United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended July 31, 2000
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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
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DIAL-THRU INTERNATIONAL CORPORATION
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(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
incorporation or organization) Identification No.)
700 South Flower, Suite 2950
Los Angeles, California 90017
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(Address of principal executive offices) (Zip Code)
(213) 627-7599
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(Registrant's telephone number, including area code)
8100 Jetstar Drive, Suite 100
Irving, Texas 75063
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(Former name, former address and former fiscal year,
if changed since last report)
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 periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of September 12, 2000, 8,894,833 shares of common stock, $.001 par value
per share, were outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
DIAL-THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
July 31, October 31,
2000 1999
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(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 532,399 $ 846,141
Restricted cash 100,000 613,634
Trade accounts receivable, net of
allowance of doubtful accounts
of $576,310 and $181,675 at
July 31, 2000 and October 31,
1999, respectively 598,729 297,914
Accounts receivable - other 37,397 --
Inventory 58,526 141,017
Prepaid expenses and other 16,687 92,074
Deferred financing fees, net 246,020 --
Current portion of long-term
receivable, net of allowance for
doubtful accounts of $20,000 at
July 31, 2000 and October 31, 1999 -- 300,000
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Total current assets 1,589,758 2,290,780
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PROPERTY AND EQUIPMENT, net 1,843,666 1,421,328
RESTRICTED CASH -- 624,099
LONG-TERM RECEIVABLE, net of current
portion, net of allowance for doubtful
accounts of $30,000 at July 31, 2000
and October 31, 1999 50,000 50,000
OTHER ASSETS 228,490 80,582
GOODWILL, net of amortization of
$78,111 at July 31, 2000 963,364 --
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TOTAL ASSETS $ 4,675,278 $ 4,466,789
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<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Convertible debentures - current $ 1,000,000 $ --
Current portion of long-term debt -- 162,000
Trade accounts payable 2,889,221 336,053
Accrued liabilities 209,005 306,239
Deferred revenue 41,843 235,104
Other payable 35,500 --
Related party note payable - current 346,000 --
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Total current liabilities 4,521,569 1,039,396
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Long-term debt, net of current portion -- 562,000
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Total liabilities 4,521,569 1,601,396
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SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value,
10,000,000 shares authorized, none
issued and outstanding at July 31,
2000 and October 31, 1999 -- --
Common stock, 44,169,000 shares
authorized; $.001 par value;
8,792,569 shares issued and
8,780,547 shares outstanding
at July 31, 2000 and 6,881,005
shares issued and outstanding
at October 31, 1999 8,793 6,881
Additional paid-in capital 29,052,165 24,940,093
Accumulated deficit (27,846,963) (22,076,165)
Accumulated other comprehensive income (5,416) (5,416)
Treasury stock, 12,022 and 0 common
shares at July 31, 2000 and October
31, 1999, respectively, at cost (54,870) --
Subscription receivable - common stock (1,000,000) --
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Total shareholders' equity 153,709 2,865,393
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 4,675,278 $ 4,466,789
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See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
DIAL-THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
July 31, July 31,
------------------------------ ----------------------------
2000 1999 2000 1999
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 952,667 $ 500,107 $7,583,138 $2,888,846
----------- ----------- ---------- ----------
COSTS AND EXPENSES
Costs of revenues 463,057 535,869 7,935,782 2,691,738
Sales & marketing 54,668 323,088 841,451 802,879
General & administrative 1,142,366 566,919 3,824,400 1,513,271
Depreciation and amortization 141,202 16,183 415,649 38,080
----------- ----------- ---------- ----------
Total costs and expenses 1,801,293 1,442,059 13,017,282 5,045,968
----------- ----------- ---------- ----------
OTHER INCOME (EXPENSES)
Financing fees (123,010) -- (363,270) --
Interest income (expense), net 6,565 19,721 26,617 35,636
----------- ----------- ---------- ----------
Total other income (expenses) (116,445) 19,721 (336,653) 35,636
----------- ----------- ---------- ----------
NET LOSS FROM CONTINUING OPERATIONS (965,071) (922,231) (5,770,797) (2,121,486)
DISCONTINUED OPERATIONS
Income (loss) from operation of
software business, net of income
taxes of $0 -- -- -- 218,376
Gain on sale of software business,
net of income taxes of $0 -- 1,378,525 -- 4,760,537
----------- ----------- ----------- ----------
NET INCOME (LOSS) $ (965,071) $ 456,294 $(5,770,797) $2,857,427
=========== =========== =========== ==========
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations $ (0.11) $ (0.13) $ (0.70) $ (0.31)
Discontinued operations -- 0.20 -- 0.73
----------- ----------- ----------- ----------
Net earnings (loss) $ (0.11) $ 0.07 $ (0.70) $ 0.42
=========== =========== =========== ==========
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations $ (0.11) $ (0.13) $ (0.70) $ (0.31)
Discontinued operations -- 0.20 -- 0.73
----------- ----------- ----------- ----------
Net earnings (loss) $ (0.11) $ 0.07 $ (0.70) $ 0.42
=========== =========== =========== ==========
<PAGE>
SHARES USED IN THE CALCULATION OF
