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, 2002
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the act). Yes / / No /X/
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price for such
common equity, as of the last business day of the registrant's most recently
completed fiscal quarter.
The aggregate market value of shares of common stock held by non-affiliates
of Dial Thru International Corporation as of January 23, 2003 was
approximately $2,031,589, based on the average bid and ask price of common
stock as quoted on the OTC Bulletin Board of $0.19.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicated the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of January
23, 2003, 15,103,751 shares of common stock 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, Pacific Palisades, California 90272, and our telephone number is (310)
566-1700.
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 February 24, 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 $0.24 which expire on January 28, 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.
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
August 1998, we entered into an agreement with PT-1 Communications, Inc. to
acquire long distance telecommunications and debit services for use in the
marketing and distribution of domestic and international prepaid phone
cards. We conducted our domestic prepaid phone card business through RDST,
Inc., a wholly owned subsidiary, by purchasing services from PT-1 until mid-
1999. In the second quarter of fiscal 1999, we purchased telecommunications
switching equipment and an enhanced services platform. Following a period of
development, implementation and testing, we commenced operations as a
facilities-based carrier in the fourth quarter of 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. 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 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 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. For 2002, 82% of our total revenue resulted from the
retail customers and VoIP infrastructure that we acquired from Rapid Link,
contributing significantly to our overall revenue growth of 255% over 2001.
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
fiscal year 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, Atlanta, Georgia, and Frankfurt, Germany, providing
for long distance services worldwide. Development of the private IP network
and the use of VoIP technology have improved both the cost and quality of
telecommunications services, as well as facilitating our expansion into
other Internet related opportunities.
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 accounting for a majority 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.
FaxThru
We offer FaxThru and "store and forward" fax services, which allow a
customer to send a fax to another party utilizing the Internet without
incurring long distance or similar charges. From the customer's perspective,
these products function exactly like traditional fax services, but with
significant savings in long distance charges.
Global Roaming
Our Global Roaming service provides customers a single account number to use
to initiate phone-to-phone calls from locations throughout the world using
specific toll-free access numbers. This service enables customers to receive
the cost benefits associated with our telecommunications network throughout
the world. This product will begin to account for a more significant amount
of our revenue due to the acquisition of Rapid Link, which provides this
product to its retail customers around the world.
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.
Prepaid Phone Cards
During fiscal year 2000, prepaid calling cards accounted for approximately
32% of our revenue. Since that time, we significantly reduced our emphasis
on this segment of our business in favor of other products and services that
offer the opportunity for higher profit margins. Currently, we do not offer
this product to our customers and calling cards did not generate any revenue
in either our 2001 or our 2002 fiscal years. It is not anticipated that this
product will account for a significant amount of revenue going forward.
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 WorldCom Inc., and Sprint Corporation, 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 WorldCom, 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. Concert Global Clearinghouse, iBasis,
ITXC, and the wholesale divisions of Net2Phone and deltathree.com route
traffic to destinations worldwide and compete directly with us. Other
Internet telephony service providers focus on a retail customer base and may
in the future compete with us. These companies may offer the kinds of voice
services we intend to offer in the future. In addition, companies currently
in related markets have begun to provide VoIP services or adapt their
products to enable voice over the Internet services. These companies may
potentially migrate into the Internet telephony market as direct
competitors.
Regulation of Internet Telephony and the Internet
The use of the Internet to provide telephone service is a relatively recent
market development. Currently, the Federal Communications Commission ("FCC")
is considering whether to impose surcharges or additional regulations upon
certain providers of Internet telephony. On April 10, 1998, the FCC issued
its report to Congress concerning the implementation of the universal
service provisions of the Telecommunications Act of 1996. In the report,
the FCC indicated that it would examine the question of whether certain
forms of phone-to-phone Internet telephony are information services or
telecommunications services. If the FCC were to determine that certain
services are subject to FCC regulation as telecommunications services, the
FCC may require providers of Internet telephony services to make universal
service contributions, pay access charges or be subject to traditional
common carrier regulation. It is also possible that PC-to-phone and phone-
to-phone services may be regulated by the FCC differently. In addition, the
FCC sets the access charges on traditional telephony traffic and if it
reduces these access charges, the cost of traditional long distance
telephone calls will probably be lowered, thereby decreasing any competitive
pricing advantage that we have. In May of 2000, the FCC approved an access
charge reduction plan known as CALLS which has resulted in a reduction of
the access charges paid by traditional long distance carriers to the major
local phone companies.
Changes in the legal and regulatory environment relating to the
Internet connectivity market, including regulatory changes which affect
telecommunications costs or that may increase the likelihood of competition
from the regional Bell operating companies or other telecommunications
companies, could increase our costs of providing services. For example, the
FCC determined in 1999 that subscriber calls to Internet service providers
should be classified for jurisdictional purposes as interstate calls. On
appeal, the U.S. Court of Appeals remanded the case to the FCC, directing
the FCC to reconsider this determination. If the FCC reaffirms its original
determination, the determination could affect a telephone carrier's cost for
provision of service to these providers by eliminating the payment of
reciprocal compensation to carriers terminating calls to these providers.
The FCC has pending a proceeding to encourage the development of cost-based
compensation mechanisms for the termination of calls to Internet service
providers. Meanwhile, state agencies will determine whether carriers receive
reciprocal compensation for these calls. If new compensation mechanisms
increase the costs to carriers of termination calls to Internet service
providers or if States eliminate reciprocal compensation payments, the
affected carriers could increase the price of service to Internet service
providers to compensate, which could raise the cost of Internet access to
consumers.
In addition, although the FCC to date has determined that providers of
Internet services should not be required to pay interstate access charges,
this decision may be reconsidered in the future. This decision could occur
if the FCC determines that the services provided are basic interstate
telecommunications services and no longer subject to the exemption from
access charges that are currently enjoyed by providers of enhanced services.
Access charges are assessed by local telephone companies to long-distance
companies for the use of the local telephone network to originate and
terminate long-distance calls, generally on a per minute basis. The FCC has
stated publicly that it would be inclined to hold the provision of phone-to-
phone Internet protocol telephony to be a basic telecommunications service
and therefore subject to access charges and universal service contribution
requirements. In a Notice of Inquiry released September 29, 1999, the FCC
again asked for comments on the regulatory status of Internet telephony.
Specifically, the FCC asked for comments to address whether Internet
telephony service generally, and phone-to-phone service in particular, may
be regulated as a basic telecommunications service. If the FCC concludes
that any or all Internet telephony should be regulated as a basic
communications service, it eventually could require that Internet telephony
providers must contribute to universal service funds and pay access charges
to local telephone companies. The imposition of access charges or universal
service contributions would substantially increase our costs of serving
dial-up customers. Following the election of George W. Bush as President of
the United States, William Kennard resigned from the chairmanship of the FCC
and President Bush appointed Michael Powell as the new chairman. The FCC's
polices may change as a result of this change in FCC leadership.
State public utility commissions may retain jurisdiction to regulate the
provision of intrastate Internet telephony services. At least one state
public utility commission (the Nebraska Commission) has made a determination
that it will regulate intrastate Internet telephony services. State
regulation of intrastate Internet telephony services may result in the
requirement that Internet telephony providers pay intrastate access charges
to local phone companies and pay into state universal service funds.
Local phone companies seeking to require that providers of Internet
telephony services pay access charges to them have the option of filing suit
as well as initiating regulatory proceedings. In January 2001, a state trial
court in Colorado ruled that one provider of Internet telephony services
must pay intrastate access charges to the local phone company. The Colorado
litigation result may encourage local phone companies to file more such
suits. Courts in such suits may award substantial damages for past periods
of time in which the Internet telephony provider did not pay access charges
as well as require that access charges be paid prospectively. State and
federal regulators are in some cases authorized to award damages as well as
prospective relief.
To our knowledge, there are currently no domestic and few foreign laws or
regulations that prohibit voice communications over the Internet. A number
of countries that currently prohibit competition in the provision of voice
telephony have also prohibited Internet telephony. Other countries permit
but regulate Internet telephony. If Congress, the FCC, or State regulatory
agencies of foreign governments begin to regulate Internet telephony, such
regulation may materially adversely affect our business, financial condition
or results of operations.
In addition, access to our services may also be limited in foreign countries
where laws and regulations otherwise do not prohibit voice communication
over the Internet. We have negotiated agreements to provide our services in
various countries. No assurances can be given that we will continue to be
successful in these negotiations.
Congress has recently adopted legislation that regulates certain aspects of
the Internet, including on-line content, user privacy and taxation. For
example, the Internet Tax Freedom Act prohibits certain taxes on Internet
uses through November 1, 2003. We cannot predict whether substantial new
taxes will be imposed on our services provided after that date. In addition,
Congress and other federal entities are considering other legislative and
regulatory proposals that would further regulate the Internet. Congress has
enacted digital signature legislation and various states have adopted and
are considering Internet-related legislation. Increased United States
regulation of the Internet may slow its growth, particularly if other
governments follow suit, which may increase the cost of doing business over
the Internet and materially adversely affect our business, financial
condition, results of operations and future prospects.
The European Union's European Commission (EC) in early January 2001
recommended that member countries refrain from regulating Internet telephony
service. However, the EC qualified its recommendation by noting that
regulation is appropriate when an Internet telephony company provides levels
of quality and reliability equal to those provided by traditional phone
companies, makes a separate voice-only service offering, and meets several
other conditions.
The European Union has also enacted several directives relating to the
Internet. The European Union has, for example, adopted a directive on data
protection that imposes restrictions on the processing of personal data that
are more restrictive than current United States privacy standards. Under the
directive, personal data may not be collected, processed or transferred
outside the European Union unless certain specified conditions are met. In
addition, persons whose personal data is processed within the European Union
are guaranteed a number of rights, including the right to access and obtain
information about their data, the right to have inaccurate data rectified,
the right to object to the processing of their data for direct marketing
purposes and in certain other circumstances, rights of legal recourse in the
event of unlawful processing. The directive will affect all companies that
process personal data in, or receive personal data processed in, the
European Union, and may affect companies that collect or transmit
information over the Internet from individuals in the European Union Member
States. In particular, companies with establishments in the European Union
may not be permitted to transfer personal data to countries that do not
maintain adequate levels of data protection. Our transmission of personal
data is limited and we do not anticipated it becoming a significant source
of revenue.
In addition, the European Union has adopted a separate, complementary
directive that pertains to privacy and the processing of personal data in
the telecommunications sector. This directive establishes certain
requirements with respect to, among other things, the processing and
retention of subscriber traffic and billing data, subscriber rights to non-
itemized bills, and the presentation and restriction of calling and
connected line identification. In addition, a number of European countries
outside the European Union have adopted, or are in the process of adopting,
rules similar to those set forth in the European Union directives.
Although we do not engage in the collection of data for purposes other than
routing calls and billing for our services, the data protection directives
are quite broad and the European Union Privacy standards are stringent.
Accordingly, the potential effect of these data protection rules on the
development of our business is uncertain.
Sales and Marketing
We market long distance telecommunications products and services from our
offices in Los Angeles, California and Atlanta, Georgia. We also have a
wholly owned subsidiary in Mannheim, Germany, 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, 2002, 2001 and 2000, $8.6 million or 35%, $5.4 million or 78%,
and $5.8 million or 68% of our total revenue 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, 2003, we had approximately 67 full-time and 3 part-time
employees, approximately 15 of which perform administrative and financial
functions, approximately 27 of which perform customer support duties and
approximately 28 of which have experience in telecommunications operations
and/or sales. Approximately 39 current employees are located in Los Angeles,
California, and Atlanta, Georgia, and approximately 28 employees operate in
offices worldwide. No employees are represented by a labor union, and we
consider our employee relations to be good.
Risk Factors
Our cash flow may not be sufficient to satisfy our cost of operations
For the years ended October 31, 2002, 2001 and 2000, we recorded net losses
of approximately $4.7 million, $2.7 million and $11.2 million, respectively,
on revenues of approximately $24.9 million, $7.0 million and $8.6 million,
respectively. As a result, we currently have a working capital deficit
of over $6 million. In addition, we have a significant amount of trade
payables, of which approximately 33% is past due, excluding disputes for
overcharges with our underlying carriers of approximately $500,000. To be
able to service our debt obligations over the course of the 2003 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 Atlanta, Georgia, where we lease 17,034 square feet,
New York, New York, where we lease 104 square feet under a co-location
agreement, and Los Angeles. Our German operations are located in Mannheim
and Frankfurt, Germany, where we lease 8,395 square feet. We also have sales
and administrative offices in Caracas, Venezuela and Johannesburg, South
Africa.
