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 March 31, 1998
[ ] 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.
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(Exact name of registrant as specified in its charter)
Nevada
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(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
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 |_|
On May 1, 1998, there were outstanding 6,878,300 shares of the registrant's
Common Stock, $.001 par value per share.
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 1998
Index
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and
June 30, 1997 3
Consolidated Statements of Operations for the Three and Nine Months
ended March 31, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity (deficit) for
the nine months ended March 31, 1998 5
Consolidated Statements of Cash Flows for the Nine Months
ended March 31, 1998 and 1997 6
Notes to consolidated financial statements 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-24
Item 3. Quantitative and Qualitative Disclosure of Market Risk 24
Part II - Other Information
Items 1, 2 and 6 25-27
Signatures 28
2
<PAGE>
Item 1. Financial Statements
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
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<S> <C> <C>
Assets (Unaudited)
Current:
Cash $ 283,710 $ 727,197
Accounts receivable, net of allowance for bad debts of $139,087 and
$60,000, respectively 4,897,723 1,868,227
Inventory 470,346 218,877
Prepaid expenses 294,528 11,814
Net assets of discontinued operations 171,593 --
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Total current assets 6,117,900 2,826,115
Property and equipment, net 176,292 64,397
Intangibles, net 452,486 606,920
Goodwill, net 488,889 --
Other assets 167,473 29,291
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$ 7,403,040 $ 3,526,723
==============================================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current:
Accounts payable $ 1,544,345 $ 2,842,891
Accrued expenses and other current liabilities 246,691 290,799
Note payable - current 192,584 117,610
Net liabilities of discontinued operations -- 211,502
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Total current liabilities 1,983,620 3,462,802
Note payable 12,114 64,390
Deferred rent 109,408 71,000
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Total liabilities 2,105,142 3,598,192
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Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 1,000,000 shares authorized;
61,050 and no shares issued and outstanding, respectively 6,105,000 --
Common stock, $.001 par value, 100,000,000 shares authorized;
6,868,300 and 4,858,418 shares issued and outstanding, respectively 6,868 4,858
Additional paid-in capital 8,284,327 3,602,462
Accumulated deficit (9,098,297) (3,678,789)
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Total stockholders' equity (deficit) 5,297,898 (71,469)
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$ 7,403,040 $ 3,526,723
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net sales $ 6,359,998 $ 7,422,417 $ 31,166,036 $ 12,085,563
Cost of sales 6,234,333 7,352,387 29,840,530 12,004,706
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Gross profit 125,665 70,030 1,325,506 80,857
Selling, general and administrative expenses 4,527,437 651,295 6,037,399 1,318,145
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Loss from continuing operations (4,401,772) (581,265) (4,711,893) (1,237,288)
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Discontinued operations:
Loss from operations of Cellular division -- -- (527,061) --
Loss from operations of World Access -- -- (105,554) --
Loss on disposal of Cellular division -- -- (75,000) --
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Loss from discontinued operations -- (581,265) (707,615) (1,237,288)
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Net loss $ (4,401,772) $ (581,265) $ (5,419,508) $ (1,237,288)
=========================================================================================================================
Net loss per common share-basic and diluted:
From continuing operations $ (.73) $ (.13) $ (.80) $ (.26)
From discontinued operations -- -- (.12) --
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$ (.73) $ (.13) $ (.92) $ (.26)
=========================================================================================================================
Weighted average number of common and
common equivalent shares outstanding 5,992,867 4,534,168 5,863,359 4,722,320
=========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Consolidated Statement of Stockholders' Equity (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1998
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Preferred Stock Common Stock Additional Total
---------------- --------------- paid-in Accumulated stockholders'
Shares Amount Shares Amount capital deficit equity (deficit)
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<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997 4,858,418 $4,858 $3,602,462 $(3,678,789) $(71,469)
For the nine months ended March 31, 1998:
Exercise of warrants 1,957,250 1,957 2,933,918 -- 2,935,875
Acquisition of Ameridial, Inc. 52,632 53 499,947 -- 500,000
350,000 Options to Officers & Directors 1,248,000 1,248,000
Investment, Premiere Communications, Inc. 61,050 6,105,000 -- 6,105,000
Net loss -- -- -- (5,419,508) (5,419,508)
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Balance, March 31, 1998 61,050 $6,105,000 6,868,300 $6,868 $8,284,327 $(9,098,297) $5,297,898
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,419,508) $(1,237,288)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization 165,544 42,136
Depreciation 26,325 5,742
Deferred rent 38,408 --
Deferred income -- (567,136)
Director/Officers compensation 1,248,000 --
(Increase) decrease in:
Accounts receivable (3,029,496) (302,711)
Inventory (251,469) (300,015)
Prepaid expenses and other assets (420,896) 477,370
Increase (decrease) in:
Accounts payable and accrued expenses (1,342,654) 1,183,800
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Net cash used in operating activities of continuing
operations (8,985,746) (698,102)
Net cash used in operating activities of discontinued operations (448,874) --
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Net cash used in operating activities (9,434,620) (698,102)
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Cash flows from investing activities:
Capital expenditures (72,442) (20,727)
Proceeds from repayment of related party loans -- 42,000
Payment received on note receivable -- 200,000
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Net cash (used in) provided by investing activities (72,442) 221,273
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Cash flows from financing activities:
Note payable-auto 22,699 --
Proceeds from exercise of warrants 2,935,876 --
Proceeds from investment by Premiere 6,105,000 --
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Net cash provided by financing activities 9,063,575 --
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Net decrease in cash (443,487) (476,829)
Cash (including $367,363 of restricted cash at
June 30, 1996), beginning of period 727,197 509,117
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Cash, end of period $ 283,710 $ 32,288
=====================================================================================================================
</TABLE>
6
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
1.Summary of (a) Business
Significant
Accounting Policies DigiTEC 2000, Inc. (formerly Promo Tel, Inc., the
"Company") is primarily engaged in the
distribution, marketing and management of prepaid
telephone calling cards. It currently markets its
telephone calling card products throughout the
United States, the Virgin Islands and Puerto Rico.
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.
The Company was formed on May 18, 1995 and
commenced operations in July 1995.
7
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
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 and
October 31, 1997, respectively (Notes 2 and 3),
its wholly-owned subsidiaries, World Access
Solutions, Inc. ("World Access") and Ameridial,
Inc. ("Ameridial"). All significant intercompany
balances and transactions have been eliminated.
8
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
The consolidated financial statements and related
notes thereto as of March 31, 1998 and for the
three and nine months ended March 31, 1998 and
1997 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.
(d) Earnings Per Share
In December 1996, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards ("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 adoption of SFAS No. 128 did
not have a material effect on the Company's
earnings per share.
Basic earnings (loss) per share is calculated
using the weighted average shares outstanding
during the period. Diluted earnings (loss) per
share is calculated using the weighted average
shares outstanding during the period and dilutive
potential common shares. The dilutive earnings
(loss) per share has not been presented since the
effect of the options and warrants to purchase
Common Stock was anti-dilutive. 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)).
(e) Reclassifications
Certain amounts as previously reported have been
reclassified to conform to the 1998 presentation.
9
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
2. Acquisition of On October 31, 1997, the Company entered into an
Ameridial agreement for the acquisition of all of the
outstanding shares of Ameridial, in exchange for
52,632 shares of the Company's common stock. The
shares were valued based on the closing market
price on October 31, 1997 of $9.50 per share. The
acquisition was recorded under purchase accounting
with the entire value of the transaction being
attributed to goodwill to be amortized over 15
years.
10
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
3. Discontinued (a) World Access
Operations
The Company owned 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 Telephone Electronics Corporation
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
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).
11
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
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 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 and nine months ended March
31, 1998, the Company incurred an additional loss
of $0 and $105,554, respectively, on the
discontinued operations of World Access. At March
31, 1998, $50,000 remains accrued for the
estimated loss related to the operations of World
Access for the year ended June 30, 1998. The
assets and liabilities of World Access, as of
March 31, 1998 are as follows:
12
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Accounts receivable $ 23,000
Inventory 123,000
Receivable from Meta3 246,000
Other assets 12,000
Accounts payable (2,407)
Other liabilities (230,000)
-----------------------------------------------
Net assets of World Access $171,593
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.
(b) Cellular division
On December 31, 1997, management adopted a formal
plan to abandon the operations of its conventional
cellular division as a result of the Company's
continuing plan to conserve assets to focus on and
expand its core business. The Company recorded a
loss of $371,380 and $527,061, respectively, for
the three and nine months ended March 31, 1998. At
March 31, 1998, $75,000 is recorded for the
estimated additional losses related to the
operations of the cellular division for the period
subsequent to the nine months ended March 31,
1997. The Company does not anticipate any
additional charges to be recognized related to the
operations of its cellular division. The net
assets of the cellular division, which consist of
accounts receivable, inventory and other
liabilities, totaled $ 28,622 at March 31, 1998.
The operations of the cellular division were
completely ceased by February 1, 1998.
13
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
4. Exercise of In February and March 1998, warrants to purchase
Warrants 1,760,865 shares of the Company's common stock
were exercised resulting in net proceeds to the
Company of $2,626,300. In connection with certain
of these exercises, the Company granted certain
registration rights which include a registration
statement on Form S-1 to be filed by the 45th
calendar day from the closing date of the
exercises. Failure to file the registration
statement will result in the obligation of the
Company to pay the holders of such shares a
penalty equal to 1% per month, pro-rated daily, of
the proceeds received from the exercises, within
15 days of its accrual. The Company filed a Form
S-1 with the Securities and Exchange Commission
("SEC") on April 20, 1998.
14
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
5. Investment On March 31, 1998, the Company entered into an
Agreement with agreement with Premiere Communications, Inc.
Premiere ("Premiere") (the "Investment Agreement") in which
Communications, Inc. Premiere received 61,050 shares of $.001 par value
voting Series A Preferred Stock, valued by the
Board of Directors at $6,105,093 which represented
Premiere's outstanding accounts receivable balance
as of that date. The $6,105,093 included
$4,636,981 which was attributable to phone cards
purchased in the normal course of business with
the $1,468,112 representing a one-time charge on
March 31, 1998 from Premiere for extra minutes
processed by Premiere on cards activated by the
Company. The $1,468,112 was charged to operations
during the quarter ended March 31, 1998. The
Series A Preferred Stock is convertible into
common stock at any time at Premiere's option and
the Company has the right to require Premiere to
convert the Series A Preferred Stock after March
31, 1999. The Certificate of Designation (the
"Certificate of Designation") for the Series A
Preferred Stock provides for certain voting,
liquidation, and registration rights and
calculates the conversion by multiplying 61,050,
the number of shares of Series A Preferred Stock
issued in connection with the Investment Agreement
by $100, the Investment Amount as defined in the
Certificate of Designation and then dividing by
$10.395, the Conversion Price as defined in the
Certificate of Designation, resulting in a total
of 587,302 shares of common stock to be issued
under the Investment Agreement. The Company may
call the redemption of each share of Series A
Preferred Stock at any time for $100 a share
plus accrued dividends.
15
<PAGE>
Item 2. Management 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 commenced operations under present management in 1995 to exploit the
Prepaid Phone Card sector of the long distance telecommunications market. The
Company's Prepaid Phone Cards provide consumers with a competitive alternative
to traditional presubscribed long distance telecommunications services. The
Company's total revenues were $26,027,909 and $31,166,036, and its net losses
were $3,549,514 and $5,419,508, for the fiscal year ended June 30, 1997 and for
the nine months ended March 31, 1998, respectively, after losses from
discontinued operations of $1,069,261 and $707,615, respectively. The Company
activated 5 million Prepaid Phone Cards and approximately 90 million minutes of
telecommunications services were provided during the nine months ended March 31,
1998.
The Company's fiscal 1997 and 1998 sales have been primarily derived from the
resale of bundled prepaid phone cards. The Company resells the cards at a
discount off the face value of the Cards to either independent distributors or
retail locations, depending on the locality of distribution. The Company's
fiscal 1997 cost of sales consist primarily of the purchase of the Cards at a
greater discount off the face value than the price at which the Cards can be
resold by the Company, 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 Cards are 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.
16
<PAGE>
Results of Operations
Three Months Ended March 31, 1998 Compared to
Three Months Ended March 31, 1997
Sales. Sales for the three months ended March 31, 1998 decreased by $1,062,419
or 14.3% over the third quarter of the prior year. For the three months ended
March 31, 1997, the Company's sales were $6,359,998 as the Company was still
introducing its Company branded, bundled products (cards purchased from a
provider) that it commenced during the three months ended September 30, 1996,
and also competing in a highly competitive marketplace.
