As filed with the Securities and Exchange Commission on April 20, 1998
Registration Statement No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
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DIGITEC 2000, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 4813 54-1287957
(State or other jurisdiction (Primary standard (I.R.S. Employer
of incorporation or industrial classi- Identification no.)
organization) fication code number)
8 West 38th Street, Fifth Floor
New York, New York 10018
(212) 944-8888
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Frank C. Magliato
President and Chief Executive Officer
DIGITEC 2000, Inc.
8 West 38th Street, Fifth Floor
New York, New York 10018
(212) 944-8888
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Edward F. Cox, Esquire
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of Americas
New York, N.Y. 10036
(212) 336-2000
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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<CAPTION>
Calculation of Registration Fee
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Proposed Amount of
Title of each Class of Securities Amount to Be Offering Price Proposed Aggregate Registration Fee
to be Registered Registered per share(8) Offering Price (5)
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<S> <C> <C> <C> <C> <C>
Common Stock, $.001 par value(1) 2,291,498 shares $ 9.125(5) $ 20,909,919 $ 6,336.34
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Common Stock $.001 par value (2) 52,250 shares $ 9.125(5) $ 476,781.25 $ 144.48
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Common Stock, $.001 par value(3) 1,333,334 shares $ 9.125(5) $ 12,166,673 $ 3,686.87
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Common Stock, $.001 par value(4) 587,302 shares $ 9.125(5) $ 5,359,130.80 $ 1,623.98
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</TABLE>
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<TABLE>
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<S> <C> <C> <C> <C>
Total 4,264,384 shares $ 9.125(5) $38,912,504 $11,791.67
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</TABLE>
(1) The shares of Common Stock registered hereby represent the number of shares
of Common Stock issued upon exercise of certain of the Company's warrants to
purchase Common Stock, dated April 23, 1996, providing for the purchase of
shares of Common Stock at $1.50 per share (the "Exercised $1.50 Warrants").
(2) The shares of Common Stock registered hereby represent the number of shares
of Common Stock issuable upon exercise of the remaining outstanding warrants of
the Company to purchase Common Stock, dated April 23, 1996, providing for the
purchase of shares of Common Stock at $1.50 per share (the "Outstanding $1.50
Warrants," together with the Exercised $1.50 Warrants, the "$1.50 Warrants").
There is also being registered such indeterminate number of additional shares of
Common Stock as may be issuable upon or in connection with the Outstanding $1.50
Warrants as a consequence of adjustments to the exercise price pursuant to the
anti-dilution and other terms of the Outstanding $1.50 Warrants.
(3) The shares of Common Stock registered hereby represent the number of shares
issuable upon exercise of the Company's warrants to purchase Common Stock, dated
April 23, 1996, providing for the purchase of shares of Common Stock at $13.20
per share (the "13.20 Warrants"). There is also being registered such
indeterminate number of additional shares of Common Stock as may be issuable
upon or in connection with the $13.20 Warrants as a consequence of adjustments
to the exercise price pursuant to the antidilution and other terms of the $13.20
Warrants.
(4) The shares registered hereby represent the number of shares issuable upon
conversion of the Company's Series A Preferred Stock. There is also being
registered such undeterminate number of additional shares of Common Stock as may
be issuable upon or in connection with the conversion of the Series A Preferred
Stock as a consequence of adjustments to the conversion ratio pursuant to the
antidilution and other terms of the Series A Preferred Stock.
(5) Based on the average of the bid and ask price on the OTC Bulletin Board for
the Company's Common Stock on April 14, 1998.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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SUBJECT TO COMPLETION DATED APRIL __, 1998
PROSPECTUS
________, 1998
[INSERT LOGO]
DIGITEC 2000, INC.
4,264,384 SHARES OF COMMON STOCK
This Prospectus relates to (i) 2,291,498 shares of common stock, par value
$0.001 per share (the"Common Stock"), of Digitec 2000, Inc., a Nevada
corporation (the "Company"), issued upon the exercise of certain of the
Company's warrants to purchase Common Stock, dated April 23, 1996, providing for
the purchase of shares of Common Stock at $1.50 per share (the "Exercised $1.50
Warrants"); (ii) 52,250 shares of Common Stock issuable upon the exercise of
certain of the Company's remaining outstanding warrants to purchase Common
Stock, dated April 23, 1996, providing for the purchase of shares of Common
Stock at $1.50 per share (the "Outstanding $1.50 Warrants," together with the
Exercised $1.50 Warrants, the "$1.50 Warrants"); (iii) 1,333,334 shares of
Common Stock issuable upon the exercise of the Company's outstanding warrants to
purchase Common Stock, dated April 23, 1996, providing for the purchase of
shares of Common Stock at $13.20 per share (the "$13.20 Warrants"); and (iv)
587, 302 shares of Common Stock issuable upon conversion of the Series A
Preferred Stock, par value $.001 per share (the "Series A Preferred Stock") of
the Company. The $1.50 Warrants, the $13.20 Warrants, the Series A Preferred
Stock and the shares of Common Stock issued upon exercise of the Exercised $1.50
Warrants were originally issued in private placements to certain "accredited
investors" (as defined in Rule 501(a) under the Securities Act of 1933, as
amended (the "Securities Act)).
This offering (the "Offering") is not being underwritten. The shares of
Common Stock being offered hereunder have been registered for sale by Selling
Stockholders (as defined herein) pursuant to this Prospectus from time to time
to purchasers directly or through agents, brokers or dealers at market or
negotiated prices. Thus, the distribution of such shares of Common Stock may
occur over an extended period of time. See "Plan of Distribution." Since the
Common Stock registered hereunder is being offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act, the Company cannot include
herein information about the price to the public of the Common Stock or the
proceeds from any sales of the Common Stock by the Selling Stockholders. The
Company will not receive any proceeds of any sale of the shares Common Stock
made by the Selling Stockholders. The Company will receive the exercise price
upon the exercise of any Outstanding $1.50 Warrants and $13.20 Warrants.
The Selling Stockholders and any broker-dealer who acts in connection with
the sale of shares hereunder may be deemed to be "underwriters", as that term is
defined in the Securities Act , and any commission received by them and profit
on any resale of the shares of Common Stock as principal might be deemed to be
underwriting discounts and commissions under the Securities Act. The Selling
Stockholders will pay or assume brokerage commissions or underwriting discounts
incurred in connection with the sale of their shares of Common Stock, which
commissions or discounts will not be paid or assumed by the Company. See "Plan
of Distribution."
The Common Stock of the Company is currently trading on the OTC Bulletin Board
under the symbol of "DGTT".
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
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SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SEE "RISK FACTORS" BEGINNING ON PAGE 12, FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is _______________, 1998.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the shares of Common Stock
being offered by certain Selling Stockholders. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted pursuant to the
rules and regulations of the Commission. Statements made in this Prospectus as
to the contents of any contract, agreement or other document are not necessarily
complete. With respect to each such contract, agreement or other document filed
or incorporated by reference as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the matter
involved, and each such statement is qualified in its entirety by such
reference.
The Company is subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other information with the
Commission. The Registration Statement and reports and other information filed
by the Company, can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549; Suite 1400, 500 West Madison Street, Chicago, Illinois 60661; and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed fees.
The Commission also maintains a website that contains reports, proxy and
information statements and other information. The website address is
http://www.sec.gov.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed information
and the Company's consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. References in this Prospectus
to the "Company" and "DIGITEC" refer to DIGITEC 2000, Inc. and its subsidiaries,
except where the context otherwise requires. The information set forth in this
Prospectus includes "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. 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.
The Company
The Company is engaged in the creation, distribution, marketing and
management of consumer prepaid utility telephone cards ("Prepaid Phone Cards" or
"Cards"). The Company's principal products are the "F/X(R)" series ("F/X(R)")
and the "DigiTEC Direct(R)" series ("DigiTEC Direct(R)") of Cards, which were
introduced in May and December 1996, respectively. See "Company History". The
Company's Prepaid Phone Cards are marketed through an extensive network of
distributors, and the Company estimates that its products are currently
available in approximately 22,800 independent retail locations. The Company's
total revenues were $26,027,909 and $24,613,043, and its net losses were
$3,549,514 and $1,123,291 for the fiscal year ended June 30, 1997 and for the
six months ended December 31, 1997, respectively after losses from discontinued
operations of $1,069,261 and $707,615, respectively. The Company activated 4
million Prepaid Phone Cards and approximately 75 million minutes of
telecommunications services were provided during the six months ended December
31, 1997. See "Business."
The Company believes it is among the leading independent providers (those
companies not owned or controlled by a regulated telephone common carrier) of
Prepaid Phone Cards in the United States. The Company markets its Prepaid Phone
Cards as a convenient and competitive alternative to credit cards and
conventional coin and collect long distance services. The Company's target
markets include ethnic communities with substantial international long distance
usage. The Company believes that consumers typically use F/X(R) and DigiTEC
Direct(R) Cards as their primary means of making long distance calls due to (i)
competitive rates, (ii) reliable service, and (iii) the inability of a portion
of the Company's end users to attain the credit necessary to have pre-subscribed
or other types of long distance service. In the intensely competitive Prepaid
Phone Card market brand awareness is essential to commercial success. The
Company has developed and promoted its brand awareness by the design of its
Cards as well as the high level of service provided to the users of its Cards.
The Company currently distributes and markets its Prepaid Phone Cards through
approximately 150 distributors in 29 states in the United States (with its most
significant presence in the New York/New Jersey metropolitan area (the "Metro
Area"), Puerto Rico and the U.S. Virgin Islands.
The F/X(R) and DigiTEC Direct(R) Card users are provided with access to
local, domestic long distance and international telephone services through
toll-free calls directed to call processing platforms operated by Premiere
Communications, Inc. ("Premiere") primarily and Frontier Corporation
("Frontier"). The customer can use Prepaid Phone Cards at any touch tone
telephone simply by dialing the toll-free number, followed by a personal
identification number ("PIN") assigned to each Card and the telephone number the
customer wishes to reach. Prior to connection, the caller is informed of the
remaining dollar balance on the Card and the number of minutes available for
usage. Calls are completed by the switches operated by Premiere and Frontier
utilizing their long distance and local carriers and debiting the Card's dollar
balance.
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The Company currently depends primarily upon Premiere to provide the
Company with the bundled Prepaid Phone Cards that it resells to its customers.
The Company's ability to resell the Cards depends upon whether it can continue
to maintain a favorable relationship with its suppliers. The Company currently
purchases Cards in bulk at a discount below the face value of the Cards. It then
resells them to either independent distributors or to retail locations serviced
by its field representatives depending upon the locality of the distribution.
The Company receives its gross margin on the difference between discounts given
to customers and the discounts received from its suppliers. In September of
1997, the Company entered into two agreements with Premiere requiring the
Company to purchase Cards with an aggregate minimum face value of $81,000,000 at
discounts ranging from 23.5% to 41.75% off the face value of the Cards. Failure
to purchase the minimum value will result in the Company being required to pay
Premiere an amount equal to the retail value of the unsold Cards less the
applicable discount that would have been payable on such Cards. The agreements
provide for the extension of certain credit terms and expire upon the earlier of
September 1998 or six months after the last purchase of Prepaid Phone Cards.
Premiere may terminate upon breach of certain conditions. Although the Company
believes that the likelihood of such a termination is remote based upon its
current relationship with Premiere and the fact that Premiere became a 6.2
percent stockholder of the Company as of March 31, 1998, the Company does not
have a specific contingency arrangement in place to provide for such
termination. Although the Company does not have any arrangements in place for
the period subsequent to September of 1998, the Company believes that it will be
able to either renew its agreements or negotiate new ones on similar terms with
another supplier. See "Risk Factors-Dependence on Suppliers" and
"Business-Overview."
On March 31, 1998, the Company entered into an agreement with Premiere
(the "Investment Agreement") in which Premiere received 61,050 shares of $.001
par value voting Series A Preferred Stock, valued by the Board of Directors at
$6,105,093 which represented Premiere's outstanding accounts receivable balance
as of that date. The $6,105,093 included $4,636,981 which was attributable to
Cards purchased in the normal course of business with the $1,468,112
representing a one-time charge on March 31, 1998 from Premiere for extra minutes
processed by Premiere on Cards activated by the Company. The $1,468,112 was
charged to operations during the quarter ended March 31, 1998. The Series A
Preferred Stock is convertible into Common Stock at any time at Premier's option
and the Company has the right to require Premiere to convert the Series A
Preferred Stock after March 31, 1999. The Certificate of Designation for the
Series A Preferred Stock provides for certain voting, liquidation, and
registration rights and calculates the conversion by multiplying 61,050, the
number of shares of Series A Preferred Stock issued in connection with the
Investment Agreement, by $100, the Investment Amount, as defined in the
Certificate of Designation and then dividing by $10.395, the Conversion Price as
defined in the Certificate of Designation, resulting in a total of 587,302
shares of Common Stock to be issued under the Investment Agreement. The Company
may call the redemption of each share of Series A Preferred Stock at any time
for $100 a share plus accrued dividends.
The Company has recently begun to implement its strategy to become a
facilities-based carrier. On March 13, 1998 it entered into a Services Agreement
with Innovative Telecom Corporation ("Innovative") pursuant to which Innovative
has agreed to provide processing services for the Company's Prepaid Phone Cards
utilizing its switching facilities and platforms located at 60 Hudson Street,
New York, NY (the "Hudson Street Facility"). The Company is currently
negotiating contracts with local and long distance carriers to provide
origination, transport and termination services for its Prepaid Phone Cards. The
Company intends to continue to expand its dedicated telecommunications
facilities by acquiring points-of-presence ("POPs") in additional states. If the
Company successfully becomes a facilities-based carrier, it will receive
additional margin from one-minute rounding, breakage, unused time and monthly
access fees subject to applicable state escheat laws. See "Business-Growth
Strategy -- Facilities-Based Carrier."
While the Company has been able to negotiate fair and competitive rates
from its bundled product providers, the Company intends to lessen its dependence
on such providers through the use of facilities dedicated to the Company's use.
As a result of the deployment of the Company's own dedicated facilities, the
Company believes it will be able to negotiate more competitive rates with its
long distance providers. Based on the Company's cost analysis, the total cost
per call under the dedicated facilities is expected to be less than the bundled
Card product that it currently purchases. This is expected to have a positive
impact on the Company's gross margins as well as cash generated from operations.
The multi-billion dollar U.S. long distance telecommunications industry is
dominated by the nation's three largest long distance providers, AT&T, MCI and
Sprint, which together generated a significant majority of the aggregate
revenues of all U.S. long distance interexchange carriers. Other long distance
companies, some with national capabilities, accounted for the remainder of the
market. Based on published Federal Communications Commission ("FCC") estimates,
toll service revenues of U.S. long distance interexchange carriers have grown
from $38.8 billion in 1984 to $72.5 billion
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in 1995. The aggregate market share of all interexchange carriers other than
AT&T, MCI and Sprint has grown from 2.6% in 1984 to 17.1% in 1995. During the
same period, the market share of AT&T declined from 90.1% to 53%. The Company
believes that these changes in the telecommunications market have created
opportunities for the growth of niche market telecommunications providers such
as the Company.
The market for Prepaid Phone Cards has grown substantially, from an
estimated $25 million in 1992 to an estimated $1.5 billion in 1997, making it
one of the fastest growing segments of the telecommunications industry. Based on
industry reports by Salomon Smith Barney, the market is expected to grow to
approximately $5 billion by 2001. The Company has identified three distinct
segments of the Prepaid Phone Card market. These three segments are utility card
products, which are Prepaid Phone Cards sold in the retail market,
corporate/affinity card products and promotional card products. The Company
intends to continue to concentrate its efforts in the utility card market, and
as part of its growth strategy, it expects to expand into the corporate/affinity
market through selective acquisitions. However, there can be no assurance that
the Company will be able to identify or consummate such acquisitions.
Growth Strategy
The Company believes that it is well-positioned to capitalize on the
growth opportunities within the Prepaid Phone Card market as a result of (i)
brand awareness of the Company's established Cards; (ii) the Company's position
as a significant conduit of telecommunications traffic to various international
destinations; (iii) the Company's distribution network through which the Company
can market, distribute and sell new and existing products; (iv) the Company's
experience in identifying and marketing to ethnic communities and other
consumers in the United States with significant long distance usage
requirements; and (v) the Company's ability to take advantage of anticipated
consolidations in the telecommunications industry through selective
acquisitions.
In addition, the Company has identified the following strategies, in order
to (i) reduce its costs of providing services as a percentage of sales which
will allow the Company to increase its gross margins, and (ii) increase its
existing revenue base by increasing its market share in existing geographic
markets and penetrate new geographic markets:
Facilities-Based Carrier. The Company intends to become a facilities-based
carrier in order to migrate its traffic from the current bundled arrangements
pursuant to which it purchases services. By obtaining use of dedicated
facilities, the Company will significantly reduce the Company's dependence on
any one supplier. In addition, based on the Company's cost analysis, the total
cost per call under a dedicated platform arrangement is expected to be less than
the bundled Card product that it currently purchases. This is expected to have a
positive impact on the Company's gross margins as well as its cash generated
from operations. The Company intends its facilities to include (i) leased
capacity to connect the Company's proposed POPs, (ii) switches, network POPs and
debit card platforms in strategic geographic regions in the United States, and
(iii) direct termination agreements with telecommunications operators in
countries where the Company terminates a large number of minutes. The Company's
facilities strategy is to utilize the services of other platform providers until
the Company has developed substantial traffic volume in a geographic region. As
the market is developed, the Company would invest in network infrastructure in
that region, thus reducing the risks associated with such capital investment and
maximizing the efficiency of expanding its facilities.
The Company currently has a contract with Innovative expiring in June of
1999 pursuant to which Innovative has agreed to provide the Company with prepaid
switch and platform facilities located at the Hudson Street Facility. The
Company has not yet begun to offer servicing utilizing this capacity. Innovative
manages state-of-the art Excel(TM) switches for processing local and
long-distance traffic. The contract requires Innovative to process calls
initiated by the Company's Card holders and received from local and long
distance carriers and to present those calls for completion to designated local
and long distance carriers. All transport and carrier services must be provided
by the Company. The Company will purchase transmission services on a per-minute
basis and lease transmission capacity on a fixed-cost basis from a variety of
local and long distance carriers. The Company is currently negotiating terms for
those transport and carrier services and has begun to enter into termination
agreements with foreign telecommunications operators, but has not yet begun to
offer services under these agreements. Innovative will operate the Hudson Street
Facility, activating PINs (at the direction of the Company), debiting dollar
balances and generating reports and other information.
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There can be no assurance that the Company will be able to implement its
strategy to become a facilities-based carrier or that it will be able to obtain
and maintain favorable rates and terms for the origination, transportation and
termination of its customers' long distance traffic.
Expansion of the Company's Retail Distribution of the Company's Products.
