business.
COMPETITION
The telecommunications services industry is highly competitive, rapidly
evolving and subject to constant technological change. Other providers
currently offer one or more of each of the services offered by the Company.
Telecommunication service companies compete for consumers based on price,
with the dominant providers conducting extensive advertising campaigns to
capture market share. As a service provider in the long distance
telecommunications industry, the Company competes with such dominant
providers as AT&T Corp. ("AT&T"), MCI WorldCom Inc. ("WorldCom"), and Sprint
Corporation ("Sprint"), all of which are substantially larger than the
Company and have (i) greater financial, technical, engineering, personnel
and marketing resources; (ii) longer operating histories; (iii) greater name
recognition; and (iv) larger consumer bases than the Company. These
advantages afford the Company's competitors the ability to (a) offer greater
pricing flexibility, (b) offer more attractive incentive packages to
encourage retailers to carry competitive products, (c) negotiate more
favorable distribution contracts with retailers and (d) negotiate more
favorable contracts with suppliers of telecommunication services. The
Company also competes with other smaller, emerging carriers including IDT
Corporation, ITXC Corp., DeltaThree Inc., Primus, and Net2Phone Inc. The
Company believes that additional competitors may be attracted to the market,
including internet-based service providers and other telecommunications
companies. The Company also believes that existing competitors are likely to
continue to expand their service offerings to appeal to retailers and
consumers.
The ability of the Company to compete effectively in the
telecommunications services industry will depend upon the Company's ability
to (i) continue to provide high quality services at prices generally
competitive with, or lower than, those charged by its competitors and (ii)
develop new innovative products and services. There can be no assurance that
competition from existing or new competitors or a decrease in the rates
charged for telecommunications services by major long distance carriers or
other competitors will not have a material adverse effect on the Company's
business, financial condition and results of operations, or that the Company
will be able to compete successfully in the future.
The market for international voice and fax call completion services is
highly competitive. The Company competes both in the market for enhanced
Internet Protocol ("IP") communication services and the market for carrier
transmission services. Each of these markets is highly competitive, and the
Company faces competition from a variety of sources, including large
communication service providers with greater resources, longer operating
histories and more established positions in the telecommunications
marketplace than the Company, some of which have commenced developing
Internet telephony capabilities. Most of the Company's competitors are
larger than the Company, although the Company also competes with small
companies that focus primarily on Internet telephony. The Company believes
that the primary competitive factors in the Internet and IP communications
business are quality of service, price, convenience and bandwidth. The
Company believes that the ability to offer enhanced service capabilities,
including new services, will become an increasingly important competitive
factor in the near future.
Future competition could come from a variety of companies both in the
Internet and telecommunications industries. The Company also competes in
the growing markets of providing reorigination services, dial-thru services,
dial-around, 10-10-XXX calling and other calling services. In addition,
some Internet service providers have begun enhancing their real-time
interactive communications and, although these companies have initially
focused on instant messaging, the Company expects them to provide PC-to-
phone services in the future.
Internet Telephone Service Providers
A number of companies have started Internet telephony operations in the
past few years. AT&T Clearing House and GRIC Communications sell
international voice and fax over the Internet and compete directly with the
Company. Other Internet telephony companies, such as Net2Phone, DeltaThree
Inc., GlobalNet, and PhoneFree.com also provide Internet telephony services
and compete or may in the future compete with the Company.
Traditional Telecommunications Carriers
A substantial majority of the telecommunications traffic around the
world is carried by dominate carriers in each market. These carriers, such
as British Telecom and Deutsch Telekom, have started to deploy packet-switch
networks for voice and fax traffic. In addition, other industry leaders,
such as AT&T, MCI WorldCom and Qwest Communications International have
recently announced their intention to offer Internet telephony services both
in the United States and internationally. All of these competitors are
significantly larger than the Company and have substantially greater
financial, technical and market resources; larger networks; a broader
portfolio of services, better name recognition and customer loyalties; an
established customer base; and an existing user base to cross-sell their
services. These and other competitors may be able to bundle services and
products that are not offered by the Company, together with Internet
telephony services, to gain a competitive advantage on the Company in the
marketing and distribution of products and services.
CERTAIN BUSINESS FACTORS
Limited Operating History; Net Losses
The Company commenced its Telecommunications Business in early 1998.
For the years ended October 31, 2000, 1999 and 1998, the Company recorded
net losses from continuing operations of approximately $8.7 million, $3.8
million and $2.6 million, respectively, on revenues from continuing
operations of approximately $8.6 million, $3.1 million and $2.2 million,
respectively. The losses in fiscal 2000 were primarily attributable to costs
associated with restructuring the Company following the merger of two
businesses, and costs associated with redirecting the Company away from the
domestic prepaid phone card market and toward the international IP telephony
market. The losses in fiscal 1999 were primarily attributable to the
startup costs associated with establishing the Company's facilities-based
operations, marketing costs associated with establishing the Company's
distribution channels, and research and development costs associated with
development of the Company's VIP Card[TM] product. The losses in fiscal 1998
were primarily attributable to the Company's unsuccessful acquisition of USC
and a one-time charge of approximately $1.2 million incurred in connection
with the disposition of USC. As the Company continues to increase its
distribution network and customer base, and develop its private IP telephony
network, it may continue to experience losses.
Competition
The market for the Company's products and services is highly
competitive. The Company faces competition from multiple sources, many of
which have greater financial resources and a substantial presence in the
Company's markets and offer products or services similar to the services of
the Company. Therefore, the Company may not be able to successfully compete
in its markets, which could result in a failure to implement the Company's
business strategy adversely affect the Company's ability to attract and
retain new customers. In addition, competition within the industries in
which the Company operates is characterized by, among other factors, price
and ability to offer enhanced service capabilities. Significant price
competition would reduce the margins realized by the Company in its
telecommunications operations and could have a material adverse effect on
the Company. In addition, many competitors have greater financial resources
to devote to research, development and marketing, and may be able to respond
more quickly to new or merging technologies and changes in customer
requirements. If the Company is unable to provide cutting-edge technology
and value-added Internet products and services, the Company will be unable
to compete in certain segments of the market, which could have a material
adverse effect on its business, results of operations and financial
condition.
Government Regulation
The legal and regulatory environment pertaining to the Internet is
uncertain and changing rapidly as the use of the Internet increases. For
example, in the United States, the FCC is considering whether to impose
surcharges or additional regulations upon certain providers of Internet
telephony.
In addition, the regulatory treatment of Internet telephony outside of
the United States varies from country to country. There can be no assurance
that there will not be interruptions in Internet telephony in these and
other foreign countries. Interruptions or restrictions on the provision of
Internet telephony in foreign countries may adversely affect the Company's
ability to continue to offer services in those countries, resulting in a
loss of customers and revenues.
New regulations could increase the cost of doing business over the
Internet or restrict or prohibit the delivery of the Company's product or
service using the Internet. In addition to new regulations being adopted,
existing laws may be applied to the Internet (see "The Company - Regulatory
Environment.") Newly existing laws may cover issues that include sales and
other taxes; access charges; user privacy; pricing controls; characteristics
and quality of products and services; consumer protection; contributions to
the Universal Service Fund, and FCC-Administered Fund for the support of
local telephone service in rural and high-cost areas; cross-border commerce;
copyright, trademark and patent infringement; and other claims based on the
nature and content of Internet materials.
Future Capital Needs
To fully implement its business plan, the Company will need to raise
additional funds within the next twelve months for capital expenditures and
working capital. Because of the Company's limited operating history and the
nature of the Internet industry, the Company's future capital needs are
difficult to predict. The Company's growth models are scaleable, but the
rate of growth is dependent on the availability of future financing.
Additional capital funding may be required for any of the following
activities: capital expenditures, advertising, maintenance and expansion;
sales, marketing, research and development; operating losses from
unanticipated competitive pressures or start-up operations; and strategic
partnerships and alliances. There is no assurance that adequate levels of
additional financing will be available at all or on acceptable terms. Any
additional financing could result in significant dilution to the Company's
existing stockholders. If the Company is unable to raise additional
capital, it would not be able to implement its business plan which could
have a material adverse effect on the Company's business, operating results
and financial condition.
Technology Changes
The industries in which the Company competes are characterized, in
part, by rapid growth, evolving industry standards, significant
technological changes and frequent product enhancements. These
characteristics could render existing systems and strategies obsolete, and
require the Company to continue to develop and implement new products and
services, anticipate changing consumer demands and respond to emerging
industry standards and technological changes. No assurance can be given
that the Company will be able to keep pace with the rapidly changing
consumer demands, technological trends and evolving industry standards.
Strategic Relationships
The Company's international business, in part, is dependent
upon relationships with distributors, governments or providers of
telecommunications services in foreign markets. The failure to develop or
maintain these relationships could result in a material adverse effect on
the financial condition and results of operations of the Company.
Dependence on and Ability to Recruit and Retain Key Management and Technical
Personnel
The Company's success depends to a significant extent on its ability to
attract and retain key personnel. In particular, the Company is dependent
on its senior management team and personnel with experience in the
telecommunications industry and experience in developing and implementing
new products and services within the industry. The Company's future success
will depend, in part, upon its ability to attract and retain key personnel.
Market for Common Stock; Volatility of the Stock Price
The Company cannot ensure that an active trading market for the common
stock exists or will exist in the future. However, even if the trading
market for the common stock exists, the price at which the shares of common
stock trade is likely to be subject to significant volatility. The market
for the common stock may be influenced by many factors, including the depth
and liquidity of the market for the Company's common stock, investor
perceptions of the Company, and general economic and similar conditions.
Listing Status; Penny Stock Rules
The Company's common stock currently trades on the OTC Bulletin Board.
Therefore, no assurances can be given that a liquid trading market will
exist at the time any investor desires to dispose of any shares of the
Company's common stock. In addition, the Company's common stock is subject
to the so-called "penny stock" rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other
than established customers and accredited investors (generally defined as an
investor with a net worth in excess of $1 million or annual income exceeding
$200,000 or $300,000 together with a spouse). For transactions covered by
the penny stock rules, a broker-dealer must make a suitability determination
for the purchaser and must have received the purchaser's written consent to
the transaction prior to sale. Consequently, both the ability of a broker-
dealer to sell the Company common stock and the ability of holders of the
Company's common stock to sell their securities in the secondary market may
be adversely affected. The Securities and Exchange Commission has adopted
regulations that define a "penny stock" to be an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions.
For any transaction involving a penny stock, unless exempt, the rules
require the delivery, prior to the transaction, of a disclosure schedule
relating to the penny stock market. The broker-dealer must disclose the
commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-
dealer is to sell the securities as a market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the market.
Finally, monthly statements must be sent disclosing recent price information
for the penny stock held in the account and information on the limited
market in penny stocks. As a result of the additional suitability
requirements and disclosure requirements imposed by the "penny stock" rules,
an investor may find it more difficult to dispose of the Company's common
stock.
Absence of Dividends
The Company has never declared or paid any cash dividends on its common
stock and does not presently intend to pay cash dividends on its common
stock in the foreseeable future.
SALES AND MARKETING
The Company markets long distance telecommunications products and
services from its offices in Los Angeles, California. The Company also has
a regional sales office located in Johannesburg, South Africa, and has
offices through joint ventures in Caracas, Venezuela, Buenos Aires,
Argentina, Jakarta, Indonesia, Hong Kong, and New Delhi, India. The
Company's revenues are primarily derived from the following three channels:
direct sales to business accounts; sales through commissioned agents; and
wholesale sales to other telecommunications providers. The Company plans
to expand its sales effort to both domestic and international business
accounts, as well as add products and services targeted toward residential
customers in both markets.
BACKLOG
Telecommunications products and services are generally delivered to
customers when ordered and, although continuing relationships with customers
exist that produce recurring revenue, there is no traditional backlog of
orders.
EMPLOYEES
As of January 23, 2001, the Company had approximately 35 full-time and
3 part-time employees, approximately 8 of which perform administrative and
financial functions, approximately 20 of which perform customer support
duties and approximately 30 of which have experience in telecommunications
operations and/or sales. Approximately 23 employees are currently located
in Los Angeles, California, and approximately 15 employees operate out of
field offices. No employees are represented by a labor union, and the
Company considers its employee relations to be excellent.
Item 2. Properties
The Company currently occupies approximately 4,000 square feet located
at 700 South Flower Street, Suite 2950, Los Angeles, California, 90017,
under an 18 month lease at $8,100 per month that expires in March 2001. The
Company is currently negotiating for an expansion of space and expects to
enter into a new 3 to 5 year lease at the same location.
As a result of the company's change in focus, the Company moved its
corporate headquarters from the Dallas, Texas facility and consolidated
operations and staff with the Los Angeles, California office. The Company
remains obligated under an operating lease agreement for the Dallas facility
for the remaining lease term with monthly lease payments of approximately
$15,000. The Company is currently taking steps to relieve itself of this
ongoing obligation.