During the second quarter of fiscal 1997, the Company negotiated an agreement
with Frontier Corporation ("Frontier"). This resulted in the offering of more
reliable and competitively priced products by the Company that, by the end of
the second half of fiscal 1997, became more recognizable by consumers, thereby
increasing brand awareness. As a result of the Company's continuing brand
awareness into fiscal 1998, the Company's sales for the three months ended March
31, 1998 were $6,359,998. Sales for the third quarter of fiscal 1998 were
impacted by the Company altering its relationship with CG Com, who had
exclusivity in the state of New York for one of the Company's products, and
accounted for 42% and 54% of sales during the three months ended September 30,
1997 and the year ended June 30, 1997, respectively. During September, 1997, the
Company and CG Com agreed to remove the exclusivity clause in the agreement. CG
Com accounted for 1.4% of sales for the three months ended March 31, 1998. 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 areas of distribution, the Company anticipates that its
concentration of sales with any particular customer will be significantly
reduced for fiscal 1998.
On September 26 and 27, 1997 the Company signed distributor agreements with
Premiere whereby the Company is required to purchase Cards with an aggregate
minimum face value of $81,000,000 at discounts ranging from 23.5% to 41.75% off
the face value of the Cards. Failure to purchase the minimum value will result
in the Company being required to pay Premiere an amount equal to the retail
value of the unsold Cards less the applicable discount that would have been
payable on such Cards. The agreements provide for the extension of certain
credit terms and expire upon the earlier of September 1998 or six months after
the last purchase of prepaid Phone Cards. Premiere may terminate upon breach of
certain conditions. These agreements expanded the relationship of the Company
with Premiere who had previously provided the Company with Cards from time to
time on a prepaid basis. Although the Company believes that the likelihood of
such a termination is remote based upon its current relationship with Premiere
and the fact that Premiere became a 6.2% stockholder of the Company as of March
31, 1998. During the quarter ended March 31, 1998, Premiere suspended or
repriced several of the Company's Card programs. As a result, the Company's
sales of Cards were significantly and adversely affected.
Cost of sales. The Company's cost of sales for the three months ended March
31, 1998 decreased to $6,234,333 from $7,325,387 for the three months ended
March 31, 1997. The decrease of $1,091,054 or 15% was primarily related to the
17
<PAGE>
decrease in revenues that the Company experienced in the three months ended
March 31, 1998 as compared to the third quarter in the prior year.
Gross Profit. Gross profit for the three months ended March 31, 1998 was
$125,665 or 2% as compared to a gross profit of $70,030 or .09% for the three
months ended March 31, 1997. While the Company's gross profit as a percentage of
sales was in line with the three months ended March 31,1997, it decreased as
compared to the three months ended December 31, 1997. The decrease resulted from
steep discounts given to distributors in order to generate sales and attempt to
maintain market share after terminating exclusivity with a significant master
distributor (See Sales above). The Company anticipates that it will be able to
increase its rates to its customers as it evaluates its relationship with its
distributors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 1998 increased to
$4,527,437 from $651,295 for the three months ended March 31, 1997. This
increase of $3,876,142 or 595.5% is primarily related to the initial
implementation of the Company's plan to increase its infrastructure in
anticipation of moving its existing brands to a switched-based platform and
expansion into other segments of the telecommunications industry. Also, the
Company incurred promotional expenses of $1,905,292 related to extra minutes
processed on cards activated by the Company.
Salaries and personnel related expenses increased by $565,772 as the Company's
employees increased to 61 full-time employees by March 31, 1998. The increase in
employees has been fueled by the increase in operations as well as the
commencement of a carrier services division to broker rates between carriers as
well as negotiate rates for the Company as it introduces its current brands
under an unbundled arrangement and introduces new services. In addition, the
Company added personnel in anticipation of the Company's plan for growth.
The Company's rent expense increased by $53,896 for the three months ended March
31, 1998 primarily due to rental payments under the lease for the Company's new
distribution and administrative headquarters which the Company began occupying
April 1, 1997. Advertising, telephone, utilities, travel and entertainment and
repairs and maintenance increased by $23,562, $64,026, $15,543, $48,126, and
$15,670, respectively, primarily related to the initial implementation of the
Company's plan to increase its infrastructure. The Company's professional fees
also increased by $165,890 primarily due to having increased needs for
accounting and corporate consulting. Amortization related to intangibles
increased by $44,858 primarily due to the acquisition of customer bases during
fiscal 1997 and the acquisition of Ameridial on October 31, 1997.
18
<PAGE>
The Company also incurred $10,960 related to shareholder relations and filing
expenses incurred in connection with complying with the reporting regulations
promulgated by the Securities and Exchange Commission ("SEC"). 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.
Loss from Continuing Operations. The increase in loss from continuing operations
of $3,820,507 for the three months ended March 31, 1998 as compared to March 31,
1997 is primarily related to the Company expanding its infrastructure in
anticipation of expanding its lines of business.
Loss from Discontinued Operations. As of December 31, 1997, management, in
connection with its plan to conserve assets to expand its core business,
resolved that it would discontinue the operations of its conventional cellular
operations division by terminating its operations. The Company did not recognize
any additional losses from the operations of the cellular division for the three
months ended March 31, 1998. The operations of the cellular division were
completely discontinued by February 1, 1998.
Nine Months Ended March 31, 1998
Compared to Nine Months Ended March 31, 1997
Sales. Sales for the nine months ended March 31, 1998 increased by $19,080,473
or 157.9% over the nine months ended March 31, 1997. For the nine months ended
March 31, 1997, the Company's sales were $31,166,036 primarily due to the
Company introducing its first Company branded, bundled products during the first
quarter of fiscal 1997 and market acceptance of the Company's brands.
Sales for the first half of fiscal 1998 were impacted by the Company altering
its relationship with CG Com, which had exclusivity in the state of New York for
one of the Company's products, and accounted for 42% and 54% of sales during the
three months ended September 30, 1997 and the year ended June 30, 1997,
respectively. During September, 1997, the Company and CG Com agreed to remove CG
Com's exclusivity clause in the agreement. CG Com accounted for 21% of sales
during the nine months ended March 31, 1998. 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 areas
of distribution, the Company anticipates that its concentration of sales with
any particular customer will be significantly reduced for fiscal 1998. On
September 26 and 27, 1997 the Company signed distributor agreements with
19
<PAGE>
Premiere whereby the Company is required to purchase Cards with an aggregate
minimum face value of $81,000,000 at discounts ranging from 23.5% to 41.75% off
the face value of the Cards. The agreements provide for the extension of certain
credit terms and expire upon the earlier of September 1998 or six months after
last purchase of prepaid Phone Cards. Premiere may terminate upon breach of
certain conditions. Failure to purchase the minimum value will result in the
Company being required to pay Premiere an equal amount to the retail value of
the unsold cards less the applicable discount that would have been payable on
such Cards. These agreements expanded the relationship of the Company with
Premiere who had previously provided the Company with Cards from time to time on
a prepaid basis. Although the Company believes that the likelihood of such a
termination is remote based upon its current relationship with Premiere and the
fact that Premiere became a 6.2% stockholder of the Company as of March 31,
1998. During the quarter ended March 31, 1998, Premiere suspended and repriced
several of the Company's Card programs. As a result the Company's sales of Cards
were significantly and adversely affected.
Cost of Sales. The Company's cost of sales for the nine months ended March 31,
1998 increased to $29,840,530 from $12,004,706 for the nine months ended March
31, 1997. The increase of $17,838,824 or 148.6% was primarily related to the
increase in revenues that the Company experienced in the nine months ended March
31, 1998 as compared to the same period in the prior year and increased expenses
incurred in connection with the Company's expansion plans.
Gross Profit. Gross profit for the nine months ended March 31, 1998 was
$1,325,506 or 4.3% as compared to a gross profit of $80,857 or .7% for the nine
months ended March 31, 1997. During the first quarter of fiscal 1997, the
Company terminated its switchless unbundled phone card based upon numerous
returns for cards that it had sold in that quarter. In addition, the Company
replaced the returned cards with cards from its new bundled programs at no
charge. 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 the three months ended September 30, 1997.
During the nine months ended March 31, 1998, the Company's gross profit
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 nine months ended March 31, 1998 increased to
$6,037,399 from $1,318,145 for the nine months ended March 31, 1997. This
increase of $4,719,254 or 358% is primarily related to the increase in volume
over the nine months ended March 31, 1997 and Company's initial implementation
of the plan to increase its infrastructure in anticipation of moving its
existing brands to a switched-based platform and expansion into other segments
of the telecommunications industry.
Salaries and personnel related expenses increased by $1,141,052 as the Company's
employees increased to 61 full-time employees by March 31, 1998 The increase in
employees has been fueled by the increase in operations as well as the
commencement of a carrier services division to broker rates between carriers as
well as negotiate rates for the Company as it introduces its current brands
under an unbundled arrangement and introduces new services. In addition, the
20
<PAGE>
Company added personnel in anticipation of the Company's plan for growth.
The Company's rent expense increased by $152,649 primarily due to rental
payments under the lease for the Company's new distribution and administrative
headquarters which the Company began occupying April 1, 1997. Advertising,
telephone, travel and entertainment, repairs and maintenance, office and
utilities expenses increased by $160,313, $148,473, $105,878, $60,197, $27,169
and $44,027, respectively, primarily related to the implementation of the
Company's expansion plans. The Company's professional fees also increased by
$378,023 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. Administrative field expenses
increased to $71,203 for the nine months ended March 31, 1998 as the Company
expanded its field routes to retail locations. Amortization related to
intangibles increased by $169,320 primarily due to the acquisition of customer
bases during fiscal 1997. The Company also incurred $39,326 related to
shareholder relations and filing expenses incurred in connection with complying
with the reporting regulations promulgated by the SEC. During fiscal 1997, the
Company was exempt from complying and therefore, was not required to report with
the SEC. 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.
Loss from Continuing Operations. The increase in loss from continuing operations
of $3,474,605 for the nine months ended March 31, 1998 as compared to the same
period in the prior year is primarily related to the Company terminating its
unbundled products and replacing them with the bundled products that it
currently sells offset by the Company increasing its infrastructure in
anticipation of expanding its lines of business.
Loss from Discontinued Operations. As of June 30, 1997, management resolved that
it would discontinue the operations of World Access. The Company recognized a
net loss from the operations of World Access of $105,554 for the nine months
ended March 31, 1998. The Company does not anticipate any additional charges to
be recognized related to World Access' operations.
As of December 31, 1997, management, in connection with its plan to conserve
assets to expand its core business, resolved that it would discontinue the
operations of its conventional cellular operations division by terminating its
operations. The Company recognized a net loss from the operations of the
cellular division of $527,061 for the nine months ended March 31, 1998. The
operations of the cellular division were completely discontinued by February 1,
1998.
21
<PAGE>
Liquidity and Capital Resources
To date, the Company has financed its operations through certain equity
transactions completed in the prior fiscal year, the exercise of warrants in
fiscal 1997 and 1998 and through operating cash flow. However, the Company
remains significantly undercapitalized. The Company's growth in its last quarter
of fiscal 1997 and during the first quarter of fiscal 1998 have outpaced its
cash flow availability. Further, the Company has continued to add overhead in
connection with its plan for growth. The Company currently plans to put its own
dedicated facilities in place. However that will be dependent on its ability to
raise additional capital in the near future.
The Company's major components of cash flows are as follows:
<TABLE>
<CAPTION>
Nine Months Ended March 31,
--------------------------
1998 1997
----------- ----------
<S> <C> <C>
Net cash used in operating activities $(9,434,620) $ (698,102)
Net cash (used in) provided by investing activities (72,442) 221,273
Net cash provided by financing activities 9,063,575 --
----------- ----------
Net decrease in cash $ (443,487) $ (476,829)
=========== ==========
</TABLE>
Net cash used by operating activities during the nine months ended March 31,
1998 was $9,434,620 as compared to $689,102 for the nine months ended March 31,
1997. The increase of $8,736,518 is primarily related to a net loss of
$5,419,508 for the nine months ended March 31, 1998 as compared to the net loss
of $1,237,288 for the nine months ended March 31, 1997. Further, non-cash
charges had a net increase of $1,997,535 of which the largest was for the
reduction of deferred income as of March 31, 1997, relating to the Company's
unbundled phone card terminated during the three months ended September 30,
1996. In addition, the Company had a net increase in amortization of $123,408
relating to its intangibles. Other significant operating changes, which are
primarily related to the Company's growth during the first six months of fiscal
1998, are net increases in accounts receivable and inventory of $3,029,496 and
$251,469, respectively and a decrease in accounts payable and other liabilities
of $1,342,654.