The Company's Cards are currently sold in 29 states in the United States, Puerto
Rico and the U.S. Virgin Islands. The Company has a route distribution network
servicing approximately 2,800 retail locations, primarily in the Metro Area and
Phoenix, Arizona. As such, the Company's revenues are primarily generated though
independent distributors. The Company currently has approximately 150
independent distributors servicing approximately 20,000 retail locations. The
Company intends to increase its route distribution network by expanding its
coverage within the markets it currently serves and by extending this network
into new markets. The Company will also evaluate the possibility of acquiring
existing or new distributors to quickly gain a route distribution presence in a
new market.
Introduction of New Prepaid Phone Cards and Services. The Company intends
to introduce local access ("LAC") cards in all of the markets that it currently
services and in any markets into which the Company expands. Further, the Company
intends to continue to identify niches of the international and domestic long
distance market to offer new Prepaid Phone Cards, increasingly segmenting the
Prepaid Phone Card market. The Company believes that it will be able to
capitalize on its brand awareness and effectively market these products to new
and existing customers. The Company also intends to capitalize on its brand
awareness within certain ethnic communities in the United States by offering
international long distance services to consumers located in countries to which
its customers direct a substantial number of calls. In addition, the Company
also believes that it will expand the telecommunications services that it
currently offers by the following:
PhoneCard Wholesalers, Inc. The Company has signed a letter of intent to
acquire the customer base of PhoneCard Wholesalers, Inc. consisting of 64
distributors for a maximum of $750,000 in cash and shares of the Company's
Common Stock with a market value of $1,000,000 based upon the closing market
price of the Common Stock on the closing date of the acquisition.
College Enterprises Inc. The Company has executed a letter of agreement
with College Enterprises, Inc. ("CEI") pursuant to which it will offer
telecommunications services to certain universities and schools. CEI services
approximately 200 colleges and universities providing services such as meal
plans, copy services and educational material through the use of debit cards.
The Company plans to offer long distance telecommunications services as one of
the services available on the debit card distributed to CEI users. Currently,
the CEI data base includes approximately 800,000 students and faculty. The
Company believes that most of the traffic generated will be domestic long
distance service.
Carrier Services. On October 31, 1997, the Company acquired Ameridial,
Inc. ("Ameridial"). Ameridial was established to negotiate and resell rates
between international long distance carriers. The Company intends to negotiate
rates for international long distance services on its Prepaid Phone Cards as it
moves away from the bundled arrangements that it currently has with its
providers and to expand its services by selling and buying international long
distance services to and from other carriers. The Company believes that its
volume of telecommunications traffic will enable it to continue to negotiate
more favorable transmission rates and direct termination agreements with foreign
telecommunications operators which will also enable the Company to offer
attractive rates to other telecommunications providers.
Continue to Target Consumers with Significant International Long Distance
Usage. The Company primarily targets consumers with significant international
long distance usage by delivering reliable international long distance services
at competitive rates. The Company believes that the international long distance
market provides and will continue to provide an attractive opportunity given its
size and expected growth rate. The Company therefore intends to continue to
identify and market its services primarily to consumers with significant
international usage providers.
The Company evaluates on an ongoing basis potential acquisitions which
would enhance or expand its current operations and planned growth strategy.
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Introduction of Prepaid Cellular Phone Service. The 1997 total revenues
for the wireless industry were in excess of $23 billion, with in excess of 44
million cellular phone subscribers. Cellular analysts estimate that
approximately 30% of all applications for cellular service are initially denied
due to the applicant's credit history. This represents a large target audience
for prepaid cellular phones.
In May 1997, the Company introduced its prepaid and conventional (or
post-paid) cellular phone service which was marketed through a separate
division. In connection with the Company's plan to conserve assets to expand its
core business, management resolved to discontinue the operations of its
conventional cellular operations as of December 31, 1997. The Company plans to
market its prepaid cellular phone service through its Prepaid Phone Cards
distribution channels.
The Company has recently completed negotiations with a supplier to offer
cellular phones co-branded with the "DigiFone" name and which will include
software within the phone to monitor the usage. DigiFone will be sold through
retailers or agents ready to be activated by the end user. The customer
purchases the phone and calls a customer service number provided to them to
activate the phone. Included in the purchase price of the phone will be a
certain amount of minutes of local air time. The customer may then purchase
additional air time through retailers or the Company's customer service
department in various increments of minutes. The rate per minute for additional
air time varies based on the volume purchased by the customer. The phone will be
equipped with software placed on a computer chip within the phone which will
monitor the amount of time the customer has activated on the number and
disconnect the phone upon termination of its paid access. In connection with the
sale of the phone, the Company will offer phone service as an authorized
reseller of AT&T wireless services. The Company believes that an affordable
price, coupled with the AT&T service name, will make the product attractive to a
large variety of consumers.
The Company's principal executive offices are located at 8 West 38th
Street, New York, New York 10018, and its telephone number is (212) 944-8888.
The Company can also be contacted through its web site at
http://www.digitec2000.com.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
The Offering
Common Stock offered by:
The Selling Stockholders ................ 4,264,384 shares
Common Stock to be outstanding after the Offering 8,851,184 shares (1)
(1) Assumes: (i) the exercise of all $13.20 Warrants outstanding on the date
hereof to purchase 1,333,334 shares of Common Stock at an exercise price
of $13.20 per share; (ii) the exercise of all of the Outstanding $1.50
Warrants to purchase 52,250 shares of Common Stock at an exercise price of
$1.50; and (iii) the conversion of 61,050 shares of Series A Preferred
Stock into 587,302 shares of Common Stock. Excludes exercise of all
options outstanding on the date hereof to purchase 1,157,500 shares of
Common Stock at a weighted average exercise price of $11.46 per share of
which 569,998 are vested and exercisable. See "Prospectus Summary-The
Company" for a description of the Investment Agreement pursuant to which
the Series A Preferred Stock was issued. See also "Management-Stock
Incentive Plan" and "Description of Securities to be Registered."
Use of Proceeds ................................. The Company will not
receive proceeds from the
sale of shares of Common
Stock by the Selling
Stockholders. The Company
would receive $17,678,384
from the exercise of the
Outstanding $1.50 Warrants
and the $13.20 Warrants.
Such exercise, however is
not assured. Amounts
received from such
exercise, if any, will be
used for general working
capital purposes.
OTC Bulletin Board Symbol........................ DGTT
Risk Factors .................................... See "Risk Factors" for a
discussion of material
factors that should be
considered in connection
with an investment in the
Common Stock offered
hereby.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
Summary Consolidated Financial Information
The summary consolidated financial information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto included elsewhere in this Prospectus.(1)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
--------------------------- ------------------------------
1996 1997 1996 1997
==============================================================
<S> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Sales .......................... $ 17,425,199 $ 26,027,909 $ 4,663,146 $ 24,613,043
Cost of sales .................. 16,900,370 25,161,443 4,652,319 22,959,045
Gross profit ................... 524,829 866,466 10,827 1,653,998
Selling, general and
administrative expenses ........ 654,104 2,040,749 666,850 2,069,674
Loss from operations ........... (129,275) (1,174,283) (656,023) (415,676)
Other expenses, net ............ -- (1,305,970) -- --
Loss from continuing operations $ (129,275) $ (2,480,253) $ (656,023) $ (415,676)
Net Loss ...................... $ (129,275) $ (3,549,514) $ (656,023) $ (1,123,291)
Net Loss per share (basic and
diluted):
From continuing operations . $ (.05) $ (.55) $ (.14) $ (.08)
From discontinued operations $ -- $ (.23) $ -- $ (.15)
Net Loss per share ......... $ (.05) $ (.78) $ (.14) $ (.23)
Weighted average common
shares outstanding ............. 2,599,532 4,579,075 4,664,427 4,972,384
<CAPTION>
AS OF DECEMBER 31, 1997
Actual Pro Forma(2)
=================================
<S> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficit) ................ $(1,532,363) $ 7,214,028
Total Assets ............................. $ 6,254,617 $ 8,895,915
Long Term Debt ........................... $ 12,481 $ 12,481
Stockholders' Equity (Deficit) ........... $ (385,184) $ 6,893,095
</TABLE>
(1) The Company had no results of operations for the period from May 18, 1995
(inception) through June 30, 1995.
(2) Adjusted to reflect the Exercised $1.50 Warrants to purchase 1,760,865
shares of the Company's Common Stock which were exercised in February and
March, 1998 (See Note 11(a) to the Consolidated Financial Statements).
11
<PAGE>
(3) Adjusted to reflect the issuance of 61,050 shares of Series A Preferred
Stock and a one-time charge to operations of $1,468,112 from Premiere for
extra minutes processed by Premiere on Cards activated by the Company.
(See Note 11(b) to the Consolidated Financial Statements).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The information set forth in this Registration Statement includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act, and Section 21E of the Exchange Act. 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.
RISK FACTORS
In addition to other information contained in this Prospectus, the
following factors should be carefully considered in evaluating an investment in
the Common Stock offered herein.
Dependence on Suppliers
The Company currently depends primarily upon Premiere to provide the
Company with bundled Prepaid Phone Cards which it resells to its customers. The
Company's ability to resell the Cards depends upon whether it can continue to
maintain a favorable relationship with its Prepaid Phone Card suppliers. The
Company currently purchases Cards in bulk at a discount below the face value of
the Cards. It then resells them to either independent distributors or to retail
locations serviced by its field representatives depending upon the locality of
the distribution. The Company receives its gross margin on the difference
between discounts given to customers and the discounts received from its
suppliers. In September of 1997, the Company entered into two agreements with
Premiere requiring the Company to purchase Cards with an aggregate minimum face
value of $81,000,000 at discounts ranging from 23.5% to 41.75% off the face
value of the Cards. Failure to purchase the minimum value will result in the
Company being required to pay Premiere an amount equal to the retail value of
the unsold Cards less the applicable discount that would have been payable on
such Cards. The agreements provide for the extension of certain credit terms and
expire upon the earlier of September 1998 or six months after the last purchase
of Prepaid Phone Cards. Premiere may terminate upon breach of certain
conditions. Although the Company believes that the likelihood of such a
termination is remote based on its current relationship with Premiere and the
fact that Premiere became a 6.2 percent stockholder of the Company as of March
31, 1998, the Company does not have a specific contingency arrangement in place
to provide for such termination. Although the Company does not have any
arrangements in place for the period subsequent to September of 1998, the
Company believes that it will be able to either renew its agreements or
negotiate new ones on similar terms with another supplier. There can be no
assurance that the Company would be able to arrange a replacement supplier in
time to maintain a presence in the market for its brands of Prepaid Phone Cards,
and any interruption in the Company's ability to provide products to its
customers may have an adverse effect on the Company.
Dependence on Long Distance Telecommunications Provider
The Company's ability to maintain and expand its business depends in part
upon the ability of its suppliers (primarily Premiere) to provide it with
Prepaid Phone Cards at favorable terms and rates. The transmission capacity of
various long distance telecommunications carriers to originate, transport and
terminate the long distance traffic of the Prepaid Phone Cards is currently used
by Premiere and will be used by the Company in implementing its strategy to
become a facilities-based carrier. Regulatory changes, competitive pressures and
changes in access charges may adversely affect the charges imposed upon Premiere
and the Company by other telecommunications providers. No assurance can be given
that Premiere will continue, or the Company will be able, to obtain origination,
transport or termination services at favorable rates and terms. Changes in terms
and rates of the Prepaid Phone Cards could have an adverse effect on the
Company.
12
<PAGE>
In addition to favorable rates and terms for its Prepaid Phone Cards,
Premiere and the Company also require the cooperation and efficiency of
incumbent local exchange carriers ("LECs"), competitive local exchange carriers
("CLECs") and foreign carriers to originate and terminate service for its
customers in a timely manner. Although the Company has not experienced
significant losses in the past because of interruptions of service provided by
these carriers, no assurance can be made that the Company will not experience
interruptions in the future or that such interruptions will not have an adverse
effect on the Company.
Competition
The Prepaid Phone Card sector of the long distance telecommunications
market and the long distance telecommunications market in general are highly
competitive and are affected by the constant introduction of new cards and
services by industry participants. Competition in the Prepaid Phone Card sector
of the long distance telecommunications business is based upon pricing, customer
service and perceived reliability of the Prepaid Phone Cards. The Company's
competitors include some of the largest telecommunications providers which are
substantially larger than the Company as well as emerging carriers in the
Prepaid Phone Card market which have greater financial, technical, personnel
and marketing resources than the Company as well as greater name recognition and
larger customer bases than the Company. The Company believes that additional
competitors will be attracted to the Prepaid Phone Card market (including
Internet-based service providers and other telecommunications companies). The
ability of the Company to compete effectively in the prepaid sector of the long
distance telecommunications market will depend upon the Company's continued
ability to provide highly reliable Cards at prices competitive with, or lower
than, those charged by its competitors. There can be no assurance that
competition from existing or new competitors or a decrease in the rates charged
for telecommunications services by the major long distance carriers or other
competitors will not have an adverse effect on the Company's business.
The telecommunications industry is subject to a very high level of
technological change. Existing competitors are more than likely to continue to
develop new services that they offer to consumers. The ability of the Company to
compete effectively in the telecommunications industry will depend partly on the
Company's ability to develop additional products and services which appeal to
its intended end users.
Recent changes in the regulation of the telecommunications industry may
affect the Company's competitive position. The Telecommunications Act of 1996
(the "Telecommunications Act") effectively opens the long distance market to
competition from the Regional Bell Operating Companies (the "RBOCs"). The entry
of these well-capitalized and well-known entities into the long distance market
will likely increase competition for long distance customers, including
customers who use Prepaid Phone Cards to make long distance calls. The
Telecommunications Act also grants the FCC the authority to deregulate other
aspects of the telecommunications industry, which in the future may, if
authorized by the FCC, facilitate the offering of telecommunications services by
regulated entities, including the RBOCs, in competition with the Company. See
"Business -Competition" and "Business - Government Regulation."
In addition, due to the prepaid nature of the industry, the Company may
compete with other issuers of Cards which may distribute Cards at or below the
Company's cost. These issuers include companies which have significantly larger
capitalization and resources which allow these companies to derive lower returns
on funds employed, or in the case of fraudulent practices, sell Cards without
payment to telecommunications carriers.
Market Acceptance
The Prepaid Phone Card segment of the telecommunications industry is an
emerging business characterized by an increasing and substantial number of new
market entrants which have introduced or are developing an array of new products
and services. Each of these entrants is seeking to market, advertise and
position its products and services as the preferred method for accessing long
distance telephone services. As is typically the case in an emerging industry,
demand and market acceptance for newly introduced products and services are
subject to a high level of uncertainty. There can be no assurance that
substantial markets will continue to develop for Prepaid Phone Cards or that the
Company will be able to maintain or increase market acceptance for its existing
products and services or achieve significant market acceptance for its new
products and services. See "Business."
13
<PAGE>
Ability to Manage Growth; Need to Hire Additional Employees
Although the Company expects to continue to grow, there can be no
assurance that the growth experienced by the Company will continue or that the
Company will be able to achieve the growth contemplated by its business
strategy. The expanding nature of the Company's business strategy has placed,
and is expected to continue to place, significant demands on all aspects of the
Company's business, including its management, financial, technical and
administrative personnel and systems. The Company's future operating results
will substantially depend upon the ability of its executive officers to manage
such anticipated growth and to attract and retain additional highly qualified
management, financial, technical and administrative personnel. While the
Company's executive officers have experience managing start-up companies and in
other entrepreneurial activities, none has had experience in managing a public
company or other large businesses. There can be no assurance that the Company
will successfully manage its expanding operations and continued growth. Any
difficulties in managing the Company's expanding operations and continued growth
or in attracting additional personnel could have an adverse effect on the
Company.
Financing Requirements and Future Charges
To date, the Company has financed its operations through two offerings
under Rule 504 of Regulation D and the exercise of the Exercised $1.50 Warrants,
which aggregated $1,000,000 and $3,437,248, respectively, of proceeds to the
Company. Due to operating losses and the Company's expansion, the Company
remains undercapitalized and cannot finance its expansion as quickly as
opportunities arise. The Company's ability to acquire additional operations and
facilities will be dependent on its ability to raise capital or otherwise
finance such acquisitions. Premiere, as a supplier of the Company in the
ordinary course of business, extends certain credit terms to the Company, but to
date the Company has no existing bank lines of credit and has not established
any sources for such financing. There can be no assurance that such financing
will be available on acceptable terms, or at all, to the Company.
On March 31, 1998, the Company entered into an agreement with Premiere
(the "Investment Agreement") in which Premiere received 61,050 shares of $.001
par value voting Series A Preferred Stock, valued by the Board of Directors at
$6,105,093 which represented Premiere's outstanding accounts receivable balance
as of that date. The $6,105,093 included $4,636,981 which was attributable to
Cards purchased in the normal course of business with the $1,468,112
representing a one-time charge on March 31, 1998 from Premiere for extra minutes
processed by Premiere on Cards activated by the Company. The $1,468,112 was
charged to operations during the quarter ended March 31, 1998. The Series A
Preferred Stock is convertible into Common Stock at any time at Premier's option
and the Company has the right to require Premiere to convert the Preferred Stock
after March 31, 1999. The Certificate of Designation for the Series A Preferred
Stock provides for certain voting, liquidation, and registration rights and
calculates the conversion by multiplying 61,050, the number of shares of Series
A Preferred Stock issued in connection with the Investment Agreement, by $100,
the Investment Amount as defined in the Certificate of Designation and then
dividing by $10.395, the Conversion Price as defined in the Certificate of
Designation, resulting in a total of 587,302 shares of Common Stock to be issued
under the Investment Agreement. The Company may call the redemption of each
share of Series A Preferred Stock at any time for $100 a share plus accrued
dividends.
Outstanding Warrants and Options
As of March 31, 1998, the Company had warrants (the $13.20 Warrants and
Outstanding $1.50 Warrants) and options outstanding to purchase 2,543,084 shares
of Company's Common Stock at exercise prices ranging from $1.50 to $14.50 per
share and an average price of $12.17 per share. Such warrants are immediately
exercisable. All of the foregoing options will become exercisable in the next
two years. 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.
Litigation
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. ("Heritage"), et. al. v.
Telephone Electronics Corporation ("TEC"), 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.;
14
<PAGE>
Barbara Scott; Ronald D. Anderson, Sr. d/b/a Anderson Engineering; Walter Frank;
and Frank C. Magliato. The second Amended Complaint filed in the action alleges
a 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
Company and others allegedly duped Heritage into surrendering its trade secrets,
its services, its intellectual property, its expertise, etc. to the Company. The
complaint's lesser allegations are that (i) defendants conspired to slander the
business reputations of Heritage and Tom Gould; and (ii) TEC and the Company are
jointly and severally liable to it for $268,245 worth of production work and
consulting services provided over the September to December 1995 time period.
The plaintiffs seek damages of $500 million. The Company believes that
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 Company intends to vigorously contest this case. See
"Business-Legal Proceedings".