Item 3. Legal Proceedings
On May 2, 2000, Star Telecommunications, Inc. ("Star") filed suit
against the Company in the Superior Court of the State of California in
Santa Barbara, California, alleging a breach of contract by the Company in
failing to pay amounts due under a Carrier Service Agreement, and seeks
damages of approximately $780,000. The Company disputes the amounts alleged
to be owed to Star, and has filed a counter-claim for damages against Star
for wrongful acts of Star under the Carrier Service Agreement. Amounts
alleged to be owed to Star are reflected in the Company's financial
statements. The Company is vigorously defending this lawsuit and strongly
believes that the Company's damages resulting from Star's actions
significantly exceed the claims by Star.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
MARKET FOR COMMON STOCK
The Company has only one class of shares, common stock, $.001 par
value, which is traded on the OTC Bulletin Board. Each share ranks equally
as to dividends, voting rights, participation in assets on winding-up and in
all other respects. No shares have been or will be issued subject to call or
assessment. There are no preemptive rights, provisions for redemption or
purpose for either cancellation or surrender or provisions for sinking or
purchase funds.
The Company's Common Stock is currently traded on the OTC Bulletin
Board under the symbol "DTIX." The Company's principal executive offices
are located at 700 South Flower Street, Suite 2950, Los Angeles, California,
90017, and its telephone number is (213) 627-7599.
MARKET PRICES OF THE COMPANY'S COMMON STOCK
The following table sets forth for the fiscal periods indicated the
high and low closing sales price per share of Company Common Stock as
reported on the OTC Bulletin Board. The market quotations presented reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and
may not necessarily reflect actual transactions.
COMMON STOCK
CLOSING PRICES
-----------------
HIGH LOW
----- -----
FISCAL 1999
First Quarter....................... $ 0.40 $ 0.28
Second Quarter...................... $ 0.52 $ 0.33
Third Quarter....................... $ 0.50 $ 0.41
Fourth Quarter...................... $ 1.63 $ 0.41
FISCAL 2000
First Quarter....................... $ 4.57 $ 0.69
Second Quarter...................... $13.30 $ 4.00
Third Quarter....................... $ 6.63 $ 2.63
Fourth Quarter...................... $ 3.88 $ 1.47
FISCAL 2001
First Quarter (through January 23, 2001) $ 2.19 $ 0.52
The closing price for the Company Common Stock on January 23, 2001 as
reported on the OTC Bulletin Board was $1.00.
Dividends
The Company has never declared or paid any cash dividends on its Common
Stock and does not presently intend to pay cash dividends on the its Common
Stock in the foreseeable future. The Company intends to retain future
earnings for reinvestment in its business.
Holders of Record
There were 423 stockholders of record as of January 23, 2001, and
approximately 3,000 beneficial stockholders.
Recent Sales of Unregistered Securities
Not Applicable.
Item 6. Selected Financial Data
FISCAL YEARS ENDED OCTOBER 31
--------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ----- -----
CONSOLIDATED STATEMENT OF OPERATIONS
DATA (1):
Revenues $ 8,591 $ 3,117 $ 2,189 $ -- $ --
Cost of revenues 9,971 2,982 2,155 -- --
Operating expenses 6,629 4,028 1,399 -- --
Interest income (expense) (665) 79 (101) -- --
Gain on sale of software business -- 5,310 -- -- --
Loss on disposal of USC -- -- (1,155) -- --
Income (loss) from continuing
operations (8,674) (3,815) (2,621) -- --
Income (loss) from discontinued
operations -- 5,528 (103) 87 143
Net income (loss) (8,674) 1,713 (2,724) 87 143
Net income (loss) per share(2) $ (1.02) $ 0.25 $ (0.38) $ 0.01 $ 0.02
CONSOLIDATED BALANCE SHEET DATA(1):
Total assets
Continuing operations 6,102 4,467 1,411 -- --
Discontinued operations -- -- 3,880 4,578 4,741
Working capital (deficiency)
Continuing operations (4,829) 1,251 (1,460) -- --
Discontinued operations -- -- 622 664 701
Noncurrent obligations
Continuing operations 119 562 -- -- --
Discontinued operations -- -- 147 178 256
Shareholders' equity 508 2,865 1,064 2,220 2,075
(1) All numbers, other than per share numbers, are in thousands. The
results of operations of the Software Business have been presented in
the financial statements as discontinued operations. Results of
operations in prior years have been restated to reclassify the Software
Business as discontinued operations.
(2) All per share amounts have been retroactively adjusted to reflect a
one-for-five reverse stock split of the Company's Common Stock
effective December 21, 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Fiscal Years Ended October 31, 2000, 1999
and 1998
General
Dial-Thru International Corporation is a facilities-based, global
Internet Protocol (IP) communications company providing connectivity to
international markets experiencing significant demand for IP enabled
services. The Company provides a variety of international
telecommunications services targeted to small and medium sized enterprises
(SME's) that include the transmission of voice and data traffic and the
provision of Web-based and other communications services. The Company
utilizes Voice over Internet Protocol (VoIP) packetized voice technology
(and other compression techniques) to improve both cost and efficiencies of
telecommunication transmissions, and is developing a private IP Telephony
network.
IP Telephony, or Voice over Internet Protocol (VoIP), is voice
communication that has been converted into digital packets and is then
addressed, prioritized, and transmitted over any form of broadband network
utilizing the technology that makes the Internet possible. These
technologies allow the Company to transmit voice communications with the
same high-density compression as networks initially designed for data
transmission, and at the same time utilize a common network for providing
customers with data and enhanced Web-based services.
The Company primarily focuses on markets where competition is not as
keen, thereby giving it opportunities for greater profit margin. These
markets include regions where deregulation of telecommunications services
has not been completed and smaller markets that have not attracted large
multi-national providers. Africa, Asia, and parts of South America offer
the greatest abundance of these target markets.
Cooperating with overseas carriers and the incumbent, usually
government owned, telephone companies, gives the Company better
opportunities to engage in co-branding of jointly marketed products,
including IP based enhancements that it has developed, rather than simply
basing a strategy on pricing arbitrage. As a result, the Company is
proactively invited to participate rather than reactively prevented from
entering new markets.
Unlike many new VoIP carriers in the market today, the Company is
focused on retail telecommunications sales to business customers, including
enhanced product offerings, allowing the Company to provide a complete
package of communication services, not just wholesale voice traffic. A
portfolio of enhanced offerings provides the Company with the opportunity
for higher profit margins and better customer loyalty, thus making the
Company less susceptible to competitive forces and market churn.
In tandem with overseas partners, the Company is deploying a "book-end"
strategy targeting markets at both ends of international circuits. As an
example, while cooperating with partners to target the SME market in a
selected foreign region, the Company also targets corresponding expatriates
and foreign owned businesses back in the U.S. By providing these services
in cooperation with the carrier that will ultimately terminate the calls in
the caller's "home" country, the Company enjoys reduced facilities costs,
increased economies of scale, lower customer acquisition costs, and higher
customer retention.
Focusing on cooperation in emerging markets also gives the Company
added benefit of being able to develop and exploit labor cost advantages not
found in industrial markets. For example, the Company plans to develop new
and extremely low-cost call center applications that will tie into and
enhance its new Web and VoIP applications. By relying on VoIP and IP,
rather than traditional voice technology, the Company ensures that its
network infrastructure is extremely cost-effective and state-of-the-art.
These are assets that not only help to build the Company's business, but
also make the Company more attractive as a potential partner to overseas
carriers and incumbent telephone companies.
During the fiscal year ended October 31, 2000, the Company acquired
substantially all the assets and business of Dial-Thru International
Corporation, a California corporation. During the fiscal year ended October
31, 1999, the Company disposed of its Software Business and its primary
business consisted of its Telecommunications Business. During the fiscal
year ended October 31, 1998, the Company operated two distinct businesses,
the Software Business and the Telecommunications Business. On December 7,
1998, the Company consummated the sale of the Software Business to
Affiliated Computer Services, Inc. (ACS). As a result of the Software
Business Sale, the Company no longer engages in the Software Business and
its business is focused solely on its Telecommunications Business.
Therefore, historic financial information attributable to the Software
Business will be reported as discontinued operations.
The following discussion and analysis of financial condition and
results of operations covers the years ended October 31, 2000, 1999, and
1998 and should be read in conjunction with the Company's Financial
Statements and the Notes thereto commencing at page F-1 hereof.
Results of Operations-2000 Versus 1999
General
On November 2, 1999, the Company consummated the acquisition (the "DTI
Acquisition") of substantially all of the assets and business of Dial-Thru
International Corporation, a California corporation now known as DTI-LIQCO,
Inc., including the rights to the name "Dial-Thru International
Corporation." On January 14, 2000, the stockholders of the Company approved
the Company's proposed change of its name from "ARDIS Telecom &
Technologies, Inc." to "Dial-Thru International Corporation" and on January
19, 2000, the Company officially changed its name to Dial-Thru International
Corporation.
In the second quarter of fiscal 2000, the Company shifted focus toward
its global IP telephony strategy; providing connectivity to international
markets experiencing significant demand for IP enabled services and then
targeting the corresponding ethnic segment in the U.S. This change in focus
by the Company has lead to a shift from its prepaid long distance operations
and toward higher margin international opportunities. This strategy allows
the Company to form local partnerships with foreign PTT's (entities
responsible for providing telecommunications services in foreign markets,
usually government owned or controlled) and ISP's, and to provide IP enabled
services based on the in-country regulatory environment affecting
telecommunications and data providers. Through these relationships, the
Company is able to acquire a direct equity interest or partnership/joint
venture interest in the local business and expects its interest to increase
as foreign ownership regulations of telecommunications companies diminish.
As an early market entrant building "super-regional" networks, management
believes the Company is positioned for long-term growth and the provision of
high margin, value-added services.
In the third quarter of fiscal 2000, the Company further concentrated
its efforts toward its global VoIP telecommunications strategy by completing
the consolidation of its Dallas, Texas and Los Angeles, California
operations into a single facility in Los Angeles, which also houses two sets
of the Company's telecommunications switching equipment and enhanced
services platforms. Significant reductions in cost have resulted from this
restructuring. Costs incurred to accomplish the restructuring include the
relocation of office facilities and staff, as well as costs associated with
reduction of personnel resulting from redundancies. Defocusing on the
prepaid market caused the Company to incur other costs associated with the
closure of certain distribution channels, and also resulted in a reduction
of revenues. The reduction of revenues, however, came from the low or
negative margin portion of the business that the Company is moving away
from. This refocusing and restructuring is also expected to result in not
only greater savings in the future, but also higher profits and more
sustainable revenues. This consolidation and reduction in staff will also
allow the Company to significantly reduce its overhead and contribute to its
goal of reaching positive cash flow in the near term. The decision to
proceed with this restructuring allows the Company to maximize the amount of
its resources available to be directed toward the continued growth of its
global network infrastructure.
In addition to helping customers achieve significant savings on long-
distance voice and fax calls by routing calls over the Internet or the
Company's private network, the Company's customers benefit by utilizing non-
traditional (Voice over Internet Protocol, "VoIP") methods to call into
international locations, thus receiving significant discounts on their
monthly bills. The Company expects to be able to offer new opportunities to
existing ISP's and Web-enabled corporate call centers engaged in electronic
commerce that want to expand into voice services and are seeking to lower
long-distance costs. The benefits delivered by virtue of participating in
the worldwide market include a wide selection of products, competitive
pricing, ease of access to vast numbers of consumers, and convenient methods
of purchase. Management believes the Company's foreign partners receive the
benefits of global marketing exposure, reduced cost of sale, reduced cost of
advertising, and access to technology that otherwise would not be readily
available.
Revenues
For the year ended October 31, 2000, the Company had revenues from
continuing operations of $8,591,000, an increase of $5,475,000 or 176% over
1999. This increase is primarily attributable to revenues of approximately
$5,836,000 arising from the business acquired in the DTI Acquisition.
There is significant growth projected from this business as the Company
continues to add customers and additional products to the existing customer
base thus allowing greater customer retention and profit margin from each
existing customer. Although the shift of business from the prepaid market
to international IP communications resulted in a reduction of revenues from
the prepaid portion of the Company's business, management believes that this
shift will ultimately allow the Company to increase and sustain higher
margins, as well as improve customer retention and EBITDA growth in the
years to come.
Expenses
For the year ended October 31, 2000, the Company had total direct costs
of revenues relating to revenues from continuing operations of $9,971,000,
an increase of $6,989,000 or 234% from 1999. This increase is primarily
attributable to the Company's 176% increase in sales combined with the
negative margins resulting from the Company's prepaid phone card product
line and the reduction thereof. The Company anticipates a significant
reduction in these costs as carrier and facilities obligations are settled,
which will have a positive impact on future operations and earnings.
