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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-K
(mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER 0-22636
DIAL THRU INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2461665
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State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization
17383 SUNSET BOULEVARD, SUITE 350 LOS ANGELES, CA 90272
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 566-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
------------------------------
(title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the act). Yes / / No /X/
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price for such
common equity, as of the last business day of the registrant's most recently
completed fiscal quarter.
The aggregate market value of shares of common stock held by non-affiliates
of Dial Thru International Corporation as of January 23, 2003 was
approximately $2,031,589, based on the average bid and ask price of common
stock as quoted on the OTC Bulletin Board of $0.19.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicated the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of January
23, 2003, 15,103,751 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
None.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this "Report") includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking
statements are statements other than historical information or statements of
current condition. Some forward-looking statements may be identified by the
use of such terms as "expects", "will", "anticipates", "estimates",
"believes", "plans" and words of similar meaning. These forward-looking
statements relate to business plans, programs, trends, results of future
operations, satisfaction of future cash requirements, funding of future
growth, acquisition plans and other matters. In light of the risks and
uncertainties inherent in all such projected matters, the inclusion of
forward-looking statements in this Form 10-K should not be regarded as a
representation by us or any other person that our objectives or plans will
be achieved or that our operating expectations will be realized. Revenues
and results of operations are difficult to forecast and could differ
materially from those projected in forward-looking statements contained
herein, including without limitation statements regarding our belief of the
sufficiency of capital resources and our ability to compete in the
telecommunications industry. Actual results could differ from those
projected in any forward-looking statements for, among others, the following
reasons: (a) increased competition from existing and new competitors using
voice over Internet protocol ("VoIP") to provide telecommunications services
over the Internet, (b) the relatively low barriers to entry for start-up
companies using VoIP to provide telecommunications services over the
Internet, (c) the price-sensitive nature of consumer demand, (d) the
relative lack of customer loyalty to any particular provider of services
over the Internet, (e) our dependence upon favorable pricing from our
suppliers to compete in the telecommunications industry, (f) increased
consolidation in the telecommunications industry, which may result in larger
competitors being able to compete more effectively, (g) failure to attract
or retain key employees, (h) continuing changes in governmental regulations
affecting the telecommunications industry and the Internet and (i) changing
consumer demand, technological developments and industry standards that
characterize the industry. We do not undertake to update any forward-looking
statements contained herein. For a discussion of these factors and others,
please see "Risk Factors" in Item 1 of this Report. Readers are cautioned
not to place undue reliance on the forward-looking statements made in this
Report or in any document or statement referring to this Report.
PART I
Item 1. Business
Our Company
Throughout this Annual Report, the term "we", "Dial Thru" and the "Company"
refer to Dial Thru International Corporation and its subsidiaries, a
Delaware corporation formerly known as ARDIS Telecom & Technologies, Inc.,
successor by merger to Canmax Inc. The Company was incorporated on July 10,
1986 under the Company Act of the Province of British Columbia, Canada. On
August 7, 1992, we renounced our original province of incorporation and
elected to continue our domicile under the laws of the State of Wyoming, and
on November 30, 1994 our name was changed to "Canmax Inc." On February 1,
1999, we reincorporated under the laws of the State of Delaware under the
name "ARDIS Telecom & Technologies, Inc." On November 2, 1999, we acquired
(the "DTI Acquisition") substantially all of the business and assets of Dial
Thru International Corporation, a California corporation, and, on January
19, 2000, we changed our name from ARDIS Telecom & Technologies, Inc. to
"Dial Thru International Corporation." Our common stock currently trades on
the OTC Bulletin Board under the symbol "DTIX."
From our inception until 1998 we provided retail automation software and
related services to the retail petroleum and convenience store industries.
In 1998 we decided that the rapidly expanding telecommunications market
presented an opportunity to utilize some of the technology and support
capabilities that we had developed, and we entered into the
telecommunications industry via the pre-paid long distance market. In
December 1998, we sold our retail automation software business and now
operate only in the telecommunications marketplace.
Our principal executive offices are located at 17383 Sunset Boulevard, Suite
350, Pacific Palisades, California 90272, and our telephone number is (310)
566-1700.
Recent Developments
On November 19, 2002 we entered into an agreement with Global Capital
Funding Group, L.P. that provided us with a two year loan of $1.25 million.
A portion of the proceeds from this financing were used to pay off the
remaining balance of Dial Thru's April 2001 convertible debenture with
Global Capital, while the remaining $807,000 has been and will be used for
the Company's ongoing working capital needs.
On January 27, 2003, we amended our 6% convertible debenture with GCA
Strategic Investment Fund Limited to change the debenture's maturity date
from January 28, 2003 to February 24, 2004. In addition, we cancelled the
existing warrants to purchase 50,000 shares of common stock at an exercise
price of $0.41 and issued warrants to purchase 150,000 shares of common
stock at an exercise price of $0.24 which expire on January 28, 2008.
On January 27, 2003, we amended our 10% convertible notes with three of our
executives to change the notes' maturity dates from October 24, 2003 to
February 24, 2004.
Development of Our Telecommunications Business
In January 1998, we acquired US Communication Services, Inc. ("USC"), a
provider of prepaid phone cards, public Internet access kiosks and pay
telephones. While the USC acquisition did not proceed as intended, leading
to our rescission of the transaction in May 1998, we decided to develop our
in-house capabilities to expand our telecommunications operations and
continued to focus on the rapidly growing prepaid phone card market. In
August 1998, we entered into an agreement with PT-1 Communications, Inc. to
acquire long distance telecommunications and debit services for use in the
marketing and distribution of domestic and international prepaid phone
cards. We conducted our domestic prepaid phone card business through RDST,
Inc., a wholly owned subsidiary, by purchasing services from PT-1 until mid-
1999. In the second quarter of fiscal 1999, we purchased telecommunications
switching equipment and an enhanced services platform. Following a period of
development, implementation and testing, we commenced operations as a
facilities-based carrier in the fourth quarter of our 1999 fiscal year.
Calls made with our prepaid phone cards were then routed through our
switching facilities, giving us better control over costs and quality of
service.
In November 1999, we completed the DTI Acquisition and continued operations
of its facilities-based telecommunications carrier business through its
subsidiary, Dial Thru.com. During the first quarter of fiscal 2000, we
appointed John Jenkins (founder of the acquired business) to the position of
President and Chief Operating Officer of our Company. In the third quarter
of fiscal 2000, we relocated our Texas operations, including our switching
facilities, to a location in downtown Los Angeles. During the fourth quarter
of fiscal 2001, Mr. Jenkins was appointed by our Board of Directors to the
position of Chairman of the Board and also became our Chief Executive
Officer. At that time we announced the creation of our "Bookend Strategy"
and the roll out of our facilities-based Internet Protocol network, whereby
we sell VoIP to allow us to compete in the international telecommunications
market.
Mr. Jenkins continued the merger of operations of the two businesses and
increased our emphasis on the international wholesale and retail business
segment while reducing our focus on the prepaid domestic market. We now
operate as a facilities-based global IP communications company providing
connectivity to international markets experiencing significant demand for IP
enabled services. We provide a variety of international telecommunications
services, including the transmission of voice and data traffic and the
provision of Web-based and other communications services, which are targeted
to small and medium sized enterprises ("SMEs"), wholesale carriers providing
international and domestic long distance traffic and consumers. We utilize
VoIP packetized voice technology (and other compression techniques) to
improve both costs and efficiencies of telecommunication transmissions, and
are developing a private VoIP telephony network. We utilize digital fiber
optic cable, oceanic cable transmission facilities, international satellites
and the Internet to transport our communications.
During the fourth quarter of fiscal 2001, we acquired the assets and certain
of the liabilities of Rapid Link, Incorporated, ("Rapid Link") a provider of
integrated data and voice communications services to both wholesale and
retail customers around the world. Rapid Link's global VoIP network reaches
thousands of retail customers, primarily in Europe and Asia. This
acquisition has significantly enhanced our product lines, particularly our
Dial Thru and Re-origination services, Global Roaming products, and
wholesale termination. Furthermore, the acquisition has allowed us to roll
out services to additional international markets and more rapidly expand our
VoIP strategy due to the engineering and operational expertise acquired in
the transaction. For 2002, 82% of our total revenue resulted from the
retail customers and VoIP infrastructure that we acquired from Rapid Link,
contributing significantly to our overall revenue growth of 255% over 2001.
Our Business Strategy
Our primary business concentrates on the marketing of IP telephony services,
including voice, fax, data and other Web-based services. The term Bookend
Strategy describes our primary focus, which is to provide telecommunication
services originating in foreign countries and in the corresponding ethnic
segment domestically in the United States via the Internet to transport
various forms of communications. These services are provided primarily via
the public Internet, utilizing VoIP and other digitized voice technologies.
VoIP is voice communication that has been converted into digital packets and
is then addressed, prioritized, and transmitted over any form of broadband
network utilizing the technology that makes the Internet possible. These
technologies allow us to transmit voice communications with the same high-
density compression as networks initially designed for data transmission,
and at the same time utilize a common network for providing customers with
data and other Web-based services.
By utilizing VoIP over the public Internet, we avoid the high network cost
associated with private line connections to each international destination,
which would require us to lease a dedicated line for a set period of time at
a set rental rate and to "fill" idle network capacity with traffic in order
to offset the high fixed costs of such a private line. The primary focus of
our business is to sell a bundled solution of communication services, such
as international dial thru, re-origination, fax over the Internet to SMEs
worldwide. We also sell telecommunications services for both the foreign and
domestic termination of international long distance traffic into the
wholesale market. Our primary objective in selling into the wholesale market
is to take advantage of below market international rates that arise from
time to time while we are developing revenue from our retail marketing
operations. We expanded the offering of our wholesale services in the 2002
fiscal year and believe that additional market opportunities for select
wholesale routes will be available to us in our current fiscal year. In some
markets, where the price advantages and capacity limitations do not provide
for significant retail opportunities, we sell only wholesale terminations.
A key part of the Bookend Strategy is the establishment of direct routes for
telecommunications traffic to and from a target country. Once we have
determined that a particular country meets our requirements for availability
of retail revenue opportunities, we then must determine the best manner to
establish dedicated connectivity. This is usually accomplished by
establishing a licensing agreement within the country, whereby we are
licensed to sell these communication products. We then make these products
available to SMEs in the target country through public Internet connections
and apply the appropriate technology to provide for the compression of the
telecommunications traffic over these routing options. The emerging
technology that is best suited for the majority of these installations is
VoIP.