Prepaid expenses and other assets had a net increase of $420,896, primarily
related to prepaid minutes the Company had at the end of fiscal 1996 related to
the switchless unbundled product that it terminated during the three months
ended September 30, 1996.
22
<PAGE>
The decrease in cash provided by investing activities for fiscal 1997 of
$293,715 is primarily related to the Company receiving $200,000 in cash
related to the TecLink Note during the nine months ended March 31, 1997.
The increase in cash provided by financing activities of $9,063,575 is primarily
related to the exercise of warrants to purchase 1,957,250 shares of the
Company's Common Stock at $1.50 per share and the Investment Agreement entered
into by the Company and Premiere, pursuant to which Premiere acquired 61,050
shares of the Company's Series A Preferred Stock.
To date, capital expenditures have not been material.
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 issued 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.
In connection with the Company's plan to commence a carrier services division,
the Company entered into an agreement for the acquisition of all of the
outstanding shares of Ameridial, Inc., in exchange for 52,632 shares of the
Company's common stock, on October 31, 1997. The objective of the division is to
broker rates between carriers as well as negotiate rates for the Company as it
introduces its current brands under an unbundled arrangement and introduces new
services. To date the Company has not realized the anticipated benefits from the
acquisition of Ameridial and accordingly, has begun negotiations to revise the
original acquisition terms.
On March 31, 1998, the Company entered into an agreement with Premiere
(the "Investment Agreement") in which Premiere received 61,050 shares of $.001
par value voting Series A Preferred Stock, valued by the Board of Directors at
$6,105,093 which represented Premiere's outstanding accounts receivable balance
as of that date. The $6,105,093 included $4,636,981 which was attributable to
Cards purchased in the normal course of business with the $1,468,112
representing a one-time charge on March 31, 1998 from Premiere for extra minutes
processed by Premiere on Cards activated by the Company. The $1,468,112 was
charged to operations during the quarter ended March 31, 1998. The Series A
Preferred Stock is convertible into Common Stock at any time at Premiere's
option and the Company has the right to require Premiere to convert the
Preferred Stock after March 31, 1999. The Certificate of Designation for the
Series A Preferred Stock provides for certain voting, liquidation, and
registration rights and calculates the conversion by multiplying 61,050, the
number of shares of Series A Preferred Stock issued in connection with the
Investment Agreement, by $100, the Investment Amount as defined in the
Certificate of Designation and then dividing by $10.395, the Conversion Price as
defined in the Certificate of Designation, resulting in a total of 587,302
shares of Common Stock to be issued under the Investment Agreement. The Company
23
<PAGE>
may call the redemption of each share of Series A Preferred Stock at any time
for $100 a share plus accrued dividends.
Although the Company believes that its cash flow is sufficient to fund
current operations, excluding expansion of services and acquisitions, for the
next twelve months, to date, the Company has financed its operations through two
offerings under Rule 504 of Regulation D and the exercise of $1.50 Warrants to
purchase the Company's Common Stock which aggregated $1,000,000 and $3,437,248,
respectively, in proceeds to the Company. Due to the operating losses, 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 of services, to continue with its plans to establish itself
as a facilities-based carrier, and to make acquisitions as the opportunity
appears, the Company will be required to obtain significant additional
financing. To date, the Company has no existing bank lines of credit and has not
established any sources of such financing other than the credit terms provided
by Premiere. There can be no assurance that such financing will be available on
acceptable terms, or at all, to the Company.
Item 3. Quantitative and Qualitative Disclosure of Market Risks
The Company does not hold any derivatives or investments that are subject
to market risk. The carrying values of financial instruments, including cash and
note receivable at June 30, 1996, and cash and note payable at June 30, 1997 and
March 31, 1998, approximate fair value as of those dates because of the
relatively short-term maturity of these instruments which eliminates any
potential market risk associated with such instruments.
24
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(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 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 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.
In October of 1997, the Company initiated a lawsuit against IDT
Corporation ("IDT"), CG Com, and Carlos Gomez in the Supreme Court
of the State of New York for the County of New York (Index No.
604920/97). The Company initially sought and was granted a temporary
restraining order which enjoined CG Com and Carlos Gomez from
distributing Prepaid Phone Cards of IDT, a competitor of the
Company, which the Company alleged was in violation of an
Independent Master Distributor Agreement (the "Agreement") with the
Company which provided for CG Com and Carlos Gomez to act as
exclusive distributors of the Company's Prepaid Phone Cards in the
State of New York. The Amended Complaint sought preliminary
injunctive relief against both CG Com and IDT and damages for breach
of contract by CG Com and for receivables due to the Company and for
tortious interference with a contract by IDT. The Amended Complaint
alleges among other things, that CG Com and Mr. Gomez are utilizing
the distribution network established and developed as a result of
the Agreement and that CG Com and Mr. Gomez have irreparably damaged
the Company's reputation by disparaging its products. The Amended
Complaint further alleges that IDT entered into its distributorship
arrangement with CG Com and Mr. Gomez with full knowledge of the
business relationship between the Company and those parties. The
motion for preliminary injunctive relief was denied on November 13,
25
<PAGE>
1997. The case is now in the discovery phase.
Item 2. Changes in Securities
---------------------
2(b) On March 31, 1998, the Company issued 61,050 shares of its
Series A Preferred Stock, $.001 par value per share ("Preferred
Stock"). The Preferred Stock is convertible into Common Stock at any
time at the holder's option, and the Company has the right to
require conversion of the Preferred Stock after March 31, 1999 upon
the occurrence of certain events. The Certificate of Designation
(the "Certificate of Designation") for the Series A Preferred Stock
provides for certain voting, liquidation, and registration rights
and provides for the conversion by multiplying 61,050, the number of
shares of Preferred Stock by $100, the Investment Amount, as defined
in the Certificate of Designation and then dividing by $10.395, the
Conversion Price, as defined in the Certificate of Designation,
resulting in a total of 587,302 shares of Common Stock to be
initially issuable. The Conversion Price is subject to adjustment
upon issuances of shares of the Company's capital stock in certain
cases. The Company may redeem each share of Preferred Stock at any
time for $100 a share plus accrued dividends. The Preferred Stock is
entitled to a liquidation preference of $100 per share plus accrued
but unpaid dividends prior to distributions to the holders of Common
Stock. The Preferred Stock is entitled to vote, as a class with the
Common Stock, the number of shares into which the Preferred Stock
is convertible and is entitled to vote separately to elect two
members of the Board of Directors if the Board consists of eight or
less members and three directors if the Board consists of a greater
number upon a default in conversion of Preferred Stock by the
Company.
2(c) On March 31, 1998, the Company entered into an agreement (the
"Investment Agreement") with Premiere Communications, Inc.
("Premiere") pursuant to which Premiere received 61,050 shares of
Preferred Stock, valued by the Board of Directors at $6,105,093
which represented Premiere's outstanding accounts receivable balance
as of that date. The $6,105,093 included $4,636,981 which was
attributable to Phone Cards purchased in the normal course of
business and the remaining $1,468,112 representing a one-time charge
on March 31, 1998 from Premiere for extra minutes processed by
Premiere on cards activated by the Company. The Investment Agreement
provides for the registration of the shares of Common Stock into
which the Preferred Stock is convertible. The Preferred Stock was
sold in a private placement exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
26
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Exhibit 4.1 - Certificate of Designation of DigiTEC 2000, Inc.
providing for the Series A Preferred Stock, dated March 31,
1998.
Exhibit 10.1 - Investment Agreement, dated as of March 31,
1998, between Premiere Communications, Inc and the Company.
Exhibit 27-Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
None
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1998 DigiTEC 2000, Inc.
--------------------------------------
(Registrant)
By: /s/ Frank C. Magliato
-----------------------------------------------
Frank C. Magliato
Chief Executive Officer, President and Director
By: /s/ Diego E. Roca
-----------------------------------------------
Diego E. Roca
Vice President of Operations, Treasurer
and Secretary (Principal Financial and
Accounting Officer)
28
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA
MAR 31 1998
No. C 4011-87
---------
/s/ Dean Heller, Secretary of State
CERTIFICATE OF DESIGNATION
OF DIGITEC 2000, INC.
In accordance with Sections 78.195 and 78.1955 of the General Corporation
Law of Nevada (the "GCLN"), DIGITEC 2000, INC. (the "Corporation"), a
corporation organized and existing under and by virtue of the GCLN, DOES HEREBY
CERTIFY:
1. The name of the corporation is Digitec 2000, Inc.
2. Pursuant to a resolution adopted by the Board of Directors of the
Corporation on March 31, 1998, 61,050 shares of the Corporation's
authorized preferred stock are hereby designated as Series A
Preferred Stock, which shall have the following rights, preferences
and privileges;
1. Definitions. For the purposes of this designation, the following
terms shall have the meanings specified below:
"Board of Directors" shall mean the board of directors of the Corporation;
any member of the Board of Directors being sometimes referred to herein as a
"Director," or any group thereof as "Directors."
"Common Stock" shall mean the common stock, $.001 par value per share, of
the Corporation.
"Conversion Price" shall mean $10.395, except as otherwise adjusted as
provided in Section 4.
"Conversion Rate" shall have the meaning provided in Section 4(a).
"Corporation" shall mean Digitec 2000, Inc., a Nevada corporation.
"Designations" shall mean the preferences, powers, limitations and
relative rights of the Series A Preferred Stock established hereby and set forth
herein.
"Invested Amount" per share of Series A Preferred Stock shall mean $100.00
(as adjusted for changes in the Series A Preferred Stock by stock split, stock
dividend, or the like occurring after the Original Issue Date).
"Liquidation" shall have the meaning specified in Section 2.
"Original Issue Date" shall mean the date on which shares of Series A
Preferred Stock are first actually issued by the Corporation pursuant to that
certain Investment Agreement dated March 31, 1998, by and between the
Corporation and Premiere Communications, Inc. pursuant to which the initial
1
<PAGE>
issuance of shares of Series A Preferred Stock is to occur.
"Securities Act" shall mean the federal Securities Act of 1933, as
amended.
"Series A Preferred Stock" shall mean the 61,050 shares of Series A
Cumulative Preferred Stock, $.001 par value per share, hereby designated.
2. Liquidation Rights. (a) In the event of the liquidation, dissolution or
winding up of the Corporation, or, if the Corporation has subsidiaries, such of
the Corporation's subsidiaries the assets of which constitute all or
substantially all the assets of the business of the Corporation and its
subsidiaries taken as a whole (a "Liquidation"), the holders of the outstanding
shares of the Series A Preferred Stock shall, at their election, be entitled to
receive in exchange for and in redemption of their Series A Preferred Stock,
prior and in preference to the holders of Common Stock and the holders of any
other class or series of stock of the Corporation ranking junior to the Series A
Preferred Stock by reason of their ownership thereof, from any funds legally
available for distribution to shareholders, an amount per share equal to the
Invested Amount, plus an amount equal to accrued and unpaid dividends and
distributions thereon, to the date of payment.
(b) To the extent necessary, the Corporation shall cause such
actions to be taken by any of its subsidiaries so as to enable the proceeds of a
Liquidation to be distributed to the holders of shares of Series A Preferred
Stock in accordance with this Section 2. All preferential amounts to be paid to
the holders of the Series A Preferred Stock under this Section 2 shall be paid
or set apart for payment before the payment or setting apart for payment of any
amount for, or the distribution of any assets of the Corporation to, the holders
of the Common Stock or any class or series of stock of the Corporation ranking
junior to the Series A Preferred Stock in connection with a Liquidation. If the
assets or surplus funds to be distributed to holders of Series A Preferred Stock
are insufficient to permit the payment to such holders of the full amount
payable to such holders, the assets and surplus funds legally available for
distribution shall be allocated pro rata on a share-by-share basis among all
such shares at the time outstanding.
3. Voting Rights. In addition to any other voting rights required by law,
the holders of Series A Preferred Stock shall have the following voting rights:
(a) Except as specifically set forth below, the holder of each share
of the Series A Preferred Stock shall be entitled to the number of votes per
share equal to the number of shares of Common Stock into which such share of
Series A Preferred Stock would be convertible under the circumstances described
in Section 4 on the record date for the vote or consent of shareholders, and
shall otherwise have voting rights and powers equal to the voting rights and
powers of the Common Stock. Except as otherwise provided herein or as required
by law, each holder of a share of the Series A Preferred Stock shall be entitled
to receive the same prior notice of any shareholders' meeting as provided to the
holders of Common Stock in accordance with the Bylaws of the Corporation, as
well as prior notice of all shareholder actions to be taken by legally available
2
<PAGE>
means in lieu of meeting. Fractional votes shall not, however, be permitted, and
any fractions shall be disregarded in computing voting rights.
