Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
------------------------
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001
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
------------------------
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:
COMMON STOCK, $0.001 PAR VALUE
------------------------
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, 2002, 13,808,494 shares of Common Stock were
outstanding. The aggregate market value of the Common Stock held by non-
affiliates of Dial-Thru International Corporation as of such date
approximated $4,863,953.
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, 2002.
============================================================================
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this "Report") includes "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 us or any other person that our objectives or plans will
be achieved or that our 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 our belief of the
sufficiency of capital resources and our 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) our dependence upon favorable pricing from our
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) 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. We do not undertake to update any forward-
looking statements contained herein. For a discussion of these factors and
others, please see "Risk Factors" in Item 1 of this Report. Readers are
cautioned not to place undue reliance on the forward-looking statements made
in, or incorporated by reference into, this Report or in any document or
statement referring to this Report.
PART I
Item 1. Business
THE COMPANY
Throughout this Annual Report, the term "we", "Dial Thru" and the
"Company" refer to Dial-Thru International Corporation and its subsidiaries,
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 the Company Act of the Province of British Columbia, Canada. On
August 7, 1992, we renounced our original province of incorporation and
elected to continue our domicile under the laws of the State of Wyoming, and
on November 30, 1994 our name was changed to "Canmax Inc." On February 1,
1999, we consummated a merger into a wholly owned subsidiary to effect our
reincorporation under the laws of the State of Delaware under the name
"ARDIS Telecom & Technologies, Inc." On November 2, 1999, we 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, we
changed our name from ARDIS Telecom & Technologies, Inc. to "Dial-Thru
International Corporation." Our common stock currently trades on the OTC
Bulletin Board under the symbol "DTIX."
Prior to December 7, 1998, we operated distinct businesses in each of
the software and telecommunications industries. On December 7, 1998, we sold
our retail automation software business (the "Software Business") to
Affiliated Computer Services, Inc. Therefore, we no longer engage in the
Software Business, and now operate only in the telecommunications industry
(the "Telecommunications Business").
Our principal executive offices are located at 700 South Flower Street,
Suite 2950, Los Angeles, California 90017, and our telephone number is (213)
627-7599.
General Description of Business
From our inception until 1998, we provided retail automation software
and related services to the retail petroleum and convenience store
industries. In late 1996, we expanded our business operations beyond the
single vertical market and one large customer that dominated our Software
Business. After evaluating a number of alternative strategies, we decided
that the rapidly expanding telecommunications market presented an
opportunity to utilize some of the technology and support capabilities that
we had developed, and chose to make our entry into the telecommunications
industry via the pre-paid long distance market.
On January 30, 1998, we 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. We concluded our acquisition of USC
believing that it would provide us with access to the telecommunications
market. Certain capabilities of USC, along with distribution channels,
failed to meet our expectations. On June 15, 1998, we executed an agreement
with the former principals of USC to rescind the USC acquisition effective
May 27, 1998.
During our experience with USC, we decided to develop our in-house
capabilities to expand our telecommunications operations and continued to
focus on the rapidly growing prepaid phone card market. In August of 1998,
we 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 marketing and distribution of domestic and
international prepaid phone cards. We conducted our domestic prepaid phone
card business through RDST, Inc., a wholly owned subsidiary, by purchasing
services from PT-1 until mid-1999. In the second quarter of fiscal 1999, we
purchased telecommunications switching equipment and an enhanced services
platform. Following a period of development, implementation and testing, we
commenced operations as a facilities-based carrier in the fourth quarter of
1999. Calls made with our prepaid phone cards were then routed through our
switching facilities, giving us better control over costs and quality of
service.
On November 2, 1999, we acquired the assets and business of Dial-Thru
International Corporation, an international facilities-based carrier. We
continued operations of the acquired business through its subsidiary, Dial-
Thru.com.
During the first quarter of fiscal 2000, we appointed John Jenkins
(founder of the acquired business) to the position of President and Chief
Operating Officer. In the third quarter of fiscal 2000, we relocated our
Texas operations, including our switching facilities, to our Los Angeles
location. During the fourth quarter 2001, Mr. Jenkins was appointed by the
Board of Directors to the position of Chairman of the Board and Chief
Executive Officer. Upon Mr. Jenkins appointment as President and Chief
Operating Officer, we also announced the creation of our "Bookend Strategy"
(see "Business Strategy" below), and the roll out of our facilities-based
Internet Protocol ("IP") network, whereby we sell Voice over Internet
Protocol ("VoIP"), to allow us 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.
We now operate as a facilities-based global IP communications company
providing connectivity to international markets experiencing significant
demand for IP enabled services. We provide a variety of international
telecommunications services targeted to small and medium sized enterprises
(SME's), wholesale carriers providing international and domestic long
distance traffic, and consumers that include the transmission of voice and
data traffic and the provision of Web-based and other communications
services. We utilize VoIP packetized voice technology (and other compression
techniques) to improve both costs and efficiencies of telecommunication
transmissions, and are developing a private VoIP telephony network. We
utilize state-of-the-art digital fiber optic cable, oceanic cable
transmission facilities, international satellites and the Internet to
transport our communications. We believe that we will be a strong competitor
in our chosen international telecommunications markets.
During the fourth quarter of 2001, we acquired the assets and certain
of the liabilities of Rapid Link, Incorporated, ("Rapid Link") a leading
provider of integrated data and voice communications services to both
wholesale and retail customers around the world. Rapid Link's state-of-the-
art, global VoIP network reaches thousands of retail customers, primarily in
Europe and Asia. We believe that the acquisition will enhance our product
lines, particularly our Dial Thru and Re-origination services, and Global
Roaming products, (see "Products and Services" below for a description of
these services) which are currently offered by Rapid Link to its customers.
Furthermore, the acquisition will allow us to roll out services to
additional international markets and more rapidly expand our VoIP strategy
due to the engineering and operational expertise acquired in the
transaction.
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 Federal Communications Commission ("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 our 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 our costs of providing services. 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 a 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 our 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 our 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, or State
regulatory agencies of foreign governments begin to regulate Internet
telephony, such regulation may materially adversely affect our business,
financial condition or results of operations.
In addition, access to our services may also be limited in foreign
countries where laws and regulations otherwise do not prohibit voice
communication over the Internet. We have negotiated agreements to provide
our services in various countries. No assurances can be given that we 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. We cannot predict whether
substantial new taxes will be imposed on our services provided 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 increase the cost of doing business over
the Internet and materially adversely affect our 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 that
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. Our transmission of personal
data is limited and we do not anticipated it becoming a significant source
of revenue.
In addition, the European Union has adopted a separate, complementary
directive that 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 we do 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 our business is uncertain.
BUSINESS STRATEGY
Our 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. We have coined the
term "Bookend Strategy" to describe our primary focus, which is to provide
telecommunication services originating in foreign countries and in the
corresponding ethnic segment domestically in the United States via state-of-
the-art digital fiber optic cable, oceanic cable transmission facilities,
international satellites and the Internet to transport our communications.
These services are provided either via direct private line circuits between
those markets, or, as in most cases, via the public Internet, utilizing VoIP
and other digitized voice technologies. 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 us 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.
By utilizing VoIP over the public Internet, we avoid the high network
cost associated with private line connections to each international
destination, which would require us to "fill" idle network capacity with
traffic in order to offset high fixed costs, a practice that has plagued the
telecommunications industry for many years. 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. In essence, we are selling a bundled solution of
communication services to these small to medium size businesses. We also
sell telecommunications services for both the foreign and domestic
origination of international long distance into the wholesale market. Our
primary objective in selling into the wholesale market is to fill our direct
routes with wholesale traffic while we are developing revenue from our
retail marketing operations so that no capacity is wasted. We plan 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 we
have judged that a candidate country meets the requirements for availability
of retail revenue opportunities, we 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 them into place either through public Internet connections or
International Private Leased Circuits (IPLC). In order to effectively
utilize these routing options, we must apply the appropriate technology to
provide for the 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.
We primarily focus on markets where competition is not as keen,
thereby giving us opportunities for greater profit margins. These markets
include regions where the deregulation of telecommunications services has
not been completed and smaller markets that have not attracted large multi-
national providers. South 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 us better opportunities to
engage in the co-branding of jointly marketed products, including IP-based
enhancements that they have developed, rather than simply basing a strategy
on pricing arbitrage. As a result, we are proactively invited to
participate in, rather than reactively prevented from entering into, new
markets.
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, VoIP provides for a cost effective manner
in which to perform the signal compression needed to maximize the return
from the use of the public Internet. In this way, not only has efficiency
of the dedicated circuits been improved, but use of the public Internet
provides a much more cost effective means of transmission and rapid
deployment compared to traditional IPLC lines.
We currently operate our domestic telecommunications switching facility
in Los Angeles, California, Atlanta, Georgia, and Frankfurt, Germany,
providing for long distance services worldwide. Development of the private
IP network and the use of VoIP technology have improved both the cost and
quality of telecommunications services, as well as facilitating our
expansion into other Internet related opportunities.
We continue to review an acquisition strategy within our current
industries and other related markets. Additional material acquisitions may
result in significant changes in our business.
PRODUCTS AND SERVICES
Dial Thru and Re-origination Services
We provide a variety of international Dial Thru and Re-origination
services. We began offering these services in fiscal 2000 following the
completion of the DTI Acquisition. In fiscal 2001, these services accounted
for approximately 72% of our revenues. We expect that these services, while
accounting for a majority of our revenues, will account for a decreasing
percentage of our total revenues as we continue to develop and market new
services. Generally, the Dial Thru and Re-origination Services are provided
to customers that establish deposits or prepayments with us to be used for
long-distance calling. The Dial Thru service allows customers the
convenience of making local and/or international calls in the same manner as
traditional long distance dialing. In those markets in which we cannot
currently provide Dial Thru service, we offer our Re-origination services.
Our Re-origination service allows a caller outside of the United States to
place a long distance telephone call which appears to have originated from
our switch in Los Angeles to the Customer's location, and then connects the
call through our network to anywhere in the world. By completing the calls
in this manner, we are able to provide very competitive rates to the
customer. Wherever possible, we route calls over our private network. By
using VoIP and other technologies to compress voice and data transmissions
across our international private lines and public Internet circuits, we
offer our voice and data services at costs that are substantially less than
traditional communications services.
FaxThru
We offer FaxThru 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
Our 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 our telecommunications network
throughout the world. This product will begin to account for a more
significant amount of our revenue due to the acquisition of Rapid Link,
which provides this product to its retail customers around the world.
Prepaid Phone Cards
During fiscal year 2000, we significantly reduced our emphasis on this
segment of our business in favor of other products and services that offer
the opportunity for higher profit margins; however, we currently continue to
offer prepaid products for domestic calling and outbound international long
distance calling, as well as for enhanced features such as customized
greetings and sequential calling. During fiscal 2001, 2000 and 1999, this
product accounted for approximately 0%, 32% and 100%, respectively, of
revenue from continuing operations. Currently, we do not offer this product
to our customers, although we are exploring opportunities in specific
international markets. It is not anticipated that this product will account
for a significant amount of revenue going forward.
1+ Services and Dial Around Products
We are licensed to provide long distance service in most of the United
States and now have begun selling our 1+ long distance service and Dial
Around products to business customers. We are also targeting ethnic
segments of the United States which correspond to foreign countries in which
we have facilities. This allows us to add a complete package of
communication services to the small to medium size business customer, thus
allowing us to be its total "Bundled Communications Provider".
PowerCall
We have developed PowerCall 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 icon on its website in which a customer may
type its telephone number in the PowerCall box and then click an icon,
prompting a call from the merchant to the customer. The customer may then
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. The merchant pays for PowerCall
services, including the associated long distance calls, and target markets
are focused where our private network can be utilized. The PowerCall
product has been developed and tested by us, however we have not yet
developed a marketing program, nor are we actively selling this product.
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. Although this product is
available, it does not currently generate any revenue.
SUPPLIERS
Our 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, we believe that the loss of any carrier would
not have a long-term material adverse effect on our financial condition or
results of operations.
CUSTOMERS
We focus our retail 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, and wholesale customers in the United States and foreign
markets. We rely heavily on the use of commissioned agents to generate
retail sales in the foreign markets. By doing so, we believe that we
establish a wide base of customers with little vulnerability based on lack
of customer loyalty. Our wholesale customers are primarily large public
telecommunications customers in the United States, and medium to large
foreign Postal, Telephone and Telegraph ("PTT's") (entities responsible for
providing telecommunications services in foreign markets, usually government
owned or controlled). We believe the loss of any individual customers would
not materially impact our 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 us.
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, we compete 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 us 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 us. These advantages afford our
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. We also compete with other smaller, emerging
carriers including IDT Corporation, ITXC Corp., DeltaThree Inc., Primus, and
Net2Phone Inc. We believe that additional competitors may be attracted to
the market, including internet-based service providers and other
telecommunications companies. We also believe that existing competitors are
likely to continue to expand their service offerings to appeal to retailers
and consumers.
The market for international voice and fax call completion services is
highly competitive. We compete both in the market for enhanced Internet
communication services and the market for carrier transmission services.
