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 December 31, 1997
[_] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-23291
DigiTEC 2000, Inc.
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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
Former name, former address and former fiscal year, if changes since last
report.
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes __ No __
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $.001 par value, 5,434,766 outstanding as of February 12,1998.
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Index
================================================================================
Part I - Financial Information
Item 1. Consolidated Financial Statements:
Balance sheets as of December 31, 1997 and
June 30, 1997 3
Statements of operations for the three and
six months ended December 31, 1997 and 1996 4
Statement of stockholders' equity (deficit)
for the six months ended December 31, 1997 5
Statements of cash flows for the six months
ended December 31, 1997 and 1996 6
Notes to consolidated financial statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-22
Risk Factors 23-24
Part II - Other Information
Items 1-6 25-26
Signatures 27
2
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current:
Cash $ 176,217 $ 727,197
Accounts receivable, net of allowance for bad debts of $75,000
and $60,000, respectively 3,691,771 1,868,227
Inventory 964,932 218,877
Prepaid expenses 101,639 11,814
Net assets of discontinued operations 84,398 --
- -------------------------------------------------------------------------------------------------
Total current assets 5,018,957 2,826,115
Property and equipment, net 118,140 64,397
Intangibles, net 494,445 606,920
Goodwill, net 491,788 --
Other assets 131,287 29,291
- -------------------------------------------------------------------------------------------------
$6,254,617 $3,526,723
=================================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current:
Accounts payable $5,950,093 $2,842,891
Accrued expenses and other current liabilities 408,706 290,799
Note payable - current 192,521 117,610
Net liabilities of discontinued operations -- 211,502
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Total current liabilities 6,551,320 3,462,802
Note payable 12,481 64,390
Deferred rent 76,000 71,000
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Total liabilities 6,639,801 3,598,192
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Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 1,000,000 shares authorized; no
shares outstanding -- --
Common stock, $.001 par value, 100,000,000 shares authorized;
5,117,433 and 4,858,418 shares issued and outstanding,
respectively 5,117 4,858
Additional paid-in capital 4,411,779 3,602,462
Accumulated deficit (4,802,080) (3,678,789)
- -------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (385,184) (71,469)
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$6,254,617 $3,526,723
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
December 31, December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 11,432,730 $ 2,130,845 $ 24,613,043 $ 4,663,146
Cost of sales 10,943,831 2,028,600 22,959,045 4,652,319
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 488,899 102,245 1,653,998 10,827
Selling, general and administrative expenses 1,222,451 369,584 2,069,674 666,850
- --------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (733,552) (267,339) (415,676) (656,023)
- --------------------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operations of Cellular division (371,380) -- (527,061) --
Loss from operations of World Access -- -- (105,554) --
Loss on disposal of Cellular division (75,000) -- (75,000) --
- --------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations (446,380) -- (707,615) --
- --------------------------------------------------------------------------------------------------------------------------------
Net loss $ (1,179,932) $ (267,339) $ (1,123,291) $ (656,023)
================================================================================================================================
Net loss per common share-basic and diluted:
From continuing operations $ (.14) $ (.06) $ (.08) $ (.14)
From discontinued operations (.09) -- (.15) --
- --------------------------------------------------------------------------------------------------------------------------------
$ (.23) $ (.06) $ (.23) $ (.14)
================================================================================================================================
Weighted average number of common and
common equivalent shares outstanding 5,050,649 4,664,427 4,954,649 4,664,427
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Consolidated Statement of Stockholders' Equity (Deficit)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------
Common Stock
-------------------- Additional Accumulated Total stockholders'
Shares Amount paid-in capital deficit equity (deficit)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1997 4,858,418 $4,858 $3,602,462 $(3,678,789) $ (71,469)
For the six months ended December 31, 1997:
Exercise of warrants 206,383 206 309,370 -- 309,576
Acquisition of Ameridial, Inc. 52,632 53 499,947 -- 500,000
Net loss -- -- -- (1,123,291) (1,123,291)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 5,117,433 $5,117 $4,411,779 $(4,802,080) $ (385,184)
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Consolidated Statements of Cash Flows
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,123,291) $(656,023)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization 120,686 26,524
Depreciation 18,699 3,828
Deferred rent 5,000 --
Deferred income -- (567,136)
(Increase) decrease in:
Accounts receivable (1,823,544) (39,137)
Inventory (746,055) (315,853)
Prepaid expenses and other assets (191,821) 417,565
Increase (decrease) in:
Accounts payable and accrued expenses 3,225,110 454,448
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities of continuing
operations (515,216) (675,784)
Net cash used in operating activities of discontinued operations (295,900) --
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (811,116) (675,784)
- --------------------------------------------------------------------------------------------------------------
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 23,002 --
Proceeds from exercise of warrants 309,576 --
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Net cash provided by financing activities 332,578 --
- --------------------------------------------------------------------------------------------------------------
Net decrease in cash (550,980) (454,511)
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 $ 176,217 $ 54,606
==============================================================================================================
</TABLE>
6
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
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, 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.
7
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
The Company was formed on May 18, 1995 and
commenced operations in July 1995.
Although Promo Tel-Delaware is deemed to be the
acquiring corporation for financial accounting and
reporting purposes, the legal status of Promo
Tel-Nevada as the surviving corporation will not
change. Promo Tel-Nevada had amended its Articles
of Incorporation to change its name from Promo
Tel, Inc. to the Company's current name (Note
1(a)).
In September 1996, the Board of Directors of the
Company approved a reverse stock split of the
Company's common stock ("Common Stock"). Each
stockholder of record on October 18, 1996 received
one share of new Common Stock for each six shares
of Common Stock held.
The equity accounts of the Company and all
disclosures have been retroactively adjusted to
reflect the recapitalization and the one-for-six
reverse stock split.
(c) Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and, from June 1, 1997 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>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
The consolidated financial statements and related
notes thereto as of December 31, 1997 and for the
three and six months ended December 31, 1997 and
1996 are unaudited but, in the opinion of
management, include all adjustments necessary to
present fairly the information set forth therein.
These adjustments consist solely of normal
recurring accruals. The consolidated balance sheet
information for June 30, 1997 was derived from the
audited consolidated financial statements included
in the Company's Form 10. These interim financial
statements should be read in conjunction with that
report. The interim results are not necessarily
indicative of the results for any future periods.
(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 1997 presentation.
9
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
2. Acquisition of On October 31, 1997, the Company entered into an
Ameridial, Inc. 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.
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>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
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,
a related company, 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>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
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 six months ended December
31, 1997, the Company incurred an additional loss
of $0 and $105,554, respectively, on the
discontinued operations of World Access. At
December 31, 1997, $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
December 31, 1997 are as follows:
12
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
Accounts receivable $ 23,000
Inventory 123,000
Receivable from Meta3 246,000
Other assets 12,000
Accounts payable (132,497)
Other liabilities (230,000)
--------------------------------------------------
Net assets of World Access $ 41,503
==================================================
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 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 six months ended December 31, 1997. At
December 31, 1997, $75,000 is recorded for the
estimated additional losses related to the
operations of the cellular division for the period
subsequent to the six months ended December 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 $42,895 at December 31, 1997.
The operations of the cellular division were
completely ceased by February 1, 1998.
4. Subsequent Event On February 2, 1998, warrants to purchase 317,333
shares of the Company's common stock were exercised
resulting in net proceeds to the Company of
approximately $476,000.
13
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
The following discussion should be read in conjunction with the consolidated
financial statements included elsewhere in this Form 10-Q.