PER SHARE AMOUNTS:
Basic common shares 8,616,383 6,861,005 8,289,012 6,782,250
Dilutive impact of stock
options and warrants -- -- -- --
----------- ----------- ----------- ----------
Diluted common shares 8,616,383 6,861,005 8,289,012 6,782,250
=========== =========== =========== ==========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
DIAL-THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
July 31,
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(5,770,796) $ 2,857,427
Adjustments to reconcile net income (loss)
to net cash used in continuing operating
activities:
Income from discontinued operations -- (218,376)
Gain on disposal of software business -- (4,760,537)
Stock issued for services -- 74,225
Warrants issued for services -- 5,942
Depreciation and amortization 415,649 27,559
Bad debt reserve -- 321
Financing fees 363,270 --
Changes in operating assets and liabilities,
net of effects of acquisition
Trade accounts receivable 282,790 (10,007)
Accounts receivable - other (20,075) --
Inventory 82,491 113,150
Prepaid expenses and other 113,078 (82,039)
Other assets (143,628) (182,361)
Trade accounts payable 1,812,988 (442,885)
Accrued liabilities (99,411) (67,414)
Other payable (100,000) --
Deferred revenue (193,261) (33,290)
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Net cash used in operating activities from
continuing operations (3,256,905) (2,718,285)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of software business -- 6,832,773
Purchase of property and equipment (249,574) (1,018,774)
Payments on note receivable 300,000 58,006
Cash in DTI at acquisition date 69,137 --
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Net cash provided by investing activities
from continuing operations 119,563 5,872,005
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<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of convertible debenture - due
to shareholder -- (1,500,000)
Proceeds from convertible debentures 1,000,000 --
Proceeds from notes payable -- 805,000
Payments on notes payable (724,000) (40,500)
Payments on related party note payable (54,000) --
Payments on capital leases (48,455) --
Change in restricted funds 1,137,733 --
Issuance of common shares for cash 512,322 --
Proceeds from common stock subscription 1,000,000 --
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Net cash provided by (used in) financing
activities from continuing operations 2,823,600 (735,500)
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Cash provided by discontinued operations -- 174,478
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NET INCREASE (DECREASE) IN CASH (313,742) 2,592,698
Cash at beginning of period 846,141 207,609
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Cash at end of period $ 532,399 $ 2,800,307
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SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 21,099 $ 41,319
========== ==========
SUPPLEMENTAL NON-CASH ACTIVITIES
Offset of accounts payable against
notes receivable $ -- $ 21,554
========== ==========
See accompanying notes.
</TABLE>
<PAGE>
DIAL-THRU INTERNATIONAL CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The condensed consolidated financial statements of Dial-Thru International
Corporation and its subsidiaries included in this Form 10-Q are unaudited.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
of the financial position and operating results for the nine month periods
ended July 31, 2000 and 1999 have been included. Operating results for the
nine-month period ended July 31, 2000 are not necessarily indicative of the
results that may be expected for the year ending October 31, 2000. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended October 31, 1999.
Prior to December 7, 1998, the Company operated in the software and
telecommunications industries. On December 7, 1998, the Company sold its
retail automation software business (the "Software Business") to Affiliated
Computer Services, Inc. ("ACS"). Therefore, the Company no longer engages
in the Software Business, and is now operating only in the
telecommunications industry (the "Telecommunications Business"). Results of
operations in prior periods have been restated to reclassify the Software
Business as discontinued operations. The measurement date for the sale is
December 7, 1998, the date the shareholders approved the transaction.
On November 2, 1999, the Company acquired substantially all of the business
and assets of Dial-Thru International Corporation, a California corporation,
now known as DTI-LIQCO, Inc., along with the rights to the name "Dial-Thru
International Corporation." On January 19, 2000, the Company changed its
name from ARDIS Telecom & Technologies, Inc. to Dial-Thru International
Corporation("DTI").
During 1998 and 1999, the Company's operations included mainly sales and
distribution of prepaid domestic and international calling cards to
wholesale and retail customers. Starting January 2000, the Company changed
its focus from prepaid calling cards to becoming a full service, facility-
based provider of communication products to small and medium size
businesses, both domestically and internationally. The Company now provides
a variety of international and domestic communication services including
international dial-thru, Internet voice and fax services, e-Commerce
solutions and other value-added communication services, using its "VoIP"
Network to effectively deliver the products to the end user.
In addition to helping companies achieve significant savings on long-
distance voice and fax calls by routing calls over the Internet, or the
Company's private network, the Company also offers new opportunities for
existing Internet Service Providers who want to expand into voice services,
private corporate networks seeking to lower long-distance costs, and Web-
enabled corporate call centers engaged in electronic commerce.
<PAGE>
DTI is also introducing "VoIP" to a new segment of customers by delivering a
high quality, reliable and scaleable solution that uniquely addresses the
needs of the rapidly growing "VoIP" industry.