We primarily focus on markets where competition is not keen, thereby giving
us opportunities for greater profit margins. These markets include regions
where the deregulation of telecommunications services has not been completed
and smaller markets that have not attracted large multi-national providers.
South Africa, Asia, and parts of South America offer the greatest abundance
of these target markets.
Cooperating with overseas carriers and the incumbent, usually government
owned, telephone companies, gives us better opportunities to engage in the
co-branding of jointly marketed products, including IP-based enhancements
that they have developed, rather than simply basing a strategy on pricing
arbitrage. As a result, we are regularly invited to participate in new
markets.
The explosive growth of the Internet has accelerated the rapid merger of the
worlds of voice-based and data-based communications. By first digitizing
voice signals, then utilizing the same packetizing technology that makes the
Internet possible, VoIP provides for a cost effective manner in which to
perform the signal compression needed to maximize the return from the use of
the public Internet. In this way, not only has efficiency of the dedicated
circuits been improved, but use of the public Internet provides a much more
cost effective means of transmission and rapid deployment compared to
traditional private leased lines and circuits.
We currently operate our domestic telecommunications switching facilities in
Los Angeles, California, Atlanta, Georgia, and Frankfurt, Germany, providing
for long distance services worldwide. Development of the private IP network
and the use of VoIP technology have improved both the cost and quality of
telecommunications services, as well as facilitating our expansion into
other Internet related opportunities.
Our Products and Services
Dial Thru and Re-origination Services
We provide a variety of international Dial Thru and Re-origination services.
These services, while accounting for a majority of our revenues, will
continue to decrease as a percentage of our total revenues as we continue to
develop and market new services. Generally, the Dial Thru and Re-origination
services are provided to customers that establish deposits or prepayments
with us to be used for long-distance calling. The Dial Thru service allows
customers the convenience of making local and/or international calls in the
same manner as traditional long distance dialing. In those markets in which
we cannot currently provide Dial Thru service, we offer our Re-origination
service, which allows a caller outside of the United States to place a long
distance telephone call that appears to have originated from our switch in
Los Angeles to the customer's location, and then connects the call through
our network to anywhere in the world. By completing the calls in this
manner, we are able to provide very competitive rates to the customer.
Wherever possible, we route calls over our private network. By using VoIP to
compress voice and data transmissions across the public Internet, we are
able to offer these services at costs that are substantially less than
traditional communications services.
International Wholesale Termination
Primarily as a result of our acquisition of Rapid Link, we began offering
international call completion on a wholesale basis to international
telecommunications companies. Our service enables our customers to offer
their own customers phone to phone global voice and fax services. This
service provides our customers with high quality and low cost long distance
without our customers having to deploy their own VoIP infrastructure. We
can also provide additional termination opportunities to customers that have
developed their own VoIP networks with nearly instant access to our
termination points by connecting to these customers via the Internet.
Therefore, we have the capability to offer our services to carriers
connecting to our network through traditional dedicated switch to switch
connections, and through the public Internet whereby our customers connect
to our network using their own VoIP equipment.
FaxThru
We offer FaxThru and "store and forward" fax services, which allow a
customer to send a fax to another party utilizing the Internet without
incurring long distance or similar charges. From the customer's perspective,
these products function exactly like traditional fax services, but with
significant savings in long distance charges.
Global Roaming
Our Global Roaming service provides customers a single account number to use
to initiate phone-to-phone calls from locations throughout the world using
specific toll-free access numbers. This service enables customers to receive
the cost benefits associated with our telecommunications network throughout
the world. This product will begin to account for a more significant amount
of our revenue due to the acquisition of Rapid Link, which provides this
product to its retail customers around the world.
1+ Services and Dial Around Products
We are licensed to provide long distance service in most of the United
States and now have begun selling our 1+ long distance service and dial
around products to our SME customer base. We are also targeting ethnic
segments of the United States which correspond to foreign countries in which
we have facilities. This allows us to add a complete package of
communication services to the SME customer, furthering our Bookend Strategy.
Prepaid Phone Cards
During fiscal year 2000, prepaid calling cards accounted for approximately
32% of our revenue. Since that time, we significantly reduced our emphasis
on this segment of our business in favor of other products and services that
offer the opportunity for higher profit margins. Currently, we do not offer
this product to our customers and calling cards did not generate any revenue
in either our 2001 or our 2002 fiscal years. It is not anticipated that this
product will account for a significant amount of revenue going forward.
Suppliers
Our principal suppliers consist of domestic and international
telecommunications carriers. Relationships currently exist with a number of
reliable carriers. Due to the highly competitive nature of the
telecommunications business, we believe that the loss of any carrier would
not have a long-term material impact on our business.
Customers
We focus our retail sales and marketing efforts toward SMEs, particularly
those located in foreign markets where telecommunications deregulation has
not taken place or is in the process of taking place, residential customers
in those same markets and in the United States, and wholesale customers
located both domestically and internationally. We rely heavily on the use of
commissioned agents to generate retail sales in the foreign markets. By
doing so, we believe that we establish a wide base of customers with little
vulnerability based on lack of customer loyalty. Our wholesale customers are
primarily large public telecommunications customers in the United States,
and medium to large foreign Postal, Telephone and Telegraph companies, which
are those entities responsible for providing telecommunications services in
foreign markets and are usually government owned or controlled. We believe
the loss of any individual customer would not materially impact our
business.
Competition
The telecommunications services industry is highly competitive, rapidly
evolving and subject to constant technological change. Other providers
currently offer one or more of each of the services offered by us.
Telecommunication service companies compete for consumers based on price,
with the dominant providers conducting extensive advertising campaigns to
capture market share. As a service provider in the long distance
telecommunications industry, we compete with such dominant providers as
AT&T Corp., MCI WorldCom Inc., and Sprint Corporation, all of which are
substantially larger than us and have the resources, history and customer
bases to dominate virtually every segment of the telecommunications market.
A substantial majority of the telecommunications traffic around the world is
carried by dominant carriers in each market. These carriers, such as British
Telecom and Deutsche Telekom, have started to deploy packet-switch networks
for voice and fax traffic. In addition, other industry leaders, such as
AT&T, MCI WorldCom, Sprint and Qwest Communications International have
recently announced their intention to offer Internet telephony services both
in the United States and internationally. These and other competitors may be
able to bundle services and products that are not offered by us, together
with Internet telephony services, to gain a competitive advantage over us in
the marketing and distribution of products and services
We also compete with other smaller, emerging carriers including IDT Corp.,
ITXC Corporation, deltathree.com, Primus Telecommunications Group, Inc., and
Net2Phone Inc. We believe that additional competitors may be attracted to
the market, including internet-based service providers and other
telecommunications companies. We also believe that existing competitors are
likely to continue to expand their service offerings to appeal to retailers
and consumers.
The market for international voice and fax call completion services is also
highly competitive. We compete both in the market for enhanced Internet
communication services and the market for carrier transmission services. We
believe that the primary competitive factors in the Internet and VoIP
communications business are quality of service, price, convenience and
bandwidth. We believe that the ability to offer enhanced service
capabilities, including new services, will become an increasingly important
competitive factor in the near future.
Future competition could come from a variety of companies both in the
Internet and telecommunications industries. We also compete in the growing
markets of providing Re-origination services, Dial Thru services, dial-
around, 10-10-XXX calling and other calling services. In addition, some
Internet service providers have begun enhancing their real-time interactive
communications and, although these companies have initially focused on
instant messaging, we expect them to provide PC-to-phone services in the
future.
Internet Telephone Service Providers
During the past several years, a number of companies have introduced
services that make Internet telephony or voice services over the Internet
available to businesses and consumers. Concert Global Clearinghouse, iBasis,
ITXC, and the wholesale divisions of Net2Phone and deltathree.com route
traffic to destinations worldwide and compete directly with us. Other
Internet telephony service providers focus on a retail customer base and may
in the future compete with us. These companies may offer the kinds of voice
services we intend to offer in the future. In addition, companies currently
in related markets have begun to provide VoIP services or adapt their
products to enable voice over the Internet services. These companies may
potentially migrate into the Internet telephony market as direct
competitors.
Regulation of Internet Telephony and the Internet
The use of the Internet to provide telephone service is a relatively recent
market development. Currently, the Federal Communications Commission ("FCC")
is considering whether to impose surcharges or additional regulations upon
certain providers of Internet telephony. On April 10, 1998, the FCC issued
its report to Congress concerning the implementation of the universal
service provisions of the Telecommunications Act of 1996. In the report,
the FCC indicated that it would examine the question of whether certain
forms of phone-to-phone Internet telephony are information services or
telecommunications services. If the FCC were to determine that certain
services are subject to FCC regulation as telecommunications services, the
FCC may require providers of Internet telephony services to make universal
service contributions, pay access charges or be subject to traditional
common carrier regulation. It is also possible that PC-to-phone and phone-
to-phone services may be regulated by the FCC differently. In addition, the
FCC sets the access charges on traditional telephony traffic and if it
reduces these access charges, the cost of traditional long distance
telephone calls will probably be lowered, thereby decreasing any competitive
pricing advantage that we have. In May of 2000, the FCC approved an access
charge reduction plan known as CALLS which has resulted in a reduction of
the access charges paid by traditional long distance carriers to the major
local phone companies.
Changes in the legal and regulatory environment relating to the
Internet connectivity market, including regulatory changes which affect
telecommunications costs or that may increase the likelihood of competition
from the regional Bell operating companies or other telecommunications
companies, could increase our costs of providing services. For example, the
FCC determined in 1999 that subscriber calls to Internet service providers
should be classified for jurisdictional purposes as interstate calls. On
appeal, the U.S. Court of Appeals remanded the case to the FCC, directing
the FCC to reconsider this determination. If the FCC reaffirms its original
determination, the determination could affect a telephone carrier's cost for
provision of service to these providers by eliminating the payment of
reciprocal compensation to carriers terminating calls to these providers.
The FCC has pending a proceeding to encourage the development of cost-based
compensation mechanisms for the termination of calls to Internet service
providers. Meanwhile, state agencies will determine whether carriers receive
reciprocal compensation for these calls. If new compensation mechanisms
increase the costs to carriers of termination calls to Internet service
providers or if States eliminate reciprocal compensation payments, the
affected carriers could increase the price of service to Internet service
providers to compensate, which could raise the cost of Internet access to
consumers.