Each of these markets is highly competitive, and we face 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 us, some of which have commenced
developing VoIP capabilities. Most of our competitors are larger than us,
although we also compete with small companies that focus primarily on VoIP.
We believe that the primary competitive factors in the Internet and VoIP
communications business are quality of service, price, convenience and
bandwidth. We believe 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 Re-origination 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, we expect them to provide PC-to-phone services
in the future.
Internet Telephone Service Providers
During the past several years, a number of companies have introduced
services that make Internet telephony or voice services over the Internet
available to businesses and consumers. Concert Global Clearinghouse, iBasis,
ITXC, and the wholesale divisions of Net2Phone and deltathree.com route
traffic to destinations worldwide and compete directly with us. Other
Internet telephony service providers focus on a retail customer base and may
in the future compete with us. These companies may offer the kinds of voice
services we intend to offer in the future. In addition, companies currently
in related markets have begun to provide VoIP services or adapt their
products to enable voice over the Internet services. These companies may
potentially migrate into the Internet telephony market as direct
competitors.
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 us 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 us, together with Internet telephony services, to gain a
competitive advantage on us in the marketing and distribution of products
and services.
RISK FACTORS
Insufficient Cash Flow to Satisfy Debt Obligations
For the years ended October 31, 2001, 2000 and 1999, we recorded net
losses from continuing operations of approximately $2.5 million, $11.2
million and $3.8 million, respectively, on revenues from continuing
operations of approximately $7.0 million, $8.6 million and $3.1 million,
respectively. As a result, we currently have a working capital deficit of
over $6 million. In addition, we have a significant amount of trade debt,
of which approximately 30% is past due, excluding disputes for overcharges
with our underlying carriers of approximately $750,000. To be able to
service our debt obligations we must generate significant cash flows and
obtain additional financing.
We did not commence our Telecommunications Business until early 1998
and our limited operating history makes it difficult to accurately assess
our general prospects in this industry and the effectiveness of our business
strategy. In addition, we have limited meaningful historical financial data
upon which to forecast our future sales and operating expenses. Our future
performance will also be subject to prevailing economic conditions and to
financial, business and other factors. Accordingly, we cannot assure you
that we will successfully implement our business strategy or that our actual
future cash flows from operations will match our current projections or be
sufficient to satisfy our debt obligations and working capital needs.
To implement our business strategy, we will also need to seek
additional financing. There is no assurance that adequate levels of
additional financing will be available at all or on acceptable terms. In
addition, any additional financing could result in significant dilution to
our existing stockholders. If we are unable to obtain additional financing
on terms that are acceptable to us, we could be forced to dispose of assets
to make up for any shortfall in the payments due on our debt under
circumstances that might not be favorable to realizing the highest price for
those assets. A substantial portion of our assets consist of intangible
assets, the value of which will depend upon a variety of factors, including
without limitation, the success of our business. As a result, we cannot
assure you that our assets could be sold quickly enough, or for amounts
sufficient, to meet our obligations.
If we are unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments on our trade debt and other
indebtedness, we may not be able to continue our operations.
Competition
The market for our products and services is highly competitive. We
face competition from multiple sources, many of which have greater financial
resources and a substantial presence in our markets and offer products or
services similar to our services. Therefore, we may not be able to
successfully compete in our markets, which could result in a failure to
implement our business strategy, adversely affecting our ability to attract
and retain new customers. In addition, competition within the industries in
which we operate is characterized by, among other factors, price and the
ability to offer enhanced services. Significant price competition would
reduce the margins realized by us in our telecommunications operations. 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 we
are unable to provide cutting-edge technology and value-added Internet
products and services, then we will be unable to compete in certain segments
of the market, which could have a material adverse effect on our 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 legally imposed 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
our 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 our products or services
using the Internet. In addition to new regulations being adopted, existing
laws may be applied to the Internet (see "Business - 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 , an 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.
Technology Changes
The industries in which we compete 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 us 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 we will be able to keep pace with the rapidly
changing consumer demands, technological trends and evolving industry
standards.
Strategic Relationships
Our 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 our financial condition and
results of operations.
Dependence on and Ability to Recruit and Retain Key Management and Technical
Personnel
Our success depends to a significant extent on our ability to attract
and retain key personnel. In particular, we are dependent on our senior
management team and personnel with experience in the telecommunications
industry and experience in developing and implementing new products and
services within the industry. Our future success will depend, in part, upon
our ability to attract and retain key personnel.
Expansion
We intend to expand our VoIP network and the range of enhanced
telecommunications services that we provide. Our expansion prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in new and rapidly evolving markets. To address
these risks, we must, among other things:
- respond to competitive developments;
- succeed in our marketing efforts; and
- upgrade our products, services and technologies.
We cannot assure you that we will be successful in addressing the
risks we face or that we will be successful in our proposed expansion
activities. The failure to do so would have a material adverse effect on our
business and financial condition.
Market for Common Stock; Volatility of the Stock Price
We 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 our common stock, investor perceptions of us, and general
economic and similar conditions.
Listing Status; Penny Stock Rules
Our 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 our common stock.
In addition, our 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 our
common stock and the ability of holders of our 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 our common stock.
Absence of Dividends
We have never declared or paid any cash dividends on our common stock
and do not presently intend to pay cash dividends on our common stock in the
foreseeable future.
SALES AND MARKETING
We market long distance telecommunications products and services from
our offices in Los Angeles, California and Atlanta, Georgia. We also have a
wholly owned subsidiary in Mannheim, Germany and a regional sales office
located in Johannesburg, South Africa, and offices through joint ventures in
Caracas, Venezuela, and Buenos Aires, Argentina. Our 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. We plan to expand our sales effort to both
domestic and international business accounts, as well as add products and
services targeted toward residential customers in both markets.
We have substantial revenues in foreign markets. For the years ending
October 31, 2001 and 2000, $6,658,939, or 95%, and $5,836,932, or 68% of
our total revenue for each year, respectively, originated from Western
Europe, Africa and South East Asia. For the year ending October 31, 1999,
we had no foreign revenue.
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.
INTELLECTUAL PROPERTY
The Company doesn't hold any significant patents or trademarks. The
Company's products and services are available to other telecommunication
companies.
EMPLOYEES
As of January 23, 2002, we had approximately 77 full-time and 2 part-
time employees, approximately 20 of which perform administrative and
financial functions, approximately 38 of which perform customer support
duties and approximately 59 of which have experience in telecommunications
operations and/or sales. Approximately 20 current employees are located in
Los Angeles, California, and approximately 59 employees operate in offices
worldwide. No employees are represented by a labor union, and we consider
our employee relations to be excellent.
Item 2. Properties
Our principal executive office is located in Los Angeles, California,
where we lease 7,716 square feet in two locations. Our operations and
information systems are located in Atlanta, Georgia, where we lease 17,034
square feet. Our German operations are located in Mannheim and Frankfurt,
Germany, where we lease 8,395 square feet. We also have sales and
administrative offices in, Caracas Venezuela, Buenos Aires, Argentina, and
Johannesburg, South Africa.
In addition, our subsidiary in Germany, acquired from Rapid Link in
October 2001, is facilities based provider of telecommunications services
and utilizes significant property and equipment to operate its business. As
of October 31, 2001, we had $559,821, or 11% of our total property and
equipment was located at our Germany subsidiary.
Item 3. Legal Proceedings
On June 12, 2001, Cygnus Telecommunications Technology, LLC ("Cygnus"),
filed a patent infringement suit (case no. 01-6052) in the United States
District Court, Central District of California, with respect to our
"international call-back" technology. This technology drives our Re-
Origination Services and allows our foreign based customers to initiate
international telephone calls by first calling a switch in the United
States, which then initiates a "call back" to the customer sight providing
the customer with an open phone line to place a call anywhere in the world.
The injunctive relief that Cygnus sought in this suit has been denied, but
Cygnus continues to seek compensatory and punitive damages as well as
attorneys' fees and costs. We deny the alleged infringement and intend to
defend the case vigorously, but our ultimate legal and financial liability
with respect to this legal proceeding cannot be estimated with any certainty
at this time.
On May 2, 2000, Star Telecommunications, Inc. ("Star") filed suit
against us in the Superior Court of the State of California in Santa
Barbara, California, alleging a breach of contract by us in failing to pay
amounts due under a Carrier Service Agreement, and seeking damages of
approximately $780,000. We disputed the amounts alleged to be owed to Star,
and filed a counter-claim against Star for damages resulting from wrongful
acts under the Carrier Service Agreement.
During the quarter ended January 31, 2001 we settled the lawsuit with
Star. In conjunction with the settlement we received a carrier usage credit
in the amount of $780,000 for previous services, and future services for
one year of domestic carrier services at no charge for transporting traffic
between Los Angeles, New York and Miami. The $780,000 credit for past
services is recorded as forgiveness of debt in the accompanying statement of
operations. We also received 1,100,000 shares of common stock of Star, which
were recorded at fair value totaling $446,820. On March 13, 2001, Star
filed for Chapter 11 reorganization. As a result the investment of $446,820
was written off. We will not be utilizing the one-year of no-charge carrier
services.
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
We have 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.
Our Common Stock is currently traded on the OTC Bulletin Board under
the symbol "DTIX." Our 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 our 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 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....................... $ 2.34 $ 0.50
Second Quarter...................... $ 2.63 $ 0.71
Third Quarter....................... $ 1.20 $ 0.62
Fourth Quarter...................... $ 1.09 $ 0.41
The closing price for our Common Stock on January 23, 2002 as reported
on the OTC Bulletin Board was $0.39.
Dividends
We have never declared or paid any cash dividends on our Common Stock
and do not presently intend to pay cash dividends on the our Common Stock in
the foreseeable future. We intend to retain future earnings for
reinvestment in our business.
Holders of Record
There were 439 stockholders of record as of January 23, 2002.
Recent Sales of Unregistered Securities
On October 24, 2001, we issued a 10% convertible note (the "Note") to
three of our executives, which provided financing of $1,945,958. The Notes
were issued to our Chief Executive officer for $1,745,958, our Chief
Financial Officer for $100,000, and our Executive Vice President for
$100,000. Each Note maturity date is October 24, 2003. Each Note is
convertible into our common stock at the option of the holder at each of the
six, twelve, eighteen and twenty four month anniversary of the date of
issuance of the note. The conversion price is equal to the closing bid
price of our common stock on the last trading day immediately preceding the
conversion.
On October 12, 2001, we completed the acquisition of certain assets
and liabilities of Rapid Link. The aggregate purchase price was $2,116,481,
including $1,450,000 in cash, $198,481 in acquisition related costs, and the
issuance of 600,000 shares of our common stock, valued at $468,000. The
value of the 600,000 common shares was determined based on the closing
market price of our common stock, $0.78, on October 12, 2001.
On April 11, 2001, we issued a 6% convertible debenture (the
"Debenture") to Global Capital Funding Group L.P, which provided financing
of $1,000,000. The Debenture maturity date is April 11, 2003. The
conversion price is equal to the lesser of (i) 100% of the volume weighted
average of sales price as reported by the Bloomberg L.P. of the common stock
on the last trading day immediately preceding the Closing Date ("Fixed
Conversion Price") and (ii) 70% of the average of the five (5) lowest volume
weighted average sales prices as reported by Bloomberg L.P. during the
twenty (20) Trading Days immediately preceding but not including the date of
the related Notice of Conversion. On April 11, 2001, in connection with the
issuance of the Debenture, we also issued to the holder of the Debenture
warrants to acquire an aggregate of 100,000 shares of common stock at an
exercise price of $0.89 per share, which expire on April 11, 2006. For
services rendered in connection with the Debenture, we issued to DP
Securities, Inc. 25,000 warrants to acquire common stock at an exercise
price of $0.89, which expires on April 11, 2006.
On December 15, 2000, we issued 90,000 shares of common stock to an
accredited investor, Scotty Cook, a former Director, at no cost as
compensation for consulting services performed for us. At the time of
issuance, our common stock price was $1.125.
On September 8, 2000, we issued 914,285 shares (which are fully
vested and nonforfeitable) of our common stock in exchange for $3.2 million
face value of advertising credits. These credits were issued by Millenium
Media Ltd. and Affluent Media Network, national advertising agencies and
media placement brokers.
On August 8, 2000, we received $1 million from an accredited investor
in exchange for the issuance of 285,714 of common shares. On September 11,
we received and additional $400,000 from the same investor and issued an
additional 114,286 common shares. These issuances were each part of a
single offering made only to that one accredited investor in Texas.
On March 28, 2000, we issued 1,000,000 shares of common stock in
connection with our purchase of Dial Thru International on November 2, 1999,
in accordance with the earnout terms of the Asset Purchase Agreement.
On February 4, 2000, we issued non-interest bearing convertible notes
(the "Notes") to nine accredited investors, which together provided
financing of $1,000,000. The notes were payable on the earlier of one year
from the date of issuance or the consummation of a debt or equity financing
in excess of $5,000,000, or convertible into common stock at a rate of $4.00
per share if the notes were not repaid within 90 days from the date of
issuance. On that same date, in connection with the issuance of the Notes,
we 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. 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 they had not been repaid within six months
following the date of issuance. During March 2001, terms of the Notes were
modified and the debt was converted into 400,000 common shares.
