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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-K
(mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2003
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 75-2461665
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State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization
17383 SUNSET BOULEVARD, SUITE 350 LOS ANGELES, CA 90272
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 566-1700
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
------------------------------
(title of class)
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
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the act). Yes / / No /X/
The aggregate market value of shares of common stock held by non-affiliates
of the registrant as of April 30, 2003 was approximately $1,761,583 based on
the average bid and ask price of common stock as quoted on the OTC Bulletin
Board of $0.13.
As of January 23, 2004, 16,201,803 shares of common stock of the registrant
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
None.
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 this Report or in any document or statement referring to this Report.
PART I
Item 1. Business
Our 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 reincorporated 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, and, 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."
From our inception until 1998 we provided retail automation software and
related services to the retail petroleum and convenience store industries.
In 1998 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 we entered into the
telecommunications industry via the pre-paid long distance market. In
December 1998, we sold our retail automation software business and now
operate only in the telecommunications marketplace.
Our principal executive offices are located at 17383 Sunset Boulevard, Suite
350, Los Angeles, California 90272, our telephone number is (310) 566-1700
and our web site address is www.dialthru.com.
Recent Developments
On November 19, 2002 we entered into an agreement with Global Capital
Funding Group, L.P. that provided us with a two year loan of $1.25 million.
A portion of the proceeds from this financing were used to pay off the
remaining balance of Dial Thru's April 2001 convertible debenture with
Global Capital, while the remaining $807,000 has been and will be used for
the Company's ongoing working capital needs.
On January 27, 2003, we amended our 6% convertible debenture with GCA
Strategic Investment Fund Limited to change the debenture's maturity date
from January 28, 2003 to November 8, 2004. In addition, we cancelled the
existing warrants to purchase 50,000 shares of common stock at an exercise
price of $0.41 and issued warrants to purchase 150,000 shares of common
stock at an exercise price of $0.21 which expire on February 8, 2008.
On January 27, 2003, we amended our 10% convertible notes with three of our
executives to change the notes' maturity dates from October 24, 2003 to
February 24, 2004.
On July 24, 2003 we entered into an agreement with GCA Strategic Investment
Fund Limited that provided us with a loan of $550,000, which has been and
will be used for the Company's ongoing working capital needs. During
January 2004, as per the terms of the agreement, this loan became a
convertible debenture with a maturity date of November 8, 2004.
Development of Our Telecommunications Business
In January 1998, we acquired US Communication Services, Inc. ("USC"), a
provider of prepaid phone cards, public Internet access kiosks and pay
telephones. While the USC acquisition did not proceed as intended, leading
to our rescission of the transaction in May 1998, 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 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 our 1999 fiscal year.
Calls made with our prepaid phone cards were then routed through our
switching facilities, giving us better control over costs and quality of
service.
In November 1999, we completed the DTI Acquisition and continued operations
of its facilities-based telecommunications carrier 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 of our Company. In the third quarter
of fiscal 2000, we relocated our Texas operations, including our switching
facilities, to a location in downtown Los Angeles, California. During the
fourth quarter of fiscal 2001, Mr. Jenkins was appointed by our Board of
Directors to the position of Chairman of the Board and also became our Chief
Executive Officer. At that time we announced the creation of our "Bookend
Strategy" and the roll out of our facilities-based Internet Protocol
network, whereby we sell voice over Internet protocol ("VoIP") to allow us
to compete in the international telecommunications market.
Mr. Jenkins continued the merger of operations of the two businesses and
increased our emphasis on the international wholesale and retail business
segment while reducing our focus on the prepaid domestic market. We now
operate as a facilities-based global Internet protocol ("IP") communications
company providing connectivity to international markets experiencing
significant demand for IP enabled services. We provide a variety of
international telecommunications services, including the transmission of
voice and data traffic and the provision of Web-based and other
communications services, which are targeted to small and medium sized
enterprises ("SMEs"), wholesale carriers providing international and
domestic long distance traffic and consumers. 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 digital fiber optic cable,
oceanic cable transmission facilities, international satellites and the
Internet to transport our communications.
During the fourth quarter of fiscal 2001, we acquired the assets and certain
of the liabilities of Rapid Link, Incorporated, ("Rapid Link") a provider of
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. This
acquisition has significantly enhanced our product lines, particularly our
Dial Thru and Re-origination services, Global Roaming products, and
wholesale termination. Furthermore, the acquisition has allowed 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.
Our Business Strategy
Our primary business concentrates on the marketing of IP telephony services,
including voice, fax, data and other Web-based services. The term Bookend
Strategy describes 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 the Internet to transport
various forms of communications. These services are provided primarily 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 other 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 lease a dedicated line for a set period of time at
a set rental rate and to "fill" idle network capacity with traffic in order
to offset the high fixed costs of such a private line. The primary focus of
our business is to sell a bundled solution of communication services, such
as international dial thru, re-origination, fax over the Internet to SMEs
worldwide. We also sell telecommunications services for both the foreign and
domestic termination of international long distance traffic into the
wholesale market. Our primary objective in selling into the wholesale
market is to take advantage of below market international rates that arise
from time to time while we are developing revenue from our retail marketing
operations. We expanded the offering of our wholesale services in the 2002
and 2003 fiscal years and believe that additional market opportunities for
select wholesale routes will be available to us in our current fiscal year.
In some markets, where the price advantages and capacity limitations do not
provide for significant retail opportunities, we sell only wholesale
terminations.
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
determined that a particular country meets our requirements for availability
of retail revenue opportunities, we then must determine the best manner
to establish dedicated connectivity. This is usually accomplished by
establishing a licensing agreement within the country, whereby we are
licensed to sell these communication products. We then make these products
available to SMEs in the target country through public Internet connections
and apply the appropriate technology to provide for the compression of the
telecommunications traffic over these routing options. The emerging
technology that is best suited for the majority of these installations is
VoIP.
We primarily focus on markets where competition is not 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 regularly invited to participate in 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 private leased lines and circuits.
We currently operate our domestic telecommunications switching facilities in
Los Angeles, California and New York, New York, 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.
Our Products and Services
Dial Thru and Re-origination Services
We provide a variety of international Dial Thru and Re-origination services.
These services, while still contributing a significant portion of our
revenues, will continue to decrease as a 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 service, which allows a caller outside of the
United States to place a long distance telephone call that 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 to compress voice and data transmissions across the
public Internet, we are able to offer these services at costs that are
substantially less than traditional communications services.
International Wholesale Termination
Primarily as a result of our acquisition of Rapid Link, we began offering
international call completion on a wholesale basis to international
telecommunications companies. Our service enables our customers to offer
their own customers phone to phone global voice and fax services. This
service provides our customers with high quality and low cost long distance
without our customers having to deploy their own VoIP infrastructure. We
can also provide additional termination opportunities to customers that have
developed their own VoIP networks with nearly instant access to our
termination points by connecting to these customers via the Internet.
Therefore, we have the capability to offer our services to carriers
connecting to our network through traditional dedicated switch to switch
connections, and through the public Internet whereby our customers connect
to our network using their own VoIP equipment.
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.
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.
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 our SME customer base. 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 SME customer, furthering our Bookend Strategy.
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 impact on our business.
Customers
We focus our retail sales and marketing efforts toward SMEs, particularly
those located in foreign markets where telecommunications deregulation has
not taken place or is in the process of taking place, residential customers
in those same markets and in the United States, and wholesale customers
located both domestically and internationally. 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
companies, which are those entities responsible for providing
telecommunications services in foreign markets and are usually government
owned or controlled. We believe the loss of any individual customer 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., MCI, Sprint Corporation and Qwest Communications International, all
of which are substantially larger than us and have the resources, history
and customer bases to dominate virtually every segment of the
telecommunications market.
A substantial majority of the telecommunications traffic around the world is
carried by dominant carriers in each market. These carriers, such as
British Telecom and Deutsche Telekom, have started to deploy packet-switch
networks for voice and fax traffic. In addition, other industry leaders,
such as AT&T, MCI, Sprint and Qwest Communications International have
recently announced their intention to offer Internet telephony services both
in the United States and internationally. 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 over us in
the marketing and distribution of products and services
We also compete with other smaller, emerging carriers including IDT Corp.,
ITXC Corporation, deltathree.com, Primus Telecommunications Group, Inc., 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 also
highly competitive. We compete both in the market for enhanced Internet
communication services and the market for carrier transmission services. 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. We also compete 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. ITXC, iBasis 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.
Regulation of Internet Telephony and the Internet
The use of the Internet and private IP networks to provide voice
communications services, is a relatively recent market development.
Although the provision of such services is currently permitted by United
States law and remains largely unregulated within the United States, several
foreign governments have adopted laws and/or regulations that could restrict
or prohibit the provision of voice communications services over the Internet
or private IP networks. More aggressive regulation of the Internet in
general, and Internet telephony providers and services specifically, may
materially and adversely affect our business, financial conditions,
operating results and future prospects, particularly if increased numbers of
governments impose regulations restricting the use and sale of IP telephony
services.
United States. In an April 10, 1998 Report to Congress, the Federal
Communications Commission (FCC) declined to conclude that IP telephony
services constitute telecommunications services and instead indicated that
it would undertake a subsequent examination of the question whether certain
forms of phone-to-phone Internet telephony are information services or
telecommunications services. The FCC indicated that, in the future, it
would consider the extent to which phone-to-phone Internet telephony
providers could be considered "telecommunications carriers" such that they
could be subject to the regulations governing traditional telephone
companies such as the imposition of access charges. The FCC stated that,
although it did not have a sufficient record upon which to make a definitive
ruling, the record suggested that, to the extent that certain forms of
phone-to-phone IP telephone appear to possess the same characteristics as
traditional telecommunications services and to the extent the providers of
those services obtain the same circuit-switched access as obtained by
interexchange carriers, the FCC may find it reasonable that they pay similar
access charges. The FCC also recognized, however, that it would consider
whether it should forbear from imposing any of the rules that would apply to
phone-to-phone Internet telephony providers as "telecommunications
carriers." To date, the FCC has not imposed regulatory surcharges or
traditional common carrier regulation upon providers of Internet
communications services.
Although the FCC treats providers of Internet telephony services no
differently from providers of other information and enhanced services that
are exempt from payment of interstate access charges, this decision may be
reconsidered in the future. For instance, on April 19, 2001, in Docket No.
CC 01-92 the FCC adopted a proposal to begin a fundamental examination
of all forms of intercarrier compensation - the payments among
telecommunications carriers resulting from their interconnecting networks.
The FCC could adopt an intercarrier compensation mechanism and other
regulations that could result in an increase in the cost of the local
transmission facilities necessary to complete our calls or a decrease in the
costs of such facilities to traditional long distance telephone companies.
An increase in our rates as a result of new FCC regulations could have a
material adverse effect on our ability to compete with long distance
carriers.
There are several proceedings pending before the FCC that may affect the
regulatory status of Internet telephony. On October 18, 2002, AT&T filed a
petition with the FCC seeking a declaratory ruling that would prevent
incumbent local exchange carriers, or ILECs, from imposing traditional
circuit-switched access charges on phone-to-phone IP services. On February
5, 2003, pulver.com filed a petition with the FCC seeking a declaratory
ruling that its "Free World Dialup," which facilitates point-to-point
broadband Internet protocol voice communications, is neither
telecommunications nor a telecommunications service as these terms are
defined in section 153 of the Telecommunications Act of 1996. More
recently, Vonage filed a petition for declaratory ruling requesting that the
FCC find an Order of the Minnesota Public Utilities Commission (MNPUC)
requiring Vonage to comply with state laws governing providers of
traditional telephone service to be preempted because Vonage's broadband
Internet telephony service is an information service. These petitions and
subsequent industry reactions may exert pressure on the FCC to render a
decision regarding the regulation of phone-to-phone IP services. The FCC
could determine, for instance, that certain types of Internet telephony
should be regulated like basic interstate telecommunications services.
Thus, Internet telephone would no longer be exempt from the access charge
regime that permits local telephone companies to charge long distance
carriers for the use of the local telephone networks to originate and
terminate long-distance calls, generally on a per minute basis, which in
turn could have a material adverse effect on the company.
The FCC could also conclude that Internet telephony providers should
contribute to the Universal Service Fund, which provides support to ensure
universal access to telephone service. The imposition of interstate access
charges or universal service contributions would substantially increase our
costs of serving our customers in the U.S. The imposition of regulation and
contribution requirements might also negatively affect the incentives for
companies to continue to develop IP technologies to offer VoIP services. It
is also possible that the FCC might adopt a regulatory framework that is
unique to IP telephony providers or one where IP telephony providers are
subject to reduced regulatory requirements. We cannot predict what
regulations, if any, the FCC will impose.
Other aspects of our services may be subject to state or federal regulation,
such as regulations relating to the confidentiality of data and
communications, copyright issues, taxation of services, and licensing. In
addition, changes in the legal and regulatory environment relating to the
Internet connectivity market, including regulatory changes that affect
telecommunications costs or that may increase the likelihood of competition
from the regional Bell operating companies, or RBOCs, or other
telecommunications companies, could increase our costs of providing service.
Moreover, state governments and their regulatory authorities may assert
jurisdiction over the provision of intra-state IP communications services
where they believe that their telecommunications regulations are broad
enough to cover regulation of IP services. Various state regulatory
authorities have initiated proceedings to examine the regulatory status of
Internet telephony services. While a majority of state commissions have not
imposed traditional telecommunications regulatory requirements on IP
telephony at this time, some states have issued rulings that may be
interpreted differently. For instance, a state court in Colorado has ruled
that the use of the Internet to provide certain intrastate services does not
exempt an entity from paying intrastate access charges. Prior to imposing
any regulatory burdens on VoIP providers, however, the Colorado Public
Utilities Commission has opened a docket to investigate whether it has
jurisdiction to regulate VoIP services. The State Public Service Commission
of New York (NYPSC) has ruled that another company's particular IP telephony
services may be considered telecommunications services subject to access
charges. The NYPSC has, however, declined to issue a broad regulatory
policy related to VoIP services in general. On October 9, 2003, the NY PSC
published a notice seeking comment regarding the regulatory classification
of another provider's VoIP services offered over broadband connections. On
the other hand, following an investigative workshop held by the Florida
Public Service Commission on VoIP, the Florida Legislature passed a bill
that exempts VoIP services offered over broadband from regulation, but some
local exchange companies have attempted to interpret the new law as leaving
open the issue of access charges. On October 16, 2003, a Federal court in
Minnesota issued a permanent injunction against the MNPUC preventing the
MNPUC from imposing state regulations on another provider's VoIP services
offered over broadband connections. This permanent injunction was recently
upheld in the face of multiple challenges. Prior to the Minnesota Federal
court ruling, several states, including California, Washington, Wisconsin
and Florida issued directives to various VoIP providers directing them to
register as telecommunications providers. There can be no assurance that
these states will respect the Minnesota Federal court ruling or accept the
position asserted by the subject VoIP providers that they are information,
as opposed to telecommunications, service providers. If the states require
these VoIP providers to register as telecommunications providers, others
VoIP providers may be targeted and subjected to significant additional fees
and charges.
International. The regulatory treatment of IP communications outside the
United States varies significantly from country to country. The regulations
global IP providers are subject to in many jurisdictions change from time to
time, they may be difficult to obtain or it may be difficult to obtain
accurate legal translations where official legal translations are
unavailable. Additionally, in our experience, the enforcement of these
regulations does not always track the letter of the law. Accordingly,
although we devote considerable resources to maintaining compliance with
these regulations, we cannot be certain that we are in compliance with all
of the relevant regulations at any given point in time.
