SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 12, 2001
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Dial Thru International Corporation
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(Exact name of registrant as specified in charter)
Delaware 0-22636 75-2461665
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
700 South Flower Street, Suite 2950, Los Angeles, California 90017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213) 627-7599
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Not Applicable
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(Former name or former address, if changed since last report.)
The undersigned registrant hereby amends the following "Item 7.
Financial Statements and Exhibits" of its Current Report on Form 8-K
filed on October 29, 2001, dated October 12, 2001, to include the
following:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) The following Financial Statements of Business
Acquired are annexed hereto:
Consolidated Balance Sheets at December 31, 1999
and 2000 and September 30, 2001 (unaudited)
Consolidated Statements of Operations for the Years
Ended December 31, 1998, 1999 and 2000 and the Nine
Months Ended September 30, 2000 (unaudited) and
September 30, 2001 (unaudited)
Consolidated Statement of Shareholder's Equity
(Deficit) for the Years Ended December 31, 1998,
1999 and 2000
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1999 and 2000 and for the
Nine Months Ended September 30, 2000 (unaudited)
and 2001 (unaudited)
(b) The following Pro Forma Financial Information is
annexed hereto:
Unaudited Pro Forma Balance Sheet at July 31, 2001
Unaudited Pro Forma Statements of Operations for
the Nine Month period ended July 31, 2001
Unaudited Pro Forma Statements of Operations for
the Year Ended October 31, 2000
(c) Exhibits.
2.1 Stock and Asset Purchase Agreement dated as of
September 18, 2001, by and among Rapid Link
USA, Inc., Rapid Link Inc., and Dial Thru
International Corporation previously filed as
Exhibit 2.1 to Dial Thru's Form 8-K filed
October 29, 2001 incorporated by reference
herein.
2.2 First Amendment to Stock and Asset Purchase
Agreement, dated as of September 21, 2001 by
and among Rapid Link USA, Inc., Rapid Link
Inc., and Dial Thru International Corporation
previously filed as Exhibit 2.2 to Dial Thru's
Form 8-K filed October 29, 2001 incorporated
by reference herein.
2.3 Second Amendment to Stock and Asset Purchase
Agreement, dated as of September 21, 2001 by
and among Rapid Link USA, Inc., Rapid Link
Inc., and Dial Thru International Corporation
previously filed as Exhibit 2.2 to Dial Thru's
Form 8-K filed October 29, 2001 incorporated
by reference herein.
2.4 Third Amendment to Stock and Asset Purchase
Agreement, dated as of October 30, 2001, by
and among Rapid Link USA, Inc., Rapid Link
Inc., and Dial Thru International Corporation.
2.5 Fourth Amendment to Stock and Asset Purchase
Agreement, dated as of November 30, 2001 by
and among Rapid Link USA, Inc., Rapid Link
Inc., and Dial Thru International Corporation.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly authorized.
Dial Thru International Corp.
Date: December 28, 2001 By: /s/ John Jenkins
----------------------------
John Jenkins, Chairman & CEO
3
DIAL-THRU INTERNATIONAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
RAPID LINK, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1999 and 2000 F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000 F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1998, 1999 and 2000 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000 F-6
Notes to Consolidated Financial Statements F-7
Unaudited Condensed Consolidated Balance Sheets
December 31, 2000 and September 30, 2001 F-18
Unaudited Condensed Consolidated Statements of Operations
for the nine months ended September 30, 2000 and 2001 F-19
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 2001 F-20
PRO FROMA FINANCIAL STATEMENTS
Introduction to Pro Forma Presentation F-22
Unaudited Pro Forma Balance Sheet as of July 31, 2001 F-23
Unaudited Pro Forma Statement of Operations for the nine month
period ended July 31, 2001 F-24
Unaudited Pro Forma Statements of Operations for the year ended
October 31, 2000 F-25
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rapid Link, Inc.:
We have audited the accompanying consolidated balance sheets of RAPID LINK,
INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1999 and
2000 and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rapid Link, Inc. and
subsidiaries as of December 31, 1999 and 2000 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has a net working capital deficiency that raises substantial
doubt about its ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
/s/ Arthur Andersen LLP
Atlanta, Georgia
December 22, 2001
F-2
RAPID LINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
ASSETS 1999 2000
---------------------------------------------- ----------- -----------
CURRENT ASSETS:
Cash $ 4,162,905 $ 1,613,765
Accounts receivable, net of allowance for
doubtful accounts of $915,339 and
$1,224,681 in 1999 and 2000, respectively 2,785,601 3,417,452
Other receivables 216,959 29,568
Prepaids and other current assets 1,189,739 658,094
----------- -----------
Total current assets 8,355,204 5,718,879
----------- -----------
PROPERTY AND EQUIPMENT:
Telecommunications equipment 6,172,184 8,050,901
Computers 2,646,483 3,075,765
Furniture, fixtures, and equipment 550,932 617,767
Construction in progress 0 60,218
Leasehold improvements 359,032 626,269
----------- -----------
9,728,631 12,430,920
Less accumulated depreciation (2,009,063) (4,433,890)
----------- -----------
Property and equipment, net 7,719,568 7,997,030
----------- -----------
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $26,000 and $315,742 in
1999 and 2000, respectively 114,923 1,321,074
Other 1,949 187,822
----------- -----------
Total other assets 166,872 1,508,896
----------- -----------
Total assets $ 16,241,644 $ 15,224,805
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) 1999 2000
---------------------------------------------- ----------- -----------
CURRENT LIABILITIES:
Line of credit $ 500,000 $ 0
Short-term loans payable 0 2,108,016
Short-term capital lease obligations 879,606 903,363
Accounts payable 3,071,223 3,189,186
Accrued carrier costs 3,628,553 12,116,833
Unearned revenue 3,200,457 1,337,484
Accrued payroll and related liabilities 703,332 617,731
Accrued other taxes 392,765 963,780
Customer deposits 126,164 186,476
Customer advances 120,552 0
Accrued dividends 0 956,269
Other accrued liabilities 777,906 1,981,375
----------- -----------
Total current liabilities 13,400,558 24,360,513
----------- -----------
LONG-TERM LIABILITIES:
Capital lease obligations 1,614,413 928,308
----------- -----------
CONVERTIBLE PREFERRED STOCK, no par value;
20,000,000 shares authorized, 632,510 and
1,231,771 shares issued and outstanding in
1999 and 2000, respectively 9,984,541 16,481,762
Subscription receivable (5,000,000) 0
----------- -----------
4,984,541 16,481,762
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, no par value; 100,000,000
shares authorized, 5,075,088 and 5,175,088
shares issued and outstanding in 1999 and
2000, respectively 4,995,616 5,399,958
Stock warrants 154,342 83,040
Cumulative translation adjustment (5,159) (319,419)
Accumulated deficit (8,902,667) (31,709,357)
----------- -----------
Total shareholders' deficit (3,757,868) (26,545,778)
----------- -----------
Total liabilities and shareholders' equity $ 16,241,644 $ 15,224,805
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
RAPID LINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
1998 1999 2000
---------- ---------- -----------
REVENUES $21,650,005 $34,421,100 $ 52,780,495
COST OF SERVICE 14,145,583 21,931,683 45,885,709
---------- ---------- -----------
Gross margin 7,504,422 12,489,417 6,894,786
---------- ---------- -----------
OPERATING EXPENSES:
Selling and marketing 1,284,174 5,970,152 8,513,023
General and administrative 6,882,978 12,887,467 16,633,934
Depreciation and amortization 555,646 1,208,563 2,917,970
---------- ---------- -----------
Total operating expenses 8,722,798 20,066,182 28,064,927
---------- ---------- -----------
OPERATING LOSS (1,218,376) (7,576,765) (21,170,141)
OTHER (EXPENSE) INCOME:
Interest income 27,293 15,854 77,214
Interest expense (73,641) (312,610) (259,395)
Loss on disposal of assets 0 0 (398,834)
Other (23,225) 35,547 (109,940)
Minority interest 0 2,287 10,675
---------- ---------- -----------
Total other expense (69,573) (258,922) (680,280)
---------- ---------- -----------
LOSS BEFORE INCOME TAXES (1,287,949) (7,835,687) (21,850,421)
BENEFIT (PROVISION) FOR INCOME TAXES 407,104 (98,804) 0
---------- ---------- -----------
NET LOSS $ (880,845) $(7,934,491) $(21,850,421)
========== ========== =========== )
The accompanying notes are an integral part of these consolidated
statements.
