UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
|_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number 000-23291
---------
DigiTEC 2000, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
54-1287957
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(I.R.S. Employer Identification No.)
8 West 38th Street, Fifth Floor, New York, New York 10018
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(Address of principal executive offices - Zip code)
Registrant's telephone number, including area code: (212) 944-8888
Former name, former address and former fiscal year, if changes since last
report.
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes |_| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $.001 par value, 5,064,801 outstanding as of November 18, 1997.
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Index
================================================================================
Part I - Financial Information
Item 1. Consolidated Financial Statements:
Balance sheets as of September 30, 1997 and
June 30, 1997 3
Statements of operations for the three months
ended September 30, 1997 and 1996 4
Statement of stockholders' equity (deficit) for
the three months ended September 30, 1997 5
Statements of cash flows for the three months
ended September 30, 1997 and 1996 6
Notes to consolidated financial statements 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-21
Risk Factors 22-23
Part II - Other Information
Items 1-6 24-25
Signatures 26
2
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current:
Cash $ 480,627 $ 727,197
Accounts receivable, net of allowance for bad debts
of $75,000 and $60,000, respectively 1,961,785 1,868,227
Inventory 802,677 218,877
Prepaid expenses 27,434 11,814
- ------------------------------------------------------------------------------------------
Total current assets 3,272,523 2,826,115
Property and equipment, net 96,559 64,397
Intangibles, net 550,792 606,920
Other assets 29,291 29,291
- ------------------------------------------------------------------------------------------
$ 3,949,165 $ 3,526,723
==========================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current:
Accounts payable $ 3,273,668 $ 2,842,891
Accrued expenses and other current liabilities 307,676 290,799
Note payable - current 182,000 117,610
Net liabilities of discontinued operations 97,774 211,502
- ------------------------------------------------------------------------------------------
Total current liabilities 3,861,118 3,462,802
Note payable -- 64,390
Deferred rent 71,000 71,000
- ------------------------------------------------------------------------------------------
Total liabilities 3,932,118 3,598,192
- ------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 1,000,000 shares
authorized; no shares outstanding -- --
Common stock, $.001 par value, 100,000,000 shares
authorized; 4,879,668 and 4,858,418 shares issued
and outstanding, respectively 4,879 4,858
Additional paid-in capital 3,634,316 3,602,462
Accumulated deficit (3,622,148) (3,678,789)
- ------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) 17,047 (71,469)
- ------------------------------------------------------------------------------------------
$ 3,949,165 $ 3,526,723
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations
(Unaudited)
================================================================================
Three Months Ended September 30, 1997 1996
- --------------------------------------------------------------------------------
Net sales $13,322,142 $2,532,301
Cost of sales 12,238,339 2,623,720
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Gross profit (loss) 1,083,803 (91,419)
Selling, general and administrative expenses 921,608 297,266
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Income (loss) from continuing operations 162,195 (388,685)
Loss from discontinued operations of World Access (105,554) --
- --------------------------------------------------------------------------------
Net income (loss) $ 56,641 $ (388,685)
================================================================================
Net income (loss) per common share:
From continuing operations $ .03 $ (.08)
From discontinued operations (.02) --
- --------------------------------------------------------------------------------
$ .01 $ (.08)
================================================================================
Weighted average number of common and common
equivalent shares outstanding 4,858,654 4,664,427
================================================================================
See accompanying notes to consolidated financial statements.
4
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Consolidated Statement of Stockholders' Equity (Deficit)
(Unaudited)
================================================================================
Three Months Ended September 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Total
----------------- Additional Accumulated stockholders'
Shares Amount paid-in capital deficit equity (deficit)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1997 4,858,418 $4,858 $3,602,462 $(3,678,789) $(71,469)
For the three months ended
September 30, 1997:
Exercise of warrants 21,250 21 31,854 -- 31,875
Net income -- -- -- 56,641 56,641
- -----------------------------------------------------------------------------------------------
Balance, September 30, 1997 4,879,668 $4,879 $3,634,316 $(3,622,148) $ 17,047
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Consolidated Statements of Cash Flows
(Unaudited)
================================================================================
Three Months Ended September 30, 1997 1996
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 56,641 $(388,685)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Provision for bad debts 15,000 --
Amortization 56,128 13,262
Depreciation 8,005 1,066
Deferred income -- (251,602)
(Increase) decrease in:
Accounts receivable (108,558) 14,336
Inventory (583,800) 30,788
Prepaid expenses and other assets (15,620) 222,029
Increase (decrease) in:
Accounts payable and accrued expenses 447,654 (130,063)
- --------------------------------------------------------------------------------
Net cash used in operating activities of
continuing operations (124,550) (488,869)
Net cash used in operating activities of
discontinued operations (113,728) --
- --------------------------------------------------------------------------------
Net cash used in operating activities (238,278) (488,869)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (40,167) (12,938)
Proceeds from repayment of related party loans -- 42,001
Payment received on note receivable -- 150,000
- --------------------------------------------------------------------------------
Net cash (used in) provided by investing
activities (40,167) 179,063
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of warrants 31,875 --
- --------------------------------------------------------------------------------
Net decrease in cash (246,570) (309,806)
Cash (including $367,363 of restricted cash at
June 30, 1996), beginning of period 727,197 509,117
- --------------------------------------------------------------------------------
Cash (including $172,088 of restricted cash at
September 30, 1996), end of period $ 480,627 $ 199,311
================================================================================
6
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
1. Summary of (a) Business
Significant
Accounting DigiTEC 2000, Inc. (formerly Promo Tel, Inc., the
Policies "Company") is primarily engaged in the distribution,
marketing and management of prepaid telephone calling
cards. It currently markets its telephone calling card
products principally throughout the New York tri-state
metropolitan area.