Additionally, in connection with the conversion, the warrants to purchase
250,000 shares of common stock were modified to allow for an exercise price
of $0.01 per share and 150,000 additional warrants with an exercise price
of $3.00 per share were issued to the note holders.
On November 2, 1999, we consummated the acquisition of substantially
all of the assets and business of Dial-Thru International Corporation (the
"Seller"), a California corporation. We issued to the Seller an aggregate of
1,000,000 shares of common stock, recorded a total purchase price of
$937,500 using our 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.
On October 26, 1999, we issued a warrant to a distributor of our
prepaid phone cards to acquire 50,000 shares of common stock at an exercise
price of $0.88 per share, the closing price of our common stock on October
25, 1999. The warrant is exercisable beginning October 26, 2001 and expires
October 26, 2003. This warrant was issued as consideration for services.
Each of the issuance noted above was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereunder.
Item 6. Selected Financial Data
FISCAL YEARS ENDED OCTOBER 31
----------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- ------
CONSOLIDATED STATEMENT OF OPERATIONS
DATA (1):
Revenues $ 7,002 $ 8,591 $ 3,117 $ 2,189 $ --
Cost of revenues 3,625 9,971 2,982 2,155 --
Operating expenses 5,365 9,142 4,028 1,399 --
Other income (expense) 647 (665) 79 (101) --
Gain on sale of software business -- -- 5,309 -- --
Loss on disposal of USC & equipment -- -- -- (1,155) --
Income (loss) from continuing operations (2,684) (11,187) (3,815) (2,621) --
Income (loss) from discontinued
operations -- -- 218 (103) 87
Extraordinary item - forgiveness of debt --
Net income (loss) (2,684) (11,187) 1,713 (2,724) 87
Income (loss) from continuing
operations per share (2) $ (0.25) $ (1.31) $ (0.56) $ (0.37) --
Net income (loss) per share (2) $ (0.25) $ (1.31) $ 0.25 $ (0.38) $ 0.01
CONSOLIDATED BALANCE SHEET DATA (1):
Total assets
Continuing operations 12,644 6,102 4,467 1,411 --
Discontinued operations -- -- -- 3,880 4,578
Working capital (deficiency)
Continuing operations (6,626) (4,829) 1,251 (1,460) --
Discontinued operations -- -- -- 622 664
Noncurrent obligations
Continuing operations,
net of discount 1,967 119 562 -- --
Discontinued operations -- -- -- 147 178
Shareholders' equity 2,079 508 2,865 1,064 2,220
--------------------
(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 our 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, 2001, 2000
and 1999
General
The following discussion and analysis of financial condition and
results of operations covers the years ended October 31, 2001, 2000, and
1999 and should be read in conjunction with our Financial Statements and the
Notes thereto commencing at page F-1 hereof.
Results of Operations-2001 Versus 2000
General
On November 2, 1999, we consummated the DTI Acquisition and in the
second quarter of fiscal 2000, we shifted focus toward our global VoIP
strategy; providing connectivity to international markets experiencing
significant demand for VoIP and other IP enabled services and then targeting
the corresponding ethnic segment in the U.S. This change in focus has lead
to a shift from our prepaid long distance operations toward higher margin
international opportunities. This strategy allows us to form local
partnerships with foreign PTT's (entities responsible for providing
telecommunications services in foreign markets, usually government owned or
controlled) and Internet Service Providers ("ISP's"), and to provide IP
enabled services based on the in-country regulatory environment affecting
telecommunications and data providers. Through these relationships, we are
able to acquire a direct equity interest or partnership/joint venture
interest in the local business and expect our interest to increase as
foreign ownership regulations of telecommunications companies diminish. As
an early market entrant building "super-regional" networks, management
believes that we are positioned for long-term growth and the provision of
high margin, value-added services.
In the third quarter of fiscal 2000, we further concentrated our
efforts toward our global VoIP telecommunications strategy by completing the
consolidation of our Dallas, Texas and Los Angeles, California operations
into a single facility in Los Angeles, which also houses two sets of our
telecommunications switching equipment and enhanced services platforms.
Significant reductions in cost have resulted from combining operational
organizations. Costs incurred to accomplish this 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 us 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 we moved away from. This refocusing and consolidation
of operations has resulted in not only greater savings , but also higher
profits and more sustainable revenues. This consolidation and reduction in
staff has allowed us to significantly reduce our overhead, and although
our operations have not yet produced positive cash flow, we believe that
continued cost reductions and moderate revenue growth would allow us to
achieve positive results in the near future.
On October 12, 2001, we completed the acquisition from Rapid Link of
certain assets and executory contracts of Rapid Link, USA, Inc. ("Rapid Link
USA") and 100% of the common stock of Rapid Link Telecommunications, GMBH,
("Rapid Link Germany") a German Company. Rapid Link is a leading provider
of high quality integrated data and voice communications services to both
wholesale and retail customers around the world.
Revenues
Our primary source of revenue is the sale of voice and fax traffic
internationally over our VoIP network, which is measured in minutes,
primarily to small and medium sized enterprises ("SME's"). We charge our
customers a fee per minute of usage that are dependent on the destination of
the call and is recognized in the period in which the call is completed.
For the year ended October 31, 2001, we had revenues from continuing
operations of $7,002,000 a decrease of $1,589,000 or 19% over 2000.
Revenues in 2001 included $1,572,000 resulting from the purchase of Rapid
Link. Our international long distance business as described above generated
revenues of $5,429,000 for the fiscal year ended October 31, 2001 compared
to $5,836,000 for the fiscal year ended October 31, 2000. The remaining
revenue for 2000 of $2,755,000 was derived from the prepaid long distance
business that we have discontinued. Resources devoted to the
discontinuation of the prepaid business, as well as a shift in our strategic
focus have prevented us from fully developing and marketing our redirected
business, resulting in a slight decline in revenues from international long
distance services. We now devote all of our resources to providing
international communication services in niche markets to SME's either
through direct sales efforts, outside sales agents or resellers in each
market.
Expenses
Our costs of revenues are termination fees, purchased minutes and
fixed costs for specific international and domestic Internet circuits and
private lines used to transport our minutes. Termination fees are paid to
local service providers and other international and domestic carriers to
terminate calls received from our network. This traffic is measured in
minutes, at a negotiated contract cost per minute.
For the year ended October 31, 2001, we had total direct costs of
revenues relating to revenues from continuing operations of $4,967,000, a
decrease of $5,004,000, or 50%, from $9,971,000 in 2000. Included in the
cost is $1,194,000 attributable to Rapid Link operations. Excluding the
impact of Rapid Link, costs of revenues were $3,773, 000 or 69% of revenues,
for the fiscal year ended October 31, 2001, compared to $9,971,000, or
116% of revenues, for the fiscal year ended October 31, 2000. A substantial
portion of this negative margin for 2000 related to our sale of prepaid
phone cards for use between the United States and Mexico. Changes in
competitive pricing structures combined with changes in predicted average
call durations resulted in carrier costs exceeding revenues. By focusing
our business away from low margin prepaid calling cards to delivering
higher margin international communication services to SME's in niche markets
utilizing our VoIP network, we have realized higher margins on sales across
our product lines. We anticipate the margin contribution from Rapid Link to
be consistent with our current margin results.
General and administrative expenses include salaries, payroll
taxes, benefit expenses and related costs for general corporate functions,
including executive management, finance and administration, legal and
regulatory, information technology and human resources.
General and administrative expenses were $3,464,000 and $5,202,000
for the fiscal years ended October 31, 2001 and October 31, 2000,
respectively. This decrease of $1,738,000, or 33% is net of $539,000
attributable to Rapid Link operations. Excluding the expenses associated
with Rapid Link, general and administrative expenses decreased by 44% from
the prior period. The change in our business away from prepaid calling
cards, which requires a larger infrastructure to support and control a large
volume of transactions, as well as our decision to consolidate our US
operations into one location has resulted in an overall drop in general and
administrative expenses in absolute dollars. It is anticipated that general
and administrative expense will grow in absolute dollars and as a percentage
of revenues in the short term due to the acquisition of Rapid Link, as a
majority of the acquired infrastructure supports a large retail customer
base. However, as revenues grow, and we continue to reduce expenses as part
of our integration plan, we anticipate a long tem reduction of these
expenses as a percentage of revenue.
Sales and marketing expenses include expenses relating to the
salaries, payroll taxes, benefits and commissions that we pay for sales
personnel and the expenses associated with advertising and marketing
programs, including expenses relating to our outside public relations firms.
Sales and marketing expenses were $824,000, or 12% of revenues for
the year ended October 31, 2001, compared to $863,000, or 10% of revenues,
for the same period last year. Included in sales and marketing expenses for
2001 is $16,000 attributable to Rapid Link operations. The increase in
sales and marketing as a percentage of revenues is the result of our
investment in startup operations in Latin America. In addition, Rapid Link
uses newspaper and periodicals to advertise its services, which we will
continue and increase in order to grow the acquired customer base.
Depreciation and amortization expenses attributable to continuing
operations increased $253,000 or 45%, from $565,000 for the year ended
October 31, 2000 to $818,000 for the year ended October 31, 2001. Of this
increase, $195,000 relates to the depreciation and amortization of the
assets of the business acquired from Rapid Link. The remaining increase of
$58,000 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 2000 and 2001 interest expense is primarily attributable to our
$1.0 million convertible notes, which had original deferred financing fees
totaling $609,000, and were being amortized over a three year period. The
notes were converted to equity in March 2001, and the remaining unamortized
deferred financing fees of $315,000 were charged to expense. In connection
with the conversion of the notes into equity, we issued 150,000 warrants to
the note holders on March 13, 2001, and recorded $144,000 as the fair value
of the warrants. This amount was recorded as interest expense for the year
ended October 31, 2001. In addition, during 2001, we incurred $150,000 in
financing fees relating to our convertible debenture, which was issued in
April, 2001. These financing fees include $144,000 relating to a beneficial
conversion feature provided by our April, 2001 Convertible Debenture
agreement, which provides for a below market conversion of 30% applied to
the fair market value of our common stock at each conversion of the
convertible debenture.
Settlements with two major carriers over charges in prior periods
amounted to a total credit to the statements of operations of $1,790,000 for
the year ended October 31, 2001. Of this amount, $780,000 is the result of
our settlement with Star Telecommunications ("Star"). Also included is
$446,820 representing common stock received from Star in connection with our
dispute settlement. The investment in common stock was subsequently written
off as Star filed for Chapter 11 reorganization in March 2001.
As a result of the foregoing, we incurred a net loss $2,684,000, or
$0.25 per share, for the year ended October 31, 2001, compared with a net
loss of $11,187,000, or $1.31 per share, for the year ended October 31,
2000.
Results of Operations-2000 Versus 1999
Revenues
For the year ended October 31, 2000, we 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 we continue 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 our business, we believes that this shift will ultimately
allow us to increase and sustain higher margins, as well as improve customer
retention and EBITDA growth in the years to come. As a result of the shift
away from the prepaid phone card business, deferred revenue has declined.
Expenses
For the year ended October 31, 2000, we 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 our 176% increase in sales combined with the negative
margins resulting from our prepaid phone card product line and the reduction
thereof. A substantial portion of this negative margin was related to our
sale of prepaid phone cards for use between the United States and Mexico.
Changes in competitive pricing structures combined with changes in predicted
average call durations resulted in carrier costs exceeding revenues. We
anticipate a significant reduction in these costs as carrier and facility
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
of $447,000, costs associated with the merger of the businesses and the
relocation of the Dallas, Texas operations to Los Angeles, California of
$330,000, costs associated with the closing of field distribution centers
for prepaid phone cards of $271,000, and costs associated with refocusing
business efforts away from the less profitable prepaid phone card market to
the higher margin international IP communications market of $1,479,000. 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 business and our prepaid phone card business 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 Acquisition. As part of our cost reduction
efforts associated with the merger of the two businesses, we 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 $2,800,000
for the year ended October 31, 2000. This decrease of $1,546,000 or 123%,
is primarily due to a non-cash charge of $1,937,184 recorded for warrants
previously issued to employees who changed their status to independent
distributors offset partially by a reduction in emphasis on the prepaid
phone card portion of our business, which has a much higher cost of sales
and marketing than the international IP telephony portion of the business.
In addition, we have transitioned a significant portion of our sales and
marketing activities into countries where we are building infrastructure.
This has allowed us 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, we anticipate continuing
reductions in the cost of sales and marketing as a percentage of revenue.
The Company also recorded an impairment charge of $575,542 to write
down advertising credits to their estimated fair value.
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.
We 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 our 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 our note receivable from US Communications
Services, Inc.
As a result of the foregoing, we incurred a net loss from continuing
operations of $11,187,000, or $1.31 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. Our efforts with
regard to the consolidation of business, and reduction in staff associated
with the relocation of operations to Los Angeles have allowed us to reduce
our overhead and will contribute to its goal of reaching positive cash flow
in the near term.