F-4
RAPID LINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
Common Stock Cumulative
---------------------- Subscription Stock Translation Accumulated
Shares Value Receivable Warrants Adjustment Deficit Total
--------- --------- --------- -------- --------- ----------- -----------
BALANCE, December 31, 1997 4,120,000 $1,010,000 $ 0 $ 0 $ 2,980 $ (87,331) $ 925,649
Comprehensive loss:
Net loss 0 0 0 0 0 (880,845) (880,845)
Changes in cumulative
translation adjustment 0 0 0 0 23,212 0 23,212
-----------
Comprehensive loss (857,633)
Issuance of common stock 600,000 1,500,000 0 0 0 0 1,500,000
Issuance of warrants 0 0 0 154,342 0 0 154,342
Subscription receivable 0 0 (250,000) 0 0 0 (250,000)
--------- --------- --------- -------- --------- ----------- -----------
BALANCE, December 31, 1998 4,720,000 2,510,000 (250,000) 154,342 26,192 (968,176) 1,472,358
Comprehensive loss:
Net loss 0 0 0 0 0 (7,934,491) (7,934,491)
Changes in cumulative
translation adjustment 0 0 0 0 (31,351) 0 (31,351)
-----------
Comprehensive loss (7,965,842)
Issuance of common stock 355,088 2,485,616 0 0 0 0 2,485,616
Repayment of subscription
receivable 0 0 250,000 0 0 0 250,000
--------- --------- --------- -------- --------- ----------- -----------
BALANCE, December 31, 1999 5,075,088 4,995,616 0 154,342 (5,159) (8,902,667) (3,757,868)
Comprehensive loss:
Net loss 0 0 0 0 0 (21,850,421) (21,850,421)
Changes in cumulative
translation adjustment 0 0 0 0 (314,260) 0 (314,260)
-----------
Comprehensive loss (22,164,681)
Issuance of common stock 100,000 404,342 0 (154,342) 0 0 250,000
Issuance of warrants 0 0 0 83,040 0 0 83,040
Dividends declared--
convertible preferred stock 0 0 0 0 0 (956,269) (956,269)
--------- --------- --------- -------- --------- ----------- -----------
BALANCE, December 31, 2000 5,175,088 $5,399,958 $ 0 $ 83,040 $ (319,419) $(31,709,357) $(26,545,778)
========= ========= ========= ======== ========= =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-5
RAPID LINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
1998 1999 2000
--------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (880,845) $(7,934,491) $(21,850,421)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Minority interest 0 (2,287) (10,675)
Depreciation and amortization 555,646 1,208,563 2,917,970
(Gain)/Loss on disposal of equipment 881 (9,929) 398,834
Amortization of debt issue costs 51,447 102,895 83,040
Deferred tax assets (88,000) 237,000 0
Changes in certain operating
assets and liabilities:
Accounts receivable (420,309) (1,984,746) (631,851)
Prepaids and other (780,226) (615,569) 583,163
Accounts payable 113,759 2,817,686 117,963
Unearned revenue 44,968 2,621,404 (1,862,973)
Accrued carrier costs 94,123 2,674,806 8,488,280
Other current liabilities 443,186 1,077,389 1,628,643
--------- ---------- -----------
Total adjustments 15,475 8,127,212 11,712,394
--------- ---------- -----------
Net cash (used in) provided
by operating activities (865,370) 192,721 (10,138,027)
--------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,359,844) (4,725,626) (3,569,381)
Purchase of intangibles 0 (113,044) (1,481,090)
Organizational cost expenditures (27,879) 0 0
Proceeds from disposal of equipment 1,406 90,000 1,549
Other (41,037) 0 0
--------- ---------- -----------
Net cash used in investing
activities (1,427,354) (4,748,670) (5,048,922)
--------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) from line of
credit, net 100,000 400,000 (500,000)
Proceeds from issuance of short-
term note 0 0 2,108,016
Proceeds from issuance of convertible
preferred stock, net of expenses 0 4,984,541 11,497,221
Proceeds from issuance of common
stock 1,250,000 2,735,616 250,000
Payments on capital leases (7,926) (182,428) (403,168)
Effect of changes in foreign
exchange rate 23,212 (31,351) (314,260)
--------- ---------- -----------
Net cash provided by
financing activities 1,365,286 7,906,378 12,637,809
--------- ---------- -----------
CHANGE IN CASH (927,438) 3,350,429 (2,549,140)
CASH, beginning of year 1,739,914 812,476 4,162,905
--------- ---------- -----------
CASH, end of year $ 812,476 $ 4,162,905 $ 1,613,765
========= ========== ===========
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations incurred
for property and equipment $1,009,004 $ 1,675,269 $ 259,180
========= ========== ===========
Issuance of subscriptions
receivables $ 250,000 $ 5,000,000 $ 0
========= ========== ===========
Exercise of stock purchase warrant
for the purchase of common stock $ 0 $ 0 $ 154,342
========= ========== ===========
The accompanying notes are an integral part of these consolidated
statements.
F-6
RAPID LINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
1. ORGANIZATION AND NATURE OF BUSINESS
Organization
Rapid Link, Inc. (the "Company") (a Georgia corporation) was formed on
February 28, 1996 and subsequently merged with Rapid Link USA, Inc. (a
Georgia corporation), which was formed on October 26, 1993.