On October 18, 1996, the Company changed its name to
DigiTEC 2000, Inc.
(b) Organization
On July 11, 1995, Promo Tel, Inc., a Delaware corporation
("Promo Tel-Delaware"), merged (the "Merger") into Promo
Tel, Inc., a Nevada corporation ("Promo Tel-Nevada").
Immediately prior to the Merger, Promo Tel-Nevada changed
its name from Yacht Havens International Corp. ("Yacht
Havens"). The surviving corporation remained Promo Tel,
Inc. Pursuant to the terms of the Merger, Promo
Tel-Nevada, which had 59,042 shares of its common stock
previously outstanding, exchanged with the sole
stockholder of Promo Tel-Delaware an aggregate of
1,333,334 shares of previously unissued $.001 Promo
Tel-Nevada common stock for the outstanding shares of
Promo Tel-Delaware's outstanding common stock.
Since the Merger resulted in voting control by the
stockholder of Promo Tel-Delaware and Promo Tel-Delaware
had the personnel and owned all the assets to be utilized
for its ongoing business, the Merger was treated as a
recapitalization of Promo Tel-Delaware and the sale of
59,042 shares of previously issued Promo Tel-Nevada common
stock for the net assets of Promo Tel-Nevada ($-0-).
Promo Tel-Delaware is the continuing entity for financial
reporting purposes, and the financial statements prior to
July 11, 1995 represent its financial position and results
of operations. The assets, liabilities and results of
operations of Promo Tel-Nevada are included as of July 11,
1995.
7
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
The Company was formed on May 18, 1995 and commenced
operations in July 1995.
Although Promo Tel-Delaware is deemed to be the acquiring
corporation for financial accounting and reporting
purposes, the legal status of Promo Tel-Nevada as the
surviving corporation will not change. Promo Tel-Nevada
had amended its Articles of Incorporation to change its
name from Promo Tel, Inc. to the Company's current name
(Note 1(a)).
In September 1996, the Board of Directors of the Company
approved a reverse stock split of the Company's common
stock ("Common Stock"). Each stockholder of record on
October 18, 1996 received one share of new Common Stock
for each six shares of Common Stock held.
The equity accounts of the Company and all disclosures
have been retroactively adjusted to reflect the
recapitalization and the one-for-six reverse stock split.
(c) Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and, from June 1, 1997 (Note 2), its
wholly-owned subsidiary, World Access Solutions, Inc.
("World Access"). All significant intercompany balances
and transactions have been eliminated.
The consolidated financial statements and related notes
thereto as of September 30, 1997 and for the three months
ended September 30, 1997 and 1996 are unaudited but, in
the opinion of management, include all adjustments
necessary to present fairly the information set forth
therein. These adjustments consist solely of normal
recurring accruals. The consolidated balance sheet
information for June 30, 1997 was derived from the audited
consolidated financial statements included in the
Company's Form 10. These interim financial statements
should be read in conjunction with that report. The
interim results are not necessarily indicative of the
results for any future periods.
8
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
(d) Deferred Rent
The Company accounts for rent on a straight-line basis
over the term of the leases. No adjustment was necessary
for the three months ended September 30, 1997 and 1996.
(e) Use of Estimates
In preparing the consolidated financial statements in
conformity with generally accepted accounting principles,
management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and
revenues and expenses during the reported period. Actual
results could differ from those estimates.