While some countries prohibit IP telecommunications, others have determined
that IP services offer a viable alternative to traditional
telecommunications services. As the Internet telephony market has expanded,
regulators have begun to reconsider whether to regulate Internet telephony
services. Some countries currently impose little or no regulation on
Internet telephony services. For instance, on January 5, 2001, in the
European Union (EU), the European Commission (EC) released a decision
concluding that VoIP, in general, continues to fall outside the definition
of voice telephony, except where the services satisfy all of four specific
conditions. To date, the EC has not ruled that any particular type of VoIP
service (such as computer-to-computer or phone-to-phone) satisfies all of
these exception conditions. As a result, the EC directed Member States to
permit providers to offer VoIP under data transmission general
authorizations and without requiring compliance with more burdensome
individual licenses and regulations applicable to traditional voice
telephony. While the EC monitors and supervises the Member States of the EU
subject to the principle of supremacy of EU law, the primary responsibility
for implementing the provisions of specific EU legislation lies with
regulatory authorities of the Member States. Accordingly, although the
Member States are required to adhere to the EU laws, an individual country
may decide that a particular VoIP service meets all of the conditions
necessary to be regulated as traditional voice services. We cannot
guarantee that Member States will refrain from imposing additional
regulations on our specific VoIP services.
Other countries, including those in which the governments prohibit or limit
competition for traditional voice telephony services, generally do not
permit Internet telephony services or strictly limit the terms under which
those services may be provided. Still other countries regulate Internet
telephony services like traditional voice telephony services, requiring
Internet telephony companies to make universal service contributions and pay
other taxes. While some countries subject IP telephony providers to reduced
regulations, other have moved towards liberalization of the IP
communications sector and have lifted bans on provision of IP
telecommunications services. We cannot predict how a regulatory or policy
change of a particular country might affect the provision of our services.
We believe that while increased regulations and restrictions could
materially threaten our ability to provide services, the lifting of
regulations in a country generally will enable use to expand our services
and presence in that country.
Regulation of the Internet. In addition to regulations addressing Internet
telephony and broadband services, other regulatory issues relating to the
Internet in general could affect our ability to provide our services.
Congress has adopted legislation that regulates certain aspects of the
Internet, including online content, user privacy, taxation, liability for
third-party activities and jurisdiction. In addition, a number of
initiatives pending in Congress and stat legislatures would prohibit or
restrict advertising or sale of certain products and services on the
Internet, which may have the effect of raising the cost of doing business on
the Internet generally. The European Union has also enacted several
directives relating to the Internet, one of which addresses online commerce.
Recently, the European Union adopted a privacy directive that establishes
certain requirements with respect to, among other things, the
confidentiality, processing and retention of personally identifiable
subscriber information and usage patterns. The potential effect, if any, of
these data protection rules on the development of our business remains
uncertain.
Federal, state, local and foreign governmental organizations are considering
other legislative and regulatory proposals that would regulate the Internet.
We cannot predict whether new taxes will be imposed on our services both
nationally and internationally, and depending on the type of taxes imposed,
whether and how our services would be affected thereafter. Increased
regulation of the Internet may decrease its growth and hinder technological
development, which may negatively impact the cost of doing business via the
Internet or otherwise materially adversely affect our business, financial
condition and results of operations.
Sales and Marketing
We market long distance telecommunications products and services from our
office in Los Angeles, California. We also have a regional sales office
located in Johannesburg, South Africa and an office in Caracas, Venezuela.
Our revenues are primarily derived from 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, 2003, 2002 and 2001, $2.7 million or 15%, $2.6 million or 14%,
and $5.1 million or 76% of our total revenue from continuing operations for
each year, respectively, originated from Western Europe, Africa and South
East Asia.
Intellectual Property
We don't hold any significant patents or trademarks. Our products and
services are available to other telecommunication companies.
Employees
As of January 23, 2004, we have 40 full-time and 1 part-time employees, 9 of
which perform administrative and financial functions, 23 of which perform
customer support duties and 9 of which have experience in telecommunications
operations and/or sales. 17 current employees are located in Los Angeles,
California, and Atlanta, Georgia, and 24 employees operate in offices
worldwide. No employees are represented by a labor union, and we consider
our employee relations to be good.
Availability of Reports
We file reports on a regular basis with the Securities and Exchange
Commission, including, but not limited to Forms 8-K, 10-K, 10-Q, 14-A and S-
3. The public may read and copy any materials we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC.
Risk Factors
Our cash flow may not be sufficient to satisfy our cost of operations
For the years ended October 31, 2003, 2002 and 2001, we recorded net losses
from continuing operations of approximately $5.4 million, $3.5 million and
$2.5 million, respectively, on revenues from continuing operations of
approximately $17.7 million, $18.4 million and $6.6 million, respectively.
As a result, we currently have a substantial working capital deficit. In
addition, we have a significant amount of trade payables, of which
approximately 36% is past due. To be able to service our debt obligations
over the course of the 2004 fiscal year we must generate significant cash
flow and obtain additional financing. If we are unable to do so or otherwise
to obtain funds necessary to make required payments on our trade debt and
other indebtedness, we may not be able to continue our operations.
Our operating history makes it difficult to accurately assess our general
prospects in the VoIP portion of the telecommunications 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
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 will likely 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 portion of our assets consist of intangible assets, the
value of which will depend upon a variety of factors, including the success
of our business. As a result, if we do need to sell any of our assets, we
cannot assure you that our assets could be sold quickly enough, or for
amounts sufficient, to meet our obligations.
We face competition from numerous, mostly well-capitalized sources
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.
Many of our 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 value-added Internet products and services then we
will be unable to compete in certain segments of the market, which could
have an adverse impact on our business.
The regulatory environment in our industry is very uncertain
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. 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.
Changes in the technology relating to Internet telephony could threaten our
operations
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.
We need to develop and maintain strategic relationships around the world to
be successful
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 have an adverse impact on our business.
We rely on two key senior executives
Our success is dependent on our senior management team of John Jenkins and
Allen Sciarillo and our future success will depend, in large part, upon our
ability to retain these two individuals.
The expansion of our VoIP product offerings is essential to our survival
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.
Our OTC Bulletin Board listing negatively affects the liquidity of our
common stock
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.
Item 2. Properties
Our principal executive office is located in Los Angeles, California, where
we lease 6,796 square feet in two locations. Our operations and information
systems are located in Los Angeles and New York, New York, where we lease
104 square feet under a co-location agreement. We also have sales and
administrative offices in Caracas, Venezuela and Johannesburg, South Africa.
We believe that our facilities are sufficient for the operation of our
business for the foreseeable future.
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 reorigination" technology. The injunctive relief that Cygnus
sought in this suit has been denied, but Cygnus continues to seek a license
fee for the use of the technology. We believe that no license fee is
required as the technology described in the patent is different from the
technology used by us.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent us from providing "reorigination" services. We filed a cross motion
for summary judgment of non-infringement. Both motions were denied. On
August 22, 2003, we re-filed the motion for summary judgment for non-
infringement. We have not received a decision regarding this filing. We
intend to continue defending this case vigorously, though its ultimate legal
and financial liability with respect to such legal proceeding cannot be
estimated with any certainty at this time.
The State of Texas ("State") performed a sales tax audit of our former
parent, Canmax Retail Systems ("Canmax"), for the years 1995 to 1999. The
State determined that we did not properly remit sales tax on certain
transactions, including asset purchases and software development projects
that Canmax performed for specific customers. Our current and former
managements filed exceptions, through its outside sales tax consultant, to
the State's audit findings, including the non-taxable nature of certain
transactions and the failure of the State to credit our account for sales
tax remittances. In correspondence from the State in June 2003, the State
agreed to consider offsetting remittances received by Canmax during the
audit period. The State has refused to consider other potential offsets.
Based on the correspondence with the State, during the fiscal year ended
October 31, 2003, our estimate of the potential liability has been recorded
at $350,000, however, we cannot provide assurance that the ultimate
liability will not be greater. We are continuing to pursue our options to
appeal the decision by the State. Furthermore, we are aggressively pursuing
the collection of unpaid sales taxes from former customers of Canmax.
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 Our 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 17383 Sunset
Boulevard, Suite 350, Los Angeles, California, 90272, and its telephone
number is (310) 566-1700.
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 2002
First Quarter . . . . . . . . . . . . $ 0.70 $ 0.29
Second Quarter . . . . . . . . . . . . $ 0.50 $ 0.21
Third Quarter . . . . . . . . . . . . $ 0.29 $ 0.09
Fourth Quarter . . . . . . . . . . . . $ 0.13 $ 0.09
FISCAL 2003
First Quarter . . . . . . . . . . . . $ 0.40 $ 0.12
Second Quarter . . . . . . . . . . . . $ 0.33 $ 0.11
Third Quarter . . . . . . . . . . . . $ 0.19 $ 0.10
Fourth Quarter . . . . . . . . . . . . $ 0.26 $ 0.10
The closing price for our Common Stock on January 23, 2003 as reported on
the OTC Bulletin Board was $0.19.
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. We intend to retain future earnings for reinvestment in
our business.
Holders of Record
There were 470 stockholders of record as of January 23, 2004.
Recent Sales of Unregistered Securities
In July 2003, we executed a 10% note payable with GCA Strategic Investment
Fund Limited, which provided financing of $550,000. This note's maturity
date was December 23, 2003. Per the terms of the agreement, in the event
this note is not repaid in full within 10 days of the maturity date, the
note becomes a convertible debenture. Effective January 2, 2004, the note
became a convertible debenture. 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 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. In an event of default the
amount declared due and payable on this debenture shall be at the price set
forth in clause (ii) above. We also issued to the holder of the this note
warrants to acquire an aggregate of 100,000 shares of common stock at an
exercise price of $0.14 per share, which expire on July 24, 2008. We relied
on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 for this non-public offering because the securities
were sold to a single purchaser with financial experience who had a pre-
existing relationship with us.
In November 2002, we executed a 12% note payable with Global Capital Funding
Group, L.P., which provided financing of $1,250,000. The GC-Note's maturity
date is November 8, 2004. The Company also issued to the holder of the note
warrants to acquire an aggregate of 500,000 shares of common stock at an
exercise price of $0.14 per share, which expire on November 8, 2007. We
relied on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 for this non-public offering because the securities
were sold to a single purchaser with financial experience who had a pre-
existing relationship with us.
In July 2002, we issued an amended 10% convertible note to Mr. Jenkins to
reflect the advance of an additional $300,000, which matures on February 24,
2004. The note was originally convertible at six-month intervals only, but
was subsequently amended in November 2002 to provide for conversion into
shares of our common stock at the option of Mr. Jenkins at any time prior to
maturity. The conversion price is equal to the closing bid price of our
common stock on the last trading day immediately preceding the conversion.
In connection with the issuance of the amended note we also issued a warrant
to Mr. Jenkins to purchase 300,000 shares of our common stock at an exercise
price of $0.75 per share, which expires on July 8, 2007. We relied on the
exemption from registration provided by Section 4(2) of the Securities Act
of 1933 for this non-public offering because the securities were sold to a
single purchaser with financial experience who had a pre-existing
relationship with us.
In January 2002, we issued an amended 10% convertible note to Mr. Jenkins to
reflect the advance of an additional $102,433, which matures on February 24,
2004. The note was originally convertible at six-month intervals only, but
was subsequently amended in November 2002 to provide for conversion into
shares of our common stock at the option of Mr. Jenkins at any time prior to
maturity. The conversion price is equal to the closing bid price of our
common stock on the last trading day immediately preceding the conversion.
In connection with the issuance of the amended note we also issued a warrant
to Mr. Jenkins to purchase 102,433 shares of our common stock at an exercise
price of $0.75 per share, which expires on January 28, 2007. We relied on
the exemption from registration provided by Section 4(2) of the Securities
Act of 1933 for this non-public offering because the securities were sold to
a single purchaser with financial experience who had a pre-existing
relationship with us.
In January 2002, we executed a 6% convertible debenture with GCA Strategic
Investment Fund Limited, which provided financing of $550,000. This
debenture's original maturity date was January 28, 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 and (ii) 85% of the
average of the three lowest volume weighted average sales prices as reported
by Bloomberg L.P. during the twenty Trading Days immediately preceding but
not including the date of the related Notice of Conversion. In an event of
default the amount declared due and payable on this debenture shall be at
the price set forth in clause (ii) above. We also issued to the holder of
the debenture warrants to acquire an aggregate of 50,000 shares of common
stock at an exercise price of $0.41 per share, which expire on January 28,
2007. In January 2003, we and the holder of the debenture agreed to extend
the maturity date of the debenture to November 8, 2004. In consideration
for this extension, in February 2003, we adjusted the exercise price of the
previously issued warrants to $0.21 per share. We also issued to the holder
of the debenture warrants to purchase an additional 100,000 shares of common
stock also at an exercise price of $0.21 per share, which expire on February
8, 2008. We relied on the exemption from registration provided by Section
4(2) of the Securities Act of 1933 for this non-public offering because the
securities were sold to a single purchaser with financial experience who had
a pre-existing relationship with us.
On October 24, 2001, we issued 10% convertible notes to three of our
executives, which provided financing of $1,945,958. These 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. The original
maturity date of each note was October 24, 2003. In January 2003, the
Company extended the maturity date of each note to February 24, 2004. The
note was originally convertible at six-month intervals only, but was
subsequently amended in November 2002 to provide for conversion into shares
of our common stock at the option of the holders of the notes at any time
prior to maturity. The conversion price is equal to the closing bid price
of our common stock on the last trading day immediately preceding the
conversion. We relied on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933 for this non-public offering
because the securities were sold to a limited number of purchasers with
financial experience who had pre-existing relationships with us.
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. We relied on
the exemption from registration provided by Section 4(2) of the Securities
Act of 1933 for this non-public offering because the securities were sold to
a single purchaser with financial experience who had access to our books and
records.
On April 11, 2001, we issued a 6% convertible debenture to Global Capital
Funding Group L.P, which provided financing of $1,000,000. This debenture
was subsequently paid in full following the issuance of a note payable to
the holder of this debenture during November 2002. On April 11, 2001, in
connection with the issuance of this debenture, we 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. We relied on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933 for this non-public offering because the
securities were sold to a single purchaser with financial experience who had
access to our books and records.
For services rendered in connection with the above April 11, 2001 debenture,
we issued to DP Securities, Inc. 25,000 warrants to acquire common stock at
an exercise price of $0.89, which expire on April 11, 2006. We relied on
the exemption from registration provided by Section 4(2) of the Securities
Act of 1933 for this non-public offering because the securities were sold to
a single purchaser with financial experience who had access to our records.
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. We relied on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 for
this non-public offering because the securities were sold to a single
purchaser with financial experience who had a pre-existing relationship with
us.
