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, 2004
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 for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X]
The aggregate market value of shares of common stock held by non-affiliates
of the registrant as of April 30, 2004 was approximately $2,450,375 based on
the average bid and ask price of a share of common stock as quoted on the
OTC Bulletin Board of $0.17.
As of January 24, 2005, 23,034,151 shares of common stock of the registrant
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
None.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this "Report") includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking
statements are statements other than historical information or statements of
current condition. Some forward-looking statements may be identified by the
use of such terms as "expects", "will", "anticipates", "estimates",
"believes", "plans" and words of similar meaning. These forward-looking
statements relate to business plans, programs, trends, results of future
operations, satisfaction of future cash requirements, funding of future
growth, acquisition plans and other matters. In light of the risks and
uncertainties inherent in all such projected matters, the inclusion of
forward-looking statements in this Form 10-K should not be regarded as a
representation by us or any other person that our objectives or plans will
be achieved or that our operating expectations will be realized. Revenues
and results of operations are difficult to forecast and could differ
materially from those projected in forward-looking statements contained
herein, including without limitation statements regarding our belief of the
sufficiency of capital resources and our ability to compete in the
telecommunications industry. Actual results could differ from those
projected in any forward-looking statements for, among others, the following
reasons: (a) increased competition from existing and new competitors using
voice over Internet protocol ("VoIP") to provide telecommunications services
over the Internet, (b) the relatively low barriers to entry for start-up
companies using VoIP to provide telecommunications services over the
Internet, (c) the price-sensitive nature of consumer demand, (d) the
relative lack of customer loyalty to any particular provider of services
over the Internet, (e) our dependence upon favorable pricing from our
suppliers to compete in the telecommunications industry, (f) increased
consolidation in the telecommunications industry, which may result in larger
competitors being able to compete more effectively, (g) failure to attract
or retain key employees, (h) continuing changes in governmental regulations
affecting the telecommunications industry and the Internet and (i) changing
consumer demand, technological developments and industry standards that
characterize the industry. We do not undertake to update any forward-
looking statements contained herein. For a discussion of these factors and
others, please see "Risk Factors" in Item 1 of this Report. Readers are
cautioned not to place undue reliance on the forward-looking statements made
in this Report or in any document or statement referring to this Report.
PART I
Item 1. Business.
Our Company
Throughout this Annual Report, the term "we", "Dial Thru" and the "Company"
refer to Dial Thru International Corporation, a Delaware corporation
formerly known as ARDIS Telecom & Technologies, Inc., successor by merger to
Canmax Inc., and its subsidiaries. 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
substantially all of the business and assets of Dial Thru International
Corporation, a California corporation (the "DTI Acquisition"), and, on
January 19, 2000, we changed our name from ARDIS Telecom & Technologies,
Inc. to "Dial Thru International Corporation." Our common stock currently
trades on the OTC Bulletin Board under the symbol "DTIX."
From our inception until 1998 we provided retail automation software and
related services to the retail petroleum and convenience store industries.
In 1998 we decided that the rapidly expanding telecommunications market
presented an opportunity to utilize some of the technology and support
capabilities that we had developed, and we entered into the
telecommunications industry via the pre-paid long distance market. In
December 1998, we sold our retail automation software business and now
operate only in the telecommunications marketplace.
Our principal executive offices are located at 17383 Sunset Boulevard, Suite
350, Los Angeles, California 90272, our telephone number is (310) 566-1700
and our website address is www.dialthru.com.
Recent Developments
On July 24, 2003 we entered into an agreement with GCA Strategic Investment
Fund Limited that provided us with a loan of $550,000, which has been used
for the Company's ongoing working capital needs. In January 2004, as per
the terms of the agreement, this loan became a convertible debenture with a
maturity date of November 8, 2004. Currently, this debenture has matured
and is due on demand. This debenture continues to accrue interest at the
stated rate.
Development of Our Telecommunications Business
In January 1998, we acquired US Communication Services, Inc. ("USC"), a
provider of prepaid phone cards, public Internet access kiosks and pay
telephones. While the USC acquisition did not proceed as intended, leading
to our rescission of the transaction in May 1998, we decided to develop our
in-house capabilities to expand our telecommunications operations and
continued to focus on the rapidly growing prepaid phone card market. In the
second quarter of fiscal 1999, we purchased telecommunications switching
equipment and an enhanced services platform. Following a period of
development, implementation and testing, we commenced operations as a
facilities-based carrier in the fourth quarter of our 1999 fiscal year.
Calls made with our prepaid phone cards were then routed through our
switching facilities, giving us better control over costs and quality of
service.
In November 1999, we completed the DTI Acquisition and continued operations
of its facilities-based telecommunications carrier business through its
subsidiary, Dial Thru.com. During the first quarter of fiscal 2000, we
appointed John Jenkins (founder of the acquired business) to the position of
President and Chief Operating Officer of our Company. In the third quarter
of fiscal 2000, we relocated our Texas operations, including our switching
facilities, to a location in downtown Los Angeles, California. During the
fourth quarter of fiscal 2001, Mr. Jenkins was appointed by our Board of
Directors to the position of Chairman of the Board and also became our Chief
Executive Officer. At that time we announced the creation of our "Bookend
Strategy" and the roll out of our facilities-based Internet Protocol
network, whereby we sell voice over Internet protocol ("VoIP") to allow us
to compete in the international telecommunications market.
Mr. Jenkins continued the merger of operations of the two businesses and
increased our emphasis on the international wholesale and retail business
segment while reducing our focus on the prepaid domestic market. We now
operate as a facilities-based global Internet protocol ("IP") communications
company providing connectivity to international markets experiencing
significant demand for IP enabled services. We provide a variety of
international telecommunications services, including the transmission of
voice and data traffic and the provision of Web-based and other
communications services, which are targeted to small and medium sized
enterprises ("SMEs"), wholesale carriers providing international and
domestic long distance traffic and consumers. We utilize VoIP packetized
voice technology (and other compression techniques) to improve both costs
and efficiencies of telecommunication transmissions, and are developing a
private VoIP telephony network. We utilize digital fiber optic cable,
international satellites and the Internet to transport our communications.
During the fourth quarter of fiscal 2001, we acquired the assets and certain
of the liabilities of Rapid Link, Incorporated ("Rapid Link"), a provider of
integrated data and voice communications services to both wholesale and
retail customers around the world. Rapid Link's global VoIP network
reaches thousands of retail customers, primarily in Europe and Asia. This
acquisition has significantly enhanced our product lines, particularly our
Dial Thru and Re-origination services, Global Roaming products, and
wholesale termination. Furthermore, the acquisition has allowed us to roll
out services to additional international markets and more rapidly expand our
VoIP strategy due to the engineering and operational expertise acquired in
the transaction.
Our Business Strategy
Our primary business concentrates on the marketing of IP telephony services,
including voice, fax, data and other Web-based services. The term Bookend
Strategy describes our primary focus, which is to provide telecommunication
services originating in foreign countries and in the corresponding ethnic
segment domestically in the United States via the Internet to transport
various forms of communications. These services are provided primarily via
the public Internet, utilizing VoIP and other digitized voice technologies.
VoIP is voice communication that has been converted into digital packets and
is then addressed, prioritized, and transmitted over any form of broadband
network utilizing the technology that makes the Internet possible. These
technologies allow us to transmit voice communications with the same high-
density compression as networks initially designed for data transmission,
and at the same time utilize a common network for providing customers with
data and other Web-based services.
By utilizing VoIP over the public Internet, we avoid the high network cost
associated with private line connections to each international destination,
which would require us to lease a dedicated line for a set period of time at
a set rental rate and to "fill" idle network capacity with traffic in order
to offset the high fixed costs of such a private line. The primary focus of
our business is to sell a bundled solution of communication services, such
as international dial thru, re-origination and 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 beginning 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. 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.
The explosive growth of the Internet has accelerated the rapid merger of the
worlds of voice-based and data-based communications. By first digitizing
voice signals, then utilizing the same packetizing technology that makes the
Internet possible, VoIP provides for a cost effective manner in which to
perform the signal compression needed to maximize the return from the use of
the public Internet. In this way, not only has efficiency of the dedicated
circuits been improved, but use of the public Internet provides a much more
cost effective means of transmission and rapid deployment compared to
traditional private leased lines and circuits.
We currently operate our domestic telecommunications switching facilities in
Los Angeles, California and New York, New York, providing for long distance
services worldwide. Development of the private IP network and the use
of VoIP technology have improved both the cost and quality of
telecommunications services, as well as facilitating our expansion into
other Internet related opportunities.
Our Products and Services
Dial Thru and Re-origination Services
We provide a variety of international Dial Thru and Re-origination services.
These services, while still contributing a significant portion of our
revenues, will continue to decrease as a percentage of our total revenues as
we continue to develop and market new services. Generally, the Dial Thru
and Re-origination services are provided to customers that establish
deposits or prepayments with us to be used for long-distance calling. The
Dial Thru service allows customers the convenience of making local and/or
international calls in the same manner as traditional long distance dialing.
In those markets in which we cannot currently provide Dial Thru service, we
offer our Re-origination service, which allows a caller outside of the
United States to place a long distance telephone call that appears to have
originated from our switch in Los Angeles to the customer's location, and
then connects the call through our network to anywhere in the world. By
completing the calls in this manner, we are able to provide very competitive
rates to the customer. Wherever possible, we route calls over our private
network. By using VoIP to compress voice and data transmissions across the
public Internet, we are able to offer these services at costs that are
substantially less than traditional communications services.
International Wholesale Termination
Primarily as a result of our acquisition of Rapid Link, we began offering
international call completion on a wholesale basis to international
telecommunications companies. Our service enables our customers to offer
their own customers phone to phone global voice and fax services. This
service provides our customers with high quality and low cost long distance
without our customers having to deploy their own VoIP infrastructure. We
can also provide additional termination opportunities to customers that have
developed their own VoIP networks with nearly instant access to our
termination points by connecting to these customers via the Internet.
Therefore, we have the capability to offer our services to carriers
connecting to our network through traditional dedicated switch to switch
connections, and through the public Internet whereby our customers connect
to our network using their own VoIP equipment.
Global Roaming
Our Global Roaming service provides customers a single account number to use
to initiate phone-to-phone calls from locations throughout the world using
specific toll-free access numbers. This service enables customers to
receive the cost benefits associated with our telecommunications network
throughout the world. This product will begin to account for a more
significant amount of our revenue due to the acquisition of Rapid Link,
which provides this product to its retail customers around the world.
FaxThru
We offer FaxThru and "store and forward" fax services, which allow a
customer to send a fax to another party utilizing the Internet without
incurring long distance or similar charges. From the customer's
perspective, these products function exactly like traditional fax services,
but with significant savings in long distance charges.
VoIP Retail
We offer several VoIP programs to the business office, the business
professional that may have a home office and the consumer. We provide a
full array of VoIP communication services by connecting a VoIP gateway from
a single line to up to a total of 120 lines in one office. We will shortly
introduce a VoIP-based executive phone that plugs into the USB port of a lap
top or desk top computer. We call this product our "Executel" and it allows
a business executive to connect his or her computer to any hotel or other
internet connection, while he or she is traveling and provides the same
discounted calling plans and connectivity he or she receives from us at his
or her home office. In addition, telephone numbers follow the executives
wherever they go, so no matter where they travel, their customers can always
get a hold of them. In addition to our "Executel", we are introducing our
"Rapid Link" product, which is a two line router that plugs into any
internet connection in a customer's home or office. This allows the user to
have both a business line and a fax line for the same low price. All of
our products run on a centrally managed and hosted telephony solution that
supports local, long distance and international calling.
Our VoIP products use Session Initiation Protocol, or SIP, signaling, which
empowers edge devices, such as multimedia terminal adapters, to establish
and manage voice calls on all types of internet systems. Our systems
provide an end user with a local phone number for inbound calling and comes
with a full set of features and functionality, including call waiting,
caller ID, three-way conference calling, and "follow me" features.
Additional features include web-based tools allowing subscribers to manage
their telephony features online, manage their accounts, and check their
voice mail. This allows the operator to provision accounts, provide
customer support, and create a unified bill for high-speed data,
telecommunications and other services or organize their bill in any format
to accommodate cost controls for their business accounting.
While we are optimistic that our VoIP-based retail products will provide us
with meaningful growth opportunities in our current fiscal year, we have yet
to derive material revenues from any of these products. The continuing
viability of our business and operations is dependant on our ability to
exploit this retail opportunity and we can give you no assurances that we
will be successful.
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 currently underway, 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. During the year ended October 31, 2004, we provided
wholesale services to a customer who accounted for 17% of our revenues and
to another customer who accounted for 13% of our revenues. 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.
Telecommunications service companies compete for consumers based on price,
with the dominant providers conducting extensive advertising campaigns to
capture market share. As a service provider in the long distance
telecommunications industry, we compete with such dominant providers as AT&T
Corp., MCI, Sprint Corporation and Qwest Communications International, all
of which are substantially larger than us and have the resources, history
and customer bases to dominate virtually every segment of the
telecommunications market.
A substantial majority of the telecommunications traffic around the world is
carried by dominant carriers in each market. These carriers, such as
British Telecom and Deutsche Telekom, have started to deploy packet-switch
networks for voice and fax traffic. In addition, other industry leaders,
such as AT&T, MCI, Sprint and Qwest Communications International, as well as
large cable companies, have begun to offer Internet telephony services both
in the United States and internationally. These and other competitors will
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 carriers including IDT Corp.,
deltathree.com, Primus Telecommunications Group, Inc., Net2Phone Inc., 8x8
Inc., and private companies such as Vonage. Additionally, a number of non-
traditional competitors have been attracted to the market, including
internet-based service providers. We also believe that existing competitors
are likely to continue to expand their service offerings to appeal to
retailers and consumers especially in the area of VoIP.
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. iBasis, Teleglobe International
Holdings 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 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. It is likely that
these companies will migrate into the Internet telephony market as direct
competitors.
Regulation of Internet Telephony and the Internet
The use of the Internet and private IP networks to provide voice
communications services is a relatively recent market development. 2004
marked a turning point for IP voice communications, popularly called Voice
over IP ("VoIP"), as a large number of established players in the
traditional voice business, such as AT&T, Verizon, SBC Communications, and
others announced their plans for offering VoIP services. Although the
provision of such services is currently permitted by United States law and
remains largely unregulated within the United States, several foreign
governments have adopted laws and/or regulations that could restrict or
prohibit the provision of voice communications services over the Internet or
private IP networks. More aggressive regulation of the Internet in general,
and Internet telephony providers and services specifically, may materially
and adversely affect our business, financial conditions, operating results
and future prospects, particularly if increased numbers of governments
impose regulations restricting the use and sale of IP telephony services.
United States. In an April 10, 1998 Report to Congress, the Federal
Communications Commission ("FCC") declined to conclude that IP telephony
services constitute telecommunications services and instead indicated that
it would undertake a subsequent examination of the question whether certain
forms of Internet telephony are "information" or "telecommunications"
services. The FCC indicated that, in the future, it would consider the
extent to which Internet telephony providers could be considered
"telecommunications carriers" subject to the regulations governing
traditional telephone companies, such as the imposition of access charges
and Universal Service Fund ("USF") obligations.
The future is upon us and, in 2004, the FCC issued a handful of decisions
addressing the regulatory treatment of specific VoIP services. The FCC also
initiated a broad rulemaking proceeding aimed at developing policies and
rules regarding the regulatory treatment of all IP-enabled services. In
addition, the FCC made progress on several other proceedings that may impact
the costs and regulatory requirements associated with providing our
communications services, including our IP-based services. These proceedings
include universal service and intercarrier compensation reform, expansion of
the Communications Assistance for Law Enforcement Act ("CALEA") to IP
services, and a handful of pending Declaratory Ruling filings pertaining to
several issues affecting IP communications services.
On February 12, 2004, the FCC adopted an Order addressing Pulver.com's
Petition for Declaratory Ruling regarding the classification of its Free
World Dialup ("FWD"). FWD is a free, PC-to-PC VoIP service and the FCC
concluded that the service does not constitute "telecommunications" as
defined by the Telecommunications Act of 1996 ("1996 Act") and therefore
would remain an unregulated information service.
On April 21, 2004, the FCC reached a contrasting conclusion in regard to
AT&T's Petition for a Declaratory Ruling that access charges do not apply to
its phone-to-phone VoIP service in which calls originate and terminate on
circuit switched Public Switched Telephone Network ("PSTN") facilities, but
are routed on the Internet backbone. The FCC rejected AT&T's request and
ruled that the service at issue is a "telecommunications service" upon which
interstate access charges may be assessed and to which USF obligations
apply.
Because our communications services do not share the same characteristics as
either Pulver's FWD service or AT&T's phone-to-phone VoIP service, we do not
believe our company and its ability to continue providing its communications
services are directly affected by either of these decisions in a material
way.
On November 9, 2004, the FCC declared that a type of Internet telephony
service offered by Vonage Holdings Corp., called DigitalVoice, is not
subject to traditional state public utility regulation. The FCC also
concluded that other types of IP-enabled services, such as those offered by
cable companies, that have basic characteristics similar to DigitalVoice,
would also not be subject to traditional state regulation. The Vonage
decision makes it clear that the FCC, not state commissions, has the
responsibility and obligation to decide whether certain regulations apply to
IP-enabled services. The Vonage decision also makes clear that the FCC has
the power to preempt state regulations that thwart or impede federal
authority over interstate communications. Some states, including California
and Ohio, recently appealed the FCC's Vonage decision. These and other
states seek a continuing role in the regulation of IP-based communications
services.