Limited Operating History; Net Losses
The Company has had only a limited operating history upon which investors
may base an evaluation of its performance. The Company reported losses from
operations and net losses of $1,174,283 and $3,549,514, respectively and
$415,676 and $1,123,291, respectively, for the year ended June 30, 1997 and six
months ended December 31, 1997. There can be no assurance that the Company will
be profitable in the future. The Company's prospects must be considered in light
of the risks, expenses, problems and delays inherent in establishing a new
business in a rapidly changing industry. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Variability of Operating Results
The Company's operating results may vary significantly in the future due
to numerous factors, including (i) changes in operating expenses such as cost of
bundled Prepaid Phone Card products and if the Company successfully establishes
its dedicated telecommunications facilities, local and long distance charges,
(ii) timing of the introduction of products and services, (iii) market
acceptance of new products and services, (iv) changes in legislation and
regulation which affect the competitive environment for the Company's products
and services, (v) other competitive conditions and (vi) general economic
factors. The timing of receipt of cash by the Company may also vary
significantly in the future if the Company successfully establishes its
dedicated telecommunications facilities. The Company would no longer need to
prepay for the Cards upon receipt, and its payment for the local and long
distance carriers, as well as the platform and switch services to be provided by
third parties, would not be payable until service was actually rendered.
Accordingly, the Company believes that prior results of operations should not be
relied upon as an indication of the Company's future performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business Telecommunications Products and Services of the Company"
and "Business - Competition."
Rapid Technological Change
The telecommunications service industry is characterized by rapid
technological change, new product and service introduction, new sales channels
and evolving industry standards. The Company's success will depend, in
significant part, upon its ability to make timely and cost-effective additions
to its technology and introduce new products and services that meet customer
demands. The Company expects new products and services to be developed and
introduced by other companies that compete with the Company's products and
services. The proliferation of new telecommunications technology, including
personal communication services and voice communication over the Internet, may
reduce demand for long distance services, including Prepaid Phone Cards. There
can be no assurance that the Company will be successful in responding to these
or other technological changes, evolving industry standards or to new products
and services offered by the Company's current and future competitors. The
inability of the Company to respond to new products and services offered by
competitors or to other changes could have an adverse effect on the Company. See
"Business - Competition" and "Business - Telecommunications Products and
Services of the Company."
Dependence on Facilities and Third Party Services
Premiere's facilities include and the Company's facilities will include
upon implementation: (i) leased capacity to connect Premiere's network POPs and
the Company's proposed network POPs; (ii) switches, network POPs and debit card
platforms in strategic geographic regions in the United States and (iii) direct
termination agreements with
15
<PAGE>
telecommunications operators in the countries where Premiere and the Company
terminate a large number of minutes. The Company is currently dependent on
Premiere's facilities as well as its agreement with other telecommunications
service providers for efficient and uninterrupted service to US customers. The
Company currently has a contract with Innovative expiring in June of 1999
pursuant to which Innovative has agreed to provide the Company with prepaid
transaction services utilizing its switching and platform facilities located at
the Hudson Street Facility. The Company has not yet begun to offer services
utilizing this capacity. The contract requires Innovative to process calls
initiated by the Company's Card holders and received from local and long
distance carriers and to present those calls for completion to designated local
and long distance carriers. All transport and carrier services must be provided
by the Company. The Company is currently negotiating those carrier services, but
there can be no assurance that the Company will be able to obtain and maintain
favorable rates and terms for the origination, transportation and termination of
its customers' long distance traffic.
Once the Company begins to utilize the capacity of the Hudson Street
Facility, a majority of its minutes will be processed by that facility. Any
significant interruption of services by Innovative could have an adverse effect
on the Company. In order to mitigate this dependency on Innovative, the Company
intends to expand its use of other dedicated facilities. The Company's provision
of reliable telecommunications services is dependent upon the ability of
Premiere and Innovative to protect the switches and other equipment and data at
such facilities against damage that may be caused by fire, power loss, technical
failures, unauthorized intrusion, natural disasters, sabotage and other similar
events. Although both Premiere and Innovative have taken precautions, there can
be no assurance that a fire, power loss, technical failure, unauthorized
intrusion, natural disaster, sabotage or other similar or unforeseen event would
not cause the failure of a switch, platform, or other significant technical
component, thereby resulting in an interruption in telecommunications services.
In order to mitigate its reliance on both Premiere and Innovative and their
facilities, the Company is in the process of establishing relationships with
other carriers as well as expanding the operations of its own carrier division.
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 establish its own
dedicated facilities. 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 has employment
agreements with its officers and is in the process of placing key person life
insurance on some of its officers. See "Management - Executive Compensation."
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 currently traded on the OTC Bulletin Board.
To date, the Company's Common Stock has been relatively illiquid and 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 likely continue to be highly volatile based on
actual or contemplated fluctuations in quarterly results of operations, changes
in earnings estimates by securities analysts and announcements of new products
or lines of business by the Company or its competitors or other events or
factors. The Company intends to apply for the listing of its Common Stock on the
American Stock Exchange in the near future, but there can be no assurance that
such application will be successful.
Possible Depressive Effect of Future Sales of Common Stock; Registration Rights
There are currently outstanding 6,878,298 shares of Common Stock. Assuming
the exercise of the Outstanding $1.50 Warrants, $13.20 Warrants and conversion
of the Series A Preferred Stock there will be an aggregate of 8,851,184 shares
of Common Stock outstanding. In addition, an aggregate of 1,157,500 shares of
Common Stock will be issuable pursuant to outstanding options. The 4,264,384
shares of Common Stock offered by the Selling Stockholders hereby will be freely
tradable without restriction under the Securities Act. Subject to restrictions
on transfer referred to below, all other shares of Common Stock were issued by
the Company in private transactions, are treated as "restricted securities" as
defined under the Securities Act and in the future may be sold in compliance
with Rule 144 under the Securities Act or pursuant
16
<PAGE>
to a registration statement filed under the Securities Act. As of the date of
this Prospectus, 2,062,428 shares of Common Stock, including shares which may be
acquired upon exercise of outstanding options and the Outstanding $1.50 and
$13.20 Warrants and the conversion of Series A Preferred Stock, are held by
persons with the right to cause the Company to register such shares under the
Securities Act under certain circumstances. The registration rights of the
holders of Series A Preferred Stock will cease upon the expiration of a period
of 120 days from the Registration Statement of which this Prospectus is a part.
Rule 144 generally provides that a person holding restricted securities for a
period of one year may sell every three months in brokerage transactions or
market-maker transactions an amount equal to the greater of (i) one percent (1%)
of the Company's issued and outstanding Common Stock or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks prior to such
sale. Rule 144 also permits, under certain circumstances, the sale of shares
without any quantity limitation by a person who is not an affiliate of the
company and who has satisfied a two year holding period. The sale of substantial
numbers of such shares, whether pursuant to Rule 144 or pursuant to a
registration statement, may have a depressive effect on the market price of the
Common Stock. See "Shares Eligible for Future Sales."
Dilution
Purchasers of the shares of Common Stock will experience immediate and
substantial dilution of the value per share of Common Stock to the extent
Outstanding $1.50 Warrants, $13.20 Warrants and options are exercised in the
future at prices below the price at which purchasers of the Common Stock offered
hereby purchased such Common Stock.
Dependence on and Concentration of Independent Distributors
While the Company has its own distribution network comprised of 22 field
representatives, the Company distributes the most significant portion of its
sales through independent distributors. As a result, the Company's current
success is still significantly dependent upon its ability to recruit, maintain
and motivate a network of independent distributors. A significant element of the
Company's growth strategy is to increase its route sales and distribution of the
Company's products and services by expanding its presence in its current markets
and by extending this network into new markets either by internal growth,
acquisition or both. There can be no assurance that the Company will be able to
continue to effectively recruit, maintain and motivate independent distributors
or prevent its distributors from marketing other Prepaid Phone Cards.
PhoneCard Wholesalers, Inc. is currently an independent distributor of the
Company and accounted for 51% of the Company's sales for the quarter ended March
31, 1998. The Company has executed a letter of intent pursuant to which it
intends to acquire PhoneCard Wholesalers, Inc. However, there can be no
assurance that such acquisition will be completed in which event the Company's
dependence on this distributor could continue. See "Business-Growth Strategy --
Introduction of New Prepaid Phone Cards and Services".
Regulation
The Company anticipates that it will be regulated at both the federal and
state level if the establishment of its dedicated facilities is successful. The
Company will be regulated at the federal level by the FCC and will be required
to maintain both domestic and international tariffs for its services containing
the current effective rates, terms and conditions of service. The FCC has
proposed, however, to eliminate the tariffing requirement for domestic
interstate non-dominant carriers. Since the Company will be classified as a
domestic interstate non-dominant carrier, this proposal could eliminate the
requirement that the Company comply with domestic tariffing requirements. In
addition, the Company has applied for a Section 214 license from the FCC to
provide international long distance services. As a condition of its Section 214
license, the Company will have to comply with a variety of reporting and filing
requirements related to its traffic and revenues, its foreign affiliations and
its correspondent and/or termination relationships with the foreign carriers, if
any. The intrastate long distance telecommunications operations of the Company
will be subject to various state laws and regulations, including prior
certification, notification or registration requirements. The Company generally
must obtain and maintain certificates of public convenience and necessity from
regulatory authorities in most states in which it offers service. In most of
these jurisdictions, the Company will be required to file and obtain prior
regulatory approval of tariffs for intrastate services. In addition, the Company
will also be required to update or amend the tariffs when rates are adjusted or
new products are added to the long distance services offered by the Company. The
FCC and numerous state agencies also impose prior approval
17
<PAGE>
requirements on "transfers of control", including pro forma transfers of control
and corporate reorganizations, and assignments of regulatory authorizations.
While the Company expects to receive all such approvals that it submits
for and believes that it is or shall or be otherwise in compliance with the
applicable federal and state regulations governing telecommunications service,
there can be no assurance that the FCC or the regulatory authorities in one or
more states will not raise material issues with regard to the Company's
compliance with applicable regulations, or that other regulatory matters will
not have a adverse effect on the Company's financial condition and or results of
operations. In addition, changes in the federal and state regulations requiring
local exchange carriers ("LEC") to provide equal access for origination and
termination of calls by long distance subscribers (such as the Company's
customers) or in the regulations governing the fees to be charged for such
access services, particularly changes allowing variable pricing based upon
volume, could have a material adverse effect on the Company's results of
operations. See "Business - Government Regulation."
The Telecommunications Act requires long distance carriers, which the
Company will become when it is established as a facilities-based carrier, to
compensate pay phones owners $.284 per call when a pay phone is used to
originate a telephone call through a toll-free number. Although approximately 30
percent of the Company's customers utilize pay phones in combination with Cards
to originate telephone calls, the Company does not believe this provision will
have a material adverse effect on the Company. See "Business-Government
Regulation."
On May 8, 1997, the FCC issued an order to implement the provisions of the
Telecommunications Act relating to the preservation and advancement of universal
telephone service (the "Universal Service Order"). The Universal Service Order
requires all telecommunications carriers providing interstate telecommunications
services to contribute to universal service support by contributing to a fund
(the "Universal Service Fund"). Universal service contributions will be assessed
based on intrastate, interstate and international "end-user" gross
telecommunications revenues effective January 1, 1998. The contribution factors
adopted by the FCC for the second quarter of 1998 will require subject
telecommunications carriers to contribute as much as 3.9% of their end user
telecommunications revenues. The contribution factors are based on the ratio of
total projected quarterly expenses of the universal service support programs to
total end user telecommunications revenues and could, therefore, increase or
decrease in subsequent periods. The Company currently is determining whether the
Universal Service Order will be applicable to the Company as it moves its
Prepaid Phone Cards to an unbundled arrangement. When its business strategy is
implemented, the Company will continue to use a distribution network to sell its
Prepaid Phone Cards, and therefore will still not be selling its Prepaid Phone
Cards directly to the public. See "Business-Growth Strategy." In addition, the
Universal Service Order is subject to petitions seeking reconsideration by the
FCC and to certain appeals. Until such petitions or appeals are decided, there
can be no assurance as to how the Universal Service Order will be implemented or
enforced or what effect the Universal Service Order generally will have on
competition within the telecommunications industry or specifically on the
competitive position of the Company. If it is determined that the Company is
subject to the Universal Service Order, compliance with the Universal Service
Order could have a material adverse effect on the Company's results of
operations.
In addition, in recent years, the telecommunications industry has
increasingly come under the scrutiny of the Federal Trade Commission (the "FTC")
and state regulatory agencies with respect to the promotion, marketing and
advertising of effective rates, terms and conditions of telecommunications
services and products. The New York regional office of the FTC and the New York
Attorney General's office (the "NYATG") are currently reviewing advertisements
of products and services of other telecommunications companies. While the
Company believes that its advertising has complied with federal and state
regulations regarding advertising, there can be no assurance that the FTC and
the NYATG will not raise inquires towards the Company's advertising practices or
any future federal or state regulatory inquiries will not raise material issues
with respect to the Company's past or present promotion, marketing or
advertising, or that the resolution of such raised issues would not result in
civil penalties (including fines), require the Company to modify its
advertisements or have a material adverse effect on the results of operations.
Taxes
The taxation of Prepaid Phone Cards is evolving and is not specifically
addressed by the laws of many of the states in which the Company does or intends
to do business. Certain states may enact regulation which specifically provides
for taxation of such Prepaid Phone Cards or may interpret current laws in a
manner resulting in additional tax liabilities.
18
<PAGE>
In addition, The Taxpayer Relief Act (which became effective on November
1, 1997) provides for a three percent federal excise tax on Prepaid Phone Card
sales, based upon retail value, to be charged by telecommunications carrier to
any such party who is not a carrier. To date, the federal excise tax has been
built in as part of the Company's cost structure from its providers. As the
Company transfers its Prepaid Phone Cards to an unbundled basis, it will be
responsible for collecting the federal excise tax from its independent
distributors. While there can be no assurance, the Company believes that the
imposition of such taxes will not have a material adverse effect on the
Company's results of operations.
Fraud; Theft of Services; Uncollectible Accounts
From time to time, callers have obtained services without rendering
payment to the Company by unlawfully utilizing the Company's access numbers and
PINs. The Company attempts to manage these theft and fraud risks through its
internal controls, monitoring and blocking systems. Although the Company
believes that its risk management practices are adequate, and to date the
Company has not experienced material losses due to such unauthorized use of
access numbers and PINs, there can be no assurance that the Company's risk
management practices will be sufficient to protect the Company in the future
from unauthorized transactions or thefts of services which could have an adverse
effect on the Company's financial condition and results of operations.
In addition, the Company sells its products to certain of its distributors
on credit terms, and the Company may introduce new services for which customers
may be billed after services are rendered. Although the Company believes that it
is able to adequately evaluate the risk of uncollectible accounts, there can be
no assurance that the Company's actual collection experience will not be worse
than anticipated.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock, and the
current policy of the Board of Directors is to retain any available earnings for
use in the operation and expansion of the Company's business. Therefore, the
payment of cash dividends on the Common Stock is unlikely in the foreseeable
future. Any future determination to pay cash dividends will be at the discretion
of the Board of Directors and will depend upon the Company's earnings, capital
requirements, financial condition and any other factors deemed relevant by the
Board of Directors.
19
<PAGE>
- --------------------------------------------------------------------------------
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, (i) on an actual basis and (ii) on a pro forma basis to give
effect to the exercise of Exercised $1.50 Warrants to purchase 1,760,865 shares
of the Company's Common Stock which occurred in February and March, 1998 (see
Note 11(a) to the Consolidated Financial Statements), and (iii) the issuance of
61,050 shares of Series A Preferred Stock and a one-time charge to operations of
$1,468,112 from Premiere for extra minutes processed by Premiere on Cards
activated by the Company (see Note 11(b) to the Consolidated Financial
Statements).
<TABLE>
<CAPTION>
As of December 31, 1997
===========================
Actual Pro Forma
=========== ===========
<S> <C> <C>
Short Term debt ................................................. $ 192,521 $ 192,521
----------- -----------
Long Term debt .................................................. 12,481 12,481
----------- -----------
Stockholders' Equity (Deficit):
Preferred Stock, $.001 par value, 1,000,000 shares authorized; 0
shares issued and outstanding, actual; 61,050 shares of Series A
Preferred issued and outstanding, pro forma ..................... -- 61
Common Stock, $.001 par value, 100,000,000 shares authorized;
5,117,433 issued and outstanding, actual; 6,878,298 shares issued 5,117 6,878
and outstanding, pro forma
Additional Paid-in Capital .................................... 4,411,779 13,156,348
Accumulated Deficit ........................................... (4,802,080) 6,270,192
----------- -----------
Total Stockholders' Equity (Deficit) .......................... (385,184) 6,893,095
----------- -----------
Total Capitalization ................... $ (180,182) $ 7,098,097
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
Selected Consolidated Financial Data
The following selected consolidated financial data for the period from May
18, 1995 (inception) to June 30, 1995 and the years ended June 30, 1996 and 1997
are derived from the consolidated financial statements of the Company which have
been audited by BDO Seidman, LLP, independent certified public accountants,
whose report is included elsewhere herein. The financial information for the six
months ended December 31, 1996 and 1997 has been derived from the unaudited
consolidated financial statements of the Company, included elsewhere in this
Prospectus, which in the opinion of management, have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the Company's consolidated financial position and results
of operations for such periods. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
the year ending June 30, 1998. The selected consolidated financial data should
be read in conjunction with, and are qualified in their entirety by,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 18, 1995
(INCEPTION)
TO JUNE 30, YEAR ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
---------------------------- ------------------------------
1995 1996 1997 1996 1997
=========================================================================
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Sales ....................... $ -- $ 17,425,199 $ 26,027,909 $ 4,663,146 $ 24,613,043
Cost of sales ............... -- 16,900,370 25,161,443 4,652,319 22,959,045
Gross profit ................ -- 524,829 866,466 10,827 1,653,998
Selling, general and
administrative expenses ..... -- 654,104 2,040,749 666,850 2,069,674
Loss from operations ........ -- (129,275) (1,174,283) (656,023) (415,676)
Other expenses ,net ......... -- -- (1,305,970) -- --
Loss from continuing
operations .................. $ -- $ (129,275) $ (2,480,253) $ (656,023) $ (415,676)
Net Loss .................... $ -- $ (129,275) $ (3,549,514) $ (656,023) $ (1,123,291)
Net Loss per share (basic and
diluted):
From continuing operations $ -- $ (.05) $ (.55) $ (.14) $ (.08)
From discontinued
operations ................ $ -- $ -- $ (.23) $ -- $ (.15)
Net Loss per share ....... $ $ (.05) $ (.78) $ (.14) $ (.23)
Weighted average common
shares outstanding .......... -- 2,599,532 4, 579, 075 4,664,427 4,972,384
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
--------------------------------------- --------------------------------------------
1995 1996 1997 1996 1997 1997
Pro Forma (1)(2)
=======================================================================================
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheets
Data:
Working capital (deficit) $ -- $ 1,216,279 $ (636,687) $ 181,938 $(1,532,363) $ 7,214,028
Total assets ............. $ -- $ 6,056,462 $ 3,526,723 $ 3,686,644 $ 6,254,617 $ 8,895,915
Long Term debt ........... $ -- $ -- $ 64,390 $ -- $ 12,481 $ 12,481
Total stockholders' equity
(deficit) ................ $ -- $ 3,126,946 $ (71,469) $ 2,470,923 $ (385,184) $ 6,893,095
</TABLE>
- --------------------------------------------------------------------------------
(1) Adjusted to reflect the Exercised $1.50 Warrants to purchase 1,760,865
shares of the Company's Common Stock which were exercised in February and March,
1998 (See Note 11(a) the Consolidated Financial Statements).