General and administrative expenses attributable to continuing
operations, comprised primarily of management, accounting, legal and
overhead expenses, were $5,202,000 and $2,683,000 for the years ended
October 31, 2000 and October 31, 1999 respectively. This increase of
$2,519,000, or 94%, is primarily attributable to costs associated with the
DTI Acquisition, costs associated with the merger of the businesses and the
relocation of the Dallas, Texas operations to Los Angeles, California, costs
associated with the closing of field distribution centers for prepaid phone
cards, and costs associated with refocusing business efforts away from the
less profitable prepaid phone card market to the higher margin international
IP communications market. In addition, approximately $1,000,000 of this
$2,519,000 increase relates to bad debt expenses recorded for uncollectible
trade receivables associated with the DTI Acquistions, and uncollectible
trade receivables and a note receivable associated with the prepaid phone
card business. The remaining increase during the year of approximately
$1,500,000 is directly related to the business acquired in the DTI
Acquistion. As part of the Company's cost reduction efforts associated with
the merger of the two businesses, management implemented changes in
expenditure policies which have reduced, and will continue to reduce,
overall general and administrative and overhead costs in future periods.
Sales and marketing expenses attributable to continuing operations
decreased from $1,254,000 for the year ended October 31, 1999 to $863,000
for the year ended October 31, 2000. This decrease of $391,000 or 31% is
primarily due to the reduction in emphasis on the prepaid phone card portion
of the Company's business, which has a much higher cost of sales and
marketing than the international IP telephony portion of the business. In
addition, the Company has transitioned a significant portion of its sales
and marketing activities into countries where the Company is building
infrastructure. This has allowed the Company to achieve a reduction in
these costs during the year, and will continue to recognize significant
savings in future periods. Given these changes in strategy during the year,
management anticipates continuing reductions in the cost of sales and
marketing as a percentage of revenue.
Depreciation and amortization expenses attributable to continuing
operations increased approximately $474,000 or 521%, from $91,000 for the
year ended October 31, 1999 to $565,000 for the year ended October 31, 2000.
Of this increase, approximately $218,000 relates to the depreciation and
amortization of the assets of the business acquired in the DTI Acquisition.
The remaining increase of approximately $256,000 is attributable to the
increase in depreciation expense for telephone switching equipment which was
purchased in late fiscal 1999, as well as the amortization of goodwill
related to the DTI Acquisition.
The Company had net interest expense of $665,000 in fiscal 2000, as
compared to net interest income of $79,000 in fiscal 1999. The net interest
expense in 2000 was comprised of approximately $679,000 of financing
expenses attributable to the financing of $1,000,000 of convertible
debentures, offset by a net interest income of approximately $15,000. The
interest and financing costs of approximately $96,000 for 1999 were
primarily associated with the Founders Equity indebtedness that was repaid
during fiscal 1999, as well as equipment financing costs for the Company's
switching facilities and platform. These costs during fiscal 1999 were
offset by interest income of approximately $175,000 earned on the proceeds
from the Software Business sale and the Company's note receivable from
USCommunications Services, Inc.
As a result of the foregoing, the Company incurred a net loss from
continuing operations of $8,674,000, or $1.02 per share, for the year ended
October 31, 2000 compared with a net loss from continuing operations of
$3,815,000, or $0.56 per share, for the year ended October 31, 1999. The
Company's efforts with regard to the consolidation of business and reduction
in staff associated with the relocation of operations to Los Angeles have
allowed the Company to reduce its overhead and will contribute to its goal
of reaching positive cash flow in the near term.
Results of Operations-1999 Versus 1998
At the beginning of fiscal 1999, the Company conducted its
Telecommunications Business as a switchless reseller of telecommunications
services. During the fourth quarter of fiscal 1999, the Company began
operating its own telecommunications switching equipment and enhanced
services platform and migrated from providing its telecommunications
services as a switchless reseller of products of PT-1 Communications to
conducting its Telecommunications Business as a facilities-based operator.
As a facilities-based operator, the Company defers the recognition of
revenue and expenses until the customer utilizes a phone card or a card
containing unused calling time expires. As a switchless reseller, the
Company recognized revenue upon the shipment and invoicing of phone cards,
as the Company performed no further services after shipment. Therefore, the
results of operations for fiscal 1999 may not reflect the revenues and
expenses associated with phone cards shipped later in fiscal 1999 while the
Company operated as a facilities-based operator.
The Company's financial statements for the year ended October 31, 1999
and management's discussion and analysis of the results of operations for
1999 reflect the results of operations of the Telecommunications Business
only. On December 7, 1998, the Company sold its software business, and the
results of operations of the Software Business have been condensed into the
line item captioned "Discontinued Operations" in the Company's financial
statements and, because the Software Business has been discontinued,
management has not discussed the results of operations for the Software
Business in 1999 as compared to 1998.
Revenues
For the year ended October 31, 1999, the Company had revenues from
continuing operations of $3,117,000, an increase of $928,000 or 42% over
1998. This increase is primarily attributable to the development of
distribution channels and an increased customer base, resulting from the
Company's marketing efforts in preparation for launching its facilities-
based operations.
Revenues from discontinued operations were $1,687,000 for the year
ended October 31, 1999, as compared to $9,380,000 for the year ended
October 31, 1998. The Company also received $7,395,000 (comprised of gross
proceeds of $7,625,000, less working capital adjustments) from ACS in fiscal
1999 from the sale of the Software Business, resulting in a gain of
$5,310,000.
Expenses
For the year ended October 31, 1999, the Company had total direct costs
of revenues relating to revenues from continuing operations of $2,982,000,
an increase of $827,000 or 38% from 1998. This increase is primarily
attributable to the Company's 42% increase in sales.
General and administrative expenses attributable to continuing
operations, comprised primarily of management, accounting, legal and
overhead expenses, were $2,683,000 and $437,000 for the years ended October
31, 1999 and 1998, respectively. General and administrative expenses for
fiscal 1998 were accounted for as either continuing operations expenses or
discontinued operations expenses. Because the Company's business operations
in 1998 were primarily comprised of discontinued operations, a significant
portion of the general and administrative expenses for fiscal 1998 was
included with discontinued operations. In fiscal 1999, as the Company
continued to grow its Telecommunications business, the Company increased its
number of employees from approximately 25 to 45 persons, and a significant
portion of the corporate overhead and management salaries were primarily
associated with the Telecommunications Business. General and administrative
expenses also included research and development costs associated with
development of the Company's VIP Card[TM] product.
Sales and marketing expenses attributable to continuing operations
increased from $389,000 to $1,254,000 for the year ended October 31, 1998 to
October 31, 1999. These increases were a result of the Company's increased
marketing efforts within the United States and to targeted international
markets. These expenses include start-up costs associated with the
establishment of distribution channels in various markets, promotional
discounts and licensing and printing costs for phone cards bearing symbols
associated with various ethnic regions.
The Company had net interest income in fiscal 1999 of $79,000, compared
to net interest expense of $101,000 in fiscal 1998. The net interest income
in 1999 was comprised of approximately $175,000 earned on the proceeds from
the Software Business sale and the Company's note receivable from
USCommunications Services, Inc., reduced by approximately $96,000 of
interest and financing expenses that were attributable to both the Founders
Equity indebtedness that was repaid during fiscal 1999 and to equipment
financing costs for the Company's switching facilities and platform. . The
interest and financing expenses for fiscal 1998 were primarily associated
with financing provided by Founders Equity Group to the Company that was
repaid during the first and second quarters of fiscal 1999.
As a result of the foregoing, the Company incurred a net loss from
continuing operations of $3,815,000, or $0.56 per share, for the year ended
October 31, 1999.
Liquidity and Sources of Capital
The Company's growth models for its business are scaleable, but the
rate of growth is dependent on the availability of future financing for
capital resources. The Company plans to commit at least $2.0 million for
capital investment for fiscal 2001, and plans to finance additional
infrastructure development externally through debt and/or equity offerings
and internally through the operations of its Telecommunications Business.
The Company plans to obtain vendor financing for a major portion of its
equipment needs associated with expansion. The Company also plans to
exchange a portion of its prepaid media credits to reduce accounts payable,
and to liquidate an additional portion of its prepaid media credits for
cash. The Company believes that, with sufficient capital, it can
significantly accelerate its growth plan. The Company's failure to obtain
additional financing or to exhange or liquidate media credits could
significantly delay the Company's implementation of its business plan and
have a material adverse effect on its business, financial condition and
operating results.
At October 31, 2000, the Company had cash and cash equivalents of
approximately $74,000, a decrease of $772,000 from the balance at October
31, 1999.
Cashflows from Operations
Net cash used in continuing operating activities totaled $4,157,000 for
the year ended October 31, 2000, compared to net cash used in continuing
operating activities of $3,613,000 for the year ended October 31, 1999. The
increase in net cash used in operating activities for the year ended October
31, 2000 was primarily due to the net loss for such period of $8,674,000,
adjusted for: loss from disposal of fixed assets of $121,000 and
depreciation and amortization of $565,000; bad debt expense of $695,000;
inventory write-offs of $59,000; financing fees and amortization of debt
discount of $679,000; and net changes in operating assets and liabilities of
$2,398,000. For the year ended October 31, 1999, the net cash used in
operating activities was comprised of the Company's net income of
$1,713,000, adjusted for: gain from discontinued operations of $5,528,000;
depreciation and amortization of $91,000; stock and warrants issued for
services of $80,000; bad debt expense of $406,000; and net changes in
operating assets and liabilities of $375,000.
Cashflows from Investing and Financing Activities
Net cash provided by investing activities of continuing operations was
approximately $50,000 for the year ended October 31, 2000, compared to cash
provided by investing activities of $6,074,000 for the year ended October
31, 1999. The decrease in the current year is primarily attributable to the
sale of the Software Business, which generated proceeds of $7,395,000, for
the year ended October 31, 1999. Also contributing to the decrease in the
current year was the reduction in the Company's purchases of property and
equipment of $1,162,000, payments received on notes receivable of $255,000,
and cash assumed from the DTI Acquisition of $69,000.
Net cash provided by financing activities of continuing operations for
the year ended October 31, 2000 was $3,335,000, compared to net cash used in
financing activities of $2,006,000 for the year ended October 31, 1999. The
change in cash provided by financing activities was due primarily to the
repayment of $833,000 on notes payable and capital lease obligations, offset
by the release of restricted cash of $1,238,000, the raising of $1,000,000
through the sale of convertible debentures and $1,400,000 through the
issuance of a common stock subscription agreement, and $531,000 in net
proceeds received upon the exercise of stock options. Cash used in
financing activities for the year ended October 31, 1999 reflected the
repayment of borrowings of $1,500,000, security of certain notes payable and
letters of credit of $1,238,000, reduced by net proceeds of $724,000 from
notes payable.
Other Capital Resources
The Company has recently suffered from liquidity and cash flow
constraints. As of October 31, 2000, the Company had a working capital
deficit of $4,829,000, compared to a working capital surplus of $1,251,000
at October 31, 1999. As of October 31, 2000, the Company's current assets
of $646,000 include $1,387,000 of gross trade accounts receivable, of which
approximately 31% was comprised of an international customer account, which
is overdue by more than a year. This customer account balance is fully
reserved as of October 31, 2000. In addition, approximately 24% is
comprised of trade accounts receivables related to the prepaid calling card
business, of which 100% is reserved at year-end. Contributing to the
working capital deficit was an increase in trade accounts payable of
$3,594,000 since the prior fiscal year, as well as increases in long-term
debt of $522,000 and advances from shareholder of $346,000.
Net property and equipment from continuing operations totaled
$1,540,000 at October 31, 2000. The majority of property and equipment is
comprised of telecommunications switch and platform equipment, computer
equipment and computer software. Property and equipment held for sale at
year-end of $320,000 represents internally constructed equipment for the
prepaid telecommunications industry. At October 31, 2000, the Company
entered into an Asset Purchase Agreement to sell this technology for $1
million, for which payment will be collected over the next year.
In connection with the rescission the Company's acquisition of USC, USC
executed a note payable to the Company in the amount of $724,660. The note
receivable totaled $460,000 at October 31, 1999 and represented funds
provided to USC. On August 17, 1999, USC commenced voluntary bankruptcy
proceedings and on January 7, 2000, the Company received bankruptcy court
approval to settle the USC note for $300,000. The settlement proceeds were
received by the Company on January 25, 2000. At the time of settlement, the
outstanding principal balance of the USC note was approximately $460,000.
Acquisition
Acquisitions
The Company continues to review an acquisition strategy within its
Telecommunications Business. From time to time the Company will review
acquisition candidates with products, technologies or other services that
could enhance the Company product offerings or services. Any material
acquisitions could result in the Company issuing or selling additional debt
or equity securities, obtaining additional debt or other lines of credit and
may result in a decrease to the Company working capital depending on the
amount, timing and nature of the consideration to be paid. The Company is
not currently a party to any agreements, negotiations or understandings
regarding any material acquisitions.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8a. Financial Statements and Supplementary Data
The information required by Item 8 of Form 10-K is presented at pages
F-1 to F-25.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers
The information required by this item will be contained in the
Company's definitive proxy statement which the Company will file with the
Commission no later than February 28, 2001 (120 days after the Company's
fiscal year end covered by this Report) and is incorporated herein by
reference.