Quarterly Results of Operations
The following table sets forth selected unaudited quarterly information for
our the last eight fiscal quarters:
Quarter Ended
January 31 April 30 July 31 October 31 Year
$ $ $ $ $
--------- --------- --------- --------- -----------
2000
Revenue 3,806,767 2,823,704 952,667 1,008,311 8,591,449
Loss from operations (2,120,321) (4,402,381) (848,626) (3,150,736) (10,522,064)
Net Loss (2,083,370) (4,659,540) (965,071) (3,478,761) (11,186,742)
Basic and diluted loss
Per share from operations (0.26) (0.56) (0.11) (0.38) (1.31)
2001 (restated)
Revenue 890,620 903,639 1,654,079 3,553,524 7,001,862
Loss from operations (991,223) (682,600) (497,762) (1,159,563) (3,331,148)
Net Income (Loss) 382,191 (1,193,171) (594,871) (1,278,455) (2,684,306)
Basic and diluted income (loss)
per share from operations 0.03 (0.11) (0.05) (0.12) (0.25)
Liquidity and Sources of Capital
The growth model for our business is scaleable, but the rate of growth
is dependent on the availability of future financing for capital resources.
Our funding of additional infrastructure development will be provided
through the operations of our Telecommunications Business and externally
through debt and/or equity offerings. We plan to obtain vendor financing
for any equipment needs associated with expansion. We believe that, with
sufficient capital, we can significantly accelerate our growth plan. Our
failure to obtain additional financing could delay the implementation of our
business plan and have a material adverse effect on its business, financial
condition and operating results.
At October 31, 2001, we had cash and cash equivalents of $94,985, an
increase of $21,118 from the balance at October 31, 2000. As of October 31,
2001, we had a working capital deficit of $6,626,000, compared to a working
capital deficit of $4,829,000 at October 31, 2000. As of October 31, 2001,
our current assets of $1,971,365 included net accounts receivable of
$1,832,768, which has increased as a result of the growth in our revenues
and the acquisition of Rapid Link.
During the fiscal year ended October 31, 2001, net cash used in
operating activities was $867,000, compared to net cash used in operating
activities of $4,157,000 for the fiscal year ended October 31, 2000. The
net cash used in operating activities for the period ended October 31, 2001
was primarily due to a net loss of $2,684,000 adjusted for: forgiveness of
debt of ($780,000); financing fees and amortization of debt discount of
$597,731; depreciation and amortization of $818,000; stock and warrants
issued for services of $258,616; and net changes in operating assets and
liabilities of $796,000. For the year ended October 31, 2000, the net cash
used in operating activities was comprised of a net loss of $11,187,000 for
year ended October 31, 2000 adjusted for: loss from disposal of fixed
assets of $121,000 and depreciation and amortization of $565,000; bad debt
expense of $695,000; impairment provision on advertising credits of
$576,000; stock and warrants issued for services of $1,937,000; 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.
Cash used in investing activities was $1,557,000 for the fiscal year
ended October 31, 2001, compared to cash provided by investing activities of
$50,000 for the prior fiscal period. For the fiscal year ended October 31,
2000, we had receipts of $255,000 from notes receivable, offset by $275,000
of capital expenditures. The investing activities for the twelve months
ended October 31, 2001 include approximately $1.5 million, net of cash
acquired, used for the purchase of Rapid Link, and $61,000 attributable to
capital expenditures.
Cash provided by financing activities for the fiscal year ended October
31, 2001, totaled $2,445,000, compared to cash provided by financing
activities of $3,335,000 for the fiscal year ended October 31, 2000. For
2001, significant components of cash provided by financing activities
include $1,000,000 in proceeds from a convertible debenture, and proceeds of
$1,945,000 from convertible notes executed with three of our executives.
During the year ended October 31, 2000, 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.
We are subject to various risks in connection with the operation of
our business including, among other things, (i) changes in external
competitive market factors, (ii) inability to satisfy anticipated working
capital or other cash requirements, (iii) changes in the availability of
transmission facilities, (iv) changes in our business strategy or an
inability to execute our strategy due to unanticipated changes in the
market, (v) various competitive factors that may prevent us from competing
successfully in the marketplace, and (vi) our lack of liquidity and our
ability to raise additional capital. We have an accumulated deficit of
approximately $35.8 million as of October 31, 2001, as well as a working
capital deficit of approximately $6.6 million. Funding of our working
capital deficit, current and future operating losses, and expansion will
require continuing capital investment. Our strategy is to fund these cash
requirements through operations, debt facilities and additional equity
financing. As of the date of this report:
1) we are currently in negotiations to obtain both debt and/or equity
financing, and have closed on an additional $550,000 of financing.
2) we have successfully negotiated payment terms on $1 million of our
past due trade payables with our largest vendor, and we have agreed to
remit equal monthly installments in excess of our normal monthly usage
billing.
3) our trade accounts payable and carrier costs include disputes with
certain vendors over what we believe are improper charges primarily for
termination of our domestic and international minutes. This amount is
approximately $750,000 at October 31, 2001. We have received
approximately $1,400,000 of such credits in fiscal 2001.
4) our German subsidiary received a net $1 million refund for a license
fee previously paid, which will be used to pay down past due
liabilities.
Although we have been able to arrange debt facilities and equity
financing to date, there can be no assurance that sufficient debt or equity
financing will continue to be available in the future or that it will be
available on terms acceptable to us. Failure to obtain sufficient capital
could materially affect the Company's operations and expansion strategies.
As a result of the aforementioned factors and related uncertainties, there
is doubt about the Company's ability to continue as a going concern.
Our current capital expenditure requirements are not significant,
primarily due to the equipment acquired from Rapid Link. Our capital
expenditures for fiscal 2001 were approximately $61,000, and we anticipate a
similar amount for fiscal 2002. In February 2000, we consummated a private
placement of $1,000,000 in principal amount of convertible debentures.
During the second quarter of 2001, the notes were converted into 400,000
shares of our common stock at a conversion price of $2.50 per share. The
holders of the notes were also issued warrants to acquire an aggregate of
250,000 shares of our common stock at an exercise price of one half at $3.00
per share and one half at $2.75 per share. As a condition of the
conversion of the notes into common stock, the exercise price of these
warrants were re priced to $0.01, and an additional 125,000 warrants were
issued with an exercise price of $3.00.
On April 11, 2001, we executed a 6% convertible debenture (the
"Debenture") with Global Capital Funding Group L.P, which provided financing
of $1,000,000. The Debenture maturity date is April 11, 2003. The
conversion price equals the lesser of (i) 100% of the volume weighted
average of sales price as reported by the Bloomberg L.P. of the common stock
on the last trading day immediately preceding the Closing Date ("Fixed
Conversion Price") and (ii) 70% of the average of the five (5) lowest volume
weighted average sales prices as reported by Bloomberg L.P. during the
twenty (20) Trading Days immediately proceeding but not including the
date of the related Notice of Conversion ("the "Formula Conversion Price").
In an event of default the amount declared due and payable on the Debenture
shall be at the Formula Conversion Price.
In October 2001, the Company executed 10% convertible notes (the
"Notes") with three of our executives, which provided financing of
$1,945,958. The Notes mature October 24, 2003. The Notes are secured by all
Company assets and are convertible into our common stock at the option of
the holder at each of the six-, twelve-, eighteen- and twenty- four month
anniversary of the date of issuance of the note. The conversion price is
equal to the closing bid price of our common stock on the last trading day
immediately preceding the conversion. We also issued to the holders of the
Notes warrants to acquire an aggregate of 1,945,958 shares of common stock
at an exercise price of $0.78 per share, which expire on October 24, 2006.
Acquisitions
We continue to review an acquisition strategy within our
Telecommunications Business. From time to time we will review acquisition
candidates with products, technologies or other services that could enhance
our offerings or services. Any material acquisitions could result in us
issuing or selling additional debt or equity securities, or obtaining
additional debt or other lines of credit and may result in a decrease of our
working capital depending on the amount, timing and nature of the
consideration to be paid. We are not currently a party to any agreements,
negotiations or understandings regarding any material acquisitions.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
We provide services primarily to customers located outside of the U.S.
Thus, our financial results could be impacted by foreign currency exchange
rates and market conditions abroad. As most of our services are paid for in
U.S. dollars, a strong dollar could make the cost of our services more
expensive than the services of non-U.S. based providers in foreign markets.
We have not used derivative instruments to hedge our foreign exchange risks
though we may choose to do so in the future.
Item 8a. Financial Statements and Supplementary Data
The information required by Item 8 of this Report is presented at pages
F-1 to F-5.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
A change in our accountants was previously reported in a current report
on Form 8-K filed on November 7, 2001.
PART III
Item 10. Directors and Executive Officer of the Registrant
The information required by this item will be contained in our
definitive proxy statement, which we will file with the Commission no later
than February 28, 2002 (120 days after our fiscal year end covered by this
Report) and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be contained in our
definitive proxy statement, which we will file with the Commission no later
than February 28, 2002 (120 days after our 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 our
definitive proxy statement which we will file with the Commission no later
than February 28, 2002 (120 days after our 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 our
definitive proxy statement which we will file with the Commission no later
than February 28, 2002 (120 days after our 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 this
Report. See the index on Page F-1.
(3) EXHIBITS
The following is a list of all exhibits filed with this Report,
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 US Communications 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)
2.5 Stock and Asset Purchase Agreement, dated as of September 18, 2001, by
and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru
International Corporation. (filed as Exhibit 2.1 to the Company's Form
8-K dated October 29, 2001 and incorporated herein by reference)
2.6 First Amendment to Stock and Asset Purchase Agreement, dated as of
September 21, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc.,
and Dial Thru International Corporation. (filed as Exhibit 2.2 to the
Company's Form 8-K dated October 29, 2001 and incorporated herein by
reference)
2.7 Second Amendment to Stock and Asset Purchase Agreement, dated as of
October 12, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc.,
and Dial Thru International Corporation. (filed as Exhibit 2.3 to the
Company's Form 8-K dated October 29, 2001 and incorporated herein by
reference)
2.8 Third Amendment to Stock and Asset Purchase Agreement, dated as of
October 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc.,
and Dial Thru International Corporation. (filed as Exhibit 2.4 to the
Company's Form 8-K dated December 28, 2001 and incorporated herein by
reference)
2.9 Fourth Amendment to Stock and Asset Purchase Agreement, dated as of
November 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc.,
and Dial Thru International Corporation. (filed as Exhibit 2.5 to the
Company's Form 8-K dated December 28, 2001 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)
4.4 Securities Purchase Agreement dated April 11, 2001 (filed as Exhibit
4.1 to the Registrant's Quarterly Report on Form 10-Q for the period
ended April 30, 2001 and incorporated herein by reference)
4.5 Registration Rights Agreement dated April 6, 2001 between Dial Thru
International Corporation and Global Capital Funding Group, L.P. (filed
as Exhibit 4.2 to the Company's Form S-3, File #333-71406, filed on
October 11, 2001 and incorporated herein by reference)
4.6 6% Convertible Debenture of Dial Thru International Corporation and
Global Capital Funding Group, L.P. (filed as Exhibit 4.3 to the
Company's Form S-3, File 333-71406, filed on October 11, 2001 and
incorporated herein by reference)
4.7 Form of Common Stock Purchase Warrant dated April 11, 2001 between
Global Capital Funding Group, L.P. and Dial Thru International
Corporation (filed as Exhibit 4.4 to the Company's Form S-3, File
333-71406, filed October 11, 2001 and incorporated herein by reference)
4.8 Form of Common Stock Purchase Warrant dated April 6, 2001 between D.P.
Securities, Inc. and Dial Thru International Corporation (filed as
Exhibit 4.5 to the Company's Form S-3, File 333-71406, filed on
October 11, 2001 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 (filed as Exhibit 10.3 to the 2000
Form 10-K and incorporated herein by reference)
21.1* Subsidiaries of the Registrant
23.1* Consent of King Griffin & Adamson P.C.
23.2* Consent of Arthur Andersen LLP
* Filed herewith.
(B) REPORTS ON FORM 8-K
During the quarter ended October 31, 2001, the Company filed one
Current Report on Form 8-K. That report, filed on October 29, 2001,
described the Registrant's acquisition of certain assets and executory
contracts of Rapid Link, Inc. in response to items 2 and 7 of that Form.