During 1997, the Company formed a wholly owned subsidiary, Rapid Link
Telecommunications GmbH, for the purpose of selling and marketing
long-distance service to the European community. During 1999, the Company
entered into a joint venture in Okinawa, Japan (Note 3), and formed a wholly
owned subsidiary, Rapid Link Czech Republic.
Nature of the Business
The Company provides domestic and international voice communications
services throughout the world. The Company provides these services via
voice over Internet protocol, direct dial, 800 numbers, international
callback, prepaid debit cards, and calling cards. The Company has offices
in Atlanta, Georgia; Mannheim, Germany; Okinawa, Japan; Kuala Lumpur,
Malaysia; and Prague, Czech Republic. It has switching equipment in
Atlanta, Georgia; Frankfurt, Germany; Okinawa, Japan; and Jersey City, New
Jersey. As all of the Company's subsidiaries operate in the same sector of
the telecommunications industry, the Company considers that all subsidiaries
are included in one segment.
Financial Condition
The Company is subject to various risks in connection with the operation of
its business including, among other things, (i) changes in external
competitive market factors, (ii) inability to satisfy anticipated working
capital or other cash requirements, (iii) changes in the availability of
transmission facilities, (iv) changes in the Company's business strategy or
an inability to execute its strategy due to unanticipated changes in the
market, (v) various competitive factors that may prevent the Company from
competing successfully in the marketplace, and (vi) the Company's lack of
liquidity and its ability to raise additional capital. The Company has an
accumulated deficit of approximately $31.7 million as of December 31, 2000,
as well as a working capital deficit of approximately $18.6 million, and
expects to continue to incur operating losses in the near future. Funding
of the Company's working capital deficit, current and future operating
losses, and expansion of the Company will require substantial continuing
capital investment.
Although the Company has been able to arrange debt facilities and equity
financing to date, there can be no assurance that sufficient debt or equity
financing will continue to be available in the future or that it will be
available on terms acceptable to the Company. Failure to obtain sufficient
capital could materially affect the Company's operations and expansion
strategies. As a result of the aforementioned factors and related
uncertainties, there is substantial doubt about the Company's ability to
continue as a going concern.
F-7
On March 13, 2001, the U.S. operations of the Company, which included the
parent and one subsidiary (collectively, the "Debtors"), filed voluntary
petitions with the United States Bankruptcy Court for the Northern District
of Georgia for reorganization under Chapter 11 (the "Chapter 11 Cases"). On
September 21, 2001, the Debtors filed a plan of reorganization (the "Plan")
for the Chapter 11 Cases. The Plan was subsequently accepted by the
required percentage of creditors entitled to vote on the Plan and was
confirmed by the Bankruptcy Court by its order entered on September 21,
2001.
On October 12, 2001, the Company completed the sale of certain assets and
executory contracts of Rapid Link USA, Inc. and 100% of the common stock of
Rapid Link Telecommunications, GmbH to Dial-Thru International Corp.
("DTI"). The creditors received approximately $2 million in cash and
600,000 shares of DTI stock. The assets acquired by DTI were purchased at a
substantial discount and included primarily telecommunication switches and
related software and furniture and fixtures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries and the majority-owned joint
venture (Note 3). All significant intercompany accounts and transactions
have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Property and Equipment
Property and equipment are stated at cost. Expenditures for improvements
are capitalized as property. Replacements, maintenance, and repairs that do
not improve or extend the lives of the respective assets are expensed as
incurred. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, commencing when the assets are
installed or placed in service. Leasehold improvements are amortized over
the shorter of the expected lease term or the useful life. The estimated
useful lives are as follows:
Telecommunications equipment and computers Three to seven years
Furniture, fixtures, and equipment Five years
F-8
Intangible Assets
Intangible assets, net of accumulated amortization, as of December 31, 1999
and 2000 consisted of the following:
1999 2000
-------- ---------
Licenses $ 27,879 $1,481,050
Customer lists 113,044 155,766
-------- ---------
140,923 1,636,816
Less accumulated amortization (26,000) (315,742)
-------- ---------
$ 114,923 $1,321,074
======== =========
In April 1999, the Company completed an agreement to acquire the customers
of a competitor in Prague, Czech Republic. In May 1999, the Company
completed an agreement to purchase the customers in relation to a joint
venture agreement (Note 3) in Okinawa, Japan. The Company amortizes the
customer list over three years.
In February 2000, the Company acquired a license from the German
authorities. This license gives the Company the right to provide and run
a telecommunication net in Germany. The price of the license was
approximately $1.5 million. The right to use it is unlimited, and the right
does not expire. In accordance with the Company's accounting policy, this
asset is depreciated straight line over five years.
Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS No. 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and cost in excess of net assets acquired related
to those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The effect of adopting SFAS
No. 121 was not material to the Company's financial statements.
The Company reviews its long-lived assets, such as property and equipment
and intangible assets, for impairment at each balance sheet date or whenever
events or changes in circumstances indicate that the carrying amount of an
asset should be assessed. Management evaluates the tangible and intangible
assets related to each acquisition individually to determine whether an
impairment has occurred. An impairment is recognized when the undiscounted
future cash flows estimated to be generated by the assets are not sufficient
to recover the unamortized balance of the asset. Estimates of future cash
flows are based on many factors, including current operating results,
expected market trends, and competitive influences. If an impairment has
occurred, a loss equal to the difference between the carrying value of the
asset and its fair value is recognized. The resulting reduced carrying
amount of the asset is accounted for as its new cost and is depreciated over
the asset's remaining useful life. Management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.
F-9
Short Term Loans Payable
In August 2000, the Company entered into a promissory note with an
individual for $250,000, all of which is outstanding at December 31, 2000.
The note was due March 31, 2001. Principal amounts outstanding under the
note bear interest at 10% per annum. The Company has not made any payments
under the promissory note.
In November 2000, the Company entered into a promissory note with a
telecommunications provider that provided financing of $1,858, 016 all of
which is outstanding as of December 31, 2000. Principal amounts outstanding
under the note bear interest at 10% per annum. The note is payable in
eighteen equal installments. The note has been classified as short-term as
the Company has defaulted on payment of the promissory note.
Fair Value of Financial Instruments
The fair value of financial instruments classified as current assets or
liabilities, including cash, accounts receivable, and accounts payable,
approximates carrying value due to the short-term maturity of the
instruments.
Advertising Expenses
The Company accounts for advertising costs in accordance with the American
Institute of Certified Public Accountants' Statement of Position No. 93-7,
"Reporting on Advertising Costs." Costs of print or other advertising are
expensed when such costs are incurred. Advertising expenses totaled
$359,516, $1,166,409, and $1,631,052 for the years ended December 31, 1998,
1999, and 2000, respectively, and are included in selling and marketing in
the accompanying statements of operations.
Revenue Recognition
The Company recognizes revenues when services are provided. Payments
received in advance for long-distance service are recorded in the
accompanying balance sheets as unearned revenue.
Foreign Operations
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with SFAS No. 52, "Foreign
Currency Translation." Under SFAS No. 52, all balance sheet accounts are
translated at the exchange rate at year-end. Income statement items are
translated based on a weighted average exchange rate for the period that the
subsidiaries were in operation. Translation adjustments are not included in
determining net income but are accumulated and reported as a separate
component of shareholders' equity.