Item 11. Executive Compensation and Other Information
The information required by this item will be contained in the
Company's definitive proxy statement which the Company will file with the
Commission no later than February 28, 2001 (120 days after the Company's
fiscal year end covered by this Report) and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be contained in the
Company's definitive proxy statement which the Company will file with the
Commission no later than February 28, 2001 (120 days after the Company's
fiscal year end covered by this Report) and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be contained in the
Company's definitive proxy statement which the Company will file with the
Commission no later than February 28, 2001 (120 days after the Company's
fiscal year end covered by this Report) and is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(A) (1) AND (2) LIST OF FINANCIAL STATEMENTS
The response to this item is submitted as a separate section of the
Report. See the index on Page F-1.
(3) EXHIBITS
The following is a list of all exhibits filed with this Form 10-K,
including those incorporated by reference.
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
2.1 Agreement and Plan of Merger dated as of January 30, 1998, among Canmax
Inc., CNMX MergerSub, Inc. and USCommunications Services, Inc. (filed
as Exhibit 2.1 to Form 8-K dated January 30, 1998 (the "USC 8-K"), and
incorporated herein by reference)
2.2 Rescission Agreement dated June 15, 1998 among Canmax Inc., USC and
former principals of USC (filed as Exhibit 10.1 to Form 8-K dated
January 15, 1998 (the "USC Rescission 8-K"), and incorporated herein by
reference)
2.3 Asset Purchase Agreement by and among Affiliated Computed Services,
Inc., Canmax and Canmax Retail Systems, Inc. dated September 3, 1998
(filed as Exhibit 10.1 to the Company's Form 8-K dated December 7, 1998
and incorporated herein by reference)
2.4 Asset Purchase Agreement dated November 2, 1999 among ARDIS Telecom &
Technologies, Inc., Dial-Thru International Corporation, a Delaware
corporation, Dial-Thru International Corporation, a California
corporation, and John Jenkins (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated November 2, 1999 and incorporated
herein by reference)
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1999 (the "1999 Form 10-K") and incorporated herein by reference)
3.2 Amended and Restated Bylaws of Dial-Thru International Corporation
(filed as Exhibit 3.2 to the 1999 Form 10-K and incorporated herein by
reference)
4.1 Registration Rights Agreement between Canmax and the Dodge Jones
Foundation (filed as Exhibit 4.02 to Canmax's Quarterly Report on Form
10-Q for the period ended April 30, 1997 and incorporated herein by
reference)
4.2 Registration Rights Agreement between Canmax and Founders Equity Group,
Inc. (filed as Exhibit 4.02 to Canmax's Quarterly Report on Form 10-Q
for the period ended April 30, 1997 and incorporated herein by
reference)
4.3 Amended and Restated Stock Option Plan of Dial-Thru International
Corporation (filed as Exhibit 4.3 to the 1999 Form 10-K and
incorporated herein by reference)
10.1 Employment Agreement, dated June 30, 1997 between Canmax Retail
Systems, Inc. and Roger Bryant (filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-3, File No. 333-33523 (the "Form S-
3"), and incorporated herein by reference)
10.2 Commercial Lease Agreement between Jackson--Shaw/Jetstar Drive Tri-star
Limited Partnership and the Company (filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K dated October 31, 1998, and
incorporated herein by reference)
10.3* Employment Agreement, dated November 2, 1999 between ARDIS Telecom
& Technologies, Inc. and John Jenkins.
11.1* Statement re: Computation of earnings per share
21.1* Subsidiaries of the Registrant
* Filed herewith.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended October 31, 2000.
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 in its behalf by the undersigned thereunto duly authorized.
DIAL-THRU INTERNATIONAL CORPORATION
By: /s/ ROGER D. BRYANT
------------------------------------
Roger D. Bryant
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Date: January 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
NAME TITLE DATE
-------------------- ------------------------------------- ----------------
/s/ ROGER D. BRYANT Chairman, Chief Executive Officer and January 29, 2001
Roger D. Bryant Director (principal executive
officer)
/s/ JOHN JENKINS President, Secretary, Chief Operating January 29, 2001
John Jenkins Officer, Chief Financial Officer and
Director (principal financial officer
and principal accounting officer)
Lawrence Vierra Executive Vice President and Director January 29, 2001
Robert M. Fidler Director January 29, 2001
/s/ NICK DeMARE Director January 29, 2001
Nick DeMare
Item 8. Financial Statements and Supplementary Data
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
1. Consolidated Financial Statements
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets at October 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the fiscal
years ended October 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Shareholders' Equity for the
fiscal years ended October 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the fiscal
years ended October 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedule
Report of Independent Certified Public Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
All other schedules are omitted because they are not applicable or
because the required information is shown in the consolidated financial
statements or notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders Dial-Thru International Corporation
We have audited the accompanying consolidated balance sheets of Dial-Thru
International Corporation and subsidiaries as of October 31, 2000 and 1999,
and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the years in the three year period ended October
31, 2000. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Dial-Thru International Corporation and subsidiaries as of
October 31, 2000 and 1999, and the consolidated results of their operations
and their cash flows for each of the years in the three year period ended
October 31, 2000, in conformity with generally accepted accounting
principles.
As described in Note C, the accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going
concern. The Company has experienced significant losses from continuing
operations and has generated negative cash flows from operations for each of
the last three fiscal years. Additionally, at October 31, 2000, the
Company's current liabilities exceeded its current assets by $4,829,283.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Unless the Company obtains additional
financing or makes other arrangements to reduce its liabilities, it will not
be able to meet its obligations as they come due and it will be unable to
execute its long-term business plan. Management's plans as they relate to
these issues are also explained in Note C. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KING GRIFFIN & ADAMSON P.C.
-------------------------------
King Griffin & Adamson P.C.
Dallas, Texas
December 1, 2000
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31,
-----------------------
2000 1999
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 73,867 $ 846,141
Restricted cash - 613,634
Trade accounts receivable, net of allowance
for doubtful accounts of $930,766 and
$181,675 in 2000 and 1999, respectively 455,819 297,914
Inventory - 141,017
Prepaid expenses and other 116,785 92,074
Current portion of long-term receivable,
net of allowance for doubtful accounts
of $55,000 and $20,000 in 2000 and
1999, respectively - 300,000
---------- ----------
Total current assets 646,471 2,290,780
---------- ----------
PROPERTY AND EQUIPMENT, net 1,539,544 1,421,328
PROPERTY AND EQUIPMENT HELD FOR SALE 320,307 -
RESTRICTED CASH, NET OF CURRENT PORTION - 624,099
LONG-TERM RECEIVABLE, NET OF CURRENT PORTION, net
of allowance for doubtful accounts of $40,000
and $30,000 in 2000 and 1999, respectively - 50,000
ADVERTISING CREDITS 2,453,027 -
OTHER ASSETS 205,473 80,582
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
OF COMPANY ACQUIRED, net of amortization of
$104,148 in 2000 937,327 -
---------- ----------
TOTAL ASSETS $ 6,102,149 4,466,789
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt, net
of debt discount of $315,988 in 2000 684,012 162,000
Current portion of capital lease 102,472 -
Trade accounts payable 3,930,315 336,053
Accrued liabilities 365,765 306,239
Deferred revenue 47,190 235,104
Note payable to shareholder 346,000 -
---------- ----------
Total current liabilities 5,475,754 1,039,396
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION - 562,000
CAPITAL LEASE, NET OF CURRENT PORTION 118,615 -
COMMITMENTS AND CONTINGENCIES (Notes C and O)
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value, 10,000,000
shares authorized, none issued or outstanding - -
Common stock, 44,169,100 shares authorized; $.001
par value; 9,895,090 shares issued and 9,883,068
shares outstanding in 2000 and 6,881,005 shares
issued and outstanding in 1999 9,895 6,881
Additional paid-in capital 31,325,432 24,940,093
Accumulated deficit (30,750,181) (22,076,165
Accumulated other comprehensive income (5,416) (5,416)
Treasury stock, 12,022 common shares in 2000 at cost (54,870) -
Subscription receivable - common stock (17,080) -
---------- ----------
Total shareholders' equity 507,780 2,865,393
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,102,149 $ 4,466,789
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended October 31,
---------------------------------------
2000 1999 1998
---------- ---------- ----------
REVENUES
Call back and dial thru services $ 5,836,392 $ - $ - -
Prepaid phone cards and other 2,755,057 3,116,911 1,479,588
Prepaid phone cards - USC - - 709,525
---------- ---------- ----------
Total revenues 8,591,449 3,116,911 2,189,113
COSTS AND EXPENSES
Call back and dial thru services 5,750,839 - -
Prepaid phone cards and other 4,220,570 2,982,290 1,589,811
Prepaid phone cards - USC - - 565,151
Sales & marketing 862,582 1,254,429 388,506
General & administrative 5,201,608 2,682,545 436,939
Selling general & administrative - USC - - 554,253
Depreciation and amortization 565,188 91,338 19,356
---------- ---------- ----------
Total cost and expenses 16,600,787 7,010,602 3,554,016
---------- ---------- ----------
Operating loss (8,009,338) (3,893,691) (1,364,903)
OTHER INCOME (EXPENSE)
Interest and financing costs (679,258) (95,836) (155,318)
Interest income 14,580 174,604 54,535
Loss on disposal of USC - - (1,155,385)
---------- ---------- ----------
Total other income (expense) (664,678) 78,768 (1,256,168)
NET LOSS FROM CONTINUING OPERATIONS (8,674,016) (3,814,923) (2,621,071)
DISCONTINUED OPERATIONS
Income (loss) from operation of software
business, net of income taxes of $0 - 218,376 (103,091)
Gain on sale of software business, net
of income taxes of $0 - 5,309,927 -
---------- ---------- ----------
NET INCOME (LOSS) $(8,674,016) $ 1,713,380 $(2,724,162)
========== ========== ==========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations $ (1.02) $ (0.56) $ (0.37)
Discontinued operations - 0.81 (0.01)
---------- ---------- ----------
Net earnings (loss) $ (1.02) $ 0.25 $ (0.38)
========== ========== ==========
SHARES USED IN THE CALCULATION OF PER
SHARE AMOUNTS:
Basic common shares 8,544,105 6,803,471 7,095,937
Dilutive impact of stock options, warrants
and convertible debentures - - -
---------- ---------- ----------
Dilutive common shares 8,544,105 6,803,471 7,095,937
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Subscription
Other Receivable-
Common Common Stock Treasury Additional Accumulated Comprehensive Common
Shares Amount Stock Paid-in Capital Deficit Income Stock Total
---------- ----------- ------- --------------- ----------- ------ ------- ----------
Balance at October 31, 1997 6,611,005 $ 23,290,733 $ - $ - $(21,065,383) $(5,416) $ - $ 2,219,934
Issuance of common stock
and warrants in connection
with acquisition of USC 1,500,000 2,647,398 - - - - - 2,647,398
Effect of USC rescission (1,500,000) (1,079,322) - - - - - (1,079,322)
Net Loss - - - - (2,724,162) - - (2,724,162)
---------- ----------- ------- ----------- ----------- ------ ------- ----------
Balance at October 31, 1998 6,611,005 24,858,809 - - (23,789,545) (5,416) - 1,063,848
Shares and warrants
issued as compensation 250,000 80,165 - - - - - 80,165
Effect of change from no par
to $.001 par value common
stock - (24,932,113) - 24,932,113 - - - -
Shares issued upon
exercise of options 20,000 20 - 7,980 - - - 8,000
Net income - - - - 1,713,380 - - 1,713,380
---------- ----------- ------- ----------- ----------- ------ ------- ----------
Balance at October 31, 1999 6,881,005 6,881 - 24,940,093 (22,076,165) (5,416) - 2,865,393
Issuance of common stock
in connection
with acquisition of DTI 1,000,000 1,000 - 936,500 - - - 937,500
Shares issued for
advertising credits 914,285 914 - 2,452,113 - - - 2,453,027
Shares issued for cash 400,000 400 - 1,399,600 - - - 1,400,000
Shares issued upon exercise
of options and warrants 699,800 700 - 601,880 - - (17,080) 585,500
Purchase of treasury stock - - $(54,870) - - - - (54,870)
Issuance of warrants in
connection with convertible no - - - 995,246 - - - 995,246
Net loss - - - - (8,674,016) - (8,674,016)
---------- ----------- ------- ----------- ----------- ------ ------- ----------
Balance at October 31, 2000 9,895,090 $ 9,895 $(54,870) $ 31,325,432 $(30,750,181) $(5,416) $(17,080) $ 507,780
========== =========== ======= =========== =========== ====== ======= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended October 31,
2000 1999 1998
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(8,674,016) $ 1,713,380 $(2,724,162)
Adjustments to reconcile net income (loss) to net
cash used in continuing operating activities:
Loss (income) from discontinued operations - (218,376) 103,091
Loss from disposal of fixed assets 121,360 - -
Gain on disposal of software business - (5,309,927) -
Loss on disposal of USC - - 1,568,076
Stock and warrants issued for services - 80,165 -
Bad debt expense 694,526 405,825 -
Inventory write-off 58,526 - -
Financing fees and amortization of debt
discount 679,258 - -
Depreciation and amortization 565,188 91,338 19,356
(Increase) decrease in:
Trade accounts receivable (173,826) (201,526) (292,086)
Inventory 82,491 88,655 (229,672)
Prepaid expenses and other 30,301 (63,072) (29,002)
Other assets (128,851) (180,389) (17,387)
Increase (decrease) in:
Trade accounts payable 2,854,082 (286,783) 771,799
Accrued liabilities (78,150) 78,661 227,578
Deferred revenue (187,914) 189,071 46,033
---------- ---------- ----------
Net cash used in operating activities from
continuing operations (4,157,025) (3,612,978) (556,376)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of software business - 7,394,917 -
Purchase of property and equipment (274,609) (1,436,337) (78,493)
Advances made under note receivable - - (724,660)
Cash in DTI at acquisition date 69,137 - -
Payments received on note long-term receivable 255,000 115,569 -
---------- ---------- ----------
Net cash provided by (used in) investing
activities of continuing operations 49,528 6,074,149 (803,153)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayment of) advances
from shareholder (54,000) (1,500,000) 1,500,000
Proceeds from debt 1,000,000 - -
Proceeds from note payable - 805,000 -
Payments on note payable (724,000) (81,000) -
Payments on capital leases (55,140) - -
Proceeds from common stock subscription 1,400,000 - -
Proceeds from exercise of stock options 585,500 8,000 -
Purchase of treasury stock (54,870) - -
Cash restricted as collateral for note and
letters of credit 1,237,733 (1,237,733) -
---------- ---------- ----------
Net cash provided by (used in) financing
activities of continuing operations 3,335,223 (2,005,733) 1,500,000
---------- ---------- ----------
Cash provided by (used in) discontinued operations - 183,094 (61,733)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH (772,274) 638,532 78,738
Cash and cash equivalents at beginning of year 846,141 207,609 128,871
---------- ---------- ----------
Cash and cash equivalents at end of year $ 73,867 $ 846,141 $ 207,609
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Offset of note receivable against trade
accounts payable $ - $ - $ 148,963
Note receivable issued for deposit repayment $ - 100,000 $ -
Switch equipment obtained through issuance
of capital lease $ 227,772 $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND NATURE OF BUSINESS
Dial-Thru International Corporation and subsidiaries ("DTI" or the
"Company"), (formerly ARDIS Telecom & Technologies, Inc., "Ardis" and
formerly Canmax, Inc., "Canmax"), was incorporated on July 10, 1986 under
the Company Act of the Province of British Columbia, Canada. On August 7,
1992, the Company renounced its original province of incorporation and
elected to continue its domicile under the laws of the State of Wyoming, and
on November 30, 1994, its name was changed to Canmax Inc. On February 1,
1999, this predecessor company reincorporated under the laws of the State of
Delaware and changed its name to ARDIS Telecom & Technologies, Inc.