Forward Looking Statements
The information set forth in this Form 10-Q includes "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "33 Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended. Words "estimated", "intends", "believes", "plans", "planning",
"expects", and "if" are intended to identify forward looking statements.
Although management believes that the assumptions made and expectations
reflected in the forward looking statements are reasonable, it must be
recognized that there is no assurance that the underlying assumptions will, in
fact, prove to be correct, or that actual future results will not be different
from the Company's expectations.
Introduction
The Company was founded in 1995 to exploit the prepaid phone card sector of the
long distance phone service market.
The Company's sales are primarily derived from the resale of bundled prepaid
telephone cards. The Company resells the cards, at a discount off the face value
of the cards, to either master distributors or retail outlets, depending on the
locality of distribution. The Company's cost of sales consists primarily of the
purchase of the prepaid card at a greater discount off the face value than what
they sell it for, thereby receiving its gross margin on the difference of
discounts given to its customers and the discounts the Company receives from its
long distance provider. Since the card is sold to the Company as a bundled
product, the long distance provider is liable to the end user for the time
remaining on the cards. At the point of sale, the Company has no further
obligation towards the cards sold. During fiscal 1996 and the three months ended
September 30, 1996, one of the products sold by the Company was a proprietary
switchless unbundled phone card. Under this arrangement, the Company negotiated
and was responsible to the long distance carriers and platform provider for the
long distance usage and related platform fee charges incurred in connection with
providing service to the end users (unlike the bundled products whereby the
Company is acting as a distributor of phone cards). Since the Company was not
liable for the usage and platform fees on the underlying traffic until it was
consumed by the end user, the Company was required to record deferred revenue
for any unused time on cards sold.
The Company believes that its ability to negotiate competitive rates with its
long distance providers, to create brand awareness and to connect with certain
ethnic markets are the primary reasons for its sales increases in fiscal 1997
and for the three and six months ended December 31, 1997 as compared to the
three and six months ended December 31, 1996. While the Company has been able to
negotiate fair and competitive rates from its long distance providers, the
Company intends to lessen its dependence on such providers to a certain
14
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
extent through the construction of its own platforms. As a result of the
deployment of the Company's own platforms, the Company would look to negotiate
more competitive rates with its long distance providers. Based on the Company's
cost analysis, the total cost per call under the platforms is expected to be
less than the bundled card product that it presently purchases. This is expected
to have positive impact on the Company's gross margins as well as its cash
generated from operations. The Company may continue to purchase the cards as a
bundled product. The Company is presently negotiating for the construction of
its platforms; however, it has not yet entered into any definitive agreements
related to the purchase of such equipment to date or the related financing of
such equipment.
Three Months Ended December 31, 1997 Compared to
Three Months Ended December 31, 1996
Sales. Sales for the three months ended December 31, 1997 increased by
$9,301,885 or 436.5% over the second quarter of the prior year. For the three
months ended December 31, 1996, the Company's sales were $2,130,845 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
December 31, 1997 were $11,432,730. Sales for the second quarter of fiscal 1998
were impacted by the Company altering its relationship with a master distributor
who 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 terminated the exclusivity clause in the agreement with this master
distributor. This master distributor accounted for 8% of sales for the three
months ended December 31, 1997. 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.
Cost of Sales. The Company's cost of sales for the three months ended December
31, 1997 increased to $10,943,831 from $2,028,600 for the three months ended
December 31, 1996. The increase of $8,915,231 or 439.4% was primarily related to
the increase in revenues that the Company experienced in the three months ended
December 31, 1997 as compared to the second quarter in the prior year.
15
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Gross Profit. Gross profit for the three months ended December 31, 1997 was
$488,899 as compared to a gross profit of $102,245 for the three months ended
December 31, 1996. While the Company's gross profit as a percentage of sales was
in line with the three months ended December 31, 1996, it decreased as compared
to the three months ended September 30, 1997. The decrease resulted from the
Company increasing its discounts to sub-distributors to generate sales in order
to try to maintain its market share as it moved away from its significant master
distributor (See Sales above). The Company anticipates that it will increase its
rates to its customers as it evaluates its relationship with its
sub-distributors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended December 31, 1997 increased
to $1,222,451 from $369,584 for the three months ended December 31, 1996. This
increase of $852,867 or 230.8% is primarily related to the increase in volume
over the three months ended December 31, 1996 and 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.
Salaries and personnel related expenses increased by $328,851 as the Company's
employees increased to 68 full-time employees by December 31, 1997. 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 in the
later half of fiscal 1998.
The Company's rent expense increased by $40,444 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 $152,115, $63,268, $28,864, $24,857, and $23,281, respectively,
primarily related to an increase in the Company's business. The Company's
professional fees also increased by $54,064 primarily due to having increased
needs for accounting and corporate consulting. Amortization related to
intangibles increased by $51,297 primarily due to the acquisition of customer
bases during fiscal 1997. Administrative field expenses increased to $55,752 for
the three months ended December 31, 1997 as the Company expanded its field
routes to retail locations. The Company also incurred $28,366 related to
shareholder relations and filing expenses incurred in connection with complying
with the reporting regulations promulgated by the Securities and Exchange
Commission ("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.
16
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Loss from Continuing Operations. The increase in loss from continuing operations
of $466,213 for the three months ended December 31, 1997 as compared to December
31, 1996 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 recognized a net
loss from the operations of the cellular division of $371,380 for the three
months ended December 31, 1997. At December 31, 1997, the Company recorded
$75,000 for the estimated additional loss of abandoning the cellular operations.
The operations of the cellular division were completely discontinued by February
1, 1998.
Six Months Ended December 31, 1997
Compared to Six Months Ended December 31, 1996
Sales. Sales for the six months ended December 31, 1997 increased by $19,949,897
or 427.8% over the six months ended December 31, 1996. For the six months ended
December 31, 1996, the Company's sales were $4,663,146 primarily due to the
Company introducing its first Company branded, bundled products (cards purchased
from a provider) during the first quarter of fiscal 1997 and also competing in a
highly competitive marketplace. Further, the Company terminated selling its own
switchless unbundled products (platform switching and minutes provided by an
independent third party), which were both unreliable and not competitively
priced, and selling other competitors' cards which it had done during fiscal
1996.
During the second quarter of fiscal 1997, the Company negotiated an agreement
with Frontier. 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 six months ended December 31,1997 were $24,613,043.
Sales for the first half of fiscal 1998 were impacted by the Company altering
its relationship with a master distributor who 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 terminated the
exclusivity clause in the agreement with this master distributor. This master
distributor accounted for 26% of sales during the six months ended December 31,
1997. 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.
Cost of Sales. The Company's cost of sales for the six months ended December 31,
1997 increased to $22,959,045 from $4,652,319 for the six months ended December
31, 1996. The increase of $18,306,726
17
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
or 393.5% was primarily related to the increase in revenues that the Company
experienced in the three months ended December 31, 1997 as compared to the same
period in the prior year.
Gross Profit. Gross profit for the six months ended December 31, 1997 was
$1,653,998 as compared to a gross profit of $10,827 for the six months ended
December 31, 1996. During the first quarter of fiscal 1997, the Company
terminated its switchless unbundled phone card since it had taken numerous
returns for cards that it had sold in that quarter that were unreliable. 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 six months ended December 31, 1997, 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 six months ended December 31, 1997 increased to
$2,069,674 from $666,850 for the six months ended December 31, 1996. This
increase of $1,402,824 or 210.4% is primarily related to the increase in volume
over the six months ended December 31, 1996 and 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.