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income represents the change in equity of a business during a
period, except for investments by owners and distributions to owners.
Foreign currency translation adjustments represent the Company's only
component of other comprehensive income. For the years ended December 31,
1999 and 2000, total comprehensive loss was approximately $8 million and
$22.2 million, respectively.
F-10
Income Taxes
The Company accounted for income taxes under SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires deferred tax assets and liabilities to
be determined based on the difference between the financial accounting and
tax bases of assets and liabilities. Deferred tax assets and liabilities at
the end of each year are determined using the enacted statutory tax rates
expected to apply to taxable income in the years in which the deferred tax
assets or liabilities are expected to be realized or settled.
Source of Supplies
The Company owns telecommunications switches and voice over Internet
protocol gateways; however, the Company does not own a fiber network and,
accordingly, relies on facilities-based bandwidth providers to provide
transmission of its subscribers' voice communication services.
Reclassifications
Certain reclassifications have been made to prior year financial statements
to conform to the current year presentation.
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies certain criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce
may not be accounted for separately. Statement 142 will require that
goodwill and intangible assets with indefinite useful lives no longer need
to be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual value,
and reviewed for impairment in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Adoption of these Statements is not expected to have any material
impact on the Company's results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and amends Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." The Statement retains the basic
framework of SFAS No. 121, resolves certain implementation issues of SFAS
No. 121, extends applicability to discontinued operations, and broadens the
presentation of discontinued operations to include a component of an entity.
The Statement will be applied prospectively and is effective for financial
statements issued for fiscal years beginning after December 15, 2001.
Adoption of the Statement is not expected to have any material impact on the
Company's results of operations or financial position.
F-11
3. JOINT VENTURE
On May 31, 1999, the Company entered into a joint venture with an individual
d.b.a. ICSC, a Japanese sole proprietorship, to operate an Internet service
provider and cyber cafe in Okinawa, Japan, and related business. The joint
venture, Rapid Link/ICSC Joint Venture, was capitalized with a company
contribution of $40,000 for a 95% interest in the joint venture. ICSC
contributed all the assets and services of the sole proprietorship with an
estimated fair value of $21,950 for a 5% interest in the joint venture. In
accordance with the joint venture agreement, ICSC was subsequently paid
$20,000 for the equipment ICSC transferred to the joint venture. The
financial statements of the joint venture are consolidated herein.
4. WORKING CAPITAL LINE OF CREDIT
During the third quarter of 1998, the Company entered into a $750,000
working capital line of credit with a bank, which was amended effective
June 1, 1999 to increase the borrowings to $1.5 million. The working
capital line of credit incurred interest at LIBOR plus 2% (7.83% at
December 31, 1999) and expired January 30, 2000. The Company had $500,000
outstanding at December 31, 1999 under the working capital line of credit.
The Company paid all outstanding balances as of the expiration date.
5. CAPITAL LEASE OBLIGATIONS
At December 31, 2000, future minimum annual rental commitments for the years
ending December 31 under noncancelable capital lease obligations are as
follows:
2001 $ 933,115
2002 781,666
2003 263,051
2004 24,912
2005 and thereafter 732
----------
Total minimum lease payments 2,003,476
Less amount representing interest (171,803)
----------
Present value of minimum capital lease payments $ 1,831,673
==========
Capital leases are for telecommunications equipment. Capital lease property
included in property and equipment at December 31, 2000 is as follows:
Telecommunications equipment $ 7,475,557
Less accumulated amortization (2,535,856)
----------
$ 4,939,701
==========
F-12
6. CONVERTIBLE PREFERRED STOCK
In December 1999, VAXA Capital agreed to purchase 632,510 shares of the
Company's convertible preferred stock of which 316,255 shares were purchased
for the year ended December 31, 1999. The remaining 316,255 shares were
issued with the payment received February 2000. In consideration of the
preferred shares, VAXA Capital paid $5,000,000 in December 1999 and
$5,000,000 in February 2000.
During the year ended December 31, 2000, the Company issued 599,260 shares
of the Company's convertible preferred stock for consideration of
$6,557,092.
The Company's convertible preferred stock has no par value and is redeemable
by the Company at any time at a redemption price to be determined by the
board of directors. In addition, the holders of such stock have the right
to require the Company to purchase their shares at a price agreed to by the
parties at any time. Dividends on the convertible preferred stock accrue at
a rate of 8% per year.
7. EQUITY
During 1999, the Company sold 355,088 shares of common stock and received
proceeds of $2,485,616. Management of the Company purchased 67% of the
common stock in 1999.
Stock Warrants
In connection with the guarantee of the working capital line of credit, the
board of directors issued 100,000 stock purchase warrants to the
shareholders. The warrants were issued on November 19, 1998 at the exercise
price of $2.50, the estimated fair value of the common stock. The warrants
were exercisable as of the date of issue. The estimated $154,000 fair value
of the warrants as calculated under the Black-Scholes option pricing model
at the date of grant was included in stock warrants and deferred debt issue
costs. The deferred debt issue costs are being amortized over the life of
the working capital line of credit. During the years ended December 31,
1998, 1999 and 2000, the Company recorded additional interest expense in
the amount of $51,447, $102,895 and $0, respectively, to reflect the
amortization of debt issuance costs.
During 2000, the shareholders exercised 100,000 stock purchase warrants.
Accordingly, the Company received $250,000 related to the exercise and
reclassified the fair value of the stock warrant as common stock.
In connection with the August 2000 promissory note (Note 2), the Company
issued 12,000 stock purchase warrants to an individual. The warrants were
issued at an exercise price of $11, the estimated fair value of the common
stock. The warrants were exercisable at the date of issue. The estimated
$83,000 fair value of the warrant as calculated under the Black-Scholes
option pricing model at the date of grant was included in stock warrants and
interest expense.
F-13
Subscription Receivable
In December 1998, a board member of the Company purchased 200,000 shares of
the Company's common stock. In consideration of the common shares, the
board member paid $250,000 in December 1998, $200,000 in January 1999, and
the remaining $50,000 in June 1999.
Employee Stock Incentive Plan
The Company sponsors a stock incentive plan, which provides for the granting
of stock options to key employees. Options are generally granted at a price
(established by the board of directors based on valuation analyses) equal to
at least 100% of the most recent valuation analysis price as of the option
grant date.