NOTE B - EARNINGS (LOSS) PER SHARE
The shares issuable upon the exercise of stock options and warrants, and
convertible debentures are excluded from the calculation of net earnings
(loss) per share as their effect on continuing operations net loss would be
antidilutive.
NOTE C - REVENUE RECOGNITION AND COSTS OF REVENUES
Prepaid services sold while the Company operates its own switch (This policy
applies to all prepaid revenue generated during the nine months ended July
31, 2000.) -- Revenue recognition originates from customer usage. The
Company sells products to retailers and distributors at a fixed price. When
the retailer or distributor is invoiced, deferred revenue is recognized.
The Company recognizes revenue, and reduces the deferred revenue account as
the customer utilizes calling time or upon expiration of cards containing
unused calling time.
Revenues generated by international re-origination and dial-thru services
are based on minutes of customer usage. The Company records payments
received in advance as deferred revenue until such services are provided.
Prepaid services sold through the PT-1 Agreement (This applies to all
revenue generated during the nine months ended July 31, 1999.) Revenue was
recognized when the prepaid phone cards were invoiced and shipped. The
Company performed no other services after the cards were shipped.
During the third quarter of 2000, the Company recorded credits of
approximately $390,000 to costs of revenues. These credits relate to
settlements of disputed carrier overcharges for the nine-month period.
NOTE D - RESTRICTED CASH
At July 31, 2000, $100,000 of cash was pledged as collateral on a building
lease and is classified as restricted cash on the balance sheet.
NOTE E - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company has an outstanding receivable from a customer of approximately
$435,000, which is overdue by approximately one year, of which $235,000 has
been reserved as of July 31, 2000. Management believes the remaining
$200,000 is fully collectible.
The Company has one customer that accounted for approximately 20% of
revenues during the nine months ended July 31, 2000 and had four customers
that accounted for approximately 25% of revenues during the nine months
ended July 31, 1999. At July 31, 2000 and 1999, these customers accounted
for 0% and 78%, respectively, of total accounts receivable.
<PAGE>
The Company had a note receivable and accrued interest from its former
subsidiary, US Communications Services, Inc., ("USC"), of which
approximately $300,000 (net of reserve of $160,000) in principal was
outstanding at October 31, 1999. On August 17, 1999, USC commenced voluntary
bankruptcy proceedings under Chapter 11 of the Bankruptcy Code. The Company
collected $300,000 of this balance as a final settlement in January 2000.
The remaining balance due of $160,000 was charged to operations during the
fiscal year ended October 31, 1999.
NOTE F - ACQUISITION
On November 2, 1999, the Company consummated the acquisition of
substantially all of the assets and business of Dial-Thru International
Corporation (the "Seller"), a California corporation. The acquisition was
effected pursuant to the terms of an Asset Purchase Agreement between the
Company, a wholly owned subsidiary of the Company, the Seller and John
Jenkins, the sole shareholder of the Seller. The Company issued to the
Seller an aggregate of 1,000,000 shares of common stock, recorded a total
purchase price of $937,500 using the Company's common stock price at the
time the acquisition was announced, and agreed to issue an additional
1,000,000 shares of its common stock upon the acquired business achieving
specified revenue and earnings goals. As of July 31, 2000, no additional
shares were as yet earned by the Seller based on revenue and earnings goals.
The acquisition was accounted for as a purchase. Goodwill recorded in the
acquisition will be amortized over a period of 10 years. The results of
operations of the acquired entity are included in the consolidated
operations of the Company from November 1, 1999.
<TABLE>
The fair value of assets and liabilities acquired consisted of:
<S> <C>
Cash $ 69,137
Accounts receivable, net 583,605
Fixed assets 505,082
Other assets 64,512
Liabilities (1,326,311)
Goodwill 1,041,475
------------
$ 937,500
============
</TABLE>
<PAGE>
<TABLE>
Unaudited pro-forma financial information for the nine-month period ended
July 31, 1999, as though the acquisition had occurred on November 1, 1998 is
as follows:
<S> <C>
Revenues $ 8,220,686
============
Net loss from continuing operations $ (2,121,832)
============
Discontinued operations income $ 4,978,913
============
Net income $ 2,857,081
============
Net loss per common share from continuing
operations (basic and diluted) $ (0.27)
============
Net income per common share (basic and diluted) $ 0.37
============
Weighted average common shares outstanding
(basic and diluted) $ 7,782,250
============
</TABLE>
NOTE G - RECLASSIFICATIONS
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform with the 2000 presentation.
NOTE H - CONVERTIBLE DEBENTURES
On February 4, 2000, the Company executed non-interest bearing convertible
note agreements (the "Agreements") with nine accredited investors, which
provided financing of $1,000,000. The notes are payable on the earlier of
one year from the date of issuance or the Company's consummation of a debt
or equity financing in excess of $5,000,000. If the notes are not repaid
within 90 days of issuance, they are convertible into shares of common stock
at $4.00 per share while remaining outstanding. The Company recorded
financing fees of approximately $117,000 in February 2000 related to
these notes for the difference in the conversion price of $4.00 and the
market price of $4.47 on the date the notes were approved by the Board of
Directors.