Item 6. Selected Financial Data
FISCAL YEARS ENDED OCTOBER 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
CONSOLIDATED STATEMENT OF OPERATIONS
DATA (1):
Revenues $ 17,655 $ 18,409 $ 6,642 $ 8,591 $ 3,117
Cost of revenues 13,129 11,540 4,668 9,971 2,982
Operating expenses 8,578 9,124 5,147 9,142 4,028
Other income (expense) (1,367) (1,270) 646 (665) 79
Gain on sale of software business - - - - 5,309
Income (loss) from continuing operations (5,419) (3,525) (2,527) (11,187) (3,814)
Income (loss) from discontinued
operations (1,203) (1,159) (157) - 218
Extraordinary item - forgiveness of debt - - - - -
Net income (loss) (6,622) (4,684) (2,684) (11,187) 1,713
Income (loss) from continuing
operations per share $ (0.34) $ (0.25) $ (0.23) $ (1.31) $ (0.56)
Net income (loss) per share $ (0.41) $ (0.34) $ (0.25) $ (1.31) $ 0.25
CONSOLIDATED BALANCE SHEET DATE (1):
Total assets
Continuing operations $ 4,839 $ 8,338 $ 11,255 $ 6,102 $ 4,467
Discontinued operations 242 742 1,389 - -
Working capital (deficiency)
Continuing operations (7,484) (6,774) (6,626) (4,829) 1,251
Discontinued operations (2,493) (2,030) - - -
Noncurrent obligations
Continuing operations,
net of debt discount 1,716 892 1,967 119 562
Discontinued operations - - - - -
Shareholders' equity (deficit) (8,222) (1,975) 2,079 508 2,865
--------------------
(1) All numbers, other than per share numbers, are in thousands. The results
of operations of our German subsidiary, Rapid Link Telecommunicaitons, GmbH,
and our predecessor software business have been presented in the financial
statements as discontinued operations. Results of operations in prior years
have been restated to reclassify these businesses as discontinued
operations.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Fiscal Years Ended October 31, 2003, 2002 and
2001
This Annual Report on Form 10-K contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements relate to
expectations concerning matters that are not historical facts. Words such
as "projects", "believe", "anticipates", "estimate", "plans", "expect",
"intends", and similar words and expressions are intended to identify
forward-looking statements. Although the Company believes that such
forward-looking statements are reasonable, we cannot assure you that such
expectations will prove to be correct. Factors that could cause actual
results to differ materially from such expectations are disclosed herein
including, without limitation, in the "Risk Factors" located in PART I, Item
1. All forward-looking statements attributable to the Company are expressly
qualified in their entirety by such language and we do not undertake any
obligation to update any forward-looking statements. You are also urged to
carefully review and consider the various disclosures we have made which
describe certain factors which affect our business throughout this Report.
The following discussion and analysis of financial condition and results of
operations covers the years ended October 31, 2003, 2002, and 2001 and
should be read in conjunction with our Financial Statements and the Notes
thereto commencing at page F-1 hereof.
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.
This change in focus has lead to a significant shift from our prepaid long
distance operations toward higher margin international wholesale and retail
telecommunication opportunities. This strategy allows us to form local
partnerships with foreign PTT's and to provide IP enabled services based on
the in-country regulatory environment affecting telecommunications and data
providers. In the third quarter of fiscal 2000, we further concentrated our
efforts toward our global VoIP telecommunications strategy by moving our
operations to Los Angeles, California. 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. and 100% of the
common stock of Rapid Link Telecommunications, GmbH, a German company.
Rapid Link provides integrated data and voice communications services to
both wholesale and retail customers around the world. Rapid Link built a
large residential retail customer base in Europe and Asia, using Rapid
Link's network to make international calls anywhere in the world.
Furthermore, Rapid Link developed a VoIP network using Clarent and Cisco
technology which we have used to take advantage of wholesale opportunities
where rapid deployment and time to market are critical. A significant
majority of our revenue in our 2003 and 2002 fiscal years was derived from
our Rapid Link acquisition.
On November 19, 2002 we entered into an agreement with Global Capital
Funding Group, L.P. that provided us with a two year loan of $1.25 million.
$443,000 of the proceeds from this financing were used to pay off the
remaining balance of Dial Thru's April 2001 convertible debenture with
Global Capital while the remaining $807,000 has been and will be used for
the Company's ongoing working capital needs.
On July 24, 2003 we entered into an agreement with GCA Strategic Investment
Fund Limited that provided us with a 152-day loan of $550,000. On January
2, 2004, per the terms of this loan agreement, the maturity date became
November 8, 2004. The loan proceeds have been and will be used for the
Company's ongoing working capital needs.
On August 1, 2003, our German Subsidiary, Rapid Link Telecommunications GmbH
received approval for its insolvency filing and has been turned over to a
trustee who is responsible for liquidating the operation.
The telecommunications industry continues to evolve towards an increased
emphasis on IP related products and services. We have focused our
business towards these types of products and services for the last couple of
years and feel we are one of the front runners in this industry.
Furthermore, we believe the use of the Internet to provide IP related
telephony services to the end user customer, either as a stand alone
solution or bundled with other IP products, will continue to impact the
industry as large companies like Time Warner and ATT look to capitalize on
their existing cable infrastructures, and smaller companies look to provide
innovative solutions to attract commercial and residential users to their
product offerings.
We expect to focus on the growth of our VoIP business through adding new
products and services residing on our existing network which we can offer to
end user customers. We are also exploring opportunities to provide
current customers, and attract new customers, through the sale of Internet
phones that allow users to connect specialized Internet phones to their
existing Dial-Up or DSL Internet connections. These Internet phones will
allow the user to originate phone calls over the Internet, thereby
bypassing the normal costs associated with originating phones calls through
the traditional Public Switched Telephone Network. By avoiding these costs,
we are able to offer lower priced services to these customers, which we
believe will allow us to attract additional users. We also believe there
will be considerable demand for this type of product in certain foreign
markets, where end users pay a significant premium to their local phone
companies to make long distance phone calls. It is our intention to secure
a purchase agreement with a supplier of Internet phones during the second
quarter of fiscal 2004.
While we expect the growth in our customers and suppliers and the
introduction of innovative product offerings to retail users, specifically
Internet phones, to have a positive impact on our revenues and earnings, we
cannot predict when this will happen, or be certain that it will happen at
all. The revenue and costs associated with the Internet phone product
offerings will depend on the number of customers and contracts we obtain.
See "Risk Factors" above for discussion of the impact of market risks,
financial risks and other uncertainties. Please also see "Forward-Looking
Statements" above relating to statements other than historical information
or statements of current condition.
Critical Accounting Policies
The consolidated financial statements include accounts of our Company and
all of our majority-owned subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States requires us to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. In preparing these financial
statements, we have made our best estimates and judgments of certain amounts
included in the financial statements, giving due consideration to
materiality. We do not believe there is a great likelihood that materially
different amounts would be reported related to the accounting policies
described below. However, application of these accounting policies involves
the exercise of judgment and use of assumptions as to future uncertainties
and, as a result, actual results could differ from these estimates.
Revenue Recognition
Our revenues are generated at the time a customer uses our network to make a
phone call. We sell our services to SMEs and end-users who utilize our
network for international re-origination and dial thru services, and to
other providers of long distance usage who utilize our network to deliver
domestic and international termination of minutes to their own customers.
At times we receive payment from our customers in advance of their usage,
which we record as deferred revenue, recognizing revenue as calls are made.
The Securities and Exchange Commission's Staff Accounting Bulletin No. 101,
"Revenue Recognition", provides guidance on the application of generally
accepted accounting principles to selected revenue recognition issues. We
have concluded that our revenue recognition policy is appropriate and
in accordance with generally accepted accounting principles and Staff
Accounting Bulletin No. 101.
Allowance for Uncollectible Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. All of our receivables are due from commercial
enterprises and residential users in both domestic and international
markets. The estimated allowance for uncollectible amounts is based
primarily on our evaluation of the financial condition of the customer, and
our estimation of the customer's willingness to pay amounts due. We review
our credit policies on a regular basis and analyze the risk of each
prospective customer individually in order to minimize our risk.
Goodwill and Other Long-Lived Assets
Property, plant and equipment and other long-lived assets are amortized over
their useful lives. Useful lives are based on our estimate of the period
that the assets will generate revenue. Goodwill is assessed for impairment
at least annually.
Financing, Warrants and Amortization of Warrants and Fair Value
Determination
We have traditionally financed our operations through the issuance of debt
instruments that are convertible into our common stock, at conversion rates
at or below the fair market value of our common stock at the time of
conversion, and typically include the issuance of warrants. We have
recorded these financing transactions in accordance with Emerging Issues
Task Force Nos. 98-5 and 00-27. Accordingly, we recognize the beneficial
conversion feature imbedded in the financings and the fair value of the
related warrants on the balance sheet as debt discount. The debt discount
is amortized over the life of the respective debt instrument.
Carrier Disputes
We review our vendor bills on a monthly basis and periodically dispute
amounts invoiced by our carriers. Prior to the second quarter of fiscal
2001, we recorded as trade accounts payable the entire amounts owed to our
vendors, including amounts in dispute. Any disputes resolved and credited
to us were recorded as other income at the time the credit was issued. We
subsequently changed our policy to record cost of revenues excluding
disputed amounts. We review our outstanding disputes on a quarterly basis
as part of the overall review of our accrued carrier costs, and adjust our
liability based on management's estimate of amounts owed.
Results of Operations
Our operating results for the last three fiscal years are as follows:
% of % Change % of % Change
Year Ended Revenue 2002 to 2003 Year Ended Revenue 2001 to 2002 Year Ended
Oct 31 2003 2003 Increase (Decr) Oct 31 2002 2002 Increase (Decr) Oct 31 2001
----------- ---- --------------- ----------- ---- --------------- -----------
REVENUES $ 17,654,794 100% -4% $ 18,408,649 100% 177% $ 6,641,818
COSTS AND EXPENSES
Costs of revenues 13,128,924 74% 14% 11,539,562 63% 147% 4,668,418
Sales and marketing 700,404 4% -21% 885,661 5% 10% 808,792
Non-cash sales and marketing expense - - - - - -100% 258,616
General and administrative 3,812,639 22% -34% 5,760,179 31% 75% 3,297,954
Impairment charge related to write
down of advertising credits 2,376,678 13% - - - - -
Impairment charge related to write
down of assets held for resale - - -100% 320,307 2% - -
Depreciation and amortization 1,338,351 8% -38% 2,158,135 12% 176% 781,331
Sales tax settlement 350,000 2% - - - - -
----------- ---- --------------- ----------- ---- --------------- -----------
Total costs and expenses 21,706,996 123% 5% 20,663,844 112% 111% 9,815,111
----------- ---- --------------- ----------- ---- --------------- -----------
Operating loss (4,052,202) -23% 80% (2,255,195) -12% -29% (3,173,293)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (1,131,806) -6% -9% (1,247,488) -7% 76% (710,464)
Other income related to settlement
of disputes - - - - - -100% 1,789,373
Foreign exchange 7,097 - -122% (31,976) - - -
Write off of investment
in marketable securities - - - - - -100% (446,820)
Gain (loss) on disposal of equipment (241,935) -1% -2772% 9,053 - -34% 13,693
----------- ---- --------------- ----------- ---- --------------- -----------
Total other income (expense) (1,366,644) -8% 8% (1,270,411) -7% -297% 645,782
----------- ---- --------------- ----------- ---- --------------- -----------
LOSS FROM CONTINUING OPERATIONS (5,418,846) -31% 54% (3,525,606) -19% 39% (2,527,511)
LOSS FROM DISCONTINUED OPERATIONS (1,203,465) -7% 4% (1,158,574) -6% 639% (156,795)
----------- ---- --------------- ----------- ---- --------------- -----------
NET LOSS $ (6,622,311) -38% 41% $ (4,684,180) -25% 75% $ (2,684,306)
=========== ==== =============== =========== ==== =============== ===========
LOSS PER SHARE:
Basic and diluted loss per share
Continuing operations $ (0.34) $ (0.25) $ (0.23)
Discontinued operations (0.07) (0.09) (0.02)
----------- ----------- -----------
$ (0.41) $ (0.34) $ (0.25)
=========== =========== ===========
SHARES USED IN THE CALCULATION
OF PER SHARE AMOUNTS:
Basic and diluted common shares 15,999,179 13,935,782 10,900,115
=========== =========== ===========
Results of Operations - 2003 Versus 2002
Operating Revenues
Our wholesale revenues increased by 41% and our retail revenues decreased by
44% for the fiscal year ended October 31, 2003, compared to the prior fiscal
year. The increase in wholesale revenues for the fiscal year ended October
31, 2003 is attributable to additions to our wholesale sales force during
fiscal year 2002, which focuses on developing greater wholesale
opportunities both in customer growth and the development of additional
points of termination. The decrease in retail revenues for the fiscal year
ended October 31, 2003 is primarily attributable to increased competition in
our largest foreign markets, including competition from the incumbent phone
company in each market. Furthermore, a significant portion of our retail
business comes from members of the United States military stationed in
foreign markets. The redeployment of troops into Iraq in March 2003
resulted in a decline in retail customers. We are exploring opportunities
to grow our retail business through use of our advertising credits and
newspaper advertising.
Costs of Revenues
Included in our cost of revenues for fiscal year 2002 are credits received
from two vendors totaling $729,000 relating to disputes for minutes billed
in error for periods prior to fiscal 2002. Without these credits, costs of
revenues as a percentage of revenues for the fiscal year ended October 31,
2002 would have been 67%. Our costs of revenues as a percentage of revenues
has increased due to a decline in our retail traffic which realizes higher
margins than our wholesale traffic. Costs of revenues as a percentage of
revenues will fluctuate, from period to period, depending on the traffic mix
between our wholesale and retail products.
General and Administrative Expenses
Included in general and administrative expenses is bad debt expense of
$28,000 and $685,000 for the fiscal years ended October 2003 and 2002,
respectively. For the 2002 fiscal year, bad debt expense includes $216,000
attributable to non-payment from a single wholesale customer. We have
implemented strict credit policies and systems to closely monitor our
wholesale traffic daily to reduce the risk of bad debt. We have further
reduced our general and administrative costs by approximately $983,000, for
the fiscal year ended October 31, 2003, through the elimination of personnel
and personnel related costs. We review our general and administrative
expenses regularly, and continue to manage the costs accordingly to support
the current and anticipated future business.
Sales and Marketing Expenses
A significant component of our revenues is generated by outside agents or
through newspaper and periodical advertising, which is managed by a small
in-house sales and marketing organization. We will continue to focus our
sales and marketing efforts on newspaper and periodical advertising and
agent related expenses to generate additional revenues. The use of our
advertising credits is expected to increase sales and marketing expenses in
absolute dollars in future periods.
Impairment Charge Related to Write Down of Advertising Credits
During fiscal year 2000, we issued common stock in exchange for advertising
credits. As our ability to use these credits is uncertain, in accordance
with Generally Accepted Accounting Principles, we have written-off the
remaining advertising credits during the fiscal year ended October 31, 2003.
(See Note 5 to the Consolidated Financial Statements.)
Impairment Charge Related to Write Down of Assets Held for Resale
Assets held for resale represents internally constructed equipment for
prepaid telecommunications. As the potential ability to sell this equipment
is uncertain, in accordance with Generally Accepted Accounting Principles,
this equipment was written-off during the fiscal year ended October 31,
2002. (See Note 11 to the Consolidated Financial Statements.)
Depreciation and Amortization
Depreciation and amortization has decreased as a portion of our assets still
in use have become fully depreciated, including a majority of the assets
acquired from Rapid Link. A majority of our depreciation and amortization
expense relates to the equipment utilized in our VoIP network. In
accordance with Statement of Accounting Standards No. 142, effective
November 1, 2001, we no longer amortize goodwill.