(2) Adjusted to reflect the issuance of 61,050 shares of Series A Preferred
Stock and a one-time charge to operations of $1,468,112 from Premiere for extra
minutes processed by Premiere on Cards activated by the Company (See Note 11(b)
to the Consolidated Financial Statements).
22
<PAGE>
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, including the notes thereto, and other
detailed information regarding the Company included elsewhere in this
Prospectus. Certain statements set forth below regarding matters that are not
historical facts, such as statements concerning the expansion and growth of the
Company, future growth in the demand for Prepaid Phone Cards, the Company's
plans to establish its own dedicated facilities and expand its distribution
network, are forward-looking statements within the meaning of Section 27A of the
Securities Act and 21E of the Exchange Act. Because such forward-looking
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
those discussed under "Risk Factors".
Introduction
The Company commenced operations under present management in 1995 to
exploit the Prepaid Phone Card sector of the long distance telecommunications
market. The Company's Prepaid Phone Cards provide consumers with a competitive
alternative to traditional presubscribed long distance telecommunications
services. The Company's total revenues were $26,027,909 and $24,613,043, and its
net losses were $3,549,514 and $1,123,291, for the fiscal year ended June 30,
1997 and for the six months ended December 31, 1997, respectively, after losses
from discontinued operations of $1,069,261 and $707,615, respectively. The
Company activated 4 million Prepaid Phone Cards and approximately 75 million
minutes of telecommunications services were provided during the six months ended
December 31, 1997.
The Company's target markets include ethnic communities with substantial
international long distance calling requirements. For the six months ended
December 31, 1997 approximately 65% of the Company's total minutes were derived
from the sale of international long distance telecommunications services. Rates
in the international long distance market have declined in recent years and, as
competition in this segment of the telecommunications industry continues to
intensify, the Company believes that this downward trend in rates is likely to
continue. Although there can be no assurance, the Company believes that any
reduction in rates will be offset in whole or in part by efficiencies
attributable to the planned expansion of the Company's services as well as by
lower transmission costs per minute resulting from the Company's increased
volume of minutes. See "Risk Factors - "Dependence on Suppliers," - "Dependence
on Long Distance Telecommunications Provider" and "-- Intense Competition".
The Company's fiscal 1997 and 1998 sales have been primarily derived from
the resale of bundled Prepaid Phone Cards. The Company resells the Cards at a
discount off the face value of the Cards to either independent distributors or
retail locations, depending on the locality of distribution. The Company's
fiscal 1997 cost of sales consist primarily of the purchase of the Cards at a
greater discount off the face value than the price at which the Cards can be
resold by the Company, thereby receiving its gross margin on the difference of
discounts given to its customers and the discounts the Company receives from its
long distance provider. Since the Cards are sold to the Company as a bundled
product, the long distance provider is liable to the end user for the time
remaining on the Cards. At the point of sale, the Company has no further
obligation towards the Cards sold. During fiscal 1996 and the three months ended
September 30, 1996, one of the products sold by the Company was a proprietary
switchless unbundled 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. Since the Company is 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, attract certain master
distributors and to connect with certain ethnic markets are the primary reasons
for its sales increases in fiscal 1997 and 1998.
While the Company has been able to negotiate fair and competitive rates
from its bundle product providers, the Company intends to lessen its dependence
on such providers through the use of its own dedicated facilities. As a result
of the deployment of the Company's own dedicated facilities, the Company
believes it will be able to negotiate more competitive rates with its long
distance providers. Based on the Company's cost analysis, the total cost per
call under the dedicated facilities is expected to be less than the bundled Card
product that it presently purchases. This is expected to have a positive
23
<PAGE>
impact on the Company's gross margins as well as cash generated from operations.
The Company will also continue to purchase some Cards as a bundled product.
The Company believes that its further growth is dependent in part on its
ability to (i) expand its services, (ii) increase the retail distribution of its
products, (iii) introduce additional products and services, (iv) continue to
attract consumers with significant international long distance usage and (v)
increase resale revenues and capitalize on economies of scale. See "Business --
Growth Strategy".
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 a
distributor 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 increased brand awareness, 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 terminating
the exclusivity clause in the agreement with CG Com, a major distributor, which
accounted for 42% and 54% of sales during the three months ended September 30,
1997 and the year ended June 30, 1997, respectively. This master distributor
accounted for 8% and 26% of sales during the three and six months ended December
31, 1997, respectively. The Company does not anticipate an extended period of
decreased sales as a result of this change since the Company has the proper
infrastructure in place to deliver products directly to the sub-distributors and
retailers. Due to this change and expansion into new areas of distribution, the
Company anticipates that its concentration of sales with any particular customer
will be significantly reduced for fiscal 1998. On September 26 and 27, 1997 the
Company signed distributor agreements with Premiere whereby the Company is
required to purchase Cards with an aggregate minimum face value of $81,000,000
at discounts ranging from 23.5% to 41.75% off the face value of the Cards.
Failure to purchase the minimum value will result in the Company being required
to pay Premiere an amount equal to the retail value of the unsold Cards less the
applicable discount that would have been payable on such Cards (see note 8(e) to
the Consolidated Financial Statements). These agreements expanded the
relationship of the Company with Premiere who had previously provided the
Company with Cards from time to time on a prepaid basis.
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 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
together with achieving more favorable rates from providers.
Gross Profit. Gross profit for the six months ended December 31, 1997 was
$1,653,998 or 6.7% as compared to a gross profit of $10,827 or .2% for the six
months ended December 31, 1996. During the first quarter of fiscal 1997, the
Company terminated its switchless unbundled phone Card based upon taking
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. 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
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
of sales over the six months ended December 31, 1996 and the initial
implementation of the Company's plan to increase its infrastructure in
anticipation of
24
<PAGE>
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 caused 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 as well as
having increased needs for accounting and corporate consulting. See "Business -
Legal Proceedings." Administrative field expenses amounting to $74,782 were
first incurred 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. In 1997 the Company also incurred $28,366 in expenses
related to stockholder relations and filing expenses incurred in connection with
compliance with the reporting requirements of the Exchange Act, which the
Company had been exempt from in previous years. 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's
termination of its unbundled products line and replacement of those product
lines with the bundled products that it currently sells offset by increased
expenses related to the expansion of the Company's infrastructure in
anticipation of the expansion of its lines of business.
Loss from Discontinued Operations. As of June 30, 1997, management
resolved that it would discontinue the operations of World Access Solutions,
Inc. ("World Access"). See "Business -- 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 in connection with 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 without further
recording of loss.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Sales. Sales for the year ended June 30, 1997 increased to $26,027,909
from $17,425,199 for the fiscal year ended June 30, 1996, representing an
increase of 49.4%. During the three months ended September 30, 1996, the Company
terminated its switchless unbundled Card and introduced its branded bundled
Cards which it purchased primarily from Frontier. With the Company offering more
competitive rates, the Company's revenues for the fourth quarter of fiscal 1997
were approximately $14,000,000. CG COM accounted for approximately 54% of the
Company's sales during fiscal 1997.
Cost of Sales. The Company's cost of sales for the year ended June 30,
1997 increased to $25,161,443 from $16,900,370 for the fiscal year ended June
30, 1996. The increase of $8,261,073 or 48.9% was primarily related to the
increase in revenues that the Company experienced in the last half of fiscal
1997, together with achieving more competitive rates from providers.
25
<PAGE>
Gross Profit. Gross profit for the year ended June 30, 1997 was $886,466
or 3.3% as compared to $524,829 or 3.0% or an increase of $341,637 or 65.1%. The
increase in gross profit is entirely related to the Company's ability, in the
last half of fiscal 1997, to offer Cards whose rates per minute were more
competitive in its pricing and the Company's ability to offer a Card which was
reliable to the end user.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 1997 increased to $2,040,749
from $654,104 for the year ended June 30, 1996. This increase of $1,386,645 or
212.0% is primarily related to an increase in salaries and personnel related
expenses of $463,683 as the Company's officers received raises and bonuses of
$175,000 and the Company's employees increased to 29 full-time employees from 5
by June 30, 1997. The Company's rent expense increased to $92,308 or 177%
primarily due to the Company recording a $71,000 non-cash charge for the
straight-lining of its rental payments under the lease for the new distribution
and administrative headquarters which the Company began occupying April 1, 1997.
Advertising, telephone, office expense, bad debt expense, bank charges, repairs
and maintenance and travel and entertainment increased by $186,291, $54,898,
$54,702, $51,562, $42,418, $32,116 and $25,569, respectively, primarily related
to an increase in the Company's business. The Company's professional fees also
increased by $131,326 primarily in connection with the Company's role in the
Heritage litigation as well as having increased needs for accounting and
corporate consulting. See "Business - Legal Proceedings." The Company also
recorded amortization related to its intangibles of $87,798 primarily due to the
acquisition of customer bases during fiscal 1997.
Other Expenses. During 1996, the Company participated in the establishment
of TECLink, Inc. ("TECLink") as a Mississippi-based Internet service provider by
selling TECLink certain Internet service provider assets, intellectual property,
computer hardware, software and office equipment (that it had previously
purchased from TEC and others) as well as an exclusive value added reseller
distribution contract for Direct PC satellite dishes from Hughes Corporation
("Hughes"). In exchange for these assets, the Company received $50,000 cash and
a 6% per annum note payable (the "Note") for $2,405,000 from TECLink due the
earlier of December 31, 1998 or upon the completion of TECLink's initial public
offering ("IPO"). The Note was collateralized by the assets of TECLink. See
"Business - World Access."
TECLink and Hughes never reached an accord related to Hughes
responsibilities under its agreement and TECLink experienced losses resulting
from not being able to proceed with its initial business plan. As a result of
this and other factors, TECLink's IPO was never consummated. Due to the
continuing losses, the Company entered into an agreement to acquire the net
assets of TECLink as partial satisfaction of the outstanding balance of the Note
from TECLink (then $2,105,000). The Company recorded a loss on the Note
satisfaction of $1,340,230. On June 1, 1997, the Company established World
Access as a wholly-owned subsidiary providing Internet access with the assets
reacquired 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 equipment and
software which services the customer base and the Company's obligations under
its leases for its premises to Meta3, Inc. ("Meta3"), a Mississippi corporation
in a similar business. The assets sold had a book value of $988,347. The
Agreement calls for Meta3 to pay for the assets sold over a ten month period,
commencing November, 1997( the "Purchase Period"), based on number of
subscribers in the identified customer base, adjusted for its attrition rate for
the first five months of the Purchase Period.
Loss from Continuing Operations. The Company's switchless unbundled
product, which was terminated and replaced by the offering of bundled products
during the second half of the year, had not been a profitable, nor a reliable
product. It is primarily for this reason that the Company experienced a loss
(before other expenses) of $1,174,283 for the year ended June 30, 1997. The
Company further experienced a loss on the Note satisfaction (as described above)
of $1,340,230. As a result, the Company's loss from continuing operations was
$2,480,253.
Loss from Discontinued Operations. As described above, Management
resolved, as of June 30, 1997 that it would discontinue the operations of World
Access. As a result of the Agreement, the Company accrued a loss on disposal of
$893,347. World Access reported a net loss from operations of $175,914 for the
one month ended June 30, 1997.
Net Loss. Due to its market and customer service issues related to its
products during the first half of fiscal 1997 and losses related to TECLink and
World Access, the Company recorded a net loss of $3,549,514 for the year ended
June 30, 1997.
26
<PAGE>
Year Ended June 30, 1996 Compared to Period May 18, 1995 (Inception) to June 30,
1995
While the Company began operations as of May 18, 1995, it was primarily a
shell entity until July, 1995, at which point the Company began to enter the
prepaid sector of the long distance telecommunications market.
Sales. Sales for the year ended June 30, 1996 were $17,425,199 as the
Company began to exploit relationships with contacts of certain employees of the
Company. Sales were primarily made to distributors who were selling the Cards in
credit challenged residential areas within the Metro Area.
Cost of Sales. The Company's cost of sales for the year ended June 30,
1996 was $16,900,370 which is directly related to the Cards sold during that
year.
Gross Profit. Gross profit for the year ended June 30, 1996 was $524,829
or 3.0% of sales. In it's efforts to gain market share, the Company was selling
the Cards with little markup over cost.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 1996 were $654,104. The
expenses were comprised primarily of salaries and personnel related expenses of
$261,339 and organization expenses of $86,518 related to various corporate
filings in order to establish the Company. The Company also had rent of $51,801
for its then current premises for its distributions and administrative
headquarters.
Net Loss. As a result of the Company's initiation of sales efforts to
achieve market share, the Company recorded a loss of $129,275 for the year ended
June 30, 1996.
Liquidity and Capital Resources
To date, the Company has financed its operations through certain equity
transactions completed in the prior fiscal year, the exercise of warrants in
fiscal 1997 and 1998 and through operating cash flow. However, the Company
remains significantly undercapitalized. The Company's growth in its last quarter
of fiscal 1997 and during the first quarter of fiscal 1998 have outpaced its
cash flow availability. Further, the Company has continued to add overhead in
connection with its plan for growth. The Company currently plans to put its own
dedicated facilities in place. However that will be dependent on its ability to
raise additional capital in the near future.
The Company's major components of cash flow are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
-------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net cash used in operating activities ... $ (89,880) $ (440,074) $ (675,784) $ (811,116)
Net cash (used in) provided by investing
activities .............................. (461,003) 171,779 221,273 (72,442)
Net cash provided by financing activities 1,000,000 486,375 -- 332,578
----------- ----------- ----------- -----------
Net increase (decrease) in cash ........ $ 449,117 $ 218,080 $ (454,511) $ (550,980)
=========== =========== =========== ===========
</TABLE>
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, 1996. 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 Card being 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
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$1,784,407, $430,202 and $2,770,662, respectively. Prepaid expenses and other
assets recorded 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.
Accounts receivable, inventory and accounts payable increased by $1,823,544,
$746,055 and $3,107,202, respectively, from June 30, 1997 to December 31, 1997.
The increase in accounts receivable is attributable to the Company extending its
payment terms as a result of the execution of the Premiere agreements on
September 26 and 27, 1997 (See Note 9(a) to the Consolidated Financial
Statements). Upon the execution of the agreements, Premiere allowed the Company
to activate inventory with extended payment terms.
Net cash used by operating activities during fiscal 1997 was $440,074 as
compared to $89,880 for fiscal 1996. The increase of $350,194 is primarily
related to the net loss of $3,549,514 for the year ended June 30,1997 as
compared to the net loss of $129,275 for the year ended June 30, 1996. This is
partially offset by a net increase in non-cash charges of $374,426. The most
significant of the non-cash charges is the loss on write-down of the TECLink
Note, described above, of $1,340,230. In addition, the Company recorded
amortization related to its intangibles of $87,798 and recorded deferred rent of
$71,000 relating to the straight lining of its rental payments under the lease
for its new distribution and administrative facility. Other significant
operating changes, which are primarily related to the Company's growth during
the last half of fiscal 1997 are net increases in accounts receivable and
accounts payable and other liabilities of $787,548 and $1,611,141, respectively.
Prepaid expenses and other current assets had a net decrease of $1,000,773,
primarily related to prepaid time the Company had at the end of fiscal 1996
related to certain products that it terminated in the first half of fiscal 1997.
The decrease in cash provided by investing activities for the six months
ended December 31, 1997 as compared to the six months ended December 31, 1996 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 investing activities for fiscal 1997 of
$632,782 is primarily related to purchased communication equipment valued at
$533,625 during fiscal 1996 which was sold as part of the TECLink transaction
during fiscal 1996. In addition, the Company received $200,000 and $150,000 in
cash related to the TECLink transaction and the TECLINK Note during fiscal 1997
and 1996, respectively.
The increase in cash provided by financing activities during the six
months ended December 31, 1997 of $332,578 is primarily related to the Exercised
$1.50 Warrants pursuant to which 206,383 shares of the Company's Common Stock
were purchased at $1.50 per share.
The decrease in cash provided by financing activities of $513,625 is
primarily related to the Company receiving $486,375 during fiscal 1997 for
Exercised $1.50 Warrants pursuant to which 324,250 shares of the Company's
common stock were purchased at $1.50 per share as compared to the Company
receiving $1,000,000 during fiscal 1996 for the two offerings which were
completed under Rule 504 of Regulation D during that year. A total of l,666,666
shares were sold as a result of the two offerings.
In April of 1996, the Company entered into an agreement whereby it enabled
the Company to issue the $1.50 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. $1.50 Warrants
to purchase 3,677,082 shares of the Company's Common Stock were actually issued.
The remaining $13.20 and $1.50 Warrants to purchase 526,042 shares of Common
Stock were held awaiting the delivery of certain assets to the Company. Those
assets were never received and the Company never issued the warrants to the
three parties. Of the $13.20 and $1.50 Warrants issued, warrants to purchase
1,333,334 and 52,250 shares of Common Stock are exercisable at $13.20 and $1.50
per share, respectively. These 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 March 31, 1998, 2,291,498
shares of Common Stock have been issued related to the exercise of $1.50
Warrants. $1.50 Warrants to purchase 1,760,865 shares of the Company's Common
Stock at $1.50 per share were exercised in February and March, 1998.
To date, capital expenditures have not been material.
The Company, during fiscal 1997, acquired the customer bases of certain of
its distributors through the release of their outstanding obligations to the
Company. In connection with one of these transactions, the Company issued a
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$182,000 note payable with interest at 8% per annum. The payments under this
note commence November 1, 1997 with the last payment being due October 1, 1998.
In connection with the Company's plan to commence a carrier services
division, the Company entered into an acquisition agreement between the Company
and the shareholders of Ameridial, Inc., pursuant to which the Company acquired
all of the outstanding shares of Ameridial, Inc. as of October 31, 1997, in
exchange for 52,632 shares of the Company's Common Stock. 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 currently depends upon primarily Premiere, to provide the
Company with the bundled Prepaid Phone Cards that it resells to its customers.
The Company's ability to resell the Cards depends upon whether it can continue
to maintain a favorable relationship with its suppliers. The Company currently
purchases Cards in bulk at a discount below the face value of the Cards. It then
resells them to either independent distributors or to retail locations serviced
by its field representatives depending upon the locality of the distribution.