In addition, our subsidiary in Germany, acquired from Rapid Link in October
2001, is a facilities based provider of telecommunications services and
utilizes significant property and equipment to operate its business. As of
October 31, 2002, $475,000, or 15% of our total property and equipment was
located at our Germany subsidiary. 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, filed a patent
infringement suit (case no. 01-6052) in the United States District Court,
Central District of California, with respect to our "international call-
back" technology. This technology drives our Re-Origination services and
allows our foreign based customers to initiate international telephone calls
by first calling a switch in the United States, which then initiates a "call
back" to the customer sight providing the customer with an open phone line
to place a call anywhere in the world. The injunctive relief that Cygnus
sought in this suit has been denied, but Cygnus continues to seek
compensatory and punitive damages as well as attorneys' fees and costs.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent us from providing "call back" services. We filed a cross motion for
summary judgment of non-infringement. Both motions were denied. We intend
to refile the motion for summary judgment for non-infringement. We intend
to continue defending this case vigorously, though our ultimate legal and
financial liability with respect to such legal proceeding cannot be
estimated with any certainty at this time.
On June 3, 2002, RSL Com USA, Inc. ("RSL") filed a breach of contract suit
(case no. BC275210) in the Superior Court of the State of California, County
of Los Angeles, alleging that the Company owes RSL past due sums for
services rendered in connection with a written Carrier Services Agreement.
We have answered denying RSL's claims and, in November 2002, we filed a
cross-complaint against RSL. We do not believe that RSL's claims are
legitimate and intend to defend this case vigorously. At the same time, we
are not presently in a position to estimate our ultimate legal and financial
liability with respect to this matter.
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 2001
First Quarter . . . . . . . . . . . . . . $ 2.34 $ 0.50
Second Quarter . . . . . . . . . . . . . . $ 2.63 $ 0.71
Third Quarter . . . . . . . . . . . . . . $ 1.20 $ 0.62
Fourth Quarter . . . . . . . . . . . . . . $ 1.09 $ 0.41
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
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 453 stockholders of record as of January 23, 2003.
Recent Sales of Unregistered Securities
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 October 24,
2003. 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.
In July 2002, we issued a second amended 10% convertible note to Mr. Jenkins
to reflect the advance of an additional $300,000, which matures on
October 24, 2003. 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.
Our issuance of the amended note and the warrants was exempt from
registration under the Securities Act pursuant to Regulation D and
Section 4(2) thereof.
Item 6. Selected Financial Data
FISCAL YEARS ENDED OCTOBER 31
-----------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
CONSOLIDATED STATEMENT OF OPERATIONS
DATA (1)
Revenues $ 24,871 $ 7,002 $ 8,591 $ 3,117 $ 2,189
Cost of revenues 16,590 3,625 9,971 2,982 2,155
Operating expenses 11,667 5,365 9,142 4,028 1,399
Other income (expense) (1,298) 647 (655) 79 (101)
Gain on sale of software business - - - 5,309 -
Loss on disposal of USC & equipment - - - - (1,155)
Income (loss) from continuing operations (4,684) (2,684) (11,187) (3,815) (2,621)
Income (loss) from discontinued
operations - - - 218 (103)
Extraordinary item - forgiveness of debt - - - - -
Net income (loss) (4,684) (2,684) (11,187) 1,713 (2,724)
Income (loss) from continuing
operations per share $ (0.34) $ (0.25) $ (1.31) $ (0.56) $ (0.37)
Net income (loss) per share $ (0.34) $ (0.25) $ (1.31) $ 0.25 $ (0.38)
CONSOLIDATED BALANCE SHEET DATE (1):
Total assets
Continuing operations $ 9,787 $ 12,644 $ 6,102 $ 4,467 $ 1,411
Discontinued operations - - - - 3,880
Working capital (deficiency)
Continuing operations (6,879) (6,524) (4,829) 1,251 (1,460)
Discontinued operations - - - - 622
Noncurrent obligations
Continuing operations,
net of discount 2,878 2,070 119 562 -
Discontinued operations - - - - 147
Shareholders' (deficit) equity (1,975) 2,079 508 2,865 1,064
--------------------
(1) All numbers, other than per share numbers, are in thousands. The
results of operations of 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 this business as
discontinued operations.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Fiscal Years Ended October 31, 2002, 2001 and
2000
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",
"believes", "anticipates", "estimates", "plans", "expects", "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" beginning on page 9. 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, 2002, 2001, and 2000 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 refocusing and consolidation of
operations has resulted in not only greater savings, but also higher profits
and more sustainable revenues. This consolidation and reduction in staff has
allowed us to significantly reduce our overhead, and although our operations
have not yet produced positive cash flow, we believe that continued cost
reductions and moderate revenue growth would allow us to achieve positive
results in the near future.
On October 12, 2001, we completed the acquisition from Rapid Link of certain
assets and executory contracts of Rapid Link, USA, Inc. 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 2002 fiscal year 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.
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.
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 SAB 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, Intangible and Other Long-Lived Assets
Property, plant and equipment, certain intangible 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 and other intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
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 No. 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 deferred financing fees. The deferred
financing fee is amortized over the life of the respective debt instrument.
Carrier Disputes
We review our vendor bills on a monthly basis and periodically disputes
amounts invoiced by its 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.
Revenues
Our primary source of revenue is the sale of voice and fax traffic
internationally over our VoIP network, which is measured in minutes,
primarily to SMEs, residential users, and wholesale customers. We charge
our customers a fee per minute of usage that is dependent on the destination
of the call and is recognized in the period in which the call is completed.
Expenses
Our costs of revenues are termination fees, purchased minutes and fixed
costs for specific international and domestic Internet circuits and private
lines used to transport our minutes. Termination fees are paid to local
service providers and other international and domestic carriers to terminate
calls received from our network. This traffic is measured in minutes, at a
negotiated contract cost per minute.
General and administrative expenses include salaries, payroll taxes, benefit
expenses and related costs for general corporate functions, including
executive management, finance and administration, legal and regulatory,
information technology and human resources. Sales and marketing expenses
include salaries, payroll taxes, benefits and commissions that we pay for
sales personnel and advertising and marketing programs, including
expenses relating to our outside public relations firms. Interest expense
and financing costs relate primarily to the amortization of deferred
financing fees on our various debt instruments.
Quarterly Results of Operations
The following table sets forth selected unaudited quarterly information for
our last eight fiscal quarters:
Quarter Ended
January 31 April 30 July 31 October 31 Year
$ $ $ $ $
--------- --------- --------- --------- ----------
2002
Revenue 6,586,754 6,086,154 6,138,790 6,059,234 24,870,932
Loss from operations (1,002,479) (922,941) (727,007) (734,107) (3,386,534)
Net loss (1,285,893) (1,239,814) (1,082,615) (1,075,858) (4,684,180)
Basic and diluted loss
per share from operations (0.10) (0.09) (0.08) (0.07) (0.34)
2001
Revenue 890,620 903,639 1,654,079 3,553,524 7,001,862
Loss from operations (991,223) (682,600) (497,762) (1,159,563) (3,331,148)
Net Income (loss) 382,191 (1,193,171) (594,871) (1,278,455) (2,684,306)
Basic and diluted income (loss)
per share from operations 0.03 (0.11) (0.05) (0.12) (0.25)
Results of Operations - 2002 Versus 2001
Due to the Rapid Link acquisition in October 2001, our Results of Operations
for fiscal year 2002 includes a full year of related operations, while
fiscal year 2001 includes one month of related operations.
Revenues
For our fiscal year ended October 31, 2002, we had revenues of $24,870,000,
an increase of $17,870,000, or 255%, over the same period in 2001. Revenues
for the fiscal year ended October 31, 2002 include $21,540,000 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.
In absolute dollars, our retail and wholesale revenues increased by 236% and
282%, 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 have successfully added new wholesale
customers and new international points of termination. Furthermore, we have
added to our wholesale sales force to focus on developing greater wholesale
opportunities. We also plan on using our advertising credits to promote our
retail products through focused advertising targeted at ethnic markets in
the United States.
Expenses
For the fiscal year ended October 31, 2002, we had total direct costs of
revenues of $16,590,000, an increase of $11,620,000, or 234%, over the same
period in 2001. Costs of revenues have increased in absolute dollars due to
the growth in minutes and customers as well as the increased revenue and
traffic acquired from Rapid Link. As a percentage of revenues, costs of
revenues were 67% of revenues for the fiscal year ended October 31, 2002
compared to 71% of revenues for the fiscal year ended October 31, 2001.
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 70%. Our costs of revenues as a percentage of revenues
have improved slightly as the retail revenue acquired from Rapid Link
realizes higher margins than our existing retail traffic. This margin
improvement has been reduced in part by growth in our wholesale traffic.
Costs of revenues as a percentage of revenues will fluctuate depending on
the traffic mix between our wholesale and retail products.
General and administrative expenses were $7,511,000 and $3,464,000 for the
fiscal years ended October 31, 2002 and 2001, respectively. This absolute
dollar increase of $4,047,000, or 117%, is primarily due to the addition of
the Rapid Link operations. As a percentage of revenues, general and
administrative expenses were 30% and 49% of revenues for the fiscal years
ended October 31, 2002 and 2001, respectively. Included in general and
administrative expenses is bad debt expense of $994,000 and $140,000 for the
fiscal years October 31, 2002 and 2001, respectively. For the 2002 fiscal
year, bad debt expense includes $525,000 attributable to non-payment from
two wholesale customers, including $310,000 from our German operation. We
have implemented strict credit policies and systems to closely monitor our
wholesale traffic daily to reduce the risk of this type of bad debt in
future periods. We also review our general and administrative expenses
regularly, and continue to manage the costs accordingly to support the
current business as well as anticipated near term growth.
Sales and marketing expenses were $1,399,000, or 6% of revenues for the
fiscal year ended October 31, 2002 compared to $824,000, or 12% of revenues,
for the same period last year. This absolute dollar increase of $575,000,
or 70%, is due to the acquisition of the Rapid Link operations. This
reduction of our sales and marketing expenses as a percentage of revenues is
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.
Depreciation and amortization expenses increased to $2,437,000 from $818,000
for the fiscal years ended October 31, 2002 and 2001, respectively. This
increase primarily relates to the depreciation and amortization of 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. Had we
amortized goodwill for fiscal year 2002, we would have recognized $220,000
in additional amortization expense.
For the fiscal year ended October 31, 2002, interest expense and financing
costs of $1,275,000 were due primarily to the amortization of deferred
financing fees on our convertible debentures and our related party notes
payable. For the fiscal year ended October 31, 2001 $709,000 of interest
expense and financing fees were primarily attributable to amortization of
deferred financing fees 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.
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.
As a result of the foregoing, we incurred a net loss of $4,684,000, or $0.34
per share, for the fiscal year ended October 31, 2002, compared with a net
loss of $2,684,000 or $0.25 per share, for the fiscal year ended October 31,
2001.
Results of Operations - 2001 Versus 2000
Revenues
For the fiscal year ended October 31, 2001, we had revenues from continuing
operations of $7,002,000, a decrease of $1,589,000 or 19% over fiscal 2000.
Revenues in 2001 included $1,572,000 resulting from the purchase of Rapid
Link. Our international long distance business as described above generated
revenues of $5,429,000 for the fiscal year ended October 31, 2001 compared
to $5,836,000 for the fiscal year ended October 31, 2000. The remaining
revenue for 2000 of $2,755,000 was derived from the prepaid long distance
business that we have discontinued. Resources devoted to the discontinuation
of the prepaid business, as well as a shift in our strategic focus have
prevented us from fully developing and marketing our redirected business,
resulting in a slight decline in revenues from international long distance
services. We now devote all of our resources to providing international
communication services in niche markets to SME's either through direct sales
efforts, outside sales agents or resellers in each market.