Sales Tax Settlement
This estimated cost is attributable to audit findings on our former parent,
Canmax Retail Systems, from the State of Texas for the years 1995 to 1999.
The State of Texas determined that we did not properly remit sales tax on
certain transactions. Our current and former managements have filed
exceptions, through our outside sales tax consultant, to the State's audit
findings. (See Note 14 to the Consolidated Financial Statements).
Interest Expense and Financing Costs
Interest expense and financing costs were due primarily to the amortization
of deferred financing fees and debt discount on our convertible debentures
and our related party notes payable.
Results of Operations - 2002 Versus 2001
Operating Revenues
Revenues for the fiscal year ended October 31, 2002 include $15,436,000
resulting from the customers and infrastructure acquired from Rapid Link.
Recurring revenues not related to Rapid Link were reduced in our 2002 fiscal
year by $1,005,000, primarily due to the loss of business from two large
resellers. Our retail and wholesale revenues increased by 147% and 220%,
respectively, for the fiscal year ended October 31, 2002 compared to the
prior fiscal year. In addition to the growth obtained by the acquisition of
Rapid Link, we successfully added new wholesale customers and new
international points of termination. Furthermore, we added to our wholesale
sales force to focus on developing greater wholesale opportunities.
Costs of Revenues
Costs of revenues increased due to the growth in minutes and customers as
well as the increased revenue and traffic acquired from Rapid Link.
Included in our cost of revenues for fiscal year 2002 are credits received
from two vendors totaling $729,000 relating to disputes for minutes billed
in error for periods prior to fiscal 2002. Without these credits, costs of
revenues as a percentage of revenues for the fiscal year ended October 31,
2002 would have been 67%. Our costs of revenues as a percentage of revenues
improved slightly as the retail revenue acquired from Rapid Link realized
higher margins than our existing retail traffic. This margin improvement
was reduced in part by growth in our wholesale traffic.
General and Administrative Expenses
The increase in general and administrative expenses was primarily due to
the addition of the Rapid Link operations. Included in general and
administrative expenses is bad debt expense of $685,000 and $140,000 for the
fiscal years October 31, 2002 and 2001, respectively. For the 2002 fiscal
year, bad debt expense includes $216,000 attributable to non-payment from a
single wholesale customer. We implemented strict credit policies and
systems to closely monitor our wholesale traffic daily to reduce the risk of
bad debt.
Sales and Marketing Expenses
The reduction of our sales and marketing expenses as a percentage of
revenues was primarily due to the increase in wholesale customer revenues as
a percentage of our total revenues. A majority of our retail revenues are
generated by outside agents, or through newspaper and periodical
advertising, which is managed by a small in-house sales and marketing group.
Alternatively, we can generate significant revenues from our wholesale
business with relatively few sales personnel, as wholesale customers are
usually large international telecommunications companies that provide both
retail and wholesale opportunities to millions of customers worldwide.
Impairment Charge Related to Write Down of Assets Held for Resale
Assets held for resale represents internally constructed equipment for
prepaid telecommunications. As the potential ability to sell this equipment
is uncertain, in accordance with Generally Accepted Accounting Principles,
this equipment was written-off during the fiscal year ended October 31,
2002. (See Note 11 to the Consolidated Financial Statements.)
Depreciation and Amortization
The increase in depreciation and amortization is primarily related to the
assets of the business acquired from Rapid Link. A majority of our
depreciation and amortization expenses relate to the equipment utilized in
our VoIP network. In accordance with Statement of Accounting Standards No.
142, effective November 1, 2001, we no longer amortize goodwill.
Amortization of goodwill for the fiscal year ended October 31, 2001 was
$172,000.
Interest Expense and Financing Costs
Interest expense and financing costs were due primarily to the amortization
of deferred financing fees and debt discount on our convertible debentures
and our related party notes payable. For the fiscal year ended October 31,
2001, $710,000 of interest expense and financing costs were primarily
attributable to amortization of deferred financing fees and debt discount
associated with our convertible notes which were converted to equity in
March 2001, and the fair value of additional warrants issued to the holders
of the notes which were fully vested at the time of issuance.
Other Income Related to Settlement of Dispute
Settlements with two major carriers over charges in prior periods amounted
to a total credit to the statements of operations of $1,789,000 for the
fiscal year ended October 31, 2001. Of this amount, $780,000 was the result
of a settlement with Star Telecommunications. Also included was $447,000
representing common stock received from Star in connection with our dispute
settlement. This amount was subsequently written off due to the Chapter 11
bankruptcy filing by Star.
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, 2003, we had cash and cash equivalents of approximately
$505,000, an increase of $236,000 from the balance at October 31, 2002. We
had significant working capital deficits at both October 31, 2003 and 2002.
As of October 31, 2003, our current assets of approximately $1,609,000
included net accounts receivable of approximately $873,000, which has
decreased over the balance of $966,000 at October 31, 2002 due to a decline
in revenues as well as the Company implementing more stringent credit
requirements during fiscal 2002.
Net cash used in operating activities of continuing operations was $684,000
for the fiscal year ended October 31, 2003, compared to net cash used in
operating activities of continuing operations of $56,000 for the fiscal
year ended October 31, 2002. The net cash used in operating activities
of continuing operations for the fiscal year ended October 31, 2003 was
primarily due to a net loss from continuing operations of $5,419,000
adjusted for: loss from disposal of fixed assets of $242,000; non-cash
interest expense of $689,000; depreciation and amortization of $1,338,000;
net changes in operating assets and liabilities of $48,000; and impairment
charge related to write down of advertising credits of $2,377,000. For the
fiscal year ended October 31, 2002, the net cash used in operating
activities of continuing operations was comprised of a net loss from
continuing operations of $3,526,000 adjusted for: impairment charge related
to write down of assets held for resale of $320,000; bad debt expense
of $685,000; non-cash interest expense of $924,000; depreciation and
amortization of $2,158,000; and net changes in operating assets and
liabilities of ($583,000).
Net cash used in investing activities of continuing operations for the years
ended October 31, 2003 and 2002 was $192,000 and $303,000, respectively, and
relate to the purchase of property and equipment.
Net cash provided by financing activities of continuing operations for the
fiscal year ended October 31, 2003, totaled $1,169,000, compared to $667,000
for the fiscal year ended October 31, 2002. For the fiscal year ended
October 31, 2003, significant components of net cash provided by financing
activities of continuing operations include $1,800,000 in net proceeds from
notes payable, offset by $105,000 in payments on capital leases, $82,000
of financing fees, and $443,000 in payments on convertible debentures.
For the fiscal year ended October 31, 2002, the significant components of
net cash provided by financing activities include $300,000 in net proceeds
from a note issued to one of our executives, $550,000 from the issuance
of a convertible debenture, offset by $106,000 in payments on capital
leases, and $93,000 of financing fees.
We have an accumulated deficit of approximately $47.2 million as of October
31, 2003, as well as significant working capital deficit. 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 obtained additional financing of $1,250,000 in November 2002, a
portion of which was used to fully pay the April 11, 2001 convertible
debenture with Global Capital Funding Group, L.P.
2) we and GCA Strategic Investment Fund Limited agreed to extend the
maturity date of the January 2002 debenture from January 28, 2003 to
November 8, 2004.
3) we obtained additional financing of $550,000 in July 2003.
Since the beginning of April 2001, we have raised $5.7 million in debt
financing.
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 our operations and expansion strategies. As a result of
the aforementioned factors and related uncertainties, there is considerable
doubt about our 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
the fiscal year ended October 31, 2003 were $192,000 and we do not
anticipate significant spending for fiscal year 2004.
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's maturity date was April 11, 2003. Subsequent
to fiscal year 2002, this debenture was paid in full through the issuance of
a subsequent loan from Global Capital Funding Group, L.P.
In October 2001, we executed 10% convertible notes (the "Notes") with three
of our executives, which provided financing of $1,945,958. With an original
maturity date of October 24, 2003, these Notes were amended subsequent to
fiscal year 2002 and now mature on February 24, 2004. These Notes are
secured by selected Company assets and are convertible into our common stock
at the option of the holder at any time prior to maturity. 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 warrants expire
on October 24, 2006. For the year ended October 31, 2002, an additional
$402,433 was added to the Notes and an additional 402,433 warrants to
acquire our common stock were issued in connection with the financing.
In January 2002, we executed a 6% convertible debenture (the "Second
Debenture") with GCA Strategic Investment Fund Limited, which provided
financing of $550,000. With an original maturity date of January 28, 2003,
the Second Debenture was amended subsequent to fiscal year 2002 and now
matures on November 8, 2004. 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
("the "Formula Conversion Price"). In an event of default the amount
declared due and payable on the Second Debenture shall be at the Formula
Conversion Price.
In November 2002, we executed a 12% note payable (the "GC-Note") with Global
Capital Funding Group, L.P., which provided financing of $1,250,000. The GC-
Note's maturity date is November 8, 2004. The Company also issued to the
holder of the GC-Note warrants to acquire an aggregate of 500,000 shares of
common stock at an exercise price of $0.14 per share, which expire on
November 8, 2007.
In July 2003, we executed a 10% note payable (the "GCA-Note") with GCA
Strategic Investment Fund Limited, which provided financing of $550,000.
The GCA-Note's maturity date was December 23, 2003. Per the terms of the
GCA-Note agreement, in the event the GCA-Note is not repaid in full within
10 days of the maturity date, the terms of the GCA-Note shall become the
same as those of the Second Debenture. Effective January 2, 2003, the GCA-
Note's terms became the same as those of the Second Debenture. We also
issued to the holder of the GCA-Note warrants to acquire an aggregate of
100,000 shares of common stock at an exercise price of $0.14 per share,
which expire on July 24, 2008.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
We provide our retail 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. In markets where we buy our services in local currency and
sell those services to U.S. customers, a weak dollar could make our services
more expensive than our competitors 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 8. Financial Statements and Supplementary Data
The information required by Item 8 of this Report is presented in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Changes in our accountants were previously reported in current reports on
Form 8-K filed on November 7, 2001, August 2, 2002 and August 23, 2002.
Item 9a. Controls and Procedures
Within the 90 days prior to the filing date of this Annual Report, we
carried out an evaluation, under the supervision and with the participation
of our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods
specified in SEC rules and forms.
There have been no significant changes in our internal controls or other
factors that could significantly affect our internal controls subsequent to
the date of their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
PART III
Item 10. Directors and Executive Officer of the Registrant
The following table sets forth certain information regarding our
executive officers and directors.
Name Age Position with the Company
--------------- --- --------------------------------
John Jenkins 42 Chairman, Chief Executive
Officer, President and Director
Allen Sciarillo 39 Executive Vice President, Chief
Financial Officer, Secretary and
Director
Lawrence Vierra 58 Executive Vice President and
Eleizer Gurfel 45 Director
Executive Vice President
Robert M. Fidler 64 Director
Nick DeMare 48 Director
David Hess 42 Director
JOHN JENKINS has served as our Chairman of the Board and Chief Executive
Officer since October 2001, and has served as our President and a director
since December 1999. Mr. Jenkins has also served as the President of Dial
Thru.com, Inc., one of our subsidiaries, since November 1999. In May 1997,
Mr. Jenkins founded Dial Thru International Corporation (subsequently
dissolved in November 2000), and served as its President and Chief Executive
Officer until joining us in November 1999. Prior to 1997, Mr. Jenkins
served as the President and Chief Financial Officer for Golden Line
Technology, a French telecommunications company. Prior to entering the
telecommunications industry, Mr. Jenkins owned and operated several
software, technology and real estate companies. Mr. Jenkins holds degrees
in physics and business/economics.
ALLEN SCIARILLO has been our Chief Financial Officer, Executive Vice
President and Secretary since July 2001 and was elected as a director in May
2002. From January to March 2001, Mr. Sciarillo was the Chief Financial
Officer of Star Telecommunications, Inc., a global facilities-based
telecommunications carrier. Prior to that time, Mr. Sciarillo served as
Chief Financial Officer of InterPacket Networks, a provider of Internet
connectivity to Internet service providers worldwide, from July 1999 until
its acquisition by American Tower Corporation in December 2000. From
October 1997 to June 1999, he served as Chief Financial Officer of RSL Com
USA, a division of RSL Com Ltd., a global facilities-based
telecommunications carrier. Prior to joining RSL, Mr. Sciarillo was Vice
President and Controller of Hospitality Worldwide Services, Inc. from July
1996 to October 1997. Mr. Sciarillo began his career at Deloitte & Touche
and is a Certified Public Accountant.
LAWRENCE VIERRA has served as our Executive Vice President and a director
since January 2000. From 1995 through 1999, Mr. Vierra served as the
Executive Vice President of RSL Com USA, Inc., an international
telecommunications company, where he was primarily responsible for
international sales. Mr. Vierra has also served on the board of directors
and executive committees of various telecommunications companies and he has
extensive knowledge and experience in the international sales and marketing
of telecommunications products and services. Mr. Vierra holds degrees in
marketing and business administration.
ELEIZER GURFEL has served as our Executive Vice President since May 2002.
From January 2001 through May 2002, Mr. Gurfel was the President of Asiatel
Inc, a privately owned global facilities-based telecommunications carrier.
From November 1999 through December 2000, Mr. Gurfel was Vice President of
InterPacket Networks, a provider of Internet connectivity to Internet
Service providers worldwide. Prior to that time, Mr. Gurfel was Chief
Operating Officer of LCR Telecommunications, from August 1997 through
November 1999
ROBERT M. FIDLER has served as one of our directors since November 1994.
Mr. Fidler joined Atlantic Richfield Company (ARCO) in 1960, was a member of
ARCO's executive management team from 1976 to 1994 and was ARCO's manager of
New Marketing Programs from 1985 until his retirement in 1994.
NICK DEMARE has served as one of our directors since January 1991. Since
May 1991, Mr. DeMare has been the President and Chief Executive Officer of
Chase Management Ltd., a private company providing a broad range of
administrative, management and financial services to private and public
companies with varied interests in mineral exploration and development,
precious and base metals production, oil and gas, venture capital and
computer software. Mr. DeMare has served and continues to serve on the
boards of a number of Canadian public companies, three of which are SEC
reporting companies; Hilton Petroleum, Ltd., Trimark Energy Ltd. and
California Exploration Ltd. Mr. DeMare is a Chartered Accountant (Canada).
DAVID HESS was elected to our Board of Directors in May 2002. From November
2001 until December 2002, Mr. Hess served as the Chief Executive Officer and
President, North America of Telia International Carrier, Inc. Prior to
joining Telia, Mr. Hess was part of a turnaround team hired by the board of
directors of Rapid Link Incorporated. He served as the Chief Executive
Officer and as a director of Rapid Link Incorporated from August 2000 until
September 2001. On March 13, 2001, Rapid Link Incorporated filed for
Chapter 11 bankruptcy protection. Before joining Rapid Link, Mr. Hess
served as Chief Executive Officer of Long Distance International from
January 1999 until its acquisition by World Access in February 2000. Mr.
Hess also served as President and Chief Operating Officer of TotalTel USA
from May 1995 until January 1999. Mr. Hess received a BA in Communications
with a Minor in Marketing from Bowling Green State University.