In addition, although the FCC to date has determined that providers of
Internet services should not be required to pay interstate access charges,
this decision may be reconsidered in the future. This decision could occur
if the FCC determines that the services provided are basic interstate
telecommunications services and no longer subject to the exemption from
access charges that are currently enjoyed by providers of enhanced services.
Access charges are assessed by local telephone companies to long-distance
companies for the use of the local telephone network to originate and
terminate long-distance calls, generally on a per minute basis. The FCC has
stated publicly that it would be inclined to hold the provision of phone-to-
phone Internet protocol telephony to be a basic telecommunications service
and therefore subject to access charges and universal service contribution
requirements. In a Notice of Inquiry released September 29, 1999, the FCC
again asked for comments on the regulatory status of Internet telephony.
Specifically, the FCC asked for comments to address whether Internet
telephony service generally, and phone-to-phone service in particular, may
be regulated as a basic telecommunications service. If the FCC concludes
that any or all Internet telephony should be regulated as a basic
communications service, it eventually could require that Internet telephony
providers must contribute to universal service funds and pay access charges
to local telephone companies. The imposition of access charges or universal
service contributions would substantially increase our costs of serving
dial-up customers. Following the election of George W. Bush as President of
the United States, William Kennard resigned from the chairmanship of the FCC
and President Bush appointed Michael Powell as the new chairman. The FCC's
polices may change as a result of this change in FCC leadership.
State public utility commissions may retain jurisdiction to regulate the
provision of intrastate Internet telephony services. At least one state
public utility commission (the Nebraska Commission) has made a determination
that it will regulate intrastate Internet telephony services. State
regulation of intrastate Internet telephony services may result in the
requirement that Internet telephony providers pay intrastate access charges
to local phone companies and pay into state universal service funds.
Local phone companies seeking to require that providers of Internet
telephony services pay access charges to them have the option of filing suit
as well as initiating regulatory proceedings. In January 2001, a state trial
court in Colorado ruled that one provider of Internet telephony services
must pay intrastate access charges to the local phone company. The Colorado
litigation result may encourage local phone companies to file more such
suits. Courts in such suits may award substantial damages for past periods
of time in which the Internet telephony provider did not pay access charges
as well as require that access charges be paid prospectively. State and
federal regulators are in some cases authorized to award damages as well as
prospective relief.
To our knowledge, there are currently no domestic and few foreign laws or
regulations that prohibit voice communications over the Internet. A number
of countries that currently prohibit competition in the provision of voice
telephony have also prohibited Internet telephony. Other countries permit
but regulate Internet telephony. If Congress, the FCC, or State regulatory
agencies of foreign governments begin to regulate Internet telephony, such
regulation may materially adversely affect our business, financial condition
or results of operations.
In addition, access to our services may also be limited in foreign countries
where laws and regulations otherwise do not prohibit voice communication
over the Internet. We have negotiated agreements to provide our services in
various countries. No assurances can be given that we will continue to be
successful in these negotiations.
Congress has recently adopted legislation that regulates certain aspects of
the Internet, including on-line content, user privacy and taxation. For
example, the Internet Tax Freedom Act prohibits certain taxes on Internet
uses through November 1, 2003. We cannot predict whether substantial new
taxes will be imposed on our services provided after that date. In addition,
Congress and other federal entities are considering other legislative and
regulatory proposals that would further regulate the Internet. Congress has
enacted digital signature legislation and various states have adopted and
are considering Internet-related legislation. Increased United States
regulation of the Internet may slow its growth, particularly if other
governments follow suit, which may increase the cost of doing business over
the Internet and materially adversely affect our business, financial
condition, results of operations and future prospects.
The European Union's European Commission (EC) in early January 2001
recommended that member countries refrain from regulating Internet telephony
service. However, the EC qualified its recommendation by noting that
regulation is appropriate when an Internet telephony company provides levels
of quality and reliability equal to those provided by traditional phone
companies, makes a separate voice-only service offering, and meets several
other conditions.
The European Union has also enacted several directives relating to the
Internet. The European Union has, for example, adopted a directive on data
protection that imposes restrictions on the processing of personal data that
are more restrictive than current United States privacy standards. Under the
directive, personal data may not be collected, processed or transferred
outside the European Union unless certain specified conditions are met. In
addition, persons whose personal data is processed within the European Union
are guaranteed a number of rights, including the right to access and obtain
information about their data, the right to have inaccurate data rectified,
the right to object to the processing of their data for direct marketing
purposes and in certain other circumstances, rights of legal recourse in the
event of unlawful processing. The directive will affect all companies that
process personal data in, or receive personal data processed in, the
European Union, and may affect companies that collect or transmit
information over the Internet from individuals in the European Union Member
States. In particular, companies with establishments in the European Union
may not be permitted to transfer personal data to countries that do not
maintain adequate levels of data protection. Our transmission of personal
data is limited and we do not anticipated it becoming a significant source
of revenue.
In addition, the European Union has adopted a separate, complementary
directive that pertains to privacy and the processing of personal data in
the telecommunications sector. This directive establishes certain
requirements with respect to, among other things, the processing and
retention of subscriber traffic and billing data, subscriber rights to non-
itemized bills, and the presentation and restriction of calling and
connected line identification. In addition, a number of European countries
outside the European Union have adopted, or are in the process of adopting,
rules similar to those set forth in the European Union directives.
Although we do not engage in the collection of data for purposes other than
routing calls and billing for our services, the data protection directives
are quite broad and the European Union Privacy standards are stringent.
Accordingly, the potential effect of these data protection rules on the
development of our business is uncertain.
Sales and Marketing
We market long distance telecommunications products and services from our
offices in Los Angeles, California and Atlanta, Georgia. We also have a
wholly owned subsidiary in Mannheim, Germany, a regional sales office
located in Johannesburg, South Africa, and an office in Caracas, Venezuela.
Our revenues are primarily derived from direct sales to business accounts,
sales through commissioned agents and wholesale sales to other
telecommunications providers. We plan to expand our sales effort to both
domestic and international business accounts, as well as add products and
services targeted toward residential customers in both markets.
We have substantial revenues in foreign markets. For the years ending
October 31, 2002, 2001 and 2000, $8.6 million or 35%, $5.4 million or 78%,
and $5.8 million or 68% of our total revenue for each year, respectively,
originated from Western Europe, Africa and South East Asia.
Intellectual Property
We don't hold any significant patents or trademarks. Our products and
services are available to other telecommunication companies.
Employees
As of January 23, 2003, we had approximately 67 full-time and 3 part-time
employees, approximately 15 of which perform administrative and financial
functions, approximately 27 of which perform customer support duties and
approximately 28 of which have experience in telecommunications operations
and/or sales. Approximately 39 current employees are located in Los Angeles,
California, and Atlanta, Georgia, and approximately 28 employees operate in
offices worldwide. No employees are represented by a labor union, and we
consider our employee relations to be good.
Risk Factors
Our cash flow may not be sufficient to satisfy our cost of operations
For the years ended October 31, 2002, 2001 and 2000, we recorded net losses
of approximately $4.7 million, $2.7 million and $11.2 million, respectively,
on revenues of approximately $24.9 million, $7.0 million and $8.6 million,
respectively. As a result, we currently have a working capital deficit
of over $6 million. In addition, we have a significant amount of trade
payables, of which approximately 33% is past due, excluding disputes for
overcharges with our underlying carriers of approximately $500,000. To be
able to service our debt obligations over the course of the 2003 fiscal year
we must generate significant cash flow and obtain additional financing. If
we are unable to do so or otherwise to obtain funds necessary to make
required payments on our trade debt and other indebtedness, we may not be
able to continue our operations.
Our operating history makes it difficult to accurately assess our general
prospects in the VoIP portion of the telecommunications industry and the
effectiveness of our business strategy. In addition, we have limited
meaningful historical financial data upon which to forecast our future sales
and operating expenses. Our future performance will also be subject to
prevailing economic conditions and to financial, business and other factors.
Accordingly, we cannot assure you that we will successfully implement our
business strategy or that our actual future cash flows from operations will
be sufficient to satisfy our debt obligations and working capital needs.
To implement our business strategy, we will also need to seek additional
financing. There is no assurance that adequate levels of additional
financing will be available at all or on acceptable terms. In addition, any
additional financing will likely result in significant dilution to our
existing stockholders. If we are unable to obtain additional financing on
terms that are acceptable to us, we could be forced to dispose of assets to
make up for any shortfall in the payments due on our debt under
circumstances that might not be favorable to realizing the highest price for
those assets. A portion of our assets consist of intangible assets, the
value of which will depend upon a variety of factors, including the success
of our business. As a result, if we do need to sell any of our assets, we
cannot assure you that our assets could be sold quickly enough, or for
amounts sufficient, to meet our obligations.
We face competition from numerous, mostly well-capitalized sources
The market for our products and services is highly competitive. We face
competition from multiple sources, many of which have greater financial
resources and a substantial presence in our markets and offer products or
services similar to our services. Therefore, we may not be able to
successfully compete in our markets, which could result in a failure to
implement our business strategy, adversely affecting our ability to attract
and retain new customers. In addition, competition within the industries in
which we operate is characterized by, among other factors, price and the
ability to offer enhanced services. Significant price competition would
reduce the margins realized by us in our telecommunications operations. Many
of our competitors have greater financial resources to devote to research,
development and marketing, and may be able to respond more quickly to new or
merging technologies and changes in customer requirements. If we are unable
to provide value-added Internet products and services then we will be unable
to compete in certain segments of the market, which could have an adverse
impact on our business.
The regulatory environment in our industry is very uncertain
The legal and regulatory environment pertaining to the Internet is uncertain
and changing rapidly as the use of the Internet increases. For example, in
the United States, the FCC is considering whether to impose surcharges or
additional regulations upon certain providers of Internet telephony.
In addition, the regulatory treatment of Internet telephony outside of the
United States varies from country to country. There can be no assurance that
there will not be legally imposed interruptions in Internet telephony in
these and other foreign countries. Interruptions or restrictions on the
provision of Internet telephony in foreign countries may adversely affect
our ability to continue to offer services in those countries, resulting in a
loss of customers and revenues.