Expenses
For the fiscal year ended October 31, 2001, we had total direct costs of
revenues relating to revenues from continuing operations of $4,967,000, a
decrease of $5,004,000, or 50%, from $9,971,000 in fiscal 2000. Included in
the cost is $1,194,000 attributable to Rapid Link operations. In addition,
during the fiscal year ended October 31, 2001 we received credits from our
vendors totaling $1,340,000, including a $780,000 carrier usage credit as
part of our settlement of litigation with Star Telecommunications. This
amount was included as a reduction of costs of revenues. Excluding the
impact of Rapid Link and the credits from our vendors, costs of revenues
were $3,773,000 or 69% of revenues, for the fiscal year ended October 31,
2001, compared to $9,971,000, or 116% of revenues, for the fiscal year ended
October 31, 2000. A substantial portion of this negative margin for 2000
related to our sale of prepaid phone cards for use between the United States
and Mexico. Changes in competitive pricing structures combined with changes
in predicted average call durations resulted in carrier costs exceeding
revenues. By focusing our business away from low margin prepaid calling
cards to delivering higher margin international communication services to
SME's in niche markets utilizing our VoIP network, we have realized higher
margins on sales across our product lines.
General and administrative expenses were $3,464,000 and $5,202,000 for the
fiscal years ended October 31, 2001 and October 31, 2000, respectively.
This decrease of $1,738,000, or 33% includes $539,000 attributable to Rapid
Link operations. Excluding the expenses associated with Rapid Link, general
and administrative expenses decreased by 44% from the prior period. The
change in our business away from prepaid calling cards, which requires a
larger infrastructure to support and control a large volume of transactions,
as well as our decision to consolidate our US operations into one location
has resulted in an overall drop in general and administrative expenses in
absolute dollars. It is anticipated that general and administrative expense
will grow in absolute dollars and as a percentage of revenues in the short
term due to the acquisition of Rapid Link, as a majority of the acquired
infrastructure supports a large retail customer base.
Sales and marketing expenses were $824,000, or 12% of revenues for the
fiscal year ended October 31, 2001, compared to $863,000, or 10% of
revenues, for the same period in fiscal 2000. Included in sales and
marketing expenses for 2001 is $16,000 attributable to Rapid Link
operations. The increase in sales and marketing as a percentage of revenues
is the result of our investment in startup operations in Latin America. In
addition, Rapid Link uses newspapers and periodicals to advertise its
services, which we will continue and increase in order to grow the acquired
customer base.
Depreciation and amortization expenses attributable to continuing operations
increased $253,000 or 45%, from $565,000 for the fiscal year ended October
31, 2000 to $818,000 for the fiscal year ended October 31, 2001. Of this
increase, $195,000 relates to the depreciation and amortization of the
assets of the business acquired from Rapid Link. The remaining increase of
$58,000 is attributable to the increase in depreciation expense for
telephone switching equipment, which was purchased in late fiscal 1999, as
well as the amortization of goodwill related to the DTI Acquisition.
The fiscal 2000 and 2001 interest expense is primarily attributable to our
$1.0 million convertible notes, which had original deferred financing fees
totaling $609,000, and were being amortized over a three year period. The
notes were converted to equity in March 2001, and the remaining unamortized
deferred financing fees of $315,000 were charged to expense. In connection
with the conversion of the notes into equity, we issued 150,000 warrants to
the note holders on March 13, 2001, and recorded $144,000 as the fair value
of the warrants. This amount was recorded as interest expense for the
fiscal year ended October 31, 2001. In addition, during fiscal 2001, we
incurred $150,000 in financing fees relating to our convertible debenture,
which was issued in April, 2001. These financing fees include $144,000
relating to a beneficial conversion feature provided by our April 2001
convertible debenture agreement, which provides for a below market
conversion of 30% applied to the fair market value of our common stock at
each conversion of the convertible debenture.
As a result of the foregoing, we incurred a net loss $2,684,000, or $0.25
per share, for the fiscal year ended October 31, 2001, compared with a net
loss of $11,187,000, or $1.31 per share, for the fiscal year ended October
31, 2000.
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, 2002, we had cash and cash equivalents of approximately
$489,000, an increase of $394,000 from the balance at October 31, 2001. As
of October 31, 2002, we had a working capital deficit of approximately
$6,879,000, compared to a working capital deficit of approximately
$6,524,000 at October 31, 2001. As of October 31, 2002, our current assets
of approximately $2,006,000 included net accounts receivable of
approximately $1,370,000, which has decreased over the balance of $1,833,000
at October 31, 2001 primarily due to a writeoff of $215,000 for a single
wholesale customer in the first quarter of fiscal 2002. As revenue
increases, we do not anticipate a commensurate increase in our accounts
receivable as a majority of our customers pay in advance for service, or on
a weekly basis.
Net cash used in operating activities was $1,202,000 for the fiscal year
ended October 31, 2002, compared to $950,000 for the fiscal year ended
October 31, 2001. The net cash used in operating activities for the fiscal
year ended October 31, 2002 was primarily due to a net loss of $4,684,000
adjusted for: bad debt expense of $994,000; non-cash interest expense of
$924,000; depreciation and amortization of $2,437,000; and net changes in
operating assets and liabilities of ($1,199,000). For the fiscal year ended
October 31, 2001, the net cash used in operating activities was comprised of
a net loss of $2,684,000 adjusted for: depreciation and amortization of
$818,000; stock and warrants issued for services of $259,000; non-cash
interest expense of $598,000; non-cash vendor credit of ($780,000); and net
changes in operating assets and liabilities of $713,000.
During the fiscal year ended October 31, 2002, net cash provided by
investing activities was $1,008,000, compared to net cash used in investing
activities of $1,556,000 for the fiscal year ended October 31, 2001. The
net cash provided by investing activities for the year ended October 31,
2002 is primarily attributable to a refund of a license fee previously paid
on behalf of our German subsidiary of $1,425,000. The investing activities
for the year ended October 31, 2001 included approximately $1.5 million used
for the purchase of Rapid Link. Investing activities also include capital
expenditures of $417,000 and $61,000 for the fiscal years ended October 31,
2002 and 2001, respectively.
Net cash provided by financing activities for the fiscal year ended October
31, 2002, totaled $588,000, compared to $2,528,000 for fiscal 2001. For the
fiscal year ended October 31, 2002, significant components of net cash
provided by financing activities include $550,000 in net proceeds from a
convertible debenture, $300,000 in proceeds from a shareholder note payable,
offset by $184,000 in payments on capital leases, and $93,000 of financing
fees. For the fiscal year ended October 31, 2001, the significant
components of net cash provided by financing activities include $1,000,000
in net proceeds from the issuance of our convertible debentures, and
proceeds of $1,599,000 from notes issued to three of our executives, offset
primarily by $106,000 in payments on capital leases.
We have an accumulated deficit of approximately $40.6 million as of October
31, 2002, as well as a working capital deficit of approximately $6.9
million. Funding of our working capital deficit, current and future
operating losses, and expansion will require continuing capital investment.
Our strategy is to fund these cash requirements through operations, debt
facilities and additional equity financing. As of the date of this report:
1) We obtained additional financing of $1,250,000 in November 2002.
Since the beginning of April 2001, we have raised $4.7 million in debt
financing.
2) We have negotiated payment terms of approximately $400,000 of our past
due trade payables with one of our largest vendors, and we have agreed
to remit equal monthly installments in excess of our normal monthly
usage billing. We have also settled a dispute with a vendor and
thereby reduced our accounts payable by approximately $700,000, which
is reflected in the October 31, 2002 balance sheet.
3) During fiscal year 2002, our German subsidiary received a net $1
million refund for a license fee previously paid, which was used to pay
down past due liabilities.
Although we have been able to arrange debt facilities and equity financing
to date, there can be no assurance that sufficient debt or equity financing
will continue to be available in the future or that it will be available on
terms acceptable to us. Failure to obtain sufficient capital could
materially affect 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, 2002 were $507,000 and we do not
anticipate significant spending for fiscal 2003.
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.
On January 28, 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 February 24, 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 Debenture shall be at the Formula Conversion
Price.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
We provide services primarily to customers located outside of the U.S. Thus,
our financial results could be impacted by foreign currency exchange rates
and market conditions abroad. As most of our services are paid for in U.S.
dollars, a strong dollar could make the cost of our services more expensive
than the services of non-U.S. based providers in foreign markets. We have
not used derivative instruments to hedge our foreign exchange risks though
we may choose to do so in the future.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 of this Report is presented at pages F-1
to F-5.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
A change in our accountants was previously reported in a current report on
Form 8-K filed on November 7, 2001, August 2, 2002 and August 23, 2002.
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 41 Chairman, Chief Executive
Officer, President and Director
Allen Sciarillo 38 Executive Vice President, Chief
Financial Officer, Secretary and
Director
Lawrence Vierra 57 Executive Vice President and
Director
Robert M. Fidler 63 Director
Nick DeMare 47 Director
David Hess 41 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.
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, 2002. 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.
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, 2002, 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, 2002, 2001
and 2000, to our chief executive officer and all other executive officers
whose total annual salary and bonus exceeded $100,000 during fiscal 2002.
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------- Awards
Securities
Underlying
Name and principal Salary Bonus Other annual Options/SARs All other
position Year ($) ($) compensation (#) Compensation ($)
------------------------------------------------------------------------------------------
John Jenkins 2002 181,042 -0- -0- -0- -0-
Chairman, CEO 2001 108,833 -0- -0- 700,000 -0-
and President 2000 175,950 -0- -0- -0- 1,599 (1)
Allen Sciarillo 2002 141,667 -0- -0- -0- -0-
Executive Vice 2001 -0- -0- -0- 500,000 -0-
President and Chief 2000 -0- -0- -0- -0- 0-
Financial Officer
(1) Includes compensation associated with supplemental long-term disability
insurance and matching 401(k) plan contributions we paid.
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- 233,333 466,667 -0- -0-
Allen Sciarillo -0- -0- 166,667 333,333 -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, 2002, which was $0.12 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.
Committees of the Board of Directors
During our 2002 fiscal year, our Audit Committee consisted of Nick DeMare
and Robert Fidler. The Audit Committee makes recommendations to our Board
of Directors or management concerning the engagement of our independent
public accountants and matters relating to our financial statements, our
accounting principles and our system of internal accounting controls. The
Audit Committee also reports its recommendations to our Board as to the
approval of our financial statements. The Audit Committee held one meeting
during the fiscal year ended October 31, 2002, during which all members were
in attendance.
During our 2002 fiscal year, our Compensation Committee consisted of Nick
DeMare and Robert Fidler. The Compensation Committee is responsible for
considering and making recommendations to our Board regarding executive
compensation and is also responsible for administration of our stock option
and executive incentive compensation plans. The Compensation Committee held
no meetings during the fiscal year ended October 31, 2002.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for implementing, overseeing and
administering the Company's overall compensation policy. The basic
objectives of that policy are to (a) provide compensation levels that are
fair and competitive with peer companies, (b) align pay with performance and
(c) where appropriate, provide incentives which link executive and
stockholder interests and long-term corporate objectives through the use of
equity-based incentives. Overall, the compensation program is designed to
attract, retain and motivate high quality and experienced employees at all
levels. The principal elements of executive officer compensation are base
pay, bonus and stock options, together with health benefits. The various
aspects of the compensation program, as applied to the Company's Named
Executive Officers, are outlined below.
Executive officer compensation is, in large part, determined by the
individual officer's ability to achieve his or her performance objectives.
Each of the Company's Named Executive Officers participates in the
development of an annual business strategy from which individual objectives
are established and performance goals are measured periodically. Initially,
the objectives are proposed by the particular officer involved. Those
objectives are then determined by the Chief Executive Officer or, in the
case of Mr. Jenkins's objectives, by the Board of Directors.
Base Pay
Initially, base pay was established at levels that were considered to be
sufficient to attract experienced personnel but which would not exhaust
available resources. As the Company grows, the compensation focus continues
to emphasize other areas of compensation. Executive officers understand that
their principal opportunities for substantial compensation lay not in
enhanced base salary, but rather through appreciation in the value of
previously granted stock options. Thus, base pay has not represented the
most critical element of executive officer compensation.