Salaries and personnel related expenses increased by $553,153 as the Company's
employees increased to 68 full-time employees by December 31, 1997. 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 in the
later half of fiscal 1998.
The Company's rent expense increased by $85,570 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 $210,419, $76,711, $55,926, $43,437, $55,466 and
$28,484, respectively, primarily related to an increase in the Company's
business. The Company's professional fees also increased by $135,935 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 $74,782 for the
six months ended December 31, 1997 as the Company expanded its field routes to
retail locations. Amortization related to intangibles increased by $94,162
primarily due to the acquisition of customer bases during fiscal 1997. The
Company also incurred $28,366 related to shareholder relations and filing
expenses incurred in connection with complying with the reporting regulations
promulgated by the Securities and Exchange Commission ("SEC"). During fiscal
1997, the Company was
18
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
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 decrease in loss from continuing operations
of $240,347 for the six months ended December 31, 1997 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 six months
ended December 31, 1997. 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 six months ended December 31, 1997. At
December 31, 1997 the Company recorded $75,000 for the estimated additional loss
of abandoning the cellular operations. The operations of the cellular division
were completely discontinued by February 1, 1998.
Liquidity and Capital Resources
The Company has financed its operations through certain equity transactions
completed in fiscal 1996, the exercise of warrants in fiscal 1997 and the six
months ended December 31, 1997 and through operating cash flow. The Company has
plans to expand its lines of business and to put its own switching platforms in
place, however, consummation of those plans will be dependent on its ability to
raise financing.
19
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
The Company's major components of cash flows are as follows:
Six Months Ended December 31,
-----------------------------
1997 1996
========= =========
Net cash used in operating activities $(811,116) $(675,784)
Net cash (used in) provided by investing
activities (72,442) 221,273
Net cash provided by financing activities 332,578 --
--------- ---------
Net decrease in cash $(550,980) $(454,511)
========= =========
Net cash used by operating activities during the six months ended December 31,
1997 was $811,116 as compared to $675,784 for the six months ended December 31,
e1996. The increase of $135,332 is primarily related to a net loss of $1,123,291
for the six months ended December 31, 1997 as compared to the net loss of
$656,023 for the six months ended December 31, 1996. Further, non-cash charges
had a net increase of $681,169 of which the largest was for the reduction of
deferred income as of December 31, 1996, 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 $94,162 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, inventory and accounts payable and other
liabilities of $1,784,407, $430,202 and $2,770,662, respectively. Prepaid
expenses and other assets had a net increase of $609,386, 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.
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 six months ended December 31, 1996.
The increase in cash provided by financing activities of $332,578 is primarily
related to the exercise of warrants to purchase 206,383 shares of the Company's
Common Stock at $1.50 per share.
In April of 1996, the Company entered into an agreement whereby it enabled the
Company to issue warrants to purchase an aggregate of 4,203,124 shares of its
Common Stock to four individuals and six corporations in exchange for trade
secrets, customer bases and other intangible property. Warrants to purchase
3,677,082 shares of the Company's Common Stock were actually issued. The
remaining warrants to purchase 526,042 shares of Common Stock were held awaiting
the delivery of certain assets to the Company. Those assets were
20
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
never received and the Company never issued the warrants to the three parties.
Of the warrants issued, warrants to purchase 1,333,334 and 1,495,782 shares of
Common Stock are exercisable at $13.20 and $1.50 per share, respectively. The
warrants have a term of five years commencing April 23, 1996 and are callable by
the Company, upon 30 days notice, at a call price of $.10 per warrant to
purchase one share. As of February 10, 1998, 847,966 shares of Common Stock have
been issued related to the exercise of warrants at $1.50 per share.
To date, capital expenditures have not been material. However, if the Company is
capable of obtaining financing to fund the purchase of equipment and software
related to switching platforms, the Company plans to purchase $1,200,000 of such
equipment and software by June 30, 1998, and would look to purchase an
additional $3,000,000 of equipment and software by December 31, 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.
The Company believes that its current cash requirements can be funded by its
operations for the next twelve months. However, its plans to acquire the
switching platforms, which would eventually impact its gross margins in a
positive manner, and to continue to grow its core line of business will be
contingent on its ability to raise additional financing.
Seasonality
The business of the Company does not experience significant seasonality.
Inflation
Management does not believe that inflation has had, or is expected to have, any
significant adverse impact on the Company's financial condition or results of
operations.
21
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 established a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. The Company adopted the employee stock-based compensation provision
of SFAS No. 123 by disclosing the pro forma net income and pro forma net income
per share amounts, assuming the fair value method was adopted July 1, 1995. The
adoption of this standard did not impact the Company's consolidated results of
operations, financial position or cash flow.
In December 1996, the FASB issued SFAS No. 128, "Earnings Per Share", which is
effective for both interim and annual periods ending after December 15, 1997.
SFAS No. 128 requires all prior period earnings per share data to be restated to
conform to the provisions of the statement. The adoption of this standard did
not have a material effect on the Company's earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which established standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by, or
distributions to, owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
SFAS No. 130, effective for all years beginning after December 31, 1997,
requires comparative information for earlier years and early adoption is
permitted. The Company intends to adopt SFAS No. 130 effective July 1, 1998.
Results of operations and financial position will be unaffected by
implementation of this standard.
The Year 2000 Issue
Many existing computer programs use only two digits to identify a year in
their date fields. These programs were designed and developed without
considering the impact of the upcoming change in the century (the "Year 2000
Issue"). If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. The Company is not currently utilizing
any integrated software which will be significantly impacted by the Year 2000
Issue. As a result, the Company does not anticipate any significant expense in
ensuring that the Company has adequately provided for any corrections to its
existing hardware or software. Furthermore, the Company is currently evaluating
an upgrade of its financial and accounting software and has obtained
documentation from vendors of such software supporting that the Year 2000 Issue
has been addressed.
22
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Risk Factors
Dependence on Long Distance Provider
The Company currently depends upon Premiere and Frontier to provide the Company
with the bundled prepaid phone cards that it resells to its customers. The
Company's ability to resell the phone cards depends upon whether it can continue
to maintain a favorable relationship with its providers. The Company's long
distance providers may terminate upon breach of certain conditions. Although the
Company believes that the likelihood of such a termination is remote, the
Company does not have a specific contingency arrangement in place to provide for
such termination.
Competition
The prepaid or debit card sector of the long distance market is highly
competitive and is affected by the constant introduction of new cards and
services by industry participants. Competition in the prepaid card sector of the
long distance business is based upon pricing, customer service and perceived
reliability of the prepaid phone cards. Several of the Company's competitors are
substantially larger and have greater financial, technical and marketing
resources than the Company. The ability of the Company to compete effectively in
the prepaid sector of the long distance market will depend upon the Company's
continued ability to provide highly reliable phone cards at prices competitive
with, or lower than, those charged by its competitors.
Financing Requirements
To date, the Company remains undercapitalized and cannot finance its expansion
as quickly as opportunities arise. In order for the Company to be successful in
its current plans for expansion and to continue with its plans to construct its
own switching platforms, the Company will be required to obtain financing. There
can be no assurance that such financing will be available on acceptable terms,
or at all, to the Company.
Litigation
The Company and its Chief Executive Officer have been named as defendants in a
legal action in Mississippi in the case entitled Heritage Graphics,
Inc.("Heritage") vs. Telephone Electronics Corporation (see Part II, Item 1.