New regulations could increase the cost of doing business over the Internet
or restrict or prohibit the delivery of our products or services using the
Internet. In addition to new regulations being adopted, existing laws may be
applied to the Internet . Newly existing laws may cover issues that include
sales and other taxes, access charges, user privacy, pricing controls,
characteristics and quality of products and services, consumer protection,
contributions to the Universal Service Fund, an FCC-administered fund for
the support of local telephone service in rural and high-cost areas, cross-
border commerce, copyright, trademark and patent infringement, and other
claims based on the nature and content of Internet materials.
Changes in the technology relating to Internet telephony could threaten our
operations
The industries in which we compete are characterized, in part, by rapid
growth, evolving industry standards, significant technological changes and
frequent product enhancements. These characteristics could render existing
systems and strategies obsolete and require us to continue to develop and
implement new products and services, anticipate changing consumer demands
and respond to emerging industry standards and technological changes. No
assurance can be given that we will be able to keep pace with the rapidly
changing consumer demands, technological trends and evolving industry
standards.
We need to develop and maintain strategic relationships around the world to
be successful
Our international business, in part, is dependent upon relationships with
distributors, governments or providers of telecommunications services in
foreign markets. The failure to develop or maintain these relationships
could have an adverse impact on our business.
We rely on two key senior executives
Our success is dependent on our senior management team of John Jenkins and
Allen Sciarillo and our future success will depend, in large part, upon our
ability to retain these two individuals.
The expansion of our VoIP product offerings is essential to our survival
We intend to expand our VoIP network and the range of enhanced
telecommunications services that we provide. Our expansion prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in new and rapidly evolving markets.
Our OTC Bulletin Board listing negatively affects the liquidity of our
common stock
Our common stock currently trades on the OTC Bulletin Board. Therefore, no
assurances can be given that a liquid trading market will exist at the time
any investor desires to dispose of any shares of the our common stock. In
addition, our common stock is subject to the so-called "penny stock" rules
that impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and
accredited investors (generally defined as an investor with a net worth in
excess of $1 million or annual income exceeding $200,000, or $300,000
together with a spouse). For transactions covered by the penny stock rules,
a broker-dealer must make a suitability determination for the purchaser and
must have received the purchaser's written consent to the transaction prior
to sale. Consequently, both the ability of a broker-dealer to sell our
common stock and the ability of holders of our common stock to sell their
securities in the secondary market may be adversely affected. The Securities
and Exchange Commission has adopted regulations that define a "penny stock"
to be an equity security that has a market price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the
transaction, of a disclosure schedule relating to the penny stock market.
The broker-dealer must disclose the commissions payable to both the broker-
dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is to sell the securities as a market
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
Item 2. Properties
Our principal executive office is located in Los Angeles, California, where
we lease 6,796 square feet in two locations. Our operations and information
systems are located in Atlanta, Georgia, where we lease 17,034 square feet,
New York, New York, where we lease 104 square feet under a co-location
agreement, and Los Angeles. Our German operations are located in Mannheim
and Frankfurt, Germany, where we lease 8,395 square feet. We also have sales
and administrative offices in Caracas, Venezuela and Johannesburg, South
Africa.
In addition, our subsidiary in Germany, acquired from Rapid Link in October
2001, is a facilities based provider of telecommunications services and
utilizes significant property and equipment to operate its business. As of
October 31, 2002, $475,000, or 15% of our total property and equipment was
located at our Germany subsidiary. We believe that our facilities are
sufficient for the operation of our business for the foreseeable future.
Item 3. Legal Proceedings
On June 12, 2001, Cygnus Telecommunications Technology, LLC, filed a patent
infringement suit (case no. 01-6052) in the United States District Court,
Central District of California, with respect to our "international call-
back" technology. This technology drives our Re-Origination services and
allows our foreign based customers to initiate international telephone calls
by first calling a switch in the United States, which then initiates a "call
back" to the customer sight providing the customer with an open phone line
to place a call anywhere in the world. The injunctive relief that Cygnus
sought in this suit has been denied, but Cygnus continues to seek
compensatory and punitive damages as well as attorneys' fees and costs.
In August 2002, Cygnus filed a motion for a preliminary injunction to
prevent us from providing "call back" services. We filed a cross motion for
summary judgment of non-infringement. Both motions were denied. We intend
to refile the motion for summary judgment for non-infringement. We intend
to continue defending this case vigorously, though our ultimate legal and
financial liability with respect to such legal proceeding cannot be
estimated with any certainty at this time.
On June 3, 2002, RSL Com USA, Inc. ("RSL") filed a breach of contract suit
(case no. BC275210) in the Superior Court of the State of California, County
of Los Angeles, alleging that the Company owes RSL past due sums for
services rendered in connection with a written Carrier Services Agreement.
We have answered denying RSL's claims and, in November 2002, we filed a
cross-complaint against RSL. We do not believe that RSL's claims are
legitimate and intend to defend this case vigorously. At the same time, we
are not presently in a position to estimate our ultimate legal and financial
liability with respect to this matter.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Market For Our Common Stock
We have only one class of shares, common stock, $.001 par value, which is
traded on the OTC Bulletin Board. Each share ranks equally as to dividends,
voting rights, participation in assets on winding-up and in all other
respects. No shares have been or will be issued subject to call or
assessment. There are no preemptive rights, provisions for redemption or
purpose for either cancellation or surrender or provisions for sinking or
purchase funds.
Our Common Stock is currently traded on the OTC Bulletin Board under the
symbol "DTIX." Our principal executive offices are located at 17383 Sunset
Boulevard, Suite 350, Los Angeles, California, 90272, and its telephone
number is (310) 566-1700.
The following table sets forth for the fiscal periods indicated the high and
low closing sales price per share of our Common Stock as reported on the
OTC Bulletin Board. The market quotations presented reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not
necessarily reflect actual transactions.
COMMON STOCK
CLOSING PRICES
--------------
HIGH LOW
----- -----
FISCAL 2001
First Quarter . . . . . . . . . . . . . . $ 2.34 $ 0.50
Second Quarter . . . . . . . . . . . . . . $ 2.63 $ 0.71
Third Quarter . . . . . . . . . . . . . . $ 1.20 $ 0.62
Fourth Quarter . . . . . . . . . . . . . . $ 1.09 $ 0.41
FISCAL 2002
First Quarter . . . . . . . . . . . . . . $ 0.70 $ 0.29
Second Quarter . . . . . . . . . . . . . . $ 0.50 $ 0.21
Third Quarter . . . . . . . . . . . . . . $ 0.29 $ 0.09
Fourth Quarter . . . . . . . . . . . . . . $ 0.13 $ 0.09
The closing price for our Common Stock on January 23, 2003 as reported on
the OTC Bulletin Board was $0.19.
Dividends
We have never declared or paid any cash dividends on our Common Stock and do
not presently intend to pay cash dividends on our Common Stock in the
foreseeable future. We intend to retain future earnings for reinvestment in
our business.
Holders of Record
There were 453 stockholders of record as of January 23, 2003.
Recent Sales of Unregistered Securities
In January 2002, we issued an amended 10% convertible note to Mr. Jenkins to
reflect the advance of an additional $102,433, which matures on October 24,
2003. The note was originally convertible at six-month intervals only, but
was subsequently amended in November 2002 to provide for conversion into
shares of our common stock at the option of Mr. Jenkins at any time prior to
maturity. The conversion price is equal to the closing bid price of our
common stock on the last trading day immediately preceding the conversion.
In connection with the issuance of the amended note we also issued a warrant
to Mr. Jenkins to purchase 102,433 shares of our common stock at an
exercise price of $0.75 per share, which expires on January 28, 2007.
In July 2002, we issued a second amended 10% convertible note to Mr. Jenkins
to reflect the advance of an additional $300,000, which matures on
October 24, 2003. The note was originally convertible at six-month
intervals only, but was subsequently amended in November 2002 to provide for
conversion into shares of our common stock at the option of Mr. Jenkins at
any time prior to maturity. The conversion price is equal to the closing
bid price of our common stock on the last trading day immediately preceding
the conversion. In connection with the issuance of the amended note we also
issued a warrant to Mr. Jenkins to purchase 300,000 shares of our common
stock at an exercise price of $0.75 per share, which expires on July 8,
2007.
Our issuance of the amended note and the warrants was exempt from
registration under the Securities Act pursuant to Regulation D and
Section 4(2) thereof.
Item 6. Selected Financial Data
FISCAL YEARS ENDED OCTOBER 31
-----------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
CONSOLIDATED STATEMENT OF OPERATIONS
DATA (1)
Revenues $ 24,871 $ 7,002 $ 8,591 $ 3,117 $ 2,189
Cost of revenues 16,590 3,625 9,971 2,982 2,155
Operating expenses 11,667 5,365 9,142 4,028 1,399
Other income (expense) (1,298) 647 (655) 79 (101)
Gain on sale of software business - - - 5,309 -
Loss on disposal of USC & equipment - - - - (1,155)
Income (loss) from continuing operations (4,684) (2,684) (11,187) (3,815) (2,621)
Income (loss) from discontinued
operations - - - 218 (103)
Extraordinary item - forgiveness of debt - - - - -
Net income (loss) (4,684) (2,684) (11,187) 1,713 (2,724)
Income (loss) from continuing
operations per share $ (0.34) $ (0.25) $ (1.31) $ (0.56) $ (0.37)
Net income (loss) per share $ (0.34) $ (0.25) $ (1.31) $ 0.25 $ (0.38)
CONSOLIDATED BALANCE SHEET DATE (1):
Total assets
Continuing operations $ 9,787 $ 12,644 $ 6,102 $ 4,467 $ 1,411
Discontinued operations - - - - 3,880
Working capital (deficiency)
Continuing operations (6,879) (6,524) (4,829) 1,251 (1,460)
Discontinued operations - - - - 622
Noncurrent obligations
Continuing operations,
net of discount 2,878 2,070 119 562 -
Discontinued operations - - - - 147
Shareholders' (deficit) equity (1,975) 2,079 508 2,865 1,064
--------------------
(1) All numbers, other than per share numbers, are in thousands. The
results of operations of our predecessor software business have been
presented in the financial statements as discontinued operations. Results of
operations in prior years have been restated to reclassify this business as
discontinued operations.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Fiscal Years Ended October 31, 2002, 2001 and
2000
This Annual Report on Form 10-K contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. These statements relate to expectations
concerning matters that are not historical facts. Words such as "projects",
"believes", "anticipates", "estimates", "plans", "expects", "intends", and
similar words and expressions are intended to identify forward-looking
statements. Although the Company believes that such forward-looking
statements are reasonable, we cannot assure you that such expectations will
prove to be correct. Factors that could cause actual results to differ
materially from such expectations are disclosed herein including, without
limitation, in the "Risk Factors" beginning on page 9. All forward-looking
statements attributable to the Company are expressly qualified in their
entirety by such language and we do not undertake any obligation to update
any forward-looking statements. You are also urged to carefully review and
consider the various disclosures we have made which describe certain factors
which affect our business throughout this Report. The following discussion
and analysis of financial condition and results of operations covers the
years ended October 31, 2002, 2001, and 2000 and should be read in
conjunction with our Financial Statements and the Notes thereto commencing
at page F-1 hereof.