The Company also issued to the holders of the notes warrants to acquire an
aggregate of 125,000 shares of common stock at an exercise price of $3.00
per share, which expire five years from the date of issuance. In February
2000, the Company recorded deferred financing fees of approximately
$492,000. This amount represents the Company's estimate of the fair value
of these warrants at the date of grant using the Black-Scholes pricing model
with the following assumptions: applicable risk-free interest rate based on
the current treasury-bill interest rate at the grant date of 6%; dividend
yields of 0%; volatility factors of the expected market price of the
Company's common stock of 1.62; and an expected life of the warrants of
three years. The Company is amortizing these fees over the initial maturity
of these notes of one year. The amount charged to expense and accumulated
amortization for the six months ended July 31, 2000 totaled approximately
$246,000.
<PAGE>
Additional warrants to acquire up to an aggregate of 125,000 shares of
common stock at an exercise price of $2.75 per share will be issued to the
holders of the notes if the convertible notes have not been repaid within
six months following the date of issuance. To date, no additional warrants
have been issued to the investors.
At July 31, 2000, the outstanding convertible debt balance was $1,000,000.
NOTE I - RELATED PARTY PAYABLE
In connection with the acquisition of Dial-Thru International Corporation on
November 2, 1999, the Company assumed a related party note payable to the
sole owner of the acquired entity of approximately $400,000. The note bears
interest at 6% per annum, is payable in quarterly installments of $50,000
plus interest beginning November 1, 1999, and matures on August 1, 2001.
The outstanding balance at July 31, 2000 was $346,000, and is classified as
a current liability.
NOTE J - DISCONTINUED OPERATIONS
On December 7, 1998, the Company sold substantially all of the assets of the
Software Business. Pursuant to the terms of the Purchase Agreement, the
Company sold the assets and received $4,000,000 at closing and transferred
certain liabilities arising from the Software Business. On January 21, 1999,
the purchaser and the Company calculated the net working capital (generally
current assets other than cash minus current liabilities) as of the closing
date, and the purchaser received a net working capital adjustment of
$230,083. The Company recorded an initial gain on the sale of the Software
Business of $2,015,494. The gain was calculated as net proceeds of
$3,769,917 less net assets of $1,693,259 less legal and accounting fees
related to the sale of $61,164. The Company was entitled, upon the sale of
the Software Business, to receive additional deferred payments of up to an
additional $3,625,000 calculated at the end of each calendar quarter during
the twelve-month period commencing on January 1, 1999. Each deferred
payment was calculated based upon the cumulative level of revenue
attributable to the Software Business from January 1, 1999 through the end
of each three month period through December 31, 1999, and equaled (a) the
sum of (i) 75% of all such revenues greater than $4 million and less than or
equal to $7 million plus (ii) 13.75% of all such revenues greater than $7
million or less than or equal to $17 million, minus (b) the sum of any
deferred payments previously made.
During the year ended October 31, 1999, the Company had received total
payments relating to the additional consideration of $3,625,000. These
payments had been recorded as additional gain on the sale of the Software
Business, reduced by costs associated with the sale. The total net gain
resulting from disposition of the Software Business was $5,309,927.
<PAGE>
NOTE K - SHAREHOLDERS' EQUITY
COMMON STOCK ISSUANCES
In connection with the acquisition of Dial-Thru International Corporation on
November 2, 1999, the Company issued 1,000,000 shares of common stock to the
Seller's sole owner. The Company also issued 193,900 shares in connection
with the exercise of options for $248,003 in cash proceeds during the three
months ended January 31, 2000. For the three months ending April 30, 2000,
the Company issued an additional 418,750 shares in connection with the
exercise of options for $242,970 in cash proceeds, and for the three months
ending July 31, 2000, the Company issued 13,200 shares in connection with
the exercise of options for $11,952 in cash proceeds.
WARRANT ISSUANCES
During the three months ended January 31, 2000, the Company issued 870,000
options and warrants. The options and warrants were issued at the closing
trading prices on the date of grant, have exercise prices ranging from $0.81
to $1.44, and expire over 2 to 3 years. The options have various vesting
terms.
In conjunction with the convertible notes (see Note H above) executed on
February 4, 2000, the Company issued warrants to the holders of the notes to
acquire an aggregate of 125,000 shares of common stock at an exercise price
of $3.00 per share, expiring five years from the date of issuance.
On March 1, 2000, the Company amended the terms of eight outstanding common
stock purchase warrants held by seven distributors of the Company's prepaid
telecommunications products. The amendments modified the vesting terms of
the warrants, but did not change exercise prices of the warrants, which
range from $0.45 to $0.88, the closing price of the Company's common stock
on the date preceding the original grant of each warrant.
COMMON STOCK SUBSCRIPTION
During the quarter, the Company received $1 million from an accredited
investor in connection with a $2 million private equity placement of 571,428
shares of common stock, par value $.001 per share. The Company issued
285,714 of common shares in connection with this private placement for the
$1 million in cash received.