Statement of Financial Accounting Standards No. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting
for all of their employee stock compensation plans. However, it also allows
an entity to continue to measure compensation cost for those plans using the
method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting methodology required by APB Opinion
No. 25 must make pro forma disclosures of net income as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation plans
under APB Opinion No. 25, under which no compensation cost has been
recognized by the Company. However, the Company has computed, for pro forma
disclosure purposes, the value of all options for shares of the Company's
common stock granted to employees of the Company using the Black-Scholes
option pricing model as prescribed by SFAS No. 123 and the following
weighted average assumptions:
1998 1999 2000
----------- ----------- ---------
Risk-free interest rate 4.6% to 5.6% 4.6% to 6.1% 4.6% to 6%
Expected dividend yield 0 0 0
Expected lives Five years Five years Five years
Expected volatility 70% 70% 70%
The total fair value of the options granted during the years ended
December 31, 1998, 1999, and 2000 was computed as approximately $115,000,
$484,000, and $1,500,000, respectively, which would be amortized over the
vesting period of the options. If the Company had accounted for these plans
in accordance with SFAS No. 123, the Company's reported pro forma net loss
for the years ended December 31, 1998, 1999, and 2000 would be as follows:
1998 1999 2000
-------- ---------- -----------
Net loss:
As reported $(880,845) $(7,934,491) $(21,850,421)
Pro forma (939,008) (8,066,069) (22,314,788)
The following table summarizes the transactions under the Company's stock
incentive plan:
Number Weighted
of Average
Shares Exercise
Price
------- ------
Outstanding at December 31, 1997 108,000 $ 1.83
Granted 124,900 3.01
Forfeited (16,000) 3.30
-------
Outstanding at December 31, 1998 216,900 2.58
Granted 240,566 3.66
Forfeited (25,400) .89
-------
Outstanding at December 31, 1999 432,066 3.07
Granted 195,525 15.81
Forfeited (71,000) 13.41
-------
Outstanding at December 31, 2000 556,591 3.07
=======
F-14
The following table sets forth the exercise price range, number of shares,
weighted average exercise prices, and remaining contractual lives by groups
of similar price and grant date:
Actual Number of Shares Weighted Weighted Number of Weighted
Range of Outstanding at Average Average Shares Average
Exercise December 31, Remaining Exercise Exercisable at Exercise
Prices 2000 Contractual Price December 31, Price
Life 2000
------------ ------- ---------- ------ ------ -----
(In Years)
$0.50-$1.00 57,800 6.60 $ 0.65 32,900 $0.69
$1.01-$3.50 205,400 7.95 3.40 0 0.00
$3.51-$5.25 97,866 8.75 5.20 0 0.00
$5.26-$15.81 195,525 9.75 15.81 0 0.00
8. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain office space and equipment under noncancelable
operating lease agreements, which expire at various dates through 2005.
Future minimum rentals under noncancelable operating leases for the years
ended December 31 are as follows:
2001 $ 639,863
2002 622,000
2003 450,565
2004 and thereafter 310,616
---------
$2,023,044
=========
Total rental expense related to operating leases totaled $292,978, $392,901,
and $181,627 for the years ended December 31, 1998, 1999, and 2000,
respectively, and is included in general and administrative operating
expenses in the accompanying statements of operations.
Contingencies
Certain of the Company's vendors have billed the Company rates other than
the parties contractually agreed upon. The Company is currently disputing
certain charges in excess of the contractual rates. The Company has
recorded all disputed items in accrued carrier costs. If the Company does
not prevail, there could be a material adverse effect on the financial
statements.
Legal Proceedings
The Company is subject to lawsuits arising in the ordinary course of
business. In the opinion of management, the ultimate resolution of these
pending legal proceedings will not have a material adverse effect on the
Company's business or financial condition.
F-15
9. INCOME TAXES
The provision (benefit) for income taxes is as follows as of December 31,
1998, 1999, and 2000:
1998 1999 2000
-------- -------- ----
Current:
Federal $(280,132) $(134,096) $ 0
State (38,972) (4,100) 0
-------- -------- ----
(319,104) (138,196) 0
-------- -------- ----
Deferred:
Federal (85,000) 228,920 0
State (3,000) 8,080 0
-------- -------- ----
(88,000) 237,000 0
-------- -------- ----
(Benefit) provision for
income taxes $(407,104) $ 98,804 $ 0
======== ======== ====
The differences between the federal statutory income tax rate and the
Company's effective tax rate were as follows as of December 31, 1998, 1999,
and 2000:
1998 1999 2000
---- ---- ----
Federal statutory rate (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit (5.0) (5.0) (5.0)
Effect of net operating loss 1.3 37.7 35.9
carryforwards and valuation allowance
Other 6.1 2.6 3.1
---- ---- ----
(31.6)% 1.3% 0.0 %
==== ==== ====
Income taxes paid (received) were $459,000, $(54,369), and $0 in the years
ended December 31, 1998, 1999, and 2000, respectively.
F-16
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
significant components of deferred tax assets and liabilities as of
December 31, 1999 and 2000 are as follows:
1999 2000
--------- ----------
Deferred tax assets:
Net operating loss carryforwards $2,764,192 $10,720,883
Bad debt reserve 347,829 393,418
Other 77,669 171,581
--------- ----------
3,189,690 11,285,882
Deferred tax liabilities:
Accelerated depreciation 463,951 140,410
--------- ----------
Total net deferred tax asset before
valuation allowance 2,725,739 11,145,472
Less valuation allowance (2,725,739) (11,145,472)
--------- ----------
Total net deferred taxes $ 0 $ 0
========= ==========
The increase in the valuation allowance for the year ended December 31, 1999
and 2000 was $2.7 million and $8.4 million, respectively, primarily related
to operating loss carryforwards.
As of December 31, 1999 and 2000, the Company had net operating loss
carryforwards, which expire at various dates through 2010, of approximately
$7.1 million and $28.2 million, respectively. A valuation allowance is
established to reduce the deferred income tax assets to the level at which
it is more likely than not that the tax benefits will be realized.
Realization of tax benefits depends on having sufficient taxable income
within the carryback and carryforward periods. The Company continually
reviews the adequacy of the valuation allowance and recognizes these
benefits as reassessment indicates that it is more likely than not that the
benefits will be realized. Based on pretax losses incurred in recent years,
management has established a valuation allowance against the entire net
deferred tax asset balance.
10. FINANCIAL FRAUD
During 2000, management of the Company discovered that a portion of their
prepaid calling cards had been fraudulently activated by certain employees
of the Company and provided to distributors but never billed to those
distributors. The employees are no longer with the Company. The Company
has reached an agreement with one of these distributors to collect $468,000
in payment for prepaid calling cards distributed without proper approval,
this settlement was recorded as revenue in the year ended December 31, 2000.
The Company did not record any revenues related to the fraudulently
activated prepaid calling cards for the year ended December 31, 1999.
Additionally, the Company has insurance coverage in the amount of $250,000
to cover a loss of this nature.