General
On November 2, 1999, we consummated the DTI Acquisition and, in the second
quarter of fiscal 2000, we shifted focus toward our global VoIP strategy.
This change in focus has lead to a significant shift from our prepaid long
distance operations toward higher margin international wholesale and retail
telecommunication opportunities. This strategy allows us to form local
partnerships with foreign PTT's and to provide IP enabled services based on
the in-country regulatory environment affecting telecommunications and data
providers. In the third quarter of fiscal 2000, we further concentrated our
efforts toward our global VoIP telecommunications strategy by moving our
operations to Los Angeles, California. This refocusing and consolidation of
operations has resulted in not only greater savings, but also higher profits
and more sustainable revenues. This consolidation and reduction in staff has
allowed us to significantly reduce our overhead, and although our operations
have not yet produced positive cash flow, we believe that continued cost
reductions and moderate revenue growth would allow us to achieve positive
results in the near future.
On October 12, 2001, we completed the acquisition from Rapid Link of certain
assets and executory contracts of Rapid Link, USA, Inc. and 100% of the
common stock of Rapid Link Telecommunications, GmbH, a German company.
Rapid Link provides integrated data and voice communications services to
both wholesale and retail customers around the world. Rapid Link built a
large residential retail customer base in Europe and Asia, using Rapid
Link's network to make international calls anywhere in the world.
Furthermore, Rapid Link developed a VoIP network using Clarent and Cisco
technology which we have used to take advantage of wholesale opportunities
where rapid deployment and time to market are critical. A significant
majority of our revenue in our 2002 fiscal year was derived from our Rapid
Link acquisition.
On November 19, 2002 we entered into an agreement with Global Capital
Funding Group, L.P. that provided us with a two year loan of $1.25 million.
A portion of the proceeds from this financing were used to pay off the
remaining balance of Dial Thru's April 2001 convertible debenture with
Global Capital while the remaining $807,000 has been and will be used for
the Company's ongoing working capital needs.
Critical Accounting Policies
The consolidated financial statements include accounts of our Company and
all of our majority-owned subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States requires us to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. In preparing these financial
statements, we have made our best estimates and judgments of certain amounts
included in the financial statements, giving due consideration to
materiality. We do not believe there is a great likelihood that materially
different amounts would be reported related to the accounting policies
described below. However, application of these accounting policies involves
the exercise of judgment and use of assumptions as to future uncertainties
and, as a result, actual results could differ from these estimates.
Revenue Recognition
Our revenues are generated at the time a customer uses our network to make a
phone call. We sell our services to SMEs and end-users who utilize our
network for international re-origination and dial thru services, and to
other providers of long distance usage who utilize our network to deliver
domestic and international termination of minutes to their own customers.
At times we receive payment from our customers in advance of their usage,
which we record as deferred revenue, recognizing revenue as calls are made.
The Securities and Exchange Commission's Staff Accounting Bulletin No. 101,
"Revenue Recognition", provides guidance on the application of generally
accepted accounting principles to selected revenue recognition issues. We
have concluded that our revenue recognition policy is appropriate and in
accordance with generally accepted accounting principles and SAB No. 101.
Allowance for Uncollectible Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. All of our receivables are due from commercial
enterprises and residential users in both domestic and international
markets. The estimated allowance for uncollectible amounts is based
primarily on our evaluation of the financial condition of the customer, and
our estimation of the customer's willingness to pay amounts due. We review
our credit policies on a regular basis and analyze the risk of each
prospective customer individually in order to minimize our risk.
Goodwill, Intangible and Other Long-Lived Assets
Property, plant and equipment, certain intangible and other long-lived
assets are amortized over their useful lives. Useful lives are based on our
estimate of the period that the assets will generate revenue. Goodwill is
assessed for impairment at least annually and other intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Financing, Warrants and Amortization of Warrants and Fair Value
Determination
We have traditionally financed our operations through the issuance of debt
instruments that are convertible into our common stock, at conversion rates
at or below the fair market value of our common stock at the time of
conversion, and typically include the issuance of warrants. We have
recorded these financing transactions in accordance with Emerging Issues
Task Force No. 00-27. Accordingly, we recognize the beneficial conversion
feature imbedded in the financings and the fair value of the related
warrants on the balance sheet as deferred financing fees. The deferred
financing fee is amortized over the life of the respective debt instrument.
Carrier Disputes
We review our vendor bills on a monthly basis and periodically disputes
amounts invoiced by its carriers. Prior to the second quarter of fiscal
2001, we recorded as trade accounts payable the entire amounts owed to our
vendors, including amounts in dispute. Any disputes resolved and credited
to us were recorded as other income at the time the credit was issued. We
subsequently changed our policy to record cost of revenues excluding
disputed amounts. We review our outstanding disputes on a quarterly basis
as part of the overall review of our accrued carrier costs, and adjust our
liability based on management's estimate of amounts owed.
Revenues
Our primary source of revenue is the sale of voice and fax traffic
internationally over our VoIP network, which is measured in minutes,
primarily to SMEs, residential users, and wholesale customers. We charge
our customers a fee per minute of usage that is dependent on the destination
of the call and is recognized in the period in which the call is completed.
Expenses
Our costs of revenues are termination fees, purchased minutes and fixed
costs for specific international and domestic Internet circuits and private
lines used to transport our minutes. Termination fees are paid to local
service providers and other international and domestic carriers to terminate
calls received from our network. This traffic is measured in minutes, at a
negotiated contract cost per minute.
General and administrative expenses include salaries, payroll taxes, benefit
expenses and related costs for general corporate functions, including
executive management, finance and administration, legal and regulatory,
information technology and human resources. Sales and marketing expenses
include salaries, payroll taxes, benefits and commissions that we pay for
sales personnel and advertising and marketing programs, including
expenses relating to our outside public relations firms. Interest expense
and financing costs relate primarily to the amortization of deferred
financing fees on our various debt instruments.
Quarterly Results of Operations
The following table sets forth selected unaudited quarterly information for
our last eight fiscal quarters:
Quarter Ended
January 31 April 30 July 31 October 31 Year
$ $ $ $ $
--------- --------- --------- --------- ----------
2002
Revenue 6,586,754 6,086,154 6,138,790 6,059,234 24,870,932
Loss from operations (1,002,479) (922,941) (727,007) (734,107) (3,386,534)
Net loss (1,285,893) (1,239,814) (1,082,615) (1,075,858) (4,684,180)
Basic and diluted loss
per share from operations (0.10) (0.09) (0.08) (0.07) (0.34)
2001
Revenue 890,620 903,639 1,654,079 3,553,524 7,001,862
Loss from operations (991,223) (682,600) (497,762) (1,159,563) (3,331,148)
Net Income (loss) 382,191 (1,193,171) (594,871) (1,278,455) (2,684,306)
Basic and diluted income (loss)
per share from operations 0.03 (0.11) (0.05) (0.12) (0.25)
Results of Operations - 2002 Versus 2001
Due to the Rapid Link acquisition in October 2001, our Results of Operations
for fiscal year 2002 includes a full year of related operations, while
fiscal year 2001 includes one month of related operations.
Revenues
For our fiscal year ended October 31, 2002, we had revenues of $24,870,000,
an increase of $17,870,000, or 255%, over the same period in 2001. Revenues
for the fiscal year ended October 31, 2002 include $21,540,000 resulting
from the customers and infrastructure acquired from Rapid Link. Recurring
revenues not related to Rapid Link were reduced in our 2002 fiscal year by
$1,005,000, primarily due to the loss of business from two large resellers.
In absolute dollars, our retail and wholesale revenues increased by 236% and
282%, respectively, for the fiscal year ended October 31, 2002 compared to
the prior fiscal year. In addition to the growth obtained by the
acquisition of Rapid Link, we have successfully added new wholesale
customers and new international points of termination. Furthermore, we have
added to our wholesale sales force to focus on developing greater wholesale
opportunities. We also plan on using our advertising credits to promote our
retail products through focused advertising targeted at ethnic markets in
the United States.
Expenses
For the fiscal year ended October 31, 2002, we had total direct costs of
revenues of $16,590,000, an increase of $11,620,000, or 234%, over the same
period in 2001. Costs of revenues have increased in absolute dollars due to
the growth in minutes and customers as well as the increased revenue and
traffic acquired from Rapid Link. As a percentage of revenues, costs of
revenues were 67% of revenues for the fiscal year ended October 31, 2002
compared to 71% of revenues for the fiscal year ended October 31, 2001.
Included in our cost of revenues for fiscal year 2002 are credits received
from two vendors totaling $729,000 relating to disputes for minutes billed
in error for periods prior to fiscal 2002. Without these credits, costs of
revenues as a percentage of revenues for the fiscal year ended October 31,
2002 would have been 70%. Our costs of revenues as a percentage of revenues
have improved slightly as the retail revenue acquired from Rapid Link
realizes higher margins than our existing retail traffic. This margin
improvement has been reduced in part by growth in our wholesale traffic.
Costs of revenues as a percentage of revenues will fluctuate depending on
the traffic mix between our wholesale and retail products.