The Company receives its gross margin on the difference between discounts given
to customers and the discounts received from its suppliers. In September of
1997, the Company entered into two agreements with Premiere requiring the
Company to purchase Cards with an aggregate minimum face value of $81,000,000 at
discounts ranging from 23.5% to 41.75% off the face value of the Cards. Failure
to purchase the minimum value will result in the Company being required to pay
Premiere an amount equal to the retail value of the unsold Cards less the
applicable discount that would have been payable on such Cards. The agreements
provide for the extension of certain credit terms to the Company and expire upon
the earlier of September 1998 or six months after the last purchase of Prepaid
Phone Cards. Premiere may terminate upon breach of certain conditions. 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. Although the Company does not have any arrangements in place
for the period subsequent to September of 1998, the Company believes that it
will be able to either renew its agreements or negotiate new ones on similar
terms with another supplier.
On March 31, 1998, the Company entered into an agreement with Premiere
(the "Investment Agreement") in which Premiere received 61,050 shares of $.001
par value voting Series A Preferred Stock, valued by the Board of Directors at
$6,105,093 which represented Premiere's outstanding accounts receivable balance
as of that date. The $6,105,093 included $4,636,981 which was attributable to
Cards purchased in the normal course of business with the $1,468,112
representing a one-time charge on March 31, 1998 from Premiere for extra minutes
processed by Premiere on Cards activated by the Company. The $1,468,112 was
charged to operations during the quarter ended March 31, 1998. The Series A
Preferred Stock is convertible into Common Stock at any time at Premier's option
and the Company has the right to require Premiere to convert the Preferred Stock
after March 31, 1999. The Certificate of Designation for the Series A Preferred
Stock provides for certain voting, liquidation, and registration rights and
calculates the conversion by multiplying 61,050, the number of shares of Series
A Preferred Stock issued in connection with the Investment Agreement, by $100,
the Investment Amount as defined in the Certificate of Designation and then
dividing by $10.395, the Conversion Price as defined in the Certificate of
Designation, resulting in a total of 587,302 shares of Common Stock to be issued
under the Investment Agreement. The Company may call the redemption of each
share of Sereis A Preferred Stock at any time for $100 a share plus accrued
dividends.
Although the Company believes that its cash flow is sufficient to fund
current operations, excluding expansion of services and acquisitions, for the
next twelve months, to date, the Company has financed its operations through two
offerings under Rule 504 of Regulation D and the exercise of $1.50 Warrants to
purchase the Company's Common Stock which aggregated $1,000,000 and $3,437,248,
respectively, in proceeds to the Company. Due to the operating losses, the
Company remains undercapitalized and cannot finance its expansion as quickly as
opportunities arise. In order for the Company to be successful in its current
plans for expansion of services, to continue with its plans to establish itself
as a facilities-based carrier, and to make acquisitions as the opportunity
appears, the Company will be required to obtain significant additional
financing. To date, the Company has no existing bank lines of credit and has not
established any sources of such financing other than the credit terms provided
by Premiere. There can be no assurance that such financing will be available on
acceptable terms, or at all, to the Company.
Seasonality
The business of the Company does not experience significant seasonality.
29
<PAGE>
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.
Recent Accounting Pronouncements
In December 1996, the Financial Accounting Standards Board ("FASB") 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 all prior period earnings per share
data to be restated to conform to the provisions of the statement. The Company
adopted SFAS No.128 for the six-months ended December 31, 1997. The adoption of
this standard did not effect 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.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes
standards for the reporting of certain information about operating segments by
public companies in both annual and interim financial statements. SFAS No. 131
defines an operating segment as a component of an enterprise for which separate
financial information is available and whose operating results are reviewed
regularly by the chief operating decision maker to make decisions about
resources to be allocated to the segment and to assess its performance.
SFAS Nos. 130 and 131 are both effective for financial statements for
periods beginning after December 15, 1997 and both require comparative
information for earlier years to be restated. The adoption of SFAS No. 130 is
not expected to have a material effect on the Company's financial position or
results of operations. The adoption of SFAS No. 131 will have no effect on the
Company's financial position or results of operations and the Company is
currently reviewing SFAS No. 131 in order to fully evaluate the impact, if any,
the adoption of the provisions of this Statement, will have on future financial
disclosures.
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 stating that the Year 2000 Issue has
been addressed.
Market Risk
The Company does not hold any derivatives or investments that are subject
to market risk. The carrying values of financial instruments, including cash and
note receivable at June 30, 1996, and cash and note payable at June 30, 1997 and
December 31, 1997, approximate fair value as of those dates because of the
relatively short-term maturity of these instruments which eliminates any
potential market risk associated with such instruments.
30
<PAGE>
BUSINESS
Overview
The Company is engaged in the creation, distribution, marketing and
management of Prepaid Phone Cards. The Company's principal products are the
"F/X(R)" and "DigiTEC Direct(R)" Cards, which were introduced in May and
December 1996, respectively. See "Company History". The Company's Prepaid Phone
Cards are marketed through an extensive network of distributors and the Company
estimates that its products are currently available in 22,800 independent retail
locations. The Company's total revenues were $26,027,909 and $24,613,043, and
its net losses were $3,549,514 and $1,123,291 for the fiscal year ended June 30,
1997 and for the six months ended December 31, 1997, respectively, after losses
from discontinued operations of $1,069,261 and $707,615, respectively. The
Company activated 4 million Prepaid Phone Cards and approximately 75 million
minutes of telecommunications services were provided during the six months ended
December 31, 1997.
The Company believes it is among the leading independent providers (those
companies not owned or controlled by a regulated telephone common carrier) of
Prepaid Phone Cards in the United States. The Company markets its Prepaid Phone
Cards as a convenient and competitive alternative to credit cards and
conventional coin and collect long distance services. The Company's target
markets include ethnic communities with substantial international long distance
usage. The Company believes that consumers typically use F/X(R) and DigiTEC
Direct(R) Cards as their primary means of making long distance calls due to (i)
competitive rates, (ii) reliable service and (iii) the inability of a portion of
the Company's end users to attain credit necessary to have pre-subscribed or
other types of long distance service. In the intensely competitive Prepaid Phone
Card market brand awareness is essential to commercial success. The Company has
developed and promoted its brand awareness by the design of its Cards as well as
the high level of service provided to the users of its Cards. The Company
currently distributes and markets its Prepaid Phone Cards through approximately
150 distributors in 29 states in the United States (with its most significant
presence in the Metro Area), Puerto Rico and the U.S. Virgin Islands.
The F/X(R) and DigiTEC Direct(R) Phone Card users are provided with access
to local, domestic long distance and international telephone services through
toll-free calls directed to platforms currently operated by Premiere primarily
and Frontier. The customer can use Prepaid Phone Cards at any touch tone
telephone simply by dialing the toll-free number, followed by a PIN assigned to
each Card, and the telephone number the customer wishes to reach. Prior to
connection, the caller is informed of the remaining dollar balance on the Card
and the number of minutes available for usage. Calls are completed by the
switches operated by Premiere and Frontier utilizing their long distance and
local carriers and debiting the Card's dollar balance.
The Company currently depends primarily upon Premiere to provide the
Company with its bundled Prepaid Phone Cards that it resells to its customers.
The Company's ability to resell the Cards depends upon whether it can continue
to maintain a favorable relationship with its suppliers. The Company currently
purchases Cards in bulk at a discount below the face value of the Cards. It then
resells them to either independent distributors or to retail locations serviced
by its field representatives depending upon the locality of the distribution.
The Company receives its gross margin on the difference between discounts given
to customers and the discounts received from suppliers. In September of 1997,
the Company entered into two agreements with Premiere requiring the Company to
purchase Cards with an aggregate minimum face value of $81,000,000 at discounts
ranging from 23.5% to 41.75% off the face value of the Cards. Failure to
purchase the minimum value will result in the Company being required to pay
Premiere an amount equal to the retail value of the unsold Cards less the
applicable discount that would have been payable on such Cards. The agreements
provide for the extension of certain credit terms and expire upon the earlier of
September 1998 or six months after the last purchase of Prepaid Phone Cards.
Premiere may terminate upon breach of certain conditions. Although the Company
believes that the likelihood of such a termination is remote based on the
Company's current relationship with Premiere and the fact that Premiere became a
6.2 percent stockholder of the Company as of March 31, 1998, the Company does
not have a specific contingency arrangement in place to provide for such
termination. Although the Company does not have any arrangements in place for
the period subsequent to September of 1998, the Company believes that it will be
able to either renew its agreements or negotiate new ones on similar terms with
another supplier. See "Risk Factors - Dependence on Suppliers."
The Company has recently begun to implement its strategy to become a
facilities-based carrier. On March 13, 1998 it entered into a Services Agreement
with Innovative pursuant to which Innovative has agreed to provide processing
services
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for the Company's Prepaid Phone Cards utilizing its switching facilities and
platforms located at the Hudson Street Facility. The Company is currently
negotiating contracts with local and long distance carriers to provide
origination, transport and termination services for its Prepaid Phone Cards. The
Company intends to continue to expand its dedicated telecommunications
facilities by acquiring POPs in additional states. If the Company successfully
becomes a facilities-based carrier, it will receive additional margin from
one-minute rounding, breakage and unused time and monthly access fees, subject
to applicable state escheat laws.
While the Company has been able to negotiate fair and competitive rates
from its bundled product providers, the Company intends to lessen its dependence
on such providers through the use of its own dedicated facilities. As a result
of the deployment of the Company's own dedicated facilities, the Company
believes it will be able to negotiate more competitive rates with its long
distance providers. Based on the Company's cost analysis, the total cost per
call under the dedicated facilities is expected to be less than the bundled Card
product that it currently purchases. This is expected to have a positive impact
on the Company's gross margins as well as cash generated from operations.
The multi-billion dollar U.S. long distance telecommunications industry is
dominated by the nation's three largest long distance providers, AT&T, MCI and
Sprint, which together generated a significant majority of the aggregate
revenues of all U.S. long distance interexchange carriers. Other long distance
companies, some with national capabilities, accounted for the remainder of the
market. Based on published FCC estimates, toll service revenues of U.S. long
distance interexchange carriers have grown from $38.8 billion in 1984 to $72.5
billion in 1995. The aggregate market share of all interexchange carriers other
than AT&T, MCI and Sprint has grown from 2.6% in 1984 to 17.1% in 1995. During
the same period, the market share of AT&T declined from 90.1% to 53%. The
Company believes that these changes in the telecommunications market have
created opportunities for the growth of niche market telecommunications
providers such as the Company.
The market for Prepaid Phone Cards has grown substantially, from an
estimated $25 million in 1992 to an estimated $1.5 billion in 1997, making it
one of the fastest growing segments of the telecommunications industry. Based on
industry reports by Salomon Smith Barney, the market is expected to grow to
approximately $5 billion by 2001. The Company has identified three distinct
segments of the Prepaid Phone Card market. These three segments are utility card
products, which are prepaid phone cards sold in the retail market,
corporate/affinity card products and promotional card products. The Company
currently intends to continue to concentrate its efforts in the utility card
market, and as part of its growth strategy, it expects to expand into the
corporate/affinity market through selective acquisitions. However, there can be
no assurance that the Company will be able to identify or consummate such
acquisitions.
The Company believes that it is well-positioned to capitalize on the
growth opportunities within the Prepaid Phone Card market as a result of (i)
brand awareness of the Company's established Cards; (ii) the Company's position
as a significant conduit of telecommunications traffic to various international
destinations; (iii) the Company's distribution network through which the Company
can market, distribute and sell new and existing products; (iv) the Company's
experience in identifying and marketing to ethnic communities and other
consumers in the United States with significant long distance usage
requirements; and (v) the Company's ability to take advantage of anticipated
consolidation in the telecommunications industry through selective acquisitions.
Industry History
The Prepaid Phone Card business is a relatively recent development in the
telecommunications service industry. Prepaid local and long distance calling
cards began to develop in the United States during 1988-1989 using a technology
developed in Europe in the early 1980s that relied upon either an embedded
microchip or a magnetic strip on each Card and a telephone set device with a
built in "reader" to access information contained on the cards. Although the
microchip and magnetic strip cards were introduced in the U.S. by several
telephone carriers, the results were disappointing and the product did not
attain sales volumes necessary for commercial success. The European technology
had developed primarily as a replacement for coin operated public pay
telephones. This technology worked reasonably well in areas where a monopoly
telephone service provider had the ability to set widespread standards for the
cards, readers and rates per minute of usage. However, in the U. S. with many
independent telephone providers, several versions of technologies soon developed
that were not compatible (i.e. a caller in the Metro Area purchasing one type of
Card from one provider, was not able to use that Card with other types of
telephones installed by that provider or at certain public pay phones installed
by other providers). Other
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drawbacks included the significant cost of the reader telephone sets, high
maintenance costs associated with the remote reader equipment and the inability
to use the Card with non-reader telephone sets.
By 1992, advances in computers and telephone switch technology allowed
several companies to introduce "cards" that could be used from any touch-tone
("DTMF" signaling) telephone in the U.S. This technology relies upon network
based intelligence including the management of the debit card data bases. A Card
using this technology merely contains the designated access number, the PIN that
identifies the Card to the network and instructions for using the Card. The Card
itself contains no technology such as a chip or magnetic strip. There are no
Card readers or other forms of remote special equipment required for use of the
Card. The Card is more analogous to a "debit account" in which a fixed amount of
money is first deposited and the account is then debited for services as they
are used by the person with access to the PIN number. When the prepaid account
balance is depleted, it is automatically closed by the remote debit Card
database computer of the prepaid Card provider. Thereafter, the Card has no
further commercial value.
Company History
The Company was organized as a Nevada corporation in May 1987 under the
name Yacht Havens International Corp ("Yacht Havens"). In July, 1995, the
Company changed its name from Yacht Havens International, Corp to Promo Tel,
Inc. ("Promo Tel-Nevada"). In August 1995, Promo Tel-Nevada merged with a
Delaware corporation, named Promo Tel, Inc. ("Promo Tel-Delaware"). The Company
exchanged 1,333,334 shares of previously unissued and unregistered common stock
for the outstanding common stock of Promo Tel-Delaware. Promo Tel-Delaware's
assets consisted of personnel, sales, marketing and distribution programs and
contacts for the development and sale of Prepaid Phone Cards. In October 1996,
the Company amended its Articles of Incorporation to change the name of the
Company to Digitec 2000, Inc.
During fiscal 1996, the Company introduced an array of Prepaid Phone
Cards. Although the Company had sales of $17,425,200 for fiscal 1996, during the
last quarter of fiscal 1996 and the first half of fiscal 1997, the Company could
not compete effectively in the marketplace due to price and service issues. In
October 1996, the Company and Frontier reached an agreement whereby the Company
would act as a distributor for Frontier's Prepaid Phone Card and market the
Cards under the Company's brand names. As a result of this agreement and a
similar subsequent distributor agreement with Premiere the customer service
issues were alleviated and the Company began to experience consistent sales
growth. The Company's sales for the fourth quarter of fiscal 1997 were
approximately $14,000,000 and its sales for the year ended June 30,1997 reached
$26,027,000.
Telecommunications Products and Services of the Company
The principal products of the Company are telephone network access
products commonly referred to as Prepaid Phone Cards, currently marketed under
the brand names F/X(R), DigiTEC Direct(R) F/X Mexico, F/X Asia, F/X South
America, F/X Quisqueya, Caribbean Direct, Mexico Direct and Brazil Direct, that
allow users to access domestic long distance, international long distance, and
local telephone services from any touch tone ("DTMF" signaling) telephone set in
the U.S. Users purchase the Company's Cards in denominations of $5.00, $10.00
and $20.00 at retail locations such as convenience stores, vending machines,
newsstands, delicatessens, gasoline stations, check cashing centers,
supermarkets, and drug stores. Each Card has printed on the back a toll-free
access number and a PIN that is unique to that Card. F/X(R) and DigiTEC
Direct(R) Cards are currently available with instructions in English, Spanish
and Chinese. The Company plans to introduce new Prepaid Phone Cards as it
identifies new market niches for its services. When the toll-free access number
is entered, the user is connected to a debit or prepaid card platform switch in
the telephone network that provides interactive voice prompts in the user
selected language through the call process. After entering the PIN, the user may
dial one or more destination telephone numbers in the same manner as a normal
telephone call. The interactive voice prompts in the platform advise the user of
the minutes remaining available on that Card for the dialed destination. The
prepaid account balance associated with each Card is managed by the platform
which automatically deducts for usage. Upon use of all the minutes stored in the
Card's account, the debit card database computer automatically instructs the
debit platform to terminate the account associated with the Card. Usage charges
are based upon values in a "rate deck" stored in the computer database connected
to the platform. Different rates may be set for domestic long distance,
international calls by country of destination and for local calls. The Company
currently has nine brands which include F/X(R), DigiTEC Direct(R), F/X Mexico,
F/X Asia, F/X South America, F/X Quisqueya, Caribbean Direct, Mexico Direct and
Brazil Direct. Each of the brands target a
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potential market segment by providing competitive rates to specific geographic
areas. Three of the brands are currently suspended during price negotiations.
Facilities and Third Party Service
Currently the Company is dependent upon the facilities of Premiere for the
completion of the long-distance traffic generated by its Prepaid Phone Cards but
upon implementation of its plans to become a facilities-based carrier will
depend primarily on its own dedicated facilities. Premiere's facilities, and the
Company's facilities will, include (i) leased capacity to connect Premiere's
network POPs and the Company's proposed network POPs; (ii) switches, network
POPs and debit card platforms in strategic geographic regions in the United
States and (iii) direct termination agreements with telecommunications operators
in the countries where the Company terminates a large number of minutes. The
Company currently has a contract with Innovative expiring in June of 1999
pursuant to which Innovative has agreed to provide the Company with prepaid
transaction services utilizing its switching and platform facilities located at
the Hudson Street Facility. The Company has not yet begun to offer services
utilizing this capacity. The contract requires Innovative to process calls
initiated by the Company's Card holders and received from local and long
distance carriers and to present those calls for completion to designated local
and long distance carriers. All transport and carrier services must be provided
by the Company. The Company is currently negotiating those carrier services, but
there can be no assurance that the Company will be able to obtain and maintain
favorable rates and terms for the origination, transportation and termination of
its customers' long distance traffic.
Premiere operates its own facilities. It has internal controls and
utilizes sophisticated software and information systems to maintain accurate
Prepaid Phone Cards balances and to debit these balances at the proper rate. The
information systems produce daily, weekly and monthly management reports as to
network routing, call completion rates and usage for the preceding time period.
The Company has twenty-four hour access to representatives of Premiere, so that
it can promptly and efficiently address any customer service issues. Innovative
will operate the Hudson Street Facility, activating PINS (at the direction of
the Company), decreasing dollar balances and generating management reports and
other information. Once the Company begins to utilize the capacity of the Hudson
Street Facility, a majority of the minutes will be processed by that Facility.
In order to mitigate its reliance on both Premiere and Innovative and their
facilities, the Company is in the process of establishing relationships with
other carriers as well as expanding the operations of its own carrier division.