(f) Revenue Recognition
Sales of branded prepaid phone cards, purchased from third
parties for which the Company acts solely as a
distributor, are recognized upon delivery.
Sales of proprietary branded prepaid phone cards are
deferred and recognized upon completion of telephone calls
by end users. Sales under this program were terminated
during the three months ended September 30, 1996.
(g) Inventory
Inventory, consisting primarily of telephone calling
cards, is stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
9
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
(h) Intangibles and Amortization
Intangibles included the costs to acquire customer lists.
As part of one of the customer acquisition agreements, the
Company entered into an 8% per annum note payable for
$182,000. The note is unsecured with payments commencing
on November 1, 1997 and continuing until October 1, 1998.
The Company periodically evaluates the recoverability of
these intangibles based on several factors, including
management's intention with respect to these acquired
assets and the estimated future non-discounted cash flows
expected to be generated by such assets. To date, the
Company has not recorded any impairment of its
intangibles.
Amortization is computed on a straight-line basis over the
estimated useful lives of the intangibles which
approximate three years.
(i) Income Taxes
Deferred tax assets and liabilities are recorded for the
estimated future tax effects attributable to temporary
differences between the bases of assets and liabilities
recorded for financial and tax reporting purposes.
(j) Risk Concentration
(i) Accounts Receivable
As of and for the three months ended September 30, 1997,
one master distributor accounted for approximately 33% and
42% of the Company's accounts receivable and sales,
respectively. Subsequent to September 30, 1997, the
Company terminated the exclusivity clause of the
distribution agreement. As a result, the Company
anticipates that its concentration of sales to any
particular customer will be reduced for the year ended
June 30, 1998.
10
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
(ii) Suppliers
The Company purchases its long distance products
primarily from two long distance providers.
(k) Earnings Per Share
Earnings (loss) per share is calculated using weighted
average shares outstanding during the period. The weighted
average shares have been retroactively adjusted to reflect
the exchange of the 1,333,334 shares and the one-for-six
reverse stock split (Note 1(b)). Options and warrants to
purchase Common Stock are not included in the earnings
(loss) per share calculation because their effect was
anti-dilutive.
(l) Advertising Costs
The Company expenses all advertising costs as incurred.
(m) Fair Value of Financial Instruments
The carrying values of financial instruments, including
cash and note payable at June 30, 1997 and September 30,
1997, approximate fair value as of those dates because of
the relatively short-term maturity of these instruments.
(n) Reclassifications
Certain amounts as previously reported have been
reclassified to conform to the 1997 presentation.
(o) Recent Accounting Pronouncements
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" for the year ended June 30, 1996. The
adoption of SFAS No. 121 did not have a material effect on
the Company's consolidated financial statements.
11
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
In October 1995, the Financial Accounting Standards Board
("FASB") issued SFAS No.123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a fair value method
for accounting for stock-based compensation plans either
through recognition or disclosure. The Company's adoption of
employee stock-based compensation provisions of SFAS No.123 as
of July 1, 1996 will require disclosure of the pro forma net
income and pro forma net income per share amounts assuming the
fair value method was adopted July 1, 1995. The adoption of
this standard did not impact the Company's results of
operations, financial position or cash flows.
In December 1996, the FASB issued SFAS No. 128, "Earnings Per
share", which is effective for both interim and annual periods
ending after December 15, 1997. SFAS No.128 requires that all
prior period earnings per share data be restated to conform to
this statement. The Company will adopt SFAS No.128 for the
three and six months ended December 31, 1997. The adoption of
this standard is not expected to have a material effect on the
Company's earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which established standards for
reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from
investments by, or distributions to, owners. Among other
disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards
as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence
as other financial statements.
SFAS No. 130, effective for all years beginning after December
31, 1997, requires comparative information for earlier years
to be restated and early adoption is permitted. The Company
intends to adopt SFAS No. 130 effective July 1, 1998. Results
of operations and financial position will be unaffected by
implementation of this standard.
12
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
2. Related Party (a) On January 20, 1996, the Company purchased certain
Transactions internet service provider assets consisting primarily of
computer hardware, software and office equipment from
Telephone Electronics Corporation ("TEC") in exchange for
1,605,385 shares of the Company's restricted Common Stock
valued at approximately $1.7 million based on the
estimated fair values of the assets received.
TEC is a communications company headquartered in Jackson,
Mississippi that provides local and long distance
telephone exchange services and provides other
telecommunications services nationally.
Subsequent to the purchase date, the purchase agreement
was amended to reflect certain assets which were not
delivered by TEC, resulting in a receivable from TEC of
$135,276 at June 30, 1996. In November 1996, TEC returned
130,259 of the Company's shares to the Company. TEC's
ownership interest at September 30, 1997 was approximately
30%.