General and administrative expenses were $7,511,000 and $3,464,000 for the
fiscal years ended October 31, 2002 and 2001, respectively. This absolute
dollar increase of $4,047,000, or 117%, is primarily due to the addition of
the Rapid Link operations. As a percentage of revenues, general and
administrative expenses were 30% and 49% of revenues for the fiscal years
ended October 31, 2002 and 2001, respectively. Included in general and
administrative expenses is bad debt expense of $994,000 and $140,000 for the
fiscal years October 31, 2002 and 2001, respectively. For the 2002 fiscal
year, bad debt expense includes $525,000 attributable to non-payment from
two wholesale customers, including $310,000 from our German operation. We
have implemented strict credit policies and systems to closely monitor our
wholesale traffic daily to reduce the risk of this type of bad debt in
future periods. We also review our general and administrative expenses
regularly, and continue to manage the costs accordingly to support the
current business as well as anticipated near term growth.
Sales and marketing expenses were $1,399,000, or 6% of revenues for the
fiscal year ended October 31, 2002 compared to $824,000, or 12% of revenues,
for the same period last year. This absolute dollar increase of $575,000,
or 70%, is due to the acquisition of the Rapid Link operations. This
reduction of our sales and marketing expenses as a percentage of revenues is
primarily due to the increase in wholesale customer revenues as a percentage
of our total revenues. A majority of our retail revenues are generated by
outside agents, or through newspaper and periodical advertising, which is
managed by a small in-house sales and marketing group. Alternatively, we
can generate significant revenues from our wholesale business with
relatively few sales personnel, as wholesale customers are usually large
international telecommunications companies that provide both retail and
wholesale opportunities to millions of customers worldwide.
Depreciation and amortization expenses increased to $2,437,000 from $818,000
for the fiscal years ended October 31, 2002 and 2001, respectively. This
increase primarily relates to the depreciation and amortization of the
assets of the business acquired from Rapid Link. A majority of our
depreciation and amortization expenses relate to the equipment utilized in
our VoIP network. In accordance with Statement of Accounting Standards No.
142, effective November 1, 2001, we no longer amortize goodwill. Had we
amortized goodwill for fiscal year 2002, we would have recognized $220,000
in additional amortization expense.
For the fiscal year ended October 31, 2002, interest expense and financing
costs of $1,275,000 were due primarily to the amortization of deferred
financing fees on our convertible debentures and our related party notes
payable. For the fiscal year ended October 31, 2001 $709,000 of interest
expense and financing fees were primarily attributable to amortization of
deferred financing fees associated with our convertible notes which were
converted to equity in March 2001, and the fair value of additional warrants
issued to the holders of the notes which were fully vested at the time of
issuance.
Settlements with two major carriers over charges in prior periods amounted
to a total credit to the statements of operations of $1,789,000 for the
fiscal year ended October 31, 2001. Of this amount, $780,000 was the result
of a settlement with Star Telecommunications. Also included was $447,000
representing common stock received from Star in connection with our dispute
settlement. This amount was subsequently written off due to the Chapter 11
bankruptcy filing by Star.
As a result of the foregoing, we incurred a net loss of $4,684,000, or $0.34
per share, for the fiscal year ended October 31, 2002, compared with a net
loss of $2,684,000 or $0.25 per share, for the fiscal year ended October 31,
2001.
Results of Operations - 2001 Versus 2000
Revenues
For the fiscal year ended October 31, 2001, we had revenues from continuing
operations of $7,002,000, a decrease of $1,589,000 or 19% over fiscal 2000.
Revenues in 2001 included $1,572,000 resulting from the purchase of Rapid
Link. Our international long distance business as described above generated
revenues of $5,429,000 for the fiscal year ended October 31, 2001 compared
to $5,836,000 for the fiscal year ended October 31, 2000. The remaining
revenue for 2000 of $2,755,000 was derived from the prepaid long distance
business that we have discontinued. Resources devoted to the discontinuation
of the prepaid business, as well as a shift in our strategic focus have
prevented us from fully developing and marketing our redirected business,
resulting in a slight decline in revenues from international long distance
services. We now devote all of our resources to providing international
communication services in niche markets to SME's either through direct sales
efforts, outside sales agents or resellers in each market.
Expenses
For the fiscal year ended October 31, 2001, we had total direct costs of
revenues relating to revenues from continuing operations of $4,967,000, a
decrease of $5,004,000, or 50%, from $9,971,000 in fiscal 2000. Included in
the cost is $1,194,000 attributable to Rapid Link operations. In addition,
during the fiscal year ended October 31, 2001 we received credits from our
vendors totaling $1,340,000, including a $780,000 carrier usage credit as
part of our settlement of litigation with Star Telecommunications. This
amount was included as a reduction of costs of revenues. Excluding the
impact of Rapid Link and the credits from our vendors, costs of revenues
were $3,773,000 or 69% of revenues, for the fiscal year ended October 31,
2001, compared to $9,971,000, or 116% of revenues, for the fiscal year ended
October 31, 2000. A substantial portion of this negative margin for 2000
related to our sale of prepaid phone cards for use between the United States
and Mexico. Changes in competitive pricing structures combined with changes
in predicted average call durations resulted in carrier costs exceeding
revenues. By focusing our business away from low margin prepaid calling
cards to delivering higher margin international communication services to
SME's in niche markets utilizing our VoIP network, we have realized higher
margins on sales across our product lines.
General and administrative expenses were $3,464,000 and $5,202,000 for the
fiscal years ended October 31, 2001 and October 31, 2000, respectively.
This decrease of $1,738,000, or 33% includes $539,000 attributable to Rapid
Link operations. Excluding the expenses associated with Rapid Link, general
and administrative expenses decreased by 44% from the prior period. The
change in our business away from prepaid calling cards, which requires a
larger infrastructure to support and control a large volume of transactions,
as well as our decision to consolidate our US operations into one location
has resulted in an overall drop in general and administrative expenses in
absolute dollars. It is anticipated that general and administrative expense
will grow in absolute dollars and as a percentage of revenues in the short
term due to the acquisition of Rapid Link, as a majority of the acquired
infrastructure supports a large retail customer base.
Sales and marketing expenses were $824,000, or 12% of revenues for the
fiscal year ended October 31, 2001, compared to $863,000, or 10% of
revenues, for the same period in fiscal 2000. Included in sales and
marketing expenses for 2001 is $16,000 attributable to Rapid Link
operations. The increase in sales and marketing as a percentage of revenues
is the result of our investment in startup operations in Latin America. In
addition, Rapid Link uses newspapers and periodicals to advertise its
services, which we will continue and increase in order to grow the acquired
customer base.
Depreciation and amortization expenses attributable to continuing operations
increased $253,000 or 45%, from $565,000 for the fiscal year ended October
31, 2000 to $818,000 for the fiscal year ended October 31, 2001. Of this
increase, $195,000 relates to the depreciation and amortization of the
assets of the business acquired from Rapid Link. The remaining increase of
$58,000 is attributable to the increase in depreciation expense for
telephone switching equipment, which was purchased in late fiscal 1999, as
well as the amortization of goodwill related to the DTI Acquisition.
The fiscal 2000 and 2001 interest expense is primarily attributable to our
$1.0 million convertible notes, which had original deferred financing fees
totaling $609,000, and were being amortized over a three year period. The
notes were converted to equity in March 2001, and the remaining unamortized
deferred financing fees of $315,000 were charged to expense. In connection
with the conversion of the notes into equity, we issued 150,000 warrants to
the note holders on March 13, 2001, and recorded $144,000 as the fair value
of the warrants. This amount was recorded as interest expense for the
fiscal year ended October 31, 2001. In addition, during fiscal 2001, we
incurred $150,000 in financing fees relating to our convertible debenture,
which was issued in April, 2001. These financing fees include $144,000
relating to a beneficial conversion feature provided by our April 2001
convertible debenture agreement, which provides for a below market
conversion of 30% applied to the fair market value of our common stock at
each conversion of the convertible debenture.
As a result of the foregoing, we incurred a net loss $2,684,000, or $0.25
per share, for the fiscal year ended October 31, 2001, compared with a net
loss of $11,187,000, or $1.31 per share, for the fiscal year ended October
31, 2000.
Liquidity and Sources of Capital
The growth model for our business is scaleable, but the rate of growth is
dependent on the availability of future financing for capital resources.
Our funding of additional infrastructure development will be provided
through the operations of our Telecommunications Business and externally
through debt and/or equity offerings. We plan to obtain vendor financing
for any equipment needs associated with expansion. We believe that, with
sufficient capital, we can significantly accelerate our growth plan. Our
failure to obtain additional financing could delay the implementation of our
business plan and have a material adverse effect on its business, financial
condition and operating results.
At October 31, 2002, we had cash and cash equivalents of approximately
$489,000, an increase of $394,000 from the balance at October 31, 2001. As
of October 31, 2002, we had a working capital deficit of approximately
$6,879,000, compared to a working capital deficit of approximately
$6,524,000 at October 31, 2001. As of October 31, 2002, our current assets
of approximately $2,006,000 included net accounts receivable of
approximately $1,370,000, which has decreased over the balance of $1,833,000
at October 31, 2001 primarily due to a writeoff of $215,000 for a single
wholesale customer in the first quarter of fiscal 2002. As revenue
increases, we do not anticipate a commensurate increase in our accounts
receivable as a majority of our customers pay in advance for service, or on
a weekly basis.
Net cash used in operating activities was $1,202,000 for the fiscal year
ended October 31, 2002, compared to $950,000 for the fiscal year ended
October 31, 2001. The net cash used in operating activities for the fiscal
year ended October 31, 2002 was primarily due to a net loss of $4,684,000
adjusted for: bad debt expense of $994,000; non-cash interest expense of
$924,000; depreciation and amortization of $2,437,000; and net changes in
operating assets and liabilities of ($1,199,000). For the fiscal year ended
October 31, 2001, the net cash used in operating activities was comprised of
a net loss of $2,684,000 adjusted for: depreciation and amortization of
$818,000; stock and warrants issued for services of $259,000; non-cash
interest expense of $598,000; non-cash vendor credit of ($780,000); and net
changes in operating assets and liabilities of $713,000.
During the fiscal year ended October 31, 2002, net cash provided by
investing activities was $1,008,000, compared to net cash used in investing
activities of $1,556,000 for the fiscal year ended October 31, 2001. The
net cash provided by investing activities for the year ended October 31,
2002 is primarily attributable to a refund of a license fee previously paid
on behalf of our German subsidiary of $1,425,000. The investing activities
for the year ended October 31, 2001 included approximately $1.5 million used
for the purchase of Rapid Link. Investing activities also include capital
expenditures of $417,000 and $61,000 for the fiscal years ended October 31,
2002 and 2001, respectively.