Legal Proceedings). The complaint alleges, among other things, that the
defendants breached a contractual agreement and conspired to have Heritage go
out of business. The complaint seeks damages of $500 million. The Company
believes that the case has no merit and intends to vigorously contest the
complaint. The case has been rescheduled to go to trial in August, 1998. There
is no assurance as to the outcome of the litigation. However, in the event of a
decision adverse to the Company, the Company's business, financial condition,
operating results and the Company's stockholders, could be materially adversely
23
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
affected. While the Company has an indemnification agreement with TEC which
calls for the Company to be indemnified for all claims regarding Heritage which
arose prior to January 20, 1996, it is unknown as of this date what impact it
will have in the event of a decision adverse to the Company.
Outstanding Warrants and Options
As of February 10, 1998, the Company had warrants and options outstanding to
purchase 3,491,616 shares of the Company's Common Stock at exercise prices
ranging from $1.50 to $14.50 per share and an average price of $5.51 per share.
Warrants and options outstanding for 3,113,837 shares of Common Stock are
immediately exercisable. To the extent that the outstanding warrants and options
are exercised, dilution to the interest of the Company's stockholders may occur.
Further, the terms upon which the Company will be able to obtain additional
equity capital may be adversely affected since the holders of the outstanding
warrants and options can be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain any needed capital on terms more
favorable to the Company than those provided by the outstanding warrants and
options.
Dependence on Key Personnel
The Company is dependent on its ability to retain and motivate high quality
personnel, especially its management and any key technical personnel that may be
needed in connection with the Company's plans to construct its own switching
platform. The loss of services of any of its executive officers or key employees
could have a material adverse effect on the business, operating results or
financial condition of the Company. The Company's future success also depends on
its continuing ability to identify, attract and hire qualified personnel as it
expands its lines of business. There can be no assurance that the Company will
be able to attract and hire qualified technical and managerial personnel in the
future. The inability to attract and retain the necessary personnel could have a
material adverse effect upon the Company's business, operating results or
financial condition.
Market Listing; Volatility of Stock Price
The Company's Common Stock is traded on the OTC Bulletin Board. To date, the
trading of the Company's Common Stock has been relatively illiquid with its
market price being subject to wide fluctuations. There can be no assurance that
an active public market for the Common Stock will develop or be sustained.
Further, the market price of the Company's Common Stock will most likely
continue to be highly volatile based on quarterly results of operations,
announcements of new products or lines of business by the Company or its
competitors or other events or factors.
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 heart of the complaint's allegations concerns
an alleged joint venture. Through the vehicle of this prospective
joint venture, the Company and others allegedly duped Heritage into
surrendering its trade secrets, its services, its intellectual
property, its expertise, etc., to the Company. The complaint alleges
that, in essence, the deal materialized, Heritage's owners never
received the stock, and Heritage was never "rolled into" a new
entity, TecLink, Inc. The complaint's lesser allegations are that
(i) defendants conspired to slander the business reputations of
Heritage and Tom Gould; and (ii) TEC and the Company are jointly and
severally liable to it for $268,245 worth of production work and
consulting services provided over the September to December 1995
time period. The plaintiffs seek damages of $500 million.
The Company is not aware of any evidence to support the plaintiffs'
claim of a joint venture. The Company believes that the plaintiffs'
claims are without merit. Further, the Company believes that its
counterclaims are sufficiently well grounded to offset any judgment
entered against the Company.
The case has been rescheduled to go to trial in August, 1998. While
the Company has an indemnification agreement with TEC which calls
for the Company to be indemnified for all claims regarding Heritage
which arose prior to January 20, 1996, it is unknown as of this date
what impact it will have in the event of a decision adverse to the
Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
25
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
Item 4. Submission of Matters to a Vote of Security Holders
(a) Not applicable;
(b) Not applicable;
(c) Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 2-Acquisition of Ameridial, Inc.
Exhibit 27-Financial Data Schedule.
(b) Reports on Form 8-K
None.
26
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 12, 1998 DigiTEC 2000, Inc.
-----------------------------------------
(Registrant)
By: /s/ Frank C. Magliato
-------------------------------------
Frank C. Magliato
Chief Executive Officer, President
and Director
By: /s/ Keith A. McGowan
-------------------------------------
Keith A. McGowan
Vice President of Finance
By: /s/ Diego E. Roca
-------------------------------------
Diego E. Roca
Vice President of Operations
and Secretary
27
AGREEMENT FOR THE ACQUISITION OF THE OUTSTANDING STOCK OF
AMERIDIAL, INC. BY DIGITEC 2000, INC
THIS AGREEMENT (the "Agreement") is effective as of October 31, 1997, by and
among DIGITEC 2000 (the "Purchaser"), a Nevada corporation with offices at 8
West 38th Street, 5th Floor, New York, New York, 10018, and all of the
Shareholders of Ameridial, Inc., whose names, addresses and signatures are set
forth on Schedule 1 hereto (collectively, the "Selling Shareholders"). The
Selling Shareholders collectively own 100% of the issued and outstanding shares
(the "Ameridial Shares") of stock in Ameridial.
The parties agree as follows:
SECTION 1. Purchase and Sale
1.1 Sale of Ameridial Shares. Subject to all of the terms and conditions of this
Agreement, simultaneously upon execution of this Agreement, each of the Selling
Shareholders hereby agrees to sell, assign, transfer and convey to Purchaser,
and Purchaser agrees to accept and purchase, for the consideration below, all of
such Shareholder's right, title and interest in and to Ameridial Shares.
Simultaneously upon the execution of this Agreement, each of the Selling
Shareholders shall deliver to Purchaser certificates representing all Ameridial
Shares owned by such Shareholder and Purchaser shall deliver the payments
described below. It is understood that Purchaser will not proceed hereunder
unless and until David Siegel and Peter Zeppieri have entered into satisfactory
employment agreements with Purchaser and the current officers and directors of
Ameridial have resigned such positions.
SECTION 2 Consideration
2.1 Consideration. As consideration for the sale of Ameridial Shares, Purchaser,
upon its receipt of the Ameridial Shares, duly endorsed for transfer, shall pay
to the Selling Shareholders 52,632 shares ("DigiTEC Shares") of DigiTEC 2000,
Inc. common stock, $.001 par value, having an aggregate "Market Value" of
$500,000. Market Value shall mean $9.50 per share of DigiTEC, Inc. Common Stock,
the closing price as quoted on the applicable trading system on October 31,
1997. DigiTEC shall deliver an aggregate 44,737 of the DigiTEC Shares on the
closing date to the Selling Shareholders. The remaining 7,895 of the DigiTEC
Shares ("Escrow Payment") shall be retained by DigiTEC under the escrow in
Section 2.2. The DigiTEC Shares shall be issued to the Selling Shareholders in
proportion to the number of Ameridial Shares held by each such Shareholder in
relation to the aggregate number of Ameridial Shares outstanding as of the date
hereof. The DigiTEC Shares to be delivered on the closing date shall be
registered in the names of the Selling Shareholders, as appropriate, provided,
however, that each Selling Shareholder shall execute a blank stock power for the
shares constituting the Escrow Payment.