<PAGE>
NOTE L - SUBSEQUENT EVENTS
On September 6, 2000, the Company received $400,000 and issued an additional
114,286 common shares in connection with the $2 million private equity
placement.
As previously disclosed, the Company has planned to raise capital through
one or more private placements of securities during fiscal year 2000 in
order to support the anticipated growth in its operations. At the time of
this filing, the Company has received a commitment of $2 million from a
private investment group controlled by one of the Company's directors. An
additional $2 million commitment has been received by a private investment
group. Another private investment group has communicated that it has
approved an investment of $2 million in the Company, although no commitment
has yet been received. Finally, another private investment group has
committed to an investment of $3.55 million, such investment in the form of
assets (i.e., Internet and other media credits). The Company anticipates
that those investments for which a commitment is in place or for which
approvals have been obtained will close in the fourth quarter of fiscal year
2000, although no assurances can be provided in this regard.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
Quarterly Report on Form 10-Q include "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", "should", "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-Q should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved or that
operating expectations will be realized. Revenues and results of operations
are difficult to forecast and could differ materially from those projects in
forward-looking statements contained herein, including without limitation
statements regarding the Company's belief of the sufficiency of capital
resources and its 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, (b) the relatively
low barriers to entry for start-up companies using VoIP to provide
telecommunications services, (c) the price-sensitive nature of consumer
demand, (d) the Company's dependence upon favorable pricing from its
suppliers to compete in the telecommunications industry, (e) increased
consolidation in the telecommunication industry, which may result in larger
competitors being able to compete more effectively, (f) the failure to
attract or retain key employees, (g) continuing changes in governmental
regulations affecting the telecommunications industry and the Internet, (h)
changing consumer demand, technological development and industry standards
that characterize the industry, and (i) the "Certain Business Factors"
identified in the Company's Annual Report on Form 10-K for the year ended
October 31, 1999. In light of the significant uncertainties inherent in the
forward-looking statements included in this Form 10-Q, you should not
consider the inclusion of such information as a representation by the
Company or anyone else that we will achieve our objectives and plans. The
Company does not undertake to update any forward-looking statements
contained herein. Readers are cautioned not to place undue reliance on the
forward-looking statements made in, or incorporated by reference into, this
Quarterly Report on Form 10-Q or in any document or statement referring to
this Quarterly Report on Form 10-Q.
<PAGE>
GENERAL
Through December 7, 1998, the Company operated two distinct businesses, its
software business conducted through its subsidiary, Canmax Retail Systems,
Inc. (the "Software Business") and its telecommunications business (the
"Telecommunications Business"). On December 7, 1998, the Company consummated
the sale of the Software Business (the "Software Business Sale") to
Affiliated Computer Services, Inc. As a result of the Software Business
Sale, the Company no longer engages in the Software Business and its
operations are focused solely on its Telecommunications Business. Therefore,
historical financial information attributable to the Software Business is
reported as discontinued operations. Because the Software Business was
discontinued in the first quarter of fiscal 1999, management has not
discussed the results of operations for the Software Business for the first
nine months of fiscal 2000 as compared to the comparable period of fiscal
1999.
On November 2, 1999, the Company consummated the acquisition (the "DTI
Acquisition") of substantially all of the assets and business of Dial-Thru
International Corporation, a California corporation now known as DTI-LIQCO,
Inc., including the rights to the name "Dial-Thru International
Corporation." On January 14, 2000, the stockholders of the Company approved
the Company's proposed change of its name from "ARDIS Telecom &
Technologies, Inc." to "Dial-Thru International Corporation" and on January
19, 2000, the Company officially changed its name to Dial-Thru International
Corporation ("DTI").
In the second quarter of fiscal 2000, the Company shifted its business focus
from its prepaid long distance operations toward providing small- to medium-
size businesses with connectivity to international markets experiencing
significant demand for Internet service provider ("ISP") enabled services.
Implementation of the Company's strategy will entail the Company's entering
into partnerships or similar arrangements with foreign postal, telegraph and
telephone organizations ("PTT's") , the entities responsible for providing
telecommunications services to foreign ISP's, and providing ISP-enabled
services based on the in-country regulatory environment affecting
telecommunications and data providers. Through these relationships, the
Company intends to acquire a direct equity interest or partnership/joint
venture interest in the local business and expects its interest to increase
as foreign ownership regulations of telecommunications companies diminish.
As an early market entrant building "super-regional" networks, management
believes the Company is positioned for potential growth through the
provision of higher margin, value-added services.
<PAGE>
In addition to helping its customers achieve significant savings on long-
distance voice and fax calls by routing calls over the Internet or DTI's
private network, the Company's customers will benefit by utilizing non-
traditional (Voice over Internet Protocol, "VoIP") methods to call into
international locations, thus receiving significant discounts from the
Company's services on their monthly bills. The Company also offers new
opportunities to existing ISPs and Web-enabled corporate call centers
engaged in electronic commerce that want to expand into voice services and
are seeking to lower long-distance costs. The Company's development of a
worldwide network of participants should enable it to offer its customers a
number of benefits, including a wide selection of products, competitive
pricing, ease of access to vast numbers of consumers and convenient methods
of purchase. Management believes the Company's existing and future PTT
partners will receive the benefit of global marketing exposure, the reduced
costs of sales and advertising, and access to technology that otherwise
would not be readily available.