F-17
RAPID LINK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND SEPTEMBER 30, 2001
ASSETS December 31, September 30,
2000 2001
---------------------------------------------- ----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash $ 1,613,765 $ 585,950
Accounts receivable, net 3,417,452 2,359,833
Other receivables 29,568 0
Prepaids and other current assets 658,094 152,830
----------- -----------
Total current assets 5,718,879 3,098,613
----------- -----------
PROPERTY AND EQUIPMENT:
Telecommunications equipment 8,050,901 7,698,775
Computers 3,075,765 3,364,771
Furniture, fixtures, and equipment 617,767 665,356
Construction in progress 60,218 0
Leasehold improvements 626,269 628,751
----------- -----------
12,430,920 12,357,653
Less accumulated depreciation (4,433,890) (6,693,874)
----------- -----------
Property and equipment, net 7,997,030 5,663,779
----------- -----------
OTHER ASSETS:
Intangible assets, net 1,321,074 876,640
Other 187,822 306,749
----------- -----------
Total other assets 1,508,896 1,183,389
----------- -----------
Total assets $ 15,224,805 $ 9,945,781
=========== ===========
December 31, September 30,
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) 2000 2001
---------------------------------------------- ----------- -----------
(Unaudited)
CURRENT LIABILITIES:
Liabilities not subject to compromise
Short-term loans payable $ 2,108,016 $ 103,663
Short-term capital lease obligations 903,363 841,579
Accounts payable 3,189,186 2,932,648
Accrued carrier costs 12,116,833 250,687
Unearned revenue 1,337,484 723,612
Accrued payroll and related liabilities 617,731 0
Accrued other taxes 963,780 85,614
Customer deposits 186,476 0
Customer advances 0 0
Accrued dividends 956,269 0
Other accrued liabilities 1,981,375 237,959
----------- -----------
Total current liabilities 24,360,513 5,175,762
----------- -----------
LONG-TERM LIABILITIES:
Capital lease obligations 928,308 0
----------- -----------
Convertible preferred stock, no par value,
20,000,000 shares authorized, 1,231,771
and 1,232,970 shares issued and
outstanding in 2000 and 2001, respectively 16,481,762 16,506,762
----------- -----------
LIABILITIES SUBJECT TO COMPROMISE 0 22,447,070
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, no par value; 10,000,000 shares
authorized, 5,175,088 shares issued and
outstanding in 2000 and 2001, respectively 5,399,958 5,399,958
Stock warrants 83,040 83,040
Cumulative translation adjustment (319,419) (472,421)
Retained deficit (31,709,357) (39,194,390)
----------- -----------
Total shareholders' deficit (26,545,778) (34,183,813)
----------- -----------
Total liabilities and shareholders' equity $ 15,224,805 $ 9,945,781
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-18
RAPID LINK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(UNAUDITED)
September 30, September 30,
2000 2001
----------- -----------
REVENUES $ 41,312,120 $ 18,267,358
COST OF SERVICE 33,990,240 13,537,293
----------- -----------
Gross margin 7,321,881 4,730,065
----------- -----------
OPERATING EXPENSES:
Selling and marketing 7,006,781 1,354,548
General and administrative 14,144,484 7,683,817
Depreciation and amortization 1,949,865 2,533,183
Reorganization items 0 322,017
----------- -----------
Total operating expenses 23,101,130 11,893,565
----------- -----------
OPERATING LOSS (15,779,250) (7,163,500)
----------- -----------
OTHER EXPENSE, NET 468,241 93,592
----------- -----------
LOSS BEFORE INCOME TAXES (16,247,491) (7,257,092)
BENEFIT (PROVISION) FOR INCOME TAXES 0 0
----------- -----------
NET LOSS $(16,247,491) $ (7,257,092)
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
statements.
F-19
RAPID LINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(UNAUDITED)
September 30, September 30,
2000 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,247,491) $ (7,257,092)
----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,949,865 2,533,183
Loss on disposal of equipment 364,848 (21,821)
Amortization of debt issue costs 13,840 27,680
Changes in certain operating assets and
liabilities:
Accounts receivable 367,642 966,704
Prepaids and other 201,741 675,032
Accounts payable 1,871,809 (4,142,504)
Unearned revenue (844,109) (904,368)
Accrued carrier costs 1,180,591 8,020,171
Other current liabilities 2,863,921 67,504
----------- -----------
Total adjustments 7,970,141 7,221,581
----------- -----------
Net cash (used in) provided by
operating activities (8,277,343) (35,511)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,451,858) (251,055)
Purchase of intangibles (1,360,812) 0
----------- -----------
Net cash used in investing activities (3,812,670) (251,055)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) from line of credit, net (500,000) (89,345)
Proceeds from issuance of convertible
preferred stock, net of expenses 10,247,216 25,000
Proceeds from issuance of common stock 250,000 169
Payments on capital leases (315,827) (524,074)
Effect of changes in foreign exchange rate (174,050) (152,099)
----------- -----------
Net cash provided by financing activities 9,507,339 (741,249)
----------- -----------
CHANGE IN CASH (2,582,674) (1,027,815)
CASH, beginning of year 4,162,905 1,613,765
----------- -----------
CASH, end of year $ 1,580,231 $ 585,950
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred for
property and equipment $ 113,002 $ 0
=========== ===========
Exercise of stock purchase warrant for the
purchase of common stock $ 154,342 $ 0
=========== ===========
The accompanying notes are an integral part of these consolidated
statements.
F-20
RAPID LINK, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to Article 10 of Regulation S-X of the Securities and Exchange
Commission. The accompanying unaudited condensed consolidated financial
statements reflect, in the opinion of management, all adjustments
necessary to achieve a fair statement of financial position and results
for the interim periods presented. All such adjustments are of a normal
recurring nature. It is suggested that these condensed financial
statements be read in conjunction with the annual consolidated
financial statements of Rapid Link, Inc. and its subsidiaries (the
"Company") and the notes thereto.
2. On March 13, 2001, the U.S. operations of the Company, which included
the parent and one subsidiary (collectively, the "Debtors"), filed
voluntary petitions with the United States Bankruptcy Court for the
Northern District of Georgia for reorganization under Chapter 11 (the
"Chapter 11 Cases"). On September 21, 2001, the Debtors filed a plan
of reorganization (the "Plan") for the Chapter 11 Cases. The Plan was
subsequently accepted by the required percentage of creditors entitled
to vote on the Plan and was confirmed by the Bankruptcy Court by its
order entered on September 21, 2001. The Company incurred $322,017 of
reorganization expenses in the nine month period ended September 30,
2001.
3. On October 12, 2001, the Company completed the sale of certain assets
and executory contracts of Rapid Link USA, Inc. and 100% of the common
stock of Rapid Link Telecommunications, GmbH to Dial-Thru International
Corp. ("DTI"). The creditors received approximately $2 million in
cash and 600,000 shares of DTI stock. The assets acquired by DTI
were purchased at a substantial discount and included primarily
telecommunication switches and related software and furniture and
fixtures.
F-21
(b) Pro Forma Financial Information.
The unaudited pro forma condensed balance sheet of Dial Thru
International Corporation (the "Company") and Rapid Link,
Incorporated ("Rapid Link") as of July 31, 2001 reflects this
acquisition as if it had occurred on July 31, 2001. The acquisition
has been accounted for using the purchase method of accounting.
The unaudited pro forma condensed statements of operations for the
year ended October 31, 2000 and the nine months ended July 31, 2001
reflect the acquisition as if it had occurred on November 1, 1999
and 2000, respectively.