2.2 Escrow
In the event that Purchaser, within the one (1) year period following the
closing date ("Escrow Period"), is subject to any claims, liabilities, losses,
costs, damages, or expenses (including, without limitation, reasonable counsel
fees incurred in litigation, investigation or otherwise) due to the breach of
any of Selling Shareholders' representations, warranties or agreements contained
herein or in any certification, schedule, exhibit or writing delivered pursuant
hereto, Purchaser, upon ten days' written notice thereof to the Selling
Shareholders, shall be entitled to receive from the Escrow Payment the number of
DigiTEC shares having the aggregate Market Value equal to the amount of any such
damages Purchaser sustains or reasonably believes it will sustain as a result of
any such breach. For example, if Purchaser incurs a loss of $10,000, then
Purchaser would be entitled to
<PAGE>
receive 1,000 DigiTEC Shares. Any DigiTEC Shares to which Purchaser becomes
entitled to under this Section shall be paid to the Purchaser by the Selling
Shareholders in proportion to the number of Ameridial Shares held by each such
Shareholder in relation to the aggregate number of Ameridial Shares outstanding
as of the date hereof. Within ten (10) days after the end of the Escrow Period,
any remaining Escrow Payment shall be delivered to the Selling Shareholders. The
existence of this escrow provision shall not in any way limit or reduce the
rights of the Purchaser to otherwise proceed against the Selling Shareholders
for indemnity or for any breaches of this Agreement.
2.3 Acknowledgements.
(a) Investment Nature of DigiTEC Shares. As a condition to the Purchaser's
issuance of the DigiTEC Shares, each Shareholder acknowledges that (i) he is
acquiring the DigiTEC shares for his own account for investment only; (ii) he
has substantial experience and knowledge in financial and business matters, or
is relying on his own advisors, in order to evaluate the merits and risks of an
investment in the DigiTEC Shares; (iii) he has been furnished with and received
information with respect to all matters he considers material to the decision to
enter into this Agreement and has relied solely upon independent investigations
in making the decision to enter into this Agreement. No oral or written
statement or inducement which is contrary to such information has been made by
or on behalf of DigiTEC.
(b) Restricted Nature of DigiTEC Shares. The Selling Shareholders hereby
acknowledge that the DigiTEC Shares are subject to the following: (i) The
Selling Shareholders may not, directly or indirectly, offer, sell, transfer,
assign, pledge, hypothecate or otherwise dispose of the DigiTEC Shares (or
solicit any offers to purchase or otherwise acquire or take a pledge of the
DigiTEC Shares), except pursuant to (A) an effective registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), and the
rules and regulations thereunder and (B) an effective registration statement or
qualification under applicable "Blue Sky" state securities laws (the "Blue Sky
Laws"), or unless the Selling Shareholders shall have delivered to Purchaser an
opinion of counsel, which opinion and counsel shall be satisfactory to the
Purchaser, to the effect that no registration statement or qualification is
required because of the availability of exemptions from registration and/or
qualification under the Securities Act and the Blue Sky Laws.
(c) No Registration of the DigiTEC Shares. The Selling Shareholders understand
that: (i) the offer and sale of the DigiTEC Shares has not been registered under
the Securities Act or registered or qualified under the Blue Sky Laws as of the
date of this Agreement; (ii) each of the Selling Shareholders must continue to
bear the economic risk in the investment in the DigiTEC Shares before such
period of time until the offer and sale of the DigiTEC Shares is subsequently
registered and/or qualified under the Securities Law and any applicable Blue Sky
Laws or an exemption from such registration and/or qualification is available;
(iii) there can be no assurance that the offer and sale of DigiTEC Shares will
be registered and/or qualified under the Securities Act or any applicable Blue
Sky Laws at any time; (iv) when and if the DigiTEC Shares may be disposed of
without registration in reliance upon Rule 144 of the Securities Act ("Rule
144"), the offer and sale of the DigiTEC Shares may not qualify under Rule 144
since dispositions under such Rule can be made only in limited amounts and in
accordance with the terms and conditions of such Rule; (v) if the exemption
afforded by Rule 144 is not available, public offer or sale of the DigiTEC
Shares without registration will require the availability of an exemption under
the Securities Act; (vi) a restrictive legend in substantially the form below
shall be placed upon the DigiTEC Shares; and (vii) a notation shall be made in
the appropriate records of Purchaser indicated that such DigiTEC Shares are
2
<PAGE>
subject to restrictions on transfer and appropriate stop-transfer instructions
will be issued to the transfer agent of the Purchaser with respect to such
DigiTEC Shares.
(d) Legend on DigiTEC Shares. The Selling Shareholders understand that the
DigiTEC Shares shall bear a legend in substantially the following form:
THE SHARES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). SUCH
SHARES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR, UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY
TO THE ISSUER, IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER, SUCH
OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION
OR IS OTHERWISE IN COMPLIANCE WITH THE ACT AND SUCH LAWS.
SECTION 3. Representations, Warranties and Covenants of the Selling Shareholders
Each of the Selling Shareholders hereby jointly and severally represent, warrant
and covenant to the Purchaser, as follows as of the date of this Agreement and
forever after:
(a) Organization and Authorization; Licenses. Ameridial is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Ameridial has all requisite corporate power
and authority to own its property and to conduct its business as now conducted.
Ameridial possesses adequate licenses, clearances, ratings, permits and
franchises, and all rights with respect thereto, to conduct its business
substantially as now conducted, without any conflict with the rights of others
in any such license, clearance, rating, permit or franchise.
(b) Capitalization. As of the date hereof, the number of issued and outstanding
Ameridial Shares is 10 shares. All authorized and issued shares of Ameridial
have been validly authorized and issued, and are fully paid and non-assessable.
There are no outstanding notes, stock, options, warrants, rights, calls,
commitments, conversion rights, plans, arrangements or other agreements of any
character providing for the issuance of any authorized but unissued shares of
Ameridial. No person has any preemptive rights to acquire any capital stock of
Ameridial. Ameridial shares have neither been issued nor are owned or held in
violation of any preemptive rights of any person.
(c) Clear Title to Ameridial Shares. Each of the Selling Shareholders, on the
date hereof, is the lawful record and beneficial owner of his Ameridial Shares,
free and clear of all claims, mortgages, pledges, liens, encumbrances, security
interests and adverse interest of every nature whatsoever and has the absolute
right, power and capacity to sell, assign and deliver his Ameridial Shares to
Purchaser, free and clear of all liens, claims, encumbrances and restrictions.
(d) Financial Statements. Attached hereto as Schedule 3(d) is the balance sheet
of Ameridial dated as of October 31, 1997 ("Financial Statements"). The
Financial Statements fairly and accurately present the assets, liabilities,
shareholders' equity and financial position of Ameridial as of the dates
thereof, contain no material misstatements or omissions and contain and reflect
all necessary adjustments for a fair presentation of the financial conditions of
Ameridial as of such date. Since the
3
<PAGE>
date of the Financial Statements, Ameridial has conducted its business in the
ordinary course of business consistent with past practices.
(e) Litigation; Insolvency; Statutory Violations. There is no litigation, at law
or in equity, or proceeding before any governmental body or any arbitration,
suits, investigations pending, or, to the knowledge of Ameridial or the Selling
Shareholders, threatened against or relating to any of the Selling Shareholders
or Ameridial. Ameridial is not the subject of any existing, pending or
threatened insolvency or bankruptcy proceedings under the laws of any
jurisdiction. The consummation of the transactions contemplated by this
Agreement will not result in any Selling Shareholder or Ameridial being the
subject of such proceedings. Neither any of the Selling Shareholders nor
Ameridial is in violation of any law, statute, permits or any rule or regulation
of any governmental body (including, without limitation, statutes, rules and
regulations relating to environmental standards or controls), the violation of
which would have a material adverse effect on Ameridial.