(b) The Company owns 40.3% of the outstanding common stock of
TecLink, Inc. ("TecLink"). The Company helped establish
TecLink as a Mississippi-based internet service provider
by selling to TecLink certain internet service provider
assets, intellectual property, computer hardware, software
and office equipment (that it had previously purchased
from TEC and others) as well as an exclusive value added
reseller distribution contract from Hughes Corporation
("Hughes"). The Company received in the sale $50,000 cash
and a 6% per annum promissory note of $2,405,000 due the
earlier of December 31, 1998 or upon the completion of
TecLink's initial public offering (the "Note"). The Note
was collateralized by the assets of TecLink. $250,000
became due upon the completion of a private placement of
TecLink's common stock. The Company accounted for its
investment in TecLink's common stock under the equity
method. As a result of TecLink's loss for the year ended
June 30, 1996, the investment was written down to $-0- as
of that date. The Company did not reduce its carrying
value of the note at June 30, 1996 since it received the
first $250,000 upon its due date
13
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
and believed that its security interest in the assets of
TecLink was sufficient at June 30, 1996 to cover the
balance of the note. Hughes and TecLink never reached an
accord as to Hughes' responsibilities under the
distribution contract. As such, TecLink was never able to
fully implement its business plan. As a result of this and
other factors, TecLink's initial public offering was never
consummated and TecLink continued to experience losses.
Due to the continuing losses, the Company entered into an
agreement to acquire the net assets as partial
satisfaction of its outstanding balance of the Note from
TecLink ($2,105,000). As a result, the Company recorded a
loss of $1,340,230. The Company maintained its right to
part of any proceeds that TecLink may receive from its
claims against Hughes. The Company established World
Access as a wholly-owned subsidiary providing internet
access with the net assets re-acquired from TecLink. As of
June 30, 1997, management determined that it needed to
focus on its core business and would discontinue the
operations of World Access by selling its net assets.
On October 1, 1997, the Company entered into an agreement
(the "Agreement") to sell the customer base, the related
hardware related to servicing the customer base and its
obligations under World Access' leases for its premises
and telephone equipment to Meta3, Inc. ("Meta3"), a
Mississippi corporation in a similar line of business. The
Agreement calls for Meta3 to pay for the subscribers at
$10 per month per customer for ten months. The amount to
be paid will be adjusted by the identified customer base's
net attrition rate for the first five months of the
purchase period. As a result of the Agreement and the
Company's plan to dispose of the remaining assets and
liabilities, the Company recorded a loss on disposal of
$893,347 for the year ended June 30, 1997. For the three
months ended September 30, 1997, the Company incurred an
additional loss of $105,554 on the discontinued operations
of World Access. The assets and liabilities of World
Access, adjusted for the Agreement, as of September 30,
1997 are as follows:
14
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
--------------------------------------------------------
Cash $ 254
Accounts receivable 58,936
Inventory 123,025
Receivable from Meta3 270,000
Prepaid expenses 3,080
Equipment 17,017
Accounts payable (339,900)
Other liabilities (230,186)
--------------------------------------------------------
Net liabilities of World Access $ (97,774)
========================================================
The Company intends to use the proceeds from the sale of
the assets to Meta3, as well as the proceeds from the sale
or collection of the remaining assets, to liquidate the
liabilities.
15
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 2. Mangement's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
The following discussion should be read in conjunction with the consolidated
financial statements included elsewhere in this Form 10-Q.
Forward Looking Statements
The information set forth in this Form 10-Q includes "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "33 Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended. Words "estimated", "intends", "believes", "plans", "planning",
"expects", and "if" are intended to identify forward looking statements.
Although management believes that the assumptions made and expectations
reflected in the forward looking statements are reasonable, it must be
recognized that there is no assurance that the underlying assumptions will, in
fact, prove to be correct, or that actual future results will not be different
from the Company's expectations.
Introduction
The Company was founded in 1995 to exploit the prepaid phone card sector of the
long distance phone service market.
The Company's sales are primarily derived from the resale of bundled prepaid
telephone cards. The Company resells the cards, at a discount off the face value
of the cards, to either master distributors or retail outlets, depending on the
locality of distribution. The Company's cost of sales consists primarily of the
purchase of the prepaid card at a greater discount off the face value than what
they sell it for, thereby receiving its gross margin on the difference of
discounts given to its customers and the discounts the Company receives from its
long distance provider. Since the card is sold to the Company as a bundled
product, the long distance provider is liable to the end user for the time
remaining on the cards. At the point of sale, the Company has no further
obligation towards the cards sold. The Company believes that its ability to
negotiate competitive rates with its long distance providers, attract certain
master distributors and to connect with certain ethnic markets are the primary
reasons for its sales increases in fiscal 1997 and for the three months ended
September 30, 1997 as compared to the three months ended September 30, 1996.