Prior to December 7, 1998, the Company operated in the software and
telecommunications industries. On December 7, 1998, the Company sold its
retail automation software business (the "Software Business") to Affiliated
Computer Services, Inc. ("ACS"). Therefore, the Company no longer engages
in the Software Business, and is now operating only in the
telecommunications industry (the "Telecommunications Business"). Results of
operations in prior periods have been restated to reclassify the Software
Business as discontinued operations. The measurement date for the sale is
December 7, 1998, the date the shareholders approved the transaction.
On November 2, 1999, the Company acquired substantially all of the business
and assets of Dial-Thru International Corporation, a California corporation,
along with the rights to the name "Dial-Thru International Corporation." On
January 19, 2000, the Company changed its name from ARDIS Telecom &
Technologies, Inc. to Dial-Thru International Corporation ("DTI").
During 1998 and 1999, the Company's operations included mainly sales and
distribution of prepaid domestic and international calling cards to
wholesale and retail customers. Effective with the acquisition of Dial-Thru
International Corporation in fiscal 2000, the Company changed its focus from
prepaid calling cards to becoming a full service, facility-based provider of
communication products to small and medium size businesses, both
domestically and internationally. The Company now provides a variety of
international and domestic communication services including international
dial-thru, Internet voice and fax services, e-Commerce solutions and other
value-added communication services, using its "VoIP" Network to effectively
deliver the products to the end user.
In addition to helping companies achieve savings on long-distance voice and
fax calls by routing calls over the Internet or the Company's private
network, the Company also offers new opportunities for existing Internet
Service Providers ("ISPs") who want to expand into voice services, private
corporate networks seeking to lower long-distance costs, and Web-enabled
corporate call centers engaged in electronic commerce.
NOTE B - SUMMARY OF SIGNIFICANT POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, RDST, Inc., a Texas
corporation and Dial-Thru.com, Inc., a Delaware corporation. The Company's
99% investment in Dial-Thru International Limited ("Hong Kong"), a joint
venture (which has had limited activity), is included in the accompanying
consolidated financial statements using the consolidation method of
accounting. All significant intercompany accounts and transactions have
been eliminated.
Revenue Recognition
The following describes the Company's revenue recognition policies by type
of activity:
Continuing Operations:
Prepaid services sold while the Company owned USCommunications Services,
Inc. ("USC") - This policy applied to revenue generated from January to
May 1998. Revenue recognition originated from customer usage of prepaid
calling cards. The Company sold cards to retailers and distributors at a
fixed price. When the retailer or distributor was invoiced, deferred
revenue was recognized. The Company recognized revenue, and reduced the
deferred revenue account as the customer utilized calling time and upon
expiration of cards containing unused calling time.
Prepaid services sold as a switchless reseller of telecommunications
services - This policy applied to revenue generated from August 1998 to
July 1999. Revenue was recognized when the prepaid phone cards were
invoiced and shipped. The Company performed no other services after the
cards were shipped.
Prepaid services sold as a facility-based operator - This policy applies
to revenue generated subsequent to August 1999. Revenue is recognized
based on minutes of customer usage or upon the expiration of cards
containing unused calling time. The Company records payments received in
advance for prepaid services as deferred revenue until such related
services are provided.
Revenues generated by international re-origination and dial-thru services
are based on minutes of customer usage. The Company records payments
received in advance as deferred revenue until such services are provided.
This policy applies to all international re-origination and dial-thru
services revenues generated during the year ended October 31, 2000.
Discontinued Operations:
Software Licenses and Products - Revenue was recognized when the software
or products were delivered to the customer, collectibility was probable,
and no significant vendor obligations remained after delivery.
Software Development Contracts - Revenue was recognized as the Company
performed the services in accordance with the contract terms. Revenue
from long-term contracts was recognized using the percentage-of-
completion method. Progress to completion was measured based upon the
relationship that total costs incurred to date bears to the total costs
expected to be incurred on a specified project. Losses on fixed price
contracts were recorded when estimable.
Service Agreements - Revenue from maintenance and support agreements was
generally recognized in one of the following ways:
- Billed annually in advance and recognized ratably over the ensuing year.
- Billed and recognized monthly based on a fixed fee per site.
- Billed and recognized monthly at a minimum base fee plus a variable fee
which was dependent on call volumes.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted Cash
At October 31 1999, $1,238,000 of cash was pledged as collateral on an
outstanding note payable and letters of credit, and was classified as
restricted cash on the balance sheet. The portion of the restricted cash
which pertains to the long-term portion of the note payable was classified
correspondingly, as long-term.
Inventory
Inventory, which consisted primarily of activated and inactivated calling
cards, is stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated
useful lives of the assets ranging from three to seven years. Equipment held
under capital leases and leasehold improvements are amortized on a straight-
line basis over the shorter of the lease term or the estimated useful life
of the related asset ranging from three to five years. Expenditures for
repairs and maintenance are charged to expense as incurred. Major renewals
and betterments are capitalized.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If a condition or event
occurs which is considered to impair the recoverability of assets the
carrying amount of the asset is compared to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or estimated fair value less costs to sell.
Excess of Cost over Fair Value of Net Assets of Company Acquired
Excess of cost over fair value of net assets of company acquired represents
the excess of purchase price over the fair market value of identifiable net
assets at the date of acquisition. This amount is amortized on a straight-
line basis over ten years. Accumulated amortization of excess of cost over
fair value of net assets of company acquired was $104,148 at October 31,
2000.
Capitalized Software Costs Related to Discontinued Operations
Under provisions of the Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed", software development costs in connection with the
discontinued operations were charged to expense when incurred until
technological feasibility for the product had been established, at which
time the costs were capitalized until the product was available for release.
The Company began amortizing capitalized software costs upon general release
of the software products to customers. The Company evaluated the net
realizable value for each of its capitalized projects by comparing the
estimated future gross revenues from a project less estimated future
disposal costs to the amount of the unamortized capitalized cost. Costs
were being amortized using the greater of (1) the ratio that current gross
revenues for a capitalized software project bears to the total of current
and future gross revenue for that project or (2) the straight-line method
over the remaining economic life of the related projects which was estimated
to be a period of between four and five years. Amortization of capitalized
software costs related to the discontinued operations amounted to
approximately $19,000, and $231,000, in 1999, and 1998, respectively.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted average
number of shares of common stock outstanding during each period. Diluted
earnings (loss) per share is computed using the weighted average number of
shares of common stock outstanding during each period and common equivalent
shares consisting of stock options and warrants, and convertible debentures
(using the treasury stock method) to the extent they are dilutive.
The shares issuable upon the exercise of stock options and warrants and
convertible debentures are excluded from the calculation of net earnings
(loss) per share for each year as their effect on continuing operations net
loss would be antidilutive.
Income Taxes
The Company utilizes the asset and liability approach to financial
accounting and reporting for income taxes. Deferred income taxes and
liabilities are computed annually for differences between the financial
statements and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense or
benefit is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Market Value of Financial Instruments
The carrying amount for current assets and liabilities, and long-term debt
is not materially different than fair market value because of the short
maturity of the instruments and/or their respective interest rate amounts.
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with
provisions of the Accounting Principles Board's Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." As such, compensation expense
is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. In accordance with Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation", entities are allowed to continue to apply the
provisions of APB 25 and provide pro-forma net income (loss) and pro-forma
earnings (loss) per share disclosures for employee stock option grants as if
the fair-value-based method defined in SFAS 123 had been applied. The
Company has elected to continue to apply the provisions of APB 25 and
provide the pro-forma disclosure provisions of SFAS 123.
Reclassifications
Certain reclassifications were made to the 1999 and 1998 consolidated
financial statements to conform to the current year presentation.
NOTE C - GOING CONCERN UNCERTAINTY
The consolidated financial statements have been prepared on the assumption
that the Company will continue as a going concern. The Company incurred a
net loss of $8,674,016 during the fiscal year ended October 31, 2000. Cash
used by operating activities for the same period aggregated $4,157,025.
Current liabilities at October 31, 2000 of $5,475,754 exceed current assets
of $646,471 by $4,829,283. In addition, the Company incurred significant
losses from continuing operations and negative cash flows for the fiscal
years ended October 31, 1999 and 1998. The Company's continued existence
depends upon the success of management's efforts to raise the additional
capital necessary to meet the Company's obligations as they come due and to
obtain sufficient capital to execute its given business plan. The Company
intends to obtain additional capital and reduce its existing accounts
payable primarily in the following manner:
1) the Company is currently in negotiations to obtain both debt and
equity financing;
2) the Company is in the process of exchanging prepaid media credits to
reduce accounts payable;
3) the Company is in the process of liquidating a portion of its prepaid
media credits for cash;
4) the Company is in the process of obtaining vendor financing for the
majority of its equipment needs for expansion;
5) the Company believes that its suit against Star Telecommunications is
meritorious and will conclude with a significant positive impact to
both accounts payable and the asset base of the Company.
There can be no degree of assurance that the Company will be successful in
completing additional financing transactions. The consolidated financial
statements do not include any adjustments to reflect the possible effects of
the recoverability and classification of assets or classification of
liabilities which may result from the inability of the Company to continue
as a going concern.