Mr. Jenkins, the Company's President and Chief Operating Officer through
September 2001, was promoted to the position of CEO in October 2001. Mr.
Jenkins' base pay for fiscal 2001 and 2002 was established at an amount
considered below market in comparison to executive compensation levels
for companies of similar size and maturity. The Compensation Committee
established, and Mr. Jenkins accepted, below market compensation at the
beginning of fiscal 2001, based on a variety of factors, including the
performance of the Company, the ability of the Company to obtain funding to
support its operational cash flow requirements, and a desire to save the
Company the expense of compensation at market levels. The Compensation
Committee set Mr. Jenkins' salary at $100,000 per annum for fiscal 2001, and
$150,000 for 2002, compared to $175,950 for fiscal 2000.
Bonus
The Compensation Committee has determined that a cash incentive plan will be
implemented when the Company is able to achieve positive operating results.
Stock Options
The Compensation Committee believes that a stock option plan provides
capital accumulation opportunities to participants in a manner that fosters
the alignment of the participants' interests and risks with the interests
and risks of public stockholders. The Compensation Committee further
believes that stock options can function to assure the continuing retention
and loyalty of employees. Options that have been granted to the Named
Executive Officers typically carry three-year vesting schedules. If these
officers leave the Company's employ before their options are fully vested,
they will lose a portion of the benefits that they might otherwise receive
if they remain in the Company's employ for the entire vesting period. Stock
option grants have been based upon amounts deemed necessary to attract
qualified employees and amounts deemed necessary to retain such employees
and to equitably reward high performance employees for their contributions
to our development. For most of the Company's executive officers, stock
options generally constitute the most substantial portion of the Company's
compensation program.
The Compensation Committee believes that an appropriate compensation program
can help in fostering competitive operations if the program reflects a
suitable balance between providing appropriate awards to key employees while
at the same time effectively controlling compensation costs, principally by
establishing cash compensation at competitive levels and emphasizing
supplemental compensation that correlates the performance of individuals,
the Company and its Common Stock.
This report has been furnished by the Compensation Committee of the
Board of Directors.
Nick DeMare, Chairman
Robert M. Fidler
AUDIT COMMITTEE MATTERS
Independence of Audit Committee Members
Our common stock is quoted on the OTC Bulletin Board and is governed by the
standards applicable thereto. All members of the Audit Committee of the
Board of Directors have been determined to be "independent directors"
pursuant to the definition contained in Rule 4200(a)(15) of the National
Association of Securities Dealers' Marketplace rules.
AUDIT COMMITTEE REPORT
In connection with the preparation and filing of our Annual Report on Form
10-K for the year ended October 31, 2002:
(1) the Audit Committee reviewed and discussed the audited financial
statements with our management;
(2) the Audit Committee discussed with our independent auditors the
matters required to be discussed by Statement of Auditing Standards
No. 61;
(3) based on the review and discussions referred to above, the Audit
Committee recommended to the Board that the audited financial
statements be included in the 2002 Annual Report on Form 10-K for
filing with the SEC.
By: The Audit Committee of the Board of Directors
Nick DeMare, Chairman
Robert Fidler
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG DIAL THRU
INTERNATIONAL CORPORATION, THE NASDAQ STOCK MARKET (U.S.) COMPOSITE INDEX
AND THE NASDAQ STOCK MARKET
[ PERFORMANCE GRAPH APPEARS HERE ]
CUMULATIVE
TOTAL RETURN 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
-------- -------- -------- -------- -------- --------
Dial Thru
Int'l Corp $100 $ 19 $ 52 $ 91 $ 41 $ 7
NASDAQ Stock
Market (U.S.) $100 $137 $259 $322 $134 $103
NASDAQ Telecom
Index $100 $135 $252 $212 $ 72 $ 36
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of January 23, 2003,
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 5.55%
Abilene, Texas 79601
Joseph E. Canon
Dodge Jones Foundation 1,000,000 (3) 5.55%
P.O. Box 176
Abilene, Texas 79601
John Jenkins
17383 Sunset Boulevard, Suite 350 3,447,066 (4) 19.12%
Los Angeles, California 90272
Scotty Cook
2602 McKinney Avenue, Suite 220 911,899 (5) 5.06%
Dallas, Texas 75204
Lawrence Vierra
2353 Dolphin Court 80,833 (6) *
Henderson, NV 89014
Nick DeMare
Chase Management 20,280 (7) *
1090 West Georgia Street, Suite 1305
Vancouver, BC V6E 3V7
Robert M. Fidler
987 Laguna Road 39,000 (8) *
Pasadena, California 91105
David Hess
17383 Sunset Boulevard, Suite 350 0 *
Los Angeles, California 90272
Allen Sciarillo
17383 Sunset Boulevard, Suite 350 237,500 (9) 1.32%
Los Angeles, CA 90272
Global Capital Funding Group L.P.
106 Colony Park Drive 1,323,838 (10) 7.34%
Cumming, GA 30040
All Executive Officers and Directors
as a group (6 persons) 3,824,679 21.21%
* 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, 2003 are
deemed outstanding. Such shares, however, are not deemed
outstanding for purposes of computing the ownership of any other
person.
(2) Based upon 18,029,150 shares of common stock outstanding as of
January 23, 2003.
(3) Includes 1,000,000 shares held by Dodge Jones Foundation, of which
Mr. Canon serves as the Executive Director. As such, Mr. Canon
exercises voting power over all such shares.
(4) Includes 1,697,066 shares of common stock which may be acquired
through the exercise of options and warrants which are exercisable
within 60 days of January 23, 2003.
(5) Includes 399,899 shares of common stock owned by Founders Partners
VI LLC, of which Founders Equity Group is the managing partner.
Founders Equity Group is controlled by Mr. Cook, who exercises
voting power over all such shares. Also includes 300,000 shares
of common stock which may be acquired through the exercise of
warrants which are exercisable within 60 days of January 23, 2003.
(6) Includes 70,833 shares of common stock which may be acquired
through the exercise of warrants which are exercisable within 60
days of January 23, 2003.
(7) 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, 2003.
(8) 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, 2003.
(9) Includes 237,500 shares of common stock which may be acquired
through the exercise of option and warrants which are exercisable
within 60 days of January 23, 2003.
(10) Includes 600,000 shares of common stock which may be acquired
through the exercise of warrants which are exercisable within 60
days of January 23, 2002.
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, 2002:
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
------------- ----------------- ---------------- ---------------
Equity 5,510,391 (1) $1.26 1,352,567
compensation
plans approved by
security holders
Equity -0- n/a -0-
compensation
plans not
approved by
security holders
Total 5,510,391 $1.26 1,352,567
(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 executed 10% convertible notes (the "Notes") with 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, 2003.
In January and July 2002, the Notes issued to Mr. Jenkins were amended to
include additional advances in the aggregate principal amount of $402,433.
We also issued to Mr. Jenkins two warrants to acquire an additional 102,433
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. Controls and Procedures
Within the 90 days prior to the filing date of this 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 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.
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
2.1 Agreement and Plan of Merger dated as of January 30, 1998, among
Canmax Inc., CNMX MergerSub, Inc. and US Communications Services, Inc.
(filed as Exhibit 2.1 to Form 8-K dated January 30, 1998 (the "USC 8-K"),
and incorporated herein by reference)
2.2 Rescission Agreement dated June 15, 1998 among Canmax Inc., USC and
former principals of USC (filed as Exhibit 10.1 to Form 8-K dated January
15, 1998 (the "USC Rescission 8-K"), and incorporated herein by
reference)
2.3 Asset Purchase Agreement by and among Affiliated Computed Services,
Inc., Canmax and Canmax Retail Systems, Inc. dated September 3, 1998
(filed as Exhibit 10.1 to the Company's Form 8-K dated December 7, 1998
and incorporated herein by reference)
2.4 Asset Purchase Agreement dated November 2, 1999 among ARDIS Telecom
& Technologies, Inc., Dial Thru International Corporation, a Delaware
corporation, Dial Thru International Corporation, a California
corporation, and John Jenkins (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated November 2, 1999 and incorporated herein
by reference)
2.5 Stock and Asset Purchase Agreement, dated as of September 18, 2001,
by and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru
International Corporation. (filed as Exhibit 2.1 to the Company's Form 8-
K dated October 29, 2001 and incorporated herein by reference)
2.6 First Amendment to Stock and Asset Purchase Agreement, dated as of
September 21, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc.,
and Dial Thru International Corporation. (filed as Exhibit 2.2 to the
Company's Form 8-K dated October 29, 2001 and incorporated herein by
reference)
2.7 Second Amendment to Stock and Asset Purchase Agreement, dated as of
October 12, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.3 to the
Company's Form 8-K dated October 29, 2001 and incorporated herein by
reference)
2.8 Third Amendment to Stock and Asset Purchase Agreement, dated as of
October 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.4 to the
Company's Form 8-K dated December 28, 2001 and incorporated herein by
reference)
2.9 Fourth Amendment to Stock and Asset Purchase Agreement, dated as of
November 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc.,
and Dial Thru International Corporation. (filed as Exhibit 2.5 to the
Company's Form 8-K dated December 28, 2001 and incorporated herein by
reference)
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1999 (the "1999 Form 10-K") and incorporated herein by reference)
3.2 Amended and Restated Bylaws of Dial Thru International Corporation
(filed as Exhibit 3.2 to the 1999 Form 10-K and incorporated herein by
reference)
4.1 Registration Rights Agreement between Canmax and the Dodge Jones
Foundation (filed as Exhibit 4.02 to Canmax's Quarterly Report on Form
10-Q for the period ended April 30, 1997 and incorporated herein by
reference)
4.2 Registration Rights Agreement between Canmax and Founders Equity
Group, Inc. (filed as Exhibit 4.02 to Canmax's Quarterly Report on Form
10-Q for the period ended April 30, 1997 and incorporated herein by
reference)
4.3 Amended and Restated Stock Option Plan of Dial Thru International
Corporation (filed as Exhibit 4.3 to the 1999 Form 10-K and incorporated
herein by reference)
4.4 Securities Purchase Agreement dated April 11, 2001 (filed as Exhibit
4.1 to the Registrant's Quarterly Report on Form 10-Q for the period
ended April 30, 2001 and incorporated herein by reference)
4.5 Registration Rights Agreement dated April 6, 2001 between Dial Thru
International Corporation and Global Capital Funding Group, L.P. (filed
as Exhibit 4.2 to the Company's Form S-3, File #333-71406, filed on
October 11, 2001 and incorporated herein by reference)
4.6 6% Convertible Debenture of Dial Thru International Corporation and
Global Capital Funding Group, L.P. (filed as Exhibit 4.3 to the Company's
Form S-3, File 333-71406, filed on October 11, 2001 and incorporated
herein by reference)
4.7 Form of Common Stock Purchase Warrant dated April 11, 2001 between
Global Capital Funding Group, L.P. and Dial Thru International Corporation
(filed as Exhibit 4.4 to the Company's Form S-3, File 333- 71406, filed
October 11, 2001 and incorporated herein by reference)
4.8 Form of Common Stock Purchase Warrant dated April 6, 2001 between
D.P. Securities, Inc. and Dial Thru International Corporation (filed as
Exhibit 4.5 to the Company's Form S-3, File 333-71406, filed on October
11, 2001 and incorporated herein by reference)
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)
21.1* Subsidiaries of the Registrant
23.1* Information regarding consent of Arthur Andersen LLP
23.2* Consent of King Griffin & Adamson P.C.
99.1* Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350.
99.2* 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, 2002, our Company filed two Current
Reports on Form 8-K.
1. A report filed on August 2, 2002 described the Registrant's receipt of a
letter from the Securities and Exchange Commission ("SEC") notifying the
Registrant that Arthur Andersen had notified that SEC that Andersen would be
unable to perform future audit services for the Company.
2. A report filed on August 23, 2002, and amended on September 12, 2002,
described the Registrant's appointment of King Griffin & Adamson P.C. as the
Company's new independent accountant.