(f) Absence of Undisclosed Liabilities. Ameridial has no liabilities or
obligations, accrued or contingent (whether or not required to be disclosed on
the Financial Statements, in accordance with generally accepted accounting
principles), other than (i) liabilities and obligations which are stated or
provided for in the Financial Statements and which continue to exist on the date
hereof, (ii) liabilities and obligations incurred by Ameridial in the ordinary
course of business subsequent to the last date of the Financial Statements and
prior to the date hereof, (iii) liabilities and obligations specifically
referred to or disclosed herein, and (iv) liabilities and obligations of
Ameridial under agreements, operating and service contracts and commitments
entered into in the ordinary course of business prior or subsequent to the last
date of the Financial Statements, not referred to in (i), (ii) or (iii) above
and which, in the aggregate, do not involve more than $5,000 in the aggregate.
Since the date of the Financial Statements, Ameridial has not (A) incurred or
become subject to, or agreed to incur or become subject to, any material
obligation or liability, absolute or contingent, except liabilities incurred in
the ordinary course of business and, to the extent required under generally
accepted accounting principles consistently applied, reflected in Financial
Statements if incurred prior to that time; (B) mortgaged, pledged or subjected
to lien, charge or other encumbrance, or agreed to do so, any assets, tangible
or intangible other than purchase money liens on equipment incurred to finance
the purchase price of the equipment involved and which do not cover any other
asset of Ameridial; (C) engaged in any transactions affecting its business or
properties not in the ordinary course of business except as contemplated hereby,
or suffered any extraordinary losses or waived any rights of substantial value
except in the ordinary course of business; (D) granted or agreed to grant, or
paid or agreed to pay, any increase in the rate of wages, salaries, bonuses or
other remuneration of any employee or become a party to any employment contract
or arrangement with any of its directors, officers or employees (other than
ordinary wage increases granted to employees following the completion of
existing probationary, trial or review employment periods) or become a party to
any contract or arrangement with any officer or employee providing for bonuses,
profit sharing payments, severance pay or retirement benefits; (E) declared or
paid any dividend or made any distribution to Selling Shareholders or issued or
sold any of its shares of capital stock or securities exchangeable, convertible
or exercisable therefor; (F) changed accounting methods or practices; or (G)
amended or terminated any material contract, agreement or license to which
Ameridial is a party or by which it is bound.
(g) Taxes. As used herein, "Taxes" shall mean all taxes, assessments, charges,
duties, fees, levies or other governmental charges (including interest,
penalties or additions associated therewith) including federal, state, city,
county, foreign or other income, franchise, capital stock, real property,
4
<PAGE>
personal property, tangible, withholding, FICA, unemployment compensation,
disability, transfer, sales, use, excise, gross receipts and all other taxes of
any kind for which the Seller may have any liability imposed by the United
States or any state, county, city, or other taxing agency or jurisdiction
therein, or by any other country or foreign government or subdivision or agency
thereof, whether disputed or not. All returns and reports of every kind with
respect to Taxes, which are due to have been filed in accordance with any
applicable law on or before the date hereof, have been duly filed and are
correct and complete in all material respects; all Taxes (including, without
limitation, all tax deposits) for which Ameridial has any liability and which
are required to have been paid on or before the date hereof have been paid in
full, the amounts accrued as liabilities for Taxes (whether accrued as currently
payable or deferred Taxes) on the books of Ameridial and reflected in the
Financial Statements are adequate to satisfy all unpaid liabilities for Taxes of
Ameridial through the date of this Agreement, including Taxes accruable upon
income earned through that date; there are not now any extensions of time in
effect with respect to the dates on which any returns or reports of Taxes were
or are due to be filed; all deficiencies asserted as a result of any examination
of any return or report of Taxes have been paid in full, accrued on the books of
Ameridial, or finally settled, and no issue has been raised in any such
examination which, by application of the same or similar principles, reasonably
could be expected to result in a proposed deficiency for any other period
through the date hereof not so examined; no claims have been asserted, and no
proposals or deficiencies for any Taxes are being asserted, proposed or
threatened, and no audit or investigation of any return or report of Taxes is
currently underway, pending or threatened; none of Ameridial or Selling
Shareholders have entered into any outstanding waivers or agreements for the
extension of time for the assessment of any Taxes or deficiencies thereof, nor
are there any requests for rulings, nor are there any outstanding subpoenas or
requests for information, notices of proposed reassessment of any property owned
or leased by Ameridial thereof, or any other matter pending between Ameridial
and any taxing authority; and there are no liens for Taxes upon any property or
assets of Ameridial except liens for current Taxes not yet due, nor are there
any liens which are pending or threatened. Ameridial has delivered to the
Purchaser true and complete copies of all federal, state and foreign income tax
returns (together with any Revenue Agent's Reports) filed by it relating to the
operations of Ameridial for the taxable years requested by the Purchaser.
Ameridial has previously made available to the Purchaser any information
relating to circumstances under which Ameridial could reasonably be expected to
have exposure for additional Taxes.
(h) Good Title; Valid Leaseholds. Ameridial has good and marketable title to, or
valid leasehold interests in, all of its assets, including, without limitation,
its customer list, subject to no liens except as shown on its Financial
Statements. The assets shown on the Financial Statements constitute all of the
properties, assets, rights, contracts, leases, easements, permits, licenses and
real and personal property heretofore utilized by Ameridial in the conduct of
its operations. The real and personal property owned or leased by Ameridial,
including, without limitation, all equipment and machinery of Ameridial, is in
good order and proper repair. None of the Selling Shareholders nor any third
party owns or has any rights in or to any assets or property used to carry on
the business or operations of Ameridial, including, without limitation, its
customer list. Such of the assets as constitute inventory are on the date hereof
in good condition. Ameridial has good and marketable title to the machinery and
equipment, merchandise, materials, supplies and other property of every kind,
tangible or intangible, which are shown as assets on the Financial Statements,
free and clear of all claims, liens, mortgages, pledges, security interests,
encumbrances or charges of any kind. Ameridial has complied with all obligations
under all material leases to which it is a party and under which it is in
occupancy or possession and all such leases are in full force and effect.
Ameridial enjoys peaceful and undisturbed possession under such leases.
5
<PAGE>
(i) No Default or Event of Default. There exists no event or condition which
constitutes a default under any material mortgage, indenture, lease, contract,
agreement, instrument, judgment, decree, or order to which Ameridial is a party
or by which it or any of its properties is bound. No such mortgage, indenture,
lease, contract, agreement, instrument, judgment, decree or order limits in any
material way the freedom of any person or entity acquiring control of Ameridial
from performing in accordance with its terms. Neither Ameridial nor any of the
Selling Shareholders has received any notice from any party to any such contract
with respect to such party's unwillingness or inability to perform thereunder.
(j) ERISA. Neither Ameridial nor any of its affiliates maintains or contributes
to any employee pension benefit plan within the meaning of ERISA Section 3(2)
(including a Multiemployer Plan), that is covered by Title IV of ERISA or is
subject to the minimum funding standards under Code Section 412 and is
maintained by the Seller or any ERISA Affiliate.
(k) Agreements. Ameridial is not a party to any agreement or instrument or
subject to any corporate restriction that has or the performance or violation of
which could, on the date hereof, reasonably could be foreseen to have a material
adverse effect on Ameridial. Ameridial has delivered to Purchaser every fully or
partially executory agreement or purchase order pursuant to which Ameridial is
obligated to deliver goods or perform services, or pay for goods, services or
other property in amount in excess of $5,000 in respect of any one person,
including, without limitation, any agreement with present or former officers,
directors, consultants, agents, brokers, vendors, customers and or dealers of
any nature. True, correct and complete copies of all such agreements have been
delivered to the Purchaser.