It is too early to determine whether the FCC's Vonage decision will
benefit our company. If the Vonage decision is overturned, however, state
governments and their regulatory authorities may assert jurisdiction over
the provision of intra-state IP communications services where they believe
that their telecommunications regulations are broad enough to cover
regulation of IP services. Various state regulatory authorities have
initiated proceedings to examine the regulatory status of Internet telephony
services. While a majority of state commissions have not imposed
traditional telecommunications regulatory requirements on IP telephony at
this time, some states have issued rulings that may be interpreted
differently. If the states require these VoIP providers to register as
telecommunications providers, other VoIP providers may be targeted and
subjected to significant additional fees and charges.
Ultimately, while the FCC made progress towards clarifying the role
regulation will play in the future of advanced communications networks and
services in 2004, the key rulings, decisions, and regulations are likely to
occur in 2005 and beyond.
Of particular importance are FCC proceedings related to IP-Enabled Services,
USF reform, intercarrier compensation reform and CALEA. We cannot speculate
as to the outcome of any of these on-going proceedings and therefore cannot
predict the impact FCC decisions may have on our business.
International. The regulatory treatment of IP communications outside the
United States varies significantly from country to country. The regulations
global IP providers are subject to in many jurisdictions change from time to
time, they may be difficult to obtain or it may be difficult to obtain
accurate legal translations where official legal translations are
unavailable. Additionally, in our experience, the enforcement of these
regulations does not always track the letter of the law. Accordingly,
although we devote considerable resources to maintaining compliance with
these regulations, we cannot be certain that we are in compliance with all
of the relevant regulations at any given point in time.
While some countries prohibit IP telecommunications, others have determined
that IP services offer a viable alternative to traditional
telecommunications services. As the Internet telephony market has expanded,
regulators have begun to reconsider whether to regulate Internet telephony
services.
In July 2003, a package of European Union ("EU") Directives on
Communications became effective and significantly altered the regulatory
regime applicable to communications services in the EU. Unlike the U.S.
system of individualized licenses, the EU adopted an approach that would
permit providers to avoid registration or licensing requirements in most
circumstances if the provider simply complied with specific conditions.
This regulatory regime extends to all providers of electronic communications
networks and electronic communications services. In essence, rather than
require licensing, the EU provided a "rulebook" with which providers of
electronic communications networks and services must comply.
Under this "self-policing" system, each national regulatory authority has
the power to set the various general and specific conditions, but the types
and scope of such conditions are strictly limited by the EU Directives.
Adopting this general approach, the UK regulatory authority - the Office of
Communications ("OFCOM") - established General Conditions applicable to
providers of electronic communications networks and services. It also
published certain informal guidelines for VoIP providers in the UK. The
Informal Guidelines provided insight as to under what circumstances OFCOM
would deem that a VoIP service would be treated as a Publicly Available
Telephone Service ("PATS") and therefore subject to the additional
obligations. Under these Guidelines a company is subject to PATS
obligations:
* If the VoIP provider markets its services as a substitute for
traditional telephone service;
* If the services appear to the customer to be a substitute for telephone
service with which they would expect to access emergency services or
directory assistance; or
* The service provides the customer's sole means to access the
traditional circuit switched telephone network.
However, where a VoIP provider service is being offered as an "adjunct to a
traditional telephone service" or as a "secondary service," it is likely not
to be considered as a PATS. While the Informal Guidelines were non-binding
and subject to change at any time, they provided important insight as to
OFCOM's view of how VoIP should be treated in the UK.
In early September 2004, both the European Commission ("EC") and OFCOM
proceeded with consultations and declarations designed to clarify the
regulatory obligations applicable to VoIP providers. The EC inquiry raised
general questions concerning VoIP - similar to those being considered at the
FCC in its IP-Enabled Services NPRM. OFCOM actually reached decisions on
number portability and geographic and non-geographic number assignment
available to VoIP providers. In this regard, OFCOM decided that it would
permit the assignment of geographic telephone numbers directly to both PATS
and non-PATS VoIP providers within the UK. In addition, the regulator
authorized the allocation of numbers from a non-geographic specific area
code - (056).
While OFCOM's framework provides some exciting opportunities for VoIP
providers offering services in the UK (such as the ability to receive direct
number assignments and non-geographic area codes), the rules suggest that
further rule revisions on number portability, "999" emergency services, and
network reliability requirements will be forthcoming in 2005. In addition,
because OFCOM's rules and other member state frameworks are subject to the
outcome of the larger EU proceeding, it appears likely that providers of
VoIP in Europe must wait until 2005 before a clearer regulatory framework
emerges. Until this time, with the exception of the UK, the EU's January 5,
2001, decision to exclude VoIP from the definition of voice telephony
appears controlling except where the services satisfy all four of the
following conditions applicable to "voice telephony": (1) service is a
commercial offering, (2) offered to the public, (3) provided to and from
public switched network termination points and (4) involves real time speech
of a quality and reliability level similar to PSTN.
To date, the EC has not ruled that any particular type of VoIP service (such
as computer-to-computer or phone-to-phone) satisfies all of these
conditions. While the EC monitors and supervises the Member States of the
EU subject to the principle of supremacy of EU law, the primary
responsibility for implementing the provisions of specific EU legislation
lies with regulatory authorities of the Member States. Accordingly,
although the Member States are required to adhere to the EU laws, an
individual country may decide that a particular VoIP service meets all of
the conditions necessary to be regulated as traditional voice services, as
the UK did in 2004. We cannot guarantee that other Member States will
refrain from imposing additional regulations on our specific VoIP services.
Other countries, including those in which the governments prohibit or limit
competition for traditional voice telephony services, generally do not
permit Internet telephony services or strictly limit the terms under which
those services may be provided. Still other countries regulate Internet
telephony services like traditional voice telephony services, requiring
Internet telephony companies to make universal service contributions and
pay other taxes. While some countries subject IP telephony providers to
reduced regulations, others have moved towards liberalization of the
IP communications sector and have lifted bans on provision of IP
telecommunications services. We cannot predict how a regulatory or policy
change of a particular country might affect the provision of our services.
We believe that while increased regulations and restrictions could
materially threaten our ability to provide services, the lifting of
regulations in a country generally will enable use to expand our services
and presence in that country.
Regulation of the Internet. In addition to regulations addressing Internet
telephony and broadband services, other regulatory issues relating to the
Internet, in general, could affect our ability to provide our services.
Congress has adopted legislation that regulates certain aspects of the
Internet, including online content, user privacy, taxation, liability for
third-party activities and jurisdiction. In addition, a number of
initiatives pending in Congress and state legislatures would prohibit or
restrict advertising or sale of certain products and services on the
Internet, which may have the effect of raising the cost of doing business on
the Internet generally. The potential effect, if any, of these initiatives
on the development of our business remains uncertain.
Federal, state, local and foreign governmental organizations are considering
other legislative and regulatory proposals that would regulate the Internet.
We cannot predict whether new taxes will be imposed on our services both
nationally and internationally, and depending on the type of taxes imposed,
whether and how our services would be affected thereafter. Increased
regulation of the Internet may decrease its growth and hinder technological
development, which may negatively impact the cost of doing business via the
Internet or otherwise materially adversely affect our business, financial
condition and results of operations.
Sales and Marketing
We market long distance telecommunications products and services from our
office in Los Angeles, California. We also have a regional sales office
located in Johannesburg, South Africa. Our revenues are primarily derived
from direct sales to business and residential 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, 2004, 2003 and 2002, $2.9 million or 22%, $2.7 million or 15%,
and $2.6 million or 14% of our total revenue from continuing operations for
each year, respectively, originated from Western Europe, Africa and South
East Asia.
Intellectual Property
We do not hold any patents or trademarks. Our products and services are
available to other telecommunication companies.
Employees
As of January 24, 2005, we have 1 part-time and 37 full-time employees, 17
of which perform administrative and financial functions, 13 of which perform
customer support duties and 8 of which have experience in telecommunications
operations and/or sales. 12 current employees are located in Los Angeles,
California and 26 employees operate in other offices worldwide. No
employees are represented by a labor union, and we consider our employee
relations to be good.
Availability of Reports
We file reports on a regular basis with the Securities and Exchange
Commission, including, but not limited to Forms 8-K, 10-K, 10-Q and Schedule
14-A. The public may read and copy any materials we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC
20549. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site (http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC.
Risk Factors
Our cash flow may not be sufficient to satisfy our cost of operations
For the years ended October 31, 2004, 2003 and 2002, we recorded net losses
from continuing operations of approximately $0.8 million, $5.1 million and
$3.5 million, respectively, on revenues from continuing operations of
approximately $13.4 million, $17.7 million and $18.4 million, respectively.
As a result, we currently have a substantial working capital deficit. In
addition, approximately 50% of our trade accounts payable and accrued
liabilities are past due. To be able to service our debt obligations over
the course of the 2005 fiscal year we must generate significant cash flow
and obtain additional financing. If we are unable to do so or otherwise
unable to obtain funds necessary to make required payments on our trade debt
and other indebtedness, it is likely that we will 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, virtually all 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 USF (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 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.
We lease approximately 6,796 square feet in two locations in Los Angeles,
California. Our principal executive office is located at 17383 Sunset
Boulevard, Suite 350, in Los Angeles, California. Our operations and
information systems are located in Los Angeles and New York, New York, where
we lease 104 square feet under a month-to-month co-location agreement. We
also have a sales and administrative office in Johannesburg, South Africa.
We believe that our facilities are sufficient for the operation of our
business for the foreseeable future. The expiration dates of the above-
mentioned lease agreements are as follows:
February 28, 2006 South Africa office
July 12, 2006 Los Angeles - operations and information systems office
April 30, 2007 Los Angeles - executive office
Item 3. Legal Proceedings.
On June 12, 2001, Cygnus Telecommunications Technology, LLC ("Cygnus"),
filed a patent infringement suit (case no. 01-6052) in the United States
District court, Central District of California, with respect to our
"international reorigination" technology. The injunctive relief that Cygnus
sought in this suit has been denied, but Cygnus continues to seek a license
fee for the use of the technology. We believe that no license fee is
required as the technology described in the patent is different from the
technology used by us.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent us from providing "reorigination" services. We filed a cross motion
for summary judgment of non-infringement. Both motions were denied. On
August 22, 2003, we re-filed the motion for summary judgment for non-
infringement. In response to this filing, in August 2004, the court
narrowly defined the issue to relate to a certain reorigination technology
which we believe we do not now use and have not ever utilized to provide any
of our telecommunications services. We intend to continue defending this
case vigorously, and though our ultimate legal and financial liability with
respect to such legal proceeding is therefore expected to be minimal, it
cannot be estimated with any certainty at this time.
The State of Texas ("Texas") performed a sales tax audit of our former
parent, Canmax Retail Systems ("Canmax"), for the years 1995 to 1999. Texas
determined that we did not properly remit sales tax on certain transactions,
including asset purchases and software development projects that Canmax
performed for specific customers. Our current and former management filed
exceptions, through our outside sales tax consultant, to Texas' audit
findings, including the non-taxable nature of certain transactions and the
failure of Texas to credit our account for sales tax remittances. In
correspondence from Texas in June 2003, Texas agreed to consider offsetting
remittances received by Canmax during the audit period. Texas has refused
to consider other potential offsets. Based on this correspondence with
Texas, our estimate of the potential liability was originally recorded at
$350,000 during fiscal year 2003. Based on further correspondence with
Texas, this estimated liability was increased to $1.1 million during the
first quarter of fiscal year 2004. Since this sales tax liability
represents an adjustment to amounts previously reported in discontinued
operations, it was classified separately during the first quarter of fiscal
year 2004 in discontinued operations, and is included in the October 31,
2004 consolidated balance sheet in "Net current liabilities from
discontinued operations". We believe that Canmax properly remitted an
appropriate amount of sales tax to Texas, and we do not believe that Texas'
position reflects the appropriate amount of tax remitted during the audit
period mentioned above and will continue to pursue this issue with Texas.
Ultimately, there is a good possibility that we will be liable for all or a
material portion of this amount. We are also aggressively pursuing the
collection of unpaid sales taxes from former customers of Canmax, though
there can be no assurance that we will be successful with respect to such
collections.
On January 12, 2004, we filed a suit against Southland Corporation
("Southland") in the 162nd District Court in Dallas Texas. Our suit claims
a breach of agreement on the part of Southland in failing to reimburse us
for taxes paid to Texas as well as related taxes for which we are currently
being held responsible by Texas. Our suit seeks reimbursement for the taxes
paid and a determination by the court that Southland is responsible to pay
the remaining tax liability to Texas. We are discussing possible settlement
options with Southland, but as of yet, no agreement has been reached.
On July 20, 2004, we filed a suit against Q Comm International, Inc. ("Q
Comm") in Federal Court in the Central District of Utah. Our suit claims
damages of $4 million plus attorneys' fees and costs resulting from the
breach of a purchase agreement by Q Comm relating to the sale of our
internally constructed equipment for the prepaid telecommunications
industry. Pursuant to the terms of the purchase agreement, we would deliver
the source code of certain proprietary software in consideration for an
aggregate purchase price of $4 million, of which $1 million was due at
closing and the remainder was due over three years. Following execution of
the agreement, we tendered the software source code to Q Comm. However, Q
Comm failed to pay us the initial amount due under the agreement and made
copies of the source code without our permission. We are currently
preparing for trial, which has been set for the first two weeks of January
2006. We are confident that we will prevail.
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
Our common stock, $0.001 par value, is quoted on the OTC Bulletin Board
under the trading symbol "DTIX". Each share ranks equally as to dividends,
voting rights, participation in assets on winding-up and in all other
respects. No shares have been or will be issued subject to call or
assessment. There are no preemptive rights, provisions for redemption or
purpose for either cancellation or surrender or provisions for sinking or
purchase funds.
The 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 2003
First Quarter . . . . . . $ 0.40 $ 0.12
Second Quarter . . . . . $ 0.33 $ 0.11
Third Quarter . . . . . . $ 0.19 $ 0.10
Fourth Quarter . . . . . $ 0.26 $ 0.10
FISCAL 2004
First Quarter . . . . . . $ 0.25 $ 0.17
Second Quarter . . . . . $ 0.23 $ 0.10
Third Quarter . . . . . . $ 0.18 $ 0.12
Fourth Quarter . . . . . $ 0.16 $ 0.10
The closing price for our common stock on January 24, 2005 as reported on
the OTC Bulletin Board was $0.35.
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 486 stockholders of record as of January 24, 2005.
Recent Sales of Unregistered Securities
In September 2004, Mr. Jenkins, Mr. Sciarillo and Mr. Vierra, holders of 10%
convertible notes, converted a total aggregate of $877,500 of their
principal balances into, respectively, 6,250,000, 250,000 and 250,000 shares
of our common stock. We relied on the exemption from registration provided
by Section 4(2) of the Securities Act for this non-public offering because
the securities were sold to a limited number of purchasers with financial
experience who had pre-existing relationships with us.
Item 6. Selected Financial Data.
FISCAL YEARS ENDED OCTOBER 31,
-----------------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA (1):
Revenues $ 13,381 $ 17,655 $ 18,409 $ 6,642 $ 8,591
Cost of revenues 10,045 13,129 11,540 4,668 9,971
Operating expenses 3,541 8,470 9,115 5,147 9,142
Other income (expense) (589) (1,125) (1,279) 646 (665)
Income (loss) from continuing operations (794) (5,069) (3,525) (2,527) (11,187)
Income (loss) from discontinued
operations 1,501 (1,553) (1,159) (157) -
Net income (loss) 707 (6,622) (4,684) (2,684) (11,187)
Income (loss) from continuing operations
per share (basic and diluted) $ (0.05) $ (0.31) $ (0.25) $ (0.23) $ (1.31)
Net income (loss) per share
(basic and diluted) $ 0.04 $ (0.41) $ (0.34) $ (0.25) $ (1.31)
CONSOLIDATED BALANCE SHEET DATA (1):
Total assets
Continuing operations $ 4,361 $ 4,838 $ 8,338 $ 11,255 $ 6,102
Discontinued operations - 242 742 1,389 -
Working capital (deficiency)
Continuing operations (8,159) (7,134) (6,774) (6,626) (4,829)
Discontinued operations 1,100 (2,843) (2,030) - -
Noncurrent obligations
Continuing operations,
net of discount - 1,716 892 1,967 119
Discontinued operations - - - - -
Shareholders' equity (deficit) (6,523) (8,222) (1,975) 2,079 508
--------------------
(1) All numbers, other than per share numbers, are in thousands. The results
of operations of our German subsidiary, Rapid Link Telecommunications, GmbH,
has 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, 2004, 2003
and 2002.
This Annual Report on Form 10-K contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements relate to
expectations concerning matters that are not historical facts. Words such
as "projects", "believe", "anticipates", "estimate", "plans", "expect",
"intends", and similar words and expressions are intended to identify
forward-looking statements. Although the Company believes that such
forward-looking statements are reasonable, we cannot assure you that such
expectations will prove to be correct. Factors that could cause actual
results to differ materially from such expectations are disclosed herein
including, without limitation, in the "Risk Factors" located in PART I, Item
1. All forward-looking statements attributable to the Company are expressly
qualified in their entirety by such language and we do not undertake any
obligation to update any forward-looking statements. You are also urged to
carefully review and consider the various disclosures we have made which
describe certain factors which affect our business throughout this Report.
The following discussion and analysis of financial condition and results of
operations covers the years ended October 31, 2004, 2003 and 2002 and should
be read in conjunction with our Financial Statements and the Notes thereto
commencing at page F-1 hereof.