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/ John Jenkins
John Jenkins
CHAIRMAN, CHIEF EXECUTIVE OFFICER
and PRESIDENT
POWER OF ATTORNEY
Date: January 29, 2002
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/ JOHN JENKINS Chairman, Chief Executive January 29, 2002
John Jenkins Officer and President and
Director
/s/ ALLEN SCIARILLO Chief Financial Officer January 29, 2002
Allen Sciarillo and secretary (principal
financial and principal
accounting officer)
/s/ LAWRENCE VIERRA Executive Vice President January 29, 2002
Lawrence Vierra and Director
/s/ ROBERT M. FIDLER Director January 29, 2002
Robert M. Fidler
/s/ NICK DeMARE Director January 29, 2002
Nick DeMare
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
21.1 Subsidiaries of the Registrant
23.1 Consent of King Griffin & Adamson P.C.
23.2 Consent of Arthur Andersen LLP
Item 8. Financial Statements and Supplementary Data
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
1. Consolidated Financial Statements
Report of Independent Public Accountants F-2
Consolidated Balance Sheets at October 31, 2001 and 2000 F-4
Consolidated Statements of Operations for the fiscal years
ended October 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Shareholders' Equity for the fiscal
years ended October 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Cash Flows for the fiscal years ended
October 31, 2001, 2000 and 1999 F-7
Notes to Consolidated Financial Statements F-8
2. Financial Statement Schedule
Report of Independent 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 PUBLIC ACCOUNTANTS
----------------------------------------
To Dial-Thru International, Inc.:
We have audited the accompanying balance sheet of Dial-Thru International,
Inc. (a Delaware corporation) and subsidiaries as of October 31, 2001 and
the related statement of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dial-Thru International,
Inc. and subsidiaries as of October 31, 2001 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and is in a working capital deficit position that raises
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Arthur Andersen LLP
Atlanta, Georgia
January 9, 2002
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
The Board of Directors and Shareholders
Dial-Thru International Corporation
We have audited the accompanying consolidated balance sheet of Dial-Thru
International Corporation and subsidiaries as of October 31, 2000 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the two year period ended October 31, 2000.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We 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 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 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 the
consolidated results of their operations and their cash flows for each of
the years in the two year period ended October 31, 2000, in conformity with
generally accepted accounting principles.
As described in Note C, to the October 31, 2000 financial statements, 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 for each of the last two 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 settle its
payables, 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.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
December 1, 2000
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31,
-----------------------
2001 2000
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 94,985 73,867
Trade accounts receivable, net of allowance
for doubtful accounts of $228,729 and
$1,025,766 in 2001 and 2000, respectively 1,832,768 455,819
Prepaid expenses and other 43,612 116,785
---------- ----------
Total current assets $ 1,971,365 646,471
---------- ----------
PROPERTY AND EQUIPMENT, net 5,135,027 1,539,544
PROPERTY AND EQUIPMENT HELD FOR SALE 320,307 320,307
ADVERTISING CREDITS, net 2,376,678 2,453,027
OTHER ASSETS 78,762 205,473
GOODWILL AND OTHER INTANGIBLE ASSETS, net
of amortization of $291,202 and $104,148 in
2001 and 2000, respesctively 2,762,010 937,327
---------- ----------
TOTAL ASSETS $12,644,149 $ 6,102,149
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt, net of
debt discount of $315,988 in 2000 - 684,012
Current portion of capital leases 385,787 102,472
Trade accounts payable 5,037,338 3,930,315
Accrued carrier costs 917,415 -
Accrued Liabilities 1,416,159 365,765
Deferred revenue 738,576 47,190
Note payable to shareholder 102,443 346,000
---------- ----------
Total current liabilities 8,597,718 5,475,754
---------- ----------
CAPITAL LEASE, NET OF CURRENT 286,102 118,615
NOTES PAYABLE RELATED PARTY, net of
debt discount of $819,470 1,126,488 -
CONVERTIBLE DEBENTURE, net of
debt discount of $445,155 554,845 -
COMMITMENTS AND CONTINGENCIES (Note 15)
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value; 10,000,000
shares authorized, none issued and outstanding - -
Common stock, 44,169,100 shares authorized,
$.001 par value; 12,119,090 and 9,895,000
shares issued in 2001 and 2000, respectively 12,119 9,895
Additional paid-in capital 38,174,588 33,838,158
Accumulated deficit (35,947,213) (33,262,907)
Accumulated other comprehensive income (88,548) (5,416)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
Subscription receivable - common stock (17,080) (17,080)
---------- ----------
Total shareholders' equity 2,078,996 507,780
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,644,149 $ 6,102,149
========== ==========
The accompanying notes are an integral part of these statements.
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended October 31,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
REVENUES
Reorigination and dial thru services $ 7,001,862 $ 5,836,392 $ -
Prepaid phone cards and other - 2,755,057 3,116,911
----------- ----------- -----------
Total revenues 7,001,862 8,591,449 3,116,911
COSTS AND EXPENSES
Re-origination and dial thru services 4,967,214 5,750,839 -
Prepaid phone cards and other - 4,220,570 2,982,290
Sales & marketing 824,388 862,582 1,254,429
Non-cash sales & marketing expense for
issuance of warrants 258,616 1,937,184 -
General & administrative 3,464,468 5,201,608 2,682,545
Impairment charge related to write down
advertising credits - 575,542
Depreciation and amortization 818,324 565,188 91,338
----------- ----------- -----------
Total cost and expenses 10,333,010 19,113,513 7,010,602
----------- ----------- -----------
Operating loss (3,331,148) (10,522,064) (3,893,691)
OTHER INCOME (EXPENSES)
Interest and financing costs (710,788) (679,258) (95,836)
Interest income 1,384 14,580 174,604
Write-off of investment in marketable
securities (446,820) - -
Other income related to settlement
of disputes 1,789,373 - -
Gain on sales of equipment 13,693 - -
----------- ----------- -----------
Total other income (expense) 646,842 (664,678) 78,768
NET LOSS FROM CONTINUING OPERATIONS (2,684,306) (11,186,742) (3,814,923)
DISCONTINUED OPERATIONS
Income from operation of
software business, net - - 218,376
Gain on sales of software business, net - - 5,309,927
----------- ----------- -----------
NET (LOSS) INCOME $ (2,684,306) $(11,186,742) $ 1,713,380
=========== =========== ===========
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE:
Continuing operations $ (0.25) $ (1.31) $ (0.56)
Discontinued operations 0.00 0.00 0.81
----------- ----------- -----------
Net (loss) earnings $ (0.25) $ (1.31) $ 0.25
=========== =========== ===========
SHARES USED IN THE CALCULATION OF PER
SHARE AMOUNTS:
Basic common shares 10,900,115 8,544,105 6,803,471
Dilutive impact of stock options, warrants
and convertible debentures - - -
----------- ----------- -----------
Dilutive common shares 10,900,115 8,544,105 6,803,471
=========== =========== ===========
The accompanying notes are integral part of these statements
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Other Receivable -
Accumulated
Common Common Stock Treasury Additional Accumulated Comprehensive Common
Shares Amount Stock Paid-in Capital Deficit Income Stock Total
---------- ----------- ------- --------------- ----------- ------ ------- ---------
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 - 3,027,655 - - - 3,028,569
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 notes - - - 995,246 - - - 995,246
Warrants issued as compensation - - - 1,937,184 - - - 1,937,184
Net loss - - - - (11,186,742) - - (11,186,742)
---------- ----------- ------- ----------- ----------- ------ ------- ----------
Balance at October 31, 2000 9,895,090 9,895 (54,870) 33,838,158 (33,262,907) (5,416) (17,080) 507,780
===================================================================================================================================
Shares issued upon exercise 134,000 134 - 34,223 - - - 34,357
of options and warrants
Issuance of common stock in
connection with consulting
agreement 90,000 90 - 101,160 - - - 101,250
Conversion of convertible notes 400,000 400 - 999,600 - - - 1,000,000
Shares issued to a shareholder 1,000,000 1,000 - 1,030,200 - - - 1,031,200
Issuance of warrants in connection
with convertible debentures - - - 79,931 - - - 79,931
Embedded beneficial conversion
feature of convertible notes
including change for conversion
factor - - - 828,111 - - - 828,111
Issuance of warrants in connection
with convertible notes-related
party - - - 496,598 - - - 496,598
Issuance of common stock in
connection with acquisition
of rapid link 600,000 600 - 467,400 - - - 468,000
Issuance of warrants in connection
with convertible notes - - - 141,841 - - - 141,841
Issuance of warrants in connection
with consulting agreement - - - 157,366 - - - 157,366
COMPREHENSIVE INCOME
Net Income - - - - (2,684,306) - - (2,684,306)
Other accumulated
comprehensive Income / (loss)
Foreign currency tranlation
adjustment - - - - - (83,132) - (83,132)
---------- ----------- ------- ----------- ----------- ------ ------- ----------
Total Comprehensive Income - - - - (2,684,306) (83,132) - (2,767,438)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at October 30, 2001 12,119,090 $ 12,119 $(54,870) $ 38,174,587 $(35,947,213) $(88,548) $(17,080) $ 2,078,996
===================================================================================================================================
The accompanying notes are integral part of these statements
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended October 31,
---------------------------------------
2001 2000 1999
---------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (2,684,306) $(11,186,742) $ 1,713,380
Adjustments to reconcile net income (loss) to net
cash used in continuing operating activities:
Loss (income) from discontinued operations - - (218,376)
(Gain)/Loss from disposal of fixed assets (13,693) 121,360 -
Gain on disposal of software business - - (5,309,927)
Stock and warrants issued for services 258,616 1,937,184 80,165
Non-cash vendor credit (780,000) - -
Bad debt expense 140,167 694,526 405,825
Inventory write-off - 58,526 -
Non-cash interest expense 597,731 679,258 -
Impairment provision on advertising credits - 575,542 -
Depreciation and amortization 818,324 565,188 91,338
(Increase) decrease in:
Trade accounts receivable (1,031,471) (173,826) (201,526)
Inventory - 82,491 88,655
Prepaid expenses and other 103,094 30,301 (63,072)
Advertising Credits 76,349 - -
Other assets 136,481 (128,851) (180,389)
Increase (decrease) in:
Trade accounts payable 549,194 2,854,082 (286,783)
Accrued Carrier Costs 666,728 - -
Accrued liabilities 217,158 (78,150) 78,661
Deferred revenue 78,628 (187,914) 189,071
---------- ----------- ----------
Net cash used in operating activities from
continuing operations (867,000) (4,157,025) (3,612,978)
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of software business - - 7,394,917
Purchase of property and equipment (60,609) (274,609) (1,436,337)
Cash in DTI at acquisition date - 69,137 -
Cash paid for Rapid Link acquisition,
net of cash acquired (1,495,814) - -
Payments received on note receivable - 255,000 115,569
---------- ----------- ----------
Net cash (used in) provided by investing
activities of continuing operations (1,556,423) 49,528 6,074,149
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayment of) advances
from shareholder - (54,000) (1,500,000)
Proceeds from convertible debentures 1,000,000 1,000,000 -
Proceeds from note payable - - 805,000
Payments on note payable - (724,000) (81,000)
Proceeds from note payable - related party 1,599,486 - -
Payments on capital leases (106,172) (55,140) -
Proceeds from common stock subscription - 1,400,000 -
Proceeds from exercise of stock options 34,357 585,500 8,000
Purchase of treasury stock - (54,870) -
Cash restricted as collateral for note
and letters of credit - 1,237,733 (1,237,733)
Effects of changes in foreign exchange rates (83,132) - -
---------- ----------- ----------
Net cash provided by (used in) financing
activities of continuing operations 2,444,539 3,335,223 (2,005,733)
---------- ----------- ----------
Cash provided by (used in) discontinued operations - - 183,094
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH 21,118 (772,274) 638,532
Cash and cash equivalents at beginning of year 73,867 846,141 207,609
---------- ----------- ----------
Cash and cash equivalents at end of year $ 94,985 $ 73,867 $ 846,141
========== =========== ==========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Note receivable issued for deposit repayment $ - $ - $ 100,000
Switch equipment obtained through issuance
of capital lease $ - $ 227,772 $ -
Conversion of Note payable shareholder
to Note Payable Related Party $ 346,000 $ - $ -
Conversion of Convertible Note to Common Stock $(1,000,000) $ - $ -
Common stock issued for acquisiton of Rapid Link $ 468,000 $ - $ -
Common stock issued for acquisiton of Dial Thru
International $ 1,031,200 $ - $ -
Warrants issued for Debt $ 1,404,056 $ - $ -
Cash paid for interest $ 11,174 $ - $ 92,000
Cash paid for income taxes $ - $ - $ -
The accompanying notes are an integral part of these statements.
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
Organization
------------
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.
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"). DTI is a
facilities-based, global Internet Protocol (IP) communications company
providing connectivity to international markets experiencing significant
demand for IP enabled services. DTI 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. DTI utilizes
Voice over Internet Protocol ("VoIP") packetized voice technology (and other
compression techniques) to improve both cost and efficiencies of
telecommunication transmissions, and are developing a private VoIP
network. DTI utilizes state-of-the-art digital fiber optic cable, oceanic
cable transmission facilities, international satellites and the
Internet to transport our communications.
Nature of Business
------------------
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, 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.
To further enhance its product offerings and accelerate its growth plans, in
October 2001, the Company acquired certain assets and liabilities of Rapid
Link, Incorporated, ("Rapid Link") a leading provider of high quality
integrated data and voice communications services to both wholesale and
retail customers around the world. Rapid Link's global VoIP network reaches
thousands of retail customers, primarily in Europe and Asia. The acquisition
will enhance the Company's product offerings and rapidly expand the
Company's VoIP strategy due to the engineering and operational expertise
acquired in the transaction.
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.