(b) Except as otherwise provided herein or required by law, the
holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock shall vote together as a single class on all matters submitted to a
vote of shareholders of the Corporation.
(c) (i) Notwithstanding anything contained in this Section 3 to the
contrary, if the Corporation should fail for any reason to issue Common Stock in
conversion of the Series A Preferred Stock as provided in Section 4, and should
such failure continue for a period of ninety (90) consecutive days, then, at the
end of such period and for so long as said failure remains uncured, the holders
of Series A Preferred Stock shall be entitled (but not obligated), at any annual
meeting of the shareholders or any special meeting called for such purpose,
voting together as a single class, to elect two (2) members of the Board of
Directors, and the holders of Common Stock, voting as a single class, shall
elect the remaining Directors; provided, however, that if the total number of
members of the Board of Directors exceeds eight (8), then in such circumstances
the holders of the Series A Preferred Stock shall be entitled to elect three (3)
members of the Board of Directors and the holders of Common Stock, voting as a
single class, shall elect the remaining Directors. If, prior to the end of the
term of any Director elected as aforesaid by the holders of shares of the Series
A Preferred Stock, a vacancy in the office of such Director shall occur by
reason of death, resignation, removal or disability, or for any other reason,
the right to fill such vacancy shall be vested in the holders of the Series A
Preferred Stock unless the right of such holders to elect such Director shall
have ceased as provided hereafter.
(ii) At such time, if any, as the holders of the Series A
Preferred Stock shall obtain the conversion referred to in Section 3(c)(i), then
the terms of office of all persons elected as Directors by such holders shall
forthwith terminate, the number of Directors shall be reduced accordingly, and
the holders of Series A Preferred Stock, if any, shall once again have rights
with respect to the election of Directors as are provided in Section 3(a). The
foregoing remedy shall not be deemed exclusive and shall be in addition to all
other rights and remedies available at law or equity to the holders of Series A
Preferred Stock.
(d) Except as otherwise provided herein, holders of Series A
Preferred Stock shall have no special voting rights, and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
4. Conversion. The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) For purposes of this Section 4, the shares of Series A Preferred
Stock shall be convertible, at the times and under the conditions described in
this Section 4, at the rate (the "Conversion Rate") of one share of Series A
Preferred Stock to the number of shares of Common Stock that equals the quotient
obtained by dividing (i) the Invested Amount plus all accrued but unpaid
dividends and distributions on such share of Series A Preferred Stock by (ii)
3
<PAGE>
the Conversion Price. Thus, the number of shares of Common Stock to which a
holder of Series A Preferred Stock shall be entitled upon any conversion
provided for in this Section 4 shall be the product obtained by multiplying the
Conversion Rate by the number of shares of Series A Preferred Stock being
converted. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of the surrender of the shares of Series A
Preferred Stock to be converted in accordance with the procedures described in
Section 4(d).
(b) Each share of Series A Preferred Stock shall be convertible, at
the option of the holder thereof, at any time after the date of issuance of such
share at the office of the Corporation or any transfer agent for the Series A
Preferred Stock, into Common Stock at the then effective Conversion Rate.
(c) No fractional shares of Common Stock shall be issued upon
conversion of Series A Preferred Stock, and any shares of Series A Preferred
Stock surrendered for conversion that would otherwise result in a fractional
share of Common Stock shall be redeemed at the then effective Conversion Price
per share, payable as promptly as possible when funds are legally available
therefor.
(d) Before any holder of Series A Preferred Stock shall be entitled
to receive certificates representing the shares of Common Stock into which
shares of Series A Preferred Stock are converted in accordance with any
provision of this Section 4, such holder shall surrender the certificate or
certificates for such shares of Series A Preferred Stock, duly endorsed, at the
office of the Corporation or of any transfer agent for the Series A Preferred
Stock, and shall give written notice to the Corporation at such office of the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued, if different from the name shown on the
books and records of the Corporation. Said conversion notice shall also contain
such representations as may reasonably be required by the Corporation to the
effect that the shares to be received upon conversion are not being acquired and
will not be transferred in any way that might violate the then applicable
securities laws. The Corporation shall, as soon as practicable thereafter and in
no event later than thirty (30) days after the delivery of said certificates,
issue and deliver at such office to such holder of Series A Preferred Stock, or
to the nominee or nominees of such holder as provided in such notice, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion pursuant to any
provision of this Section 4 shall be treated for all purposes as the record
holder or holders of such shares of Common Stock as of the effective date of
conversion specified in such section. All certificates issued upon the exercise
or occurrence of the conversion shall contain a legend governing restrictions
upon such shares imposed by law or agreement of the holder or his or its
predecessors.
(e) In the event the Corporation at any time or from time to time
after the Original Issue Date effects a subdivision or combination of the
outstanding Common Stock into a greater or lesser number of shares without a
proportionate and corresponding subdivision or combination of the outstanding
Series A Preferred Stock, then and in each such event the Conversion Price (and
the corresponding Conversion Rate) shall be increased or decreased
proportionately.
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<PAGE>
(f) Subject to Section 5(a)(i), in the event that the Corporation at
any time or from time to time after the Original Issue Date shall make or issue,
or fix a record date for the determination of holders of Common Stock entitled
to receive, a dividend or other distribution payable in additional shares of
Common Stock or other securities or rights convertible into or entitling the
holder thereof to receive additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any consideration
by such holder of such Common Stock Equivalents or the additional shares of
Common Stock, and without a proportionate and corresponding dividend or other
distribution to holders of Series A Preferred Stock, then and in each such event
the maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for subsequent adjustment of
such number) of Common Stock issuable in payment of such dividend or
distribution or upon conversion or exercise of such Common Stock Equivalents
shall be deemed, for purposes of this Section 4(f), to be issued and outstanding
as of the time of such issuance or, in the event such a record date shall have
been fixed, as of the close of business on such record date. In each such event,
the Conversion Price shall be decreased as of the time of such issuance or, in
the event such a record date shall have been fixed, as of the close of business
on such record date, by multiplying the Conversion Price by a fraction,
(i) the numerator of which shall be the total number of shares
of Common Stock issued and outstanding or deemed to be issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date; and
(ii) the denominator of which shall be the total number of
shares of Common Stock (x) issued and outstanding or deemed pursuant to the
terms hereof to be issued and outstanding (not including any shares described in
clause (y) immediately below), immediately prior to the time of such issuance or
the close of business on such record date, plus (y) the number of shares of
Common Stock issuable in payment of such dividend or distribution or upon
conversion or exercise of such Common Stock Equivalents;
provided, however, that (i) if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Conversion Price (and the corresponding Conversion Rate)
shall be recomputed accordingly as of the close of business on such record date
and thereafter the Conversion Price (and the corresponding Conversion Rate)
shall be adjusted pursuant to this Section 4(f) as of the time of actual payment
of such dividend or distribution; or (ii) if such Common Stock Equivalents
provide, with the passage of time or otherwise, for any decrease in the number
of shares of Common Stock issuable upon conversion or exercise thereof (or upon
the occurrence of a record date with respect thereto), the Conversion Price (and
the corresponding Conversion Rate) computed upon the original issue thereof (or
upon the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such decrease becoming effective, be
recomputed to reflect such decrease insofar as it affects the rights of
conversion or exercise of the Common Stock Equivalents then outstanding; or
(iii) upon the expiration of any rights of conversion or exercise under any
unexercised Common Stock Equivalents, the Conversion Price (and the
corresponding Conversion Rate) computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed as if the
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<PAGE>
only additional shares of Common Stock issued were the shares of such stock, if
any, actually issued upon the conversion or exercise of such Common Stock
Equivalents.
(g) (i) Except as otherwise provided in this Section 4(g), in the
event, and each time as, the Corporation sells or issues any Common Stock or
Common Stock Equivalents following the Original Issue Date, at a per share
consideration (as defined below) less than the Conversion Price then in effect,
then the Conversion Price shall be adjusted as provided in this Section 4(g),
and the Conversion Rate shall be appropriately adjusted. For purposes of the
foregoing, the per share consideration with respect to the sale or issuance of a
share of Common Stock shall be the price per share received by the Corporation,
prior to the payment of any expenses, commissions, discounts and other
applicable costs. With respect to the sale or issuance of Common Stock
Equivalents that are convertible into or exchangeable for Common Stock without
further consideration, the per share consideration shall be determined by
dividing the maximum number of shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein for subsequent
adjustment of such number) of Common Stock issuable with respect to such Common
Stock Equivalents into the aggregate consideration received by the Corporation
upon the sale or issuance of such Common Stock Equivalents. With respect to the
issuance of other Common Stock Equivalents, the per share consideration shall be
determined by dividing the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
for subsequent adjustment of such number) of Common Stock issuable with respect
to such Common Stock Equivalents into the aggregate consideration received by
the Corporation upon the sale or issuance of such Common Stock Equivalents plus
the total consideration receivable by the Corporation upon the conversion or
exercise of such Common Stock Equivalents. The issuance of Common Stock or
Common Stock Equivalents for no consideration shall be deemed to be an issuance
at a per share consideration of $.01. In connection with the sale or issuance of
Common Stock and/or Common Stock Equivalents for non-cash consideration, the
amount of consideration shall be determined by the Board of Directors of the
Corporation in good faith.
(ii) As used herein, "Additional Shares of Common Stock" shall
mean either shares of Common Stock issued, with respect to such adjustments to
be made to the Conversion Price and the Conversion Rate, subsequent to the
Original Issue Date, or, with respect to the issuance of Common Stock
Equivalents, the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein for
subsequent adjustment of such number) of Common Stock issuable in exchange for,
upon conversion of, or upon exercise of such Common Stock Equivalents.
(iii) Upon each issuance of Common Stock for a per share
consideration less than the Conversion Price as in effect on the date of such
issuance, the Conversion Price as in effect on such date shall be adjusted by
multiplying it by a fraction:
(x) the numerator of which shall be the number of
shares of Common Stock deemed outstanding (as defined
below) immediately prior to the issuance of such
Additional Shares of Common Stock plus the number of
shares of Common Stock that the aggregate net
consideration received by the Corporation for the total
number of such Additional Shares of Common Stock so
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<PAGE>
issued would purchase at the Conversion Price then in
effect; and
(y) the denominator of which shall be the number
of shares of Common Stock deemed outstanding (as defined
below) immediately prior to the issuance of such
Additional Shares of Common Stock plus the number of
shares of Common Stock so issued.
(iv) For the purposes of Section 4(g)(iii), the number of
shares of Common Stock deemed to be outstanding as of a given date shall be the
sum of (x) the number of shares of Common Stock actually outstanding, (y) the
number of shares of Common Stock into which the then outstanding shares of
Series A Preferred Stock could be converted if fully converted on the day
immediately preceding the given date, and (z) the number of shares of Common
Stock that could be obtained through the exercise or conversion of all other
rights, options and convertible securities on the day immediately preceding the
given date.
(v) Upon each issuance of Common Stock Equivalents that are
exchangeable without further consideration into Common Stock, for a per share
consideration less than the Conversion Price as in effect on the date of such
issuance, the Conversion Price shall be adjusted as provided in Section
4(g)(iii) on the basis that the Additional Shares of Common Stock are to be
treated as having been issued on the date of issuance of the Common Stock
Equivalents, and the aggregate consideration received by the Corporation for
such Common Stock Equivalents shall be deemed to have been received for such
Additional Shares of Common Stock.
(vi) Upon each issuance of Common Stock Equivalents other than
those described in Section 4(g)(v) for a per share consideration less than the
Conversion Price as in effect on the date of such issuance, the Conversion Price
shall be adjusted as provided in Section 4(g)(iii) on the basis that the
Additional Shares of Common Stock are to be treated as having been issued on the
date of issuance of such Common Stock Equivalents, and the aggregate
consideration received and receivable by the Corporation on conversion or
exercise of such Common Stock Equivalents shall be deemed to have been received
for such Additional Shares of Common Stock.
(vii) Once any Additional Shares of Common Stock have been
treated as having been issued for the purpose of this Section 4(g), they shall
be treated as issued and outstanding shares of Common Stock whenever any
subsequent calculations must be made pursuant hereto; provided that on the
expiration of any options, warrants or rights to purchase Additional Shares of
Common Stock, the termination of any rights to convert or exchange for
Additional Shares of Common Stock, or the expiration of any options or rights
related to such convertible or exchangeable securities on account of which an
adjustment in the Conversion Price has been made previously pursuant to this
Section 4(g), such Conversion Price shall forthwith be readjusted to the
Conversion Price as would have obtained had the adjustment made upon the
issuance of such options, warrants, rights, securities or options or rights
related to such securities been made upon the basis of the issuance of only the
number of shares of Common Stock actually issued upon the exercise of such
options, warrants or rights, upon the conversion or exchange of such securities
7
<PAGE>
or upon the exercise of the options or rights related to such securities.