Marketing and Distribution
The Company distributes the F/X(R) and DigiTEC Direct(R) Cards primarily
through independent distributors. Distributors purchase cards from the Company
at a discount from the face amount of the Card. Distributor discounts off the
face amount of the Card depend on the Prepaid Phone Card and the volume of
purchases by the distributor. Master distributor agreements provide for limited
exclusivity in defined metropolitan areas, subject to the master distributor
maintaining an agreed upon monthly volume of Card purchases. A master
distributor has the right to enter into local distribution agreements with
sub-distributors in his territory to which the Company is not a party. Terms of
the discount offered to the sub-distributor are negotiated directly between the
master distributor and the sub-distributor. A master distributor is responsible
for supplying the sub-distributor and may also sell directly to retailers. The
Company retains the right to supply national accounts directly within the master
distributor's territory as well as its own direct retail accounts. A national
account is generally defined as a large retailer that operates in more than one
state. Most of the expenses that are incurred in the course of distribution of
the F/X(R) and DigiTEC Direct(R) Cards are the responsibility of the Company. As
of December 31, 1997, approximately 150 distributors purchased Prepaid Phone
Cards directly from the Company, reaching over 20,000 retail locations.
The Company also sells and distributes its Cards through its own route
distribution comprised of 22 field representatives and servicing approximately
2,800 retail locations primarily in the Metro Area and Phoenix, Arizona. By
building out its route distribution infrastructure, the Company is able to
attain higher gross margins since it eliminates the independent distributor's
discount in the sale. The Company intends to further expand its route sales and
distribution network as part of its plans for expansion. See "Growth Strategy."
The Company has targeted heavily populated metropolitan areas, with an
emphasis on areas with significant ethnic community populations, in the
development and expansion of its distribution network. Many of the Company's
distributors
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are members of such ethnic communities, or otherwise have personal or business
relationships in such communities. In its expansion process the Company intends
to continue to focus on geographic and metropolitan areas with significant
ethnic community populations. The Company believes that the success of its
Prepaid Phone Cards has created significant brand loyalty and encourages its
distributors and retail locations to actively market the products. The Company
provides its distributors and retail locations with advertising and explanatory
materials, including posters presenting certain of the Company's current rates
and detailed rate sheets. The Company adjusts its pricing for particular
segments in order to target customer groups, respond to competitive pressures
and otherwise increase market share.
Customer Service
The Company believes that effective and convenient multilingual customer
service is essential to attracting and retaining customers. The Company's
customer service center handles customer inquiries, including inquiries relating
to Prepaid Phone Card balances, Prepaid Phone Card availability, becoming a
distributor, rates and billing. The Company currently employs 18 full-time
customer service representatives ("CSRs"). Most CSRs are fluent in both English
and Spanish. Customer service is provided twenty-four hours per day, seven days
per week.
Prepaid Phone Card Production and Inventory Control
The Company controls its Prepaid Phone Card inventory by PIN and by
physical count. Generally, Prepaid Phone Cards are received by, stored at, and
shipped from, the Company's headquarters. Physical inventory is counted on a
daily basis and reconciled against all incoming Card deliveries and outgoing
shipments to distributors.
All PINs are inactive when the Prepaid Phone Cards arrive at the Company's
facility. Calls cannot be completed until PINs are activated by the Company.
PINs are activated upon shipment from the Company's facility to distributors in
order to minimize the numbers of cards with activated PINs in its facility.
PINs are created electronically with unique inventory and batch codes. The
Company currently relies on Premiere and upon establishment of its facilities
will rely on Innovative and other suppliers to provide software support to track
Prepaid Phone Card information and deactivate specified PINs in certain
instances such as mistaken activation or theft.
Growth Strategy
The Company believes that it is well-positioned to capitalize on the
growth opportunities within the Prepaid Phone Card market as a result of (i)
brand awareness of the Company's established Cards; (ii) the Company's position
as a significant conduit of telecommunications traffic to various international
destinations; (iii) the Company's distribution network through which the Company
can market, distribute and sell new and existing products, (iv) the Company's
experience in identifying and marketing to ethnic communities and other
consumers in the United States with significant long distance usage
requirements; and (v) the Company's ability to take advantage of anticipated
consolidations in the telecommunications industry through selective
acquisitions.
The Company has identified the following strategies, in order to (i)
reduce its costs of providing services as a percentage of sales which will allow
the Company to increase its gross margins, and (ii) increase its existing
revenue base by increasing its market share in existing geographic markets and
penetrate new geographic markets:
Facilities-Based Carrier. The Company intends to become a facilities-based
carrier in order to migrate its traffic away from the current bundled
arrangements pursuant to which it purchases services. By obtaining use of
dedicated facilities, the Company would significantly reduce its dependence on
any one supplier. In addition, based on the Company's cost analysis, the total
cost per call under a dedicated platform arrangement is expected to be less than
the bundled Card product that it currently purchases. This is expected to have a
positive impact on the Company's gross margins as well as cash generated from
operations. The Company intends to include in its network (i) leased capacity to
connect the Company's proposed POPs, (ii) switches, network POPs and debit card
platforms in strategic geographic regions in the United States, and (iii) direct
termination agreements with telecommunications operators in countries where the
Company terminates a large number of minutes. The Company's facilities strategy
is to utilize the services of other platform providers until the Company has
developed substantial traffic volume in a geographic region. As the market is
developed, the
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Company would invest in facilities infrastructure in that region, thus reducing
the risks associated with such capital investment and maximizing the efficiency
of expanding its facilities.
The Company currently has a contract with Innovative expiring in June of
1999 pursuant to which Innovative has agreed to provide the Company with prepaid
switch and platform facilities located at the Hudson Street Facility. The
Company has not yet begun to offer servicing utilizing this capacity. Innovative
manages state-of-the art Excel(TM) switches for processing Card traffic. The
contract requires Innovative to process calls initiated by the Company's Card
holders and received from local and long distance carriers and to present those
calls for completion to designated local and long distance carriers. All
transport and carrier services must be provided by the Company. The Company will
purchase transmission services on a per-minute basis and lease transmission
capacity on a fixed-cost basis from a variety of local and long distance
carriers. The Company is currently negotiating terms for those and transport
carrier services and has begun to enter into termination agreements with foreign
telecommunications operators, but has not yet begun to offer services under
these agreements. Innovative will operate the Hudson Street Facility, activating
PINs (at the direction of the Company,) debiting dollar balances and generating
reports and other information.
There can be no assurance that the Company will be able to implement its
strategy to become a facilities-based carrier or that it will be able to obtain
and maintain favorable rates and terms for the origination, transportation and
termination of its customers' long distance traffic.
Expansion of the Company's Retail Distribution of the Company's Products.
The Company's Cards are currently sold in 29 states in the United States, Puerto
Rico and the U.S. Virgin Islands. The Company has its own route distribution
network servicing approximately 2,800 retail locations, primarily in the Metro
Area and Phoenix, Arizona. As such, the Company's revenues are primarily
generated though independent distributors. The Company currently has
approximately 150 independent distributors servicing approximately 20,000 retail
locations. The Company intends to increase its route distribution network by
expanding its coverage within the markets it currently serves and by extending
this network into new markets. The Company will also evaluate the possibility of
acquiring existing or new distributors to quickly gain a route distribution
presence in a new market.
Introduction of New Prepaid Phone Cards and Services. The Company intends
to introduce local access ("LAC") cards in all of the markets that it currently
services and in any markets into which the Company expands. Further, the Company
intends to continue to identify niches of the international and domestic long
distance market to offer new Prepaid Phone Cards, increasingly segmenting the
Prepaid Phone Card market. The Company believes that it will be able to
capitalize on its brand awareness and effectively market these products to new
and existing customers. The Company also intends to capitalize on its brand
awareness within certain ethnic communities in the United States by offering
international long distance services to consumers located in countries to which
its customers direct a substantial number of calls. In addition, the Company
also believes that it will expand the telecommunications services that it
currently offers by the following:
PhoneCard Wholesalers, Inc. The Company had signed a letter of intent to
acquire the customer base of Phone Card Wholesalers, Inc. consisting of 64
distributors for a maximum $750,000 in cash and shares of the Company's Common
Stock with a market value of $1,000,000 based upon the closing price of the
Common Stock on the closing date of the acquisition.
College Enterprises Inc. The Company has executed a contract with College
Enterprises, Inc. ("CEI") pursuant to which it will offer telecommunications s
services to certain universities and schools. CEI services approximately 200
colleges and universities providing services such as meal plans, copy services
and educational material through the use of debit cards. The Company plans to
offer long distance telecommunications services as one of the services available
on debit cards distributed to CEI users. Currently, the CEI data base includes
approximately 800,000 students and faculty. The Company believes that most of
the traffic generated will be domestic long distance service.
Carrier Services. On October 31, 1997, the Company acquired Ameridial,
Inc. ("Ameridial"). Ameridial was established to negotiate and resell rates
between international long distance carriers. The Company intends to negotiate
rates for international long distance services on its Prepaid Phone Cards as it
moves away from the bundled arrangements that it currently has with its
providers and to expand its services by selling and buying international long
distance services
36
<PAGE>
to and from other carriers. The Company believes that its volume of
telecommunications traffic will enable it to continue to negotiate more
favorable transmission rates and direct termination agreements with foreign
telecommunications operators which will also enable the Company to offer
attractive rates to other telecommunications providers.
The Company evaluates on an ongoing basis potential acquisitions which
would enhance or expand its current operations and planned growth strategy.
Continue to Target Consumers with Significant International Long Distance
Usage. The Company primarily targets consumers with significant international
long distance usage by providing reliable international long distance services
at competitive rates. The Company believes that the international long distance
market provides and will continue to provide an attractive opportunity given its
size and expected growth rate. The Company therefore intends to continue to
identify and market its services primarily to consumers with significant
international usage providers.
Introduction of Prepaid Cellular Phone Service. The 1997 total revenues
for the wireless industry were in excess of $23 billion, with in excess of 44
million cellular phone subscribers. Cellular analysts estimate that
approximately 30% of all applications for cellular service are initially denied
due to the applicant's credit history. This represents a large target audience
for prepaid cellular phones.
In May 1997, the Company introduced its prepaid and conventional (or
post-paid) cellular phone service which was a marketed through a separate
division. In connection with the Company's plan to conserve resources to expand
its core business, management resolved to discontinue the operations of its
conventional cellular operations as of December 31, 1997. The Company plans to
market its prepaid cellular phone service through its Prepaid Phone Card
distribution channels.
The Company has recently completed negotiations with a supplier to offer
cellular phones co-branded with the "DigiFone" name and which will include
software within the phone to monitor the usage. DigiFone will be sold through
retailers or agents ready to be activated by the end user. The customer
purchases the phone and calls a customer service number provided to them to
activate the phone. Included in the purchase price of the phone will be a
certain amount of minutes of local air time. The customer may then purchase
additional air time through retailers or the Company's customer service
department in various increments of minutes. The rate per minute for additional
air time varies based on the volume purchased by the customer. The phone will be
equipped with software placed on a computer chip within the phone which will
monitor the amount of time the customer has activated on the number and
disconnect the phone upon termination of its paid access. In connection with the
sale of the phone, the Company will offer phone service as an authorized
reseller of AT&T wireless services. The Company believes that an affordable
price, coupled with the AT&T service name, will make the product attractive to a
large variety of consumers.
Competition
The Prepaid Phone Card sector of the long distance market and the long
distance telecommunications market in general is highly competitive and is
affected by the constant introduction of new cards and services by industry
participants. Competition in the Prepaid Phone Card sector of the long distance
telecommunications business is based upon pricing, customer service and
perceived reliability of the Prepaid Phone Cards. The Company's competitors
include some of the largest telecommunications providers which are substantially
larger than the Company and emerging carriers in the Prepaid Phone Card market
which have greater financial, technical personnel, and marketing resources than
the Company as well as greater name recognition and larger customer bases than
the Company. The Company believes that additional competitors will be attracted
to the Prepaid Phone Card market (including Internet-based service providers and
other telecommunications companies). 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 Cards at prices
competitive with, or lower than, those charged by its competitors.
The telecommunications industry is subject to a very high level of
technological change. Existing competitors are more than likely to continue to
develop new services that they offer to consumers. The ability of the Company to
compete
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effectively in the telecommunications industry will depend partly on the
Company's ability to develop additional products and services which appeal to
its intended end users.
Recent changes in the regulation of the telecommunications industry may
affect the Company's competitive position. The Telecommunications Act
effectively opens the long distance market to competition from the RBOCs. The
entry of these well-capitalized and well-known entities into the long distance
market likely will increase competition for long distance customers, including
customers who use Prepaid Phone Cards to make long distance calls. The
Telecommunications Act also grants the FCC the authority to deregulate other
aspects of the telecommunications industry, which in the future may, if
authorized by the FCC, facilitate the offering of telecommunications services by
regulated entities, including the RBOCs, in competition with the Company. See "
- -- Government Regulation."
In addition, due to the prepaid nature of the industry, the Company may
compete with other issuers of Cards which may distribute at or below the
Company's cost. These issuers include companies which have significantly larger
capitalization and resources, which allow these companies to derive lower
returns on funds employed or, in the case of fraudulent practices, sell Cards
without payment to telecommunications carriers.
Government Regulation
Currently the Company is subject to minimal government regulation.
However, as the Company implements its plan to change the focus of its business
strategy from resale of its Prepaid Phone Cards bought in bundled arrangements
from third party suppliers to sales of Prepaid Phone Cards which utilize its own
dedicated facilities, the Company will become subject to extensive federal and
state regulation. The Telecommunications Act and the FCC regulations apply to
interstate telecommunications and international telecommunications that
originate or terminate in the United States. State regulatory authorities have
jurisdiction over telecommunications that originate and terminate within a
state. See "Risk Factors-Regulation."
Federal. The Telecommunications Act opened the local telecommunications
market to competition, and significantly opens the long distance market to local
exchange carriers, including the RBOCs, to provide inter-LATA (local access and
transport area) long distance telephone service. The Telecommunications Act also
grants the FCC the authority to deregulate other aspects of the
telecommunications industry and to implement certain policy objectives,
including access charge reform and establishment of the universal service fund.
The new legislation will likely result in increased competition in the industry,
including from the RBOCs, in the future. See "--Competition."
As a non-dominant international carrier, the Company will be required to
obtain Section 214 authority from the FCC. The Company has applied for a Section
214 license from the FCC to provide international long distance telephone
service. When the Company becomes a Section 214 licensee, it must also comply
with a variety of reporting requirements concerning international traffic and
revenues, active circuits, interlocking directors, foreign affiliates and
agreements it enters into with foreign carriers. No specific authorization is
required by the FCC to provide domestic interstate service. Both domestic
interstate and international non-dominant carriers must maintain current tariffs
for their service on file with the FCC which contain the current effective
rates, terms and conditions of telephone service. Although the tariffs of
non-dominant carriers, and the rates and charges they specify, are subject to
FCC review, they are presumed to be lawful. As an international non-dominant
carrier, the Company will be required to include detailed rate schedules in its
international tariffs. On March 21, 1996, the FCC initiated a rule making
proceeding in which it proposed to eliminate the requirement that non-dominant
interstate carriers such as the Company maintain tariffs on file with the FCC
for domestic interstate services. The FCC's proposed rules are pursuant to
authority granted to the FCC in the Telecommunications Act to "forbear" from
regulating any telecommunications service provider if the FCC determines that
the public interest will be served. The FCC subsequently adopted its proposal
and eliminated the requirement that interstate carriers file domestic tariffs.
That decision has been appealed to the Circuit Court and a stay has been issued
pending a decision on the merits of the appeal. It is unclear when the Court
will rule on the appeal.
The Telecommunications Act requires long distance carriers, which the
Company will become when it is established as a facilities-based carrier, to
compensate pay phone owners $.284 per call when a pay phone is used to originate
a telephone call through a toll-free number. Although approximately 30 percent
of the Company's customers utilize
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pay phones in combination with Cards to originate telephone calls, the Company
does not believe this provision will have a material adverse effect on the
Company.
On May 8, 1997, the FCC issued an order to implement the provisions of the
Telecommunications Act relating to the Universal Service Order. The Universal
Service Order requires all telecommunications carriers providing interstate
telecommunications services to contribute to universal service support by
contributing to a the Universal Service Fund. Universal service contributions
will be assessed based on intrastate, interstate and international "end-user"
gross telecommunications revenues effective January 1, 1998. The contribution
factors adopted by the FCC for the second quarter of 1998 will require subject
telecommunications carriers to contribute as much as 3.9% of the end user
telecommunications revenues. The contribution factors are based on the ratio of
total projected quarterly expenses of the universal service support programs to
total end user telecommunications revenues and could, therefore, increase or
decrease in subsequent periods. The Company currently is determining whether the
Universal Service Order will be applicable to the Company as it moves its
Prepaid Phone Cards to unbundled arrangements. See "Business - Growth Strategy."
When its business strategy is implemented, the Company will continue to use a
distribution network to sell its Prepaid Phone Cards, and therefore will not
offer Prepaid Phone Cards directly to the public. In addition, the Universal
Service Order is subject to petitions seeking reconsideration by the FCC and to
certain appeals. Until such petitions or appeals are decided, there can be no
assurance as to how the Universal Service Order will be implemented or enforced
or what effect the Universal Service Order generally will have on competition
within the telecommunications industry or specifically on the competitive
position of the Company.
Resale carriers are also subject to a variety of miscellaneous regulations
that, for instance, govern the documentation and verifications necessary to
change a consumer's long distance carriers, and limit the use of toll-free
numbers for pay-per-call services. Resale carriers such as the Company must also
pay certain fees annually, including TRS Fund and other regulatory fees and
charges.
State. When the Company establishes its own dedicated facilities, the
intrastate long distance telecommunications operations provided will also be
subject to various state laws and regulations, including prior certification,
notification or registration requirements. The Company will be subject to
various levels of regulation in the states in which it provides telephone
service using its own dedicated facilities (which are generally subject to the
same rates as presubscribed long distance services by the states). The majority
of states will require that the Company apply for certification to provide
telecommunications services, or at least register, before commencing intrastate
service. In most of the states where certification or registration is required,
the Company will be required to file and maintain detailed tariffs listing rates
for intrastate service. Many states also impose various reporting requirements
and/or require prior approval for transfers of control of certified carriers and
assignments of carrier assets, including customer bases, carrier stock offerings
and incurrence by carriers of significant debt obligations. Certificates of
authority can generally be conditioned, modified, canceled, terminated or
revoked by state regulatory authorities for failure to comply with state law and
the rules, regulations and policies of the state regulatory authorities. Fines
and other penalties, including revocation, may be imposed for such violations.
The Company is currently authorized to do business in 20 states in the
United States and has applications on file for the remaining states as well as
Puerto Rico and the U.S. Virgin Islands. As discussed above, the Company will
also need to make additional filings in most states to be certified to provide
telecommunications services. The Company has made, or will make, the filings and
has taken, or will take, any action it believes is necessary to become certified
or tariffed to provide intrastate telecommunications services to its customers
throughout the U.S. See "Risk Factors--Regulation."