While the Company has been able to negotiate fair and competitive rates from its
long distance providers, the Company intends to lessen its dependence on such
providers to a certain extent through the construction of its own platforms. As
a result of the deployment of the Company's own platforms, the Company would
look to negotiate more competitive rates with its long distance providers. Based
on the Company's cost analysis, the total cost per call under the platforms is
expected to be less than the bundled card product that it presently purchases.
This is expected to have positive impact on the Company's gross margins as well
as its cash generated from operations. The Company may continue to purchase the
cards as a bundled product. The Company is presently negotiating for the
construction of its platforms; however, it has not yet entered into
16
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 2. Mangement's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
any definitive agreements related to the purchase of such equipment to date or
the related financing of such equipment.
Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996
Sales. Sales for the three months ended September 30, 1997 increased by
$10,489,841 or 426% over the first quarter of the prior year. For the three
months ended September 30, 1996, the Company's sales were only $2,532,301
primarily due to the Company introducing its first bundled products (cards
purchased from a provider) with the Company's brand names, under an agent of
World Com Network Services, Inc. during this quarter and also competing in a
highly competitive marketplace. Further, the Company terminated selling its own
switchless unbundled products (platform switching and minutes provided by an
independent third party), which were both unreliable and not competitively
priced, and selling other competitors' cards which it had done during fiscal
1996.
During the second quarter of fiscal 1997, the Company negotiated an agreement
with Frontier Corporation ("Frontier") and later with Premiere Communications,
Inc. ("Premiere"). This resulted in the offering of more reliable and
competitively priced products by the Company that became more recognizable by
consumers, thereby increasing brand awareness. As a result, the Company's sales
for the first quarter of fiscal 1997 were $13,322,142. One master distributor
accounted for 42% of sales during the three months ended September 30, 1997. The
master distributor resold the cards to sub-distributors and retailers in credit
challenged residential areas within the New York metropolitan area. Subsequent
to September 30, 1997, the Company terminated the exclusivity clause in the
agreement with this master distributor. The Company does not anticipate an
extended period of decreased sales as a result of this change since the Company
has the proper infrastructure in place to deliver products directly to the
sub-distributors and retailers. Due to this change and expansion into new
geographic areas of distribution, the Company anticipates that its concentration
of sales with any particular customer will be significantly reduced for fiscal
1998.
Cost of Sales. The Company's cost of sales for the three months ended September
30, 1997 increased to $12,238,339 from $2,623,720 for the three months ended
September 30, 1996. The increase of $9,614,619 or 366% was primarily related to
the increase in revenues that the Company experienced in the three months ended
September 30, 1997 as compared to the first quarter in the prior year.
Gross Profit. Gross profit for the three months ended September 30, 1997 was
$1,083,803 as compared to a gross loss of $91,411 for the three months ended
September 30, 1996. During the three months ended September 30, 1996, the
Company terminated its switchless unbundled products since it had taken numerous
returns for cards that it had sold in that quarter that were unreliable and not
competitively priced. Further, the Company introduced its first Company branded
bundled products at very steep discounts in order to gain market share. As a
result, the Company reported a gross loss for that period. During the three
months ended
17
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 2. Mangement's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
September 30, 1997, the Company's gross profit significantly increased over the
prior year due to the Company's large increase in market share and its ability
to negotiate competitive rates with its current providers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 1997 increased
to $921,608 from $297,266 for the three months ended September 30, 1996. This
increase of $624,342 or 210% is primarily related to an increase in salaries and
personnel related expenses of $326,425 as the Company's employees increased to
41 full-time employees by September 30, 1997. The increase in employees has been
fueled by the increase in operations as well as the commencement of a cellular
operations division. The Company's rent expense increased to $72,543 or 242%
primarily related to rental payments under the lease for the Company's new
distribution and administrative headquarters which the Company began occupying
April 1, 1997. Advertising, repairs and maintenance and travel and entertainment
increased by $68,522, $20,155 and $27,068, respectively, primarily related to an
increase in the Company's business. The Company's professional fees also
increased by $81,871 primarily in connection with the Company's role in the
Heritage litigation (See Part II, Item 1. Legal Proceedings) as well as having
increased needs for accounting and corporate consulting. Amortization related to
intangibles increased by $42,866 primarily due to the acquisition of customer
bases during fiscal 1997. Insurance expense also increased by $34,952 primarily
due to the Company obtaining directors' and officers' liability insurance at the
end of fiscal 1997. These increases were offset by a decrease of $36,672 in bad
debt expense. The Company anticipates its overhead expenses to continue to
increase during fiscal 1998 as it continues to add the necessary operational and
administrative infrastructure to support the anticipated growth of the Company.