NOTE D - ACQUISITIONS AND RESCISSION
USC Acquisition and Rescission
On January 30, 1998, the Company acquired USC in a transaction recorded
under the purchase method of accounting. The total purchase price of the
acquisition was $2,667,398 and consisted of 1,500,000 common shares and
2,500,000 warrants for 1 common share each. The Company shares were valued
at the trading price at the acquisition date with the warrants being valued
using the Black-Scholes pricing model. The following assumptions were used
in the Black-Scholes model; dividend yield of 0%, expected volatility of
112%, risk free interest rate of 6% over a 3 year period and an expected
life of 3 years. Effective in May of 1998, the Company and principals of
USC agreed to rescind the USC acquisition, and that the economic benefits
and burdens of any revenues received or expenses incurred following May 27,
1998 would accrue to USC. On June 15, 1998, the Company and USC executed
definitive documents to reflect the rescission of the acquisition of USC,
resulting in the Company recovering 1.5 million shares, and canceling
2,500,000 warrants. Cash payments made on behalf of USC were recovered
through a note receivable in the original principal amount of $724,660, of
which approximately $300,000 (net of reserve of $160,000) in principal was
outstanding at October 31, 1999. On August 17, 1999, USC commenced
voluntary bankruptcy proceedings under Chapter 11 of the Bankruptcy Code.
The Company collected $300,000 of this balance as a final settlement in
January 2000.
The Company recognized a loss on the disposition of $1,155,385. The loss on
disposal is calculated as the difference between the fair value of common
stock and warrants returned by USC and the net investment in USC, recognized
by the Company through its disposition date.
Acquisition of Talk Time Inc.
On June 16, 1998, the Company acquired the assets of Talk Time, a wholesale
distributor of prepaid calling cards to convenience stores in the Rocky
Mountain and Oklahoma regions. The asset purchase agreement provided for
the acquisition of certain assets and the assumption of obligations with a
cash purchase price approximating $54,000. In addition, the owner of Talk
Time received 50,000 warrants to purchase 50,000 shares of the Company's
common stock at $1 per share. The exercise price for the warrants was
reduced to $.53 per share on July 1, 1998. The value of these warrants
using the Black-Scholes method approximates the fair value assigned by
management to the net assets acquired of $3,000. The following assumptions
were used in the Black-Scholes model; dividend yield of 0%, expected
volatility of 112%, risk free interest rate of 6% and an expected life of 2
years.
The warrants vest upon attainment of target revenues as specified in the
warrant agreement. On June 30, 1999, 25,000 of the warrants expired without
vesting. Prior to the expiration of the remaining 25,000 warrants, these
warrants were canceled and an amended warrant agreement was issued on March
1, 2000 for the purchase of 50,000 shares of the Company's common stock at
$.53 per share. 25,000 of the warrants vested immediately, with the
remaining 25,000 warrants vesting upon the attainment of target revenues as
specified in the warrant agreement (see Note M).
Acquisition of Dial-Thru International Corporation
On November 2, 1999, the Company consummated the acquisition of
substantially all of the assets and business of Dial-Thru International
Corporation (the "Seller"), a California corporation. The Company issued to
the Seller an aggregate of 1,000,000 shares of common stock, recorded a
total purchase price of $937,500 using the Company's common stock price at
the time the acquisition was announced, and agreed to issue an additional
1,000,000 shares of its common stock upon the acquired business achieving
specified revenue and earnings goals. As of October 31, 2000, no additional
shares were earned by the Seller based on revenue and earnings goals. The
acquisition was accounted for as a purchase. Excess of cost over fair value
of net assets of company acquired recorded in the acquisition is being
amortized over a period of 10 years. The results of operations of the
acquired entity are included in the consolidated operations of the Company
from November 1, 1999.
The fair value of assets and liabilities acquired consisted of:
Cash $ 69,137
Accounts receivable, net 583,605
Fixed assets 505,082
Other assets 64,512
Liabilities (1,326,311)
Excess of cost over fair value
of net assets of company
acquired 1,041,475
----------
$ 937,500
==========
Unaudited pro-forma financial information for the fiscal years ended October
31, 1999 and 1998, as though the acquisition had occurred on November 1,
1997 is as follows:
Unaudited
Year ended October 31,
-------------------------
1999 1998
---------- ----------
Revenues $ 9,623,932 $ 7,015,627
========== ==========
Net loss from continuing operations $(3,931,216) $(2,748,699)
========== ==========
Discontinued operations income (loss) $ 5,528,303 $ (103,091)
========== ==========
Net income (loss) $ 1,597,087 $(2,851,790)
========== ==========
Net loss per common share from continuing
operations (basic and diluted) $ (0.50) $ (0.34)
========== ==========
Net income (loss) per common share
(basic and diluted) $ 0.20 $ (0.35)
========== ==========
Weighted average common shares outstanding
(basic and diluted) 7,802,375 8,095,937
========== ==========
NOTE E - NASDAQ DELISTING
On August 25, 1997, the U.S. Securities and Exchange Commission, The
National Association of Securities Dealers, Inc. and the NASDAQ Stock Market
approved increases in the listing and maintenance standards governing the
NASDAQ SmallCap Market. On June 8, 1998, the Company was delisted from the
NASDAQ SmallCap Market for failing to meet such requirements, and is now
traded on the OTC Bulletin Board. The delisting of the Company's Common
Stock may adversely affect the liquidity of the Company's Common Stock, the
operations of the Company and the ability of the Company to raise capital in
the future.
NOTE F - ADVERTISING CREDITS
On September 8, 2000, the Company issued 914,285 shares of the Company's
common stock in exchange for $3.2 million of advertising credits. The
Company has valued the advertising credits on its balance sheet using its
common stock trading price. Such credits entitle the Company to place
advertisements on Yahoo, in major airline publications and in other
electronic media, and could also be used to settle certain liabilities. No
credits were utilized for the period ended October 31, 2000. The Company
will charge the credits to expense as utilize or will offset against
payables as applicable.
NOTE G - CONVERTIBLE DEBENTURES
Convertible Debentures to Shareholders
On December 15, 1997, the Company executed a convertible loan agreement (the
"Original Agreement") with a shareholder, Founders Equity Group, Inc.
("Founders"), which provided financing of up to $500,000. Funds obtained
under the loan agreement were collateralized by all assets of the Company
and bore interest at 10%. Required payments were for interest only and were
due monthly beginning February 1, 1998. Borrowings under the loan agreement
matured January 1, 1999, unless otherwise redeemed or converted. Under the
terms of the loan agreement, Founders had the option to exercise its right
at any time to convert all, or in multiples of $25,000, any part of the
borrowed funds into the Company's Common Stock at a conversion price of
$1.25 per share. The conversion price was subject to adjustment for certain
events and transactions as specified in the loan agreements. Additionally,
the outstanding principal amount was redeemable at the option of the Company
at 110% of par.
On February 5, 1998, Founders and the Company entered into a financial
consulting agreement pursuant to which Founders agreed to provide financial
advisory and consulting services to the Company, and the Company agreed to
pay to Founders a fee equal to 3% of the value of the consideration received
in any sale or merger of any division or subsidiary of the Company. As a
result of this agreement, Founders has received $120,000 of the initial
proceeds of the sale of the Software Business. Founders agreed to forego
any further payments attributable to the Company's receipt of deferred
payments in connection with the sale.
On February 11, 1998, the Company and Founders executed a loan commitment
letter (the "Loan Commitment") which provided for multiple advance loans of
up to $2 million upon terms similar to the Original Agreement; however,
indebtedness outstanding under the Loan Commitment was convertible into
shares of Common Stock at a conversion price equal to the average closing
prices of the Common Stock over the five-day trading period immediately
preceding the date of each advance. As consideration for the Loan
Commitment, the Company paid a commitment fee of $10,000.
As of March 31, 1998, Founders (and certain of its affiliates) entered into
the First Restated Loan Agreement (the "Loan Agreement") which consolidated
all rights and obligations of the Company to Founders under the Original
Agreement and the Loan Commitment. Amounts advanced under the First
Restated Loan Agreement bore interest at the rate of 12% per annum, were
secured by a lien on all other Company assets and were convertible into
shares of Common Stock, at the option of Founders, at $0.80 per share. On
August 25, 1998, Founders agreed to release its lien on all of the Company's
assets upon the consummation of the sale of the Software Business (See Note
J). As consideration for the release, the Company agreed, upon the
consummation of the sale, to repay $1.0 million of the $1.5 million
currently outstanding under the Loan Agreement, and to allow Founders to
convert the remaining $0.5 million plus accrued but unpaid interest
outstanding under the Loan Agreement into shares of Common Stock at a
conversion price of $0.50 per share. The Company used $1,000,000 from the
Software Business sale proceeds to pay down the Founders debt.
On December 11, 1998, the Company and Founders executed Amendment No. 1 to
the First Restated Loan Agreement. As a result of the amendment, the
Company agreed to defer Founders' conversion of the remaining indebtedness
outstanding under the Loan Agreement in exchange for (a) Founders' waiver of
any registration obligation under the Registration Rights Agreement dated
May 1, 1997 or under the Loan Agreement until February 1, 1999 or the
Company's earlier delivery of a conversion notice with regard to the
outstanding indebtedness, (b) the adjustment of the conversion price for the
remaining convertible indebtedness outstanding under the Loan Agreement
($500,000) from $0.50 per share to the greater of $0.50 per share or 75% of
the average closing price of the Common Stock over the ten trading days
preceding the delivery of a conversion notice, and (c) Founders' agreement
to convert the remaining outstanding principal amount under the Loan
Agreement ($500,000) upon written notice from the Company at the adjusted
conversion agreed to price described above. Further, the amendment to the
First Restated Loan Agreement reduced the interest rate payable on the
outstanding principal amount from 12% to 9% per annum. The amendment also
terminated any additional funding obligations of Founders under the First
Restated Loan Agreement. On March 31, 1999, the Company and Founders
extended the maturity date of the Founders First Restated Loan Agreement
from April 1, 1999 to July 1, 1999. On May 4, 1999, the Company repaid the
balance of the amounts outstanding ($500,000) under the First Restated Loan
Agreement with Founders and the Company's obligations under the First
Restated Loan Agreement were terminated.
Convertible Debentures to Accredited Investors
On February 4, 2000, the Company executed non-interest bearing convertible
note agreements (the "Agreements") with nine accredited investors, which
provided financing of $1,000,000. The notes are payable on the earlier of
one year from the date of issuance or the Company's consummation of a debt
or equity financing in excess of $5,000,000, and may be converted into
common stock at a rate of $4.00 per share if the notes are not repaid within
90 days from the date of issuance. The Company recorded financing fees of
approximately $117,000 in February 2000 related to these notes for the
difference in the conversion price of $4.00 and the market price of $4.47 on
the date the notes were approved by the Board of Directors.
The Company also issued to the holders of the notes warrants to acquire an
aggregate of 125,000 shares of common stock at an exercise price of $3.00
per share, which expire five years from the date of issuance. In February
2000, the Company recorded a debt discount of approximately $492,000. This
amount represents the Company's estimate of the fair value of these warrants
at the date of grant using the Black-Scholes pricing model with the
following assumptions: applicable risk-free interest rate based on the
current treasury-bill interest rate at the grant date of 6%; dividend yields
of 0%; volatility factors of the expected market price of the Company's
common stock of 1.62; and an expected life of the warrants of three years.
On August 4, 2000, additional warrants to acquire up to an aggregate of
125,000 shares of common stock at an exercise price of $2.75 per share were
issued to the holders of the notes, as the convertible notes had not been
repaid within six months following the date of issuance. Additional debt
discount of approximately $386,000 was recorded during the fourth quarter of
fiscal 2000. This amount was calculated using the Black-Scholes pricing
model with the following assumptions: applicable risk-free interest rate
based on the current treasury-bill interest rate at the grant date of 6%;
dividend yields of 0%; volatility factors of the expected market price of
the Company's common stock of 2.01; and an expected life of the warrants of
three years. The Company is amortizing the total debt discount of $877,996
over the initial maturity of these notes of one year. The amount charged to
expense and accumulated amortization for the year ended October 31, 2000
totaled approximately $562,008. The balance of debt net of the unamortized
discount of $315,988 was $684,012 at October 31, 2000.
NOTE H - NOTE PAYABLE TO SHAREHOLDER
In connection with the acquisition of Dial-Thru International Corporation on
November 2, 1999, the Company assumed a related party note payable to the
sole owner of the acquired entity of approximately $400,000. The note bears
interest at 6% per annum, is payable in quarterly installments of $50,000
plus interest beginning November 1, 1999, and matures on August 1, 2001.
The outstanding balance at October 31, 2000 was $346,000, and is classified
as a current liability.
NOTE I - NOTES PAYABLE
On April 13, 1999, the Company executed a loan agreement with Bank One for
$805,000. The loan bore interest at prime less .5% (7.75% at October 31,
1999), was payable in monthly installments of $13,500 plus interest
beginning May 13, 1999, and matured April 13, 2004. The loan was secured by
cash equivalents of $900,000. The purpose of this loan was to purchase
telephone switch equipment and software to operate the switch. The loan
balance at October 31, 2000 was $724,000 of which $162,000 is classified as
a current liability. On February 14, 2000, the Company utilized restricted
cash collateralizing this loan to pay off amounts outstanding ($724,000)
under the loan agreement.