(l) Hazardous Wastes. There are no outstanding or written notices received by
Ameridial from any governmental authority (federal, state or local) alleging
that any of its property or its business is in violation of any law, ordinance
or regulation relating to health, industrial hygiene or to the environment.
During the time in which Seller has had any right, title or interest in and to
its property or business, neither Ameridial, nor, to Ameridial's best knowledge,
any third party has used, generated, manufactured, stored or disposed of on the
property or transported to or from the Property any Hazardous Material (as
defined below) except for cleaning, maintenance and repair materials customarily
used in Ameridial's business and Seller has no actual knowledge that, at
any time, any party has used, generated, manufactured, stored or disposed of on
its property or transported to or from its property any Hazardous Material
except for cleaning, maintenance and repair materials customarily used in the
business. As used in this Agreement, the term "Hazardous Material" means any
substance, material or waste which is regulated as a hazardous or toxic
substance, material or waste by any state or local government or the United
States government. The term "Hazardous Material" includes, without limitation,
any material, substance or waste defined as "hazardous waste", "extremely
hazardous waste", "restricted hazardous waste", "hazardous substance",
"hazardous material", "toxic substance", "solid waste", or "pollutant or
contaminant" under any local, state or federal law; petroleum; asbestos; and
such other substances, materials and wastes which are or become regulated under
local, state or federal law, or which are classified as hazardous or toxic under
federal, state, or local laws or regulations.
(m) Insurance. Ameridial has delivered to Purchaser true and correct copies of
all policies or binders of insurance of Ameridial in force as of the date
hereof. No claims are pending under any such policies. Ameridial is not in
default with respect to any provisions contained in any such policy or binder,
nor has it failed to give any notice or present any claim under any such policy
or binder in due and timely fashion. There are no outstanding unpaid claims
under any such policy or binder, or
6
<PAGE>
claims for worker's compensation. Ameridial has not received notice of
cancellation or non-renewal of any such policy or binder.
(n) Employment Matters. (i) There are no employment, management or consulting
agreements, understandings or contracts between Ameridial and any person
including with respect to the payment of any bonuses or incentives. (ii) There
is neither pending nor threatened any labor dispute, strike or work stoppage
involving employees of Ameridial which affects or which may affect its business
or which may interfere with its continued operations. There are no union
organization efforts relating to employees of Ameridial or any representation
question involving recognition as a collective bargaining agent for any
employees of Ameridial. Ameridial has not been charged with any violation, nor
to the best of Ameridial's knowledge is Ameridial under investigation with
respect to, any charge by the National Labor Relations Board, the Equal
Employment Opportunity Commission, the Immigration and Naturalization Service,
the Department of Labor, the Occupational Safety and Health Review Commission,
the Internal Revenue Service, the Pension Benefit Guaranty Corporation, any
municipal human rights agencies, any wage and hour authority or any other
government agency, federal, state or local, concerning any potential or alleged
violation of state, federal or other applicable law or administrative
regulations, and Ameridial has not been threatened with any such charge or
investigation or lawsuit. To the best of Ameridial's knowledge, no wrongful
discharge, breach of implied contract, discrimination, wage and hour, workers'
compensation, unemployment or similar employment litigation by any person or
entity or agency, under any statute, code, law or ordinance, or based upon any
common law right or other right arising in law or equity, is pending or
threatened against Ameridial, nor does any basis therefor exist which could give
rise to a claim which could have a material adverse effect. (iii) Ameridial has
complied with all laws, regulations, wage orders and other administrative
rulings or orders regarding employment and employment practices and wages and
hours applicable to the operation of its assets, including, but not limited to,
all requirements and regulations under the Immigration Reform and Control Act of
1986 ("IRCA"), concerning review, collection and retention of evidence of
ability to live and work lawfully in the United States (including, but not
limited to "I-9" forms), and the Consolidated Omnibus Budget Reconciliation Act
of 1985 ("COBRA"), concerning notice of right and opportunity to continue group
health insurance coverage, if any, at favorable rates. Ameridial is not a party
to any collective bargaining agreements and its relations with its employees are
satisfactory. (iv) Ameridial has not received any oral or written notice of
violation of any law, decree, order or regulation applicable to it, including,
without limitation, those relating to employment practices (such as
discrimination, health and safety), including, without limitation, the federal
Occupational Safety and Health Act of 1970, as amended, and any similar state
legislation regulations, and environmental protection (such as air, water and
noise pollution) under any environmental laws.
(o) Subsidiaries. Ameridial owns no stock in any other corporation nor does it
have any proprietary interest or voting rights in the securities of any other
corporation, association or business organization.
(p) Full Disclosure. No financial statement, exhibit, schedule or document
required by this Agreement to be prepared and/or furnished by or on behalf of
Ameridial or any Selling Shareholder to the Purchaser in connection with this
Agreement or any agreement contemplated hereby or delivered pursuant hereto,
contained or contains any material misstatement of fact or omits to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Selling
Shareholders, and each of them, shall notify Purchaser promptly of the
occurrence of any event or the discovery of any fact to the contrary.
7
<PAGE>
SECTION 4. Representations, Warranties and Covenants of the Purchaser.
4.1 Representations, Warranties and Covenants of the Purchaser. The Purchaser
represents, warrants and covenants to each of the Selling Shareholders as
follows as of the date of this Agreement and forever after:
(a) Organization and Authorization. The Purchaser is a corporation duly
organized and validly existing under the laws of Nevada and has all requisite
power and authority to enter into this Agreement and the agreements contemplated
hereunder and to consummate the transactions contemplated hereby.
(b) Litigation; Observance of Orders. There are no actions, suits or proceedings
pending or threatened, nor is there any basis therefor against or affecting the
Purchaser in any court or before an arbitrator of any kind or before or by any
governmental body, which involves the possibility of materially and adversely
affecting the transactions contemplated by this Agreement or which in any way
might adversely affect the validity or enforceability of this Agreement or any
other agreement or instrument to which the Purchaser is or is to be a party
relating to the transactions contemplated hereby.
SECTION 5. Indemnity
5.1 By the Selling Shareholders. The Selling Shareholders, jointly and
severally, agree to indemnify and hold harmless the Purchaser from and against
all claims, liabilities, losses, costs, damages, or expenses (including, without
limitation, reasonable counsel fees incurred in litigation, investigation or
otherwise) sustained by the Purchaser due to the breach of any of Selling
Shareholders' representations, warranties or agreements contained herein or in
any certification, schedule, exhibit or writing delivered pursuant hereto. To be
entitled to indemnification, the Purchaser shall be required to make its claims
in writing, describing the nature of the claim in reasonable detail and shall
deliver the same by registered or certified mail, return receipt requested,
within the applicable period of limitation as prescribed by law. It is
understood and agreed that the foregoing provisions are in addition to the
rights of Purchaser set forth in Section 2.2 and that the rights granted under
Section 2.2 to Purchaser may be exercised without compliance with this Section.
The rights of indemnification provided for hereunder shall be cumulative with
any other right Purchaser may have or hereafter acquire under any law, any
provision of this Agreement, including, without limitation, Section 2.2, or
otherwise, and any rights may be asserted against any Selling Shareholder,
without regard to the rights Purchaser may have against any other person or
entity.