General
On November 2, 1999, we consummated the DTI Acquisition and, in the second
quarter of fiscal 2000, we shifted focus toward our global VoIP strategy.
This change in focus has lead to a significant shift from our prepaid long
distance operations toward higher margin international wholesale and retail
telecommunication opportunities. This strategy allows us to form local
partnerships with foreign PTT's and to provide IP enabled services based on
the in-country regulatory environment affecting telecommunications and data
providers. In the third quarter of fiscal 2000, we further concentrated our
efforts toward our global VoIP telecommunications strategy by moving our
operations to Los Angeles, California. This consolidation and reduction in
staff has allowed us to significantly reduce our overhead, and although our
operations have not yet produced positive cash flow, we believe that
continued cost reductions and moderate revenue growth would allow us to
achieve positive results in the near future.
On October 12, 2001, we completed the acquisition from Rapid Link of certain
assets and executory contracts of Rapid Link, USA, Inc. and 100% of the
common stock of Rapid Link Telecommunications, GmbH, a German company.
Rapid Link provides integrated data and voice communications services to
both wholesale and retail customers around the world. Rapid Link built a
large residential retail customer base in Europe and Asia, using Rapid
Link's network to make international calls anywhere in the world.
Furthermore, Rapid Link developed a VoIP network using Clarent and Cisco
technology which we have used to take advantage of wholesale opportunities
where rapid deployment and time to market are critical. A majority of our
revenue in our 2003 and 2002 fiscal years was derived from our Rapid Link
acquisition.
On November 19, 2002 we entered into an agreement with Global Capital
Funding Group, L.P. that provided us with a two year loan of $1.25 million,
with a maturity date of November 8, 2004. $443,000 of the proceeds from
this financing were used to pay off the remaining balance of Dial Thru's
April 2001 convertible debenture with Global Capital while the remaining
$807,000 has been used for our Company's ongoing working capital needs.
Currently, this loan has matured and is due on demand. This loan continues
to accrue interest at the stated rate.
On July 24, 2003 we entered into an agreement with GCA Strategic Investment
Fund Limited that provided us with a 152-day loan of $550,000. On January
2, 2004, per the terms of this loan agreement, this loan became a
convertible debenture with a maturity date of November 8, 2004. The loan
proceeds have been used for our Company's ongoing working capital needs.
Currently, this debenture has matured and is due on demand. This debenture
continues to accrue interest at the stated rate.
On August 1, 2003, our German Subsidiary, Rapid Link Telecommunications GmbH
received approval for its insolvency filing and was turned over to a trustee
who is responsible for liquidating the operation. We have determined that
we no longer control the operations of this subsidiary and that our parent
entity has no legal obligation to pay the liabilities of Rapid Link
Telecommunications, GmbH.
The telecommunications industry continues to evolve towards an increased
emphasis on IP related products and services. We have focused our business
towards these types of products and services for the last couple of years.
Furthermore, we believe the use of the Internet to provide IP related
telephony services to the end user customer, either as a stand alone
solution or bundled with other IP products, will continue to impact the
industry as large companies like Time Warner and AT&T look to capitalize on
their existing cable infrastructures, and smaller companies look to provide
innovative solutions to attract commercial and residential users to their
product offerings.
We will focus on the growth of our VoIP business by adding new products and
services that we can offer to end user customers. We are also exploring
opportunities to provide current customers, and attract new customers,
through the sale of specialized Internet phones to allow customers to
connect their phones to their existing Dial-Up or DSL Internet connections.
These Internet phones will allow the user to originate phone calls over the
Internet, thereby bypassing the normal costs associated with originating
phone calls over existing land lines. By avoiding these costs, we are able
to offer lower priced services to these customers, which we believe will
allow us to attract additional users. We also believe there will be
considerable demand for this type of product in certain foreign markets,
where end users pay a significant premium to their local phone companies to
make long distance phone calls. While we expect the growth in our customers
and suppliers and the introduction of innovative product offerings to retail
users, specifically Internet phones, to have a positive impact on our
revenues and earnings, we cannot predict when this will happen, or be
certain that it will happen at all. The revenue and costs associated with
the Internet phone product offerings will depend on the number of customers
and contracts we obtain. In many ways, our ability to maintain operations
in the foreseeable future will be dictated by our ability to quickly deploy
VoIP products into selected markets and to realize high quality revenues
from these products and related telecommunications sources. Any delay in
our expansion of VoIP products and services will adversely affect our
financial condition and cash flow and could ultimately cause us to greatly
reduce or even cease operations.
See "Risk Factors" above for discussion of the impact of market risks,
financial risks and other uncertainties. Please also see "Forward-Looking
Statements" above relating to statements other than historical information
or statements of current condition.
Critical Accounting Policies
The consolidated financial statements include accounts of our Company and
all of our majority-owned subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States requires us to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. In preparing these financial
statements, we have made our best estimates and judgments of certain amounts
included in the financial statements, giving due consideration to
materiality. We do not believe there is a great likelihood that materially
different amounts would be reported related to the accounting policies
described below. However, application of these accounting policies involves
the exercise of judgment and use of assumptions as to future uncertainties
and, as a result, actual results could differ from these estimates.
Revenue Recognition
Our revenues are generated at the time a customer uses our network to make a
phone call. We sell our services to SMEs and end-users who utilize our
network for international re-origination and dial thru services, and to
other providers of long distance usage who utilize our network to deliver
domestic and international termination of minutes to their own customers.
At times we receive payment from our customers in advance of their usage,
which we record as deferred revenue, recognizing revenue as calls are made.
The Securities and Exchange Commission's Staff Accounting Bulletin No. 104,
"Revenue Recognition", provides guidance on the application of generally
accepted accounting principles to selected revenue recognition issues. We
have concluded that our revenue recognition policy is appropriate and in
accordance with generally accepted accounting principles and Staff
Accounting Bulletin No. 104.
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
Effective November 1, 2001, we adopted SFAS No, 141, "Business Combinations"
("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, and also specifies
the criteria for the recognition of intangible assets separately from
goodwill. Under SFAS 142, goodwill is no longer amortized but is subject to
an impairment test at least annually or more frequently if impairment
indicators arise. In accordance with SFAS 142, an annual impairment test of
goodwill was performed by an independent valuation firm in the fourth
quarters of fiscal years 2004 and 2003. The valuation process appraised our
assets and liabilities using a combination of present value and multiple
of earnings valuation techniques. The results of both impairment tests
indicated goodwill was not impaired.
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 debt discounts in connection with these financing transactions in
accordance with Emerging Issues Task Force Nos. 98-5 and 00-27.
Accordingly, we recognize the beneficial conversion feature imbedded in the
financings and the fair value of the related warrants on the balance sheet
as debt discount. The debt discount is amortized over the life of the
respective debt instrument.
Carrier Disputes
We review our vendor bills on a monthly basis and periodically dispute
amounts invoiced by our carriers. We review our outstanding disputes on a
quarterly basis as part of the overall review of our accrued carrier costs,
and adjust our liability based on management's estimate of amounts owed.
Results of Operations
Our operating results for the last three fiscal years are as follows:
% of % Change % of % Change
Year Ended Revenue 2004 2003 to 2004 Year Ended Revenue 2003 2002 to 2003 Year Ended
Oct 31 Increase Increase Oct 31 Increase Increase Oct 31
2004 (Decr) (Decr) 2003 (Decr) (Decr) 2002
----------- -------- ------------ ------------ -------- ------------ -----------
REVENUES $ 13,380,510 100% (24%) $ 17,654,794 100% (4%) $ 18,408,649
COSTS AND EXPENSES
Costs of revenues 10,045,063 75% (23%) 13,128,924 74% 14% 11,539,562
Sales and marketing 400,559 3% (43%) 700,404 4% (21%) 885,661
General and administrative 2,990,630 22% (22%) 3,812,639 22% (34%) 5,760,179
Impairment charge related to write
down of advertising credits - - (100%) 2,376,678 13% - -
Impairment charge related to write
down of assets held for resale - - - - - (100%) 320,307
Gain (loss) on disposal of - - (100%) 241,935 1% (2772%) (9,053)
equipment
Gain on settlement of liabilities (466,000) (3%) - - - - -
Depreciation and amortization 615,883 5% (54%) 1,338,351 8% (38%) 2,158,135
----------- -------- ------------ ------------ -------- ------------ -----------
Total costs and expenses 13,586,135 102% (37%) 21,598,931 122% 5% 20,654,791
----------- -------- ------------ ------------ -------- ------------ -----------
Operating loss (205,625) (2%) (95%) (3,944,137) (22%) 76% (2,246,142)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (613,511) (5%) (46%) (1,131,806) (6%) (9%) (1,247,488)
Foreign exchange 24,919 - 251% 7,097 - (122%) (31,976)
----------- -------- ------------ ------------ -------- ------------ -----------
Total other expense, net (588,592) (4%) (48%) (1,124,709) (6%) (12%) (1,279,464)
----------- -------- ------------ ------------ -------- ------------ -----------
LOSS FROM CONTINUING OPERATIONS (794,217) (6%) (84%) (5,068,846) (29%) 44% (3,525,606)
INCOME (LOSS) FROM DISCONTINUED 1,501,147 11% (197%) (1,553,465) (9%) 34% (1,158,574)
OPERATIONS
----------- -------- ------------ ------------ -------- ------------ -----------
NET INCOME (LOSS) $ 706,930 5% (111%) $ (6,622,311) (38%) 41% $ (4,684,180)
=========== ======== ============ ============ ======== ============ ===========
INCOME (LOSS) PER SHARE:
Basic and diluted income (loss)
per share
Continuing operations $ (0.05) $ (0.31) $ (0.25)
Discontinued operations 0.09 (0.10) (0.09)
---------- ---------- -----------
$ 0.04 $ (0.41) $ (0.34)
========== ========== ===========
Results of Operations-2004 Versus 2003
Operating Revenues
Our revenues decreased from $17.7 million for the fiscal year ended October
31, 2003 to $13.4 million for the fiscal year ended October 31, 2004, a
24% decline. Wholesale and retail revenues decreased by 20% and 33%,
respectively, period to period.
The decrease in wholesale revenues for the fiscal year ended October 31,
2004 is attributable to a decrease in the number of termination
opportunities available to us to offer our customers. Due to the
competitive nature of the wholesale telecommunications business, our
customers frequently request a reduction in the per minute termination rates
that we offer them. At times, our suppliers are not able to offer us lower
rates in order to maintain the minutes we are terminating to them. As a
result, our wholesale revenues fluctuate depending on the number of
termination opportunities available to us at any one time. We are working
with new providers in an effort to recapture our lost revenue, though the
results of these discussions are not presently known. If we are unable to
attract and retain new wholesale customers, our wholesale revenues will
continue to erode.
The decrease in retail revenues for the fiscal year ended October 31, 2004
is primarily attributable to increased competition in our largest foreign
markets, including competition from the incumbent phone company in each
market. Furthermore, a significant portion of our retail business comes
from members of the United States military stationed in foreign markets.
The March 2003 redeployment of troops into Iraq, where we have not
historically provided long distance service, resulted in a decline in our
retail sales to these military customers who were previously stationed in
foreign markets that we serviced. We currently offer services to U.S.
troops in Iraq on a limited basis and hope to increase these services during
fiscal year 2005. We are exploring opportunities to grow our retail
business, utilizing our in-house sales group and our outside agents, through
the introduction of new products and services, focusing our efforts
principally on the sale of Internet phones that allow users to connect
specialized Internet phones to their existing Dial-Up or DSL Internet
connections. If we are unable to stabilize our retail revenues from the
U.S. military and grow our retail revenues from VoIP-based products, this
category of revenue will also continue to decline.
Costs of Revenues
Our costs of revenues as a percentage of revenues has increased by one
percent due to a decline in our retail traffic (see "Revenues" directly
above) which realizes higher margins than our wholesale traffic. As a
majority of our costs of revenues are variable, based on per minute
transportation costs, costs of revenues as a percentage of revenues will
fluctuate, from period to period, depending on the traffic mix between our
wholesale and retail products
Sales and Marketing Expenses
A significant component of our revenue is generated by outside agents or
through periodic newspaper advertising, which is managed by a small in-house
sales and marketing organization. The reduction in our sales and marketing
costs is primarily due to lower agent commission costs which are paid as a
percentage of our revenue, as well as a reduction in our advertising costs.
During the fiscal year ended October 31, 2003, a significant portion of our
advertising costs related to the introduction of new product lines. During
the fiscal year ended October 31, 2004, we have focused our attention on
increasing revenues through the efforts of our agents. We will continue to
focus our sales and marketing efforts on periodic newspaper advertising, the
establishment of distribution networks to facilitate the introduction and
growth of new products and services, and agent related expenses to generate
additional revenues.
General and Administrative Expenses
We have reduced our general and administrative expenses for the fiscal year
ended October 31, 2004 compared to the prior fiscal year primarily through
the elimination of personnel and personnel related costs, which resulted
in a decrease in costs of approximately $531,000. A portion of this
$531,000 decrease is due to the closure of our Atlanta office during the
third quarter of fiscal year 2003. The remaining decrease in general and
administrative expenses of approximately $291,000 is due to decreases in
several expense categories during fiscal year 2004. We review our general
and administrative expenses regularly and continue to manage the costs
accordingly to support our current and anticipated future business.
Impairment Charge Related to Write Down of Advertising Credits
During fiscal year 2000, we issued common stock in exchange for advertising
credits. As our ability to use these credits is uncertain, we have
concluded that the carrying value of these credits is impaired.
Accordingly, we wrote off the remaining advertising credits during the
fiscal year ended October 31, 2003. (See Note 4 to the Consolidated
Financial Statements.)
Gain (Loss) on Disposal of Equipment
During the fiscal year ended October 31, 2003, we closed our Atlanta,
Georgia office and expensed the remaining book value of the office's
leasehold improvements. During the same fiscal year, we expensed the
remaining book value of computer software which was no longer utilized.
Gain on Settlement of Liabilities
During the second quarter of fiscal year 2003, we vacated our office space
in Atlanta, Georgia. At that time, we began negotiations with the landlord
to terminate our lease agreement. In October 2004, we reached an agreement
with the landlord to pay $100,000 in settlement of all outstanding rents,
payable in monthly installments of $5,000 through May 2006. As a result, we
recorded $241,000 as Gain on Settlement of Liabilities during the fourth
quarter of fiscal year 2004, representing the difference between our accrued
rent and the settlement amount.
In connection with the acquisition of the assets and certain of the
liabilities of Rapid Link, Incorporated ("Rapid Link") during the fiscal
year ended October 31, 2001, we recorded certain liabilities of $255,000,
and continued to hold those liabilities pending a final settlement with the
Rapid Link trustee. During the fiscal year ended October 31, 2004, we
agreed to pay $30,000 to the trustee, and recorded the remaining $225,000 to
Gain on Settlement of Liabilities.
Depreciation and Amortization
Depreciation and amortization has decreased as a larger portion of our
assets still in use have become fully depreciated, including a majority of
the assets acquired from Rapid Link. A majority of our depreciation and
amortization expense relates to the equipment utilized in our VoIP network.
Interest Expense and Financing Costs
Interest expense and financing costs were due primarily to the amortization
of deferred financing fees and debt discount on our convertible debentures,
notes payable and notes payable to related parties. The decrease in
interest expense and financing costs primarily relates to the reduction in
such amortization due to our related party notes payable reaching their
maturity date during the fourth quarter of fiscal year 2003 as well as the
early repayment of one of our convertible debentures through the issuance of
a note payable during the first quarter of fiscal year 2003. All
unamortized debt discount associated with this convertible debenture was
expensed at the time of repayment. A further explanation of these changes
can be found in the Liquidity and Capital Resources section.
Income (loss) from discontinued operations
Income (loss) from discontinued operations for fiscal year ended October 31,
2004 relates to an increase in our estimated sales tax liability to the
State of Texas of $750,000, offset by the write-off of the remaining net
liability of our German subsidiary, Rapid Link Telecommunications GMBH,
totaling $2,251,000. Income (loss) from discontinued operations for the
fiscal year ended October 31, 2003 relates to the losses of Rapid Link
Telecommunications GMBH, in the amount of $1,203,000 and an original
estimate of the Company's sales tax liability to the State of Texas of
$350,000.
In the fourth quarter of fiscal 2003, Rapid Link Telecommunications GMBH
filed for insolvency. The net liability associated with the disposal of the
assets and liabilities of Rapid Link Telecommunications GMBH of
approximately $2.3 million was included in the balance sheet at October 31,
2003 and classified as Discontinued Operations. During the fiscal year
2004, we determined that we no longer controlled the operations of this
subsidiary and that the parent entity had no legal obligation to pay the
liabilities of Rapid Link Telecommunications GMBH. Accordingly, we wrote
off the remaining net liability of $2,251,000 and included the gain in
Discontinued Operations during the fiscal year ended October 31, 2004.
During the first quarter of fiscal year 2004, we determined based on final
written communications with the State of Texas that the liability for sales
taxes (including penalties and interest) totaled $1.1 million. We had
previously accrued an estimated settlement amount of $350,000. Accordingly,
we accrued an additional $750,000. The sales tax amount due is attributable
to audit findings of our former parent, Canmax Retail Systems, from the
State of Texas for the years 1995 to 1999. These operations were previously
classified as discontinued after we changed our business model from a focus
on domestic prepaid phone cards to international wholesale and retail
business. The State of Texas determined that we did not properly remit
sales tax on certain transactions. Management believes that the amount due
has been improperly assessed and will continue to pursue a lesser settlement
amount, though we cannot assure you that this matter will be resolved in the
Company's favor. Since this sales tax liability represents an adjustment to
amounts previously reported in Discontinued Operations, this amount was
classified during the fiscal year ended October 31, 2004 as Discontinued
Operations. (See Note 3 to the Consolidated Financial Statements.)