NOTE J - DISPOSITION OF SOFTWARE BUSINESS AND DISCONTINUED OPERATIONS
On December 7, 1998, the Company obtained shareholder approval to sell the
Software Business to Affiliated Computer Systems, Inc. ("ACS"), a Delaware
corporation. The Asset Purchase Agreement dated as of September 3, 1998
provided for the sale of the computer equipment, purchased software, and
internally developed software for $3,770,000 in cash and an additional
$3,625,000 of deferred payments during 1999. As of October 31, 1999, the
Company had received all of the deferred payments. These payments have been
recorded as additional gain on the sale of the Software Business, reduced by
costs associated with the sale. The net gain resulting from disposition of
the Software Business was $5,309,927.
Summarized operating results of discontinued Software Business operations
are as follows:
Period from
November 1,1998 through Year Ending
December 7, 1998 October 31, 1998
---------- ----------
Revenues $ 1,686,945 $ 9,380,064
Costs and expenses 1,468,569 9,483,155
---------- ----------
Net income (loss) $ 218,376 $ (103,091)
========== ==========
NOTE K - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at October 31:
2000 1999
--------- ----------
Telephone switch equipment $1,776,773 $ 982,699
Vending machines - 97,346
Leasehold improvements - 21,544
Furniture and fixtures 78,676 68,395
Office equipment 46,154 -
Computer equipment 166,583 77,406
Computer software 267,507 267,438
--------- ----------
2,335,693 1,514,828
Less accumulated depreciation and
amortization (796,149) (93,500)
--------- ----------
$1,539,544 $1,421,328
========= =========
At October 31, 2000 and 1999, the gross amount of capital lease assets and
related accumulated amortization recorded under capital leases was as
follows:
2000 1999
--------- ----------
Telephone switch equipment $ 184,220 $ -
Office equipment 43,552 -
--------- ----------
227,772 -
Less accumulated amortization (21,173) -
--------- ----------
$ 206,599 $ -
========= ==========
Amortization of assets held under capital leases is included with
depreciation expense. Depreciation and amortization expense from continuing
operations amounted to $565,188, $91,338 and $19,356 in 2000, 1999, and
1998, respectively.
NOTE L - PROPERTY AND EQUIPMENT HELD FOR SALE
Property and equipment held for sale represents internally constructed
equipment for the prepaid telecommunications industry. On October 31, 2000,
the Company entered into an Asset Purchase Agreement to sell this technology
for $1 million. As these assets had not yet been transferred to the buyer
at October 31, 2000, the sale of the assets has not been recognized during
the year ended October 31, 2000.
NOTE M - STOCK OPTIONS AND WARRANTS
Warrant Issuances to Employees
Employee warrant activity for the three years ended October 31, 2000 was as
follows:
Weighted
Number Warrant Average
of Price Per Exercise
Warrants Share Price
-------- ----------- --------
Warrants outstanding at
October 31, 1997 475,000 $ 2.25 $ 2.25
Warrants granted 875,000 0.53 0.53
Warrants exercised - - -
Warrants canceled (475,000) 2.25 2.25
-------- ----------- --------
Warrants outstanding at
October 31, 1998 875,000 0.53 0.53
Warrants granted 150,000 0.46 - 0.80 0.60
Warrants exercised - - -
Warrants canceled - - -
-------- ----------- --------
Warrants outstanding at
October 31, 1999 1,025,000 0.46 - 0.80 0.54
Warrants granted 590,000 0.81 - 1.44 1.33
Warrants exercised (125,000) 0.53 0.53
Warrants canceled (835,000) 0.46 - 1.44 0.75
-------- ----------- --------
Warrants outstanding at
October 31, 2000 655,000 $0.53 - 1.44 0.83
======== =========== ========
In September 1997, the Company executed employment agreements with certain
executives which provided for the issuance of warrants ("1997 Performance
Warrants") to each executive as additional compensation. These agreements
were effective July 1, 1997. The aggregate number of shares to be issued
upon exercise of such 1997 Performance Warrants is 475,000. Each 1997
Performance Warrant expires 10 years from the date of issuance, and was
exercisable at a price of $2.25 per share, the closing price of the
Company's Common Stock on July 17, 1997, the date that the compensation
committee approved the issuance of such warrants. The 1997 Performance
Warrants vest 50% upon the "Trigger Date" and 50% on the one-year
anniversary of the Trigger Date. As used in each warrant agreement, the
Trigger Date means the date of the earlier of the following events: (i) the
earnings per share of the Company (after tax) equals or exceeds $0.30 per
share during any fiscal year, (ii) the closing price of the Company's Common
Stock equals or exceeds $8.00 per share for sixty-five consecutive trading
days, or (iii) a Change of Control.
Effective on January 30, 1998, pursuant to a trigger event, 475,000 of the
1997 Performance Warrants vested concurrent with the issuance of common
stock and warrants in connection with the acquisition of USC. During fiscal
1998, 1997 Performance Warrants to acquire 100,000 shares were canceled.
The exercise price of $2.25 was in excess of the trading price at the
vesting date, and accordingly no expense pursuant to APB No. 25 was recorded
by the Company during 1998. The fair value of these warrants has been
calculated pursuant to SFAS 123 "Accounting for Stock Based Compensation".
The fair value of the warrants using the Black-Scholes pricing model was
$650,011 with the following assumptions: applicable risk-free interest
rates based on the current treasury-bill interest rate at the grant date of
6.0%; dividend yields of 0%; volatility factors of the expected market price
of the Company's common stock of .99; and an expected life of the
Performance Warrants of 5 years.
Effective July 20, 1998, the remaining 375,000 1997 Performance Warrants
were repriced to 0.53 per share, the closing price of the Company's Common
Stock on that date. The repricing was made because management believed that
the higher priced options were no longer a motivating factor. The options
repriced are reflected in the cancellation and grant activity for 1998.
Effective July 20, 1998, an additional 500,000 performance warrants were
issued to certain executives ("1998 Performance Warrants"). Each 1998
Performance Warrant expires 10 years after the date of issuance and is
exercisable at a price of $0.53 per share, the closing price of the
Company's Common Stock on July 20, 1998. The 1998 Performance Warrants vest
upon achieving either $50 million in revenue in any period of twelve
consecutive months with positive earnings during such months, or upon a
change of control of the Company. In accordance with APB No. 25, and its
related interpretations, the Company has recorded no compensation expense to
date. Compensation expense will be recognized when it becomes probable that
an event, which will trigger vesting, will occur.
Effective July 15, 1999, 50,000 performance warrants were issued to an
employee of the Company ("1999 Performance Warrants"). The warrants expire
two years from the date of vesting and are exercisable at $0.46 per share,
the closing price of the Company's stock on July 15, 1999. The 1999
Performance Warrants vest upon achieving target revenues in excess of
$750,000 per month for three consecutive months during the vesting period.
In accordance with APB No. 25, and its related interpretations, the Company
has recorded no compensation expense to date. Compensation expense will be
recognized when it becomes probable that an event, which will trigger
vesting, will occur.
On August 16, 1999, the Company issued a warrant to an employee of the
Company to acquire 50,000 shares of common stock at an exercise price of
$0.55 per share, the closing price of the Company's common stock on August
13, 1999. On October 1, 1999, the Company issued a warrant to an employee
of the Company to acquire 50,000 shares of the Company's common stock at an
exercise price of $0.80 per share, the closing price of the Company's common
stock on September 30, 1999. Each of these warrants vests in 25,000 share
increments on the first and second anniversary dates of the warrant, and are
exerciseable during the two year period following the date of vesting. The
right to purchase any shares under these warrants terminates upon any
termination of employment with the Company. Each of these warrants were
issued as consideration for services. The fair value of these warrants has
been calculated pursuant to SFAS 123 "Accounting for Stock Based
Compensation". The fair value of the warrants using the Black-Scholes
pricing model was $82,774 with the following assumptions: applicable risk-
free interest rates based on the current treasury-bill interest rate at the
grant date of 6.0%; dividend yields of 0%; volatility factors of the
expected market price of the Company's common stock of .90; and an expected
life of the warrants ranging from 3 - 6 years.
On December 1, 1999 the Company issued warrants to several employees of the
Company to acquire 100,000 shares of common stock at an exercise price of
$0.81 per share. The warrants vest within one to two years from the date of
grant. On December 22, 1999 the Company issued warrants to several employees
of the Company to acquire 490,000 shares of common stock at an exercise
price of $1.44 per share. The warrants vest over three years from the date
of grant. The exercise price was in excess of the trading price at the grant
date, and accordingly no expense pursuant to APB No. 25 was recorded by the
Company for these issuances. The fair value of these warrants has been
calculated pursuant to SFAS 123 "Accounting for Stock Based Compensation".
The fair value of the warrants using the Black-Scholes pricing model was
$782,834 with the following assumptions: applicable risk-free interest rates
based on the current treasury-bill interest rate at the grant date of 6.0%;
dividend yields of 0%; volatility factors of the expected market price of
the Company's common stock of 2.13; and an expected life of the warrants
ranging from 2 - 3 years.
During March 2000, one employee exercised 125,000 warrants at an exercise
price of $0.53 per share. Also in March 2000, 275,000 warrants with exercise
prices ranging from $0.46 to $0.81 that were previously issued to various
employees were amended, changing the vesting period of the warrants only.
At various dates during 2000, 560,000 warrants with exercise prices ranging
from $0.53 to $1.44 were canceled or expired.
The warrants issued to employees that were exercisable at the years ended
October 31, 2000, 1999 and 1998 were 350,000, 375,000 and 375,000,
respectively.
The weighted average fair value of the warrants granted during the years
ended October 31, 2000, 1999 and 1998 is $1.33, $0.60 and $0.53,
respectively.
Warrant Issuances to Non-Employees
Non-Employee warrant activity for the three years ended October 31, 2000 was
as follows:
Weighted
Number Warrant Average
of Price Per Exercise
Warrants Share Price
-------- ----------- --------
Warrants outstanding at
October 31, 1997 50,000 $ 2.00 $ 2.00
Warrants granted 50,000 0.53 0.53
Warrants exercised - - -
Warrants canceled - - -
-------- ----------- --------
Warrants outstanding at
October 31, 1998 100,000 0.53 - 2.00 1.27
Warrants granted 120,000 0.29 - 0.88 0.56
Warrants exercised - - -
Warrants canceled (25,000) 0.53 0.53
-------- ----------- --------
Warrants outstanding at
October 31, 1999 195,000 0.29 - 2.00 0.93
Warrants granted 660,000 0.46 - 3.00 1.53
Warrants exercised (31,200) 0.46 - 0.81 0.61
Warrants canceled (50,000) 0.88 0.88
-------- ----------- --------
Warrants outstanding at
October 31, 2000 773,800 $0.29 - 3.00 $ 1.50
======== =========== ========
Effective June 16, 1998, 50,000 warrants were issued relating to an asset
purchase agreement entered into by the Company (see note D). The warrants
were initially exercisable at a price of $1 per share, and subsequently
repriced to $0.53 per share on July 20, 1998. These warrants vest upon
attainment of certain target revenues as specified in the warrant agreement.
On June 30, 1999, 25,000 of the warrants expired without vesting. The
remaining 25,000 warrants expired on June 30, 2000.
On January 11, 1999, the Company retained a consultant to assist in its
strategic planning and investor relations activities by issuing warrants to
acquire 50,000 shares of Company common stock at an exercise price of $.29
per share. The right to acquire 25,000 shares under such warrant vests on
January 10, 2000, and the right to acquire the remaining 25,000 shares under
the warrant vests on July 10, 2000.The Company recorded expense of $5,942 in
1999 related to these warrants. This amount represents the Company's
estimate of the fair value of these warrants at the date of grant using a
Black-Scholes pricing model with the following assumptions: applicable risk-
free interest rate based on the current treasury-bill interest rate at the
grant date of 6.0%; dividend yields of 0%; volatility factors of the
expected market price of the Company's common stock of 1.02; and an expected
life of the warrant of one year.
October 26, 1999, the Company issued a warrant to a distributor of the
Company's prepaid phone cards to acquire 50,000 shares of common stock at an
exercise price of $0.88 per share, the closing price of the Company's common
stock on October 25, 1999. The warrant is exerciseable beginning October
26, 2001 and expires October 26, 2003. This warrant was issued as
consideration for services.
During the fiscal year ended October 31, 1999, the Company issued a warrant
to purchase 20,000 shares of the Company's common stock for provision of
services at an exercise price of $.45 per share. The fair market value of
these warrants is not significant, and therefore is not included in the
proforma disclosure or net income for the year.
On November 2, 1999 the Company issued warrants to a consultant of the
Company to acquire 10,000 shares of common stock at an exercise price of
$0.81 per share. These warrants vested immediately.
On March 1, 2000 the Company issued warrants to several distributors of the
Company's prepaid calling card business to acquire 400,000 shares of common
stock at an exercise price ranging between $0.46 and $0.88 per share. Fifty
percent of these warrants vested immediately, while the remaining fifty
percent are performance based.
On February 4, 2000 and August 4, 2000, the Company issued warrants to
several investors to acquire 250,000 shares of common stock at an exercise
price ranging between $2.75 and $3.00 per share. The warrants vested
immediately (see Note G).