Net cash provided by financing activities for the fiscal year ended October
31, 2002, totaled $588,000, compared to $2,528,000 for fiscal 2001. For the
fiscal year ended October 31, 2002, significant components of net cash
provided by financing activities include $550,000 in net proceeds from a
convertible debenture, $300,000 in proceeds from a shareholder note payable,
offset by $184,000 in payments on capital leases, and $93,000 of financing
fees. For the fiscal year ended October 31, 2001, the significant
components of net cash provided by financing activities include $1,000,000
in net proceeds from the issuance of our convertible debentures, and
proceeds of $1,599,000 from notes issued to three of our executives, offset
primarily by $106,000 in payments on capital leases.
We have an accumulated deficit of approximately $40.6 million as of October
31, 2002, as well as a working capital deficit of approximately $6.9
million. Funding of our working capital deficit, current and future
operating losses, and expansion will require continuing capital investment.
Our strategy is to fund these cash requirements through operations, debt
facilities and additional equity financing. As of the date of this report:
1) We obtained additional financing of $1,250,000 in November 2002.
Since the beginning of April 2001, we have raised $4.7 million in debt
financing.
2) We have negotiated payment terms of approximately $400,000 of our past
due trade payables with one of our largest vendors, and we have agreed
to remit equal monthly installments in excess of our normal monthly
usage billing. We have also settled a dispute with a vendor and
thereby reduced our accounts payable by approximately $700,000, which
is reflected in the October 31, 2002 balance sheet.
3) During fiscal year 2002, our German subsidiary received a net $1
million refund for a license fee previously paid, which was used to pay
down past due liabilities.
Although we have been able to arrange debt facilities and equity financing
to date, there can be no assurance that sufficient debt or equity financing
will continue to be available in the future or that it will be available on
terms acceptable to us. Failure to obtain sufficient capital could
materially affect our operations and expansion strategies. As a result of
the aforementioned factors and related uncertainties, there is considerable
doubt about our ability to continue as a going concern.
Our current capital expenditure requirements are not significant, primarily
due to the equipment acquired from Rapid Link. Our capital expenditures for
the fiscal year ended October 31, 2002 were $507,000 and we do not
anticipate significant spending for fiscal 2003.
On April 11, 2001, we executed a 6% convertible debenture (the "Debenture")
with Global Capital Funding Group L.P, which provided financing of
$1,000,000. The Debenture's maturity date was April 11, 2003. Subsequent
to fiscal year 2002, this debenture was paid in full through the issuance of
a subsequent loan from Global Capital Funding Group, L.P.
In October 2001, we executed 10% convertible notes (the "Notes") with three
of our executives, which provided financing of $1,945,958. With an original
maturity date of October 24, 2003, these Notes were amended subsequent
to fiscal year 2002 and now mature on February 24, 2004. These Notes are
secured by selected Company assets and are convertible into our common stock
at the option of the holder at any time prior to maturity. The conversion
price is equal to the closing bid price of our common stock on the last
trading day immediately preceding the conversion. We also issued to the
holders of the Notes warrants to acquire an aggregate of 1,945,958 shares of
common stock at an exercise price of $0.78 per share, which warrants expire
on October 24, 2006. For the year ended October 31, 2002, an additional
$402,433 was added to the Notes and an additional 402,433 warrants to
acquire our common stock were issued in connection with the financing.
On January 28, 2002, we executed a 6% convertible debenture (the "Second
Debenture") with GCA Strategic Investment Fund Limited, which provided
financing of $550,000. With an original maturity date of January 28, 2003,
the Second Debenture was amended subsequent to fiscal year 2002 and now
matures on February 24, 2004. The conversion price is equal to the lesser
of (i) 100% of the volume weighted average of sales price as reported by
the Bloomberg L.P. of the common stock on the last trading day immediately
preceding the Closing Date ("Fixed Conversion Price") and (ii) 85% of the
average of the three (3) lowest volume weighted average sales prices as
reported by Bloomberg L.P. during the twenty (20) Trading Days immediately
preceding but not including the date of the related Notice of Conversion
("the "Formula Conversion Price"). In an event of default the amount
declared due and payable on the Debenture shall be at the Formula Conversion
Price.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
We provide services primarily to customers located outside of the U.S. Thus,
our financial results could be impacted by foreign currency exchange rates
and market conditions abroad. As most of our services are paid for in U.S.
dollars, a strong dollar could make the cost of our services more expensive
than the services of non-U.S. based providers in foreign markets. We have
not used derivative instruments to hedge our foreign exchange risks though
we may choose to do so in the future.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 of this Report is presented at pages F-1
to F-5.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
A change in our accountants was previously reported in a current report on
Form 8-K filed on November 7, 2001, August 2, 2002 and August 23, 2002.
PART III
Item 10. Directors and Executive Officer of the Registrant
The following table sets forth certain information regarding our executive
officers and directors.
Name Age Position with the Company
--------------- --- --------------------------------
John Jenkins 41 Chairman, Chief Executive
Officer, President and Director
Allen Sciarillo 38 Executive Vice President, Chief
Financial Officer, Secretary and
Director
Lawrence Vierra 57 Executive Vice President and
Director
Robert M. Fidler 63 Director
Nick DeMare 47 Director
David Hess 41 Director
JOHN JENKINS has served as our Chairman of the Board and Chief Executive
Officer since October 2001, and has served as our President and a director
since December 1999. Mr. Jenkins has also served as the President of Dial
Thru.com, Inc., one of our subsidiaries, since November 1999. In May 1997,
Mr. Jenkins founded Dial Thru International Corporation (subsequently
dissolved in November 2000), and served as its President and Chief Executive
Officer until joining us in November 1999. Prior to 1997, Mr. Jenkins
served as the President and Chief Financial Officer for Golden Line
Technology, a French telecommunications company. Prior to entering the
telecommunications industry, Mr. Jenkins owned and operated several
software, technology and real estate companies. Mr. Jenkins holds degrees
in physics and business/economics.
ALLEN SCIARILLO has been our Chief Financial Officer, Executive Vice
President and Secretary since July 2001 and was elected as a director in May
2002. From January to March 2001, Mr. Sciarillo was the Chief Financial
Officer of Star Telecommunications, Inc., a global facilities-based
telecommunications carrier. Prior to that time, Mr. Sciarillo served as
Chief Financial Officer of InterPacket Networks, a provider of Internet
connectivity to Internet service providers worldwide, from July 1999 until
its acquisition by American Tower Corporation in December 2000. From
October 1997 to June 1999, he served as Chief Financial Officer of RSL
Com USA, a division of RSL Com Ltd., a global facilities-based
telecommunications carrier. Prior to joining RSL, Mr. Sciarillo was Vice
President and Controller of Hospitality Worldwide Services, Inc. from July
1996 to October 1997. Mr. Sciarillo began his career at Deloitte & Touche
and is a Certified Public Accountant.
LAWRENCE VIERRA has served as our Executive Vice President and a director
since January 2000. From 1995 through 1999, Mr. Vierra served as the
Executive Vice President of RSL Com USA, Inc., an international
telecommunications company, where he was primarily responsible for
international sales. Mr. Vierra has also served on the board of directors
and executive committees of various telecommunications companies and he has
extensive knowledge and experience in the international sales and marketing
of telecommunications products and services. Mr. Vierra holds degrees in
marketing and business administration.
ROBERT M. FIDLER has served as one of our directors since November 1994.
Mr. Fidler joined Atlantic Richfield Company (ARCO) in 1960, was a member of
ARCO's executive management team from 1976 to 1994 and was ARCO's manager of
New Marketing Programs from 1985 until his retirement in 1994.
NICK DEMARE has served as one of our directors since January 1991. Since
May 1991, Mr. DeMare has been the President and Chief Executive Officer of
Chase Management Ltd., a private company providing a broad range of
administrative, management and financial services to private and public
companies with varied interests in mineral exploration and development,
precious and base metals production, oil and gas, venture capital and
computer software. Mr. DeMare has served and continues to serve on the
boards of a number of Canadian public companies, three of which are SEC
reporting companies; Hilton Petroleum, Ltd., Trimark Energy Ltd. and
California Exploration Ltd. Mr. DeMare is a Chartered Accountant (Canada).
DAVID HESS was elected to our board of directors in May 2002. From
November 2001 until December 2002, Mr. Hess served as the Chief Executive
Officer and President, North America of Telia International Carrier, Inc.
Prior to joining Telia, Mr. Hess was part of a turnaround team hired by the
Board of Directors of Rapid Link Incorporated. He served as the Chief
Executive Officer and as a director of Rapid Link Incorporated from August
2000 until September 2001. On March 13, 2001, Rapid Link Incorporated filed
for Chapter 11 bankruptcy protection. Before joining Rapid Link, Mr. Hess
served as Chief Executive Officer of Long Distance International from
January 1999 until its acquisition by World Access in February 2000. Mr.
Hess also served as President and Chief Operating Officer of TotalTel USA
from May 1995 until January 1999. Mr. Hess received a BA in Communications
with a Minor in Marketing from Bowling Green State University.
Meetings of the Board of Directors
Our Board of Directors held one meeting during the fiscal year ended
October 31, 2002. The Board of Directors has two standing committees: an
Audit Committee and a Compensation Committee. There is no standing
nominating committee. Each of the directors attended the meeting of the
Board of Directors and all meetings of any committee on which such director
served.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our directors, executive officers
and persons who own more than 10% of our common stock to file with the SEC
initial reports of ownership and reports of changes in ownership of our
common stock and other equity securities of our Company. Officers,
directors and greater than 10% stockholders are required by regulations
promulgated by the SEC to furnish us with copies of all Section 16(a)
reports they file. Based solely on the review of such reports furnished to
us and written representations that no other reports were required, we
believe that during the fiscal year ended October 31, 2002, our executive
officers, directors and all persons who own more than 10% of our common
stock complied with all Section 16(a) requirements.
Item 11. Executive Compensation
The following table summarizes the compensation we paid, for services
rendered to our Company during the fiscal years ended October 31, 2002, 2001
and 2000, to our chief executive officer and all other executive officers
whose total annual salary and bonus exceeded $100,000 during fiscal 2002.