DTI's Internet gateway product has the ability to help access the
marketplace for "VoIP" without requiring higher-cost digital connections and
large infrastructure investments. The Company believes that it offers
solutions that bring together voice quality, scalability, ease of use and
price points needed to bring "VoIP" to the wider marketplace.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes for the quarter ended
July 31, 2000 found elsewhere in this report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2000 AND 1999
The quarter ended July 31, 2000, represents the first full quarterly period
for which the Company's operating results reflect the shift in its business
focus from prepaid long distance operations toward providing international
communications for small- to medium-sized businesses. For this reason, the
quarter-to-quarter comparisons are not particularly meaningful.
REVENUES
Revenues were $953,000 for the quarter ended July 31, 2000, compared to
$500,000 for the quarter ended July 31, 1999, representing an increase of
91% from the prior period. Roughly 96% of the $953,000 in revenues for this
quarter were derived from the operations as a result of the Company's change
in business focus during the prior quarter from the prepaid long distance
market toward providing international communication services for small- to
medium-size businesses. The remaining 4% of revenues for this quarter were
generated as a result of existing prepaid long distance business.
<PAGE>
EXPENSES
Costs of revenues were $463,000, or 49% of revenues, for the quarter ended
July 31, 2000, compared to $536,000, or 107% of revenues, for the quarter
ended July 31, 1999, representing, in dollar terms, a 14% decrease in costs
of revenues from the prior period. A portion of this decrease is
attributable to approximately $390,000 in credits related to settlements of
disputed carrier overcharges for the nine-month period ended July 31, 2000.
The remaining decrease in costs of revenues as compared to the same quarter
in 1999 is attributable to the Company's focusing its business on providing
international communication services. By interconnecting the Company's
switch with the facilities acquired in the DTI Acquisition, the Company has
been able to reduce its overall carrier costs as a percentage of revenue and
gained access to additional carriers with lower prices and better quality.
Sales and marketing costs were $55,000, or 6% of revenues for the quarter
ended July 31, 2000, compared to $323,000, or 65% of revenues, for the
quarter ended July 31, 1999. This represents an 83% decrease in such costs
from the prior period. Sales and marketing costs incurred during the prior
period were primarily associated with the operation of the distribution
channel for the prepaid products. The change in the focus of the Company's
operations has reduced its sales and marketing costs in absolute terms and
as a percentage of revenues, as the prepaid calling card business required a
large sales and marketing staff. In addition, the Company has moved most of
its sales and marketing staff outside the United States, where labor costs
are significantly less. The Company expects that sales and marketing costs
will continue to decline as a percentage of revenue in the upcoming months.
General and administrative costs were $1,142,000, or 120% of revenue, for
the quarter ended July 31, 2000, compared to $567,000, or 113% of revenue,
for the quarter ended July 31, 1999, representing, in dollar terms, a 101%
increase from the prior period. Approximately $623,000 of the general and
administrative costs incurred in the quarter ended July 31, 2000, is
attributable to management, accounting, legal and overhead expenses
associated with the prepaid long-distance business. The remaining $519,000
in general and administrative costs relates to the Company's new business
operations and increases in personnel and overhead resulting from the DTI
Acquisition. The Company anticipates that the change in the focus of its
business will result in a drop of its general and administrative expenses,
both in absolute terms and as a percentage of revenues, in future periods.
During the quarter ended July 31, 2000, the Company reported net interest
income of $7,000, compared with a net interest income of $20,000 for the
quarter ended July 31, 1999.
As a result of the foregoing, the Company incurred a net loss from
continuing operations of $965,000, or $0.11 per share, for the quarter ended
July 31, 2000, as compared to a net loss from continuing operations of
$922,000, or $0.13 per share, for the quarter ended July 31, 1999. During
the quarter ended July 31, 1999, the Company recorded a gain on sale of the
Software Business of $1,379,000 or $0.20 per share, resulting in net income
of $456,000, or $0.07 per share.
<PAGE>
NINE MONTHS ENDED JULY 31, 2000 AND 1999
REVENUES
Revenues from continuing operations were $7,583,000 for the nine months
ended July 31, 2000, compared to $2,889,000 for the nine months ended July
31, 1999, representing a 162% increase over the prior period. This increase
is primarily attributable to revenues of approximately $4,834,000 arising
from the business acquired in the DTI Acquisition, and the previously
described change in the Company's focus during the second quarter of fiscal
2000 from the prepaid long distance market toward providing international
communication services for small- to medium-size businesses. The remaining
$2,749,000 in revenues for the nine-month period ended July 31, 2000 are a
result of the prepaid long distance business.