Financial Condition
-------------------
The Company is subject to various risks in connection with the operation of
its business including, among other things, (i) changes in external
competitive market factors, (ii) inability to satisfy anticipated working
capital or other cash requirements, (iii) changes in the availability of
transmission facilities, (iv) changes in the Company's business strategy or
an inability to execute is strategy due to unanticipated changes in the
market, (v) various competitive factors that may prevent the Company from
competing successfully in the marketplace, and (vi) the Company's lack of
liquidity and its ability to raise additional capital. The Company has an
accumulated deficit of approximately $35.9 million as of October 31, 2001,
as well as a working capital deficit of approximately $6.6 million. Funding
of the Company's working capital deficit, current and future operating
losses, and expansion of the Company will require continuing capital
investment. The Company's strategy is to fund these cash requirements
through debt facilities and additional equity financing. As of the date
of this report.
1) the Company is currently in negotiations to obtain both debt and/or
equity financing, and in January 2002, closed on an additional $550,000
of debt financing.
2) the Company has successfully negotiated payment terms on $1 million of
its past due trade payables with its largest vendor, and has agreed to
remit equal monthly installments in excess of its normal monthly usage
billing.
3) the Company's trade accounts payable and accrued carrier costs include
disputes with certain vendors over what the Company believes are
improper charges primarily for termination of our domestic and
international minutes. This amount is approximately $750,000 at
October 31, 2001. The Company has received approximately $1,400,000 of
such credits in fiscal 2001.
4) the Company's German subsidiary received a net $1 million refund for a
license fee previously paid, which will be used to pay down past due
liabilities.
Although the Company has been able to arrange debt facilities and equity
financing to date, there can be no assurance that sufficient debt or equity
financing will continue to be available in the future or that it will be
available on terms acceptable to the Company. Failure to obtain sufficient
capital could materially affect the Company's operations and expansion
strategies. As a result of the aforementioned factors and related
uncertainties, there is substantial doubt about the Company's ability to
continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING 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, Dial-Thru.com, Inc., a Delaware corporation, and DTI Com Inc.,
a California corporation, Dial thru International Argentina S.A., Dial Thru
International Venezuela, C.A., Dial Thru International Corporation, South
Africa, and Rapid Link GMBH, a Germany company. All significant intercompany
accounts and transactions have been eliminated.
Revenue Recognition
-------------------
The following describes the Company's revenue recognition policies:
Revenues generated by international re-origination, dial-thru services
and international wholesale termination 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, and is the
primary source of the Company's revenue going forward.
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.
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.
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.
Goodwill and Other Intangible Assets
------------------------------------
Intangible assets, net of accumulated amortization, as of October 31, 2001
and 2000 consisted of the following:
2001 2000
----------- -----------
Goodwill $ 2,072,675 $ 1,041,475
Licenses and other 980,537 -
----------- -----------
3,053,212 1,041,475
Less accumulated amortization (291,202) (104,148)
----------- -----------
$ 2,762,010 $ 937,327
=========== ===========
Excess of cost over fair value of net assets of company acquired (Goodwill)
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
$275,665 and $104,148 at October 31, 2001 and 2000, respectively.
The Company's German subsidiary, acquired from Rapid Link in October 2001,
obtained a license from the German authorities in February 2000. This
license gives the Company the right to provide and run a telecommunication
net in Germany. The license has been recorded at its fair market value of
$933,864 as of the acquisition date, October 1, 2001. The right to use the
license is unlimited, and the right does not expire. In accordance with the
Company's accounting policy, this asset is amortized straight line over five
years, its estimated economic useful life. The amortization for the fiscal
year ending October 31, 2001 is $15,537.
In November 2001, the Company received a refund for the full amount of
the orginal license fee of $1.5 million. The Company anticipates that
approximately $500,000 will be returned to the German authorities as a
revised license fee. This refund will be recorded in the Company financial
results for the first quarter of fiscal 2002.
Valuation of Long-Lived Assets
------------------------------
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.
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 accounting
principles generally accepted in the United States 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 for equity
issued to employees 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.
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), sets forth
rules for the reporting and display of comprehensive income (net income plus
all other changes in net assets from non owner sources) and its components
in the financial statements. At October 31, 2001, 2000 and 1999 the major
component of other comprehensive income consisted of an unrealized loss from
currency translation, which is stated as a component of shareholders'
equity.
Foreign Currency Translation
----------------------------
The assets and liabilities of subsidiaries domiciled outside the United
States are translated at rates of exchange existing at the balance sheet
date. Revenues and expenses are translated at average rates of exchange
prevailing during the year. The resulting translation adjustments are
recorded as a separate component of shareholders' equity.
New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
In addition, companies are required to review goodwill and intangible assets
reported in connection with prior acquisitions, possibly disaggregate and
report separately previously identified intangible assets and possibly
reclassify certain intangible assets into goodwill. SFAS No. 142 establishes
new guidelines for accounting for goodwill and other intangible assets. In
accordance with SFAS No. 142, goodwill associated with acquisitions
consummated after June 30, 2001 is not amortized. The Company implemented
the remaining provisions of SFAS No. 142 on November 1, 2001. Since
adoption, existing goodwill is no longer amortized but instead will be
assessed for impairment at least annually. The Company is currently
determining the impact of adopting this standard under the transition
provisions of SFAS No. 142. Goodwill amortization expense for Fiscal 2001
and 2000 was $171,517 and $104,148 respectively.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143, addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement is effective for
fiscal years beginning after June 15, 2002. The Company is currently
assessing the impact of this new standard.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of Long-
Lived Assets," which is effective for fiscal years beginning after December
15, 2001. The provisions of this statement provide a single accounting model
for impairment of long-lived assets. The Company is currently assessing the
impact of this new standard.
Reclassifications
-----------------
Certain reclassifications were made to the 2001 and 2000 consolidated
financial statements to conform to the current year presentation.
NOTE 3 - ACQUISITIONS
Dial-Thru International Corporation Acquisition
-----------------------------------------------
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. In March 2001, the additional
1,000,000 shares of common stock were issued to the Seller in accordance
with the terms of the Asset Purchase Agreement, and the Company recorded
additional purchase price of $1,031,200 using the Company's common stock
price at the time of approval of the issuance. 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)
Goodwill 2,072,675
----------
$ 1,968,700
==========
Rapid Link, Inc. Acquisition
----------------------------
On October 12, 2001, Dial Thru International Corporation ("Dial Thru")
completed the acquisition of certain assets and liabilities of Rapid Link,
USA, Inc. ("Rapid Link USA") and 100% of the common stock of Rapid Link
Telecommunications, GMBH, ("Rapid Link Germany") a German Company, from
Rapid Link Inc. ("Rapid Link"). The results of the businesses acquired from
Rapid Link have been included in operations of the Company in the
consolidated financial statements from the date of acquisition. Rapid Link
is a provider of high quality integrated data and voice communications
services to both wholesale and retail customers around the world. The
aggregate purchase price was $2,116,481, including $1,450,000 in cash,
common stock valued at $468,000, and an additional $198,481 in acquisition
related costs. The value of the 600,000 common shares was determined based
on the closing market price of Dial Thru's common shares on October 12,
2001. The value of the common stock is guaranteed by Dial Thru to be no less
than $300,000 at the time of the Registration of the shares. Dial Thru will
either (i) issue additional shares to Rapid Link in excess of the 600,000
Shares; or (ii) pay to Rapid Link additional cash consideration, so that the
minimum value of the consideration received is $300,000. Any additional
consideration will not change the recorded cost of Rapid Link. The
following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of the acquisition. In accordance with
Statement of Financial Accounting Standards No. 141 Business Combinations,
the Company has allocated the purchase price to net assets acquired,
resulting in negative goodwill. Therefore the Company has reduced the net
book value of fixed assets by $1,345,630, the amount representing negative
goodwill.
The fair value of assets and liabilities acquired consisted of:
Cash $ 152,000
Accounts Receivable 485,645
Fixed Assets 4,187,647
Intangible and others 1,030,453
Accrued liabilities (833,236)
Accounts Payable and other (1,603,485)
Deferred revenue (612,758)
Capital leases and other debt (690,266)
------------
$ 2,116,000
============
The following unaudited pro-forma consolidated results of operations for the
years ended October 31, 2001 and 2000, assume that the acquisitions had
occurred on November 1, 1999 is as follows:
Unaudited
Year ended October 31,
---------------------------
2001 2000
----------- ------------
Revenues $ 32,933,450 $ 61,371,944
=========== ============
Net loss $ (8,734,575) $ (26,569,378)
=========== ============
Net loss per common share (basic and diluted) $ (0.76) $ (2.91)
=========== ============
Weighted average common shares outstanding
(basic and diluted) 11,500,115 9,144,105
=========== ============
NOTE 4 - ADVERTISING CREDITS
On September 8, 2000, the Company issued 914,285 shares (which are fully
vested and nonforfeitable) of the Company's common stock in exchange for
$3.2 million face value of advertising credits. These credits were issued
by Millenium Media Ltd. and Affluent Media Network, national advertising
agencies and media placement brokers. The Company recorded the advertising
credits on the date the shares were issued, September 8, 2000, using the
Company's quoted common stock price of $3.3125, totaling $3,028,569.
Through October 31, 2001 the Company has recorded an impairment charge of
$575,542 to reduce the credits to their estimated fair value, and sold a
portion of the credits for cash, reducing the balance by an additional
$76,349, reduced the impairment by $11,610 during the year due to sales
above the estimated value of the credits. The estimated fair value was
established at the end of fiscal 2000 using a discount of 25% off the face
value, which was based on management's estimate of the dollar value of the
credits to be used in settling various outstanding trade obligations. Such
credits can be used by the Company to place electronic media and periodical
advertisements. With the acquisition of Rapid Link, and the expanding
market presence of the Company worldwide, it is management's intention to
utilize the remaining advertising credits to promote the Company's products
and services. There is no contractual expiration date for these trade
credits and there are no limitations relating to the use of these credits.
NOTE 5 - SETTLEMENT OF LEGAL/CARRIER DISPUTES
During the quarter ended January 31, 2001, the Company settled a pending
lawsuit with Star Telecommunications, Inc. In conjunction with the
settlement the Company received a carrier usage credit in the amount of
$780,000 for previous services and future services comprised of one year of
no charge domestic carrier services for transporting traffic between Los
Angeles, New York and Miami. The $780,000 credit for past services
is recorded as OTHER INCOME RELATED TO SETTLEMENT OF DISPUTES in the
accompanying statement of operations for the year ended October 31, 2001.
The Company also received 1,100,000 shares of common stock of Star
Telecommunications, which were recorded at fair value totaling $446,820,
which were subsequently written off as WRITE OFF OF INVESTMENT IN MARKETABLE
SECURITIES in the year ended October 31, 2001. On March 13, 2001, Star
Telecommunications filed for Chapter 11 reorganization. The Company
will not be able to utilize its carrier services agreement with Star
Telecommunications and placed no value on the future services.
NOTE 6 - CONVERTIBLE DEBENTURES
Convertible Debentures to Accredited Investors
----------------------------------------------
On February 4, 2000, the Company executed non-interest bearing convertible
note agreements (the "Notes") with nine accredited investors, which provided
financing of $1,000,000. The notes were 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, or converted into common stock at a rate
of $4.00 per share if the notes were not repaid within 90 days from the date
of issuance. The Company recorded financing fees of approximately $117,000
in February 2000 related to the 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 they 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
related to the issuance of additional warrants. 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
amortized the total debt discount of $877,996 over the initial maturity of
the Notes of one year.
During March 2001, terms of the Notes were modified and the debt was
converted into 400,000 common shares. Additionally, in connection with the
conversion, the warrants to purchase 250,000 shares of common stock were
modified to allow for an exercise price of $0.01 per share and 150,000
additional warrants with an exercise price of $3.00 per share were issued to
the note holders. The amount charged to expense for the fiscal year ended
October 31, 2001 and 2000 totaled approximately $316,000 and $562,000,
respectively. In connection with the grant of the additional 150,000
warrants to the note holders, the Company recorded additional debt discount
of approximately $142,000 which was immediately expensed as the warrants
were exercisable at the date of grant, and the note has been redeemed in its
entirety. 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 5%; dividend
yields of 0%; volatility factors of the expected market price of the
Company's common stock of 1.47; and an expected life of the warrants of
three years.
Convertible Debenture with Global Capital Funding Group L.P.
------------------------------------------------------------
On April 11, 2001, the Company executed a 6% convertible debenture (the
"Debenture") with Global Capital Funding Group L.P, which provided financing
of $1,000,000. The Debenture maturity date is April 11, 2003. The
Debenture is secured by $320,307 of property & equipment held for sale. The
conversion price is equal to the lesser of (i) 100% of the volume weighted
average of sales price as reported by the Bloomberg L.P. of the common stock
on the last trading day immediately preceding the Closing Date ("Fixed
Conversion Price") and (ii) 80% of the average of the five (5) lowest volume
weighted average sales prices as reported by Bloomberg L.P. during the
twenty (20) Trading Days immediately preceding but not including the date of
the related Notice of Conversion ("the "Formula Conversion Price"). In an
event of default the amount declared due and payable on the Debenture shall
be at the Formula Conversion Price. The Formula Conversion Price was
adjusted downward to 70% in accordance with the terms of the Debenture as
the Company's registration statement was not declared effective by the
Securities and Exchange Commission on the date required by the Debenture.