Results of Operations-2003 Versus 2002
Operating Revenues
Our wholesale revenues increased by 41% and our retail revenues decreased by
44% for the fiscal year ended October 31, 2003, compared to the prior fiscal
year. The increase in wholesale revenues for the fiscal year ended October
31, 2003 is attributable to additions to our wholesale sales force during
fiscal year 2002, which focuses on developing greater wholesale
opportunities both in customer growth and the development of additional
points of termination. The decrease in retail revenues for the fiscal year
ended October 31, 2003 is primarily attributable to increased competition in
our largest foreign markets, including competition from the incumbent phone
company in each market. Furthermore, a significant portion of our retail
business comes from members of the United States military stationed in
foreign markets. The redeployment of troops into Iraq in March 2003
resulted in a decline in retail customers. We are exploring opportunities
to grow our retail business through use of our advertising credits and
newspaper advertising.
Costs of Revenues
Included in our cost of revenues for fiscal year 2002 are credits received
from two vendors totaling $729,000 relating to disputes for minutes billed
in error for periods prior to fiscal 2002. Without these credits, costs of
revenues as a percentage of revenues for the fiscal year ended October 31,
2002 would have been 67%. Our costs of revenues as a percentage of revenues
has increased due to a decline in our retail traffic which realizes higher
margins than our wholesale traffic. Costs of revenues as a percentage of
revenues will fluctuate, from period to period, depending on the traffic mix
between our wholesale and retail products.
General and Administrative Expenses
Included in general and administrative expenses is bad debt expense of
$28,000 and $685,000 for the fiscal years ended October 2003 and 2002,
respectively. For the 2002 fiscal year, bad debt expense includes $216,000
attributable to non-payment from a single wholesale customer. We have
implemented strict credit policies and systems to closely monitor our
wholesale traffic daily to reduce the risk of bad debt. We have further
reduced our general and administrative costs by approximately $983,000, for
the fiscal year ended October 31, 2003, through the elimination of personnel
and personnel related costs. We review our general and administrative
expenses regularly, and continue to manage the costs accordingly to support
the current and anticipated future business.
Sales and Marketing Expenses
A significant component of our revenues is generated by outside agents or
through newspaper and periodical advertising, which is managed by a small
in-house sales and marketing organization. We will continue to focus our
sales and marketing efforts on newspaper and periodical advertising and
agent related expenses to generate additional revenues. The use of our
advertising credits is expected to increase sales and marketing expenses in
absolute dollars in future periods.
Impairment Charge Related to Write Down of Advertising Credits
During fiscal year 2000, we issued common stock in exchange for advertising
credits. As our ability to use these credits is uncertain, in accordance
with Generally Accepted Accounting Principles, we have written off the
remaining advertising credits during the fiscal year ended October 31, 2003.
(See Note 4 to the Consolidated Financial Statements.)
Impairment Charge Related to Write Down of Assets Held for Resale
Assets held for resale represents internally constructed equipment for
prepaid telecommunications. As the potential ability to sell this equipment
is uncertain, in accordance with Generally Accepted Accounting Principles,
this equipment was written off during the fiscal year ended October 31,
2002. (See Note 9 to the Consolidated Financial Statements.)
Gain (Loss) on Disposal of Equipment
During the fiscal year ended October 31, 2003, we closed our Atlanta,
Georgia office and expensed the remaining book value of the office's
leasehold improvements. During the same fiscal year, we expensed the
remaining book value of computer software which was no longer utilized.
Depreciation and Amortization
Depreciation and amortization has decreased as a portion of our assets still
in use have become fully depreciated, including a majority of the assets
acquired from Rapid Link. A majority of our depreciation and amortization
expense relates to the equipment utilized in our VoIP network. In
accordance with Statement of Accounting Standards No. 142, effective
November 1, 2001, we no longer amortize goodwill.
Interest Expense and Financing Costs
Interest expense and financing costs were due primarily to the amortization
of deferred financing fees and debt discount on our convertible debentures
and our related party notes payable.
Income (loss) from discontinued operations
Income (loss) from discontinued operations for the fiscal year ended October
31, 2003 relates to the losses of Rapid Link Telecommunications GMBH, in the
amount of $1,203,000 and an original estimate of the Company's sales tax
liability of $350,000. Income (loss) from discontinued operations for the
fiscal year ended October 31, 2002 relates to the losses of Rapid Link
Telecommunications GMBH.
In the fourth quarter of fiscal 2003, Rapid Link Telecommunications GMBH
filed for insolvency. The net liability associated with the disposal of the
assets and liabilities of Rapid Link Telecommunications GMBH of
approximately $2.3 million was included in the balance sheet at October 31,
2003 and classified as Discontinued Operations. During the fiscal year
2004, we determined that we no longer controlled the operations of this
subsidiary and that the parent entity had no legal obligation to pay the
liabilities of Rapid Link Telecommunications GMBH. Accordingly, we wrote
off the remaining net liability of $2,251,000 and included the gain in
Discontinued Operations during the fiscal year ended October 31, 2004.
During the first quarter of fiscal year 2004, we determined based on final
written communications with the State of Texas that the liability for sales
taxes (including penalties and interest) totaled $1.1 million. We had
previously accrued an estimated settlement amount of $350,000. Accordingly,
we accrued an additional $750,000. The sales tax amount due is attributable
to audit findings of our former parent, Canmax Retail Systems, from the
State of Texas for the years 1995 to 1999. These operations were previously
classified as discontinued after we changed our business model from a focus
on domestic prepaid phone cards to international wholesale and retail
business. The State of Texas determined that we did not properly remit
sales tax on certain transactions. Management believes that the amount due
has not been properly assessed and will continue to pursue a lesser
settlement amount, though we cannot assure you that this matter will be
resolved in the Company's favor. Since this sales tax liability represents
an adjustment to amounts previously reported in Discontinued Operations,
this amount was classified during the fiscal year ended October 31, 2004
as Discontinued Operations. (See Note 3 to the Consolidated Financial
Statements.)
Liquidity and Sources of Capital
Although we have significantly reduced our operating loss, to date we have
been generally unable to achieve positive cash flow on a quarterly basis
primarily due to the fact that our present lines of business do not generate
a volume of business sufficient to cover our overhead costs. Furthermore,
approximately 50% of our trade accounts payable and accrued liabilities
are past due. Our future operating success is extremely dependent on our
ability to quickly generate positive cash flow from our VoIP lines of
products and services. Any failure of this business plan will result in a
cash flow crisis and could force us to seek alternative sources of financing
or to greatly reduce or discontinue operations. Although various
possibilities for obtaining financing or effecting a business combination
have been discussed from time to time, there are no agreements with any
party to raise money or combine with another entity. Further, negotiations
with our existing lenders have not resulted in any extension of past due
obligations, which could therefore be declared due and accelerated at
any time. Any additional financing we may obtain will involve material
and substantial dilution to existing stockholders. In such event, the
percentage ownership of our current stockholders will be materially reduced,
and any new equity securities sold by us may have rights, preferences or
privileges senior to our current common stockholders. If we are unable to
obtain additional financing, our operations in the short term will be
materially affected and we may not be able to remain in business. These
circumstances raise substantial doubt as to the ability of our Company to
continue as a going concern.
At October 31, 2004, we had cash and cash equivalents of $586,000, an
increase of $81,000 from the balance at October 31, 2003. We had
significant working capital deficits at both October 31, 2004 and 2003.
Net cash provided by operating activities of continuing operations was
$260,000 for the fiscal year ended October 31, 2004, compared to net cash
used in operating activities of continuing operations of $684,000 for the
fiscal year ended October 31, 2003. The net cash provided by operating
activities of continuing operations for the fiscal year ended October 31,
2004 was primarily due to a net loss from continuing operations of $794,000
adjusted for: non-cash interest expense of $182,000; depreciation and
amortization of $616,000; gain on settlement of liabilities of ($466,000);
and net changes in operating assets and liabilities of $693,000, which was
primarily an increase in accrued liabilities of $665,000. For the fiscal
year ended October 31, 2003, the net cash used in operating activities of
continuing operations was primarily due to a net loss from continuing
operations of $5,069,000 adjusted for: loss from disposal of fixed assets of
$242,000; impairment charge related to write down of advertising credits
of $2,377,000; non-cash interest expense of $689,000; depreciation and
amortization of $1,338,000; and net changes in operating assets and
liabilities of ($302,000).
Net cash used in investing activities of continuing operations for the years
ended October 31, 2004 and 2003 was $145,000 and $192,000, respectively, and
relate to the purchase of property and equipment.
Net cash used in financing activities of continuing operations for the
fiscal year ended October 31, 2004, totaled $34,000, compared to net cash
provided by financing activities of continuing operations of $1,169,000 for
the fiscal year ended October 31, 2003. For the fiscal year ended October
31, 2004, net cash used in financing activities of continuing operations was
due to payments on capital leases. For the fiscal year ended October 31,
2003, net cash provided by financing activities of continuing operations was
due to $1,800,000 in net proceeds from notes payable, offset by $105,000 in
payments on capital leases, $82,000 of financing fees, and $443,000 in
payments on convertible debentures.
We have an accumulated deficit of approximately $46.5 million as of October
31, 2004 as well as significant working capital deficit. Funding of our
working capital deficit, current and future operating losses, and expansion
will require continuing capital investment which may not be available to us.
Since the beginning of April 2001, we have raised $5.7 million in debt
financing.
Although to date we have been able to arrange the debt facilities and equity
financing described below, 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. As of October 31, 2004, we had $3.8
million of notes payable and convertible debentures which have matured or
mature within the next year as well as a significant amount of trade
payables and accrued liabilities which are past due. We will continue to
explore external financing opportunities and renegotiation of our short-term
debt with our current financing partners in order to extend the terms or
retire these obligations. Approximately 39% of the short-term debt is due
to our senior management. Our management is committed to the success of our
Company as is evidenced by the level of financing it has made available to
our Company. Failure to obtain sufficient capital will materially affect
our Company's operations and financial condition. As a result of the
aforementioned factors and related uncertainties, there is significant doubt
about our Company's ability to continue as a going concern.
Our current capital expenditure requirements are not significant, primarily
due to the equipment acquired from Rapid Link. Our capital expenditures for
the fiscal year ended October 31, 2004 were $145,000 and we do not
anticipate significant spending for fiscal year 2005.
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 to mature on February 24, 2004. Currently, these Notes
have matured and are due on demand. These Notes continue to accrue interest
at the stated rate. These Notes are secured by selected Company assets and
are convertible into our common stock at the option of the holder at any
time. The conversion price is equal to the closing bid price of our common
stock on the last trading day immediately preceding the conversion. We also
issued to the holders of the Notes warrants to acquire an aggregate of
1,945,958 shares of common stock at an exercise price of $0.78 per share,
which expire on October 24, 2006. 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. During fiscal year 2004, the holders of the Notes elected to
convert $877,500 of the Notes into 6,750,000 shares of common stock. The
outstanding balance of these Notes at October 31, 2004 totals $1,470,890.
In January 2002, we executed a 6% convertible debenture (the "Second
Debenture") with GCA Strategic Investment Fund Limited ("GCA"), which
provided financing of $550,000 and had an original maturity date of January
28, 2003. The Second Debenture was amended subsequent to fiscal year 2002
to mature on November 8, 2004. The Second Debenture matured in November
2004 and is currently due on demand. Although no event of default has been
declared by the lender, we are technically in default under this agreement
and are currently negotiating with this party to extend the maturity date.
The Second Debenture continues to accrue interest at the stated rate. The
conversion price is equal to the lesser of (i) 100% of the volume weighted
average of sales price as reported by the Bloomberg L.P. of the common stock
on the last trading day immediately preceding the Closing Date ("Fixed
Conversion Price") and (ii) 85% of the average of the three (3) lowest
volume weighted average sales prices as reported by Bloomberg L.P. during
the twenty (20) Trading Days immediately preceding but not including the
date of the related Notice of Conversion ("the "Formula Conversion Price").
In an event of default the amount declared due and payable on the Second
Debenture shall be at the Formula Conversion Price. During fiscal year
2003, GCA converted $50,000 of the Second Debenture and $3,463 of accrued
interest into approximately 374,000 shares of common stock. During fiscal
year 2004, GCA converted $10,000 of the Second Debenture and $730 of accrued
interest into approximately 82,000 shares of common stock. The outstanding
balance on the Second Debenture is $490,000 at October 31, 2004.
In November 2002, we executed a 12% note payable (the "GC-Note") with Global
Capital Funding Group, L.P., which provided financing of $1,250,000. The
GC-Note matured on November 8, 2004 and is currently due on demand.
Although no event of default has been declared by the lender, we are
technically in default under this agreement and are currently negotiating
with this party to extend the maturity date. The GC-Note continues to
accrue interest at the stated rate. The Company also issued to the holder
of the GC-Note warrants to acquire an aggregate of 500,000 shares of common
stock at an exercise price of $0.14 per share, which expire on November 8,
2007.
In July 2003, we executed a 10% note payable (the "GCA-Note") with GCA
Strategic Investment Fund Limited, which provided financing of $550,000.
The GCA-Note's maturity date was December 23, 2003. Per the terms of the
GCA-Note agreement, in the event the GCA-Note is not repaid in full within
10 days of the maturity date, the terms of the GCA-Note shall become the
same as those of the Second Debenture. Effective January 2, 2004, the GCA-
Note's terms became the same as those of the Second Debenture which had a
maturity date of November 8, 2004. The GCA-Note matured in November 2004
and is currently due on demand. Although no event of default has been
declared by the lender, we are technically in default under this agreement
and are currently negotiating with this party to extend the maturity date.
The GCA-Note continues to accrue interest at the stated rate. We also
issued to the holder of the GCA-Note warrants to acquire an aggregate of
100,000 shares of common stock at an exercise price of $0.14 per share,
which expire on July 24, 2008.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
We provide our retail services primarily to customers located outside of the
U.S. Thus, our financial results could be impacted by foreign currency
exchange rates and market conditions abroad. As most of our services are
paid for in U.S. dollars, a strong dollar could make the cost of our
services more expensive than the services of non-U.S. based providers in
foreign markets. In markets where we buy our services in local currency and
sell those services to U.S. customers, a weak dollar could make our services
more expensive than our competitors in foreign markets. We have not used
derivative instruments to hedge our foreign exchange risks though we may
choose to do so in the future. We believe our pricing is lower than the
incumbent carrier in each market, and therefore, we would not expect to lose
significant revenues as a result of any fluctuations, although certainly,
our margin would be negatively impacted by a weak dollar.
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 of this Report is presented in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9a. Controls and Procedures.
Within the 90 days prior to the filing date of this Annual Report, we
carried out an evaluation, under the supervision and with the participation
of our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods
specified in SEC rules and forms.
There have been no significant changes in our internal controls or other
factors that could significantly affect our internal controls subsequent to
the date of their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Item 9b. Other Information.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information regarding our
executive officers and directors.
Name Age Position with the Company
--------------- --- --------------------------------
John Jenkins 43 Chairman, Chief Executive Officer,
President and Director
Allen Sciarillo 40 Executive Vice President, Chief
Financial Officer, Secretary and
Director
Lawrence Vierra 59 Director
Robert M. Fidler 66 Director
David Hess 43 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 DTI
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 one of our directors since January 2000, and
from that time through October 2004, served as our Executive Vice President.
Currently, Mr. Vierra is a professor at the University of Las Vegas. 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.
DAVID HESS was elected to our Board of Directors in May 2002. Mr. Hess is
currently the Managing Partner of RKP Steering Group, a company he co-
founded in August 2003. 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 two meetings during the fiscal year ended
October 31, 2004. The Board of Directors has two standing committees: an
Audit Committee and a Compensation Committee. There is no standing
nominating committee. Each of the directors attended the meeting of the
Board of Directors and all meetings of any committee on which such director
served.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics for employees,
executive officers and directors that is designed to ensure that all of our
directors, executive officers and employees meet the highest standards of
ethical conduct. The code requires that our directors, executive officers
and employees avoid conflicts of interest, comply with all laws and other
legal requirements, conduct business in an honest and ethical manner and
otherwise act with integrity and in our best interest. Under the terms of
the code, directors, executive officers and employees are required to report
any conduct that they believe in good faith to be an actual or apparent
violation of the code.
As a mechanism to encourage compliance with the code, we have established
procedures to receive, retain and treat complaints received regarding
accounting, internal accounting controls or auditing matters. These
procedures ensure that individuals may submit concerns regarding
questionable accounting or auditing matters in a confidential and anonymous
manner. The code also prohibits us from retaliating against any director,
executive officer or employee who reports actual or apparent violations of
the code.
Audit Committee Financial Expert
We currently do not have an audit committee financial expert as defined by
Item 401(h) of Regulation S-K of the Exchange Act 1934. Our previous audit
committee financial expert resigned from our board of directors in September
2004. As our current board of directors does not have anyone eligible to
become our audit committee financial expert and be independent within the
meaning of Item 7(d)(3)(iv) of Schedule 14A of the above-mentioned act, our
board of directors is currently conducting a search for a new audit
committee financial expert.
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, 2004, 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, 2004, 2003
and 2002 to our chief executive officer and all other executive officers
whose total annual salary and bonus exceeded $100,000 during fiscal 2004.