Meetings of the Board of Directors
Our Board of Directors held one meeting during the fiscal year ended
October 31, 2003. The Board of Directors has two standing committees: an
Audit Committee and a Compensation Committee. There is no standing
nominating committee. Each of the directors attended the meeting of the
Board of Directors and all meetings of any committee on which such director
served.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics for employees,
executive officers and directors that is designed to ensure that all of
our directors, executive officers and employees meet the highest standards
of ethical conduct. The code requires that our directors, executive
officers and employees avoid conflicts of interest, comply with all laws and
other legal requirements, conduct business in an honest and ethical manner
and otherwise act with integrity and in our best interest. Under the terms
of the code, directors, executive officers and employees are required to
report any conduct that they believe in good faith to be an actual or
apparent violation of the code.
As a mechanism to encourage compliance with the code, we haves established
procedures to receive, retain and treat complaints received regarding
accounting, internal accounting controls or auditing matters. These
procedures ensure that individuals may submit concerns regarding
questionable accounting or auditing matters in a confidential and anonymous
manner. The code also prohibits us from retaliating against any director,
executive officer or employee who reports actual or apparent violations of
the code.
The code is included in this filing as Exhibit 14.1.
Audit Committee Financial Expert
Our board of directors has determined that Nick DeMare is an audit committee
financial expert as defined by Item 401(h) of Regulation S-K of the
Securities Exchange Act of 1934, as amended, and is independent within the
meaning of Item 7(d)(3)(iv) of Schedule 14A of that act.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our directors, executive officers
and persons who own more than 10% of our common stock to file with the SEC
initial reports of ownership and reports of changes in ownership of our
common stock and other equity securities of our Company. Officers,
directors and greater than 10% stockholders are required by regulations
promulgated by the SEC to furnish us with copies of all Section 16(a)
reports they file. Based solely on the review of such reports furnished to
us and written representations that no other reports were required, we
believe that during the fiscal year ended October 31, 2003, our executive
officers, directors and all persons who own more than 10% of our common
stock complied with all Section 16(a) requirements.
Item 11. Executive Compensation
The following table summarizes the compensation we paid, for services
rendered to our Company during the fiscal years ended October 31, 2003, 2002
and 2001 to our chief executive officer and all other executive officers
whose total annual salary and bonus exceeded $100,000 during fiscal 2003.
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------- Awards
Securities
Name and principal Other annual Underlying All other
position Year Salary Bonus compensation Options/SARs Compensation
------------------------------------------------------------------------------------------
($) ($) ($) (#) ($)
John Jenkins 2003 150,000 -0- -0- -0- -0-
Chairman, CEO 2002 181,042 -0- -0- -0- -0-
and President 2001 108,833 -0- -0- 700,000 -0-
Allen Sciarillo 2003 125,000 1,106 -0- -0- -0-
Executive Vice 2002 141,667 -0- -0- -0- -0-
President and Chief 2001 -0- -0- -0- 500,000 -0-
Financial Officer
Eleizer Gurfel 2003 105,000 -0- 44,210 -0- -0-
Executive Vice 2002 53,692 -0- 1,268 75,000 -0-
President 2001 -0- -0- -0- -0- -0-
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth information with respect to the number of
options held at fiscal year end and the aggregate value of in-the-money
options held at fiscal year end by each of the Named Executive Officers.
Shares Number of securities Value of unexercised in-
acquired on Value underlying unexercised options the-money options at fiscal
exercise realized at fiscal year end (#) year end ($) (2)
Name (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
-------------- ----------- -------- ----------- ------------- ----------- -------------
John Jenkins -0- -0- 466,667 233,333 -0- -0-
Allen Sciarillo -0- -0- 333,333 166,667 -0- -0-
(1) The value realized upon the exercise of stock options represents the
difference between the exercise price of the stock option and the fair
market value of the shares, multiplied by the number of options exercised on
the date of exercise.
(2) The value of "in-the-money" options represents the positive spread
between the exercise price of the option and the fair market value of the
underlying shares based on the closing stock price of our common stock on
October 31, 2003, which was $0.17 per share. "In-the-money" options include
only those options where the fair market value of the stock is higher than
the exercise price of the option on the date specified. The actual value,
if any, an executive realizes on the exercise of options will depend on the
fair market value of our common stock at the time of exercise.
Compensation of Directors
Each of our directors who is not one of our officers receives a fee of
$1,500 for each Board meeting attended. Directors are not compensated for
attending committee meetings. Our directors also participate in our Equity
Incentive Plan and are annually awarded non-qualified stock options for an
aggregate of 5,000 shares of our common stock for services rendered to our
company as a director.
Compensation Committee Interlocks and Insider Participation
None of our executive officers or directors serves as a member of the board
of directors or compensation committee of any other entity which has one or
more executive officers serving as a member of our board of directors.
During our 2003 fiscal year, our Compensation Committee consisted of Nick
DeMare and Robert Fidler.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of January 23, 2004,
concerning those persons known to us, based on information obtained from
such persons, our records and schedules required to be filed with the SEC
and delivered to us, with respect to the beneficial ownership of our common
stock by (i) each stockholder known by us to own beneficially five percent
or more of such outstanding common stock, (ii) each of our current
directors, (iii) each Named Executive Officer and (iv) all of our executive
officers and directors as a group. Except as otherwise indicated below,
each of the entities or persons named in the table has sole voting and
investment power with respect to all shares of our common stock beneficially
owned. Effect has been given to shares reserved for issuance under
outstanding stock options and warrants where indicated.
Number of Percent of
Name and address of Beneficial Owner Shares (1) Class (2)
------------------------------------ ----------- ----------
Dodge Jones Foundation
400 Pine Street, Suite 900 1,000,000 (3) 6.17%
Abilene, Texas 79601
John Jenkins
17383 Sunset Boulevard, Suite 350 4,315,057 (4) 22.99%
Los Angeles, California 90272
Lawrence Vierra 405,000 (5) 2.44%
2353 Dolphin Court
Henderson, NV 89014
Nick DeMare 20,280 (6) *
Chase Management
1090 West Georgia Street, Suite 1305
Vancouver, BC V6E 3V7
Robert M. Fidler 14,000 (7) *
987 Laguna Road
Pasadena, California 91105
David Hess 0 *
545 Alder Avenue
Westfield, New Jersey 07090
Allen Sciarillo 433,333 (8) 2.60%
17383 Sunset Boulevard, Suite 350
Los Angeles, CA 90272
Global Capital Funding Group L.P. 1,373,838 (9) 8.15%
106 Colony Park Drive
Cumming, GA 30040
All Executive Officers and Directors 5,187,670 26.44%
as agroup (6 persons)
* Reflects less than one percent.
(1) Beneficial ownership is determined in accordance with the rules
of the SEC. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, shares of
our Common Stock subject to options or warrants held by that
person that are exercisable within 60 days of January 23, 2004 are
deemed outstanding. Such shares, however, are not deemed
outstanding for purposes of computing the ownership of any other
person.
(2) Based upon 16,201,803 shares of Common Stock outstanding as of
January 23, 2004.
(3) Based upon information contained within Schedule 13D filed with
the Securities and Exchange Commission on July 2, 1997.
(4) Includes 2,565,057 shares of Common Stock which may be acquired
through the exercise of options which are exercisable within 60
days of January 23, 2004.
(5) Includes 400,000 shares of Common Stock which may be acquired
through the exercise of options which are exercisable within 60
days of January 23, 2004.
(6) Includes 10,000 shares of Common Stock which may be acquired
through the exercise of options which are exercisable within 60
days of January 23, 2004.
(7) Includes 10,000 shares of Common Stock which may be acquired
through the exercise of option and warrants which are exercisable
within 60 days of January 23, 2004.
(8) Includes 433,333 shares of Common Stock which may be acquired
through the exercise of warrants which are exercisable within 60
days of January 23, 2004.
(9) Includes 650,000 shares of Common Stock which may be acquired
through the exercise of warrants which are exercisable within 60
days of January 23, 2004.
Equity Compensation Plan Information
The following table provides information about shares of our common
stock that may be issued under our equity compensation plans, as of October
31, 2003:
Number of
Number of Weighted-average securities
securities to be exercise price remaining
issued upon of outstanding available for
exercise of options, future issuance
outstanding warrants under equity
options, warrants and compensation
Plan Category and rights rights plans (excluding
(column (a)) securities reflected
in column (a))
------------- ----------------- ---------------- ---------------
Equity 5,579,891 (1) $0.83 2,856,000
compensation
plans approved
by security holders
Equity -0- n/a -0-
compensation
plans not
approved by
security holders
Total 5,579,891 $0.83 2,856,000
(1) Amount includes outstanding options granted pursuant to the 2002
Dial Thru International Corporation Equity Incentive Plan and the
Amended and Restated 1990 Dial Thru International Corporation Stock
Option Plan.
Item 13. Certain Relationships and Related Transactions
In October 2001, we issued 10% convertible notes (the "Notes") to three of
our executive officers, each of whom was also one of our directors, who
provided financing to our Company in the aggregate principal amount of
$1,945,958. The Notes were issued as follows: (i) a note in the principal
amount of $1,745,958 to John Jenkins, our Chief Executive Officer; (ii) a
note in the principal amount of $100,000 to Allen Sciarillo, our Executive
Vice President and Chief Financial Officer; and (iii) a note in the
principal amount of $100,000 to Larry Vierra, our Executive Vice President.
With an original maturity date of October 24, 2003, these Notes were amended
subsequent to fiscal year 2002 and now mature on February 24, 2004. Each
note is secured by certain of our assets. Each Note was originally
convertible at six-month intervals only, but was subsequently amended in
November 2002 to provide for conversion into shares of our common stock at
the option of the holder at any time prior to maturity. 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 $0.75 per share, which warrants expire
on October 24, 2006.
In January and July 2002, the Notes issued to Mr. Jenkins were amended to
include additional advances in the aggregate principal amount of $402,443.
We also issued to Mr. Jenkins two warrants to acquire an additional 102,443
and 300,000 shares of common stock, respectively, at an exercise price of
$0.75, which warrants expire on January 28, 2007 and July 8, 2007,
respectively.
Item 14. Principal Accounting Fees and Services
We are not yet required to make any disclosure under this new Item because
the fiscal year covered by this Annual Report ended prior to December 15,
2003.
PART IV
Item 15. 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.
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)
4.9 Securities Purchase Agreement issued January 28, 2002 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited
(filed as Exhibit 4.1 to the Company's Form S-3, File 333-82622, filed
on February 12, 2002 and incorporated herein by reference)
4.10 Registration Rights Agreement dated January 28, 2002 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited
(filed as Exhibit 4.2 to the Company's Form S-3, File 333-82622, filed
on February 12, 2002 and incorporated herein by reference)
4.11 6% Convertible Debenture of Dial Thru International Corporation and GCA
Strategic Investment Fund Limited (filed as Exhibit 4.3 to the
Company's Form S-3, File 333-82622, filed on February 12, 2002 and
incorporated herein by reference)
4.12 Common Stock Purchase Warrant dated January 28, 2002 between GCA
Strategic Investment Fund Limited and Dial Thru International
Corporation (filed as Exhibit 4.4 to the Company's Form S-3, File 333-
82622, filed on February 12, 2002 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 4.3 to the 2000
Form 10-K and incorporated herein by reference)
14.1* Code of Business Conduct and Ethics for Employees, Executive Officers
and Directors
21.1* Subsidiaries of the Registrant
23.1* Consent of KBA Group LLP
23.2* Information regarding consent of Arthur Andersen LLP
31.1* Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934
31.2* Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934
32.1* Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section
1350
32.2* Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section
1350
* Filed herewith.
(b) reports on form 8-K
During the quarter ended October 31, 2003, our Company filed two Current
Reports on Form 8-K.
1. A report filed on August 1, 2003 described the approval of the insolvency
filing by the registrant's German subsidiary, Rapid Link, GmbH.
2. A report filed on September 17, 2003 described the registrant's:
a. Securities Purchase Agreement dated November 8, 2002 with
Global Capital Funding Group, L.P.
b. Securities Purchase Agreement dated July 24, 2003 with GCA
Strategic Investment Fund Limited.
c. issuance of a press release setting forth its financial
results for its third quarter ended July 31, 2003.
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
Date: January 29, 2004
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, 2004
John Jenkins Officer and President and
Director
/s/ ALLEN SCIARILLO Chief Financial Officer January 29, 2004
Allen Sciarillo and secretary (principal
financial and principal
accounting officer)
/s/ LAWRENCE VIERRA Executive Vice President January 29, 2004
Lawrence Vierra and Director
/s/ ROBERT M. FIDLER Director January 29, 2004
Robert M. Fidler
/s/ NICK DeMARE Director January 29, 2004
Nick DeMare
/s/ DAVID HESS Director January 29, 2004
David Hess
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
1. Consolidated Financial Statements
Reports of Independent Public Accountants F-2
Consolidated Balance Sheets at October 31, 2003 and 2002 F-4
Consolidated Statements of Operations for the fiscal years
ended October 31, 2003, 2002 and 2001 F-5
Consolidated Statement of Shareholders' (Deficit) Equity for
the fiscal years ended October 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for the fiscal years ended
October 31, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-8
2. Financial Statement Schedule
Reports of Independent Public Accountants as to Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
All other schedules are omitted because they are not applicable or
because the required information is shown in the consolidated financial
statements or notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and Shareholders of
Dial Thru International Corporation
We have audited the accompanying consolidated balance sheets of Dial Thru
International Corporation and subsidiaries as of October 31, 2003 and 2002,
and the related consolidated statements of operations, shareholders' deficit
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dial
Thru International Corporation and subsidiaries as of October 31, 2003 and
2002, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in
the United States of America.
As described in Note 1 to the October 31, 2003 and 2002 financial
statements, the accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The
Company has suffered recurring losses and has used significant cash flows
in operations during each of the last three fiscal years. Additionally, at
October 31, 2003, the Company's current liabilities exceeded its current
assets by $9.9 million and the Company has a shareholders' deficit totaling
$8.1 million. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans as they relate
to these issues are also explained in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
As discussed in Note 1 to the Consolidated Financial Statements, during
fiscal year 2002, the Company changed its method of accounting for goodwill
and other intangibles to comply with the accounting provisions of Statement
of Accounting Standard No. 142 "Goodwill and Other Intangibles".
/s/ KBA GROUP LLP
__________________
KBA GROUP LLP
Dallas, Texas
December 12, 2003, except for Note 19,
as to which the date is January 2, 2004
F-2
REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS
-------------------------------------------------
The following report is a copy of a report previously issued by Arthur
Andersen LLP ("Andersen"), which report has not been reissued by Andersen.
Other than with respect to Andersen's review of our Quarterly Report on Form
10-Q for the period ended January 31, 2002, none of the financial
information for our fiscal year ended October 31, 2002 has been reviewed by
Andersen. Reclassifications were made to the financial information for the
time period indicated in Andersen's previously issued report to conform that
report to the financial statement presentations made with respect to our
fiscal year ended October 31, 2002.
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.