(viii) The foregoing notwithstanding, no adjustment of the
Conversion Price and the Conversion Rate shall be made pursuant to this Section
4(g) as a result of the issuance of:
(v) any shares of Common Stock upon the conversion
of shares of Series A Preferred Stock;
(w) any shares of Common Stock pursuant to which
the Conversion Price and the Conversion Rate are
adjusted under Section 4(e) or (f);
(x) any shares of Common Stock issued pursuant to
the exchange, conversion or exercise of any Common Stock
Equivalents that have previously been incorporated into
computations hereunder on the date when such Common
Stock Equivalents were issued;
(y) any shares of Common Stock issued at any time
after the Original Issue Date pursuant to (i) warrants
or options to purchase shares of Common Stock that have
been granted by the Corporation as of the Original Issue
Date or (ii) options granted under the Corporation's
Stock Incentive Plan adopted in April 1997; and
(z) any shares of Common Stock or other securities
of the Corporation issued as consideration in a business
combination transaction, joint venture or investment
involving the Corporation so long as such transaction is
negotiated and entered into on an arms' length basis and
no affiliate of the Corporation receives any
consideration in connection therewith other than
customary finders' fees.
(h) No adjustment to the Conversion Price (and, thereby, the
Conversion Rate) shall be made if such adjustment would result in a change in
the Conversion Price of less than $.01. Any adjustment of less than $.01 that is
not made shall be carried forward and shall be made at the time of and together
with any subsequent adjustment that, on a cumulative basis, amounts to an
adjustment of $.01 or more in the Conversion Price.
(i) Except as provided in Section 6, the Corporation shall not, by
amendment of its Articles of Incorporation or Bylaws or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but shall at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such actions as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock against
impairment.
8
<PAGE>
(j) Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Section 4, the Corporation at its expense
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and cause independent public accountants selected by the
Corporation to verify such computation and prepare and furnish to each holder of
Series A Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price and the Conversion Rate at that time in
effect, and (iii) the number of shares of Common Stock and the amount, if any,
of other property that at that time would be received upon the conversion of
Series A Preferred Stock.
(k) In the event of any taking by the Corporation of a record of the
holders of Common Stock for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, any Common Stock
Equivalents or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, the Corporation shall mail to each holder of Series A Preferred
Stock, at least twenty (20) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or rights, and the amount and character of such
dividend, distribution or rights.
(l) The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock solely for the purpose
of effecting the conversion of the shares of the Series A Preferred Stock such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series A Preferred Stock;
and if at any time the number of authorized but unissued shares of Common Stock
shall be insufficient to effect the conversion of all then outstanding shares of
the Series A Preferred Stock, the Corporation shall take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose.
(m) The Corporation shall pay all taxes (other than taxes based upon
income) and other governmental charges that may be imposed with respect to the
issue or delivery of shares of Common Stock upon conversion of shares of Series
A Preferred Stock, excluding any tax or other charge imposed in connection with
any transfer involved in the issue and delivery of shares of Common stock in a
name other than that in which the shares of Series A Preferred Stock so
converted were registered.
(n) The Corporation may, at its option, cause all but not less than
all of the shares of Series A Preferred Stock to be converted into Common Stock
pursuant to this Section 4 on or after March 31, 1999, upon at least thirty (30)
and not more than sixty (60) days notice, but only if
(i) the average current market price of the
Corporation's Common Stock for any twenty (20) consecutive
trading days (as defined below) ending within ten (10) days
prior to the date of the notice of such redemption shall have
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<PAGE>
equaled or exceeded one hundred fifty percent (150%) of the
Conversion Price, and the average daily trading volume of such
Common Stock during such twenty (20) trading days is at least
25,000 shares (as adjusted for changes in the Common Stock by
stock split, stock dividend or the like occurring after the
date of this Certificate), and
(ii) all of the shares of Common Stock into which such
shares of Series A Preferred Stock may be converted shall be
registered for resale from time to time on any exchange or
trading system or in privately negotiated transactions under a
registration statement that has been declared effective by the
Commission. Such registration statement shall remain effective
for at least six (6) months after such conversion. This
requirement shall not be applicable at any time that Purchaser
is entitled to sell all of the Registrable Securities under
Rule 144(k) under the Securities Act.
For purposes hereof, the "current market price," of the
Corporation's Common Stock on any date is the last sale price
on the NASDAQ national market or, if the Common Stock is
listed on an exchange, the last reported sales price on the
principal exchange on which the Common Stock is listed or, if
the Common Stock is not so traded or listed, then the average
of the high and low bid prices during such trading day. For
purposes hereof, "trading days" include any day on which
shares of Common Stock are purchased and sold on an exchange
or trading system, but exclude any such days in which
purchases by the Corporation, its officers or directors or any
entity controlled by any of them have taken place, unless such
purchases do not exceed 25% of such trading day's total
trading volume and were made in compliance with Rule 10b-18
promulgated by the Commission.
5. Redemption of Preferred Stock. (a)(i) All, or any part of, the then
outstanding shares of Series A Preferred Stock may be redeemed at the option of
the Corporation on a date specified in the Corporation's notice to redeem such
shares (the "Redemption Date"). Notice of any proposed redemption shall be given
by the Corporation by mailing a copy of such notice sixty (60) days prior to the
Redemption Date, to the holders of record of the shares to be redeemed at their
respective addresses then appearing on the books of the Corporation. Each holder
of Series A Preferred Stock shall have fifteen (15) days from the receipt of the
notice of redemption from the Corporation in which to notify the Corporation
that the holder of Series A Preferred Stock will convert his, her or its shares
into shares of Common Stock pursuant to Section 4. On the Redemption Date, the
Corporation shall deposit in trust, for the account of the holder of shares to
be redeemed, funds necessary for such redemption with a bank or trust company
organized under the laws of the United States of America or of the State of
Nevada which shall be designated in such notice of redemption. Notice of
redemption having been duly given, or said bank or trust company having been
irrevocably authorized by the Corporation to give such notice, and funds
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necessary for such redemption having been deposited, all as aforesaid, all
shares with respect to which such deposit shall have been made shall forthwith,
whether or not the date fixed for such redemption shall have occurred or the
certificates for such shares shall have been surrendered for cancellation, be
deemed no longer to be outstanding for any purpose, and all rights with respect
to such shares shall thereupon cease and terminate, excepting only (x) the right
of conversion specified above and (y) the right of the holder of the
certificates for such shares to receive, out of the funds so deposited in trust,
on the Redemption Date, the redemption funds, without interest, to which he, she
or it is entitled.
(ii) On or before the Redemption Date, each holder of shares
required to be redeemed shall surrender the certificate representing such shares
to the Corporation and shall receive payment of the Redemption Price (as defined
below) in cash. If less than all the shares represented by a surrendered
certificate are redeemed, the Corporation shall issue a new certificate
representing the unredeemed shares.
(iii) From and after the Redemption Date, unless there shall
have been a default in payment of the Redemption Price, all rights of the
holders of shares of Series A Preferred Stock designated for redemption on such
date (except the right to receive the Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to such
shares, and such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever. If the
funds of the Corporation legally available for redemption of shares of Series A
Preferred Stock on any date scheduled for a redemption are insufficient to
redeem the total number of shares of Series A Preferred Stock to be redeemed on
such date, those funds that are legally available will be used to redeem the
maximum possible number of such shares ratably among the holders of such shares
to be redeemed based upon their holdings of Series A Preferred Stock. The shares
of Series A Preferred Stock not redeemed shall remain outstanding and entitled
to all the rights and preferences provided herein. At any time thereafter when
additional funds of the Corporation are legally available for the redemption of
shares of Series A Preferred Stock, such funds will immediately be used to
redeem the balance of the shares that the Corporation has become obliged to
redeem on any scheduled redemption date but that it has not redeemed.
(b) The price payable for each redeemed share of Series A Preferred
Stock (the "Redemption Price") shall be equal to the Invested Amount plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of payment.
6. Protective Provisions. Actions Requiring Majority Approval of Series A
Preferred Stock. In addition to any other rights provided by law, so long as any
shares of Series A Preferred Stock are then outstanding, except where the vote
or written consent of the holders of a greater number of shares is required by
law or by another provision of the Articles of Incorporation, without first
obtaining the affirmative vote or written consent of the holders of a majority
of the total number of shares of Series A Preferred Stock outstanding, voting
together as a single class, the Corporation shall not (except as provided
below):
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(i) declare or pay dividends on, or make any other
distributions on, any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends on, or make any other
distributions on, any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A Preferred Stock
and all such other parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled; or
(iii) amend or repeal any provision of, or add any provision
to, the Corporation's Articles of Incorporation or Bylaws, or file any
certificate of designations, preferences, limitations and relative rights of any
series of preferred stock, if such action would alter or change the preferences,
rights, privileges or powers of, or restrictions provided for the benefit of the
Series A Preferred Stock;
(iv) create or authorize the creation or increase the
authorized amount of any additional class or series of shares of stock, unless
the same ranks junior to the Series A Preferred Stock as to dividends,
redemption and the distribution of assets on the liquidation, dissolution or
winding up of the Corporation; increase the authorized amount of any additional
class or series of shares of stock unless the same ranks junior to the Series A
Preferred Stock as to dividends, redemption and the distribution of assets on
the liquidation, dissolution or winding up of the Corporation; or create or
authorize any obligation or security convertible into shares of Common Stock,
Series A Preferred Stock or any other class or series of stock, whether voting
or non-voting; regardless of whether any such creation, authorization or
increase shall be by means of amendment to the Articles of Incorporation, or by
merger, consolidation or otherwise;
(v) increase or decrease the authorized number of shares of
the Series A Preferred Stock or issue any additional shares of Series A
Preferred Stock to any person other than Premiere Communications, Inc. or any of
its affiliates;
(vi) enter into any agreement, commitment or plan regarding a
Liquidation;
(vii) purchase, redeem or otherwise acquire, other than as
required in Section 5, for value any shares of any class of its capital stock or
cause or permit any employee stock ownership plan, including any Employee Stock
Ownership Plan as defined in Section 4975(e)(7) of the Internal Revenue Code of
1986, as amended, to purchase shares of any class of its capital stock, except
pursuant to a stock option or employee stock ownership plans or restricted stock
agreements or other contract of or with the Corporation, or in exercise of any
right of first refusal of the Corporation upon a proposed transfer that is, in
each case, in existence on the Original Issue Date; or
(viii) amend the provisions of this Section 6(a).
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Provided, however, that the provisions of this Section 6(a) shall not apply to
any issuance of any class or series of shares of stock of the Corporation that
is pari pasu or senior to Series A Preferred Stock as to dividends, redemption,
distribution of assets on liquidation, dissolution or winding up or otherwise,
so long as such shares are issued as consideration in a business combination
transaction, joint venture or investment involving the Corporation which
transaction is negotiated and entered into on an arms'-length basis and in which
no affiliate of the Corporation receives any consideration in connection
therewith other than customary finder's fees.
(b) The Corporation shall not permit any Subsidiary (as defined
herein) of the Corporation to purchase or otherwise acquire for value any shares
of stock of the Corporation unless the Corporation could, under this Section 6,
purchase or otherwise acquire such shares at such time and in such manner. A
"Subsidiary" means, for purposes of this Section 6(b), any corporation or other
entity of which securities or other ownership interests entitled to cast at
least a majority of the votes that would be entitled to be cast in an election
of the board of Directors of such corporation or other entity or other persons
performing similar functions are beneficially owned, directly or indirectly, by
the Corporation or by any corporation or other entity that is otherwise
controlled by the Corporation.
7. Notices. Any notice required by the provisions hereof to be given to
the holders of shares of Series A Preferred Stock shall be deemed given on the
third business day following (and not including) the date on which such notice
is deposited in the United States Mail, first-class, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation. Notice by any other means shall not be deemed effective until
actually received.
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by the undersigned duly authorized officer, this 31st
day of March, 1998.
DIGITEC 2000, INC.
By: /s/ Frank C. Magliato
-----------------------------
Name: Frank C. Magliato
Title: President
By: /s/ Diego E. Roca
-----------------------------
Name: Diego E. Roca
Title: Secretary
STATE OF NEW YORK )
) SS:
COUNTY OF NEW YORK )
This instrument was acknowledged before me this 31st day of March, 1998 by
Frank Magliato, the President of Digitec 2000, Inc.
/s/ John E. Schmeltzer III
-----------------------------------
[SEAL] Notary Public
My Commission Expires: 12/10/98
[STAMP OF JOHN E. SCHMELTZER III]
A-14
INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT is made and entered into as of the 31st day of
March, 1998, by and between PREMIERE COMMUNICATIONS, INC., a Florida corporation
("Purchaser"), and DIGITEC 2000, INC., a Nevada corporation ("Company").