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------- Awards
Securities
Name and principal Other annual Underlying All other
position Year Salary Bonus compensation Options/SARs Compensation
------------------------------------------------------------------------------------------
($) ($) ($) (#) ($)
John Jenkins 2004 150,000 -0- -0- 100,000 -0-
Chairman, CEO 2003 150,000 -0- -0- -0- -0-
and President 2002 181,042 -0- -0- -0- -0-
Allen Sciarillo 2004 130,000 -0- -0- 100,000 -0-
Executive Vice 2003 125,000 1,106 -0- -0- -0-
President and Chief 2002 141,667 -0- -0- -0- -0-
Financial Officer
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth information with respect to the number of
options held at fiscal year end and the aggregate value of in-the-money
options held at fiscal year end by each of the Named Executive Officers.
Shares Number of securities Value of unexercised in-
acquired on Value underlying unexercised options the-money options at fiscal
exercise realized at fiscal year end (#) year end ($) (2)
Name (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
-------------- ----------- -------- ----------- ------------- ----------- -------------
John Jenkins -0- -0- 700,000 100,000 -0- -0-
Allen Sciarillo -0- -0- 500,000 100,000 -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, 2004, which was $0.10 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
Directors are not compensated for attending Board and committee meetings,
though our directors participate in our Equity Incentive Plan and are
annually awarded non-qualified stock options for an aggregate of 5,000
shares of our common stock for services rendered to our company as a
director.
Compensation Committee Interlocks and Insider Participation
None of our executive officers or directors serve as members of the board
of directors or compensation committee of any other entity which has one or
more executive officers serving as a member of our board of directors. The
Compensation Committee is comprised of two non-employee directors, Robert M.
Fidler and Lawrence Vierra. Nick DeMare served on the Compensation Committee
through September 19, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of January 24, 2005,
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)
------------------------------------ ----------- ----------
John Jenkins 16,021,575 (3) 51.61%
17383 Sunset Boulevard,
Suite 350
Los Angeles, CA 90272
Lawrence Vierra 902,598 (4) 3.81%
8760 Castle Hill Avenue
Las Vegas, NV 89129
Robert M. Fidler
987 Laguna Road 14,000 (5) *
Pasadena, CA 91105
David Hess 0 *
545 Alder Avenue
Westfield, NJ 07090
Allen Sciarillo 1,097,598 (6) 4.60%
17383 Sunset Boulevard,
Suite 350
Los Angeles, CA 90272
All Executive Officers and 18,035,771 55.41%
Directors as a group (5 persons)
* Reflects less than one percent.
** We have disclosed in previous reports that Global Capital
Funding Group, L.P. ("Global") and GCA Strategic Investment
Fund Limited ("GCA") beneficially owned more then 5% of our
issued and outstanding common stock due to the fact that the
notes and convertible debentures they hold are convertible
within 60 days into a number of shares of our common stock
that would exceed 5% of our shares outstanding. However, both
Global and GCA have represented to us that due to conversion
caps set forth in their respective agreements with our
Company, they are forbidden from holding, at any given time,
more than 4.9% of our issued and outstanding common stock.
Consequently, we are not required to include them in our
beneficial ownership table.
(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 14, 2005 are deemed outstanding. Such shares,
however, are not deemed outstanding for purposes of computing
the ownership of any other person.
(2) Based upon 23,022,129 shares of common stock outstanding as of
January 14, 2005.
(3) Includes (i) 700,000 shares of common stock which may be
acquired through the exercise of options, (ii) 2,148,390
shares of common stock which may be acquired through the
exercise of warrants, and (iii) 5,173,185 shares of common
stock which may be acquired through the conversion of a
convertible note (shares from conversion calculated using the
closing bid share price at January 14, 2005 of $0.40); all of
which are exercisable or convertible within 60 days of January
14, 2005.
(4) Includes (i) 400,000 shares of common stock which may be
acquired through the exercise of warrants and (ii) 247,598
shares of common stock which may be acquired through the
conversion of a convertible note (shares from conversion
calculated using the closing bid share price at January 14,
2005 of $0.40); all of which are exercisable or convertible
within 60 days of January 14, 2005.
(5) Includes 10,000 shares of common stock which may be acquired
through the exercise of option and warrants which are
exercisable within 60 days of January 14, 2005.
(6) Includes (i) 500,000 shares of common stock which may be
acquired through the exercise of options, (ii) 100,000 shares
of common stock which may be acquired through the exercise of
warrants, and (iii) 247,598 shares of common stock which may
be acquired through the conversion of a convertible note
(shares from conversion calculated using the closing bid share
price at January 14, 2005 of $0.40); all of which are
exercisable or convertible within 60 days of January 14, 2005.
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,
2004:
Number of
Number of Weighted-average securities
securities to be exercise price remaining
issued upon of outstanding available for
exercise of options, future issuance
outstanding warrants under equity
options, warrants and compensation
Plan Category and rights rights plans (excluding
(column (a)) securities reflected
in column (a))
----------------------------------------------------------------------------
Equity 1,674,000 (1) $0.35 1,610,000
compensation
plans approved
by security holders
----------------------------------------------------------------------------
Equity -0- n/a -0-
compensation
plans not
approved by
security holders
----------------------------------------------------------------------------
Total 1,674,000 $0.35 1,610,000
----------------------------------------------------------------------------
(1) Amount includes outstanding options granted pursuant to the 2002 Dial
Thru International Corporation Equity Incentive Plan and the Amended
and Restated 1990 Dial Thru International Corporation Stock Option
Plan.
We adopted the 2002 Equity Incentive Plan ("Incentive Plan"), at our annual
shareholder meeting in May 2002. The Incentive Plan authorizes our Board of
Directors to grant up to 2,000,000 options to purchase our common shares.
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.
The 1990 Stock Option Plan ("1990 Stock Option Plan"), as amended,
authorizes our 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. Subsequent to the adoption of the Incentive Plan, no
further options will be granted under the 1990 Stock Option Plan
Item 13. Certain Relationships and Related Transactions.
In October 2001, we issued 10% convertible notes (the "Notes") to three of
our executive officers, each of whom was also one of our directors, who
provided financing to our Company in the aggregate principal amount of
$1,945,958. The Notes were issued as follows: (i) a note in the principal
amount of $1,745,958 to John Jenkins, our Chief Executive Officer; (ii) a
note in the principal amount of $100,000 to Allen Sciarillo, our Executive
Vice President and Chief Financial Officer; and (iii) a note in the
principal amount of $100,000 to Larry Vierra, our Executive Vice President.
With an original maturity date of October 24, 2003, these Notes were amended
to mature on February 24, 2004. The Notes have matured and are currently
due on demand. The notes continue to accrue interest at the stated rate.
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. The conversion price is equal to the
closing bid price of our common stock on the last trading day immediately
preceding the conversion. We also issued to the holders of the Notes
warrants to acquire an aggregate of 1,945,958 shares of common stock at an
exercise price of $0.75 per share, which warrants expire on October 24,
2006.
In January and July 2002, the Notes issued to Mr. Jenkins were amended to
include additional advances in the aggregate principal amount of $402,443.
We also issued to Mr. Jenkins two warrants to acquire an additional 102,443
and 300,000 shares of common stock, respectively, at an exercise price of
$0.75, which warrants expire on January 28, 2007 and July 8, 2007,
respectively.
In September 2004, the holders of the Notes converted a total aggregate of
$877,500 of the outstanding principal into an aggregate of 6,750,000 shares
of common stock.
Item 14. Principal Accounting Fees and Services.
Audit Fees
The aggregate fees billed by KBA Group LLP for professional services
rendered for the audit of the Company's annual financial statements and
review of the interim financial statements included in the Company's Forms
10-Q, including services related thereto, were $90,470 and $94,626 for the
fiscal years ended October 31, 2004 and 2003, respectively.
Audit-Related Fees
There were no audit-related fees billed by KBA Group LLP during the fiscal
years ended October 31, 2004 and 2003.
Tax Fees
The aggregate fees billed by KBA Group LLP for professional services
rendered for tax compliance, tax advice and tax planning were $0 and $28,985
for the fiscal years ended October 31, 2004 and 2003, respectively. The
services comprising the fees reported as "Tax Fees" included tax return
preparation, consultation regarding various tax issues and support provided
to management in connection with income and other tax audits.
All Other Fees
The aggregate fees billed by KBA Group LLP for professional services
rendered for the review of registration statements were $0 and $6,195 for
the fiscal years ended October 31, 2004 and 2003, respectively.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)
(1) and (2) list of financial statements
The response to this item is submitted as a separate section of this Report.
See the index on Page F-1.
(3) exhibits
The following is a list of all exhibits filed with this Report, including
those incorporated by reference.
2.1 Agreement and Plan of Merger dated as of January 30, 1998, among
Canmax Inc., CNMX MergerSub, Inc. and US Communications Services, Inc.
(filed as Exhibit 2.1 to Form 8-K dated January 30, 1998 (the "USC 8-K"),
and incorporated herein by reference)
2.2 Rescission Agreement dated June 15, 1998 among Canmax Inc., USC and
former principals of USC (filed as Exhibit 10.1 to Form 8-K dated January
15, 1998 (the "USC Rescission 8-K"), and incorporated herein by
reference)
2.3 Asset Purchase Agreement by and among Affiliated Computed Services,
Inc., Canmax and Canmax Retail Systems, Inc. dated September 3, 1998
(filed as Exhibit 10.1 to the Company's Form 8-K dated December 7, 1998
and incorporated herein by reference)
2.4 Asset Purchase Agreement dated November 2, 1999 among ARDIS Telecom &
Technologies, Inc., Dial Thru International Corporation, a Delaware
corporation, Dial Thru International Corporation, a California
corporation, and John Jenkins (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated November 2, 1999 and incorporated herein
by reference)
2.5 Stock and Asset Purchase Agreement, dated as of September 18, 2001,
by and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru
International Corporation. (filed as Exhibit 2.1 to the Company's Form 8-
K dated October 29, 2001 and incorporated herein by reference)
2.6 First Amendment to Stock and Asset Purchase Agreement, dated as of
September 21, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc.,
and Dial Thru International Corporation. (filed as Exhibit 2.2 to the
Company's Form 8-K dated October 29, 2001 and incorporated herein by
reference)
2.7 Second Amendment to Stock and Asset Purchase Agreement, dated as of
October 12, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.3 to the
Company's Form 8-K dated October 29, 2001 and incorporated herein by
reference)
2.8 Third Amendment to Stock and Asset Purchase Agreement, dated as of
October 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and
Dial Thru International Corporation. (filed as Exhibit 2.4 to the
Company's Form 8-K dated December 28, 2001 and incorporated herein by
reference)
2.9 Fourth Amendment to Stock and Asset Purchase Agreement, dated as of
November 30, 2001, by and among Rapid Link USA, Inc., Rapid Link Inc.,
and Dial Thru International Corporation. (filed as Exhibit 2.5 to the
Company's Form 8-K dated December 28, 2001 and incorporated herein by
reference)
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1999 (the "1999 Form 10-K") and incorporated herein by reference)
3.2 Amended and Restated Bylaws of Dial Thru International Corporation
(filed as Exhibit 3.2 to the 1999 Form 10-K and incorporated herein by
reference)
3.3* Amendment to Certificate of Incorporation dated January 11, 2005 and
filed with the State of Delaware on January 13, 2005
4.1 Registration Rights Agreement between Canmax and the Dodge Jones
Foundation (filed as Exhibit 4.02 to Canmax's Quarterly Report on Form
10-Q for the period ended April 30, 1997 and incorporated herein by
reference)
4.2 Registration Rights Agreement between Canmax and Founders Equity
Group, Inc. (filed as Exhibit 4.02 to Canmax's Quarterly Report on Form
10-Q for the period ended April 30, 1997 and incorporated herein by
reference)
4.3 Amended and Restated Stock Option Plan of Dial Thru International
Corporation (filed as Exhibit 4.3 to the 1999 Form 10-K and incorporated
herein by reference)
4.4 Securities Purchase Agreement dated April 11, 2001 (filed as Exhibit
4.1 to the Registrant's Quarterly Report on Form 10-Q for the period
ended April 30, 2001 and incorporated herein by reference)
4.5 Registration Rights Agreement dated April 6, 2001 between Dial Thru
International Corporation and Global Capital Funding Group, L.P. (filed
as Exhibit 4.2 to the Company's Form S-3, File #333-71406, filed on
October 11, 2001 and incorporated herein by reference)
4.6 6 % Convertible Debenture of Dial Thru International Corporation and
Global Capital Funding Group, L.P. (filed as Exhibit 4.3 to the Company's
Form S-3, File 333-71406, filed on October 11, 2001 and incorporated
herein by reference)
4.7 Form of Common Stock Purchase Warrant dated April 11, 2001 between
Global Capital Funding Group, L.P. and Dial Thru International
Corporation (filed as Exhibit 4.4 to the Company's Form S-3, File 333-
71406, filed October 11, 2001 and incorporated herein by reference)
4.8 Form of Common Stock Purchase Warrant dated April 6, 2001 between
D.P. Securities, Inc. and Dial Thru International Corporation (filed as
Exhibit 4.5 to the Company's Form S-3, File 333-71406, filed on October
11, 2001 and incorporated herein by reference)
4.9 Securities Purchase Agreement issued January 28, 2002 between Dial
Thru International Corporation and GCA Strategic Investment Fund Limited
(filed as Exhibit 4.1 to the Company's Form S-3, File 333-82622, filed on
February 12, 2002 and incorporated herein by reference)
4.10 Registration Rights Agreement dated January 28, 2002 between Dial
Thru International Corporation and GCA Strategic Investment Fund Limited
(filed as Exhibit 4.2 to the Company's Form S-3, File 333-82622, filed on
February 12, 2002 and incorporated herein by reference)
4.11 6% Convertible Debenture of Dial Thru International Corporation and
GCA Strategic Investment Fund Limited (filed as Exhibit 4.3 to the
Company's Form S-3, File 333-82622, filed on February 12, 2002 and
incorporated herein by reference)
4.12 Common Stock Purchase Warrant dated January 28, 2002 between GCA
Strategic Investment Fund Limited and Dial Thru International Corporation
(filed as Exhibit 4.4 to the Company's Form S-3, File 333-82622, filed on
February 12, 2002 and incorporated herein by reference)
10.1 Employment Agreement, dated June 30, 1997 between Canmax Retail
Systems, Inc. and Roger Bryant (filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-3, File No. 333-33523 (the "Form S-3"),
and incorporated herein by reference)
10.2 Commercial Lease Agreement between Jackson--Shaw/Jetstar Drive Tri-
star Limited Partnership and the Company (filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K dated October 31, 1998, and
incorporated herein by reference)
10.3 Employment Agreement, dated November 2, 1999 between ARDIS Telecom &
& Technologies, Inc. and John Jenkins (filed as Exhibit 4.3 to the 2000
Form 10-K and incorporated herein by reference)
14.1 Code of Business Conduct and Ethics for Employees, Executive Officers
and Directors (filed as Exhibit 14.1 to the 2003 Form 10-K and incorporated
herein by reference)
21.1* Subsidiaries of the Registrant
23.1* Consent of Independent Registered Public Accounting Firm
31.1* Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934
31.2* Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934
32.1* Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section
1350
32.2* Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section
1350
* Filed herewith.
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.