The Company has calculated the beneficial conversion feature embedded in the
Debenture in accordance with Emerging Issues Task Force ("EITF") 00-27 and
recorded $496,598 as a deferred financing fee. This fee is being amortized
over the two year life of the Debenture. During the year ended October 31,
2001, the Company recorded $106,034 as interest expense. The Company also
issued to the holder of the debenture warrants to acquire an aggregate of
100,000 shares of common stock at an exercise price of $0.89 per share,
which expire on April 11, 2006. The Company recorded deferred financing
fees of approximately $80,000 related to the issuance of the warrants.
This amount represents the relative fair value of the warrants in accordance
with EITF 00-27, and is amortizing the fees over the two year life of the
Debenture. For the year ended October 31, 2001, the Company has recorded
interest expense of $25,340 relating to the warrants.
NOTE 7 - 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 bore
interest at 6% per annum, and was payable in quarterly installments.
The balance due at October 31, 2000 was $346,000 and was included as a
current liability. During the fiscal year ended October 31, 2001, the
Company borrowed an additional $1,502,401 from the shareholder, and used a
majority of the proceeds for its acquisition of Rapid Link. The total
balance due in October 2001 of $1,745,958 was transferred to a long-term
convertible note. (See Note 9). The remaining balance of $102,493 at
October 31, 2001 is included in the Notes Payable to Shareholder.
NOTE 8 - 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%, was payable in monthly
installments of $13,500 plus interest beginning May 13, 1999, and would
mature 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 was classified as a current
liability. On February 14, 2000, the Company utilized restricted cash
collateralizing this loan and paid off amounts outstanding ($724,000) under
the loan agreement.
Interest expense in connection with the Bank One loan was $0, $29,587 and
$18,799 for the fiscal years ended October 31, 2001, 2000 and 1999
respectively.
NOTE 9 - NOTES PAYABLE - RELATED PARTY
In October, 2001, the Company executed a 10% convertible note (the "Note")
with three executives of the Company, which provided financing of
$1,945,958. The Note maturity date is October 24, 2003. The Note is secured
by all Company assets. The Note is convertible into the Company's common
stock at the option of the holder at each of the six-, twelve-, eighteen-
and twenty- four month anniversary of the date of issuance of the note. The
conversion price is equal to the closing bid price of the Company's common
stock on the last trading day immediately preceding the conversion. The
Company has calculated the beneficial conversion feature embedded in the
Note in accordance with EITF 00-27 and recorded debt discount of
approximately $171,000 which will be amortized over two years. The Company
also issued to the holders of the Note warrants to acquire an aggregate of
1,945,958 shares of common stock at an exercise price of $0.78 per share,
which expire on October 24, 2003. Additional debt discount of approximately
$657,000 was recorded during the fourth quarter of fiscal 2001. The Company
determined the additional debt discount by allocating the relative fair
value to the Note and the warrants. The Company is amortizing the
additional debt discount over the initial maturity of the Note of two years.
For the fiscal year ended October 31, 2001, the Company has recorded
approximately $8,529 of interest expense.
NOTE 10 - 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, 1988 through
December 7, 1998
----------
Revenues $1,686,945
Cost and expenses 1,468,569
---------
Net income (loss) $ 218,376
=========
NOTE 11 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at October 31:
2001 2000
----------- -----------
Telephone switch equipment $ 3,760,015 $ 1,776,773
Leasehold improvements 262,085 -
Furniture and fixtures 229,554 78,676
Office equipment 64,396 46,154
Computer equipment 1,375,838 166,583
Computer software 849,619 267,507
----------- -----------
6,541,507 2,335,693
Less: accumulated depreciation and amortization (1,406,480) (796,149)
----------- -----------
$ 5,135,027 $ 1,539,544
=========== ===========
At October 31, 2001 and 2000, the gross amount of capital lease assets and
related accumulated amortization recorded under capital leases were as
follows:
2001 2000
----------- -----------
Telephone switch equipment $ 792,502 $ 184,220
Office equipment 11,494 43,552
----------- -----------
803,996 227,772
Less: accumulated amortization (110,619) (21,173)
----------- -----------
$ 693,377 $ 206,599
=========== ===========
Amortization of assets held under capital leases is included with
depreciation expense. Depreciation and amortization expense from continuing
operations amounted to $818,324, $565,188, and $91,338 in 2001, 2000, and
1999, respectively.
NOTE 12 - 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, however the sale was not consummated. The Company will
continue to search for a buyer for the asset, and is current utilizing
the assets as collateral against its $1 million convertible debenture.
Management believes the property and equipment held for sale is
appropriately valued and realizable.
NOTE 13 - STOCK OPTIONS AND WARRANTS
Warrant Issuances to Employees
------------------------------
Employee warrant activity for the three years ended October 31, 2001 was as
follows:
Weighted
Number Warrant Average
of Price Per Exercise
Warrants Share Price
-------- ----------- --------
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 820,000 0.81-1.44 1.36
Warrants exercised (125,000) 0.53 0.53
Warrants canceled (810,000) 0.46 - 1.44 0.76
--------- ----------- --------
Warrants outstanding at
October 31, 2000 910,000 0.53 - 1.44 1.09
Warrants granted 1,945,958 0.78 0.78
Warrants exercised - - -
Warrants canceled (100,000) 0.53 0.53
--------- ----------- --------
Warrants outstanding at
October 31, 2001 2,755,958 $0.53 - 1.44 $ 0.89
========= =========== ========
Effective July 15, 1999, 50,000 performance warrants were issued to an
employee of the Company ("1999 Performance Warrants"). Each 1999
Performance Warrant expires 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 Opinion 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, occurs.
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
exercisable 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 No. 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 720,000 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
$1,094,322 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.
In October 2001, the Company issued, in connection with a convertible note
agreement, warrants to acquire an aggregate of 1,945,958 shares of common
stock at an exercise price of $0.78 per share, which expire on October 24,
2006. Deferred financing fees of approx. $657,000 were recorded during the
fourth quarter of fiscal 2001. In accordance with EITF 00-27, the Company
determined the deferred financing fee by calculating the relative fair value
of the warrants issued using the following assumptions: applicable risk-
free interest rate based on the current treasury-bill interest rate at the
grant date of 5%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 1.36; and an expected life of
the warrants of two years. The Company is amortizing the deferred
financing fees over the initial maturity of the Note of two years.
The warrants issued to employees that were exercisable at the years ended
October 31, 2001, 2000 and 1999 were 286,667, 350,000, and 375,000,
respectively.
Warrant Issuances to Non-Employees
----------------------------------
Non-Employee warrant activity for the three years ended October 31, 2001 was
as follows:
Weighted
Number Warrant Average
of Price Per Exercise
Warrants Share Price
-------- ----------- --------
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 (75,000) 0.53 - 0.88 0.76
-------- ----------- --------
Warrants outstanding at
October 31, 2000 748,800 0.29 - 3.00 1.49
Warrants granted 575,000 0.89 - 3.00 2.80
Warrants exercised (100,500) 0.01 - 0.53 0.21
Warrants canceled (20,000) 0.45 - 3.00 0.45
--------- ----------- --------
Warrants outstanding at
October 31, 2001 1,203,300 $0.01 - 3.00 $ 1.65
========= =========== ========
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 vested on
January 10, 2000, and the right to acquire the remaining 25,000 shares under
the warrant vested 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.
On 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 exercisable beginning October 26,
2001 and expires October 26, 2003. This warrant was issued as consideration
for services.
On March 1, 2000 the Company issued warrants to several employees who later
became 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 vest upon the distributors
achieving consolidated revenues of in excess of $10 million for a period of
three consecutive calendar months on or before February 28, 2002. In
connection with the change in status and related changes in the vesting
schedule, during the fiscal year ended October 31, 2000, the Company
recorded a charge of $1,937,184 for the vested portion of the 400,000
warrants. This charge is included in sales and marketing expense in the
accompanying statements of operations. As of October 31, 2001, the
distributors have failed to generate any revenue toward their performance
goals and are no longer selling the Company's products and services.
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.
All warrants issued to non-employees during the year ended October 31, 2000
were recorded at fair value using the Black-Scholes pricing model, 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 213%; and an expected life of the warrants ranging
from 1 - 3 years. The total fair value of these warrants at the date of
issuance was approximately $878,000, which is being charged to operations
over the initial maturity of the related debt.
During December 2000, the Company issued 300,000 warrants to Founders Equity
Group, Inc. at an exercise price of $3.50, in connection with Investment
Banking services. The warrants were fully vested at the time of issuance.
At the time of issuance, the Company's common stock price was $1.3125. The
fair value of the warrants was calculated at $157,366. The fair value was
determined using the Black-Scholes pricing model and was expensed as
non-cash sales and marketing expense for issuance of warrants during the
year ended October 31, 2001, with the following assumptions: applicable
risk free interest rates based on the current treasury bill interest rate
at the grant date of 5.0%; dividend yields of 0%; volatility factors of the
expected market price of the Company's common stock of 79%; and an expected
life of the warrants of four years.
During fiscal 2001, warrants to purchase 100,500 shares of common stock with
an exercise price ranging from $0.01 to $0.53 were exercised. In addition,
20,000 warrants with an exercise price ranging from $0.45 to $3.00 were
canceled or expired.
The warrants issued to non-employees that were exercisable at October 31,
2001, 2000 and 1999 were 1,103,300, 70,000, and 20,000, respectively.
The weighted average fair value of the warrants granted during the years
ended October 31, 2001, 2000 and 1999 were $2.80, $1.53, and $0.93,
respectively.
Stock Options
-------------
The Company has adopted a stock option plan (the "Stock Option Plan").
The 1990 Stock Option Plan, as amended, authorizes the Board of Directors to
grant up to 2,300,000 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 that 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.
Activity under the Stock Option Plan for the three years ended October 31,
2001 was as follows:
Weighted
Number Option Average
of Price Exercise
Shares Per Share Price
--------- ----------- --------
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
Options granted 1,930,000 0.42 - 1.50 0.55
Options exercised (33,500) 0.30 - 1.41 0.40
Options canceled (178,100) 0.40 - 2.50 1.10
--------- ----------- --------
Options outstanding at
October 31, 2001 2,182,500 $0.30 - 2.25 $ 0.53
The following table summarizes information about employee warrants and stock
options outstanding at October 31, 2001:
Weighted
Weighted Average
Range of Options/ Average Exercise Price Of Options/ Prices of
Exercise Warrants Remaining Options/Warrants Warrants Options/Warrants
Prices Outstanding Life Outstanding Exercisable Exercisable
------------ --------- ---- ---- --------- ----
$ 0 - $0.99 4,915,258 3.30 0.63 853,300 0.59
$1.00 - $1.99 576,500 1.21 1.44 293,829 1.44
$2.00 - $2.99 200,000 2.30 0.80 200,000 2.19
$3.00 - $3.99 450,000 3.53 3.33 300,000 3.50
--------- ---- ---- --------- ----
6,141,758 3.09 0.91 1,647,129 1.46
========= ==== ==== ========= ====
Statements of Financial Accounting Standards No. 123
The Company accounts for its stock-based compensation plans in accordance
with APB No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123
encourages but does not require the use of a fair value-based method of
accounting for stock-based compensation plans under which the fair value of
stock option is determined on the date of grant and expensed over the
vesting period of the stock options. While the Company has elected to
continue to apply the provisions of APB No. 25 under which no compensation
cost has been recognized by the Company, SFAS No. 123 requires pro forma
disclosure of net loss and loss per share as if the fair value-based method
under SFAS No. 123 has been adopted. The value of all options for shares of
the Company's common stock to employees of the Company has been determined
under the market value method using Black-Scholes valuation principles and
the following assumptions:
2001 2000 1999
---------------------------------------------------------------------------
Risk-free interest rate 5% 6% 6%
Expected dividend yield 0% 0% 0%
Expected lives 4 years 1-3 years 3-6 years
Expected volatility 133 % - 159% 213% 90%
The total value of options and warrants granted to employees during the
years ended October 31, 2001 and 2000 was computed as $900,677 and
$1,119,895, respectively. If the Company had accounted for these plans in
accordance with SFAS No. 123, the Company's net loss for the year ended
October 31, 2001 and 2000 would have increased as follows:
2001 2000 1999
---------- ----------- -----------
Net Income (loss):
As reported $(2,684,306) $(11,186,742) $ 1,713,380
Pro forma $(2,950,373) $(11,425,397) (1,619,853)
Net loss per share
As reported:
Basic and diluted $ (0.25) $ (1.31) $ 0.25
Pro forma:
Basic and diluted $ (0.27) $ (1.34) $ 0.24
NOTE 14 - INCOME TAXES
The temporary differences that give rise to the deferred tax assets or
liabilities at October 31, 2001 and 2000 are as follows:
2001 2000
---------- -----------
Deferred tax assets
Net operating loss carryovers $10,789,919 $ 8,962,015
Accounts receivable 100,075 348,760
Advertising credits 190,134 195,684
Stock warrants - 658,643
Accrued liabilities 228,714 173,912
---------- -----------
Total gross deferred tax assets 11,308,842 10,339,014
Deferred tax liabilities
Property and equipment (34,314) (71,574)
---------- -----------
Total gross deferred tax liabilities (34,314) (71,574)
---------- -----------
11,274,528 10,267,440
Valuation allowance (11,274,528) (10,267,440)
---------- -----------
Net deferred tax assets $ - $ -
========== ===========
The increase in the valuation allowance for the years ended October 31, 2001
and 2000 of $1 million and $3.8 million, respectively, was related to a
change in operating loss carryforwards.