WHEREAS, Purchaser is engaged in, among other things, the business of
manufacturing and selling prepaid telephone cards; and
WHEREAS, the Company is in the business of marketing and distributing
prepaid telephone cards; and
WHEREAS, Purchaser and the Company have established a distribution
relationship, and the Company owes Purchaser an aggregate of $6,105,093.15 for
prepaid telephone cards (the "Accounts Receivable"); and
WHEREAS, the parties desire to establish a long-term supply relationship
and believe that the mutual interest of both parties will be enhanced by the
conversion of the Accounts Receivable into a long-term investment in the Company
in the form of preferred stock of the Company;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. AUTHORIZATION AND SALE OF THE SHARES.
1.1 Sale of Shares. At the Closing (as defined below), the Company will
sell to Purchaser 61,050 shares of its Series A Cumulative Preferred Stock, par
value $.001 per share (the "Series A Preferred Stock") for the purchase price
set forth in Section 1.3 (the "Purchased Shares").
1.2 Authorization of Shares. Before the Closing, (a) the Board of
Directors of the Company will consent to the designation and authorization of
61,050 shares of Series A Preferred Stock (the "Consent"), and will authorize
the filing with the Nevada Secretary of State of the Certificate of Designation
of Series A Preferred Stock in the form attached hereto as Exhibit A (the
"Certificate"), and (b) an authorized representative of the Company will file
such Certificate with the Nevada Secretary of State.
1.3 Purchase Price; Discharge of Accounts Receivable. In consideration for
the issuance of the Purchased Shares to Purchaser in accordance with this
Agreement, Purchaser agrees that the balance otherwise due and payable under the
Accounts Receivable will be deemed paid in full and discharged at the Closing.
<PAGE>
2. THE CLOSING; DELIVERIES.
2.1 The Closing. The Closing of the transactions described in Article 1
(the "Closing") will be held on March 31, 1998, or at such other date as the
parties may mutually agree (the "Closing Date").
2.2 Deliveries at the Closing. At the Closing, the Company will execute
and deliver to Purchaser (a) certificates registered in Purchaser's name
representing the Purchased Shares; (b) certificate of Purchaser acknowledging
payment in full of the Accounts Receivable by the Company; and (c) opinions from
Patterson, Belknap, Webb & Tyler LLP and Gilbert McSwain, Esq., counsel to the
Company, dated as of the Closing Date, in substantially the form attached hereto
as Exhibit B.
2.3 Concurrent Payment of Accounts Receivable and Purchase of Purchased
Shares. The parties agree that (i) the Accounts Receivable shall be deemed fully
paid and satisfied, and (ii) the Purchased Shares shall be deemed issued, paid
for and delivered, each concurrently at the Closing.
2.4 Mutual Release. Upon the Closing, each of Purchaser and the Company
shall be deemed to have fully released the other from all claims relating to or
arising out of the prepaid telephone cards giving rise to the Accounts
Receivable.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to Purchaser as follows:
3.1 Organization; Corporate Power. The Company is a corporation duly
organized and validly existing under the laws of the State of Nevada, and it is
in good standing under such laws. The Company is qualified to do business as a
foreign corporation in every jurisdiction in which the failure to so qualify
would have a material adverse effect on the business of the Company. The Company
has the requisite power and authority (corporate or otherwise) to own and
operate its properties and assets and to carry on its business as now conducted.
The Company has previously delivered to Purchaser true, correct and complete
copies of the Articles of Incorporation and Bylaws of the Company, and all
amendments thereto. The Company has previously delivered to Purchaser true,
correct and complete copies of the minutes and other similar records of the
Company, which contain all records of meetings and all actions by the Board of
Directors (including all committees thereof) and the shareholders.
3.2 Authorization. The Company has full corporate power and authority to
make, execute, and deliver this Agreement, to issue the Purchased Shares, and to
perform its obligations hereunder and thereunder. The making, execution, and
delivery of this Agreement, the issuance of the Purchased Shares by the Company,
and the performance by the Company of its obligations hereunder and thereunder,
have been duly authorized by all necessary corporate action of the Company.
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3.3 Capitalization. (a) As of the date of this Agreement, the authorized
capital stock of the Company consists of 100,000,000 shares of common stock, par
value $.001 per share ("Common Stock"), of which 6,878,298 shares are issued and
outstanding, and 1,000,000 shares of preferred stock, par value $.001 per share
("Preferred Stock"), of which no shares are issued and outstanding. No other
shares of Common Stock or Preferred Stock are issued and outstanding. All issued
and outstanding shares have been duly authorized and validly issued, are fully
paid and nonassessable, have been offered, issued, sold and delivered by the
Company in compliance with applicable federal and state securities laws, and are
not subject to, nor were they issued in violation of, any preemptive rights.
Upon adoption by the Board of Directors of the Company of the Consent and the
filing of the Certificate, the authorized capital stock of the Company will
include 61,050 shares of Preferred Stock, designated as Series A Preferred
Stock. The Company is not a party to, nor does it have knowledge that any
shareholders are parties to, any voting trust agreements or other contracts,
agreements or arrangements restricting voting rights or transferability with
respect to the issued and outstanding Common Stock.
(b) There are no options, warrants, subscriptions, convertible
debentures, securities convertible into the capital stock of the Company or
other rights, commitments or any other similar agreements for the purchase of
any securities of the Company other than (i) options to purchase a total of
1,157,500 shares of Common Stock issued to certain employees and directors of
the Company, and (ii) warrants to purchase a total of 1,385,584 shares of Common
Stock. The Company has also reserved for issuance up to 600,000 shares of Common
Stock to be issued in the form of options to purchase Common Stock pursuant to
the Company's 1997 Stock Incentive Plan.
3.4 Investments; Subsidiaries. Except as set forth on Schedule 3.4, the
Company does not own or control, directly or indirectly, any interest or
investment in any corporation, partnership, association or other form of
business entity.
3.5 Validity of Stock. The Purchased Shares, when issued, sold and
delivered, will be validly issued, fully paid and nonassessable, will be free of
any and all liens or encumbrances, and will not be subject to any preemptive
rights, rights of first refusal or redemption rights, other than as provided
herein and in the Articles of Incorporation of the Company. The Common Stock
issuable upon conversion of the Purchased Shares has been duly and validly
reserved, and neither it nor the issuance thereof is subject to any preemptive
rights or rights of first refusal or redemption rights, and, upon issuance, it
will be validly issued, fully paid and nonassessable.
3.6 No Inconsistent Obligations. The execution, delivery and performance
of this Agreement by the Company and the other agreements contemplated hereby,
will not (i) result in a violation of its Articles of Incorporation, Bylaws or
any applicable law, (ii) result in a breach of, conflict with or default under
any term or provision of any indenture, note, mortgage, bond, security
agreement, loan agreement, guaranty, pledge or other instrument,
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contract, agreement or commitment to which the Company is a party, (iii) result
in a violation of any order, writ, judgment, injunction, decree, ruling, consent
agreement or award by any forum entered against the Company, or by which any of
the assets of the Company are subject or bound, or (iv) result in the creation
of any mortgage, pledge, hypothecation, security interest, encumbrance, claim,
restriction on use, lien or charge of any kind on the assets of the Company or
the acceleration or creation of any liability.
3.7 Financial Statements. The Company has delivered to Purchaser an
audited balance sheet of the Company as at June 30, 1997, 1996 and 1995
(including the notes thereto), and the related statements of income and cash
flows for the fiscal years then ended, together with the report thereon of BDO
Seidman LLP, independent certified public accountants. Such financial statements
and notes fairly present the financial condition and the results of operations
and cash flows of the Company as at the respective dates of and for the periods
referred to in such financial statements, all in accordance with generally
accepted accounting principles ("GAAP"). Such financial statements are
consistent with the books and records of the Company, and the books and records
of the Company are maintained in accordance with GAAP and are true, correct and
complete in all material respects.
3.8 Litigation and Other Proceedings. Except as disclosed on Schedule 3.8,
there are no actions, proceedings or investigations pending against the Company,
its assets or shareholders (or any basis therefor or, to the knowledge of the
Company, any threat thereof) that might result in any material adverse change in
the business or financial condition of the Company or any of its properties or
assets or in any material impairment of the right or ability of the Company to
carry on its business, or in any material liability on the part of the Company,
and none that challenges the validity of this Agreement, or any action taken or
to be taken in connection herewith or therewith.
3.9 Registration Rights. Except as disclosed on Schedule 3.9, and as
provided for in Article 6, the Company is not under any obligation to register
any of its outstanding securities or any of its securities that may hereafter be
issued pursuant to this or any other existing agreement.
3.10 Governmental Consents. Except as provided by applicable securities
laws, no consent, approval or authorization of, or registration, declaration,
designation, qualification or filing with, any governmental authority on the
part of the Company is required in connection with the valid execution and
delivery of this Agreement, the offer, sale or issuance of the Purchased Shares
by the Company, the issuance by the Company of the Common Stock issuable upon
conversion of the Purchased Shares, or the consummation of any other transaction
contemplated hereby and thereby.
3.11 Compliance with Law. The Company is conducting its business in
substantial compliance with all applicable statutes, ordinances, rules,
regulations and orders. Further, the Company is not charged with, or to the
knowledge of the Company, under governmental investigation with respect to, any
actual or alleged violation of any statute, ordinance, rule or regulation. To
the knowledge of the Company, the Company is not currently the subject of any
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pending or threatened adverse proceeding by any regulatory authority having
jurisdiction over its business, assets or operations.
3.12 Securities Filings. Each registration statement, proxy statement, or
report filed and not withdrawn by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), or the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (collectively, "Securities Filings"), did not, on the date of
effectiveness in the case of each such registration statement, or on the later
of the date of filing of each such report or any subsequent amendment thereof in
the case of each such report, or on the date of mailing in the case of each such
proxy or information statement, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The Company has filed all documents required to be filed
by it with the Commission pursuant to Sections 13 and 14(a) of the Exchange Act,
and all such documents complied in all material respects as to form and
substance with the applicable requirements of the federal securities law.
3.13 Changes. Except as disclosed on Schedule 3.13, since June 30, 1997,
there has not been:
3.13.1 any change in the assets, liabilities, financial condition,
or operations of the Company considered in the aggregate, except changes in the
ordinary course of business that have not been, either individually or in the
aggregate, materially adverse;
3.13.2 any change (individually or in the aggregate), except in the
ordinary course of business, in the contingent obligations of the Company by way
of guaranty, endorsement, indemnity, warranty, or otherwise;
3.13.3 any damage, destruction, or loss, whether or not covered by
insurance, materially and adversely affecting the properties or business of the
Company;
3.13.4 any loans made by the Company to its employees, officers, or
directors or members of their immediate families other than travel advances made
in the ordinary course of business;
3.13.5 any increases in the compensation of any of the Company's
employees, officers or directors;
3.13.6 any declaration or payment of any dividend or other
distribution of the assets of the Company;
3.13.7 any issuance or sale by the Company of any shares of Common
Stock, Preferred Stock or other securities;
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3.13.8 any other event or condition of any character that has
materially and adversely affected the business or prospects of the Company; or
3.13.9 any agreement or commitment by the Company to do any of the
things described in this Section 3.13.
3.14 Full Disclosure. No representation or warranty by the Company in this
Agreement or in any written statement or certificate furnished to Purchaser in
connection with the transactions contemplated by this Agreement, contains, or
will contain, any untrue statement of a material fact or omits, or will omit, a
material fact necessary to make the statements made not misleading in light of
the circumstances under which they were made. There is no material fact known to
the Company relating to the business, prospects, condition (financial or
otherwise), affairs, operations, or assets of the Company that has not been
disclosed to Purchaser in writing by the Company.
4. PURCHASER REPRESENTATIONS.
Purchaser represents and warrants to the Company as follows:
4.1 Investment. Purchaser is acquiring the Purchased Shares for its own
account, not as a nominee or agent, and not with a view to, or for sale in
connection with, any distribution thereof. Purchaser understands that the
Purchased Shares have not been, and that the Common Stock issuable on conversion
of the Purchased Shares may not be, registered under the Securities Act or any
state securities laws, by reason of specific exemptions from the registration
provisions of the Securities Act and that such laws may depend upon, among other
things, the bona fide nature of Purchaser's investment intent as expressed
herein. Purchaser is an "accredited investor" within the meaning of Regulation D
promulgated by the Commission under the Securities Act.
4.2 Corporate Power. Purchaser has all requisite legal and corporate power
and authority to enter into this Agreement, to purchase the Purchased Shares,
and to carry out and perform its other obligations under the terms of this
Agreement.