Date: January 31, 2005
/s/ JOHN JENKINS
John Jenkins,
Chairman of the Board and Chief
Executive Officer
DIAL THRU INTERNATIONAL CORPORATION
Date: January 31, 2005
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 31, 2005
John Jenkins Officer and President and
Director
/s/ ALLEN SCIARILLO Chief Financial Officer January 31, 2005
Allen Sciarillo and secretary (principal
financial and principal
accounting officer)
/s/ LAWRENCE VIERRA Executive Vice President January 31, 2005
Lawrence Vierra and Director
/s/ ROBERT M. FIDLER Director January 31, 2005
Robert M. Fidler
/s/ DAVID HESS Director January 31, 2005
David Hess
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
1. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets at October 31, 2004 and 2003 F-3
Consolidated Statements of Operations for the fiscal years
ended October 31, 2004, 2003 and 2002 F-4
Consolidated Statement of Shareholders' (Deficit) Equity for
the fiscal years ended October 31, 2004, 2003 and 2002 F-5
Consolidated Statements of Cash Flows for the fiscal years ended
October 31, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedule
Report of Independent Registered Public Accounting Firm
as to Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
All other schedules are omitted because they are not applicable or
because the required information is shown in the consolidated financial
statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Shareholders of
Dial Thru International Corporation
We have audited the accompanying consolidated balance sheets of Dial Thru
International Corporation and subsidiaries as of October 31, 2004 and 2003,
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for the years ended October 31, 2004, 2003 and
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dial
Thru International Corporation and subsidiaries as of October 31, 2004 and
2003, and the results of their operations and their cash flows for the years
ended October 31, 2004, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated 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 continuing operations during each of the last three
fiscal years. Additionally, at October 31, 2004, the Company's current
liabilities exceeded its current assets by $9.3 million and the Company
has a shareholders' deficit totaling $6.5 million. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans as they relate to these issues are also
explained in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KBA GROUP LLP
Dallas, Texas
December 9, 2004
F-2
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------ October 31, October 31,
2004 2003
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 586,389 $ 505,256
Trade accounts receivable, net of allowance
for doubtful accounts of $122,291 at October
31, 2004 and $295,094 at October 31, 2003 841,127 872,610
Prepaid expenses and other current assets 197,968 230,997
---------- ----------
Total current assets 1,625,484 1,608,863
---------- ----------
PROPERTY AND EQUIPMENT, net 869,957 1,340,986
GOODWILL, net 1,796,917 1,796,917
OTHER ASSETS 69,050 91,434
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS - 242,334
---------- ----------
TOTAL ASSETS $ 4,361,408 $ 5,080,534
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Capital lease obigation $ 126,196 $ 146,140
Trade accounts payable 2,791,545 2,814,472
Accrued liabilities 1,142,829 1,377,307
Accrued interest (including $759,692 to related
parties at October 31, 2004 and $539,125 at
October 31, 2003) 1,154,284 721,632
Deferred revenue 380,444 356,999
Deposits and other payables 428,109 430,678
Convertible debentures 1,040,000 -
Note payable, net of unamortized debt discount
of $2,847 at October 31, 2003 1,250,000 547,153
Notes payable to related parties 1,470,890 2,348,401
Net current liabilities of discontinued operations 1,100,000 2,843,481
---------- ----------
Total current liabilities 10,884,297 11,586,263
---------- ----------
NOTE PAYABLE, net of unamortized debt discount of
$22,838 at October 31, 2003 - 1,227,162
CONVERTIBLE DEBENTURES, net of unamortized debt
discount of $10,756 at October 31, 2003 - 489,244
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 13)
SHAREHOLDERS' DEFICIT
Preferred stock, $.001 par value; 10,000,000
shares authorized; none issued and outstanding - -
Common stock, $.001 par value; 44,169,100 shares
authorized; 23,034,151 shares issued at
October 31, 2004 and 16,201,803 shares
issued at October 31, 2003 23,034 16,202
Additional paid-in capital 40,055,719 39,070,235
Accumulated deficit (46,546,772) (47,253,702)
Treasury stock, 12,022 common shares at cost (54,870) (54,870)
---------- ----------
Total shareholders' deficit (6,522,889) (8,222,135)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 4,361,408 $ 5,080,534
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended October 31,
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
REVENUES $ 13,380,510 $ 17,654,794 $ 18,408,649
COSTS AND EXPENSES
Costs of revenues 10,045,063 13,128,924 11,539,562
Sales and marketing 400,559 700,404 885,661
General and administrative 2,990,630 3,812,639 5,760,179
Depreciation and amortization 615,883 1,338,351 2,158,135
Impairment charge related to write down of
advertising credits - 2,376,678 -
Impairment charge related to write down of
assets held for resale - - 320,307
Gain (loss) on disposal of equipment - 241,935 (9,053)
Gain on settlement of liabilities (466,000) - -
----------- ----------- -----------
Total costs and expenses 13,586,135 21,598,931 20,654,791
Operating loss (205,625) (3,944,137) (2,246,142)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (396,899) (896,966) (1,043,416)
Related party interest expense and
financing costs (216,612) (234,840) (204,072)
Foreign currency exchange gains (losses) 24,919 7,097 (31,976)
----------- ----------- -----------
Total other expense, net (588,592) (1,124,709) (1,279,464)
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (794,217) (5,068,846) (3,525,606)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
net of income taxes of $0 for all periods 1,501,147 (1,553,465) (1,158,574)
----------- ----------- -----------
NET INCOME (LOSS) $ 706,930 $ (6,622,311) $ (4,684,180)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Basic and diluted net income (loss) per share
Continuing operations $ (0.05) $ (0.31) $ (0.25)
Discontinued operations 0.09 (0.10) (0.09)
----------- ----------- -----------
$ 0.04 $ (0.41) $ (0.34)
=========== =========== ===========
WEIGHTED AVERAGE SHARES USED IN THE CALCULATION
OF PER SHARE AMOUNTS:
Basic and diluted weighted average
common shares 16,998,795 15,999,179 13,935,782
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
Other
Accumulated Receivable -
Common Common Stock Treasury Additional Accumulated Comprehensive Common
Shares Amount Stock Paid-in Capital Deficit Income/(Loss) Stock Total
---------- ----------- ------- --------------- ----------- ------------- ------- ----------
Balance at October 31, 2001 12,119,090 $ 12,119 $(54,870) $ 38,174,587 $(35,947,212) $ (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 - - - 45,607 - - - 45,607
Cash received for subscription
receivable-common stock - - - - - - 15,179 15,179
COMPREHENSIVE INCOME (LOSS)
Net loss - - - - (4,684,179) - - (4,684,180)
Foreign currency translation
adjustment - - - - - (107,509) - (107,509)
---------- ----------- ------- --------------- ----------- ------------- ------- ----------
Total Comprehensive Income (Loss) - - - - (4,684,179) (107,509) - (4,791,689)
---------- ----------- ------- --------------- ----------- ------------- ------- ----------
Balance at October 31, 2002 15,074,916 15,075 (54,870) 38,894,063 (40,631,391) (196,057) (1,901) (1,975,081)
-----------------------------------------------------------------------------------------------------------------------------------
Conversion of convertible notes
including accrued interest 1,098,052 1,098 - 108,099 - - - 109,197
Issuance of warrants in connection
with convertible debentures - - - 17,208 - - - 17,208
Issuance of warrants in connection
with notes payable - - - 52,795 - - - 52,795
Adjustment of outstanding shares 28,835 29 - (29) - - - -
Write off of subscription receivable - - - (1,901) - - 1,901 -
COMPREHENSIVE INCOME (LOSS)
Net loss - - - - (6,622,311) - - (6,622,311)
Foreign currency translation
adjustment - - - - - 196,057 - 196,057
---------- ----------- ------- --------------- ----------- ------------- ------- ----------
Total Comprehensive Income (Loss) - - - - (6,622,311) 196,057 - (6,426,254)
---------- ----------- ------- --------------- ----------- ------------- ------- ----------
Balance at October 31, 2003 16,201,803 16,202 (54,870) 39,070,235 (47,253,702) - - (8,222,135)
-----------------------------------------------------------------------------------------------------------------------------------
Conversion of convertible notes
including accrued interest 6,832,348 6,832 - 881,398 - - - 888,230
Embedded beneficial conversion
feature related to issuance
of convertible debt - - - 104,086 - - - 104,086
Net income - - - - 706,930 - - 706,930
---------- ----------- ------- --------------- ----------- ------------- ------- ----------
Balance at October 31, 2004 23,034,151 $ 23,034 $(54,870) $ 40,055,719 $(46,546,772) $ - $ - $(6,522,889)
===================================================================================================================================
The accompanying notes are an integral part of this consolidated financial statement.
F-5
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31,
---------------------------------------
2004 2003 2002
---------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
OF CONTINUING OPERATIONS
Net loss from continuing operations $ (794,217) $ (5,068,846) $ (3,525,606)
Adjustments to reconcile net loss from continuing
operations to net cash provided by (used in)
operating activities:
(Gain) loss from disposal of fixed assets - 241,935 (9,053)
Impairment charge related to write down
of assets held for resale - - 320,307
Impairment charge related to write down
of advertising credits - 2,376,678 -
Fair value of stock and warrants issued
for services - - 13,750
Bad debt expense 30,000 28,268 685,059
Non-cash interest expense (including related
party interest of $0, $423,291 and $441,787) 181,525 688,732 924,340
Gain on settlement of liabilities (466,000) - -
Depreciation and amortization 615,883 1,338,351 2,158,135
Effects of changes in foreign exchange rates - 13,066 (39,792)
(Increase) decrease in:
Trade accounts receivable 1,483 64,739 (372,978)
Prepaid expenses and other current assets 33,029 (106,152) (108,468)
Other assets (18,614) (1,623) 12,421
Increase (decrease) in:
Trade accounts payable (8,473) (851,186) (730,283)
Accrued liabilities 664,892 580,570 578,783
Deferred revenue 23,445 25,213 (406,790)
Deposits and other payables (2,569) (13,526) 444,204
---------- ----------- -----------
Net cash provided by (used in) operating activities
of continuing operations 260,384 (683,781) (55,971)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
OF CONTINUING OPERATIONS
Purchase of property and equipment (144,854) (192,150) (303,460)
---------- ----------- -----------
Net cash used in investing activities
of continuing operations (144,854) (192,150) (303,460)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
OF CONTINUING OPERATIONS
Proceeds from notes payable - 1,800,000 -
Proceeds from convertible debentures - - 550,000
Proceeds from related party notes payable - - 300,000
Payments on capital leases (34,397) (105,387) (105,784)
Deferred financing fees - (82,441) (92,625)
Subscription receivable-common stock - - 15,179
Payments on convertible debentures - (443,000) -
---------- ----------- -----------
Net cash provided by (used in) financing activities
of continuing operations (34,397) 1,169,172 666,770
---------- ----------- -----------
NET CASH USED IN DISCONTINUED OPERATIONS - (57,298) (112,143)
---------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 81,133 235,943 195,196
Cash and cash equivalents at beginning of year 505,256 269,313 74,117
---------- ----------- -----------
Cash and cash equivalents at end of year $ 586,389 $ 505,256 $ 269,313
========== =========== ===========
SUPPLEMENTAL INFORMATION AND SCHEDULE OF NON CASH
INVESTING AND FINANCING ACTIVITIES
Conversion of convertible debenture and
accrued interest to common stock $ 888,230 $ 109,197 $ 531,825
Fair value of warrants issued with debt - 70,003 62,704
Beneficial conversion feature of convertible
debentures recorded as debt discount 104,086 - 114,154
Note payable exchanged for convertible debenture 550,000 - -
Cash paid for interest - 35,000 -
Exercise of stock options in exchange for retirement
of 100,000 common shares - - 70,000
The accompanying notes are an integral part of these consolidated financial statements.
F-6
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
Organization
------------
Dial Thru International Corporation and subsidiaries ("DTI" or the
"Company"), was incorporated on July 10, 1986 under the Company Act of the
Province of British Columbia, Canada. On August 7, 1992, the Company
renounced its original province of incorporation and elected to continue its
domicile under the laws of the State of Wyoming, and on November 30, 1994,
its name was changed to Canmax Inc. On February 1, 1999, this predecessor
company reincorporated under the laws of the State of Delaware and changed
its name to ARDIS Telecom & Technologies, Inc.
On November 2, 1999, the Company acquired substantially all of the business
and assets of Dial Thru International Corporation, a California corporation,
along with the rights to the name "Dial Thru International Corporation." On
January 19, 2000, the Company changed its name from ARDIS Telecom &
Technologies, Inc. to Dial Thru International Corporation. DTI is a
facilities-based, global Internet Protocol ("IP") communications company
providing connectivity to international markets experiencing significant
demand for IP enabled services. DTI provides a variety of international
telecommunications services targeted to small and medium sized enterprises
("SME's") that include the transmission of voice and data traffic and the
provision of Web-based and other communications services. The Company also
sells telecommunications services for both the foreign and domestic
termination of international long distance traffic into the wholesale
market. DTI utilizes Voice over Internet Protocol ("VoIP") packetized voice
technology (and other compression techniques) to improve both cost and
efficiencies of telecommunication transmissions, and is 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 the Company's communications.
Nature of Business
------------------
In November 1999 with the acquisition of Dial Thru International
Corporation, the Company changed its focus from prepaid calling cards to
becoming a full service, facility-based provider of communication products
to small and medium size businesses, both domestically and internationally.
The Company currently provides a variety of international and domestic
communication services including international re-origination and dial thru,
Internet voice and fax services, e-Commerce solutions and other value-added
communication services, using its VoIP Network to effectively deliver the
products to the end user.
To further enhance its product offerings and accelerate its growth plans, in
October 2001, the Company acquired certain assets and liabilities of Rapid
Link, USA, Inc. ("Rapid Link USA") and 100% of the common stock of Rapid
Link Telecommunications, GmbH, ("Rapid Link Germany") a German Company, from
Rapid Link, Incorporated ("Rapid Link"). Rapid Link is a leading provider
of high quality integrated data and voice communications services to both
wholesale and retail customers around the world. Rapid Link's global VoIP
network reaches thousands of retail customers, primarily in Europe and Asia.
The acquisition enhanced the Company's product offerings and rapidly
expanded the Company's VoIP strategy due to the engineering and operational
expertise acquired in the transaction. During 2003, management decided to
discontinue its continued financial support of Rapid Link Germany and on
August 1, 2003, Rapid Link Germany received approval for its insolvency
filing. Accordingly, the operations of Rapid Link Germany have been
reflected as discontinued operations in the accompanying financial
statements for all periods presented.
Financial Condition
-------------------
The Company is subject to various risks in connection with the operation of
its business including, among other things, (i) changes in external
competitive market factors, (ii) inability to satisfy anticipated working
capital or other cash requirements, (iii) changes in the availability of
transmission facilities, (iv) changes in the Company's business strategy or
an inability to execute is strategy due to unanticipated changes in the
market, (v) various competitive factors that may prevent the Company from
competing successfully in the marketplace, and (vi) the Company's lack of
liquidity and its ability to raise additional capital. The Company has an
accumulated deficit of approximately $46.5 million as of October 31, 2004,
as well as a working capital deficit of approximately $9.3 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.
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. The Company will continue to explore external financing
opportunities and renegotiation of its short-term debt with its current
financing partners in order to extend the terms or retire these
obligations. At October 31, 2004, approximately 39% of the short-term debt
is due to the senior management of the Company. Management is committed to
the growth and success of the Company as is evidenced by the level of
financing they have made available to the Company.
F-7
As a result of the aforementioned factors and related uncertainties,
there is substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments to reflect the possible effects of recoverability and
classification of assets or classification of liabilities which may result
from the inability of the Company to continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Dial Thru, Inc., a Texas
corporation, DTI Com, Inc., a Delaware corporation, Dial Thru International
Argentina S.A., Dial Thru International Venezuela, S.A., Dial Thru
International Corporation, South Africa, and Rapid Link GmbH, a Germany
company, which is currently in liquidation. All significant intercompany
accounts and transactions have been eliminated.
Revenue Recognition
-------------------
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.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash and
cash equivalent deposits are at risk to the extent that they exceed Federal
Deposit Insurance Corporation insured amounts. To minimize this risk, the
Company places its cash and cash equivalents with high credit quality
financial institutions.
Accounts Receivable
-------------------
Trade accounts receivable are stated at the amount the Company expects to
collect. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make
required payments. Management considers the following factors when
determining the collectibility of specific customer accounts: customer
credit-worthiness, past transaction history with the customer, current
economic industry trends, and changes in customer payment terms. If the
financial condition of the Company's customers were to deteriorate,
adversely affecting their ability to make payments, additional allowances
would be required. Based on management's assessment, the Company provides
for estimated uncollectible amounts through a charge to earnings and a
credit to a valuation allowance. Interest is typically not charged on
overdue accounts receivable. Balances that remain outstanding after the
Company has used reasonable collection efforts are written off through a
charge to the valuation allowance and a credit to accounts receivable.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated
useful lives of the assets ranging from three to seven years. Equipment
held under capital leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the remaining 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
--------
Effective November 1, 2001, the Company adopted SFAS No, 141, "Business
Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001, and also specifies the criteria for the recognition of intangible
assets separately from goodwill. Under SFAS 142, goodwill is no longer
amortized but is subject to an impairment test at least annually or more
frequently if impairment indicators arise. In accordance with SFAS 142,
an annual impairment test of goodwill was performed by an independent
valuation firm in the fourth quarters of fiscal years 2004, 2003 and
2002. The valuation process appraised the Company's assets and liabilities
using a combination of present value and multiple of earnings valuation
techniques. The results of the impairment tests indicated that goodwill was
not impaired.
Long-Lived Assets
-----------------
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be
recoverable. The Company does not perform a periodic assessment of assets
for impairment in the absence of such information or indicators. Conditions
that would necessitate an impairment include a significant decline in the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company
recognizes an impairment loss only if an impairment is indicated by its
carrying value not being recoverable through undiscounted cash flows. The
impairment loss is the difference between the carrying amount and the fair
value of the asset estimated using discounted cash flows. Long-lived assets
held for sale are reported at the lower of cost or fair value less costs to
sell. During fiscal 2002, the Company wrote down certain property and
equipment held for resale. The property and equipment was written down by
$320,307 to $0, its estimated fair value. The estimated fair value was
based on comparable market value.
Net Income (Loss ) Per Share
----------------------------
Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding during the year. Diluted net
income (loss) per share is computed using the weighted average number of
shares of common stock outstanding during the year and common equivalent
shares consisting of stock options, warrants, and convertible debentures
(using the treasury stock method) to the extent they are dilutive.
The shares issuable upon the exercise of stock options, warrants and
convertible debentures are excluded from the calculation of net income
(loss) per share for the years ended October 31, 2004, 2003 and 2002 as
their effect would be antidilutive. At October 31, 2004, 2003 and 2002,
there were 41,235,234, 30,891,492 and 41,038,893 shares, respectively,
potentially issuable from outstanding stock options, warrants and
convertible debentures.
Income Taxes
------------
The Company utilizes the asset and liability approach to financial
accounting and reporting for income taxes. Deferred income taxes and
liabilities are computed for differences between the financial statement
carrying amounts and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are recorded when necessary to
reduce deferred tax assets to the amount expected to be realized. Income
tax expense or benefit is the tax payable or refundable for the period plus
or minus the change during the period in deferred tax assets and
liabilities.
Estimates and Assumptions
-------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that effect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Fair Market Value of Financial Instruments
------------------------------------------
The carrying amount for current assets and liabilities, and long-term debt
(all current at October 31, 2004) is not materially different than fair
market value because of the short maturity of the instruments and/or their
respective interest rate amounts.
Stock-Based Compensation
------------------------
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure". Under APB Opinion No. 25,
compensation expense for employees is based on the excess, if any, on the
date of grant, of fair value of the Company's stock over the exercise price.