/s/ ARTHUR ANDERSEN LLP
___________________________
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 9, 2002
F-3
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------ October 31, October 31,
2003 2002
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 505,256 $ 269,313
Trade accounts receivable, net of allowance
for doubtful accounts of $295,094 at October
31, 2003 and $506,391 at October 31, 2002 872,610 965,617
Prepaid expenses and other current assets 230,997 124,845
---------- ----------
Total current assets 1,608,863 1,359,775
---------- ----------
PROPERTY AND EQUIPMENT, net 1,340,986 2,729,122
ADVERTISING CREDITS, net - 2,376,678
GOODWILL, net 1,796,917 1,796,917
OTHER ASSETS 91,434 75,739
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 242,334 742,124
---------- ----------
TOTAL ASSETS $ 5,080,534 $ 9,080,355
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Current portion of capital lease obligations 146,140 257,780
Trade accounts payable 2,814,472 3,647,856
Accrued liabilities 2,448,939 1,526,691
Deferred revenue 356,999 331,786
Deposits and other payables 430,678 444,204
Note payable, net of debt discount of $2,847
at October 31, 2003 547,153 -
Notes payable to related parties, net of debt
discount of $423,291 at October 31, 2002 2,348,401 1,925,110
Net current liabilities of discontinued operations 2,493,481 2,030,095
---------- ----------
Total current liabilities 11,586,263 10,163,522
---------- ----------
CAPITAL LEASE OBLIGATIONS, net of current portion - 11,549
NOTE PAYABLE, net of debt discount of $22,838
at October 31, 2003 1,227,162 -
CONVERTIBLE DEBENTURES, net of debt discount
of $10,756 at October 31, 2003 and $163,510
at October 31, 2002 489,244 880,365
COMMITMENTS AND CONTINGENCIES (See Notes 1 and 14)
SHAREHOLDERS' DEFICIT
Preferred stock, $.001 par value, 10,000,000
shares authorized, none issued and outstanding - -
Common stock, $.001 par value; 44,169,100
shares authorized; 16,201,803 shares issued
at October 31, 2003 and 15,074,916 shares
issued at October 31, 2002 16,202 15,075
Additional paid-in capital 39,070,237 38,894,065
Accumulated deficit (47,253,704) (40,631,393)
Accumulated other comprehensive loss - (196,057)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
Subscription receivable - common stock - (1,901)
---------- ----------
Total shareholders' deficit (8,222,135) (1,975,081)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 5,080,534 $ 9,080,355
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended October 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
REVENUES $ 17,654,794 $ 18,408,649 $ 6,641,818
COSTS AND EXPENSES
Costs of revenues 13,128,924 11,539,562 4,668,418
Sales and marketing 700,404 885,661 808,792
Non-cash sales and marketing expense - - 258,616
General and administrative 3,812,639 5,760,179 3,297,954
Impairment charge related to write down of
advertising credits 2,376,678 - -
Impairment charge related to write down of
assets held for resale - 320,307 -
Depreciation and amortization 1,338,351 2,158,135 781,331
Sales tax settlement 350,000 - -
----------- ----------- -----------
Total costs and expenses 21,706,996 20,663,844 9,815,111
----------- ----------- -----------
Operating loss (4,052,202) (2,255,195) (3,173,293)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (1,131,806) (1,247,488) (710,464)
Other income related to settlement of disputes - - 1,789,373
Foreign currency exchange gains (losses) 7,097 (31,976) -
Write off of investment in marketable securities - - (446,820)
Gain (loss) on disposal of equipment (241,935) 9,053 13,693
----------- ----------- -----------
Total other income (expense), net (1,366,644) (1,270,411) 645,782
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (5,418,846) (3,525,606) (2,527,511)
LOSS FROM DISCONTINUED OPERATIONS, net
of income taxes of $0 for all periods (1,203,465) (1,158,574) (156,795)
----------- ----------- -----------
NET LOSS $ (6,622,311) $ (4,684,180) $ (2,684,306)
=========== =========== ===========
LOSS PER SHARE:
Basic and diluted loss per share
Continuing operations $ (0.34) $ (0.25) (0.23)
Discontinued operations (0.07) (0.09) (0.02)
----------- ----------- -----------
$ (0.41) $ (0.34) $ (0.25)
=========== =========== ===========
SHARES USED IN THE CALCULATION
OF PER SHARE AMOUNTS:
Basic and diluted common shares 15,999,179 13,935,782 10,900,115
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
Other
Accumulated Receivable -
Common Common Stock Treasury Additional Accumulated Comprehensive Common
Shares Amount Stock Paid-in Capital Deficit Income/(Loss) Stock Total
---------- ----------- ------- --------------- ----------- ------------- ------- ----------
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
of options and warrants 134,000 134 - 34,223 - - - 34,357
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 related to change
in 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 (LOSS)
Net loss - - - - (2,684,306) - - (2,684,306)
Foreign currency translation
adjustment - - - - - (83,132) - (83,132)
---------- ----------- ------- --------------- ----------- ------------- ------- ----------
Total Comprehensive Income (Loss) - - - - (2,684,306) (83,132) - (2,767,438)
Balance at October 31, 2001 12,119,090 $ 12,119 $(54,870) $ 38,174,588 $(35,947,213) $ (88,548) $(17,080) $ 2,078,996
===================================================================================================================================
Shares issued upon exercise
of options and warrants 175,000 175 - 69,825 - - - 70,000
Retirement of shares as payment
for options (100,000) (100) - (69,900) - - - (70,000)
Issuance of common stock
in connection with
consulting agreement 25,000 25 - 13,725 - - - 13,750
Conversion of convertible notes
including accrued interest 2,855,826 2,856 - 528,969 - - - 531,825
Issuance of warrants in connection
with convertible debentures - - - 17,096 - - - 17,096
Embedded beneficial conversion
feature related to issuance
of note payable - - - 114,154 - - - 114,154
Issuance of warrants in connection
with convertible notes-related
party - - - 45,608 - - - 45,608
Cash received for subscription
receivable-common stock - - - - - - 15,179 15,179
COMPREHENSIVE INCOME (LOSS)
Net loss - - - - (4,684,180) - - (4,684,180)
Foreign currency translation
adjustment - - - - - $(107,509) - (107,509)
---------- ----------- ------- --------------- ----------- ------------- ------- ----------
Total Comprehensive Income (Loss) - - - - (4,684,180) (107,509) - (4,791,689)
Balance at October 31, 2002 15,074,916 $ 15,075 $(54,870) $ 38,894,065 $(40,631,393) $(196,057) $(1,901) $(1,975,081)
===================================================================================================================================
Conversion of convertible notes
including accrued interest 1,098,052 1,098 - 108,099 - - - 109,197
Issuance of warrants in connection
with convertible debentures - - - 17,208 - - - 17,208
Issuance of warrants in connection
with notes payable - - - 52,795 - - - 52,795
Adjustment of outstanding shares 28,835 29 (29) - - -
Write off of subscription receivable - - - (1,901) - - 1,901 -
COMPREHENSIVE INCOME (LOSS)
Net loss - - - - (6,622,311) - - (6,622,311)
Foreign currency translation
adjustment - - - - - 196,057 - 196,057
---------- ----------- ------- --------------- ----------- ------------- ------- ----------
Total Comprehensive Income (Loss) - - - - (6,622,311) 196,057 - (6,426,254)
Balance at October 31, 2003 16,201,803 $ 16,202 $(54,870) $ 39,070,237 $(47,253,704) $ - $ - $(8,222,135)
===================================================================================================================================
The accompanying notes are an integral part of this consolidated financial statement.
F-6
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended October 31,
---------------------------------------
2003 2002 2001
---------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (5,418,846) $ (3,525,606) $ (2,527,511)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
(Gain) loss from disposal of fixed assets 241,935 (9,053) (13,693)
Impairment charge related to write down
of assets held for resale - 320,307 -
Impairment charge related to write down
of advertising credits 2,376,678 - -
Stock and warrants issued for services - 13,750 258,616
Bad debt expense 28,268 685,059 140,167
Non-cash interest expense 688,732 924,340 597,731
Non-cash vendor credit - - (780,000)
Depreciation and amortization 1,338,351 2,158,135 781,331
Effects of changes in foreign exchange rates 13,066 (39,792) (83,132)
(Increase) decrease in:
Trade accounts receivable 64,739 (372,978) (962,046)
Prepaid expenses and other current assets (106,152) (108,468) 100,408
Advertising credits - - 76,349
Other assets (1,623) 12,421 136,319
Increase (decrease) in:
Trade accounts payable (851,186) (730,283) 1,217,182
Accrued liabilities 930,570 578,783 154,874
Deferred revenue 25,213 (406,790) 78,628
Deposits and other payables (13,526) 444,204 -
---------- ----------- -----------
Net cash used in operating activities
of continuing operations (683,781) (55,971) (824,777)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (192,150) (303,460) (68,651)
Cash paid for Rapid Link acquisition,
net of cash acquired - - (1,648,650)
---------- ----------- -----------
Net cash used in investing activities
of continuing operations (192,150) (303,460) (1,717,301)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party note payable - 300,000 1,599,486
Proceeds from notes payable 1,800,000 - -
Proceeds from convertible debentures - 550,000 1,000,000
Payments on capital leases (105,387) (105,784) (91,516)
Deferred financing fees (82,441) (92,625) -
Proceeds from exercise of stock options - - 34,357
Payments on convertible debentures (443,000) - -
Subscription receivable-common stock - 15,179 -
---------- ----------- -----------
Net cash provided by financing activities
of continuing operations 1,169,172 666,770 2,542,327
---------- ----------- -----------
NET CASH USED IN DISCONTINUED OPERATIONS (57,298) (112,143) -
---------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 235,943 195,196 249
Cash and cash equivalents at beginning of year 269,313 74,117 73,868
---------- ----------- -----------
Cash and cash equivalents at end of year $ 505,256 $ 269,313 $ 74,117
========== =========== ===========
SUPPLEMENTAL INFORMATION AND SCHEDULE OF NON
CASH INVESTING AND FINANCING ACTIVITIES
Conversion of convertible debenture and
accrued interest to common stock $ 109,197 $ 531,825 $ -
Fair value of warrants issued with debt 70,003 62,704 736,458
Debt issued with embedded beneficial
conversion feature - 114,154 667,598
Exercise of stock options in exchange for
retirement of 100,000 common shares - 70,000 -
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 acquisition
of Dial Thru International - - 1,031,200
Common stock issued for acquisition of Rapid Link - - 468,000
Cash paid for interest 35,000 - 11,174
The accompanying notes are an integral part of these consolidated financial statements.
F-7
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 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. The Company also
sells telecommunications services for both the foreign and domestic
termination of international long distance traffic into the wholesale
market. 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. In November 1999 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 currently provides a variety
of international and domestic communication services including international
re-origination and dial thru, Internet voice and fax services, e-Commerce
solutions and other value-added communication services, using its VoIP
Network to effectively deliver the products to the end user.
In addition to helping companies achieve savings on long-distance voice and
fax calls by routing calls over the Internet or the Company's private
network, the Company also offers new opportunities for existing Internet
Service Providers ("ISPs") who want to expand into voice services and
private corporate networks seeking to lower long-distance costs.
F-8
To further enhance its product offerings and accelerate its growth plans, in
October 2001, the Company acquired 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, Incorporated ("Rapid Link"). Rapid Link is 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 enhanced the Company's product offerings and rapidly
expanded the Company's VoIP strategy due to the engineering and operational
expertise acquired in the transaction. During 2003, management decided to
discontinue its continued financial support of Rapid Link Germany and on
August 1, 2003, Rapid Link Germany received approval for its insolvency
filing. Accordingly, the operations of Rapid Link Germany have been
reflected as discontinued operations in the accompanying financial
statements for all periods presented.
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 $47.3 million as of October 31, 2003,
as well as a working capital deficit from continuing operations of
approximately $7.5 million. Funding of the Company's working capital
deficit, current and future operating losses, and expansion of the Company
will require continuing capital investment. Historically, some of the
funding of the Company has been provided by a major shareholder. 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 obtained additional financing of $1,250,000 in November
2002, a portion of which was used to fully pay the April 11, 2001
convertible debenture with Global Capital Funding Group L.P.
2) the Company and GCA Strategic Investment Fund Limited agreed to extend
the maturity date of the January 2002 debenture from January 28, 2003
to November 8, 2004.
3) the Company obtained additional financing of $550,000 in July 2003.
Since the beginning of April 2001, the Company has raised $5.7 million
in debt financing.
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. The consolidated financial statements do not
include any adjustments to reflect the possible effects of the
recoverability and classification of assets or classification of liabilities
which may result from the inability of the Company to continue as a going
concern.
NOTE 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, which is currently in
liquidation. 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 currently the primary
source of the Company's revenue.
Revenues generated by prepaid phone cards are 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. Cash and
cash equivalent deposits are at risk to the extent that they exceed Federal
Deposit Insurance Corporation insured amounts. To minimize this risk, the
Company places its cash and cash equivalents with high credit quality
financial institutions.
Accounts Receivable
-------------------
Trade accounts receivable are stated at the amount the Company expects to
collect. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make
required payments. Management considers the following factors when
determining the collectibility of specific customer accounts: customer
credit-worthiness, past transaction history with the customer, current
economic industry trends, and changes in customer payment terms. If the
financial condition of the Company's customers were to deteriorate,
adversely affecting their ability to make payments, additional allowances
would be required. Based on management's assessment, the Company provides
for estimated uncollectible amounts through a charge to earnings and a
credit to a valuation allowance. Balances that remain outstanding after the
Company has used reasonable collection efforts are written off through a
charge to the valuation allowance and a credit to accounts receivable.
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
------------------------------------
Effective November 1, 2001, the Company adopted SFAS No, 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and also specifies the
criteria for the recognition of intangible assets separately from goodwill.
Under SFAS No. 142, goodwill is no longer amortized but is subject to an
impairment test at least annually or more frequently if impairment
indicators arise. In accordance with SFAS No. 142, the Company performed
annual impairment tests of goodwill in the fourth quarters of fiscal 2003
and 2002. The results of both impairment tests indicated goodwill was not
impaired. Goodwill, net of accumulated amortization, was $1,796,917 at
October 31, 2003 and 2002. Had the Company not amortized goodwill for the
year ended October 31, 2001, net loss would have been $2,512,789, and loss
per share would have been $0.23.
Valuation of Long-Lived Assets
------------------------------
Effective November 1, 2002, the Company adopted the provisions of SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121")
and accounting and reporting provisions of Accounting Principles Bulletin
Opinion 30, "Reporting the Results of Operations" for a disposal of a
segment. The primary objective of SFAS 144 is to develop one accounting
model based on the framework established in SFAS 121 for long-lived assets
to be disposed of and significantly changes the criteria that would have to
be met to classify an asset as held for sale. SFAS 144 also requires
expected future operating losses from discontinued operations to be
displayed in the period(s) in which the losses are incurred, rather than as
of the measurement date.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be
recoverable. The Company does not perform a periodic assessment of assets
for impairment in the absence of such information or indicators. Conditions
that would necessitate an impairment include a significant decline in the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company
recognizes an impairment loss only if an impairment is indicated by its
carrying value not being recoverable through undiscounted cash flows. The
impairment loss is the difference between the carrying amount and the fair
value of the asset estimated using discounted cash flows. Long-lived assets
held for sale are reported at the lower of cost or fair value less costs to
sell. During fiscal 2002, the Company wrote down certain property and
equipment held for resale. The property and equipment was written down by
$320,307 to $0, its estimated fair value.
Loss Per Share
--------------
Loss per share is computed using the weighted average number of shares of
common stock outstanding during each year. Diluted loss per share is
computed using the weighted average number of shares of common stock
outstanding during each year and common equivalent shares consisting of
stock options, warrants, and convertible debentures (using the treasury
stock method) to the extent they are dilutive.
The shares issuable upon the exercise of stock options, warrants and
convertible debentures are excluded from the calculation of net loss per
share for each year as their effect on net loss for each year presented
would be antidilutive. At October 31, 2003, there are 9,410,197 shares
potentially issuable from outstanding stock options, warrants and
convertible debentures.