4.3 Authorization. Purchaser has full corporate power and authority to
make, execute, and deliver this Agreement and perform its obligations hereunder
and the transactions contemplated hereby, and the making, execution, and
delivery of this Agreement and the performance by Purchaser of its obligations
hereunder have been duly authorized by all necessary corporate action of
Purchaser.
4.4 No Inconsistent Obligations. The execution, delivery and performance
of this Agreement by Purchaser and the other agreements contemplated hereby,
will not (i) result in a violation of its charter or certificate of
incorporation or bylaws or any applicable laws, (ii) result in a breach of,
conflict with or default under any term or provision of any indenture, note,
mortgage, bond, security agreement, loan agreement, guaranty, pledge or other
instrument, contract, agreement or commitment to which Purchaser is a party,
(iii) result in a violation of any order, writ, judgment, injunction, decree,
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ruling, consent agreement or award by any forum entered against Purchaser, or by
which any of the assets of Purchaser is subject or bound, or (iv) result in the
creation of any mortgage, pledge, hypothecation, security interest, encumbrance,
claim, restriction on use, lien or charge of any kind on the assets of Purchaser
or the acceleration or creation of any liability.
5. COVENANTS OF THE COMPANY.
5.1 Basic Information and Access. Until all of the Purchased Shares have
been redeemed or converted into Common Stock:
5.1.1 Within ninety (90) days after each fiscal year, the Company
will furnish to Purchaser audited consolidated balance sheets of the Company and
its subsidiaries, if any, as of the end of such fiscal year and audited
consolidated statements of income and cash flow of the Company and its
subsidiaries, if any, for such fiscal year, prepared in accordance with GAAP and
setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail and certified by an independent public
accounting firm of recognized national standing, or other independent accounting
firm approved by the Company's Board of Directors.
5.1.2 Within forty-five (45) days after the end of each fiscal
quarter, the Company will furnish to Purchaser consolidated balance sheets of
the Company and its subsidiaries, if any, as of the end of such quarter, and
consolidated statements of income and cash flow of the Company and its
subsidiaries, if any, for such quarter and for the current fiscal year to date,
prepared in accordance with GAAP, with such statements certified by the chief
financial officer of the Company as having been so prepared in accordance with
GAAP.
5.2 Reservation of Shares. The Company will reserve and keep available for
issuance that number of authorized but unissued shares of Common Stock that is
sufficient to permit the conversion of the Purchased Shares into Common Stock in
accordance with the Certificate. All shares of Common Stock that are so issuable
will, when issued upon conversion or exercise, be duly and validly issued and
fully paid and non-assessable.
6. REGISTRATION RIGHTS.
6.1 Certain Definitions. As used in this Article 6, in addition to the
terms defined above, the following terms have the meanings set forth below:
"Conversion Shares" means the shares of Common Stock that have actually
been acquired by the holders of: (i) any of the Purchased Shares upon the
conversion thereof pursuant to the Certificate; and (ii) any additional shares
of Series A Preferred Stock or Common Stock issued with respect to the foregoing
clause pursuant to any stock split, stock dividend, recapitalization or similar
event, upon the conversion of such additional shares.
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"Holders" means Purchaser and any other person holding Registrable
Securities to whom these registration rights have been transferred pursuant to
Section 6.10.
"Other Shareholders" means persons other than Holders who, by virtue of
agreements with the Company, are entitled to include their securities in a
registration effected pursuant to this Agreement, and shall include only those
persons identified on Schedule 3.9 hereto who currently are parties to the
agreements identified thereon (and only with respect to those shares covered by
such agreements on the date hereof, as adjusted for any stock splits or stock
dividends) and such other Persons who have such rights pursuant to the terms of
this Article 6.
The terms "register," "registered" and "registration" refer to the
effectiveness of a registration statement prepared and filed in compliance with
the Securities Act.
"Registrable Securities" means, as of any particular time, (i) all
then-issued and outstanding Conversion Shares, and (ii) all shares of Common
Stock issuable, yet not actually issued, upon conversion of the then-outstanding
Purchased Shares and upon conversion of any additional shares of Series A
Preferred Stock issued by virtue of such Purchased Shares pursuant to any stock
split, stock dividend, recapitalization or similar event.
"Registration Expenses" means all expenses incurred by the Company in
complying with Sections 6.2 and 6.3, including, without limitation, all
registration and filing fees; printing expenses; fees and disbursements of
counsel for the Company; reasonable fees and expenses of a single counsel for
the selling Holders; state "blue sky" fees and expenses; and accountants'
expenses, including without limitation any special audits or reviews incident to
or required by any such registration; but excluding the compensation of regular
employees of the Company, which will be paid by the Company.
"Selling Expenses" means all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and any other
securities of the Company being sold in the same registration as the Registrable
Securities by Other Shareholders.
"Shares" means all Purchased Shares as issued and outstanding together
with any shares of Series A Preferred Stock issued with respect to the foregoing
upon any stock split, stock dividend, recapitalization or similar event.
6.2 Current Registration. The Company shall cause the Registrable
Securities to be covered by the S-1 Registration Statement to be filed by the
Company with the Commission covering the registration of certain shares of
Common Stock issuable upon the exercise of outstanding Warrants previously
issued by the Company; provided , however, that such inclusion of the
Registrable Shares will not be required if doing so would cause the Company to
be unable to proceed with its proposed registration of the aforementioned other
securities due to rules and regulations of the Commission. If such Registration
Statement, covering the Registrable Securities, has not been declared effective
by the Commission by June 30, 1998, then the Company will file with the
Commission, and use its best efforts to obtain the prompt effectiveness of, a
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registration statement under the Securities Act to register for public sale all
of the Registrable Securities so that such shares may be offered and sold by or
for the account of the Purchaser from time to time as market conditions permit
in the public markets or in privately negotiated transactions. Such Registration
Statement shall be filed within 60 days of the written request of Purchaser
which may be delivered at any time after the date of this Agreement. Either such
Registration Statements shall remain effective with respect to the Registrable
Securities for at least six months or, if earlier, until the Purchaser may sell
all of the Registrable Securities pursuant to the terms of Rule 144(k)
promulgated under the Securities Act.
6.3 Company Registration.
---------------------
6.3.1 Notice of Registration. If the Registrable Securities are not
subject to an effective registration under Section 6.2 or otherwise, and the
Company decides to register any of its securities in connection with an
underwritten public offering of such securities solely for cash on a form that
would permit the registration of the Registrable Securities (e.g., it will not
include Form S-8 or any successor thereto), the Company will promptly give to
each Holder written notice of such registration (a "Piggyback Registration"),
which will include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws, and will include in such registration (and any related
qualification under blue sky laws or other compliance), all the Registrable
Securities specified in a written request or requests, made by any Holder or
Holders within fifteen (15) days after receipt of such written notice from the
Company, subject to the underwriter limitations, if any, described in Section
6.3.4. and prior registration rights listed in Schedule 3.9. The Company will
have the right to withdraw or cease to prepare or file any registration
statement for any offering referred to in this Subsection 6.3.1 without any
obligation or liability to any Holder.
6.3.2 Number of Piggyback Registrations. Subject to the underwriter
limitations described in Subsection 6.3.4, each Holder will be entitled to have
its Registrable Securities included in two (2) Piggyback Registrations pursuant
to this Section 6.3.
6.3.3 Holdback by the Company. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to
Section 6.2 or pursuant to this Section 6.3, and if such previous registration
has not been withdrawn or abandoned, the Company will not file or cause to be
effected any other registration of any of its equity securities or securities
convertible or exchangeable into or exercisable for its equity securities under
the Securities Act (except on Form S-4, Form S-8 or any successor forms),
whether on its own behalf or at the request of any holder or holders of such
securities, until a period of one hundred eighty (180) days has elapsed from the
effective date of such previous registration.
6.3.4 Underwriting. (a) The right of any Holder to registration
pursuant to Section 6.3.1 is conditioned upon such Holder's participation in the
underwriting, and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein, and will terminate as to each Holder
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upon the availability of Rule 144(k) to such Holder and such Holder holding not
more than one percent (1%) of the outstanding Registrable Securities. All
Holders proposing to distribute their securities through such underwriting will
(together with the Company and Other Shareholders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for underwriting by the
Company.
(b) Notwithstanding any other provision of this Section 6.3,
if the underwriter reasonably determines that market factors require a
limitation on the number of shares to be underwritten, the securities of the
Company held by the Holders will first be excluded from such registration to the
extent so required by such limitation and as required by the contractual
obligations to the Other Shareholders existing as of the date hereof, and, to
the extent additional shares need to be excluded in order to conform to such
limitation, the securities requested by the Other Shareholders to be included,
if any, will next be excluded. The Company will advise all holders of securities
requesting registration as to the number of shares or securities that may be
included in the registration and underwriting as allocated in the foregoing
manner.
(c) If any Holder or Other Shareholder disapproves of the
terms of any such underwriting, such person may elect to withdraw therefrom by
written notice to the Company and the underwriter. Any Registrable Securities or
other securities excluded or withdrawn from such underwriting will also be
withdrawn from such registration.
6.4 Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to this
Agreement will be borne by the Company; and all Selling Expenses will be borne
by the Holders and the Other Shareholders of the securities so registered pro
rata on the basis of the number of their shares so registered; provided,
however, that if any jurisdiction in which the securities will be qualified will
require that expenses incurred in connection with the qualification of the
securities in that jurisdiction be borne by the selling shareholders, then such
expenses will be payable by the selling shareholders pro rata to the extent
required by such jurisdiction.
6.5 Registration Procedures. In the case of each registration effected by
the Company under this Agreement, the Company will keep each Holder advised in
writing as to the initiation of each registration and as to its completion. At
its expense, the Company will use its best efforts to:
6.5.1 keep such registration effective for a period of one hundred
eighty (180) days or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever occurs
first;
6.5.2 furnish the number of prospectuses and other documents
incident thereto as a Holder from time to time may reasonably request; and
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6.5.3 cause all Registrable Securities registered hereunder to be
listed on each securities exchange or automated quotation service on which
similar securities of the Company are listed.
6.6 Indemnification.
----------------
6.6.1 With respect to each Holder whose securities have been
registered under this Agreement, the Company will indemnify such Holder, each of
such Holder's officers, directors and partners, and each person "Controlling"
(as defined by the Securities Act) such Holder and each of such Controlling
person's officers, directors and partners, and will also indemnify each
underwriter, if any, and each person who Controls any underwriter, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering circular or other document
(including any related registration statement, notification or the like)
incident to any such registration, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of any rule or regulation promulgated under the Securities Act
applicable to the Company and relating to any action or inaction required of the
Company in connection with any such registration, and will reimburse each such
Holder and each person Controlling such Holder, and each of such Controlling
person's officers, directors and partners, each of its officers, directors and
partners, each such underwriter, and each person who controls such underwriter,
for any legal and other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
extent that any claim, loss, damage, liability or expense arises out of or is
based upon written information furnished to the Company in an instrument duly
executed by the Holder or underwriter seeking to be indemnified, where such
information is stated to be specifically for use in such prospectus, offering
circular or related document.
6.6.2 Each Holder and Other Shareholder will, if securities held by
him or it are included among the securities as to which the registration is
being effected, indemnify the Company, each of its directors and officers, each
underwriter of the Company's securities covered by the registration statement,
each person who Controls the Company or such underwriter, and each other such
Holder and Other Shareholder and each of such Controlling person's officers,
directors and partners, and each person Controlling such Holder or Other
Shareholder and each of such Controlling person's officers, directors and
partners, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company and such Holders, Other Shareholders, directors, officers, partners,
persons, underwriters and Control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
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to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by such Holder or
Other Shareholder specifically for use therein; provided, however, that the
obligations of such Holder or Other Shareholder hereunder will be limited to an
amount equal to the proceeds to such Holder or Other Shareholder of securities
sold as contemplated herein.
6.6.3 Each party entitled to indemnification under this Section 6.6
(the "Indemnified Party") will give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought and will
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who will conduct the defense of such claim or any litigation resulting
therefrom, will be approved by the Indemnified Party (whose approval will not be
withheld unreasonably), and the Indemnified Party may participate in such
defense at such Indemnified Party's expense. The failure of any Indemnified
Party to give notice as provided herein will relieve the Indemnifying Party of
its obligations under this Section 6.6 only if such failure is prejudicial to
the ability of the Indemnifying Party to defend such action, and such failure
will not relieve the Indemnifying Party of any liability that he or it may have
to any Indemnified Party otherwise than under this Section 6.6. No Indemnifying
Party, in the defense of any such claim or litigation, will, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement that does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability with respect to such claim or litigation.