The unaudited pro forma condensed balance sheet and statements
of operations should be read in conjunction with the separate
historical financial statements of the Company and Rapid Link, and
related notes appearing elsewhere in this document. The historical
statements of operations for Rapid Link included in these pro forma
financial statements are for the year ended December 31, 2000 and
nine months ended September 30, 2001. The pro forma financial
information is not necessarily indicative of the results that would
have been reported had such events actually occurred on the dates
specified, nor is it necessarily indicative of the future results
of the combined entities.
Notes to Pro Forma Financial Statements
1. Pro Forma Condensed Balance Sheet
For purposes of determining the pro forma effect of the Rapid Link
acquisition, the pro forma adjustments described below have been
made on the historical balance sheet as of July 31, 2001
(unaudited).
2. Pro Forma Condensed Statements of Operations
For purposes of determining the pro forma effect of the Rapid
Link acquisition, the pro forma adjustments described below have
been made on the unaudited historical statements of operations of
the Company and Rapid Link for the nine month period ended July
31, 2001, and to the historical statements of operations of the
Company and Rapid Link for the year ended October 31, 2000 as if
the acquisition had occurred as of November 1, 1999.
F-22
DIAL THRU INTERNATIONAL, CORPORATION
UNAUDITED COMBINED PRO FORMA BALANCE SHEET
AS OF JULY 31, 2001
Historical Historical Pro Forma
Dial Thru Rapid Link, Pro Forma Dial Thru
Intl. Corp. Inc.(a) Adjustments Intl. Corp.
-------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 315,528 $ 585,950 $ (433,283) (b) $ 118,195
(350,000) (b)
Trade accounts receivable, net 896,993 2,359,833 (1,764,770) (b) 1,492,056
Prepaid expenses and other 67,162 152,830 (122,908) (b) 97,084
-------------------------------------------------------------
Total current assets 1,279,683 3,098,613 (2,670,962) 1,707,334
-------------------------------------------------------------
Property and equipment, net 1,235,526 5,663,779 (1,347,416) (b) 5,551,889
Property and equipment held for sale 320,307 - 320,307
Other assets 2,688,923 306,749 (293,018) (b) 2,702,654
Intangible assets, net 1,851,866 876,640 17,459 (b) 2,745,965
-------------------------------------------------------------
Total assets $ 7,376,305 $ 9,945,781 $ (4,293,937) $ 13,028,149
=============================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilites Not Subject to Compromise
Current Liabilities
Loans and note payable $ 755,958 $ 103,663 859,621
Current portion of capital
lease obligation 118,582 - 118,582
Trade accounts payable 3,515,346 2,932,648 (1,590,000) (b) 4,857,994
Accrued Carrier Costs - 250,687 250,687
Accrued Liabilities 197,910 237,959 358,081 (b) 793,950
Deferred revenue 86,156 723,612 809,768
Tax Payable - 85,614 85,614
-------------------------------------------------------------
Total current liabilities 4,673,952 4,334,184 (1,231,919) 7,776,217
Capital lease obligation,
net of current 71,549 841,579 913,128
Convertible debenture, net 927,605 - 927,605
Convertible note, net 1,240,000 (g) 410,764
(551,018) (d)
(278,218) (e)
Preferred stock - 16,506,762 (16,506,762) (b) -
Liabilities subject to compromise 22,447,070 (22,447,070) (b)
Stockholders' equity
Common stock 11,535 5,399,958 (5,399,958) (b) 12,135
600 (c)
Additional paid-in capital 35,988,936 - 551,018 (d) 37,648,344
467,400 (c)
362,772 (f)
278,218 (e)
Accumulated deficit (34,219,906) (39,194,390) 39,194,390 (b) (34,582,678)
(362,772) (f)
Accumulated other comprehensive
income (loss) (5,416) - (5,416)
Cumulative translation adjustments - (472,421) 472,421 (b) -
Treasury stock, 12,022 common
shares at cost (54,870) - (54,870)
Notes Receivable - common stock (17,080) - (17,080)
Capital Stock Warrants - 83,040 (83,040) (b) -
-------------------------------------------------------------
Total stockholders' equity 1,703,199 (34,183,813) 35,481,049 3,000,435
-------------------------------------------------------------
Total liabilities and
stockholders' equity $ 7,376,305 $ 9,945,781 $ (4,293,937) $ 13,028,149
=============================================================
(a) Reflects the historcial balance sheet of Rapid Link, Inc. as of
September 30, 2001. Rapid Link, Inc. has a calendar year fiscal
period.
(b) Reflects the purchase price allocation arising from the acquisition of
the certain assets and liabilities of the U.S. operations of Rapid Link,
Inc. and the stock of Rapid Link Inc.'s German subsidiary as if it had
occurred on November 1, 2000. A summary of the computation is as
follows:
Purchase Price $ 2,058,000
Less: Net tangible assets acquired 3,763,497
Plus: Transaction costs of purchase acquisition 358,081
----------
Excess fair value over purchase price of the the noted
subsidiaries of Rapid Link's net assets acquired
(i.e. negative goodwill) $(1,347,416)
==========
The negative goodwill noted above has been allocated to reduce the fair
value of property and equipment, net in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 141 Business Combinations.
(c) Reflects 600,000 shares of Dial Thru International, Inc.'s common
stock issued to the Bankruptcy Estate of Rapid Link, Inc in
association with the acquisition of certain assets and liabilities
of Rapid Link, Inc. (representing 600,000 shares at $0.78 fair value
on the date of issuance) as if such shares were outstanding as of
November 1, 2000.
(d) Reflects the relative fair value calculation of the warrants issued
in connection with the convertible notes. The Company calculates a
fair value of $991,967 using an option pricing model. The assumptions
under the Balck scholes calculation were; 5% risk free interest rate,
dividends yield of 0%, volatility factors of the expected market price
of Dial Thru's common stock of 1.36; and an expected life of the
warrants of two years. The Company then calculated the relative fair
value in accordance with EITF 00-27 and arrived at an amount of
$551,018 allocated to warrants. The stock warrants will be amortized
to interest expense over the life of the convertible notes.
(e) Reflects the beneficial conversion feature embedded in the convertible
notes issued in connection with the acquisition in accordance with
EITF 00-27. The notes are convertible over two years.
(f) Reflects the beneficial conversion feature, which was immediately
convertible, embedded in the convertible debenture calculation in
accordance with EITF 00-27.
(g) Reflects the notes issued by the Company to execute the transaction.
The notes carry an interest rate of 10% and are payable over two
years.
Liabilities subject to compromise consist of the following:
Loans and note payable $ 1,965,008
Trade accounts payable 1,056,809
Accrued carrier costs 14,584,025
Accrued liabilites & taxes payable 3,026,957
Capital lease obligations 630,059
Dividends payable 1,184,211
-----------
22,447,070
F-23
DIAL THRU INTERNATIONAL, CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED JULY 31, 2001
Historical Historical Pro Forma
Dial Thru Rapid Link, Pro Forma Dial Thru
Intl. Corp. Inc.(a) Adjustments Intl. Corp.