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 for differences between the financial statement 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 recorded when 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 stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure". Under APB Opinion No. 25,
compensation expense for employees is based on the excess, if any, on the
date of grant, of fair value of the Company's stock over the exercise price.
Accordingly, no compensation cost has been recognized for its employee stock
options in the financial statements during the years ended October 31, 2003,
2002 and 2001 as the fair market value on the grant date approximates the
exercise price. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No.123, as
amended by SFAS No. 148, the Company's pro forma net loss for the years
ended October 31, 2003, 2002 and 2001 would have been as follows:
2003 2002 2001
----------- ----------- -----------
Net loss, as reported $ (6,622,311) $ (4,684,180) $ (2,684,306)
Add: Stock-based employee
compensation expense
included in reported net loss - - -
Deduct: Stock-based employee
compensation expense
determined under the
fair value based method (252,040) (343,700) (266,067)
----------- ----------- -----------
Pro forma net loss $ (6,874,351) $ (5,027,880) $ (2,950,373)
=========== =========== ===========
Net loss per share - basic
and dilutive, as reported $ (0.41) $ (0.34) $ (0.25)
=========== =========== ===========
Net loss per share - basic
and dilutive, pro forma $ (0.43) $ (0.36) $ (0.27)
=========== =========== ===========
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Because
options vest over a period of several years and additional awards are
generally made each year, the pro forma information presented above is not
necessarily indicative of the effects on reported or pro forma net earnings
or losses for future years.
The value of all options and warrants 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:
2003 2002 2001
----------------------------------------------------------------
Risk-free interest rate 3% 4% 5%
Expected dividend yield 0% 0% 0%
Expected lives 3 years 5 years 4 years
Expected volatility 126-221% 99% - 157% 133% - 159%
Comprehensive Income (Loss)
---------------------------
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), sets forth
rules for the reporting and display of comprehensive income (loss) (net
income (loss) plus all other changes in net assets from non owner sources)
and its components in the financial statements. At October 31, 2002 and
2001 the major component of other comprehensive income (loss) consisted of
an unrealized loss from currency translation, which is stated as a component
of shareholders' (deficit) equity.
Foreign Currency Translation and Foreign Currency Transactions
--------------------------------------------------------------
The Company's foreign operations are subject to exchange rate fluctuations
and foreign currency transaction costs. Monetary assets and liabilities of
subsidiaries domiciled outside the United States are translated at rates of
exchange existing at the balance sheet date and non-monetary assets,
liabilities and equity are translated at historical rates. 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' deficit. Foreign currency transactions resulting
in gains and losses are recorded in the Statement of Operations.
Reclassifications
-----------------
Certain reclassifications were made to the 2002 and 2001 consolidated
financial statements to conform to the current year presentation.
NOTE 3 - RAPID LINK ACQUISITION
On October 12, 2001, DTI completed the acquisition of certain assets and
liabilities of Rapid Link USA and 100% of the common stock of Rapid Link
Germany, from Rapid Link. The acquisition was accounted for under the
purchase method of accounting and accordingly, 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 DTI's common shares on October 12, 2001. The
value of the common stock is guaranteed by DTI to be no less than $300,000
at the time of the effectiveness of the Registration of the shares. As of
the effectiveness of the Registration Statement relating to the shares,
completed on March 28, 2002, the value of the common stock was $210,000.
The incremental amount will be paid in stock and will not change the total
purchase price paid for the Rapid Link acquisition.
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
year ended October 31, 2001 assumes that the acquisition had occurred on
November 1, 2000:
Unaudited
Year ended
October 31, 2001
----------------
Revenues $ 32,933,450
===========
Net loss $ (8,734,575)
===========
Net loss per common share (basic and diluted) $ (0.76)
===========
Weighted average common shares outstanding
(basic and diluted) 11,500,115
===========
NOTE 4 - DISCONTINUED OPERATIONS
On August 1, 2003, the Company's German Subsidiary, Rapid Link Germany,
received approval for its insolvency filing. Rapid Link Germany has been
turned over to a trustee who is responsible for liquidating the entity. At
October 31, 2003, certain long-lived assets of Rapid Link Germany have been
written down to their fair value. Assets and liabilities of Rapid Link
Germany are categorized on the Consolidated Balance Sheets as Discontinued
Operations. Operations of Rapid Link Germany for fiscal years 2003, 2002
and 2001 are categorized on the Consolidated Statements of Operations as
Discontinued Operations.
The following table presents selected balance sheet information for Rapid
Link Germany at October 31:
2003 2002
---------- ----------
Current Assets
Cash $ 164,878 $ 219,555
Trade accounts receivable, net 416,013 404,338
Other current assets 192,917 20,150
---------- ----------
Total current assets 773,808 644,043
---------- ----------
Current liabilities
Current portion of capital lease
obligations 144,643 131,670
Trade accounts payable 2,612,864 1,739,061
Accrued liabilities 86,877 16,225
Deferred revenue 422,905 787,182
---------- ----------
Total current liabilities 3,267,289 2,674,138
---------- ----------
Net current liabilities of
discontinued operations $ 2,493,481 $ 2,030,095
========== ==========
Property and equipment
Telecom Equipment $ - $ 399,355
Furniture, Fixtures, Equipment - 29,367
Computers - 52,060
Software - 302,833
Leasehold Improvements - 15,403
Accumulated depreciation and
amortization - (324,477)
---------- ----------
Total property and equipment, net - 474,541
---------- ----------
Other assets and long-term
liabilities
Capital lease obligations (9,644) (60,816)
Other 251,978 328,399
---------- ----------
Total other assets, net 242,334 267,583
---------- ----------
Net long-term assets
of discontinued operations $ 242,334 $ 742,124
========== ==========
The following table presents summary operating results for Rapid Link
Germany for the years ended October 31:
2003 2002 2001
---------- ---------- ----------
Revenues $ 3,598,007 $ 4,559,411 $ 360,044
Costs and expenses 4,801,472 5,717,985 516,839
---------- ---------- ----------
Loss from discontinued
operations $(1,203,465) $(1,158,574) $ (156,795)
========== ========== ==========
NOTE 5 - 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.
During the fiscal year ended October 31, 2000, the Company 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. 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. The
primary use for the media credits was to advertise products and services
domestically. Although the Company has explored product offerings that it
believed would benefit from the form of advertising described herein, the
Company's limited financial resources have delayed the development of those
products and it is unclear whether the Company will have the resources
necessary to develop products that could effectively use these advertising
credits. Furthermore, management has received limited cooperation from its
media placement brokers regarding the use of the credits in recent months,
and therefore has begun contacting the actual underlying provider of the
advertising. This contact has not provided any certainty as to the
Company's ability to use the credits. Therefore, the Company has written
off the remaining $2,376,678 of the advertising credits during the year
ended October 31, 2003.
NOTE 6 - 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 that were recorded at fair value totaling $446,820
recorded as Other Income Related To Settlement Of Disputes, which were
subsequently written off as Write Off Of Investment In Marketable Securities
during 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 7 - NOTES PAYABLE
Note Payable with Global Capital Funding Group, L.P.
----------------------------------------------------
In November 2002, the Company executed a 12% note payable (the "GC-Note")
with Global Capital Funding Group, L.P., which provided financing of
$1,250,000. The GC-Note's maturity date is November 8, 2004. The GC-Note is
secured by $1,518,267 of certain property and equipment. In connection with
the GC-Note, the Company paid $47,441 as financing fees, which were
capitalized and are being amortized over the life of the GC-Note. For the
year ended October 31, 2003, the Company recorded approximately $24,000 as
interest expense relating to these deferred financing fees. The Company
also issued to the holder of the GC-Note warrants to acquire an aggregate of
500,000 shares of common stock at an exercise price of $0.14 per share,
which expire on November 8, 2007. The Company recorded debt discount of
approximately $46,000, the fair value of the warrants, relating to the
issuance of the warrants. The Company is amortizing the debt discount over
the two year life of the GC-Note. For the year ended October 31, 2003, the
Company recorded approximately $23,000 as interest expense relating to the
warrants.
Note Payable with GCA Strategic Investment Fund Limited
-------------------------------------------------------
In July 2003, the Company executed a 10% note payable (the "GCA-Note") with
GCA Strategic Investment Fund Limited, which provided financing of $550,000.
The GCA-Note's maturity date was December 23, 2003 and is unsecured. In the
event the GCA-Note is not repaid in full within 10 days of the maturity
date, the terms of the GCA-Note shall become the same as those of the Second
Debenture (see Note 8). In the event the terms of the GCA-Note become the
same as the Second Debenture, the GCA-Note would have a beneficial
conversion feature. In accordance with EITF 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" ("EITF-98-5"), the intrinsic value of the
beneficial conversion feature has been calculated as approximately $104,000
at the commitment date using the stock price as of that date. The value of
the beneficial conversion feature will only be recorded at the date in which
the future event occurs, which, in this case, is 10 days after the maturity
date of the note. The note matured during December 2003 and, accordingly,
since the GCA-Note remained unpaid as of January 2004, the Company replaced
the note with a convertible debenture. Upon the replacement of the GCA-Note
with a convertible debenture, the Company recorded the debt discount of
$104,000 and will amortize it over the life of the new convertible debenture
(see Note 19). In connection with the GCA-Note, the Company paid $35,000 as
financing fees, which were capitalized and are being amortized over the life
of the GCA-Note. For the year ended October 31, 2003, the Company recorded
approximately $22,000 as interest expense relating to these deferred
financing fees. The Company also issued to the holder of the GCA-Note
warrants to acquire an aggregate of 100,000 shares of common stock at an
exercise price of $0.14 per share, which expire on July 24, 2008. The
Company recorded a debt discount of approximately $7,000, the fair value of
the warrants, relating to the issuance of the warrants. For the year ended
October 31, 2003, the Company recorded approximately $4,000 as interest
expense relating to the warrants.
NOTE 8 - CONVERTIBLE DEBT
Convertible Debenture with Global Capital Funding Group L.P.
------------------------------------------------------------
In April 2001, the Company executed a 6% convertible debenture (the
"Debenture") with Global Capital Funding Group L.P. ("Global"), which
provided financing of $1,000,000. In November 2002, Global converted
$50,875 of debt and $4,859 of accrued interest into approximately 724,000
shares of the Company's common stock. In November 2002, the Debenture's
outstanding balance of $443,000 was paid in full following the issuance of
the GC-Note (see Note 7) and the remaining unamortized deferred financing
fees of approximately $131,000 on the Debenture were recorded as interest
expense.
Convertible Debenture with GCA Strategic Investment Fund Limited
----------------------------------------------------------------
In January 2002, the Company executed a 6% convertible debenture (the
"Second Debenture") with GCA Strategic Investment Fund Limited ("GCA"),
which provided financing of $550,000. The Second Debenture's original
maturity date was January 28, 2003. The Second Debenture is secured by
certain property and 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 and (ii) 85% of the average of the
three lowest volume weighted average sales prices as reported by Bloomberg
L.P. during the twenty 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. In connection with the
Second Debenture, the Company paid $92,625 in financing fees, which were
capitalized and amortized over the original life of the Second Debenture.
During the year ended October 31, 2003, the Company recorded approximately
$23,000 as interest expense relating to these financing fees. The Company
calculated the beneficial conversion feature embedded in the Second
Debenture in accordance with EITF 98-5 and recorded approximately $114,000
as debt discount. This debt discount was amortized over the original life
of the Second Debenture. During the year ended October 31, 2003, the
Company recorded approximately $28,000 as interest expense relating to the
amortization of the debt discount. The Company also issued to the holder of
the debenture warrants to acquire an aggregate of 50,000 shares of common
stock at an exercise price of $0.41 per share, which expire on January 28,
2007. The Company recorded debt discount of approximately $17,000 related
to the issuance of the warrants. The Company determined the debt discount
by allocating the relative fair value to the Second Debenture and the
warrants, and the Company amortized the debt discount over the original life
of the Second Debenture. For the year ended October 31, 2003, the Company
recorded approximately $4,000 as interest expense relating to the warrants.
In January 2003, the Company and GCA agreed to extend the maturity date of
the Second Debenture to November 8, 2004. In consideration for this
extension, in February 2003, the Company adjusted the exercise price of the
previously issued warrants to $0.21 per share. The Company also issued to
the holder of the Second Debenture warrants to purchase an additional
100,000 shares of common stock also at an exercise price of $0.21 per share,
which expire on February 8, 2008. The Company recorded additional debt
discount of approximately $17,000 related to the warrant exercise price
adjustment and the issuance of the new warrants. The Company is amortizing
the additional debt discount over the Second Debenture's extension period.
For the year ended October 31, 2003, the Company recorded approximately
$6,000 as interest expense relating to the warrants.
During the year ended October 31, 2003, GCA converted $50,000 of debt and
$3,463 of accrued interest into approximately 374,000 shares of the
Company's common stock, in accordance with the debt conversion terms.
NOTE 9 - NOTES PAYABLE - RELATED PARTY
In October 2001, the Company executed 10% convertible notes (the "Notes")
with three executives of the Company, which provided financing in the
aggregate principal amount of $1,945,958. The original maturity date of each
note was October 24, 2003. In January 2003, the Company extended the
maturity date of each note to February 24, 2004. The Notes are secured by
certain Company assets. Each Note is convertible into the Company's common
stock at the option of the holder at any time. 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 Notes in
accordance with EITF 98-5 and recorded debt discount of approximately
$171,000 which is being amortized over two years. The Company 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. Additional debt discount of approximately $657,000 was
recorded during the fourth quarter of fiscal 2001 relating to these
warrants. The Company determined the additional debt discount by allocating
the relative fair value to the Notes and the warrants. The Company is
amortizing the additional debt discount over the life of the Notes. For the
year ended October 31, 2003, the Company recorded approximately $410,000 of
interest expense relating to the amortization of the debt discount. In
January 2002, an additional $102,433 was added to the Notes in exchange for
an existing note payable. The Company also issued to the holder of the
Notes warrants to acquire an additional 102,433 shares of common stock at an
exercise price of $0.75, which expire on January 28, 2007. Additional debt
discount, related to these warrants, of approximately $24,000 was recorded
during the first quarter of fiscal 2002. The Company determined the
additional debt discount by allocating the relative fair value to the Notes
and the warrants. The Company is amortizing the additional debt discount
over the remaining life of the Notes. For the year ended October 31, 2003,
the Company recorded approximately $14,000 of interest expense relating to
the warrants. In July 2002, an additional $300,000 was added to the Notes,
representing incremental monies loaned by a shareholder. The Company also
issued to the holder of the Notes warrants to acquire an additional 300,000
shares of common stock at an exercise price of $0.75, which expire on July
8, 2007. Additional debt discount of approximately $22,000 was recorded as
interest expense during the third quarter of fiscal 2002 relating to these
warrants. The Company determined the additional debt discount by allocating
the relative fair value to the Notes and the warrants.