During fiscal 2000, several distributors exercised 21,200 warrants at an
exercise price ranging between $0.46 and $0.88 per share. Also during the
year a consultant of the Company exercised 10,000 warrants with an exercise
price of $0.81.
During fiscal 2000, 50,000 warrants with an exercise price of $0.88 were
canceled and amended.
The warrants issued to non-employees that were exercisable at the years
ended October 31, 2000, 1999 and 1998 were 70,000, 20,000 and none,
respectively.
The weighted average fair value of the warrants granted during the years
ended October 31, 2000, 1999 and 1998 was $1.50, $0.93 and $1.27,
respectively.
Stock Options
In 1990, the Company adopted a stock option plan (the "Stock Option Plan").
The Stock Option Plan authorizes the Board of Directors to grant up to
1,200,000 options to purchase common shares of the Company. No options will
be granted to any individual director or employee which will, when
exercised, exceed 5% of the issued and outstanding shares of the Company.
The term of any option granted under the Stock Option Plan is fixed by the
Board of Directors at the time the options are granted, provided that the
exercise period may not be longer than 10 years from the date of grant. All
options granted under the Stock Option Plan have up to 10 year terms and
have vesting periods which range from 0 to 3 years from the grant date. The
exercise price of any options granted under the Stock Option Plan is the
fair market value at the date of grant. As of October 31, 1997, the Board
had granted certain options under the Stock Option Plan in excess of shares
authorized under the plan. On February 26, 1998, the Board of Directors
increased the number of shares issuable under the Company's Stock Option
Plan from 1.2 million shares to 2.3 million shares so that stock options
previously granted by the Board in excess of those permitted by the Stock
Option Plan could be covered by the plan.
Activity under the Stock Option Plan for the three years ended October 31,
2000 was as follows:
Weighted
Number Warrant Average
of Price Per Exercise
Warrants Share Price
-------- ----------- --------
Options outstanding at
October 31, 1997 1,017,700 $1.50 - 5.00 $ 2.23
Options granted 199,050 0.38 - 1.41 0.94
Options exercised - - -
Options canceled (122,600) 1.41 - 5.00 2.17
-------- ----------- --------
Options outstanding at
October 31, 1998 1,094,150 0.38 - 5.00 1.95
Options granted 901,450 0.28 - 0.48 0.40
Options exercised (20,000) 0.40 0.40
Options canceled (912,300) 0.28 - 5.00 1.97
-------- ----------- --------
Options outstanding at
October 31, 1999 1,063,300 0.30 - 2.50 0.70
Options granted 50,000 0.46 - 1.44 1.44
Options exercised (543,600) 0.30 - 2.25 0.95
Options canceled (105,600) 0.40 - 2.50 1.14
-------- ----------- --------
Options outstanding at
October 31, 2000 464,100 $0.30 - 2.25 $ 0.67
======== =========== ========
Effective December 11, 1998, employee options to purchase 792,150 shares
were repriced to $.40 per share, the closing price of the Company's stock on
that date. The repricing was made because the Board of Directors believed
that the higher priced options were no longer a motivating factor for key
employees and officers. The repriced options are reflected above in the
cancellation and grant activity for 1999.
The options issuable to employees that were exercisable at year ended
October 31, 2000, 1999, and 1998 were 464,100, 1,043,300 and 732,850,
respectively.
The weighted-average fair value of the options granted during the years
ended October 31, 2000, 1999, and 1998 is $ 1.44, $ 0.24 and $ 0.49,
respectively.
The weighted-average remaining contractual life of options outstanding at
October 31, 2000, 1999 and 1998 is 1.62 years, 2.12 years and 4.37 years,
respectively.
Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, and has been determined as if the Company
had accounted for its employee stock options and warrants under the fair
value method of that statement. The fair value for options was estimated at
the date of grant using a Black-Scholes option pricing model with the
following assumptions: applicable risk-free interest rates based on the
current treasury-bill interest rate at the grant date, which approximated 6%
in 2000 and 1999, respectively and 5.4% to 6.0% in 1998; dividend yields of
0% in all three years; volatility factors of the expected market price of
the Company's common stock of approximately 2.13 in 2000, .90 in 1999; and
between .94 and 1.0 in 1998; and an expected life of the option of between
one and three years in 2000, three and six years in 1999, and two and six
years in 1998.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options and warrants is amortized to expense over the vesting period of the
related option or warrant. The effects of applying SFAS No. 123 in
computing the pro forma disclosures presented below are not indicative of
future amounts as only options and warrants granted subsequent to October
31, 1995 have been included in the pro forma computations. The Company's
pro forma information for the years ended October 31, 2000, 1999 and 1998 is
as follows:
2000 1999 1998
----------- --------- ----------
Net income (loss) as reported $ (8,674,016) $1,713,380 $(2,724,162)
SFAS No. 123 Pro forma adjustments:
Stock options (2,175,839) (81,849) (261,726)
Performance warrants - (11,678) (650,011)
----------- --------- ----------
Pro forma net income (loss) $(10,849,855) $1,619,853 $(3,635,899)
=========== ========= ==========
Income (loss) per share as
reported - basic and diluted $ (1.02) $ 0.25 $ (0.38)
=========== ========= ==========
Pro forma income (loss) per
share - basic and diluted $ (1.27) $ 0.24 $ (0.51)
=========== ========= ==========
NOTE N - INCOME TAXES
The temporary differences that give rise to the deferred tax assets or
liabilities at October 31, 2000 and 1999 are as follows:
2000 1999
---------- ----------
Deferred tax assets
Net operating loss carryovers $ 8,962,015 $ 6,252,711
Accounts receivable 348,760 78,770
Other assets 173,710 173,710
Other 202 202
---------- ----------
Total gross deferred tax assets 9,484,687 6,505,393
Deferred tax liabilities
Property and equipment (71,574) -
Other - (447)
---------- ----------
Total gross deferred tax liabilities (71,574) (447)
---------- ----------
9,413,113 6,504,946
Valuation allowance (9,413,113) (6,504,946)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
The reconciliation of income tax at the statutory United States federal
income tax rates to income tax provision (benefit) for the years ended
October 31, is:
2000 1999 1998
---------- --------- ----------
Income tax (benefit) at
statutory rate $(2,949,165) $ 582,549 $ (923,263)
Change in valuation allowance 2,908,167 (592,047) 390,118
Difference related to USC
rescission - - 533,145
Other 40,998 9,498 -
---------- --------- ----------
$ - $ - $ -
========== ========= ==========
At October 31, 2000, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $26.3 million, which expire in
2006 through 2015. Utilization of net operating losses are subject to
annual limitations provided for by the Internal Revenue Code. The annual
limitation may also result in the expiration of net operating losses before
utilization.
NOTE O - COMMITMENTS AND CONTINGENCIES
The Company is obligated under various capital leases for equipment used in
operating the business with terms expiring at various dates through 2005.
One of the leases in the amount of $40,865 was in default at October 31,
2000 and accordingly, the entire obligation has been shown as a current
liability. The Company leases its branch office facilities and its
corporate office under various noncancelable operating leases with terms
expiring at various dates through 2004, and has also entered into various
operating leases for equipment used in the Company's business. Rental
expense for operating leases was $290,175 and $210,157 for the years ended
October 31, 2000 and 1999, respectively.
Future minimum lease payments under noncancelable operating leases and
capital leases as of October 31, 2000 are as follows:
Capital Operating
Leases Leases
-------- ---------
Year ending October 31,
2001 $ 142,372 $ 365,037
2002 77,756 394,738
2003 58,316 389,947
2004 - 161,170
2005 - -
-------- ---------
Total minimum lease payments 278,444 $1,310,892
=========
Less amount representing interest (57,357)
--------
Present value of net minimum
capital lease payments 221,087
Less current installments of
obligations under capital leases (102,472)
--------
Obligations under capital leases,
excluding current installments $ 118,615
========
On May 2, 2000, Star Telecommunications, Inc. ("Star") filed suit against
the Company in the Superior Court of the State of California in Santa
Barbara, California, alleging a breach of contract by the Company in failing
to pay amounts due under a Carrier Service Agreement, and seeks damages of
approximately $780,000. The Company disputes the amounts alleged to be owed
to Star, and has filed a counter-claim for damages against Star for wrongful
acts of Star under the Carrier Service Agreement. Amounts alleged to be
owed to Star are reflected in the Company's financial statements. The
Company is vigorously defending this lawsuit and strongly believes that the
Company's damages resulting from Star's actions significantly exceed the
claims by Star.
NOTE P - BENEFIT PLAN
Effective January 1, 1994, the Company implemented a 401(k) Profit Sharing
Plan for all employees of the Company. The Plan provides for voluntary
contributions by employees into the Plan subject to the limitations imposed
by the Internal Revenue Code Section 401(k). The Company may match employee
contributions to a discretionary percentage of the employees contribution.
The Company's matching funds are determined at the discretion of the Board
of Directors and are subject to a seven-year vesting schedule from the date
of original employment. The Company made matching contributions of $10,566,
$18,659, and $0 for the years ended October 31, 2000, 1999, and 1998,
respectively.
NOTE Q - BUSINESS AND CREDIT CONCENTRATIONS
Continuing Operations:
One customer accounted for approximately 17% of revenues during the year
ended October 31, 2000 and 0% of the trade accounts receivable balance at
October 31, 2000. One customer accounted for approximately 18% of
revenues during the year ended October 31, 1999. This customer made up
approximately 6% of the trade accounts receivable balance at October 31,
1999. The receivable balance was however fully reserved. The Company no
longer provides service to this customer, since its migration to a
facilities-based operation. Management provides an allowance for
doubtful accounts which reflects its estimate of the uncollectible
receivables. In the event of non-performance, the maximum exposure to
the Company is the recorded amount of the receivable at the balance sheet
date. The Company's receivables are generally not secured.
The Company has a note receivable and accrued interest from its former
subsidiary, USC, under which approximately $460,000 in principal was
outstanding at October 31, 1999. On August 17, 1999, USC commenced
voluntary bankruptcy proceedings under Chapter 11 of the Bankruptcy Code
(See Note D). Subsequent to October 31, 1999, bankruptcy proceedings
were settled and the Company has agreed to a full settlement of
outstanding debts owed by USC in the amount of $300,000. The remaining
$160,000 note receivable balance has been charged to operations in 1999.
Discontinued Operations:
The Company derived its sales primarily from customers in the retail
petroleum market. The Company performed periodic credit evaluations of
its customers and generally did not require collateral. Billed
receivables were generally due within 30 days. Credit losses have
historically been insignificant.
The Company's revenues (See Note J) were concentrated in The Southland
Corporation ("Southland"), which accounted for approximately 0%, 86%, and
87% of the Company's total revenue for fiscal years 2000, 1999 and 1998,
respectively. At October 31, 2000, 1999 and 1998, Southland accounted for
0%, 0% and 77%, respectively of total accounts receivable. The Company's
revenues derived from its relationship with Southland included products
and services provided directly by the Company to Southland and indirectly
through NCR Corporation ("NCR") to Southland pursuant to NCR's contract
with Southland. No other customer accounted for over 10% of the Company's
total revenues.
NOTE R - SEGMENT INFORMATION
During the year ended October 31, 2000 the Company had two operating
segments, prepaid calling cards and call back and dial-thru services.
Financial information by segment as of October 31, 2000 and for the year
then ended is as follows:
Prepaid Call Back and
Phone Cards Dial-Thru Services
---------- ----------
Revenue $ 2,755,057 $ 5,836,392
Direct cost of revenues 4,220,570 5,750,839
Net loss (5,887,570) (2,244,087)
Total assets 1,506,644 1,283,835
Depreciation and amortization 242,788 217,963
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board Of Directors and Stockholders
Dial-Thru International Corporation
In connection with our audit of the consolidated financial statements of
Dial-Thru International Corporation and Subsidiaries referred to in our
report dated December 1, 2000, we have also audited Schedule II for the
years ended October 31, 2000 and 1999. In our opinion, this schedule
presents fairly, in all material respects, the information required to be
set forth therein.
/s/ KING GRIFFIN & ADAMSON P.C.
-------------------------------
King Griffin & Adamson P.C.
Dallas, Texas
December 1, 2000
DIAL-THRU INTERNATIONAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended October 31, 2000, 1999 and 1998
Balance at Balance
beginning at end
of period Additions Deductions of period
--------- --------- ---------- ---------
2000
----
Allowance for uncollectible
accounts $ 231,675 $983,760 $189,669 (1) $ 1,025,766
======== ======= ======= ==========
1999
----
Allowance for uncollectible
accounts $ 4,001 $405,825 $178,151 (1) $ 231,675
======== ======= ======= ==========
1998
----
Allowance for uncollectible
accounts $ 26,900 $ - $ 22,899 (2) $ 4,001
======== ======= ======= ==========
(1) Write offs.
(2) Collections on accounts previously written off.