Income (Loss) from Continuing Operations. The increase in income from continuing
operations of $550,880 for the three months ended September 30, 1997 as compared
to September 30, 1996 is primarily related to the Company terminating its
unbundled products and replacing them with the bundled products that it
currently sells.
Loss from Discontinued Operations. As of June 30, 1997, management resolved that
it would discontinue the operations of World Access. World Access reported a net
loss from operations of $105,554 for the three months ended September 30, 1997.
18
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 2. Mangement's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Liquidity and Capital Resources
Through June 30, 1997, the Company had experienced losses from continuing
operations. It has financed its operations through certain equity transactions
completed in fiscal 1996, the exercise of warrants in fiscal 1997 and through
operating cash flow. While the Company reported income for both its fourth
quarter of fiscal 1997 and first quarter of fiscal 1998, and believes that it
will be profitable for fiscal 1998, it remains significantly undercapitalized.
The Company currently has plans to put its own switching platforms in place,
however, that will be dependent on its ability to raise financing in the near
future.
The Company's major components of cash flows are as follows:
Three Months Ended
September 30,
---------------------
1997 1996
--------- ---------
Net cash used in operating activities $(238,278) $(488,869)
Net cash (used in) provided by investing activities (40,167) 179,063
Net cash provided by financing activities 31,875 --
--------- ---------
Net decrease in cash $(246,570) $(309,806)
========= =========
Net cash used by operating activities during the three months ended September
30, 1997 was $238,278 as compared to $488,869 for the three months ended
September 30, 1996. The decrease of $250,591 is primarily related to net income
of $56,641 for the three months ended September 30, 1997 as compared to the net
loss of $388,685 for the three months ended September 30, 1996. Further,
non-cash charges had a net increase of $316,407, of which the largest was for
the reduction of deferred income as of September 30, 1996 relating to the
Company's unbundled products at that time. In addition, the Company had a net
increase in amortization of $42,866 relating to its intangibles. Other
significant operating changes, which are primarily related to the Company's
growth during the first quarter of fiscal 1998, are net increases in accounts
receivable, inventory and accounts payable and other liabilities of $122,894,
$614,588 and $577,717, respectively.
The decrease in cash provided by investing activities for fiscal 1997 of
$219,230 is primarily related to the Company receiving $150,000 in cash related
to the TecLink Note during the three months ended September 30, 1996.
19
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 2. Mangement's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
The increase in cash provided by financing activities of $31,875 is primarily
related to the exercise of warrants to purchase 21,250 shares of the Company's
Common Stock at $1.50 per share.
In April of 1996, the Company entered into an agreement whereby it enabled the
Company to issue warrants to purchase an aggregate of 4,203,124 shares of its
Common Stock to four individuals and six corporations in exchange for trade
secrets, customer bases and other intangible property. Warrants to purchase
3,677,082 shares of the Company's Common Stock were actually issued. The
remaining warrants to purchase 526,042 shares of Common Stock were held awaiting
the delivery of certain assets to the Company. Those assets were never received
and the Company never issued the warrants to the three parties. Of the warrants
issued, warrants to purchase 1,333,334 and 2,343,748 shares of Common Stock are
exercisable at $13.20 and $1.50 per share, respectively. The warrants have a
term of five years commencing April 23, 1996 and are callable by the Company,
upon 30 days notice, at a call price of $.10 per warrant to purchase one share.
As of November 17, 1997, 530,633 shares of Common Stock have been issued related
to the exercise of warrants at $1.50 per share.
To date, capital expenditures have not been material. However, if the Company is
capable of obtaining financing to fund the purchase of equipment and software
related to switching platforms, the Company plans to purchase $1,200,000 of such
equipment and software by December 31, 1997, and would look to purchase an
additional $3,000,000 of equipment and software by December 31, 1998.
The Company, during fiscal 1997, acquired the customer bases of certain of its
distributors through the release of their outstanding obligations to the
Company. In connection with one of these transactions, the Company agreed to a
$182,000 note payable with interest at 8% per annum. The payments under this
note commence November 1, 1997 with the last payment being due October 1, 1998.