Other. The telecommunications industry has increasingly come under the
scrutiny of the FTC and state regulatory agencies with respect to the promotion,
marketing and advertising of effective rates, terms and conditions of
telecommunications services and products. The New York regional office of the
FTC and the NYATG are currently reviewing advertisements of products and
services of other telecommunications companies. While the Company believes that
its advertising has complied with federal and state regulations regarding
advertising, there can be no assurance that the FTC and the NYATG will not raise
inquires towards the Company's advertising practices or any future federal or
state regulatory inquiries will not raise material issues with respect to the
Company's past or present promotion, marketing or advertising, or that the
resolution of any raised issues would not result in civil penalties (including
fines) and or require the Company to modify its advertisements.
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World Access
The Company's wholly-owned subsidiary, World Access, commenced its
operations on June 1, 1997. The Company established World Access as a
Mississippi based internet provider with assets which the Company had reacquired
from TECLink, an affiliate of the Company. In May, 1996, the Company sold
certain internet service provider assets to TECLink. The Company, which owned
40% of TECLink, received $50,000 and the Note, due December 31, 1998 from TEC
Link. The assets sold to TECLink had been purchased primarily from TEC in
January 1996 in exchange for 1,475,126 shares of the Company's Common Stock. Due
to TECLink's continuing losses, it ceased operations as of May 31, 1997. The
Company and TECLink entered into an agreement whereby TECLink exchanged its net
assets for satisfaction of the outstanding balance of the Note. The Company
recorded a loss of $1,340,230 as a result of the settlement of the Note. See
"Certain Relationships and Related Transactions."
For the year ended June 30, 1997, revenues from the operations of World
Access were not material. Further, as of June 30, 1997, management resolved to
discontinue the operations of World Access by selling its net assets. On October
1, 1997, the Company entered into an Agreement to sell the customer base, the
equipment and software which services the customer base and the Company's
obligations under its leases for its premises and telephone equipment to Meta3,
Inc. The Agreement calls for Meta3 to pay for the assets sold over the Purchase
Period (as defined therein), commencing November, 1997, based on number of
subscribers in the identified customer base, adjusted for its attrition rate for
the first five months of the Purchase Period . As of June 30, 1997, the Company
recorded a loss on disposal of $893,347. The assets sold had a book value of
$988,347. For the six months ended December 31, 1997, the Company recorded an
additional loss from the discontinued operations of World Access of $105,554.
Employees
The Company had 65 full-time employees, including three of its officers,
as of March 31, 1998. None of the Company's employees are members of a labor
union or are covered by a collective bargaining agreement. Management believes
that the Company's relationship with its employees is good.
Trademarks
The brand names F/X(R), TEC DIRECT(R) and DigiTEC Direct(R) are registered
trademarks of the Company. The Company plans to apply for trademark protection
for the mark DigiFone. As the Company develops new products and variants of the
F/X(R), the TECDirect(R) and DigiTEC Direct(R) trademarks, it intends to file
additional trademark applications. There can be no assurance that the Company
will receive registration for any applied for trademarks or that any registered
trademark will provide the Company with any significant marketing or industry
recognition, protection, advantage or benefit.
Properties
The Company occupies leased premises of approximately 20,000 square feet
on two floors at 8 West 38th Street, New York, New York. The lease provides for
10,000 rentable square feet per floor, with a base rental of $14.50 per square
foot per annum or approximately $24,200 per month, commencing July 1, 1997 and
annual fixed increases of 2.5% in lieu of payment for operating expenses. The
lease expires on March 30, 2001. The Company's present use of the premises
involves: 2,000 square feet for reception and common areas; 1,400 square feet
for executive offices; 1,000 square feet for conference rooms; 1,500 square feet
for shipping and receiving; and the remainder is for working areas.
The Company also maintains a sales and distribution office in Phoenix,
Arizona in leased premises containing 1,360 square feet. The lease is for a
two-year term which commenced in April of 1997 and provides for an annual rent
of approximately $19,000 the first term year and $20,000 the second term year.
World Access occupied leased premises in Suite 1510 at 125 South Congress
Street, Jackson, Mississippi. The offices contain 4,750 square feet. The lease
is for a five year term commencing June 1, 1997 and ending May 31, 2002. The
monthly rental for the first three years is $5,940 per month, $6,237 per month
in the fourth year and $6,336 per month
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in the fifth year. As part of the Agreement with Meta3, Meta3 has agreed to
assume the obligation under the lease for World Access' premises.
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. ("Heritage"), 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 Raine 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 C. Magliato. The second Amended
Complaint filed in the action alleges a 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 Company and others allegedly duped
Heritage into surrendering its trade secrets, its services, its intellectual
property, its expertise, etc. to the Company. The complaint's lesser allegations
are that (i) defendants conspired to slander the business reputations of
Heritage and Tom Gould; and (ii) TEC and the Company are jointly and severally
liable to it for $268,245 worth of production work and consulting services
provided over the September to December 1995 time period. The plaintiffs seek
damages of $500 million. The Company believes that the plaintiffs' claims are
without merit. Further the Company believes that its counterclaims are
sufficiently well grounded to offset any judgment entered against the Company.
The Company intends to vigorously contest this case.
In October of 1997, the Company initiated a lawsuit against IDT
Corporation ("IDT"), CG Com, and Carlos Gomez in the Supreme Court of the State
of New York for the County of New York (Index No. 604920/97). The Company
initially sought and was granted a temporary restraining order which enjoined CG
Com and Carlos Gomez from distributing Prepaid Phone Cards of IDT, a competitor
of the Company, which the Company alleged was in violation of an Independent
Master Distributor Agreement (the "Agreement ) with the Company which provided
for CG Com and Carlos Gomez to act as exclusive distributors of the Company's
Prepaid Phone Cards in the state of New York. The Amended Complaint sought
preliminary injunctive relief against both CG Com and IDT and damages for breach
of contract by CG Com and for receivables due to the Company and for tortious
interference with a contract by IDT. The Amended Complaint alleges, among other
things, that CG Com and Mr. Gomez are utilizing the distribution network
established and developed as a result of the Agreement and that CG Com and Mr.
Gomez have irreparably damaged the Company's reputation by disparaging its
products. The Amended Complaint further alleges that IDT entered into its
distributorship arrangement with CG Com and Mr. Gomez with full knowledge of the
business relationship between the Company and those parties. The motion for
preliminary injunctive relief was denied on November 13, 1997. The case is now
in the discovery phase.
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Market Price of and Dividends on the Registrant's Common Equity
and Other Stockholder Matters
Since October 15, 1996, the Company's Common Stock has been and is being
quoted and traded on an inconsistent basis on the OTC Bulletin Board, under the
trading symbol "DGTT". Prior to such time, it so traded under the symbol "PROE."
The following table sets forth the high and low closing bid and ask prices
as reported on the OTC Bulletin Board for the periods indicated.
<TABLE>
<CAPTION>
------------------------------------------------------
Period (1) High(1) Low(1)
------------------------------------------------------
<S> <C> <C>
Year Ending June 30, 1996 (2):
First Quarter $27.00 $24.00
Second Quarter 30.00 25.50
Third Quarter 30.00 15.00
Fourth Quarter 36.00 12.00
Year Ending June 30, 1997(2):
First Quarter $36.00 $18.00
Second Quarter 30.00 9.88
Third Quarter 13.50 9.88
Fourth Quarter 15.50 13.00
Year Ending June 30, 1998(2):
First Quarter $17.25 $13.00
Second Quarter 14.75 5.50
Third Quarter 9.38 5.00
------------------------------------------------------
</TABLE>
(1) High and low closing ask and bid prices prior to October 15, 1996 have
been retroactively adjusted to give effect to the Company's 6:1 reverse
stock split of its Common Stock.
(2) For the years ended June 30, 1996 and 1997 and the period July 1, 1997
through March 31, 1998, the Company's Common Stock was thinly traded.
Further, over-the-counter market quotations may not necessarily represent
actual transactions.
As of March 31, 1998, there were approximately 701 holders of record of
the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock, and the
current policy of the Board of Directors is to retain any available earnings for
use in the operation and expansion of the Company's business. Therefore, the
payment of cash dividends on the Common Stock is unlikely in the foreseeable
future. Any future determination to pay cash dividends will be at the discretion
of the Board of Directors and will depend upon the Company's earnings, capital
requirements, financial condition and any other factors deemed relevant by the
Board of Directors.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth information regarding the directors and
executive officers of the Company. In accordance with the Company's Amended and
Restated ByLaws (the "ByLaws"), all directors are elected for a term of one
year.
Name Age Position
---- --- --------
Frank C. Magliato 46 Chairman, Chief Executive Officer,
President and Director
Lori Ann Perri 33 Director
Francis J. Calcagno 48 Director
Scott W. Steffey 36 Director
Amy L. Newmark 40 Director
Diego E. Roca 30 Vice President of Operations, Secretary
and Treasurer
The principal occupation for the past five years, and other biographical
information with respect to each of the directors and executive officers of the
Company is as follows:
Frank C. Magliato has served as Chairman, Chief Executive Officer,
President and a director of the Company since June of 1995. From February of
1993 to June of 1995, he was employed as President of Windsor Associates of New
York City, a telecommunications consulting firm. From December of 1988 to
February of 1993, he was employed as President of Telecorp Funding, Inc. and
subsidiaries, a telecommunications company in New York City. Mr. Magliato
received a Bachelor of Science degree in Engineering from Rensselaer Polytechnic
Institute in 1973.
Lori Ann Perri, CPA, sibling of Frank C. Magliato, has served as a
director of the Company since November of 1995. She has been employed by the
publishing division of Time, Inc. in New York City since August of 1995 and
presently serves as an Assistant Director of Finance and Reporting. From August
of 1993 to August of 1995, she was employed by Computer Dynamics, Inc. of
Virginia Beach, Virginia as Director of Finance and Accounting. Ms. Perri
received a Bachelor of Science degree in Accounting from Hofstra University in
1987. She is a member of the American Institute of Certified Public Accountants
and the New York State Society of Certified Public Accountants.
Francis J. Calcagno has been employed by Dominick & Dominick since
February 1998. From February of 1994 to January of 1998 he was employed as
managing director in the corporate finance practice of Deloitte &Touche LLP
("Deloitte&Touche"). Prior to joining Deloitte & Touche, Mr. Calcagno was the
Vice President in charge of Corporate Development for Franklin Holding Company,
a publicly-held company from 1993 to 1994. Mr. Calcagno received a Bachelor of
Science degree in Electrical Engineering from Worcester Polytechnic Institute in
1971 and an MBA from Washington University in 1973.
Scott W. Steffey has served as the Vice Chancellor of the New York State
University System since February 26, 1997. The State University System is the
largest public higher education system in the United States. From 1990 to 1996,
Mr. Steffey held several senior positions with NYNEX Corporation, including the
position of President of NYNEX Computer Services Company. Mr. Steffey received a
Bachelor of Arts degree in Philosophy from Skidmore College and has earned
advanced credits in Business at Columbia University and in Philosophy at Fordham
University.
43
<PAGE>
Amy L. Newmark is a private investor in the telecommunications industry.
From 1995 to 1997 she was employed by WinStar Communications, Inc. as Executive
Vice President -- Strategic Planning. From 1993 to 1995 she was a general
partner and portfolio manager for Information Age Partners, an investment
partnership specializing in telecommunications and information services. Ms.
Newmark received a Bachelors degree from Harvard College and is a Chartered
Financial Analyst.
Diego E. Roca began employment with the Company during July of 1995 on a
part-time basis. He began full-time employment during September 1996 when he
became Vice President of Operations. From October of 1991 to May of 1995, he was
employed by Telecorp Funding , Inc. and subsidiaries . He served as Assistant
Controller in 1991 and became Controller in 1992. From May of 1995 to September
of 1996, he served as a consultant to various entities in the telecommunications
industry. Mr. Roca received a Bachelor of Science degree in Accounting from
Queens College in 1992.
Executive Compensation
The following table sets forth information with respect to the aggregate
remuneration paid by the Company to the Chief Executive Officer and one other
most highly compensated officer (the "Named Executives") of the Company for the
period from May 18, 1995 (inception) to June 30, 1995 and the fiscal years ended
June 30, 1996 and 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Annual Long Term
Compensation Compensation Awards
-------------------
(a) (b) (c) (d) (g)
- ------------------------------------------------------------------------------------------------------
Securities Underlying
Name and Fiscal Salary Bonus Options/SARs
Principal Position Year ($) ($) (#)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Frank C. Magliato, Chief Executive Officer, 1997 $125,000 $ 35,000 --
President and Director
1996 $ 70,000 $ -- --
1995 $ -- $ -- --
Diego E. Roca, Vice President of Operations,
Secretary and Treasurer 1997 $ 75,342 $ 25,000 187,500
1996 $ 5,200 $ -- --
- ------------------------------------------------------------------------------------------------------
</TABLE>
Employment Agreements
The Company has entered into separate employment agreements with Messrs.
Magliato and Roca. Except with respect to the positions to be occupied, the
duties to be performed and the renumeration to be paid, the agreements are on
identical terms and conditions and provide for (i) a term of three years
commencing June 30, 1997; (ii) the Board of Directors to review each employee's
base salary at least annually during the term and the Board of Directors to be
able to increase such salaries in its sole discretion; (iii) if an employee's
service is actually or constructively terminated by the Company without cause,
for the payment of the employee's then base salary and performance bonus for the
remainder of the term; (iv) that in the event of the death of an employee, for
the payment of the employee's then base salary to the employee's surviving
spouse or estate as is applicable for a period of six months; (v) in the event
of the disability of employee, compensation will terminate except to the extent
payment is provided for in the then-existing disability or extended side plan;
(vi) the full participation by the employee in the Company's benefits available
to the Company's other employees; (vii) that all trade secrets, inventions, work
product, methods, software and similar property which relate to the Company's
business and are developed by the employee are the property of the Company;
(viii) in the event of either the employee's voluntary termination of
employment, the employee's involuntary termination for cause or the employee's
failure to accept an extension of the employment agreement on substantially
similar terms, the employee agrees not to conduct any activity competitive
44
<PAGE>
to the Company for a period of two years from the termination; (ix) in the event
the Company does not renew the employment agreement on substantially similar
terms at its expiration, employee shall receive six months severance pay; and
(x) other terms customarily contained in similar employment agreements. Messrs.
Magliato and Roca will devote full-time to the affairs of the Company.
The employment agreements provide for base salaries as follows: (i) Mr.
Magliato-$175,000 in fiscal 1998, $225,000 in fiscal 1999 and $250,000 in fiscal
2000 and (ii) Mr. Roca-$150,000 in fiscal 1998, $200,000 in fiscal 1999 and
$225,000 in fiscal 2000. In connection with his employment agreement Mr. Roca
also received an option to purchase 187,500 shares of Common Stock at $14.50 per
share.
In addition to the base salaries, the employment agreements provide for an
annual performance bonus commencing in the fiscal year ending June 30, 1997
(prorated for the number of months the agreements were in effect for the fiscal
year ending June 30, 1997) to each of the officers equivalent to a percentage of
the Company's adjusted annual net income before depreciation and amortization,
interest and income tax as follows: (i) Mr. Magliato-2% and (ii) Mr. Roca-1.5%.
Stock Option Grants
The following table sets forth information regarding grants of options to
purchase Common Stock made by the Company during the year ended June 30, 1997 to
the Named Executives.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
- ------------------------------------------------------------------------------------------------------------
Potential Realized Value
At Assumed Annual Rates of Stock
Price Appreciation for Individual
Individual Grants Grant Option Term(2)
- ------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
- ------------------------------------------------------------------------------------------------------------
Percent of
Number of Total
securities Options/SARs
underlying Granted to
Options/SARs Employees in Exercise or
Granted Fiscal Year Base Price Expiration
Name (#) (1) (%) ($/Share) Date 5% 10%
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Diego E. Roca 187,500 100 14.50 4/24/07 $1,709,207 $4,332,987
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options granted above vest at the date of grant and expire ten years from
date of grant.
(2) Disclosures of the 5% and 10% assumed compound rates of stock appreciation
are mandated by the rules of the SEC and do not represent the Company's
estimate or projection of future common stock prices. The actual value
realized may be greater or less that the potential realizable value set
forth in the table.
45
<PAGE>
The following table sets forth information concerning the year-end value of
unexercised in-the-money options held by each of the Named Executives.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises And Fiscal Year-end Option/SAR Values
- ------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs at Fiscal Options/SARs at Fiscal Year End
Year-End(#) ($)(1)
- ------------------------------------------------------------------------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Diego E. Roca 187,500/0 $0/$0
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Based on a year-end fair market value of the underlying securities equal
to $13.00 per share.
Compensation Committee Interlocks and Insider Participation
The Company established a Compensation Committee on March 31, 1998 which
consists of two independent directors, Francis J. Calcagno and Amy L. Newmark,
as well as Frank C. Magliato, who is also the President and Chief Executive
Officer of the Company. Prior to the establishment of the Compensation
Committee, for the fiscal year ended June 30, 1997, Mr. Magliato was the only
officer or employee who participated in the Board deliberations relating to
executive compensation.
Committees of the Board of Directors
Audit Committee. On March 31, 1998, the Board of Directors established an
Audit Committee. The Audit Committee is comprised of two independent directors
and a relative of the Chief Executive Officer and President of the Company. The
Audit Committee will be charged with recommending the engagement of independent
accountants to audit the Company's financial statements, discussing the scope
and results of the audit with the independent accountants, reviewing the
functions of the Company's management and independent accountants pertaining to
the Company's financial statements and performing such other related duties and
functions as are deemed appropriate by the Audit Committee and th Board of
Directors.
Compensation Committee. The Compensation Committee will be responsible for
reviewing general policy matters relating to compensation and benefits of
directors and officers, determining the total compensation of the officers and
directors of the Company.
Awards Committee. On March 31, 1998, the Board of Directors established an
Award Committee. The Awards Committee is comprised solely of "disinterested
persons" or "Non-Employee Directors" as such term is used in Rule 16b-3
promulgated under the Exchange Act, and "outside directors" as such term is used
in Treasury Regulation Section 1.162- 27(c)(3) promulgated under the Internal
Revenue Code of 1986, as amended (the "Code"). The Award Committee will be
responsible for administering the Company's Stock Incentive Plan.
Director Renumeration
All directors will be reimbursed for out-of-pocket expenses incurred in
connection with attendance at board and committee meetings. The Company may
grant options to directors under the Company's Stock Incentive Plan.
Performance Graph
Due to the illiquidity of the Company's Common Stock and the amount of
shares of its Common Stock which are restricted from trading (approximately 79%
of outstanding shares at March 31, 1998), a performance graph has not been
disclosed in the Registration Statement. Such information, in the opinion of
management, would be misleading to the
46
<PAGE>
investor. From May 18, 1995 to June 30, 1997, the Company's Common Stock has
been very thinly traded on the OTC Bulletin Board.