6.6.4 If the indemnification provided for in this Section 6.6 is
unavailable or insufficient to hold harmless an Indemnified Party in respect of
any loss, claim, damage, liability, or action in respect thereof referred to
herein, then each Indemnifying Party shall (in lieu of indemnifying such
Indemnified Party) contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, claim, damage, liability, or action in such
proportion as is appropriate to reflect the relative fault of the Company, on
the one hand, and each Holder and Other Shareholder, on the other, in connection
with the statements or omissions that resulted in such loss, claim, damage,
liability, or action as well as any other relevant equitable considerations,
including any failure to give in a timely manner any notice required under
Section 6.6.3. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement or omission or
alleged omission of a material fact relates to information supplied by the
Company, on the one hand, or the Holders or Other Shareholders, on the other
hand, and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission. The Company and
each Holder or Other Shareholder agree that it would not be just and equitable
if contributions pursuant to this Section 6.6 were determined by pro rata
allocation or by any other method of allocation that did not take account of the
equitable considerations referred to above. The amount paid or payable by an
Indemnified Party as a result of any loss, claim, damage, liability, or action
in respect thereof referred to in this Section 6 shall be deemed to
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include any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or claim. No
person guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act), shall be entitled to contribution from any person
who is not guilty of fraudulent misrepresentation.
6.7 Information by Holders and Other Shareholders. Each Holder or Other
Shareholder of securities included in any registration will furnish to the
Company such information regarding such Holder or Other Shareholder and the
distribution proposed by such Holder or Other Shareholder as the Company may
request in writing and as will be required in connection with any registration,
qualification or compliance referred to in this Agreement.
6.8 [INTENTIONALLY OMITTED]
6.9 Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission that may permit the sale of the
Common Stock to the public without registration, the Company will, while any
Holder owns any Registrable Securities:
6.9.1 at all times, make and keep public information available as
those terms are understood and defined in Rule 144 promulgated by the Commission
under the Securities Act ("Rule 144");
6.9.2 file with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
6.9.3 furnish to each Holder, upon request, (a) a written statement
describing its compliance with the reporting requirements of Rule 144 and of the
Securities Act, if applicable, (b) a copy of the most recent annual or quarterly
report of the Company, and (c) such other reports and documents so filed by the
Company as such Holder may reasonably request in connection with any rule or
regulation of the Commission allowing such Holder to sell any such securities
without registration.
6.10 Transfer of Registration Rights. The right to cause the Company to
register securities of the Company under Sections 6.2 and 6.3 may be assigned by
any Holder to any transferee of Registrable Securities together with the
securities being transferred, provided that the Company is given written notice,
at the time or within a reasonable time after such transfer, stating the name
and address of the transferee and identifying the securities with respect to
which the registration rights are being assigned. No such assignment will be
effective unless the transferee will be required, as a condition to such
transfer, to agree in writing that he or it will receive and hold such
securities subject to the provisions of this Article 6.
6.11 "Market Stand-Off" Agreement. If requested by the Company, upon the
recommendation of the Board of Directors of the Company and an underwriter of
Common Stock (or other securities) of the Company, the Holders will not sell or
otherwise transfer or dispose of any Common Stock (or other securities) of the
Company held by them during the ninety (90) day period following the effective
13
<PAGE>
date of a registration statement of the Company filed under the Securities Act,
provided that: (a) such agreement will apply only with respect to an
underwritten offering (whether such offering was initiated by the Company or the
Initiating Holders); and (b) Other Shareholders selling securities pursuant to
such registration statement and all officers and directors of the Company enter
into similar agreements. Such agreement will be in writing in a form
satisfactory to the Company and such underwriter. The Company may impose
stop-transfer instructions with respect to the shares (or securities) subject to
the foregoing restriction until the end of said ninety (90) day period.
6.12 Standstill. Until the second (2nd) anniversary of the Closing, the
Purchaser agrees that it will not, and will not assist or encourage others to,
directly or indirectly, without the prior written approval of the Company's
Board of Directors, acquire or agree to acquire beneficial ownership (as defined
in Rule 13(d)-3 under the Securities Exchange Act of 1934, as amended) of any of
the Company's securities or rights or options to acquire such ownership.
7. ADDITIONAL RIGHTS
7.1 Telecommunications Services. At any time from the date of this
Agreement through the earlier of the seventh anniversary of the date of this
Agreement or the redemption or conversion of all of the Series A Preferred Stock
held by Purchaser, but in any event for at least three (3) years from the
Closing, if the Company or any of its subsidiaries determines that it will
require telecommunications services with respect to the offering of any prepaid
or other telephone calling card, the Company will and will cause any such
subsidiary to notify Purchaser of the existence of any other telecommunications
services arrangement it proposes to enter into and the terms and conditions
thereof with respect to such offering and grant to Purchaser a right of first
refusal with respect to providing such telecommunications services on the same
or better terms and subject to the same conditions contained in such other
arrangement, and upon receipt of such notice (setting forth in detail all
relevant terms and conditions of such alternative arrangement), Purchaser will
have five (5) days thereafter in which to agree to provide all of the
telecommunications services on the same terms and conditions.
7.2 Transmission Services. At any time from the date of this Agreement
through the earlier of the seventh anniversary of the date of this Agreement or
the redemption or conversion of all of the Series A Preferred Stock held by
Purchaser, but in any event for at least three years from the Closing, the
Company agrees to use its best efforts to have Purchaser designated as a "TEC
Affiliate" such that Purchaser will receive the best available pricing terms
offered by TEC. In the event that Purchaser is not so designated, the Company
agrees to sell to Purchaser transmission services provided to it by TEC (to the
extent not used by the Company for its own operations) at a price equal to the
Company's actual payments to TEC for such services plus two percent (2%) of such
total cost.
7.3 Card Distribution. Until the earlier of the seventh anniversary of the
date of this Agreement or the redemption or conversion of all of the Series A
Preferred Stock held by Purchaser, but in any event for at least three (3) years
from the Closing, Purchaser will refer to the Company all opportunities to
14
<PAGE>
distribute prepaid phone cards which the Purchaser elects in its discretion not
to pursue directly or indirectly.
8. MISCELLANEOUS.
8.1 Governing Law. This Agreement is made under, and will be governed by
and construed and enforced in accordance with, the substantive laws of the State
of Georgia without regard to its conflict of law rules.
8.2 Waiver of Right to Jury Trial. THE PARTIES HERETO WAIVE ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON
CONTRACT, TORT OR OTHERWISE) RELATED TO OR ARISING OUT OF THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT.
8.3 Entire Agreement; Amendment. This Agreement, and the transactions
contemplated hereby, constitute the full and entire understanding and agreement
among the parties with regard to the subject hereof. This Agreement may not be
amended, waived, discharged or terminated orally, but only by a written
instrument signed by the holders of at least a majority of the shares of Series
A Preferred Stock then issued and outstanding and any shares of Common Stock
into which any shares of Series A Preferred Stock have been converted (as well
as any shares issued with respect to the same upon any stock split, stock
dividend, recapitalization or similar event) and a representative of the Company
so authorized by its Board of Directors.
8.4 Survival. The representations, warranties, covenants and agreements
made herein will survive any investigation made by Purchaser and the Closing of
the transactions contemplated hereby.
8.5 Successors and Assigns. This Agreement will be binding upon and will
inure to the benefit of the parties hereto and their respective permitted
successors and assigns. Neither the Company nor Purchaser may assign, delegate
or otherwise transfer any of their rights or obligations under this Agreement
without the written consent of the other party. The Company acknowledges and
agrees that Purchaser may transfer or assign the Purchased Shares to one or more
affiliates.
8.6 Notices. All notices required or permitted hereunder will be in
writing, and will be deemed to be delivered and received (a) if personally
delivered or, if delivered by telegram, facsimile, or courier service, when
actually received by the party to whom notice is sent (or upon confirmation of
receipt received by the sender), or (b) if delivered by mail (whether actually
received or not), at the close of business on the third business day next
following the day when placed in the mail, postage prepaid, certified or
registered, addressed to the appropriate party or parties, at the address of
such party set forth below (or at such other address as such party may designate
by written notice to all other parties in accordance herewith):
15
<PAGE>
(a) if to Purchaser, at
Premiere Communications, Inc.
3399 Peachtree Road, N.E.
The Lenox Building
Suite 600
Atlanta, Georgia 30326
Attn: Patrick G. Jones, Esq.
Facsimile No.: (404) 262-8540
(b) if to the Company, at
Digitec 2000, Inc.
8 West 38th Street
5th Floor
New York, New York 10018
Attn: Frank Magliato
Facsimile No. (212) 944-2829
8.7 Agent's Fees. Each party (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement (except as disclosed to the other party hereto as of the date
hereof), and (ii) hereby agrees to indemnify and to hold the other party
harmless of and from any liability for commissions or compensation in the nature
of an agent's, finder's or broker's fee to any broker or other person or firm
(and the cost and expenses of defending against such liability or asserted
liability) for which said party is responsible.
8.8 Expenses. The Company and Purchaser will bear their own respective
expenses and legal fees (and expenses and disbursements of their respective
legal counsel) incurred with respect to this Agreement and the transactions
contemplated hereby.
8.9 Construction of Certain Terms. Wherever the words "including,"
"include" or "includes" are used in this Agreement, they will be deemed followed
by the words "without limitation." References to any gender will be deemed to
mean any gender. All references herein to the Company's knowledge or awareness
will mean the knowledge of officers and key employees of the Company.
8.10 Counterparts; Headings. This Agreement may be executed in any number
of counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument. The headings set out
herein are for convenience of reference only and will not be deemed a part of
this Agreement.
8.11 Further Assurances. Each party hereby agrees that it will, from time
to time, whether before or after the Closing, at the other party's reasonable
and good faith request and without further consideration, execute and deliver
16
<PAGE>
such further and other transfers, assignments and documents and do all matters
and things that may be necessary or convenient to more effectively and
completely carry out the intentions of this Agreement.
8.12 Legends. In addition to any legends required by the Securities Act or
any applicable state securities laws, the Company will place the following
legend on the front or back of each certificate evidencing ownership of shares
of Series A Preferred Stock:
The Corporation will furnish without charge to each shareholder who
so requests a statement of the designations, relative rights,
preferences and limitations applicable to each class, and series
within a class, of capital stock of the Corporation and the
variations in rights, preferences and limitations applicable to each
series (and the authority of the Corporation's board of directors to
determine variations for future series).
The Company will place legends on each certificate evidencing ownership of
shares of Common Stock into which the shares of Series A Preferred Stock are
convertible identical to those initially placed on the certificates for Series A
Preferred Stock relating to the Securities Act and all applicable state
securities laws.
8.13 [INTENTIONALLY OMITTED]
8.14 Exercise of Rights and Remedies. Except as otherwise provided herein,
no delay or omission in the exercise of any right, power, or remedy accruing to
either party hereto as a result of any breach or default hereunder by any other
party hereto will impair any such right, power, or remedy, nor will it be
construed, deemed, or interpreted as a waiver of or acquiescence in any such
breach or default, or of any similar breach or default occurring later; nor will
any waiver of any single breach or default be construed, deemed, or interpreted
as a waiver of any other breach or default hereunder occurring before or after
that waiver. Each parties' remedies, either under this Agreement, or by law or
otherwise afforded to the parties hereto, will be cumulative and not
alternative.
8.15 Time. Time is of the essence in the performance of this Agreement in
all respects.
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year first above-written.
COMPANY:
DIGITEC 2000, INC.
By: /s/ Frank C. Magliato
-------------------------------
Name: Frank C. Magliato
-----------------------------
Title: President
----------------------------
PURCHASER:
PREMIERE COMMUNICATIONS, INC.
By: /s/ Patrick G. Jones
-------------------------------
Name: Patrick G. Jones
-----------------------------
Title: Senior Vice-President
----------------------------
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheets as of March 31, 1998 and the unaudited
consolidated statement of operations for the three months ended March 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 283,710
<SECURITIES> 0
<RECEIVABLES> 4,897,723
<ALLOWANCES> 75,000
<INVENTORY> 470,346
<CURRENT-ASSETS> 6,117,900
<PP&E> 176,293
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,403,040
<CURRENT-LIABILITIES> 1,983,620
<BONDS> 0
0
6,105,000
<COMMON> 6,868
<OTHER-SE> (9,098,297)
<TOTAL-LIABILITY-AND-EQUITY> 7,425,540
<SALES> 6,359,998
<TOTAL-REVENUES> 6,359,998
<CGS> 6,234,333
<TOTAL-COSTS> 6,234,333
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,401,772)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,401,772)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,401,772)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
</TABLE>