The Company believes that its current cash requirements can be funded by its
operations for the next twelve months. However, its plans to acquire the
switching platforms, which would eventually impact its gross margins in a
positive manner, and to continue to grow its core line of business is
significantly hampered by the Company's undercapitalization and will be
contingent on its ability to raise additional financing.
Seasonality
The business of the Company does not experience significant seasonality.
Inflation
Management does not believe that inflation has had, or is expected to have, any
significant adverse impact on the Company's financial condition or results of
operations.
20
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 2. Mangement's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 established a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. The Company adopted the employee stock-based compensation provision
of SFAS No. 123 by disclosing the pro forma net income and pro forma net income
per share amounts, assuming the fair value method was adopted July 1, 1995. The
adoption of this standard did not impact the Company's consolidated results of
operations, financial position or cash flow.
In December 1996, the FASB issued SFAS No. 128, "Earnings Per Share", which is
effective for both interim and annual periods ending after December 15, 1997.
SFAS No. 128 requires all prior period earnings per share data to be restated to
conform to the provisions of the statement. The Company will adopt SFAS No. 128
for the three and six months ended December 31, 1997. The adoption of this
standard is not expected to have a material effect on the Company's earnings per
share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which established standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by, or
distributions to, owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
SFAS No. 130, effective for all years beginning after December 31, 1997,
requires comparative information for earlier years and early adoption is
permitted. The Company intends to adopt SFAS No. 130 effective July 1, 1998.
Results of operations and financial position will be unaffected by
implementation of this standard.
21
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 2. Mangement's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Risk Factors
Dependence on Long Distance Provider
The Company currently depends upon Premiere and Frontier to provide the Company
with the bundled prepaid phone cards that it resells to its customers. The
Company's ability to resell the phone cards depends upon whether it can continue
to maintain a favorable relationship with its providers. The Company's long
distance providers may terminate upon breach of certain conditions. Although the
Company believes that the likelihood of such a termination is remote, the
Company does not have a specific contingency arrangement in place to provide for
such termination.
Competition
The prepaid or debit card sector of the long distance market is highly
competitive and is affected by the constant introduction of new cards and
services by industry participants. Competition in the prepaid card sector of the
long distance business is based upon pricing, customer service and perceived
reliability of the prepaid phone cards. Several of the Company's competitors are
substantially larger and have greater financial, technical and marketing
resources than the Company. The ability of the Company to compete effectively in
the prepaid sector of the long distance market will depend upon the Company's
continued ability to provide highly reliable phone cards at prices competitive
with, or lower than, those charged by its competitors.
Financing Requirements
To date, the Company remains undercapitalized and cannot finance its expansion
as quickly as opportunities arise. In order for the Company to be successful in
its current plans for expansion and to continue with its plans to construct its
own switching platforms, the Company will be required to obtain financing. There
can be no assurance that such financing will be available on acceptable terms,
or at all, to the Company.
Litigation
The Company and its Chief Executive Officer have been named as defendants in a
legal action in Mississippi in the case entitled Heritage Graphics,
Inc.("Heritage") vs. Telephone Electronics Corporation (see Part II, Item 1.
Legal Proceedings). The complaint alleges, among other things, that the
defendants breached a contractual agreement and conspired to have Heritage go
out of business. The complaint seeks damages of $500 million. The Company
believes that the case has no merit and intends to vigorously contest the
complaint. The case has been rescheduled to go to trial in August, 1998. There
is no assurance as to the outcome of the litigation. However, in the event of a
decision adverse to the Company, the Company's business, financial condition,
operating results and the Company's stockholders, could be materially adversely
22
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Item 2. Mangement's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
affected. While the Company has an indemnification agreement with TEC which
calls for the Company to be indemnified for all claims regarding Heritage which
arose prior to January 20, 1996, it is unknown as of this date what impact it
will have in the event of a decision adverse to the Company.
Outstanding Warrants and Options
As of November 17, 1997, the Company had warrants and options outstanding to
purchase 3,878,949 shares of the Company's Common Stock at exercise prices
ranging from $1.50 to $14.50 per share and an average price of $5.19 per share.
Warrants and options outstanding for 3,478,949 shares of Common Stock are
immediately exercisable. To the extent that the outstanding warrants and options
are exercised, dilution to the interest of the Company's stockholders may occur.
Further, the terms upon which the Company will be able to obtain additional
equity capital may be adversely affected since the holders of the outstanding
warrants and options can be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain any needed capital on terms more
favorable to the Company than those provided by the outstanding warrants and
options.