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, 2003
By: /s/ John Jenkins
John Jenkins
CHAIRMAN, CHIEF EXECUTIVE OFFICER
and PRESIDENT
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, 2003
John Jenkins Officer and President and
Director
/s/ ALLEN SCIARILLO Chief Financial Officer January 29, 2003
Allen Sciarillo and secretary (principal
financial and principal
accounting officer)
/s/ LAWRENCE VIERRA Executive Vice President January 29, 2003
Lawrence Vierra and Director
/s/ ROBERT M. FIDLER Director January 29, 2003
Robert M. Fidler
/s/ NICK DeMARE Director January 29, 2003
Nick DeMare
/s/ DAVID HESS Director January 29, 2003
David Hess
Certification
I, John Jenkins, certify that:
1. I have reviewed this annual report on Form 10-K of Dial Thru
International Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this annual
report.
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 29, 2003
/s/ John Jenkins
John Jenkins,
Chief Executive Officer and Chairman
Certification
I, Allen Sciarillo, certify that:
1. I have reviewed this annual report on Form 10-K of Dial Thru
International Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this annual
report.
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 29, 2003
/s/ Allen Sciarillo
Allen Sciarillo,
Chief Financial Officer and Executive Vice President
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
1. Consolidated Financial Statements
Reports of Independent Public Accountants
Consolidated Balance Sheets at October 31, 2002 and 2001
Consolidated Statements of Operations for the fiscal years
ended October 31, 2002, 2001 and 2000
Consolidated Statements of Shareholders' (Deficit) Equity
for the fiscal years ended October 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the fiscal years
ended October 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Report of Independent Public Accountants as to Schedule
Schedule II - Valuation and Qualifying Accounts
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 sheet of Dial Thru
International Corporation and subsidiaries as of October 31, 2002, and the
related consolidated statements of operations, shareholders' deficit 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates 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 consolidated financial position of Dial Thru
International Corporation and subsidiaries as of October 31, 2002, and the
consolidated results of their operations and their cash flows for the year
then ended, in conformity with accounting principles generally accepted in
the United States.
As described in Note 1 to the October 31, 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, 2002, the
Company's current liabilities exceeded its current assets by $9.7 million
and the Company has a stockholders deficit. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Unless the Company obtains additional financing or makes other
arrangements to settle its payables, it will not be able to meet its
obligations as they come due and it will be unable to execute its long-term
business plan. Management's plans as they relate to these issues are also
explained in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KING GRIFFIN & ADAMSON P.C.
-------------------------------
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
December 18, 2002
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
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and Shareholders of
Dial Thru International Corporation
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Dial Thru International Corporation
and subsidiaries for the year ended October 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates 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 consolidated results of operations and cash
flows of Dial Thru International Corporation and subsidiaries for the year
ended October 31, 2000, in conformity with generally accepted accounting
principles.
As described in Note C to the previously issued October 31, 2000 financial
statements, the accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The
Company has experienced significant losses from continuing operations and
has generated negative cash flows for each of the last two fiscal years.
Additionally, at October 31, 2000, the Company's current liabilities
exceeded its current assets by $4,829,283. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Unless the Company obtains additional financing or makes other
arrangements to settle its payables, it will not be able to meet its
obligations as they come due and it will be unable to execute its long-term
business plan. Management's plans as they relate to these issues are also
explained in Note C. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KING GRIFFIN & ADAMSON P.C.
-------------------------------
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
December 1, 2000
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------ October 31, October 31,
2002 2001
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 488,868 $ 94,985
Trade accounts receivable, net of allowance
for doubtful accounts of $548,467 at October
31, 2002 and $228,729 at October 31, 2001 1,369,955 1,832,768
Prepaid expenses and other current assets 147,209 43,612
---------- ----------
Total current assets 2,006,032 1,971,365
---------- ----------
PROPERTY AND EQUIPMENT, net 3,203,663 5,135,027
PROPERTY AND EQUIPMENT HELD FOR SALE - 320,307
ADVERTISING CREDITS, net 2,376,678 2,376,678
INTANGIBLE ASSETS, net 330,613 965,093
GOODWILL, net 1,796,917 1,796,917
OTHER ASSETS 73,525 78,762
---------- ----------
TOTAL ASSETS $ 9,787,428 $12,644,149
========== ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
CURRENT LIABILITIES
Current portion of capital leases 389,450 385,787
Trade accounts payable 4,422,493 4,973,338
Accrued carrier costs 982,863 917,415
Accrued liabilities 2,313,873 1,416,159
Deferred revenue 331,786 346,294
Deposits and other payables 444,204 456,282
---------- ----------
Total current liabilities 8,884,669 8,495,275
---------- ----------
CAPITAL LEASES, net of current portion 72,365 286,102
NOTES PAYABLE TO RELATED PARTIES, net of debt
discount of $423,291 at October 31, 2002
and $819,470 at October 31, 2001 1,925,110 1,228,931
CONVERTIBLE DEBENTURE, net of debt discount
of $163,510 at October 31, 2002 and
$445,155 at October 31, 2001 880,365 554,845
COMMITMENTS AND CONTINGENCIES (Notes 1 and 11)
SHAREHOLDERS' (DEFICIT) EQUITY
Preferred stock, $.001 par value, 10,000,000
shares authorized, none issued and outstanding - -
Common stock, $.001 par value; 44,169,100 shares
authorized; 15,074,916 shares issued at October
31, 2002 and 12,119,090 at October 31, 2001 15,075 12,119
Additional paid-in capital 38,894,064 38,174,588
Accumulated deficit (40,631,392) (35,947,213)
Accumulated other comprehensive income (196,057) (88,548)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
Subscription receivable - common stock (1,901) (17,080)
---------- ----------
Total shareholders' (deficit) equity (1,975,081) 2,078,996
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY $ 9,787,428 $12,644,149
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended October 31,
-------------------------------------------
2002 2001 2000
----------- ----------- -----------
REVENUES
Re-origination and dial thru services $ 24,870,932 $ 7,001,862 $ 5,836,392
Prepaid phone cards and other - - 2,755,057
----------- ----------- -----------
Total revenues 24,870,932 7,001,862 8,591,449
COSTS AND EXPENSES
Re-origination and dial thru services 16,590,152 4,967,214 5,750,839
Prepaid phone cards and other - - 4,220,570
Sales and marketing 1,398,639 824,388 862,582
Non-cash sales and marketing expense - 258,616 1,937,184
General and administrative 7,511,063 3,464,468 5,201,608
Impairment charge related to write down of
advertising credits - - 575,542
Impairment charge related to write down of
assets held for resale (320,307) - -
Depreciation and amortization 2,437,305 818,324 565,188
----------- ----------- -----------
Total costs and expenses 28,257,466 10,333,010 19,113,513
----------- ----------- -----------
Operating loss (3,386,534) (3,331,148) (10,522,064)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (1,274,723) (709,404) (664,678)
Other income related to settlement of disputes - 1,789,373 -
Foreign exchange (31,976) - -
Write off of investment in marketable securities - (446,820) -
Gain on sales of equipment 9,053 13,693 -
----------- ----------- -----------
Total other income (expense) (1,297,646) 646,842 (664,678)
----------- ----------- -----------
NET LOSS $ (4,684,180) $ (2,684,306) $(11,186,742)
=========== =========== ===========
LOSS PER SHARE:
Basic and diluted loss per share $ (0.34) $ (0.25) $ (1.31)
=========== =========== ===========
SHARES USED IN THE CALCULATION
OF PER SHARE AMOUNTS:
Basic and diluted common shares 13,935,782 10,900,115 8,544,105
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
Other
Accumulated Receivable -
Common Common Stock Treasury Additional Accumulated Comprehensive Common
Shares Amount Stock Paid-in Capital Deficit Income Stock Total
---------- ----------- ------- --------------- ----------- ------ ------- ---------
Balance at October 31, 1999 6,881,005 $ 6,881 $ - $ 24,940,093 $(22,076,165) $ (5,416) $ - $ 2,865,393
Issuance of common stock
in connection
with acquisition of DTI 1,000,000 1,000 - 936,500 - - - 937,500
Shares issued for
advertising credits 914,285 914 - 3,027,655 - - - 3,028,569
Shares issued for cash 400,000 400 - 1,399,600 - - - 1,400,000
Shares issued upon exercise
of options and warrants 699,800 700 - 601,880 - - (17,080) 585,500
Purchase of treasury stock - - (54,870) - - - - (54,870)
Issuance of warrants in
connection with convertible notes - - - 995,246 - - - 995,246
Warrants issued as compensation - - - 1,937,184 - - - 1,937,184
Net loss - - - - (11,186,742) - - (11,186,742)
---------- ----------- ------- ----------- ----------- -------- ------- ----------
Balance at October 31, 2000 9,895,090 $ 9,895 $(54,870) $ 33,838,158 $(33,262,907) $ (5,416) $(17,080) $ 507,780
===================================================================================================================================
Shares issued upon exercise
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
Net loss - - - - (2,684,306) - - (2,684,306)
Foreign currency translation
adjustment - - - - - (83,132) - (83,132)
---------- ----------- ------- ----------- ----------- -------- ------- ----------
Total Comprehensive Income - - - - (2,684,306) (83,132) - (2,767,438)
------------------------------------------------------------------------------------------------
Balance at October 31, 2001 12,119,090 $ 12,119 $(54,870) $ 38,174,587 $(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
Net loss - - - - (4,684,180) - - (4,684,180)
Foreign currency translation
adjustment - - - - - (107,509) - (107,509)
---------- ----------- ------- ----------- ----------- -------- ------- ----------
Total Comprehensive Income - - - - (4,684,180) (107,509) - (4,791,689)
------------------------------------------------------------------------------------------------
Balance at October 31, 2002 15,074,916 $ 15,075 $(54,870) $ 38,894,064 $(40,631,392) $(196,057) $ (1,901) $(1,975,081)
===================================================================================================================================
The accompanying notes are an integral part of this consolidated financial statement.
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended October 31,
---------------------------------------
2002 2001 2000
---------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,684,180) $ (2,684,306) $(11,186,742)
Adjustments to reconcile net loss to net cash
used in operating activities:
(Gain) loss from disposal of fixed assets (9,053) (13,693) 121,360
Impairment charge related to write down
of assets held for resale 320,307 - -
Stock and warrants issued for services 13,750 258,616 1,937,184
Bad debt expense 993,698 140,167 694,526
Inventory write-off - - 58,526
Non-cash interest expense 924,340 597,731 679,258
Non-cash vendor credit - (780,000) -
Impairment provision on advertising credits - - 575,542
Depreciation and amortization 2,437,305 818,324 565,188
(Increase) decrease in:
Trade accounts receivable (530,885) (1,031,471) (173,826)
Prepaid expenses and other current assets (103,597) 103,094 30,301
Inventory - - 82,491
Advertising credits - 76,349 -
Effects of changes in foreign exchange rates (107,509) (83,132) -
Other assets 28,204 136,483 (128,851)
Increase (decrease) in:
Trade accounts payable (1,106,135) 490,194 2,854,082
Accrued carrier costs 65,448 666,728 -
Accrued liabilities 582,484 217,158 (78,150)
Deferred revenue (14,508) 78,628 (187,914)
Deposits and other payables (12,078) 59,000 -
---------- ----------- -----------
Net cash used in operating activities (1,202,409) (950,130) (4,157,025)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (416,882) (60,609) (274,609)
Refund of license fee 1,424,899 - -
Cash in DTI at acquisition date - - 69,137
Payments received on note receivable - - 255,000
Cash paid for Rapid Link acquisition,
net of cash acquired - (1,495,814) -
---------- ----------- -----------
Net cash provided by (used in) investing activities 1,008,017 (1,556,423) 49,528
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party note payable 300,000 1,599,486 -
Proceeds from convertible debentures 550,000 1,000,000 1,000,000
Payments on capital leases (184,279) (106,172) (55,140)
Deferred financing fees (92,625) - -
Proceeds from exercise of stock options - 34,357 585,500
Payments on note payable - - (724,000)
Proceeds from common stock subscription - - 1,400,000
Purchase of treasury stock - - (54,870)
Repayment of advances to shareholder - - (54,000)
Cash restricted as collateral for note
and letters of credit - - 1,237,733
Subscription receivable-common stock 15,179 - -
---------- ----------- -----------
Net cash provided by financing activities 588,275 2,527,671 3,335,223
---------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 393,883 21,118 (772,274)
Cash and cash equivalents at beginning of year 94,985 73,867 846,141
---------- ----------- -----------
Cash and cash equivalents at end of year $ 488,868 $ 94,985 $ 73,867
========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
Conversion of convertible debenture and
accrued interest to common stock $ 531,825 $ - $ -
Fair value of warrants issued with debt 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 - -
Acquisition of customer base for payable 340,931 - -
Switch equipment obtained through issuance
of capital lease - - 227,772
Conversion of note payable shareholder
to note payable related party - 346,000 -
Conversion of convertible note to common stock - 1,000,000 -
Common stock issued for acquisition
of Dial Thru International - 1,031,200 -
Common stock issued for acquisition of Rapid Link - 468,000 -
Cash paid for interest - 11,174 -
The accompanying notes are an integral part of these consolidated financial statements.