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------- Awards
Securities
Underlying
Name and principal Salary Bonus Other annual Options/SARs All other
position Year ($) ($) compensation (#) Compensation ($)
------------------------------------------------------------------------------------------
John Jenkins 2002 181,042 -0- -0- -0- -0-
Chairman, CEO 2001 108,833 -0- -0- 700,000 -0-
and President 2000 175,950 -0- -0- -0- 1,599 (1)
Allen Sciarillo 2002 141,667 -0- -0- -0- -0-
Executive Vice 2001 -0- -0- -0- 500,000 -0-
President and Chief 2000 -0- -0- -0- -0- 0-
Financial Officer
(1) Includes compensation associated with supplemental long-term disability
insurance and matching 401(k) plan contributions we paid.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth information with respect to the number
of options held at fiscal year end and the aggregate value of in-the-money
options held at fiscal year end by each of the Named Executive Officers.
Shares Number of securities Value of unexercised in-
acquired on Value underlying unexercised options the-money options at fiscal
exercise realized at fiscal year end (#) year end ($) (2)
Name (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
-------------- ----------- -------- ----------- ------------- ----------- -------------
John Jenkins -0- -0- 233,333 466,667 -0- -0-
Allen Sciarillo -0- -0- 166,667 333,333 -0- -0-
(1) The value realized upon the exercise of stock options represents the
difference between the exercise price of the stock option and the fair
market value of the shares, multiplied by the number of options exercised on
the date of exercise.
(2) The value of "in-the-money" options represents the positive spread
between the exercise price of the option and the fair market value of the
underlying shares based on the closing stock price of our common stock on
October 31, 2002, which was $0.12 per share. "In-the-money" options include
only those options where the fair market value of the stock is higher than
the exercise price of the option on the date specified. The actual value,
if any, an executive realizes on the exercise of options will depend on the
fair market value of our common stock at the time of exercise.
Compensation of Directors
Each of our directors who is not one of our officers receives a fee of
$1,500 for each Board meeting attended. Directors are not compensated for
attending committee meetings. Our directors also participate in our Equity
Incentive Plan and are annually awarded non-qualified stock options for an
aggregate of 5,000 shares of our common stock for services rendered to our
company as a director.
Committees of the Board of Directors
During our 2002 fiscal year, our Audit Committee consisted of Nick DeMare
and Robert Fidler. The Audit Committee makes recommendations to our Board
of Directors or management concerning the engagement of our independent
public accountants and matters relating to our financial statements, our
accounting principles and our system of internal accounting controls. The
Audit Committee also reports its recommendations to our Board as to the
approval of our financial statements. The Audit Committee held one meeting
during the fiscal year ended October 31, 2002, during which all members were
in attendance.
During our 2002 fiscal year, our Compensation Committee consisted of Nick
DeMare and Robert Fidler. The Compensation Committee is responsible for
considering and making recommendations to our Board regarding executive
compensation and is also responsible for administration of our stock option
and executive incentive compensation plans. The Compensation Committee held
no meetings during the fiscal year ended October 31, 2002.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for implementing, overseeing and
administering the Company's overall compensation policy. The basic
objectives of that policy are to (a) provide compensation levels that are
fair and competitive with peer companies, (b) align pay with performance and
(c) where appropriate, provide incentives which link executive and
stockholder interests and long-term corporate objectives through the use of
equity-based incentives. Overall, the compensation program is designed to
attract, retain and motivate high quality and experienced employees at all
levels. The principal elements of executive officer compensation are base
pay, bonus and stock options, together with health benefits. The various
aspects of the compensation program, as applied to the Company's Named
Executive Officers, are outlined below.
Executive officer compensation is, in large part, determined by the
individual officer's ability to achieve his or her performance objectives.
Each of the Company's Named Executive Officers participates in the
development of an annual business strategy from which individual objectives
are established and performance goals are measured periodically. Initially,
the objectives are proposed by the particular officer involved. Those
objectives are then determined by the Chief Executive Officer or, in the
case of Mr. Jenkins's objectives, by the Board of Directors.
Base Pay
Initially, base pay was established at levels that were considered to be
sufficient to attract experienced personnel but which would not exhaust
available resources. As the Company grows, the compensation focus continues
to emphasize other areas of compensation. Executive officers understand that
their principal opportunities for substantial compensation lay not in
enhanced base salary, but rather through appreciation in the value of
previously granted stock options. Thus, base pay has not represented the
most critical element of executive officer compensation.
Mr. Jenkins, the Company's President and Chief Operating Officer through
September 2001, was promoted to the position of CEO in October 2001. Mr.
Jenkins' base pay for fiscal 2001 and 2002 was established at an amount
considered below market in comparison to executive compensation levels
for companies of similar size and maturity. The Compensation Committee
established, and Mr. Jenkins accepted, below market compensation at the
beginning of fiscal 2001, based on a variety of factors, including the
performance of the Company, the ability of the Company to obtain funding to
support its operational cash flow requirements, and a desire to save the
Company the expense of compensation at market levels. The Compensation
Committee set Mr. Jenkins' salary at $100,000 per annum for fiscal 2001, and
$150,000 for 2002, compared to $175,950 for fiscal 2000.
Bonus
The Compensation Committee has determined that a cash incentive plan will be
implemented when the Company is able to achieve positive operating results.
Stock Options
The Compensation Committee believes that a stock option plan provides
capital accumulation opportunities to participants in a manner that fosters
the alignment of the participants' interests and risks with the interests
and risks of public stockholders. The Compensation Committee further
believes that stock options can function to assure the continuing retention
and loyalty of employees. Options that have been granted to the Named
Executive Officers typically carry three-year vesting schedules. If these
officers leave the Company's employ before their options are fully vested,
they will lose a portion of the benefits that they might otherwise receive
if they remain in the Company's employ for the entire vesting period. Stock
option grants have been based upon amounts deemed necessary to attract
qualified employees and amounts deemed necessary to retain such employees
and to equitably reward high performance employees for their contributions
to our development. For most of the Company's executive officers, stock
options generally constitute the most substantial portion of the Company's
compensation program.
The Compensation Committee believes that an appropriate compensation program
can help in fostering competitive operations if the program reflects a
suitable balance between providing appropriate awards to key employees while
at the same time effectively controlling compensation costs, principally by
establishing cash compensation at competitive levels and emphasizing
supplemental compensation that correlates the performance of individuals,
the Company and its Common Stock.
This report has been furnished by the Compensation Committee of the
Board of Directors.
Nick DeMare, Chairman
Robert M. Fidler
AUDIT COMMITTEE MATTERS
Independence of Audit Committee Members
Our common stock is quoted on the OTC Bulletin Board and is governed by the
standards applicable thereto. All members of the Audit Committee of the
Board of Directors have been determined to be "independent directors"
pursuant to the definition contained in Rule 4200(a)(15) of the National
Association of Securities Dealers' Marketplace rules.
AUDIT COMMITTEE REPORT
In connection with the preparation and filing of our Annual Report on Form
10-K for the year ended October 31, 2002:
(1) the Audit Committee reviewed and discussed the audited financial
statements with our management;
(2) the Audit Committee discussed with our independent auditors the
matters required to be discussed by Statement of Auditing Standards
No. 61;
(3) based on the review and discussions referred to above, the Audit
Committee recommended to the Board that the audited financial
statements be included in the 2002 Annual Report on Form 10-K for
filing with the SEC.
By: The Audit Committee of the Board of Directors
Nick DeMare, Chairman
Robert Fidler
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG DIAL THRU
INTERNATIONAL CORPORATION, THE NASDAQ STOCK MARKET (U.S.) COMPOSITE INDEX
AND THE NASDAQ STOCK MARKET
[ PERFORMANCE GRAPH APPEARS HERE ]
CUMULATIVE
TOTAL RETURN 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
-------- -------- -------- -------- -------- --------
Dial Thru
Int'l Corp $100 $ 19 $ 52 $ 91 $ 41 $ 7
NASDAQ Stock
Market (U.S.) $100 $137 $259 $322 $134 $103
NASDAQ Telecom
Index $100 $135 $252 $212 $ 72 $ 36
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of January 23, 2003,
concerning those persons known to us, based on information obtained from
such persons, our records and schedules required to be filed with the SEC
and delivered to us, with respect to the beneficial ownership of our common
stock by (i) each stockholder known by us to own beneficially five percent
or more of such outstanding common stock, (ii) each of our current
directors, (iii) each Named Executive Officer and (iv) all of our executive
officers and directors as a group. Except as otherwise indicated below,
each of the entities or persons named in the table has sole voting and
investment power with respect to all shares of our common stock beneficially
owned. Effect has been given to shares reserved for issuance under
outstanding stock options and warrants where indicated.
Number of Percent of
Name and address of Beneficial Owner Shares (1) Class (2)
------------------------------------ ----------- ----------
Dodge Jones Foundation
400 Pine Street, Suite 900 1,000,000 5.55%
Abilene, Texas 79601
Joseph E. Canon
Dodge Jones Foundation 1,000,000 (3) 5.55%
P.O. Box 176
Abilene, Texas 79601
John Jenkins
17383 Sunset Boulevard, Suite 350 3,447,066 (4) 19.12%
Los Angeles, California 90272
Scotty Cook
2602 McKinney Avenue, Suite 220 911,899 (5) 5.06%
Dallas, Texas 75204
Lawrence Vierra
2353 Dolphin Court 80,833 (6) *
Henderson, NV 89014
Nick DeMare
Chase Management 20,280 (7) *
1090 West Georgia Street, Suite 1305
Vancouver, BC V6E 3V7
Robert M. Fidler
987 Laguna Road 39,000 (8) *
Pasadena, California 91105
David Hess
17383 Sunset Boulevard, Suite 350 0 *
Los Angeles, California 90272
Allen Sciarillo
17383 Sunset Boulevard, Suite 350 237,500 (9) 1.32%
Los Angeles, CA 90272
Global Capital Funding Group L.P.
106 Colony Park Drive 1,323,838 (10) 7.34%
Cumming, GA 30040
All Executive Officers and Directors
as a group (6 persons) 3,824,679 21.21%
* Reflects less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of
the SEC. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, shares of
our common stock subject to options or warrants held by that
person that are exercisable within 60 days of January 23, 2003 are
deemed outstanding. Such shares, however, are not deemed
outstanding for purposes of computing the ownership of any other
person.
(2) Based upon 18,