EXPENSES
Costs of revenues were $7,936,000, or 105% of revenues, for the nine months
ended July 31, 2000, compared to $2,692,000, or 93% of revenues, for the
nine months ended July 31, 1999, representing a 195% increase in costs of
revenues from the prior period. Of the $7,936,000 in costs, approximately
$4,088,000 related to the acquisition of DTI. The remaining increase in cost
of revenues is primarily attributable to costs associated with the prepaid
telecommunications services provided during the period, and costs associated
with the operation of the distribution channel established for the prepaid
products, offset by approximately $390,000 in credits related to the
settlements of disputed carrier overcharges.
Sales and marketing costs were $841,000, or 11% of revenues, for the nine
months ended July 31, 2000, compared to $803,000, or 28% of revenues, for
the nine months ended July 31, 1999. This represents a 5% increase in such
costs from the prior period. Sales and marketing expenses for the nine-month
period ended July 31, 2000 were primarily associated with the operation of
the distribution channel for the prepaid products.
General and administrative costs were $3,824,000, or 50% of revenues, for
the nine months ended July 31, 2000, compared to $1,513,000, or 52% of
revenues, for the nine months ended July 31, 1999, representing a 153%
increase from the prior period. Of this increase, approximately $2,518,000
relates to management, accounting, legal and overhead expenses attributable
to the prepaid long-distance business. The remaining $1,306,000 increase
relates to the Company's new business operations and increases in personnel
and overhead resulting from the DTI Acquisition.
During the nine month period ended July 31, 2000, the Company reported net
interest income of $27,000 compared with a net interest income of $36,000
for the nine month period ended July 31, 1999.
As a result of the foregoing, the Company incurred a net loss from
continuing operations of $5,771,000, or $0.70 per share, for the nine month
period ended July 31, 2000, as compared to a net loss from continuing
operations of $2,121,000, or $0.31 per share, for the nine months ended July
31, 1999. During the nine-month period ending July 31, 1999, the Company
recorded a gain on the sale of the Software Business of $4,761,000, or $0.73
per share, resulting in net income of $2,857,000, or $0.42 per share.
<PAGE>
As a result of the changes described above, the Company has been able to
implement its "bookend" strategy: to increase higher margin traffic with
small- to medium-size enterprises, increase customer retention, and reduce
the Company's overhead expenses. With the Company's new strategy and new
partners in the foreign sector, along with reduced costs, management
believes the Company is positioned to be a significant entrant in "VoIP",
"Next Gen" products and services provider for the business sector, both in
foreign and domestic markets.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2000, the Company had cash and cash equivalents of $532,000, a
decrease of $314,000 from the balance at October 31, 1999.
During the nine months ended July 31, 2000, net cash used in operating
activities was $3,257,000, compared to net cash used in operating activities
of $2,718,000 for the nine months ended July 31, 1999. The increase in net
cash used in operating activities for the nine months ended July 31, 2000
was primarily due to the net loss for such period of $5,771,000 vs. net
income of $2,857,000 for the comparable period of the prior fiscal year.
Partially offsetting the increase in net cash used in operating activities
for the nine months ended July 31, 2000, was an increase in trade accounts
payable of $1,813,000 and an increase in depreciation and amortization
expenses of $416,000. During the nine months ended July 31, 1999, net cash
used in operating activities was offset by the gain on disposal of the
Software Business of $4,761,000 and the related income of $218,000.
Cash provided by investing activities was $120,000 for the nine months ended
July 31, 2000, compared to cash provided by investing activities of
$5,872,000 for the nine months ended July 31, 1999. The decrease was
primarily due to the sale of the Software Business (which generated proceeds
of $6,833,000) during the nine months ended July 31, 1999. Also
contributing to the period-to-period change was the Company's reduction in
its purchases of property and equipment in the first nine months of fiscal
2000 by $769,000 compared with the comparable period of fiscal 1999.
Cash provided by financing activities for the nine months ended July 31,
2000 totaled $2,824,000, compared to cash used in financing activities of
$736,000 for the nine months ended July 31, 1999. The change in cash
provided by financing activities was due primarily to the payment of
$724,000 on a note payable and the resulting release of restricted cash of
$1,138,000, the raising of $1,000,000 through the sale of convertible
debentures and $1,000,000 through the issuance of a common stock
subscription agreement, and $512,000 in proceeds received upon the exercise
of stock options. Cash used in financing activities for the nine months
ended July 31, 1999 reflected the repayment of borrowings of $1,541,000,
offset by the proceeds from an equipment financing of $805,000.
<PAGE>
The Company has recently suffered from liquidity and cash flow constraints.
As of July 31, 2000, the Company had a working capital deficit of
$2,932,000, compared to a working capital balance of $3,296,000 at July 31,
1999. As of July 31, 2000, the Company's current assets of $1,590,000
include $1,175,000 of gross trade accounts receivable, of which 37% were
comprised of an international customer account which is overdue by more than
a year. Of this overdue balance, approximately 54% has been reserved as of
July 31, 2000. Contributing to the working capital deficit was an increase
in trade accounts payable of $2,553,000 since the end of the prior fiscal
year.
To address its cash flow needs, the Company consummated a private placement
of $1,000,000 in principal amount of non-interest bearing convertible notes
in February 2000. The notes are payable on the earlier of one year from the
date of issuance or the closing of equity financing in excess of $5 million.