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
Organization
------------
Dial Thru International Corporation and subsidiaries ("DTI" or the
"Company"), (formerly ARDIS Telecom & Technologies, Inc., "Ardis" and
formerly Canmax, Inc., "Canmax"), was incorporated on July 10, 1986 under
the Company Act of the Province of British Columbia, Canada. On August 7,
1992, the Company renounced its original province of incorporation and
elected to continue its domicile under the laws of the State of Wyoming, and
on November 30, 1994, its name was changed to Canmax Inc. On February 1,
1999, this predecessor company reincorporated under the laws of the State of
Delaware and changed its name to ARDIS Telecom & Technologies, Inc.
On November 2, 1999, the Company acquired substantially all of the business
and assets of Dial Thru International Corporation, a California corporation,
along with the rights to the name "Dial Thru International Corporation." On
January 19, 2000, the Company changed its name from ARDIS Telecom &
Technologies, Inc. to Dial Thru International Corporation ("DTI"). DTI is a
facilities-based, global Internet Protocol (IP) communications company
providing connectivity to international markets experiencing significant
demand for IP enabled services. DTI provides a variety of international
telecommunications services targeted to small and medium sized enterprises
(SME's) that include the transmission of voice and data traffic and the
provision of Web-based and other communications services. DTI utilizes Voice
over Internet Protocol ("VoIP") packetized voice technology (and other
compression techniques) to improve both cost and efficiencies of
telecommunication transmissions, and are developing a private VoIP network.
DTI utilizes state-of-the-art digital fiber optic cable, oceanic cable
transmission facilities, international satellites and the Internet to
transport our communications.
Nature of Business
------------------
During 1998 and 1999, the Company's operations included mainly sales and
distribution of prepaid domestic and international calling cards to
wholesale and retail customers. 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-orignation 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.
To further enhance its product offerings and accelerate its growth plans, in
October 2001, the Company acquired certain assets and liabilities of Rapid
Link, Incorporated, ("Rapid Link") a leading provider of high quality
integrated data and voice communications services to both wholesale and
retail customers around the world. Rapid Link's global VoIP network reaches
thousands of retail customers, primarily in Europe and Asia. The acquisition
has enhanced the Company's product offerings and rapidly expand the
Company's VoIP strategy due to the engineering and operational expertise
acquired in the transaction.
In addition to helping companies achieve savings on long-distance voice and
fax calls by routing calls over the Internet or the Company's private
network, the Company also offers new opportunities for existing Internet
Service Providers ("ISPs") who want to expand into voice services, private
corporate networks seeking to lower long-distance costs, and Web-enabled
corporate call centers engaged in electronic commerce.
Financial Condition
-------------------
The Company is subject to various risks in connection with the operation of
its business including, among other things, (i) changes in external
competitive market factors, (ii) inability to satisfy anticipated working
capital or other cash requirements, (iii) changes in the availability of
transmission facilities, (iv) changes in the Company's business strategy or
an inability to execute is strategy due to unanticipated changes in the
market, (v) various competitive factors that may prevent the Company from
competing successfully in the marketplace, and (vi) the Company's lack of
liquidity and its ability to raise additional capital. The Company has an
accumulated deficit of approximately $40.6 million as of October 31, 2002,
as well as a working capital deficit of approximately $9.7 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. Since the beginning of April 2001, the Company has raised $4.7
million in debt financing.
2) the Company has negotiated payment terms of approximately $400,000 of
its past due trade payables with one of its largest vendors, and the
Company has agreed to remit equal monthly installments in excess of its
normal monthly usage billing. The Company has also settled a dispute
with a vendor and thereby reduced its accounts payable by approximately
$700,000, which is reflected in the October 31, 2002 balance sheet.
3) during fiscal year 2002, the Company's German subsidiary received a net
$1 million refund for a license fee previously paid, which was used to
pay down past due liabilities.
Although the Company has been able to arrange debt facilities and equity
financing to date, there can be no assurance that sufficient debt or equity
financing will continue to be available in the future or that it will be
available on terms acceptable to the Company. Failure to obtain sufficient
capital could materially affect the Company's operations and expansion
strategies. As a result of the aforementioned factors and related
uncertainties, there is substantial doubt about the Company's ability to
continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, RDST, Inc., a Texas
corporation, Dial Thru.com, Inc., a Delaware corporation, and DTI Com Inc.,
a California corporation, Dial Thru International Argentina S.A., Dial Thru
International Venezuela, C.A., Dial Thru International Corporation, South
Africa, and Rapid Link GmbH, a Germany company. All significant intercompany
accounts and transactions have been eliminated.
Revenue Recognition
-------------------
The following describes the Company's revenue recognition policies:
Revenues generated by international re-origination, dial thru services and
international wholesale termination are based on minutes of customer usage.
The Company records payments received in advance as deferred revenue until
such services are provided. This policy applies to all international re-
origination and dial thru services revenues, and is 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.
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
------------------------------------
Goodwill and other intangible assets, net of accumulated amortization, as of
October 31, 2002 and 2001 consisted of the following:
2002 2001
----------- -----------
Goodwill $ 2,072,675 $ 2,072,675
Licenses and other 494,669 980,537
----------- -----------
2,567,344 3,053,212
Less accumulated amortization (439,814) (291,202)
----------- -----------
$ 2,127,530 $ 2,762,010
=========== ===========
Excess of cost over fair value of net assets of company acquired
("Goodwill") represents the excess of purchase price over the fair market
value of identifiable net assets at the date of acquisition. This amount was
amortized on a straight-line basis over ten years through fiscal year 2001.
In accordance with SFAS No. 142, goodwill is no longer amortized but instead
will be assessed for impairment at least annually. Accumulated amortization
of excess of cost over fair value of net assets of company acquired was
$275,758 at October 31, 2002 and 2001. Had the Company not amortized
goodwill for the years ended October 31, 2001 and 2000, net loss would have
been $2,512,789 and $11,082,594, respectively, and loss per share would have
been $0.23 and $1.30, respectively.
The Company's German subsidiary, acquired from Rapid Link in October 2001,
obtained a license from the German authorities in February 2000. This
license gives the Company the right to provide and run a telecommunication
network in Germany. The license was recorded at its fair market value of
$933,864 as of the acquisition date, October 1, 2001. The right to use the
license is unlimited, and the right does not expire. In November 2001, the
Company received a refund for the full amount of the original license fee of
$1.5 million. The Company anticipates that approximately $500,000 will be
returned to the German authorities as a revised license fee and is accrued
at October 31, 2002.
Valuation of Long-Lived Assets
------------------------------
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If a condition or event
occurs which is considered to impair the recoverability of assets the
carrying amount of the asset is compared to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or estimated fair value less costs to sell.
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 and warrants, and convertible debentures (using the treasury
stock method) to the extent they are dilutive.
The shares issuable upon the exercise of stock options, 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, 2002, there are 15,748,927
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 annually for differences between the financial
statements and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense or
benefit is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
Estimates and Assumptions
-------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that effect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Fair Market Value of Financial Instruments
------------------------------------------
The carrying amount for current assets and liabilities, and long-term debt
is not materially different than fair market value because of the short
maturity of the instruments and/or their respective interest rate amounts.
Stock-Based Compensation
------------------------
The Company accounts for its stock-based compensation in accordance with
provisions of the Accounting Principles Board's Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees."
As such, compensation expense is recorded on the date of grant for equity
issued to employees only if the current market price of the underlying stock
exceeds the exercise price. In accordance with Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", entities are allowed to continue to apply the provisions of
APB 25 and provide pro forma net income (loss) and pro forma earnings (loss)
per share disclosures for employee stock option grants as if the fair-value-
based method defined in SFAS 123 had been applied. The Company has elected
to continue to apply the provisions of APB 25 and provide the pro forma
disclosure provisions of SFAS 123.
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), sets forth
rules for the reporting and display of comprehensive income (net income plus
all other changes in net assets from non owner sources) and its components
in the financial statements. At October 31, 2002, 2001 and 2000 the major
component of other comprehensive income consisted of an unrealized loss from
currency translation, which is stated as a component of shareholders'
(deficit) equity.
Foreign Currency Translation and Foreign Currency Transaction
-------------------------------------------------------------
The assets and liabilities of subsidiaries domiciled outside the United
States are translated at rates of exchange existing at the balance sheet
date. Revenues and expenses are translated at average rates of exchange
prevailing during the year. The resulting translation adjustments are
recorded as a separate component of shareholders' equity. Foreign currency
translations resulting in gains and losses are recorded in the Statement of
Operations.
Reclassifications
-----------------
Certain reclassifications were made to the 2001 and 2000 consolidated
financial statements to conform to the current year presentation.
NOTE 3 - ACQUISITIONS
Rapid Link, Inc. Acquisition
----------------------------
On October 12, 2001, DTI completed the acquisition of certain assets and
liabilities of Rapid Link, USA, Inc. ("Rapid Link USA") and 100% of the
common stock of Rapid Link Telecommunications, GmbH, ("Rapid Link Germany")
a German Company, from Rapid Link. 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 - 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 is to advertise products and services
domestically. As the Company's focus to date has been on foreign traffic,
the Company has not utilized any of the media credits. The Company is
currently developing domestic products and services and management intends
to utilize the media credits to advertise these new services. There is no
contractual expiration date for these trade credits and there are no
limitations relating to the use of these credits.
NOTE 5 - SETTLEMENT OF LEGAL/CARRIER DISPUTES
During the quarter ended January 31, 2001, the Company settled a pending
lawsuit with Star Telecommunications, Inc. In conjunction with the
settlement the Company received a carrier usage credit in the amount of
$780,000 for previous services and future services comprised of one year of
no charge domestic carrier services for transporting traffic between Los
Angeles, New York and Miami. The $780,000 credit for past services is
recorded as OTHER INCOME RELATED TO SETTLEMENT OF DISPUTES in the
accompanying statement of operations for the year ended October 31, 2001.
The Company also received 1,100,000 shares of common stock of Star
Telecommunications 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 6 - CONVERTIBLE DEBT
Convertible Debenture with Global Capital Funding Group L.P.
------------------------------------------------------------
On April 11, 2001, the Company executed a 6% convertible debenture (the
"Debenture") with Global Capital Funding Group L.P, which provided financing
of $1,000,000. The Debenture maturity date is April 11, 2003. The
Debenture is secured by 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) 80% of the average of the five 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. During the fourth quarter of 2001, the Formula Conversion
Price was adjusted downward to 70% in accordance with the terms of the
Debenture as the Company's registration statement was not declared effective
by the Securities and Exchange Commission on the date required by the
Debenture. The Company has calculated the beneficial conversion feature
embedded in the Debenture in accordance with EITF No. 00-27 and recorded
approximately $497,000 as debt discount. This debt discount is being
amortized over the two-year life of the Debenture. For the years ended
October 31, 2002 and 2001, the Company recorded approximately $276,000 and
$106,000, respectively, as interest expense. The Company also issued to the
holder of the debenture warrants to acquire an aggregate of 100,000 shares
of common stock at an exercise price of $0.89 per share, which expire on
April 11, 2006. The Company recorded debt discount of approximately $80,000
relating to the issuance of the warrants. This amount represents the
relative fair value of the warrants in accordance with EITF No. 00-27, and
the Company is amortizing the debt discount over the two year life of the
Debenture. For the years ended October 31, 2002 and 2001, the Company has
recorded interest expense of approximately $39,000 and $25,000,
respectively, relating to the warrants. During the year ended October 31,
2002, Global Capital Funding Group L.P. converted $506,125 of debt into
approximately 2,856,000 shares of the Company's stock.