Accordingly, no compensation cost has been recognized for its employee stock
options in the financial statements during the years ended October 31, 2004,
2003 and 2002 as the fair market value on the grant date approximates the
exercise price. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No.123, as
amended by SFAS No. 148, the Company's pro forma net loss from continuing
operations for the years ended October 31, 2004, 2003 and 2002 would have
been as follows:
2004 2003 2002
----------- ----------- -----------
Net loss from continuing
operations, as reported $ (794,217) $ (5,068,846) $ (3,525,606)
Add: Stock-based employee
compensation expense
included in reported
net loss from continuing
operations - - -
Deduct: Stock-based employee
compensation expense
determined under the
fair value based method (150,185) (252,040) (343,700)
----------- ----------- -----------
Pro forma net loss from
continuing operations $ (944,402) $ (5,320,886) $ (3,869,306)
=========== =========== ===========
Net loss per share from
continuing operations -
basic and dilutive, as
reported $ (0.05) $ (0.31) $ (0.25)
=========== =========== ===========
Net loss per share from
continuing operations -
basic and dilutive, pro forma $ (0.06) $ (0.33) $ (0.28)
=========== =========== ===========
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Because
options vest over a period of several years and additional awards are
generally made each year, the pro forma information presented above is not
necessarily indicative of the effects on reported or pro forma net earnings
or losses for future years.
The fair value of all options and warrants for shares of the Company's
common stock issued to employees has been determined using the Black-Scholes
option pricing model with the following assumptions:
2004 2003 2002
------------------------------------------------------------------
Risk-free interest rate 3% 3% 4%
Expected dividend yield 0% 0% 0%
Expected lives 2 years 3 years 5 years
Expected volatility 100% 126% - 221% 99% - 157%
Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) is the increase or decrease in equity from
sources other than owners. The major component of the Company's other
comprehensive income (loss) consists of unrealized income from currency
translation, which is stated as a component of shareholders' deficit.
During the fourth quarter of fiscal year 2003, the Company's German
subsidiary filed for insolvency. Accordingly, subsequent to October 31,
2003, there is no longer a foreign currency translation adjustment and no
comprehensive income (loss).
Foreign Currency Translation and Foreign Currency Transactions
--------------------------------------------------------------
The Company's foreign operations are subject to exchange rate fluctuations
and foreign currency transaction costs. Monetary assets and liabilities of
subsidiaries domiciled outside the United States are translated at rates of
exchange existing at the balance sheet date and non-monetary assets,
liabilities and equity are translated at historical rates. Revenues and
expenses are translated at average rates of exchange prevailing during the
year. The resulting translation adjustments are recorded as a separate
component of shareholders' deficit. During the fourth quarter of fiscal
year 2003, the Company's German subsidiary filed for insolvency.
Accordingly, subsequent to October 31, 2003, there is no longer a foreign
currency translation adjustment. Foreign currency transactions resulting in
gains and losses are recorded in the Statement of Operations.
Advertising
-----------
Advertising costs are expensed as incurred and totaled $7,209, $103,603 and
$248,200 for the years ended October 31, 2004, 2003 and 2002, respectively.
Reclassifications
-----------------
Certain reclassifications were made to the 2003 and 2002 consolidated
financial statements to conform to the current year presentation.
Recent Accounting Pronouncements
--------------------------------
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004)
("Statement 123(R)"), "Share-Based Payment", which revised SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees". The revised
statement addresses the accounting for share-based payment transactions with
employees and other third parties, eliminates the ability to account for
share-based compensation transactions using APB 25 and requires that the
compensation costs relating to such transactions be recognized in the
consolidated statement of operations. The revised statement is effective as
of the first interim period beginning after June 15, 2005. The Company will
adopt the statement on August 1, 2005 as required. The impact of adoption
of Statement 123(R) cannot be predicted at this time because it will depend
on levels of share-based payments granted in the future. However had the
Company adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as described
in the disclosure of pro forma net loss and net loss per share in the
stock-based compensation accounting policy note included in Note 2 to the
consolidated financial statements.
NOTE 3 - DISCONTINUED OPERATIONS
Rapid Link Telecommunications GMBH
----------------------------------
In the fourth quarter of fiscal year 2003, the Company's German Subsidiary,
Rapid Link Telecommunications GMBH ("Rapid Link Germany"), filed for
insolvency. The net liability of approximately $2.3 million was included
in the balance sheet and classified as Discontinued Operations at October
31, 2003. During the first quarter of fiscal year 2004, the Company
determined that it no longer controlled the operations of this subsidiary
and that the parent entity had no legal obligation to pay the liabilities
of Rapid Link Germany. Accordingly, the Company wrote off the remaining
net liability of $2,251,000 and included the gain in Discontinued Operations
during the first quarter of fiscal year 2004.
The following table presents selected balance sheet information for Rapid
Link Germany at October 31, 2003:
Current assets
Cash $ 164,878
Trade accounts receivable, net 416,013
Other current assets 192,917
------------
Total current assets 773,808
------------
Current liabilities
Current portion of capital lease
obligations 144,643
Trade accounts payable 2,612,864
Accrued liabilities 86,877
Deferred revenue 422,905
------------
Total current liabilities 3,267,289
------------
Net current liabilities of
discontinued operations $ 2,493,481
============
Property and equipment
Telecom equipment $ -
Furniture, fixtures, equipment -
Computers -
Software -
Leasehold improvements -
Accumulated depreciation and
amortization -
------------
Total property and equipment, net -
------------
Other assets and long-term liabilities
Capital lease obligations (9,644)
Other 251,978
------------
Total other assets, net 242,334
------------
Net long-term assets of
discontinued operations $ 242,334
============
The following table presents summary operating results for Rapid Link
Germany for the years ended October 31:
2003 2002
------------ ------------
Revenues $ 3,598,007 $ 4,559,411
Costs and expenses 4,801,472 5,717,985
------------ ------------
Loss from discontinued operations $ (1,203,465) $ (1,158,574)
============ ============
Canmax Retail Systems
---------------------
During the first quarter of fiscal year 2004, the Company determined based
on final written communications with the State of Texas that the Company had
a liability for sales taxes (including penalties and interest) totaling $1.1
million. The Company had previously accrued an estimated settlement amount
of $350,000 during fiscal year 2003. During the first quarter of fiscal
year 2004, the Company accrued an additional $750,000. The sales tax amount
due is attributable to audit findings of the State of Texas for the years
1995 to 1999 associated with the Company's former parent, Canmax Retail
Systems. These operations were previously classified as discontinued after
the Company changed its business model from a focus on domestic prepaid
phone cards to international wholesale and retail business, operating as a
facilities-based global Internet protocol communications company providing
connectivity to international markets. The State of Texas determined that
the Company did not properly remit sales tax on certain transactions. The
Company's current and former management believes that the amount due has not
been properly assessed and will continue to pursue a lesser settlement
amount. Since this sales tax liability represents an adjustment to amounts
previously reported in Discontinued Operations, the amount was classified as
Discontinued Operations. The amount that the State of Texas assessed of $1.1
million has been accrued as a liability and is included in the October 31,
2004 Consolidated Balance Sheet as Discontinued Operations. (See Note 13.)
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 was to advertise products and services
domestically. Although the Company has explored product offerings that it
believed would benefit from the form of advertising described herein, the
Company's limited financial resources have delayed the development of those
products and it is unclear whether the Company will have the resources
necessary to develop products that could effectively use these advertising
credits. Furthermore, management has received limited cooperation from its
media placement brokers regarding the use of the credits, and therefore, has
begun contacting the actual underlying provider of the advertising. This
contact has not provided any certainty as to the Company's ability to use
the credits. Therefore, the Company wrote off the remaining $2,376,678 of
the advertising credits during the year ended October 31, 2003.
NOTE 5 - CONVERTIBLE DEBENTURES
In January 2002, the Company executed a 6% convertible debenture (the "GCA-
Debenture") with GCA Strategic Investment Fund Limited ("GCA"), which
provided financing of $550,000. The GCA-Debenture's original maturity date
was January 28, 2003. The GCA-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
GCA-Debenture shall be at the Formula Conversion Price. In connection
with the GCA- Debenture, the Company paid $92,625 in financing fees,
which were capitalized and amortized over the original life of the
GCA-Debenture. At October 31, 2003, the deferred financing fees were fully
amortized. The Company calculated the beneficial conversion feature
embedded in the GCA-Debenture in accordance with EITF 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" ("EITF-98-5") and EITF 00-27 "Application of
Issue No. 98-5 to Certain Convertible Instruments" ("EITF 00-27") and
recorded approximately $114,000 as debt discount. This debt discount was
amortized over the original life of the GCA-Debenture. The debt discount
was fully amortized at October 31, 2003. The Company also issued to the
holder of the GCA-Debenture warrants to acquire an aggregate of 50,000
shares of common stock at an exercise price of $0.41 per share, which expire
on January 28, 2007. The Company recorded debt discount of approximately
$17,000 related to the issuance of the warrants. The Company determined the
debt discount by allocating the relative fair value to the GCA-Debenture and
the warrants, and the Company amortized the debt discount over the original
life of the GCA-Debenture. The debt discount was fully amortized at October
31, 2003.
In January 2003, the Company and GCA agreed to extend the maturity date of
the GCA-Debenture to November 8, 2004. In consideration for this extension,
in February 2003, the Company adjusted the exercise price of the previously
issued warrants to $0.21 per share. The Company also issued to the holder
of the GCA-Debenture warrants to purchase an additional 100,000 shares of
common stock also at an exercise price of $0.21 per share, which expire on
February 8, 2008. The Company recorded additional debt discount of
approximately $17,000 related to the warrant exercise price adjustment and
the issuance of the new warrants. The Company is amortizing the additional
debt discount over the GCA-Debenture's extension period. For the years
ended October 31, 2004 and 2003, the Company recorded approximately $11,000
and $6,000, respectively, as interest expense relating to the amortization
of the debt discount. The debt discount was fully amortized at October 31,
2004.
During the years ended October 31, 2004 and 2003, GCA elected to convert
$10,000 and $50,000, respectively, of the GCA-Debenture into approximately
82,000 and 374,000 shares of common stock, respectively. The outstanding
balance of the GCA-Debenture was $490,000 and $500,000 at October 31, 2004
and 2003, respectively. The GCA-Debenture matured in November 2004 and is
currently due on demand. Although no event of default has been declared by
GCA, the Company is technically in default under this agreement and is
currently negotiating with GCA to extend the maturity date.
In July 2003, the Company executed a 10% note payable (the "GCA-Note") with
GCA, which provided financing of $550,000. The GCA-Note provided for a
maturity date of December 23, 2003 and is unsecured. In the event the GCA-
Note was not repaid in full within 10 days of the maturity date, the GCA-
Note shall be replaced by a 6% convertible debenture. This convertible
debenture would have a maturity date of November 8, 2004 and be secured by
certain property and equipment held for resale. The conversion price would
be 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, which was $0.20, 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 would be at the Formula
Conversion Price. In the event the GCA-Note was replaced by a convertible
debenture, the GCA-Note would have a beneficial conversion feature. In
accordance with EITF 98-5 and EITF 00-27, the intrinsic value of the
beneficial conversion feature was calculated as approximately $104,000 at
the commitment date using the stock price as of that date, and would be
recorded if the note was not repaid as noted above.
The GCA-Note matured during December 2003 and, accordingly, since the GCA-
Note remained unpaid as of January 2004, the Company exchanged the note for
a convertible debenture. Upon the replacement of the GCA-Note with a
convertible debenture, the Company recorded debt discount of $104,000 as
interest expense during the year ended October 31, 2004. In connection with
the GCA-Note, during fiscal year 2003, the Company paid $35,000 as financing
fees, which were capitalized and amortized over the original life of the
GCA-Note. For the years ended October 31, 2004 and 2003, the Company
recorded approximately $13,000 and $22,000, respectively, as interest
expense relating to the amortization of these deferred financing fees. The
deferred financing fees were fully amortized at October 31, 2003. The
Company also issued to the holder of the GCA-Note warrants to acquire an
aggregate of 100,000 shares of common stock at an exercise price of $0.14
per share, which expire on July 24, 2008. The relative fair value of the
warrants of $7,000 was recorded as a debt discount which was amortized to
interest expense over the original term of the GCA-Note. For the years
ended October 31, 2004 and 2003, the Company recorded approximately $3,000
and $4,000, respectively, as interest expense relating to the amortization
of the debt discount. The debt discount was fully amortized at October 31,
2004. The GCA-Note matured in November 2004 and is currently due on demand.
Although no event of default has been declared by GCA, the Company is
technically in default under this agreement and is currently negotiating
with GCA to extend the maturity date.
NOTE 6 - NOTE PAYABLE
In November 2002, the Company executed a 12% note payable (the "GC-Note")
with Global Capital Funding Group, L.P., which provided financing of
$1,250,000. The GC-Note's maturity date is November 8, 2004. The GC-Note is
secured by $1,518,267 of certain property and equipment. In connection with
the GC-Note, the Company paid $47,441 as financing fees, which were
capitalized and amortized over the life of the GC-Note. For the years ended
October 31, 2004 and 2003, the Company recorded approximately $23,000 and
$24,000, respectively, as interest expense relating to the amortization of
these deferred financing fees. The deferred financing fees were fully
amortized at October 31, 2004. The Company also issued to the holder of the
GC-Note warrants to acquire an aggregate of 500,000 shares of common stock
at an exercise price of $0.14 per share, which expire on November 8, 2007.
The Company recorded debt discount of approximately $46,000, the relative
fair value of the warrants, which were amortized over the two year life of
the GC-Note. For the years ended October 31, 2004 and 2003, the Company
recorded approximately $23,000 in each year as interest expense relating to
the amortization of the debt discount. The debt discount was fully
amortized at October 31, 2004. The GCA-Note matured in November 2004 and is
currently due on demand. Although no event of default has been declared by
the holder, the Company is technically in default under this agreement and
is currently negotiating with the holder to extend the maturity date.
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 in the
aggregate principal amount of $1,945,958. The original maturity date of each
note was October 24, 2003. In January 2003, the Company's executives
extended the maturity date of each note to February 24, 2004. These Notes
are currently due on demand. The Notes are secured by certain Company
assets. Each Note is convertible into the Company's common stock at the
option of the holder at any time. The conversion price is equal to
the closing bid price of the Company's common stock on the last trading
day immediately preceding the conversion. The Company has calculated
the beneficial conversion feature embedded in the Notes in accordance
with EITF 98-5 and EITF 00-27 and recorded debt discount of approximately
$171,000 which was amortized over two years, the original term of the
Notes. The Company also issued to the holders of the Notes warrants to
acquire an aggregate of 1,945,958 shares of common stock at an exercise
price of $0.78 per share, which expire on October 24, 2006. Additional
debt discount of approximately $657,000 was recorded during the fourth
quarter of fiscal 2001 relating to these warrants. The Company determined
the additional debt discount by allocating the relative fair value to
the Notes and the warrants. The Company amortized the additional debt
discount over the life of the Notes. For the year ended October 31,
2003, the Company recorded approximately $410,000 of interest expense
relating to the amortization of the debt discount. The debt discount
was fully amortized at October 31, 2003. In January 2002, an additional
$102,432 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 102,432 shares of common stock at an exercise price of
$0.75, which expire on January 28, 2007. Additional debt discount, related
to these warrants, of approximately $24,000 was recorded during the first
quarter of fiscal 2002. The Company determined the additional debt discount
by allocating the relative fair value to the Notes and the warrants. The
Company amortized the additional debt discount over the remaining life of
the Notes. For the year ended October 31, 2003, the Company recorded
approximately $14,000 of interest expense relating to the amortization of
the debt discount. The debt discount was fully amortized at October 31,
2003. In July 2002, an additional $300,000 was added to the Notes,
representing incremental monies loaned by a shareholder. The Company also
issued to the holder of the Notes warrants to acquire an additional 300,000
shares of common stock at an exercise price of $0.75, which expire on July
8, 2007. Additional debt discount of approximately $22,000 was recorded as
interest expense during the third quarter of fiscal 2002 relating to these
warrants. The Company determined the additional debt discount by allocating
the relative fair value to the Notes and the warrants.
During the year ended October 31, 2004, the holder of the Notes elected to
convert $877,500 of the Notes into 6,750,000 shares of common stock. The
outstanding balance of the Notes at October 31, 2004 and 2003 is $1,470,890
and $2,348,401, respectively. The Notes matured during fiscal 2004 and are
currently due on demand.
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at October 31, 2004 and
2003:
2004 2003
---------- ----------
Telephone switch equipment $ 3,759,818 $ 4,411,325
Leasehold improvements 232,917 223,577
Furniture and fixtures 852,011 232,916
Computer equipment 1,079,159 797,005
Computer software 58,378 536,428
---------- ----------
5,982,283 6,201,251
Less: accumulated depreciation and
amortization (5,112,326) (4,860,265)
---------- ----------
$ 869,957 $ 1,340,986
========== ==========
At October 31, 2004 and 2003, the gross amount of capital lease assets and
related accumulated amortization recorded under capital leases were as
follows:
2004 2003
---------- ----------
Telephone switch equipment $ 455,728 $ 455,728
Less: accumulated amortization (455,728) (297,330)
---------- ----------
$ - $ 158,398
========== ==========
Amortization of assets held under capital leases is included with
depreciation expense. Depreciation and amortization expense totaled
$615,883, $1,338,351 and $2,158,135 in 2004, 2003 and 2002, 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 currently utilizing the
assets as collateral against its $550,000 convertible debenture. As the
potential ability to sell this equipment is uncertain, this equipment, which
had a carrying value of $320,307, was written-off during the year ended
October 31, 2002.