The future maturities of the Company's notes payable and convertible debt by
fiscal year as follows (see Notes 7,8):
Year ending October 31,
2004 $ 2,898,401
2005 1,750,000
------------
Total future maturities 4,648,401
Less: unamortized debt discount (36,441)
------------
Total future maturities, net of
amortized debt discount $ 4,611,960
============
NOTE 10 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at October 31, 2003 and
2002:
2003 2002
---------- ----------
Telephone switch equipment $ 4,411,325 $ 4,282,349
Leasehold improvements 223,577 301,258
Furniture and fixtures 232,916 227,551
Computer equipment 797,005 752,899
Computer software 536,428 690,939
---------- ----------
6,201,251 6,254,996
Less: accumulated depreciation
and amortization (4,860,265) (3,525,874)
---------- ----------
$ 1,340,986 $ 2,729,122
========== ==========
At October 31, 2003 and 2002, the gross amount of capital lease assets and
related accumulated amortization recorded under capital leases were as
follows:
2003 2002
---------- ----------
Telephone switch equipment $ 455,728 $ 455,728
Less: accumulated amortization (297,330) (228,540)
---------- ----------
$ 158,398 $ 227,188
========== ==========
Amortization of assets held under capital leases is included with
depreciation expense. Depreciation and amortization expense totaled
$1,338,351, $2,158,135 and $781,331 in 2003, 2002 and 2001, respectively.
NOTE 11 - 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 currently utilizing the
assets as collateral against its $550,000 convertible debenture. As the
potential ability to sell this equipment is uncertain, this equipment was
written-off during the year ended October 31, 2002.
NOTE 12 - STOCK OPTIONS AND WARRANTS
Warrant Issuances to Employees
Employee warrant activity for the three years ended October 31, 2003 was as
follows:
Weighted
Number Warrant Average
of Price Exercise
Shares Per Share Price
--------- ----------- --------
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
Warrants granted 402,433 0.75 0.75
Warrants exercised - - -
Warrants canceled (145,000) 1.44 1.44
--------- ----------- --------
Warrants outstanding at
October 31, 2002 3,013,391 0.75 - 1.44 0.83
Warrants granted - - -
Warrants exercised - - -
Warrants canceled (365,000) 0.53 - 0.81 0.62
--------- ----------- --------
Warrants outstanding at
October 31, 2003 2,648,391 $0.75 - 1.44 $ 0.83
========= =========== ========
The warrants issued to employees that were exercisable at the years ended
October 31, 2003, 2002 and 2001 were 2,648,000, 1,701,000 and 287,000,
respectively.
Warrant Issuances to Non-Employees
----------------------------------
Non-Employee warrant activity for the three years ended October 31, 2003 was
as follows:
Weighted
Number Warrant Average
of Price Exercise
Shares Per Share Price
--------- ----------- --------
Warrants outstanding at
October 31, 2000 748,800 $0.29 - 3.50 $ 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 - 3.50 1.65
Warrants granted 50,000 0.40 0.40
Warrants exercised - - -
Warrants canceled (365,800) 0.53 - 0.88 0.74
--------- ----------- --------
Warrants outstanding at
October 31, 2002 887,500 0.01 - 3.50 1.95
Warrants granted 700,000 0.14 - 0.21 0.15
Warrants exercised - - -
Warrants canceled - - -
--------- ----------- --------
Warrants outstanding at
October 31, 2003 1,587,500 $0.01 - 3.50 $ 1.16
========= =========== ========
The majority of the warrants issued to non-employees during fiscal year
2003, 2002 and 2001 were issued in connection to debt financing (see Notes
7,8). The warrants issued to non-employees that were exercisable at October
31, 2003, 2002 and 2001 totaled 1,587,500, 887,500 and 1,203,000,
respectively.
Stock Options
2002 Equity Incentive Plan
The Company adopted the 2002 Equity Incentive Plan ("Incentive Plan"), at
the Company's annual shareholder meeting in May 2002. The Incentive Plan
authorized the Board of Directors to grant up to 2,000,000 options to
purchase common shares of the Company. The maximum number of shares of
common stock which may be issuable under the Incentive Plan to any
individual plan participant is 500,000 shares. All options granted under
the Incentive Plan have vesting periods up to a maximum of five years. The
exercise price of an option granted under the Incentive Plan shall not be
less than 85% of the fair value of the common stock on the date such option
is granted.
Amended and restated 1990 Stock Option Plan
The 1990 Stock Option Plan ("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 1990 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
1990 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 1990 Stock Option Plan is the fair market value at
the date of grant.
The Company's stock option activity for the three years ended October 31,
2003 was as follows:
Weighted
Number Option Average
of Price Exercise
Shares Per Share Price
--------- ----------- --------
Options outstanding at
October 31, 2000 464,100 $0.30 - 2.50 $ 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 - 1.50 0.53
Options granted 195,000 0.21 - 0.70 0.27
Options exercised (175,000) 0.40 0.40
Options canceled (593,000) 0.30 - 0.78 0.73
--------- ----------- --------
Options outstanding at
October 31, 2002 1,609,500 0.09 - 1.50 0.44
Options granted 187,500 0.11 - 0.18 0.18
Options exercised - - -
Options canceled (353,000) 0.11 - 1.50 0.43
--------- ----------- --------
Options outstanding at
October 31, 2003 1,444,000 $0.09 - 1.50 $ 0.41
========= =========== ========
The following table summarizes information about employee warrants and stock
options outstanding at October 31, 2003:
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
------------ --------- ---- ---- --------- ----
$0.09 - $0.70 1,407,000 2.82 0.40 890,333 0.41
$0.75 - $0.78 2,383,391 3.97 0.75 2,371,724 0.75
$1.44 - $1.50 302,000 1.15 1.44 302,000 1.44
--------- ---- ---- --------- ----
4,092,391 3.37 0.68 3,564,057 0.72
========= ==== ==== ========= ====
The weighted average grant date fair value of all options and warrants
granted to employees during the fiscal year ended October 31, 2003 was $0.18
a share.
NOTE 13 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. There are
no deferred tax liabilities as of October 31, 2003 and 2002. Significant
components of the Company's deferred tax assets at October 31, 2003 and 2002
are as follows:
2003 2002
---------- ----------
Deferred tax assets
Net operating loss carryovers $14,527,382 $13,529,415
Accounts receivable 100,332 172,173
Advertising credits 977,185 190,134
Property and equipment 69,154 132,799
Accrued liabilities 34,918 36,627
---------- ----------
Total gross deferred tax assets 15,708,971 14,061,148
Valuation allowance (15,708,971) (14,061,148)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
The increase in the valuation allowance for the years ended October 31, 2003
and 2002 of $1.6 million and $2.8 million, respectively, was related
primarily to a change in U.S. operating loss carryforwards.
At October 31, 2003, the Company has U.S. net operating loss carryforwards
for federal income tax purposes of approximately $43 million, which expire
in 2006 through 2023. Utilization of U.S. 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 U.S. net
deferred asset balance.
NOTE 14 - 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 2007, and has also entered into various operating leases for
equipment used in the Company's business. Rental expense from continuing
operations for operating leases was $474,567, $400,425 and $188,553 for the
years ended October 31, 2003, 2002 and 2001, respectively.
Future minimum lease payments under noncancelable operating leases and
capital leases as of October 31, 2003 are as follows:
Capital Operating
Leases Leases
---------- ----------
Year ending October 31,
2004 $ 146,624 $ 433,078
2005 - 201,641
2006 - 168,854
2007 - 54,595
---------- ----------
Total minimum lease pmts 146,624 $ 858,168
==========
less: Amt representing interest (484)
----------
Present value of net minimum
capital lease payment 146,140
Less: current installments of
obligations under capital lease (146,140)
----------
Obligations under capital leases,
excluding current installments $ -
==========
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 the
Company's "international reorigination" technology. The injunctive relief
that Cygnus sought in this suit has been denied, but Cygnus continues to
seek a license fee for the use of the technology. The Company believes that
no license fee is required as the technology described in the patent is
different from the technology used by the Company.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent the Company from providing "reorigination" services. The Company
filed a cross motion for summary judgment of non-infringement. Both motions
were denied. On August 22, 2003, the Company re-filed the motion for
summary judgment for non-infringement. The Company has not received a
decision regarding this filing. The Company intends to continue defending
this case vigorously, though its ultimate legal and financial liability with
respect to such legal proceeding cannot be estimated with any certainty at
this time.
The State of Texas ("State") performed a sales tax audit of the Company's
former parent, Canmax Retail Systems ("Canmax"), for the years 1995 to 1999.
The State determined that the Company did not properly remit sales tax on
certain transactions, including asset purchases and software development
projects that Canmax performed for specific customers. The Company's
current and former managements filed exceptions, through its outside sales
tax consultant, to the State's audit findings, including the non-taxable
nature of certain transactions and the failure of the State to credit the
Company's account for sales tax remittances. In correspondence from the
State in June 2003, the State agreed to consider offsetting remittances
received by Canmax during the audit period. The State has refused to
consider other potential offsets. Based on the correspondence with the
State, during the fiscal year ended October 31, 2003, Management's estimate
of the potential liability has been recorded at $350,000 and is included in
the accompanying consolidated balance sheet in "Deposits and other
payables"; however, management cannot provide assurance that the ultimate
liability will not be greater. The Company is continuing to pursue its
options to appeal the decision by the State. Furthermore, the Company is
aggressively pursuing the collection of unpaid sales taxes from former
customers of Canmax.
NOTE 15 - 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 no matching contributions during
the years ended October 31, 2003, 2002 and 2001.
NOTE 16 - BUSINESS AND CREDIT CONCENTRATIONS
During the year ended October 31, 2003, the Company provided wholesale
services to a customer who accounted for approximately 11% of revenues.
During the year ended October 31, 2002, the Company provided wholesale
services to a customer who accounted for approximately 14% of revenues.
During the year ended October 31, 2001, the Company provided wholesale
services to a customer who accounted for approximately 11% of revenues.
Information regarding the Company's domestic and foreign revenues is as
follows:
All other
foreign
Africa countries Domestic Total
---------- ---------- ---------- ----------
Fiscal 2001 $ 2,953,817 $ 2,116,320 $ 1,571,681 $ 6,641,818
Fiscal 2002 1,392,384 1,184,239 15,832,026 18,408,649
Fiscal 2003 1,315,793 1,349,067 14,989,934 17,654,794
No individual foreign country represented more than 10 percent of revenue or
more than 10 percent of long lived assets for any period presented.
NOTE 17 - QUARTER-BY-QUARTER COMPARISION
Summarized unaudited quarterly financial data for the
years ended October 31, 2003, 2002 and 2001
are as follows:
2003 First Second Third Fourth
Quarters: ---------- ---------- ---------- ----------
Revenues, net $ 4,318,055 $ 4,609,051 $ 4,569,165 $ 4,158,523
Operating loss (436,798) (734,977) (166,632) (2,713,795)
Loss from continuing operations (828,386) (975,444) (397,855) (3,217,161)
Income (loss) from discontinued
operations (253,727) (316,349) (949,482) 316,093
Net loss (1,082,113) (1,291,793) (1,347,337) (2,901,068)
Loss per share-continuing
operations (0.05) (0.06) (0.03) (0.20)
Income (loss) per share-
discontinued operations (0.02) (0.02) (0.06) 0.03
2002
Quarters:
Revenues, net 5,241,466 4,787,785 4,248,348 4,131,050
Operating loss (792,634) (695,527) (608,975) (158,059)
Loss from continuing operations (1,072,322) (1,018,054) (960,137) (475,093)
Loss from discontinued operations (213,571) (221,760) (122,478) (600,765)
Net loss (1,285,893) (1,239,814) (1,082,615) (1,075,858)
Loss per share-continuing
operations (0.08) (0.07) (0.07) (0.03)
Income (loss) per share-
discontinued operations (0.02) (0.02) (0.01) (0.03)
2001
Quarters:
Revenues, net 890,620 903,639 1,654,079 3,193,480
Operating loss (991,223) (682,600) (497,762) (1,001,708)
Income (loss) from continuing
operations 382,191 (1,193,171) (594,871) (1,121,660)
Loss from discontinued operations - - - (156,795)
Net (loss) income 382,191 (1,193,171) (594,871) (1,278,455)
Loss per share-continuing operations 0.03 (0.11) (0.05) (0.10)
Income (loss) per share-
discontinued operations - - - (0.02)
NOTE 18 - CAPITAL STOCK
During the year ended October 31, 2003, a holder of one of the Company's
Debentures converted $53,463 of debt and accrued interest into approximately
374,000 shares of the Company's stock (see Note 8).
During the year ended October 31, 2003, a holder of one of the Company's
Debentures converted $55,734 of debt and accrued interest into approximately
724,000 shares of the Company's stock (see Note 8).
During the year ended October 31, 2002, a holder of one of the Company's
Debentures converted $531,487 of debt and accrued interest into
approximately 2,856,000 shares of the Company's stock (see Note 8).
In November 2001, the Company issued 175,000 shares in connection with the
exercise of options. The exercise price was paid with 100,000 shares of
common stock, which were subsequently retired.
In November 2001, the Company issued 25,000 shares of common stock for
investor relations services and were recorded at the stock's fair market
value.
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.
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.
During the years ended October 31, 2003, 2002 and 2001, options and warrants
to purchase 0, 175,000 and 134,000, respectively, shares of common stock
were exercised.
The following table describes stock reserved for future issuances at October
31, 2003:
# Shares
----------
Options 1,444,000
Warrants 4,235,891
Convertible debt (1) 20,815,751
Shares to be issued in connection
with acquisition (see Note 3) 529,412
----------
27,025,054
==========
(1) Assumes conversion on October 31, 2003 under the
terms of the related agreements
NOTE 19 - SUBSEQUENT EVENTS
During January 2004, the Company's GCA-Note was replaced by a convertible
debenture as per the terms of the related note agreement (see Note 7).
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AS TO SCHEDULE
-----------------------------------------------------------------
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 12, 2003, we have also audited Schedule II for the
years ended October 31, 2003 and 2002. In our opinion, this schedule
presents fairly, in all material respects, the information required to
be set forth therein.
/s/ KBA GROUP LLP
__________________
KBA GROUP LLP
Dallas, Texas
December 12, 2003
REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
----------------------------------------------------------------
The following report is a copy of a report previously issued by Arthur
Andersen LLP ("Andersen"), which report has not been reissued by Andersen.
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
__________________
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 9, 2002
S-1
DIAL THRU INTERNATIONAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended October 31, 2003, 2002 and 2001
Balance at Balance at
the beg the end
of period Additions Deductions of period
---------- ---------- ----------- -----------
2003
----
Allowance for doubtful
accounts $ 506,391 $ 158,469 $369,766 (1) $ 295,094
========= ========= ======= ==========
Impairment provision for
advertising credits $ 563,932 $2,376,678 $ - $ 2,940,610
========= ========= ======= ==========
2002
----
Allowance for doubtful
accounts $ 228,729 $ 711,246 $433,584 (1) $ 506,391
========= ========= ======= ==========
Impairment provision for
advertising credits $ 563,932 $ - $ - $ 563,932
========= ========= ======= ==========
2001
----
Allowance for doubtful
accounts $1,025,766 $ 140,167 $937,204 (1) $ 228,729
========= ========= ======= ==========
Impairment provision for
advertising credits $ 575,542 $ - $ 11,610 $ 563,932
========= ========= ======= ==========
(1) Write offs.
S-2
EXHIBIT INDEX
NO. DESCRIPTION OF EXHIBIT
14.1 Code of Business Conduct and Ethics for Employees, Executive Officers
and Directors
21.1 Subsidiaries of the Registrant
23.1 Consent of KBA Group LLP
23.2 Information Regarding Consent of Arthur Andersen
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section
1350
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section
1350