The notes have since become convertible into shares of the Company's common
stock at a conversion price, subject to adjustment, of $4.00 per share. The
holders of the notes were also issued warrants to acquire an aggregate of
125,000 shares of the Company's common stock at an exercise price of $3.00
per share. The Company's failure to repay the notes within six months of
issuance requires the issuance of warrants to acquire an additional 125,000
shares of the Company's common stock at $2.75 per share. Such additional
warrants will be recorded as additional financing charges and amortized over
the remaining life of the notes.
During the quarter ended July 31, 2000, the Company raised $1 million
through the sale and issuance of 285,714 shares of the Company's common
stock to an accredited investor who is a director of the Company. The
Company has since sold and issued an additional 114,286 shares of its common
stock to raise an additional $400,000.
The Company's growth models for its business are scaleable, but the rate of
growth is dependent on the availability of future financing for capital
resources. The Company plans to commit at least $2.0 million for capital
investments for fiscal 2000, and plans to finance additional infrastructure
development externally through debt and/or equity offerings and internally
through the operations of its Telecommunications Business. The Company
believes that, with sufficient capital, it can significantly accelerate its
growth plan. At its current and anticipated level of operations through the
next twelve month period, management believes that it will have to raise
significant additional funds through outside financing activities. The
Company's failure to obtain such financing could significantly delay the
Company's implementation of its business plan and have a material adverse
effect on its business, financial condition and operating results.
As a result of the company's change in focus, the Company moved its
corporate headquarters from the Dallas, Texas facility and consolidated
operations and staff with the Los Angeles, California office. The Company
remains obligated under an operating lease agreement for the Dallas facility
for the remaining lease term with monthly lease payments of approximately
$15,000. The Company is currently in negotiations to sublease the facility
in order to reduce monthly overhead expenses.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended July 31, 2000, the Company consummated a $2 million
private equity placement of 571,428 shares of common stock, par value $.001,
with an accredited investor who is a director of the Company. In accordance
with the Subscription Agreement ("Agreement"), the Company is required to
file a Registration Statement with the Securities and Exchange Commission
within 90 days from the execution of the Agreement (the "Registration
Deadline"), and shall include the investor's 571,428 shares in such
Registration Statement. In the event the Company fails to register the
investor's 571,428 shares within 90 days from the execution of the
Agreement, the investor is entitled to an additional 10,000 shares of
restricted voting common stock of the Company, and shall further issue to
the investor allotments of 10,000 shares for each additional 30-day period
from the Registration Deadline during which the Company fails to file the
Registration Statement for the investor's 571,428 shares.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2000 Annual Meeting of Shareholders was held on May 15, 2000.
Three items of business were acted upon at the meeting: (1) the election of
six directors to serve until the next Annual Meeting of Shareholders and
until their successors are duly elected and qualified; (2) approval of the
Company's 2000 Omnibus Securities Plan; and (3) the ratification of the
selection of King, Griffin & Adamson P.C. to serve as independent public
accountants for the Company for the 2000 fiscal year.
<TABLE>
The results of the voting for the election of directors were as follows:
Nominee Votes For Votes Withheld Abstentions
--------------- --------- ----- -----
<S> <C> <C> <C>
Roger D. Bryant 6,243,200 1,736 1,851
John Jenkins 6,243,200 1,736 1,851
Nick Demare 6,244,260 1,176 1,851
Robert M. Fidler 6,243,680 1,256 1,851
Lawrence Vierra 6,243,580 1,256 1,851
Scott Cook 6,243,800 1,136 1,851
Accordingly, each of the six nominees received a plurality of the votes cast
and was elected.
The results of the voting for the approval of the Company's 2000 Omnibus
Securities Plan were as follows:
Votes For Votes Against Abstentions
--------- ------ -----
<C> <C> <C>
1,969,820 90,019 5,689
</TABLE>
<PAGE>
Accordingly, the number of shares voted for the proposal constitute a
majority of the shares entitled to vote thereon, and the approval of the
Company's 2000 Omnibus Securities Plan was ratified.
<TABLE>
The results of the voting on the ratification of the selection of King,
Griffin & Adamson P.C. as the Company's independent auditors for the 2000
fiscal year were as follows:
Votes For Votes Against Abstentions
--------- ------ -----
<S> <C> <C>
6,198,112 29,196 19,479
</TABLE>
Accordingly, the number of shares voted for the proposal constitute a
majority of the shares entitled to vote thereon, and the selection of King,
Griffin & Adamson P.C. as the Company's independent auditors for the 2000
fiscal year was ratified.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are required to be filed with this quarterly
report on Form 10-Q:
4.1 Investment Agreement (filed herewith)
11 Statement re Computation of Per Share Earnings (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-Ks
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dial-Thru International Corporation
(Registrant)
DATE: September 14, 2000 /s/ John Jenkins
-------------------------- ----------------------------------
John Jenkins
President, Chief Financial Officer
(Principal Financial Officer)