NOTE 10 - GAIN ON SETTLEMENT OF LIABILITIES
During the second quarter of fiscal year 2003, the Company vacated
its office space in Atlanta, Georgia. At that time, the Company began
negotiations with the landlord to terminate its lease agreement. In October
2004, the Company reached an agreement with the landlord to pay $100,000 in
settlement of all outstanding rents, payable in monthly installments of
$5,000 through May 2006. As a result, the Company recorded $241,000 as
Gain on Settlement of Liabilities during the fourth quarter of fiscal year
2004, representing the difference between the Company's accrued rent and the
settlement amount.
In connection with the acquisition of the assets and certain of the
liabilities of Rapid Link, Incorporated ("Rapid Link") during the fourth
quarter of the fiscal year ended October 31, 2001, the Company recorded
certain liabilities of $255,000, and continued to hold those liabilities
pending a final settlement with the Rapid Link trustee. During the second
quarter of fiscal year 2004, the Company agreed to pay $30,000 in full and
final settlement to the trustee and has recorded the remaining $225,000 as
Gain on Settlement of Liabilities during the year ended October 31, 2004.
NOTE 11 - STOCK OPTIONS AND WARRANTS
Warrant Issuances to Employees
------------------------------
Employee warrant activity for the three years ended October 31, 2004 was as
follows:
Weighted
Number Warrant Average
of Price Exercise
Shares Per Share Price
--------- ----------- --------
Warrants outstanding at
October 31, 2001 2,755,958 $0.53 - 1.44 $ 0.89
Warrants granted 402,433 0.75 0.75
Warrants exercised - - -
Warrants canceled (145,000) 1.44 1.44
--------- ----------- --------
Warrants outstanding at
October 31, 2002 3,013,391 0.75 - 1.44 0.83
Warrants granted - - -
Warrants exercised - - -
Warrants canceled (365,000) 0.53 - 0.81 0.62
--------- ----------- --------
Warrants outstanding at
October 31, 2003 2,648,391 0.75 - 1.44 0.83
Warrants granted - - -
Warrants exercised - - -
Warrants canceled - - -
--------- ----------- --------
Warrants outstanding at
October 31, 2004 2,648,391 $0.75 - 1.44 $ 0.83
========= =========== ========
The warrants issued to employees that were exercisable at the years ended
October 31, 2004, 2003 and 2002 were approximately 2,648,000, 2,648,000 and
1,701,000, respectively.
Warrant Issuances to Non-Employees
----------------------------------
Non-Employee warrant activity for the three years ended October 31, 2004 was
as follows:
Weighted
Number Warrant Average
of Price Exercise
Shares Per Share Price
--------- ----------- --------
Warrants outstanding at
October 31, 2001 1,203,300 $0.01 - 3.50 $ 1.65
Warrants granted 50,000 0.40 0.40
Warrants exercised - - -
Warrants canceled (365,800) 0.53 - 0.88 0.74
--------- ----------- --------
Warrants outstanding at
October 31, 2002 887,500 0.01 - 3.50 1.95
Warrants granted 700,000 0.14 - 0.21 0.15
Warrants exercised - - -
Warrants canceled - - -
--------- ----------- --------
Warrants outstanding at
October 31, 2003 1,587,500 0.01 - 3.50 1.16
Warrants granted - - -
Warrants exercised - - -
Warrants canceled (150,000) 3.00 3.00
--------- ----------- --------
Warrants outstanding at
October 31, 2004 1,437,500 $0.01 - 3.50 $ 0.97
========= =========== ========
The majority of the warrants issued to non-employees during fiscal years
2003 and 2002 were issued in connection with debt financing. The warrants
issued to non-employees that were exercisable at October 31, 2004, 2003 and
2002 totaled 1,437,500, 1,587,500, and 887,500, 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,
2004 was as follows:
Weighted
Number Option Average
of Price Exercise
Shares Per Share Price
--------- ----------- --------
Options outstanding at
October 31, 2001 2,182,500 $0.30 - 1.50 $ 0.53
Options granted 195,000 0.09 - 0.70 0.27
Options exercised (175,000) 0.40 0.40
Options canceled (593,000) 0.30 - 0.78 0.73
--------- ----------- --------
Options outstanding at
October 31, 2002 1,609,500 0.09 - 1.50 0.44
Options granted 187,500 0.11 - 0.18 0.18
Options exercised - - -
Options canceled (353,000) 0.11 - 1.50 0.43
--------- ----------- --------
Options outstanding at
October 31, 2003 1,444,000 0.09 - 1.50 0.41
Options granted 410,000 0.11 - 0.14 0.12
Options exercised - - -
Options canceled (180,000) 0.09 - 0.78 0.32
--------- ----------- --------
Options outstanding at
October 31, 2004 1,674,000 $0.11 - 1.50 $ 0.35
========= =========== ========
The following table summarizes information about employee compensatory stock
options and warrants outstanding at October 31, 2004:
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
------------ --------- ---- ---- --------- ----
$0.11 - $0.78 1,672,000 3.61 $0.35 1,285,333 $0.41
$1.44 - $1.50 302,000 0.15 1.44 302,000 1.44
--------- ---- ---- --------- ----
1,974,000 3.08 $0.52 1,587,333 $0.61
========= ==== ==== ========= ====
The weighted average grant date fair value of all stock options granted to
employees during the fiscal year ended October 31, 2004 was $0.07 a share.
NOTE 12 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
at October 31, 2004 and 2003 are as follows:
2004 2003
---------- ----------
Deferred tax assets
Net operating loss carryovers $15,205,732 $14,527,382
Accounts receivable 41,579 100,332
Advertising credits 977,185 977,185
Property and equipment - 69,154
Accrued liabilities 34,694 34,918
---------- ----------
Total gross deferred tax assets 16,259,190 15,708,971
Deferred tax liabilities
Property and equipment (45,142) -
---------- ----------
Total gross deferred tax liabilities (45,142) -
---------- ----------
16,214,048 15,708,971
Valuation allowance (16,214,048) (15,708,971)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
The increase in the valuation allowance for the years ended October 31, 2004
and 2003 of $505,000 and $1.6 million, respectively, was related primarily
to a change in U.S. operating loss carryforwards.
At October 31, 2004, the Company has U.S. net operating loss carryforwards
for federal income tax purposes of approximately $45 million, which expire
in 2006 through 2024. 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 net
deferred asset balance.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company is obligated under various capital leases for equipment used in
operating the business with terms expiring at various dates through 2005.
The Company leases its branch office facilities and its corporate office
under various noncancelable operating leases with terms expiring at various
dates through 2007, and has also entered into various operating leases for
equipment used in the Company's business. Rental expense from continuing
operations for operating leases was $502,940, $474,567 and $400,425 for the
years ended October 31, 2004, 2003 and 2002, respectively.
Future minimum lease payments under noncancelable operating leases and
capital leases as of October 31, 2004 are as follows:
Capital Operating
Leases Leases
---------- ----------
Year ending October 31,
2005 $ 126,196 $ 203,251
2006 - 168,854
2007 - 54,595
---------- ----------
Total minimum lease pmts 126,196 $ 426,700
==========
Less: Amount representing interest -
----------
Present value of net minimum
capital lease payment 126,196
Less: current installments of
obligations under capital lease (126,196)
----------
Obligations under capital leases,
excluding current installments $ -
==========
Legal Proceedings
-----------------
The Company, from time to time, may be subject to legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property of third parties
by the Company. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
On June 12, 2001, Cygnus Telecommunications Technology, LLC ("Cygnus"),
filed a patent infringement suit (case no. 01-6052) in the United States
District court, Central District of California, with respect to the
Company's "international reorigination" technology. The injunctive relief
that Cygnus sought in this suit has been denied, but Cygnus continues to
seek a license fee for the use of the technology. The Company believes that
no license fee is required as the technology described in the patent is
different from the technology used by the Company.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent the Company from providing "reorigination" services. The Company
filed a cross motion for summary judgment of non-infringement. Both motions
were denied. On August 22, 2003, the Company re-filed the motion for
summary judgment for non-infringement. In response to this filing, during
August 2004, the court narrowly defined the issue to relate to a certain
reorigination technology which the Company believes it does not now, nor has
it ever utilized to provide any of its telecommunications services. The
Company intends to continue defending this case vigorously, and though its
ultimate legal and financial liability with respect to such legal proceeding
is therefore expected to be minimal, it cannot be estimated with any
certainty at this time.
The State of Texas ("State") performed a sales tax audit of the Company's
former parent, Canmax Retail Systems ("Canmax"), for the years 1995 to 1999.
The State determined that the Company did not properly remit sales tax on
certain transactions, including asset purchases and software development
projects that Canmax performed for specific customers. The Company's
current and former management filed exceptions, through its outside sales
tax consultant, to the State's audit findings, including the non-taxable
nature of certain transactions and the failure of the State to credit the
Company's account for sales tax remittances. In correspondence from the
State in June 2003, the State agreed to consider certain offsetting
remittances received by Canmax during the audit period. The State has
refused to consider other potential offsets. Based on this correspondence
with the State, management's estimate of the potential liability was
originally recorded at $350,000 during the fiscal year ended October 31,
2003. Based on further correspondence with the State, this estimated
liability was increased to $1.1 million during the first quarter of fiscal
year 2004. Since this sales tax liability represents an adjustment to
amounts previously reported in discontinued operations, it was classified
separately during the first quarter of fiscal year 2004 in discontinued
operations, and is included in the October 31, 2004 consolidated balance
sheet in "Net current liabilities from discontinued operations". Management
believes that Canmax properly remitted an appropriate amount of sales tax to
Texas, and management does not believe the State's position reflects the
appropriate amount of tax remitted during the audit period mentioned above
and will continue to pursue this issue with the State. The Company is also
aggressively pursuing the collection of unpaid sales taxes from former
customers of Canmax, though there can be no assurance that the Company will
be successful with respect to such collections.
On January 12, 2004, the Company filed a suit against Southland Corporation
("Southland") in the 162nd District Court in Dallas, Texas. The Company's
suit claims a breach of contract on the part of Southland in failing to
reimburse it for taxes paid to the State as well as related taxes for which
the Company is currently being held responsible by the State. The Company's
suit seeks reimbursement for the taxes paid and a determination by the court
that Southland is responsible for paying the remaining tax liability to
the State. The Company is discussing possible settlement options with
Southland, but as of yet, no agreement has been reached.
On July 20, 2004, the Company filed a suit against Q Comm International,
Inc. ("Q Comm") in Federal Court in the Central District of Utah. The
Company's suit claims damages of $4 million plus attorney's fees and costs
resulting from the breach of a purchase agreement on the part of Q Comm
relating to the sale of the Company's internally constructed equipment for
the prepaid telecommunications industry. Pursuant to the terms of the
purchase agreement, the Company would deliver the source code of certain
proprietary software in consideration for an aggregate purchase price of $4
million, of which $1 million was due at closing and the remainder was due
over three years. Following execution of the agreement, the Company
tendered the software source code to Q Comm. However, Q Comm failed to pay
the Company the initial amount due under the agreement and made copies of
the source code without the Company's permission. The Company is currently
preparing for trial, which has been set for the first two weeks of January
2006.
NOTE 14 - 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 six-year vesting schedule from the date of
original employment. The Company made no matching contributions during the
years ended October 31, 2004, 2003 and 2002.
NOTE 15 - BUSINESS AND CREDIT CONCENTRATIONS
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers. Management has provided an allowance for
doubtful accounts which reflects its estimate of amounts which may become
uncollectible. In the event of complete non-performance by the Company's
customers, the maximum exposure to the Company is the outstanding accounts
receivable balance at the date of non-performance.
During the year ended October 31, 2004, the Company provided wholesale
services to a customer who accounted for 17% of revenues and another
customer who accounted for 13% of revenues. During the same period, one of
the Company's suppliers accounted for approximately 20% of the Company's
total costs of revenues. At October 31, 2004, another customer accounted
for 16% of the Company's trade accounts receivable. During the year ended
October 31, 2003, the Company provided wholesale services to a customer who
accounted for 11% of revenues. During the year ended October 31, 2002, the
Company provided wholesale services to a customer who accounted for 14% of
revenues.
Information regarding the Company's domestic and foreign revenues is as
follows:
All other
foreign
Africa countries Domestic Total
---------- ---------- ---------- ----------
Fiscal 2002 $ 1,392,384 $ 1,184,239 $15,832,026 $18,408,649
Fiscal 2003 1,323,903 1,346,914 14,983,977 17,654,794
Fiscal 2004 1,617,433 1,284,641 10,478,436 13,380,510
No individual foreign country represented more than 10 percent of revenue or
more than 10 percent of long lived assets for any period presented.
NOTE 16 - QUARTER-BY-QUARTER COMPARISION
Summarized unaudited quarterly financial data for
the years ended October 31, 2004, 2003 and 2002
are as follows:
2004 First Second Third Fourth
Quarters: ---------- ---------- ---------- ----------
Revenues, net $ 4,344,692 $ 3,342,892 $ 2,940,023 $ 2,752,903
Operating income (loss) (121,991) (85,479) (332,229) 334,074
Income (loss) from continuing
operations (261,548) (240,000) (488,273) 195,604
Income from discontinued
operations 1,501,147 - - -
Net income (loss) 1,239,599 (240,000) (488,273) 195,604
Income (loss) per share-continuing
operations (0.02) (0.01) (0.03) 0.01
Income per share-discontinued
operations 0.09 - - -
2003
Quarters:
Revenues, net 4,275,580 4,630,480 4,348,552 4,400,182
Operating loss (436,798) (384,977) (166,632) (2,955,730)
Loss from continuing operations (828,386) (625,444) (397,855) (3,217,161)
Income (loss) from discontinued
operations (253,727) (666,349) (949,482) 316,093
Net loss (1,082,113) (1,291,793) (1,347,337) (2,901,068)
Loss per share-continuing
operations (0.05) (0.04) (0.02) (0.23)
Income (loss) per share-discontinued
operations (0.02) (0.04) (0.06) 0.05
2002
Quarters:
Revenues, net 5,241,466 4,787,785 4,248,348 4,131,050
Operating loss (783,581) (695,527) (608,975) (158,059)
Loss from continuing operations (1,072,322) (1,018,054) (960,137) (475,093)
Loss from discontinued operations (213,571) (221,760) (122,478) (600,765)
Net loss (1,285,893) (1,239,814) (1,082,615) (1,075,858)
Loss per share-continuing
operations (0.08) (0.07) (0.07) (0.03)
Loss per share-discontinued
operations (0.02) (0.02) (0.01) (0.03)
NOTE 17 - CAPITAL STOCK
During the year ended October 31, 2004, three holders of the Company's
Related Party Notes converted $877,500 of debt into 6,750,000 shares of the
Company's stock.
During the year ended October 31, 2004, a holder of one of the Company's
Debentures converted $10,730 of debt and accrued interest into approximately
82,000 shares of the Company's stock.
During the year ended October 31, 2003, a holder of one of the Company's
Debentures converted $53,463 of debt and accrued interest into approximately
374,000 shares of the Company's stock.
During the year ended October 31, 2003, a holder of one of the Company's
Debentures converted $55,734 of debt and accrued interest into approximately
724,000 shares of the Company's stock.
During the year ended October 31, 2002, a holder of one of the Company's
Debentures converted $531,487 of debt and accrued interest into
approximately 2,856,000 shares of the Company's stock.
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.
During the years ended October 31, 2004, 2003 and 2002, options and warrants
to purchase 0, 0, and 175,000, respectively, shares of common stock were
exercised.
The following table describes stock reserved for future issuances at October
31, 2004:
# Shares
----------
Options 3,284,000
Warrants 4,085,891
Convertible debt (1) 35,475,343
----------
42,845,234
==========
(1) Assumes conversion on October 31, 2004
under the terms of the related agreements
NOTE 18 - SUBSEQUENT EVENT
During November 2004, the Company's security holders passed an amendment
to the Company's Certificate of Incorporation increasing the number of
authorized common shares from 44,169,100 to 84,169,100.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AS TO SCHEDULE
----------------------------------------------------------------------
Board of Directors and Shareholders of
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 9, 2004, we have also audited Schedule II for the
years ended October 31, 2004, 2003 and 2002. In our opinion, this schedule
presents fairly, in all material respects, the information required to be
set forth therein.
/s/ KBA GROUP LLP
Dallas, Texas
December 9, 2004
S-1
DIAL THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended October 31, 2004, 2003 and 2002
Balance at Balance at
the beg the end
of period Additions Deductions of period
----------- ---------- ----------- -----------
2004
----
Allowance for doubtful
accounts $ 295,094 $ 30,000 $202,803 (1) $ 122,291
========== ========= ======= ==========
Valuation allowance for
deferred tax assets $15,708,971 $ 505,077 $ - $16,214,048
========== ========= ======= ==========
2003
----
Allowance for doubtful
account $ 506,391 $ 158,469 $369,766 (1) $ 295,094
========== ========= ======= ==========
Valuation allowance for
deferred tax assets $14,061,148 $1,647,823 $ - $15,708,971
========== ========= ======= ==========
2002
----
Allowance for doubtful
accounts $ 228,729 $ 711,246 $433,584 (1) $ 506,391
========== ========= ======= ==========
Valuation allowance for
deferred tax assets $11,274,528 $2,786,620 $ - $14,061,148
========== ========= ======= ==========
(1) Write offs.
S-2
EXHIBIT INDEX
NO. DESCRIPTION OF EXHIBIT
3.3 Amendment to Certificate of Incorporation
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act of 1934
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act of 1934
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350