5.2 By Purchaser. The Purchaser agrees to indemnify and hold harmless the
Selling Shareholders from and against all claims, liabilities, losses, costs,
damages, or expenses (including, without limitation, reasonable counsel fees
incurred in litigation, investigation or otherwise) sustained by the Selling
Shareholders due to the breach of any of Purchaser's representations, warranties
or agreements contained herein or in any certification, schedule, exhibit or
writing delivered pursuant hereto. To be entitled to indemnification, the
Selling Shareholder shall be required to make its claims in writing, describing
the nature of the claim in reasonable detail and shall deliver the same by
registered or certified mail, return receipt requested, within the applicable
period of limitation as prescribed by law.
SECTION 6. Miscellaneous
8
<PAGE>
6.1 Brokers. All of the parties hereto represent and warrant to the others that
he or it has not employed or dealt with any broker in connection with any
transactions contemplated by this Agreement and shall save the other harmless
from any and all other claims at any time hereafter made for brokers' or
finders' fees or commissions, which claim or claims arise out of any agreement
alleged to have been made by the other, concerning or relating to the subject
matter of this Agreement.
6.2 Notices. All notices and other communications hereunder will be in writing
and will be given by delivery in person, telegram, telex, facsimile or other
standard form of telecommunications, or by registered or certified mail, return
receipt requested, to the parties at their respective addresses set forth above
and on Schedule 1 or to such other addresses as the recipient shall, by notice
given pursuant hereto, notify the other parties hereto.
6.3 Additional Documents. The Purchaser and the Selling Shareholders shall each
execute and deliver or cause to be executed and delivered such additional
instruments as any of the other parties may reasonably request for the purpose
of carrying out this Agreement. The Selling Shareholders shall cooperate and use
their best efforts to have the present officers, directors and employees of
Ameridial cooperate with the Purchaser, after the date hereof, in the collection
of accounts and notes receivable owing to Ameridial, and in furnishing
information, evidence, testimony and other assistance in connection with any
actions, proceedings, arrangements or disputes of any nature with respect to
matters pertaining to all periods prior to the date hereof.
6.4 Rights Confined to Parties. Nothing expressed or implied herein is intended
or shall be construed to confer upon or give to any person, other than the
parties hereto, and their successors and assigns as permitted hereunder, any
right, remedy, or claim under or by reason of this Agreement or of any term,
covenant, or condition hereto, and all the terms, covenants, conditions,
promises, and agreements contained herein shall be for the sole and exclusive
benefit of the parties hereto and their successors and assigns as permitted
hereunder.
6.5 Confidentiality. The parties hereto agree that the contents of this
Agreement shall be held in confidence; provided however that Purchaser shall
have the right to make such public announcements and filings as it may deem
appropriate to comply with applicable law.
6.6 Survival. The provisions of this Agreement, including, but not limited to,
all representations and warranties of the Purchaser and the Selling
Shareholders, shall survive the execution of this Agreement and the consummation
of the transactions contemplated herein.
6.7 Entire Agreement. This Agreement, together with the agreements entered into
in accordance with the terms hereof and contemplated hereby, constitute the
entire understanding between the parties hereto with respect to the subject
matter hereof and supersede any and all prior agreements between the parties
hereto with respect to the subject matter hereof. No amendment may be made to
this Agreement except by a writing signed by all parties.
6.8 Assignment. This Agreement is not assignable and any purported assignment
shall be null and void and of no effect.
6.09 Severability. This Agreement shall be deemed severable, and the invalidity
or unenforceability of any term or provision hereof shall not affect the
validity or enforceability of this Agreement or of any other term or provision
hereof. Furthermore, in lieu of any such invalid or unenforceable term or
provision, the parties hereto intend that there shall be added as a part of this
9
<PAGE>
Agreement a provision as similar in terms to such invalid or unenforceable
provision as may be possible and be valid and enforceable.
6.10 Effect of Headings. The Section and subsection headings contained herein
are for convenience only and shall not affect the construction hereof.
6.11 Governing Law. This Agreement shall be governed and construed in accordance
with the internal, substantive laws of the State of New York without giving
effect to the conflict of laws rules thereof and any action relating thereto
shall be brought exclusively in the state or federal courts of the State of New
York.
6.12 Counterparts. This Agreement may be executed in multiple counterparts, each
of which shall be deemed to be an original, and all such counterparts shall
constitute but one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers or other representatives thereunto duly authorized,
as of the date first above written.
DIGITEC 2000, INC.
By: /s/ Frank C. Magliato
-------------------------
Title: President and CEO
Date: 10/31/97
10
<PAGE>
SCHEDULE 1
AMERIDIAL, INC. SELLING SHAREHOLDERS:
David Siegel
11 Inverness Drive
New City, New York 10956
Social Security: 102 46 0858
Ameridial Shares: 4.75 shares
Percent of issued and
Outstanding
Ameridial Shares: 47.5%
/s/ David Siegel
- ----------------
Signature
Dated: 10/31/97
Peter Zeppieri
48 Davison Ave.
East Rockaway
NY NY 11518
Social Security: 125 36 7508
Ameridial Shares: 5.25 shares
Percent of issued and
Outstanding
Ameridial Shares: 52.5%
/s/ Peter Zeppieri
- ------------------
Signature
Dated: 10/31/97
<PAGE>
SCHEDULE 3(d)
FINANCIAL STATEMENTS
<PAGE>
Ameridial, Inc.
Balance Sheet
October 31, 1997
Assets:
Cash $ 60
========
Liabilities and Equity:
Common Stock 20,000
Accumulated Deficit (19,940)
--------
$ 60
========
Ameridial, Inc.
Statement of Operations
October 31, 1997
Revenues $ 4,400
Operating Expenses (24,340)
--------
Net Loss $(19,940)
========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet as of December 31, 1997 and the unaudited
consolidated statement of operations for the three months ended December 31,
1997 and is qualified in it's entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 176,217
<SECURITIES> 0
<RECEIVABLES> 3,766,771
<ALLOWANCES> 75,000
<INVENTORY> 964,932
<CURRENT-ASSETS> 5,018,957
<PP&E> 118,140
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,254,617
<CURRENT-LIABILITIES> 6,551,320
<BONDS> 0
0
0
<COMMON> 5,117
<OTHER-SE> (390,301)
<TOTAL-LIABILITY-AND-EQUITY> 6,254,617
<SALES> 11,432,730
<TOTAL-REVENUES> 11,432,730
<CGS> 10,943,831
<TOTAL-COSTS> 10,943,831
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (733,552)
<INCOME-TAX> 0
<INCOME-CONTINUING> (733,552)
<DISCONTINUED> (446,380)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,179,932)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet as of December 31, 1997 and the unaudited
consolidated statement of operations for the six months ended December 31, 1997
and is qualified in it's entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 176,217
<SECURITIES> 0
<RECEIVABLES> 3,766,771
<ALLOWANCES> 75,000
<INVENTORY> 964,932
<CURRENT-ASSETS> 5,018,957
<PP&E> 118,140
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,254,617
<CURRENT-LIABILITIES> 6,551,320
<BONDS> 0
0
0
<COMMON> 5,117
<OTHER-SE> (390,301)
<TOTAL-LIABILITY-AND-EQUITY> 6,254,617
<SALES> 24,613,043
<TOTAL-REVENUES> 24,613,043
<CGS> 22,959,045
<TOTAL-COSTS> 22,959,045
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (415,676)
<INCOME-TAX> 0
<INCOME-CONTINUING> (415,676)
<DISCONTINUED> (707,615)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,123,291)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