Convertible Debenture with GCA Strategic Investment Fund Limited
----------------------------------------------------------------
On January 28, 2002, the Company executed a 6% convertible debenture (the
"Second Debenture") with GCA Strategic Investment Fund Limited, which
provided financing of $550,000. The Second Debenture maturity date is
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 as financing fees, which are
being amortized over the one-year life of the Second Debenture using the
Interest Method. For the year ended October 31, 2002, the Company recorded
interest expense of approximately $70,000 relating to these financing fees.
The Company has calculated the beneficial conversion feature embedded in the
Second Debenture in accordance with EITF No. 00-27 and recorded
approximately $114,000 as debt discount. This debt discount is being
amortized over the one-year life of the Second Debenture. For the year
ended October 31, 2002, the Company recorded approximately $86,000 as
interest expense. 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 $0.40 per share, which expire on January 28, 2007. The
Company recorded debt discount of approximately $17,000 related to the
issuance of the warrants. This amount represents the relative fair value of
the warrants in accordance with EITF No. 00-27, and the Company is
amortizing the debt discount over the one-year life of the Second Debenture.
For the year ended October 31, 2002, the Company has recorded interest
expense of approximately $13,000 relating to the warrants.
NOTE 7 - NOTES PAYABLE - RELATED PARTY
In October 2001, the Company executed 10% convertible notes (the "Notes")
with three executives of the Company, which provided financing of
$1,945,958. The maturity date of each note is October 24, 2003. The Notes
are secured by all Company assets. Each Note is convertible into the
Company's common stock at the option of the holder at anytime. 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 No. 00-27 and recorded debt discount of
approximately $171,000 which will be amortized over two years. The Company
also issued to the holders of the 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. 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 initial maturity of the Notes of two
years. For the two years ended October 31, 2002 and 2001, the Company has
recorded approximately $410,000 and $9,000, respectively, of interest
expense. 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 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, 2002, the
Company has recorded approximately $10,000 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
during the year ended October 31, 2002.
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at October 31:
2002 2001
----------- -----------
Telephone switch equipment $ 4,609,703 $ 4,415,093
Leasehold improvements 334,661 262,085
Furniture and fixtures 274,918 229,554
Computer and office equipment 822,960 785,156
Computer software 1,011,772 849,619
----------- -----------
7,054,014 6,541,507
Less: accumulated depreciation and amortization (3,850,351) (1,406,480
----------- -----------
$ 3,203,663 $ 5,135,027
=========== ===========
At October 31, 2002 and 2001, the gross amount of capital lease assets and
related accumulated amortization recorded under capital leases were as
follows:
2002 2001
----------- -----------
Telephone switch equipment $ 833,981 $ 792,502
Office equipment 12,580 11,494
----------- -----------
846,561 803,996
Less: accumulated amortization (344,230) (110,619)
----------- -----------
$ 502,331 $ 693,377
=========== ===========
Amortization of assets held under capital leases is included with
depreciation expense. Depreciation and amortization expense totaled
$2,437,305, $818,324 and $565,188 in 2002, 2001, and 2000, respectively.
NOTE 9 - PROPERTY AND EQUIPMENT HELD FOR SALE
Property and equipment held for sale represents internally constructed
equipment for the prepaid telecommunications industry. On October 31, 2000,
the Company entered into an Asset Purchase Agreement to sell this technology
for $1 million, however the sale was not consummated. The Company will
continue to search for a buyer for the asset, and is current utilizing the
assets as collateral against its $1 million convertible debenture. As the
potential sale of this equipment is currently uncertain, this equipment was
written-off during the year ended October 31, 2002.
NOTE 10 - STOCK OPTIONS AND WARRANTS
Warrant Issuances to Employees
Employee warrant activity for the three years ended October 31, 2002 was as
follows:
Weighted
Number Warrant Average
of Price Exercise
Shares Per Share Price
--------- ----------- --------
Warrants outstanding at
October 31, 1999 1,025,000 $0.46 - 0.80 $ 0.54
Warrants granted 820,000 0.81 - 1.44 1.36
Warrants exercised (125,000) 0.53 0.53
Warrants canceled (810,000) 0.46 - 1.44 0.76
--------- ----------- --------
Warrants outstanding at
October 31, 2000 910,000 0.53 - 1.44 1.09
Warrants granted 1,945,958 0.78 0.78
Warrants exercised - - -
Warrants canceled (100,000) 0.53 0.53
--------- ----------- --------
Warrants outstanding at
October 31, 2001 2,755,958 0.53 - 1.44 0.89
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 - 2.25 $ 0.83
========= =========== ========
On December 1, 1999 the Company issued warrants to several employees of the
Company to acquire 100,000 shares of common stock at an exercise price of
$0.81 per share. The warrants vest within one to two years from the date of
grant. On December 22, 1999 the Company issued warrants to several employees
of the Company to acquire 720,000 shares of common stock at an exercise
price of $1.44 per share. The warrants vest over three years from the date
of grant. The exercise price was in excess of the trading price at the grant
date, and accordingly no expense pursuant to APB No. 25 was recorded by the
Company for these issuances. The fair value of these warrants has been
calculated pursuant to SFAS 123 "Accounting for Stock Based Compensation".
The fair value of the warrants using the Black-Scholes pricing model was
$1,094,322 with the following assumptions: applicable risk-free interest
rates based on the current treasury-bill interest rate at the grant date of
6.0%; dividend yields of 0%; volatility factors of the expected market price
of the Company's common stock of 2.13; and an expected life of the warrants
ranging from 2 - 3 years.
In October 2001, the Company issued, in connection with a convertible
note agreement, warrants to acquire an aggregate of 1,945,958 shares of
common stock at an exercise price of $0.78 per share, which expire on
October 24, 2006. Deferred financing fees of approximately $657,000 were
recorded during the fourth quarter of fiscal 2001. In accordance with EITF
00-27, the Company determined the deferred financing fee by calculating the
relative fair value of the warrants issued using the following assumptions:
applicable risk- free interest rate based on the current treasury-bill
interest rate at the grant date of 5%; dividend yields of 0%; volatility
factors of the expected market price of the Company's common stock of 1.36;
and an expected life of the warrants of two years.
In January and July 2002, the Company issued, in connection with the
convertible note agreement noted above, warrants to acquire an aggregate of
402,433 shares of common stock at an exercise price of $0.75 per share,
respectively, which expire on October 24, 2006. Deferred financing fees of
approximately $46,000 were recorded in connection with the warrants. In
accordance with EITF 00-27, the Company determined the deferred financing
fee by calculating the relative fair value of the warrants issued using the
following assumptions: applicable risk-free interest rate based on the
current treasury-bill interest rate at the grant date of 5%; dividend yields
of 0%; volatility factors of the expected market price of the Company's
common stock of $1.36 and $1.57; and an expected life of the warrants of two
years.
The warrants issued to employees that were exercisable at the years ended
October 31, 2002, 2001 and 2000 were 1,701,000, 287,000, and 350,000,
respectively.
Warrant Issuances to Non-Employees
----------------------------------
Non-Employee warrant activity for the three years ended October 31, 2002 was
as follows:
Weighted
Number Warrant Average
of Price Exercise
Shares Per Share Price
--------- ----------- --------
Warrants outstanding at
October 31, 1999 195,000 $0.29 - 2.00 $ 0.93
Warrants granted 660,000 0.46 - 3.50 1.53
Warrants exercised (31,200) 0.46 - 0.81 0.61
Warrants canceled (75,000) 0.53 - 0.88 0.76
--------- ----------- --------
Warrants outstanding at
October 31, 2000 748,800 0.29 - 3.50 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
========= =========== ========
On March 1, 2000 the Company issued warrants to several employees who later
became distributors of the Company's prepaid calling card business, to
acquire 400,000 shares of common stock at an exercise price ranging between
$0.46 and $0.88 per share. Fifty percent of these warrants vested
immediately, while the remaining fifty percent vest upon the distributors
achieving consolidated revenues of in excess of $10 million for a period of
three consecutive calendar months on or before February 28, 2002. In
connection with the change in status and related changes in the vesting
schedule, during the fiscal year ended October 31, 2000, the Company
recorded a charge of $1,937,184 for the vested portion of the 400,000
warrants. This charge is included in sales and marketing expense in the
accompanying statements of operations. As of October 31, 2001, the
distributors have failed to generate any revenue toward their performance
goals and are no longer selling the Company's products and services.
During fiscal 2000, several distributors exercised 21,200 warrants at an
exercise price ranging between $0.46 and $0.88 per share. Also during the
year a consultant of the Company exercised 10,000 warrants with an exercise
price of $0.81.
All warrants issued to non-employees during the year ended October 31, 2000
were recorded at fair value using the Black-Scholes pricing model, with the
following assumptions: applicable risk free interest rates based on the
current treasury bill interest rate at the grant date of 6.0%; dividend
yields of 0%; volatility factors of the expected market price of the
Company's common stock of 213%; and an expected life of the warrants ranging
from 1 - 3 years. The total fair value of these warrants at the date of
issuance was approximately $878,000, which is being charged to operations
over the initial maturity of the related debt.
During December 2000, the Company issued 300,000 warrants to Founders Equity
Group, Inc. at an exercise price of $3.50, in connection with Investment
Banking services. The warrants were fully vested at the time of issuance. At
the time of issuance, the Company's common stock price was $1.3125. The fair
value of the warrants was calculated at $157,366. The fair value was
determined using the Black-Scholes pricing model and was expensed as non-
cash sales and marketing expense for issuance of warrants during the year
ended October 31, 2001, with the following assumptions: applicable risk free
interest rates based on the current treasury bill interest rate at the grant
date of 5.0%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 79%; and an expected life of
the warrants of four years.
The warrants issued to non-employees that were exercisable at October 31,
2002, 2001 and 2000 were 888,000, 1,103,000, and 70,000, 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,
2002 was as follows:
Weighted
Number Option Average
of Price Exercise
Shares Per Share Price
--------- ----------- --------
Options outstanding at
October 31, 1999 1,063,300 $0.30 - 2.50 $ 0.70
Options granted 50,000 0.46 - 1.44 1.44
Options exercised (543,600) 0.30 - 2.25 0.95
Options canceled (105,600) 0.40 - 2.50 1.14
--------- ----------- --------
Options outstanding at
October 31, 2000 464,100 0.30 - 2.25 0.67
Options granted 1,930,000 0.42 - 1.50 0.55
Options exercised (33,500) 0.30 - 1.41 0.40
Options canceled (178,100) 0.40 - 2.50 1.10
--------- ----------- --------
Options outstanding at
October 31, 2001 2,182,500 0.30 - 2.25 0.53
Options granted 195,000 0.21 - 0.70 0.27
Options exercised (175,000) 0.40 0.40
Options canceled (593,000) 0.30 - 1.88 0.77
--------- ----------- --------
Options outstanding at
October 31, 2002 1,609,500 $0.09 - 1.50 $ 0.44
========= =========== ========
The following table summarizes information about warrants and stock options
outstanding at October 31, 2002:
Weighted
Weighted Average
Range of Options/ Average Exercise Price Of Options/ Prices of
Exercise Warrants Remaining Options/Warrants Warrants Options/Warrants
Prices Outstanding Life Outstanding Exercisable Exercisable
------------ --------- ---- ---- --------- ----
$0 - $0.9 4,335,891 3.85 0.60 1,947,738 0.59
$1.00 - $1.9 424,500 0.19 1.44 381,500 1.44
$2.00 - $2.9 300,000 4.68 2.21 300,000 2.21
$3.00 - $3.9 450,000 2.46 3.33 450,000 3.33
--------- ---- ---- --------- ----
5,510,391 3.50 0.97 3,079,238 1.26
========= ==== ==== ========= ====
Statements of Financial Accounting Standards No. 123
The Company accounts for its stock-based compensation plans in accordance
with APB No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123
encourages but does not require the use of a fair value-based method of
accounting for stock-based compensation plans under which the fair value of
stock option is determined on the date of grant and expensed over the
vesting period of the stock options. While the Company has elected to
continue to apply the provisions of APB No. 25 under which no compensation
cost has been recognized by the Company, SFAS No. 123 requires pro forma
disclosure of net loss and loss per share as if the fair value-based method
under SFAS No. 123 has been adopted. The value of all options for shares of
the Company's common stock to employees of the Company has been determined
under the market value method using Black-Scholes valuation principles and
the following assumptions:
2002 2001 1999
---------------------------------------------------------------------------
Risk-free interest rate 4% 5% 6%
Expected dividend yield 0% 0% 0%
Expected lives 5 years 4 years 1-3 years
Expected volatility 99% - 157% 133% - 159% 213%
The total value of options and warrants granted to employees during the
years ended October 31, 2002, 2001 and 2000 was computed as $40,011,
$900,677 and $1,119,895, respectively. If the Company had accounted for
these plans in accordance with SFAS No. 123, the Company's net loss for the
year ended October 31, 2002, 2001 and 2000 would have increased as follows:
2002 2001 2000
---------- ----------- -----------
Net Income (loss):
As reported $(4,684,180) $ (2,684,306) $(11,186,742)
Pro forma $(5,027,880) $ (2,950,373) $(11,425,397)
Net loss per share
As reported:
Basic and diluted $ (0.34) $ (0.25) $ (1.31)
Pro forma
Basic and diluted $ (0.36) $ (0.27) $ (1.34)
NOTE 11 - INCOME TAXES
The temporary differences that give rise to the deferred tax assets or
liabilities at October 31, 2002 and 2001 are as follows:
2002 2001
---------- ----------
Deferred tax assets
Net operating loss carryovers $13,529,415 $10,789,919
Accounts receivable 172,173 100,075
Advertising credits 190,134 190,134
Property and equipment 132,799 -
Accrued liabilities 36,627 228,714
---------- ----------
Total gross deferred tax assets 14,061,148 11,308,842
Deferred tax liabilities
Property and equipment - (34,314)
---------- ----------
Total gross deferred tax liabilities - (34,314)
---------- ----------
14,061,148 11,274,528
Valuation allowance (14,061,148) (11,274,528)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
The increase in the valuation allowance for the years ended October 31,
2002 and 2001 of $2.8 million and $1 million, respectively, was related
primarily to a change in U.S. operating loss carryforwards.