Dependence on Key Personnel
The Company is dependent on its ability to retain and motivate high quality
personnel, especially its management and any key technical personnel that may be
needed in connection with the Company's plans to construct its own switching
platform. The loss of services of any of its executive officers or key employees
could have a material adverse effect on the business, operating results or
financial condition of the Company. The Company's future success also depends on
its continuing ability to identify, attract and hire qualified personnel as it
expands its lines of business. There can be no assurance that the Company will
be able to attract and hire qualified technical and managerial personnel in the
future. The inability to attract and retain the necessary personnel could have a
material adverse effect upon the Company's business, operating results or
financial condition.
Market Listing; Volatility of Stock Price
The Company's Common Stock is traded on the OTC Bulletin Board. To date, the
trading of the Company's Common Stock has been relatively illiquid with its
market price being subject to wide fluctuations. There can be no assurance that
an active public market for the Common Stock will develop or be sustained.
Further, the market price of the Company's Common Stock will most likely
continue to be highly volatile based on quarterly results of operations,
announcements of new products or lines of business by the Company or its
competitors or other events or factors.
23
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
Item 1. Legal Proceedings
In June of 1996, the Company became a co-defendant in a legal action in
the Circuit Court for the First Judicial District of Hinds County in
Jackson, Mississippi in the case entitled Heritage Graphics Inc., et.
al. v. Telephone Electronics Corporation, et. al. Civ. No.
251-96-000492. The named plaintiffs in the action are: Heritage
Graphics, Inc.; Thomas L. Gould, Jr.; Suzanne G. Gould; and Rainey
Scott. The named defendants in the action are: Telephone Electronics
Corporation d/b/a TecLink; TecLink, Inc.; the Company; Asynchronous
Technologies, Inc.; Barbara Scott; Ronald D. Anderson, Sr. d/b/a
Anderson Engineering; Walter Frank; and Frank Magliato. The second
Amended Compliant filed in the action alleges a wide-spread conspiracy
on the part of all of the defendants to destroy Heritage and to
eliminate it as a competitor in the Internet services provider market.
The heart of the complaint's allegations concerns an alleged joint
venture. Through the vehicle of this prospective joint venture, the
Company and others allegedly duped Heritage into surrendering its trade
secrets, its services, its intellectual property, its expertise, etc.,
to the Company. The complaint alleges that, in essence, the deal
materialized, Heritage's owners never received the stock, and Heritage
was never "rolled into" a new entity, TecLink, Inc. The complaint's
lesser allegations are that (i) defendants conspired to slander the
business reputations of Heritage and Tom Gould; and (ii) TEC and the
Company are jointly and severally liable to it for $268,245 worth of
production work and consulting services provided over the September to
December 1995 time period. The plaintiffs seek damages of $500 million.
The Company is not aware of any evidence to support the plaintiffs'
claim of a joint venture. The Company believes that the plaintiffs'
claims are without merit. Further, the Company believes that its
counterclaims are sufficiently well grounded to offset any judgment
entered against the Company.
The case has been rescheduled to go to trial in August, 1998. While the
Company has an indemnification agreement with TEC which calls for the
Company to be indemnified for all claims regarding Heritage which arose
prior to January 20, 1996, it is unknown as of this date what impact it
will have in the event of a decision adverse to the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
24
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
Item 4. Submission of Matters to a Vote of Security Holders
(a) Not applicable;
(b) Not applicable;
(c) Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27-Financial Data Schedule.
(b) Reports on Form 8-K
None.
25
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
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.
Date: November 20, 1997 DigiTEC 2000, Inc.
---------------------------------------------------
(Registrant)
By: /s/ Frank C. Magliato
-----------------------------------------------
Frank C. Magliato
Chief Executive Officer, President and Director
By: /s/ Keith A. McGowan
-----------------------------------------------
Keith A. McGowan
Vice President of Finance
By: /s/ Diego E. Roca
-----------------------------------------------
Diego E. Roca
Vice President of Operations
and Secretary
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from September
30, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 480,627
<SECURITIES> 0
<RECEIVABLES> 2,036,785
<ALLOWANCES> 75,000
<INVENTORY> 802,677
<CURRENT-ASSETS> 3,272,523
<PP&E> 96,559
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,949,165
<CURRENT-LIABILITIES> 3,861,118
<BONDS> 0
0
0
<COMMON> 4,879
<OTHER-SE> 12,168
<TOTAL-LIABILITY-AND-EQUITY> 3,949,165
<SALES> 13,322,142
<TOTAL-REVENUES> 13,322,142
<CGS> 12,238,339
<TOTAL-COSTS> 12,238,399
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 162,195
<INCOME-TAX> 0
<INCOME-CONTINUING> 162,195
<DISCONTINUED> (105,554)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,641
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