-------------------------------------------------------------
REVENUES
Revenues $ 3,448,338 $ 18,267,358 $ - $ 21,715,696
-------------------------------------------------------------
Total revenues 3,448,338 18,267,358 - 21,715,696
COSTS AND EXPENSES
Cost of Revenues 2,357,552 13,537,293 - 15,894,845
Sales & marketing 499,641 1,354,548 - 1,854,189
General & administrative 2,042,678 7,683,817 (1,924,822) (b) 7,801,673
Depreciation and amortization 468,029 2,533,183 (389,636) (c) 2,611,576
Reorganizational items - 322,017 - 322,017
-------------------------------------------------------------
Total cost and expenses 5,367,900 25,430,858 (2,314,458) 28,484,300
-------------------------------------------------------------
Operating loss (1,919,562) (7,163,500) 2,314,458 (6,768,604)
OTHER INCOME (EXPENSES)
Interest and financing costs (379,990) (138,797) (310,963) (d) (783,953)
138,797 (e)
(93,000) (f)
Interest Income - 4,933 - 4,933
Other Income (Expense) 1,009,373 40,552 - 1,049,925
Write off of investment in
marketable securities (446,820) - - (446,820)
-------------------------------------------------------------
Total other income (expense) 182,563 (93,312) (265,166) (175,915)
Net loss before income taxes (1,736,999) (7,256,812) 2,049,292 (6,944,519)
Provision for Income tax - (279) (279)
-------------------------------------------------------------
Net loss $ (1,736,999) $ (7,257,091) $ 2,049,292 $ (6,944,798)
=============================================================
Basic and diluted loss per share $ (0.16) $ (0.62)
=========== ===========
Weighted average number of common
shares - basic and diluted 10,677,487 600,000 (g) 11,277,487
=========== =========== ===========
(a) Historical amounts related to Rapid Link, Inc. represent the statement
of operations for the nine months ended September 30, 2001.
(b) Reflects an adjustment to general and administrative expenses
representing expenses eliminated upon the closing of the acquisition
of Rapid Link. The adjustment reflected is solely related to
headcount reduction which has already been executed.
(c) Represents a reduction of depreciation expense based on the purchase
price allocation as noted in footnote (a) to the pro forma balance sheet
for the acquisition of Rapid Link. Upon allocation of purchase price
to net assets acquired, the Company ends up with negative goodwill.
Therefore, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 141 Business Combinations, the Company reduced the net book
value of fixed assets which reduces the depreciation.
(d) Reflects the amortization of the debt discount and additional
beneficial conversion feature calculated in accordance with EITF
00-27 recognized in connection with the issuance of warrants
detachable from convertible notes as if the acquisition of Rapid
Link had taken place on November 1, 2000.
(e) Reflects the reduction of interest expense related to Rapid Link as the
Company will not assume the debt.
(f) Reflects interest expense related to the $1.2 million of convertible
notes issued to execute the purchase of Rapid Link. Interest is
calculated at 10% in accordance with the notes.
(g) Reflects 600,000 shares of Dial Thru Intl common stock issued to the
Bankruptcy Estate of Rapid Link, Inc. in the merger as if such shares
were outstanding since November 1, 2000. Also, excludes the effect
of stock options for purposes of the diluted earnings per share
calculation, since the effect for pro forma purposes is antidilutive.
F-24
DIAL THRU INTERNATIONAL, CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
Historical Historical Pro Forma
Dial Thru Rapid Link, Pro Forma Dial Thru
Intl. Corp. Inc. (a) Adjustments Intl. Corp.
-------------------------------------------------------------
REVENUES
Revenues $ 8,591,449 $ 52,780,495 - $ 61,371,944
-------------------------------------------------------------
Total revenues 8,591,449 52,780,495 - 61,371,944
COSTS AND EXPENSES
Cost of Revenues 9,971,409 45,885,709 - 55,857,118
Sales & marketing 862,582 8,513,023 - 9,375,605
Non-cash expense related to
issuance of warrants 1,937,184 - - 1,937,184
General & administrative 5,201,608 16,633,934 (6,317,914) (b) 15,517,628
Impairment charge to write
down advertising credits 575,542 - - 575,542
Depreciation and amortization 565,188 2,917,970 (519,515) (c) 2,963,643
-------------------------------------------------------------
Total cost and expenses 19,113,513 73,950,636 (6,837,429) 86,226,720
-------------------------------------------------------------
Operating loss (10,522,064) (21,170,141) 6,837,429 (24,854,776)
OTHER INCOME (EXPENSES)
Interest and financing costs (679,258) (259,395) (414,618) (d) (1,271,876)
259,395 (e)
(124,000) (f)
Interest Income 14,580 77,214 - 91,794
Other Expense - (498,098) - (498,098)
-------------------------------------------------------------
Total other income (expense) (664,678) (680,280) (279,223) (1,624,181)
Net loss before income tax (11,186,742) (21,850,421) 6,558,206 (26,478,957)
Provision for Income tax - - - -
-------------------------------------------------------------
Net loss $(11,186,742) $(21,850,421) $ 6,558,206 $(26,478,957)
=============================================================
Baisc and diluted loss per share $ (1.31) $ (2.90)
=========== ===========
Weighted average number of common
shares - basic and diluted 8,544,105 600,000 (g) 9,144,105
=========== =========== ===========
(a) Historical amounts related to Rapid Link, Inc. represent the statement
of operations for the twelve months ended December 31, 2000
(b) Reflects an adjustment to general and administrative expenses
representing expenses eliminated upon the closing of the acquisition
of Rapid Link. The adjustment reflected is solely related to
headcount reduction which has already been executed.
(c) Represents a reduction of depreciation expense based on the purchase
price allocation as noted in footnote (a) to the pro forma balance
sheet for the acquisition of Rapid Link. Upon allocation of purchase
price to net assets acquired, the Company ends up with negative
goodwill. Therefore, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 141 Business Combinations, the
Company reduced the net book value of fixed assets which reduces the
depreciation.
(d) Reflects the amortization of the debt discount and additional
beneficial conversion feature calculated in accordance with EITF
00-27 recognized in connection with the issuance of warrants
detachable from convertible notes as if the acquisition of Rapid
Link had taken place on November 1, 1999.
(e) Reflects the reduction of interest expense related to Rapid Link as
the Company will not assume the debt.
(f) Reflects interest expense related to the $1.2 million of convertible
notes issued to execute the purchase of Rapid Link. Interest is
calculated at 10% in accordance with the notes.
(g) Reflects 600,000 shares of Dial Thru Intl common stock issued to
the Bankruptcy Estate of Rapid Link, Inc. in the merger as if such
shares were outstanding since November 1, 2000. Also, excludes the
effect of stock options for purposes of the diluted earnings per share
calculation, since the effect for pro forma purposes is antidilutive.
F-25