At October 31, 2002, the Company has U.S. net operating loss carryforwards
for federal income tax purposes of approximately $40 million, which expire
in 2006 through 2022. 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 12 - 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 for operating
leases was $555,598, $228,882 and $290,175 for the years ended October 31,
2002, 2001 and 2000, respectively.
Future minimum lease payments under noncancelable operating leases and
capital leases as of October 31, 2002 are as follows:
Capital Operating
Leases Leases
---------- -----------
Year ending October 31,
2003 $ 405,090 $ 507,615
2004 61,185 409,427
2005 14,130 198,294
2006 - 171,742
2007 - 57,676
---------- -----------
Total minimum lease payments 480,405 $ 1,344,754
===========
Less amount representing interest (18,590)
----------
Present value of net minimum
capital lease payment 461,815
Less current installments of
obligations under capital lease (389,450)
----------
Obligations under capital leases,
excluding current installments $ 72,365
==========
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 call-back" technology. This technology drives the
Company's Re-Origination Services and allows its foreign based customers to
initiate international telephone calls by first calling a switch in the
United States, which then initiates a "call back" to the customer sight
providing the customer with an open phone line to place a call anywhere in
the world. The injunctive relief that Cygnus sought in this suit has been
denied, but Cygnus continues to seek compensatory and punitive damages as
well as attorneys' fees and costs.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent the Company from providing "call back" services. The Company filed
a cross motion for summary judgment of non-infringement. Both motions were
denied. The Company plans to refile the motion for summary judgment for
non-infringement. The Company's ultimate legal and financial liability with
respect to such legal proceeding cannot be estimated with any certainty at
this time. The Company intends to continue defending this case vigorously.
On June 3, 2002, RSL Com USA, Inc. ("RSL") filed a breach of contract suit
(case no. BC275210) in the Superior Court of the State of California, County
of Los Angeles, alleging that the Company owes RSL past due sums for
services rendered in connection with a written Carrier Services Agreement.
The Company has answered denying RSL's claims and, in November 2002, the
Company filed a cross-complaint against RSL. The Company does not believe
that RSL's claims are legitimate and intends to defend this case vigorously.
At the same time, the Company is not presently in a position to estimate its
ultimate legal and financial liability with respect to this matter.
NOTE 13 - BENEFIT PLAN
Effective January 1, 1994, the Company implemented a 401(k) Profit Sharing
Plan for all employees of the Company. The Plan provides for voluntary
contributions by employees into the Plan subject to the limitations imposed
by the Internal Revenue Code Section 401(k). The Company may match employee
contributions to a discretionary percentage of the employee's contribution.
The Company's matching funds are determined at the discretion of the Board
of Directors and are subject to a seven-year vesting schedule from the date
of original employment. The Company made matching contributions of $0, $0
and $10,566 for the years ended October 31, 2002, 2001 and 2000,
respectively.
NOTE 14 - BUSINESS AND CREDIT CONCENTRATIONS
During the year ended October 31, 2002, the Company provided wholesale
services to a customer who accounted for approximately 10% of revenues, and
during the year ended October 31, 2001, the Company provided wholesale
services to a customer who accounted for approximately 11% of revenues.
Management provides an allowance for doubtful accounts which reflects its
estimate of the Company's uncollectible receivables. In the event of non-
performance, the maximum exposure to the Company is the recorded amount of
the receivable at the balance sheet date. The Company's receivables
are generally not secured.
NOTE 15 - SEGMENT INFORMATION
Prior to fiscal 2001 the Company was organized by line of business. The two
major line of business operating segments were prepaid phone cards and dial
thru services.
The accounting policies of the line of business operating segments are the
same as those described in the summary of significant accounting policies.
Revenue represents revenue from external customers. Substantially all
revenues are from customers within the United States. All assets of the
Company are also located in the United States.
During the year ended October 31, 2000, the Company had two major lines of
business, its Dial Thru services and prepaid phone card business. During
the years ended October 31, 2002 and 2001, the Company operated its Dial
Thru business exclusively.
A summary of the segment financial information as of and for the year ended
October 31, 2000 reported to the chief operating decision maker is as
follows:
During the Year Ended Prepaid Dial Thru
October 31, 2000 Phone Cards Services Total
----------------------------- ---------- ---------- ----------
Revenue $ 2,755,057 $ 5,836,392 $ 8,591,449
Direct cost of revenues 4,220,570 5,750,839 9,971,409
Net loss (7,824,754) (2,819,629) (10,644,383)
Total assets 1,506,644 4,595,505 6,102,149
Depreciation and amortization 242,788 322,400 565,188
Capital expenditures 243,513 258,868 502,381
Information regarding the Company's domestic and foreign revenues is as
follows:
All other
foreign
Africa Germany countries Domestic Total
--------- --------- --------- ---------- ----------
Fiscal 2000 $1,891,191 $ 418,347 $3,526,854 $ 2,755,057 $ 8,591,449
Fiscal 2001 2,953,817 455,643 2,020,721 1,571,681 7,001,862
Fiscal 2002 1,392,384 6,037,612 1,184,239 16,256,697 24,870,932
No individual foreign country, except as noted above represented more than
10 percent of revenue. No individual foreign country represented more than
10 percent of long lived assets for any period presented.
NOTE 16 - QUARTER-BY-QUARTER COMPARISION
Summarized unaudited quarterly financial data for the years ended October
31, 2002, 2001 and 2000 are as follows:
2002 First Second Third Fourth
Quarters: ---------- ---------- ---------- ----------
Revenues, net $ 6,586,754 $ 6,086,154 $ 6,138,790 $ 6,059,234
Operating loss (1,002,479) (922,941) (727,007) (734,107)
Net loss (1,285,893) (1,239,814) (1,082,615) (1,075,858)
Net loss per share-basic (0.10) (0.09) (0.08) (0.07)
Net loss per share-diluted (0.10) (0.09) (0.08) (0.07)
2001
Quarters:
Revenues, net 890,620 903,639 1,654,079 3,553,524
Operating loss (991,223) (682,600) (497,762) (1,159,563)
Net (loss) income 382,191 (1,193,171) (594,871) (1,278,455)
Net (loss) income per share-basic 0.03 (0.11) (0.05) (0.12)
Net (loss) income per share-diluted 0.03 (0.11) (0.05) (0.12)
2000
Quarters:
Revenues, net 3,806,767 2,823,704 952,667 1,008,311
Operating loss (2,120,381) (4,402,381) (848,626) (3,150,676)
Net loss (2,083,370) (4,659,540) (965,071) (3,478,761)
Net loss per share-basic (0.26) (0.55) (0.11) (0.39)
Net loss per share-diluted (0.26) (0.55) (0.11) (0.39)
NOTE 17 - CAPITAL STOCK
During the year ended October 31, 2002, a holder of one of the Company's
Debentures converted $506,125 of debt into approximately 2,856,000 shares
of the Company's stock. (See Note 6).
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.
In September 2000, the Company issued 914,285 shares of the Company's
common stock in exchange for $3.2 million face value of advertising
credits. (See Note 4).
In August 2000, the Company received $1 million from an accredited investor
in connection with a $2 million private equity placement of 571,428 shares
of common stock, par value $.001 per share. The Company issued 285,714 of
common shares in connection with this private placement for the $1 million
in cash received. In September 2000, the Company received $400,000 and
issued an additional 114,286 common shares in connection with the $2
million private equity placement.
In November 1999, the Company consummated the acquisition of substantially
all of the assets and business of Dial Thru International Corporation (the
"Seller"), a California corporation. The Company issued to the Seller an
aggregate of 1,000,000 shares of common stock, recorded a total purchase
price of $937,500 using the Company's common stock price at the time the
acquisition was announced, and agreed to issue an additional 1,000,000
shares of its common stock upon the acquired business achieving specified
revenue and earnings goals.
During the years ended October 31, 2002, 2001 and 2000, options and
warrants to purchase 175,000, 134,000 and 699,800, respectively, shares of
common stock were exercised.
NOTE 18 - SUBSEQUENT EVENTS
In November 2002, the Company executed a 12% note payable with Global
Capital Funding Group, L.P. which provided additional financing of
$1,250,000. The note's maturity date is November 2004. In conjunction with
the issuance of the note, the outstanding balance of $443,000 on the
Debenture (see Note 6) was paid in full.
In January 2002, the Company amended the maturity date of the Second
Debenture (see Note 6) from January 28, 2003 to February 24, 2004. In
addition, the Company 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 $0.24 which
expire on January 28, 2008.
In January 2002, the Company amended the maturity date of the Notes (see
Note 7) from October 24, 2003 to February 24, 2004.
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 18, 2002, we have also audited Schedule II for the
year ended October 31, 2002. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
/s/ KING GRIFFIN & ADAMSON P.C.
-------------------------------
King Griffin & Adamson P.C.
Dallas, Texas
December 18, 2002
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
-----------------------
Atlanta, Georgia
January 9, 2002
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 1, 2000, we have also audited Schedule II for the
year ended October 31, 2000. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
/s/ KING GRIFFIN & ADAMSON P.C.
-------------------------------
King Griffin & Adamson P.C.
Dallas, Texas
December 1, 2000
DIAL THRU INTERNATIONAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended October 31, 2002, 2001 and 2000
Balance at Balance at
the beg the end
of period Additions Deductions of period
---------- ---------- ----------- ----------
2002
----
Allowance for doubtful
accounts $ 228,729 $1,085,043 $ 765,305 (1) $ 548,467
========= ========= ======== =========
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
========= ========= ======== =========
2000
----
Allowance for doubtful
accounts $ 231,675 $ 983,760 $ 189,669 (1) $1,025,766
========= ========= ======== =========
Impairment provision for
advertising credits $ - $ 575,542 $ - $ 575,542
========= ========= ======== =========
(1) Write offs.
EXHIBIT INDEX
NO. DESCRIPTION OF EXHIBIT
21.1 Subsidiaries of the Registrant
23.1 Information Regarding Consent of Arthur Andersen LLP
23.2 Consent of King Griffin & Adamson P.C.
99.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350
99.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350