At October 31, 2001, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $32 million, which expire in
2006 through 2017. Utilization of net operating losses is 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.
Realization of tax benefits depends on having sufficient taxable income
within the carryback and carryforward periods. The Company continually
reviews the adequacy of the valuation allowance and recognizes these
benefits as reassessment indicates that it is more likely than not that
the benefits will be realized. Based on pretax losses incurred in recent
years, management has established a valuation allowance against the entire
net deferred asset balance.
NOTE 15 - 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.
The Company leases its branch office facilities and its corporate office
under various noncancelable operating leases with terms expiring at various
dates through 2006, and has also entered into various operating leases for
equipment used in the Company's business. Rental expense for operating
leases was $228,882, $290,175 and $210,157 for the years ended October 31,
2001, 2000 and 1999, respectively.
Future minimum lease payments under noncancelable operating leases and
capital leases as of October 31, 2001 are as follows:
Capital Operating
Leases Leases
---------- -----------
Year ending October 31,
2002 $ 434,494 $ 440,754
2003 256,906 398,863
2004 53,123 124,594
2005 12,188 82,942
2006 - 56,389
---------- -----------
Total minimum lease payments 756,711 $ 1,103,542
===========
less: Amount representing interest (84,822)
----------
Present value of net minimum
capital lease payment 671,889
Less: current installments of
obligations under capital lease (385,787)
----------
Obligations under capital leases,
excluding current installments $ 286,102
==========
Legal Proceedings
-----------------
The Company is not currently a party to any material legal proceedings. The
Company, from time to time, may be subject to legal proceedings and claims
in the ordinary course of business, including claims of alleged infringement
of trademarks and other intellectual property of third parties by the
Company. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
On June 12, 2001, Cygnus Telecommunications Technology, LLC ("Cygnus"),
filed a patent infringement suit (case no. 01-6052) in the United States
District Court, Central District of California, with respect to our
"international call-back" technology. This technology drives our Re-
Origination Services and allows our foreign based customers to initiate
international telephone calls by first calling a switch in the United
States, which then initiates a "call back" to the customer sight providing
the customer with an open phone line to place a call anywhere in the world.
The injunctive relief that Cygnus sought in this suit has been denied, but
Cygnus continues to seek compensatory and punitive damages as well as
attorneys' fees and costs. We deny the alleged infringement and intend to
defend the case vigorously, but our ultimate legal and financial liability
with respect to this legal proceeding cannot be estimated with any certainty
at this time.
NOTE 16 - 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 employee's 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 $0,
$10,566 and $18,659 for the years ended October 31, 2001, 2000 and 1999,
respectively.
NOTE 17 - BUSINESS AND CREDIT CONCENTRATIONS
Continuing Operations:
One customer accounted for approximately 11% of revenues during the year
ended October 31, 2001 and 15% of trade accounts receivable balance at
October 31, 2001. The company continues to provide services to this
customer and plans to expand its existing relationship. One customer
accounted for approximately 17% of revenues during the year October 31,
2000 and 0% of the trade accounts receivable balance at October 31, 2000.
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 had 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.
Subsequent to October 31, 1999, bankruptcy proceedings were settled and
the Company agreed to a full settlement of outstanding debts owed by USC
in the amount of $300,000. The remaining $160,000 note receivable
balance was 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 were concentrated in The Southland Corporation
(Southland), which accounted for approximately 0%, 0%, and 86% of
the Company's total revenue for fiscal years 2001, 2000 and 1999,
respectively. At October 31, 2001, 2000 and 1999, Southland had no
accounts receivable outstanding. 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 18 - SEGMENT INFORMATION
Prior to fiscal 2001 the Company was organized by line of business. The
two major line of business operating segments were prepaid phone cards and
dial thru services.
The accounting policies of the line of business operating segments are the
same as those described in the summary of significant accounting policies.
Revenue represents revenue from external customers. Substantially all
revenues are from customers within the United States. All assets of the
Company are also located in the United States.
During the year ended October 31, 2000 the Company had two major lines of
business, its Dial Thru and prepaid phone card business. During the year
ended October 31, 2001 the Company operated its Dial Thru business
exclusively.
A summary of the segment financial information as of and for the year ended
October 31, 2000 reported to the chief operating decision maker is as
follows:
During the Year Ended Prepaid Dial Thru
October 31, 2000 Phone Cards Services Total
----------------------------- ---------- ---------- ----------
Revenue $ 2,755,057 $ 5,836,392 $ 8,591,449
Direct cost of revenues 4,220,570 5,750,839 9,971,409
Net loss (7,824,754) (2,819,629) (10,644,383)
Total assets 1,506,644 4,595,505 6,102,149
Depreciation and amortization 242,788 322,400 565,188
Capital expenditures 243,513 258,868 502,381
Information regarding the Company's domestic and foreign revenues are as
follows:
All other
foreign
Africa countries Domestic Total
--------- --------- -------- ---------
Fiscal 1999 $ - $ - $3,116,911 $3,116,911
Fiscal 2000 1,891,191 3,945,201 2,755,057 8,591,449
Fiscal 2001 2,953,817 3,694,171 353,874 7,001,862
No individual foreign country, except as noted above represented more than
10 percent of revenue. No individual foreign country represented more than
10 percent of long lived assets for any period presented.
NOTE 19 - RESTATEMENT
Fiscal Year Ended October 31, 2001
----------------------------------
The Company is restating its financial statements for the first fiscal
quarter ended January 31, 2001, to reflect non-cash compensation charges of
$258,616 for common stock and warrants issued in connection with investment
banking services provided to the Company. The common stock was recorded at
the fair market value at the time of issuance, and the warrants were
recorded in accordance with SFAS 123.
The Company is restating its financial statements for the second fiscal
quarter ended April 30, 2001, to reflect additional interest expense of
$155,587 for additional warrants issued to the holders of the Company's
Convertible Notes (see Note 6), totaling $141,840, and amortization of
deferred financing fees of $13,747 for the amortization of the beneficial
conversion feature embedded in the Company's Convertible Debentures, in
accordance with EITF 00-27 (See Note 6). The Company is restating its long-
term liabilities and equity to reflect the deferred financing fee of
$496,598, which represents the fair value of the beneficial conversion
feature, which is being amortized over the life of the Convertible Debenture
of two years. The Company is also restating equity for the issuance of the
warrants noted above for $141,840.
The Company is restating its financial statements for the third fiscal
quarter ended September 30, 2001, to reflect additional interest expense of
$41,241 for the amortization of the deferred financing fees for the
Convertible Debenture noted above.
The adjustments above were not recorded in the Company's quarterly financial
statements during the fiscal year ended October 31, 2001.
The effect of these restatements on the unaudited interim financial
statements for the quarters ended January 31, 2001, April 31, 2001, July 31,
2001 and the year ended October 31, 2001 are as follows:
Quarter Ended Year Ended
---------------------------------- ------------
January 31, April 30, July 31, October 31,
2001 2001 2001 2001
--------- ------- -------- ---------
Total assets $ - $ - $ - $ -
Total liabilities - 482,851 (41,241) 441,610
Increase in net loss 258,616 155,587 41,241 455,444
Increase in net loss
per share 0.02 0.01 0.00 0.04
Total equity - 638,438 - 638,438
NOTE 20 - QUARTER-BY-QUARTER COMPARISION
Summarized quarterly financial data for the years ended October 31, 2001, 2000 and 1999 are as follows:
2001 (restated) First Second Third Fourth
Quarters: --------- ---------- --------- ----------
Revenues, net $ 890,620 $ 903,639 $1,654,079 $ 3,553,524
Operating loss (991,223) (682,600) (497,762) (1,159,563)
Net (loss) income 382,191 (1,193,171) (594,871) (1,278,455)
Net (loss) income per share-basic 0.03 (0.11) (0.05) (0.12)
Net (loss) income per share-diluted 0.03 (0.11) (0.05) (0.12)
2000
Quarters:
Revenues, net 3,806,767 2,823,704 952,667 1,008,311
Operating (loss) income (2,120,381) (4,402,381) (848,626) (3,150,676)
Net loss (2,083,370) (4,659,540) (965,071) (3,478,761)
Net loss per share-basic (0.26) (0.55) (0.11) (0.39)
Net loss per share-diluted (0.26) (0.55) (0.11) (0.39)
1999
Quarters:
Revenues, net 1,542,719 846,020 500,107 228,065
Operating loss (526,574) (689,486) (941,952) (1,735,679)
Income from discontinued operations 2,233,870 1,366,518 1,378,525 331,014
Net (loss) income 1,707,296 693,837 456,294 (1,144,017)
Net (loss) income per share-basic 0.26 0.10 0.07 (0.18)
Net (loss) income per share-diluted 0.26 0.10 0.07 (0.18)
NOTE 21 - CAPITAL STOCK
In October 2001, the Company issued 600,000 shares in connection with the
Company's purchase of certain assets and executory contracts of Rapid Link,
Inc, valued at $468,000 at the date of issuance. (See Note 3).
In March 2001, the Company issued 1,000,000 shares of common stock as
additional consideration for the purchase of Dial Thru International in
accordance with terms of the Asset Purchase Agreement with the seller.
(See Note 3).
In March 2001, the Company's $1 million convertible note with accredited
investors was converted into 400,000 shares of common stock. In connection
with the conversion, the Company issued additional 150,000 warrants to the
investors and recorded deferred financing fees of $96,230.
In December 2000, the Company issued 90,000 shares to Scotty Cook, former
Director of the Company, as compensation for consulting services performed
for the Company. The Company recorded $101,250 as consulting fees for the
year ending October 31, 2001.
In September 2000, the Company issued 914,285 shares of the Company's common
stock in exchange for $3.2 million face value of advertising credits. (See
Note 4).
In November, 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. (See Note 3).
In August 2000, the Company received $1 million from an accredited investor
in connection with a $2 million private equity placement of 571,428 shares
of common stock, par value $.001 per share. The Company issued 285,714 of
common shares in connection with this private placement for the $1 million
in cash received. In September 2000, the Company received $400,000 and
issued an additional 114,286 common shares in connection with the $2 million
private equity placement.
In January, 1999 the Company issued 250,000 shares of the Company's common
stock to employees of the Company as compensation. In connection with the
issuance, the Company recorded $74,225 of compensation expense, such expense
being calculated as the difference between the trading price of the common
stock on the date of issuance and the proceeds received for the issuance.
During the year ended October 31, 2001, 2000 and 1999, options and warrants
to purchase 134,000, 699,800 and 20,000, respectively, shares of common
stock were exercised.
NOTE 22 - SUBSEQUENT EVENTS
Subsequent to October 31, 2001, Global Capital, holder of the Company's $1.0
million Debenture, has converted $350,000 of the Debenture into
approximately 1,285,000 shares or common stock.
In January, 2002, the Company executed a 6% convertible debenture (the
"Debenture") with GCA Strategic Investment Fund Limited, which provided
financing of $550,000. The Debenture maturity date is January 2003. The
conversion price is equal to the lesser of (i) 100% of the volume weighted
average of sales price as reported by the Bloomberg L.P. of the common stock
on the last trading day immediately preceding the Closing Date("Fixed
Conversion Price") and (ii) 85% of the average of the three (3) lowest
volume weighted average sales prices as reported by Bloomberg L.P.
during the twenty (20) Trading Days immediately preceding but not including
the date of the related Notice of Conversion.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited, in accordance with auditing standards generally accepted in
the United States, the financial statements of DIAL-THRU INTERNATIONAL
CORPORATION AND SUBSIDIARIES included in this Form 10-K and have issued our
report thereon dated January 9, 2002. Our audits were made for the purpose
of forming an opinion on the basic financial statements taken as a whole.
The schedule listed in the index is the responsibility of the Company's
management and is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
January 9, 2002
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, 2001, 2000 and 1999
Balance at Balance at
the beg the end
of period Additions Deductions of period
---------- --------- ---------- ---------
2001
----
Allowance for uncollectable
accounts $1,025,766 $140,167 $937,204 (1) $ 228,729
========= ======= ======= ==========
Impairment provision for
advertising credits $ 575,542 $ - $ 11,610 $ 563,932
========= ======= ======= ==========
2000
----
Allowance for uncollectable
accounts $ 231,675 $983,760 $189,669 (1) $ 1,025,766
========= ======= ======= ==========
Impairment provision for
advertising credits $ - $575,542 $ - $ 575,542
========= ======= ======= ==========
1999
----
Allowance for uncollectable
accounts $ 4,001 $405,825 $178,151 (1) $ 231,675
========= ======= ======= ==========
(1) Write offs.