Stock Incentive Plan
The Board of Directors of the Company adopted a Stock Incentive Plan (the
"Plan") on May 15, 1997, which was subsequently approved by stockholders on
December 22, 1997, under which stock options, stock appreciation rights or
"restricted" or unrestricted stock awards may be granted to employees, officers,
directors, employees and consultants of the Company or any Affiliate of the
Company (as defined therein). The Company has reserved 600,000 shares of the
Common Stock, subject to any adjustment to reflect changes in the Company's
capitalization.
The Plan is administered by a committee of the Board of Directors, the
Awards Committee (the "Committee"), the members of which must be non-employees
of the Company and outside directors as defined by the Code and Rule 16b-3 of
the Exchange Act. Subject to certain restrictions set out in the Plan and the
Code with respect to incentive stock options, and up to a limit of 100,000
shares in any one fiscal year to any one individual, the Committee has full
discretion and power as to the form and terms of an option or other right
granted under the Plan. As of March 31, 1998, the Company had granted options to
purchase 350,000 shares of Common Stock under the Plan to directors and officers
of the Company.
Stock options granted under the Plan may be incentive stock options under
Section 422 of the Internal Revenue Code ("Code") or non-qualified stock
options. The exercise price of incentive stock options will be determined by the
Committee, but may not be less than the fair market value of the Common Stock on
the date of grant and the term of any such option may not exceed ten years from
the date of grant. With respect to any participant in the Stock Incentive Plan
who owns stock representing more than 10% of the voting power of all classes of
the outstanding capital stock of the Company or of its subsidiaries, the
exercise price of any incentive stock option may not be less than 110% of the
fair market value of such shares on the date of grant and the term of such
option may not exceed five years from the date of grant. The exercise price of
non-qualified stock options will be determined by the Committee on the date of
grant. The term of such options may not exceed ten years from the date of grant.
Payment of the option price may be made in cash or certified check, with
the approval of the Committee, in shares of Common Stock having a fair market
value in the aggregate equal to the option price or any combination of the
foregoing methods or any other method that the Committee may allow. Options
granted pursuant to the Plan are not transferable, except by will or the laws of
descent and distribution. During an optionee's lifetime, the option is
exercisable only by the optionee. Notwithstanding, the foregoing sentence,
non-qualified options may be transferred to family members and certain entities
controlled by family members.
The Committee may also grant eligible participants under the Plan Stock
Appreciation Rights ("SAR") which enable the grantee to receive a payment having
an aggregate value equal to the product of (i) the excess of (A) the fair market
value on the exercise date of one share of Common Stock over (B) the base price
per share specified in the Grant Agreement, multiplied by (ii) the number of
shares specified in the SAR which is exercised. Such payment may be made by the
delivery of Common Stock or cash or any contribution thereof that the Committee
determines. The Committee may also grant restricted or unrestricted stock awards
to participants in such amounts and for such consideration as the Committee may
determine.
The Board of Directors has the right at any time to terminate, amend or
modify the Plan, without the consent of the Company's stockholders or optionees;
provided that no amendment may be made which materially changes eligibility
requirements to receive incentive stock options or increases the number of
shares of Common Stock which may be issued pursuant to the Plan without
stockholder approval. The expiration date of the Plan is May 19, 2007.
The Company expects to file with the Commission a registration statement
on Form S-8 covering the shares of Common Stock underlying awards granted under
the Plan.
47
<PAGE>
USE OF PROCEEDS
The Company will not receive proceeds from the sale of shares of Common
Stock by the Selling Stockholders. If all the Outstanding $1.50 Warrants and
$13.20 Warrants were exercised, the Company could receive an aggregate of
$17,678,384 of proceeds comprised of $17,600,009 from the exercise of the $13.20
Warrants and $78,375 from the exercise of the Outstanding $1.50 Warrants.
Any proceeds received by the Company will be used for general working
capital purposes.
PLAN OF DISTRIBUTION
The shares of Common Stock have been registered for offer and sale from
time to time by Selling Stockholders to purchasers directly or through agents,
brokers or dealers. Such sales may be made in the over-the-counter market or
otherwise at market prices then prevailing or in negotiated transactions. No
Selling Stockholder is obligated to sell any Common Stock pursuant to this
Prospectus.
Selling Stockholders and any brokers or dealers participating in the
distribution of the shares of Common Stock may be deemed to be "underwriters"
under the Securities Act, and any profit on the sale of the shares of Common
Stock by them and any discounts, commissions or concessions received by any
broker or dealer may be deemed to be underwriting discounts and commissions
under the Securities Act. The Company is not aware of any arrangement among
Selling Stockholders to sell or refrain from selling any shares of Common Stock.
Certain expenses in connection with the distribution of the shares of
Common Stock pursuant to this Prospectus, including fees and expenses of the
Company's counsel and independent auditors, filing fees and printing expenses,
will be borne by the Company. Selling Stockholders will bear additional legal
expenses that they incur, if any, as well as commissions and discounts received
by brokers or dealers in connection with the sale of shares of Common Stock. The
Company has agreed to indemnify Selling Stockholders against certain civil
liabilities in connection with the Registration Statement of which this
Prospectus is a part (the "Registration Statement"), including certain
liabilities under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the shares of Common Stock may not simultaneously
engage in market making activities for specified periods prior to the
commencement of the distribution. In addition, and without limiting the
foregoing, each Selling Stockholder will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including, without
limitation, Rules 10b-6 and 10b-7, which provisions may limit the timing of
purchases and sales of Common Stock by Selling Stockholders.
SELLING STOCKHOLDERS
The Registration Statement has been filed pursuant to Rule 415 under the
Securities Act to afford the holders of shares of Common Stock registered
hereby, the opportunity to sell the shares of Common Stock in a public
transaction rather than pursuant to an exemption from the registration and
prospectus delivery requirements of the Securities Act. In order to avail
himself of that opportunity, a holder must notify the Company in writing of his
intention to sell shares of Common Stock and request the Company file a
supplement to this Prospectus or an amendment to the Registration Statement, if
required, identifying such holder as a Selling Stockholder and disclosing such
other information concerning rules of the Commission. No offer or sale pursuant
to this Prospectus may be made by any holder until such a request has been made
and until any such supplement has been filed or any such amendment has become
effective. The holders of the shares of Common Stock who have made such a
request and as to which any such required supplement or amendment has been filed
or become effective are referred to herein as "Selling Stockholders."
The Company will from time to time supplement or amend this Prospectus to
reflect the required information concerning any Selling Stockholder.
48
<PAGE>
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 31, 1998, as
adjusted to reflect the sale of Common Stock being offered by (i) each person
known by the Company to beneficially own five percent or more of any class of
the Company's capital stock, (ii) each director of the Company, (iii) each
executive officer of the Company as a group; and (iv) each Selling Stockholder.
Except as otherwise noted below, each of the Stockholders identified in the
table has sole voting and investment power over the shares beneficially owned by
such person:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Relationship Beneficial Ownership Prior to Number of Shares Beneficial Ownership After
Name and Address to Company Offering Offered Offering
- ---------------------------------------------------------------------------------------------------------------------------
Shares (1) (2) Percent Shares(1)(2) Percent
----------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Frank C. Magliato Chief Executive 2,116,677(3) 22.5% -- 2,116,677(3) 22.5%
8 West 38th Street Officer,
Fifth Floor President and
New York, NY 10118 Director
Telephone Electronics Stockholder 1,475,126 15.7% -- 1,475,126 15.7%
Corporation
Walter Frank
200 Southwest Street
Jackson, MS 39201
Premiere Stockholder 587,032(4) 6.2% -- 587,032(4) 6.2%
Communications, Inc.
3399 Peachtree Road, NE
Lenox Building, Suite 600
Atlanta, GA 30326
Lori Ann Perri Director 122,917(5) 1% -- 122,917 (5) 1%
8 West 38th Street
Fifth Floor
New York, NY 10018
Francis J. Calcagno Director 140,000(6) 1% -- 140,000(6) 1%
8 West 38th Street
Fifth Floor
New York, NY 10018
Amy L. Newmark Director 107,500(7) 1% -- 100,000(7) 1%
8 West 38th Street
Fifth Floor
New York, NY 10018
Scott W. Steffey Director 55,000(8) .5% -- 55,000(8) .5%
8 West 38th Street
Fifth Floor
New York, NY 10018
Diego E. Roca Vice President 335,000(9) 3.5% -- 335,000(9) 3.5%
8 West 38th Street of Operations,
Fifth Floor Treasurer and
New York, NY 10018 Secretary
All Named Executive
Officers and Directors as
a Group (6 Persons) 2,877,094 30.5% -- 2,877,094 30.5%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set forth
in the regulations of the Commission and, accordingly, may include
securities owned by or for, among others,
49
<PAGE>
the spouse, children or certain other relatives of such person. The
same shares may be beneficially owned by more than one person.
Beneficial ownership may be disclaimed as to certain of the
securities.
(2) Includes shares of Common Stock underlying the options and warrants
held by the listed persons.
(3) Mr. Magliato disclaims beneficial ownership of 250,000 shares held
in trust for Kendall Magliato, daughter of Mr. Magliato. Mr
Magliato's spouse is the trustee over the shares. The number
reflected herein includes such shares held in trust and also
includes 729,167 shares of Common Stock underlying warrants to
purchase Common Stock held by Mr. Magliato.
(4) Assumes the conversion of 61,050 shares of Series A Preferred Stock
into Common Stock.
(5) Includes a warrant to purchase 72,911 shares of Common Stock and an
option to purchase 50,000 shares.
(6) Includes options to purchase 100,000 shares of Common Stock.
(7) Includes an option to purchase 100,000 shares of Common Stock.
(8) Includes a warrant to purchase 5,000 shares of Common Stock and an
option to purchase 50,000 shares of Common Stock.
(9) Includes a warrant to purchase 62,500 shares of Common Stock and
options to purchase 237,500 shares of Common Stock.
The denominator is comprised of all shares outstanding of the
Company's common stock as March 31, 1998 and 2,543,084 shares of the
Company's Common Stock reserved for the exercise of outstanding
warrants and stock options.
DESCRIPTION OF CAPITAL STOCK
General
The Company's authorized capitalization consists of 100,000,000 shares of
$.001 par value Common Stock and 1,000,000 shares of $.001 par value of
preferred stock ("Preferred Stock"). As of March 31, 1998, there were 6,878,298
shares of Common Stock issued and outstanding and 61,050 shares of Preferred
Stock designated as Series A Preferred Stock, all of which are issued and
outstanding. There are no outstanding options, warrants or other rights to
acquire shares of Preferred Stock. As of March 31, 1998, the Company has
outstanding warrants to purchase 1,385,584 shares of Common Stock. On that date,
the Company had outstanding options to purchase 1,157,500 shares of its Common
Stock. For details on these warrants and options, see "- Warrants" and "-
Options".
Common Stock
The shares of Common Stock currently outstanding are fully paid and
non-assessable. The holders of Common Stock do not have any preemptive rights to
acquire shares of any capital stock of the Company. In the event of liquidation
of the Company, assets then legally available and able for distribution to the
holders of Common Stock (assets remaining after payment or provision for payment
of all debts and of all preferential liquidation payments to holders of any
outstanding Preferred Stock) will be distributed in pro rata shares among the
holders of Common Stock in proportion to their stock holdings.
Each stockholder is entitled to one vote for each share of Common Stock
held by such stockholder. A quorum for a meeting of the stockholders consists of
the representation in person or by proxy of a majority in number of the shares
of outstanding capital stock entitled to vote at such meeting. There is no right
to cumulate votes for the election of directors. This means that holder of more
than 50% of the shares voting for the election of directors can elect 100% of
the directors if they choose to do so; and in such event, the holders of the
remaining shares voting for the election of directors will not be
50
<PAGE>
able to elect any person or persons to the Board of Directors. The Company
intends to make an application to have the Common Stock approved for listing on
the American Stock Exchange.
Holders of Common Stock are entitled to dividends when, and if, declared
by the Board of Directors, out of funds legally available; and then, only after
all preferential dividends have been paid on any outstanding Preferred Stock.
The Company has not had any earnings and it does not presently contemplate the
payment of any cash dividends in the foreseeable future.
Preferred Stock
The Company's Restated Articles of Incorporation authorize its Board of
Directors to issue Preferred Stock in one or more series and to fix and state
the designations preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, and relative rights of the shares of each such series.
The directors may determine among other things, the annual dividend rates,
whether dividends are to be cumulative or non-cumulative, whether the Preferred
Stock is subject to redemption and, if so, the manner of redemption and the
redemption price, the preference of the Preferred Stock over any other series of
Preferred Stock or Common Stock on liquidation or dissolution of the Company,
and sinking fund or other retirement provisions for the stock and any conversion
or exchange rights or other privileges of the holders to acquire the Stock or
Common Stock of the Company. The Board of Directors may also determine the
number of shares in each series, the voting rights of each series and the
consideration for which the Preferred Stock may be issued.
Holders of Preferred Stock may have the right to receive dividends and
payments in the event of liquidation of the Company prior to the holders of
Common Stock and any issued Preferred Stock may also have other rights which
adversely affect the rights of the holders of Common Stock. The holders of
Preferred Stock do not have any preemptive rights to acquire shares of any
capital stock of the Company. The Company does not have any present plans to
issue any additional Preferred Stock.
Series A Preferred Stock. The Company has 61,050 shares of Series A
Preferred Stock issued and outstanding as of March 31, 1998. The holders of the
Series A Preferred Stock have no preemptive rights with respect to any shares of
capital stock of the Company or any other securities of the Company convertible
into or carrying rights or options to purchase any such shares. Any Series A
Preferred Stock converted, redeemed or otherwise acquired by the Company will,
upon cancellation of such shares, have the status of authorized and unissued
preferred stock, subject to reissuance by the Board of Directors as Series A
Preferred Stock or as shares of preferred stock of any one or more other series.
Liquidation Preference. In the event of a liquidation, dissolution
or winding up of the Company or any subsidiary of the Company whose assets
constitute a substantial part of the Company's assets, holders of the
outstanding shares of Series A Preferred Stock shall be entitled to receive in
exchange for and in redemption of their shares of Series A Preferred Stock,
prior and in preference to the holders of Common Stock and any other class or
series of Preferred Stock ranking junior to the Series A Preferred Stock from
funds legally available for distribution to stockholders an amount per share
equal to $100.00 (as adjusted for stock splits, stock dividends or the like),
plus an amount equal to accrued and unpaid dividends and distributions thereon
to the date of payment. If upon any liquidation, dissolution or winding up of
the Company, the amounts payable with respect to the Series A Preferred Stock
are not paid in full, the holders of the Series A Preferred Stock will share
ratably in any such distribution of assets in proportion to the full respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of shares of the Series A Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Company.
Voting Rights. Holders of Series A Preferred Stock will be entitled
to vote on all matters submitted to a vote of the holders of Common Stock,
voting together as one class with the holders of Common Stock. When voting as
one class together with the holders of Common Stock, each holder of Series A
Preferred Stock will be entitled to one vote for each share of Common Stock into
which a share of Series A Preferred Stock would be convertible as of the
applicable record date for the meeting of the stockholders at which the vote is
to be taken.
51
<PAGE>
If the Company fails to convert the Series A Preferred Stock into Common
Stock as provided for in the Certificate of Designations of the Series A
Preferred Stock, and such failure remains uncured for a period of ninety days,
then at the end of such period and for so long as the failure remains uncured,
the holders of outstanding shares of the Series A Preferred Stock, voting
together as one class, will be entitled to elect two directors until the
conversion of the shares of Series A Preferred Stock is completed. If the number
of directors shall exceed eight, the holders of the Series A Preferred Stock
will be entitled to elect three directors as set forth in the preceding
sentence.
The approval of the holders of a majority of the shares of the Series A
Preferred Stock is required (i) to amend or repeal the Restated Certificate or
ByLaws, and to file any certificate of designations to adversely affect the
preferences, rights, privileges or powers of the Series A Preferred Stock; (ii)
or to authorize, create or increase the authorized amount of any class or series
of preferred stock of the Company ranking prior to the Series A Preferred Stock
either as to dividend, redemption or liquidation rights; (iii) create or
authorize any obligation or security convertible into shares of Common Stock,
Series A Preferred Stock or any other class or series of stock, whether voting
or non-voting, regardless of whether such creation, authorization or increase is
by means of Amendment to the Restated Articles or by merger or otherwise; (iv)
to increase or decrease the authorized number of shares of Series A Preferred
Stock or issue any additional shares of Series A Preferred to any person other
than Premiere or its affiliates; (v) to declare or pay dividends on, or make any
other distributions on, any shares of stock on a parity or ranking junior to the
Series A Preferred Stock except dividends on stock on a parity which are paid
ratably on Series A Preferred Stock and all such other parity stock; (vi) to
enter into any agreement or plan with respect to liquidation of the Company; to
purchase, redeem or otherwise acquire for value any shares of its capital stock
or cause or permit any employee stock ownership plan to purchase for value any
shares of its capital stock except pursuant to a stock option plan or other
similar plans or contracts of the Company in existence at the time of issuance
of the Series A Preferred Stock and except as provided for in the Certificate of
Designations of the Series A Preferred Stock; or (vii) to amend Section 6(a) of
such Certificate of Designations; provided, however, that such restrictions
shall not apply to the issuance of any class or series of capital stock of the
Company that is pari passu or senior to Series A Preferred Stock so long as such
shares are issued in arms-length basis transactions to non-affiliates.
Optional Redemption. The Series A Preferred Stock will be redeemable on a
date specified in the Company's notice ("Redemption Date") at the option of the
Company, in whole or in part, for cash on 60 days' notice to the record holders
of the shares of Series A Preferred Stock. Such holders will have fifteen days
from receipt of notice of redemption from the Company to notify the Company that
the holder will convert its shares of Series A Preferred Stock to Common Stock.
On the Redemption Date, the Company shall deposit with a bank or trust company
funds sufficient to pay the price payable for each redeemed share of Series A
Preferred Stock which amount shall be equal to $100.00 per share plus an amount
equal to accrued and unpaid dividends and distributions to the date of payment
for the account of holders of outstanding shares of Series A Preferred Stock to
be redeemed. All shares of Series A Preferred Stock with respect to which such
deposit shall have been made shall be deemed to be no longer outstanding for any
purpose, and all rights of the holder of such shares of Series A Preferred Stock
with respect to such shares shall terminate except the conversion right which
shall terminate upon the expiration of fifteen (15) days after receipt of notice
and the right to receive out of funds deposited in trust the funds to which it
is entitled, without interest. If funds legally available for redemption of
shares of Series A Preferred Stock on any day scheduled for a redemption are
insufficient to redeem the total number of shares of Series A Preferred Stock to
be redeemed on such date, those funds legally available will be used to redeem
the maximum possible number of such shares ratably among holders of such shares
to be redeemed based upon their holdings of Series A Preferred Stock. When
additional funds are legally available for redemption, such funds shall
immediately be used to redeem the balance of shares that the Company has become
obliged to redeem on any scheduled redemption but that it has not redeemed. The
holders of any shares of Series A Preferred Stock scheduled for redemption but
not redeemed shall retain all rights and privileges associated with ownership of
Series A Preferred Stock.
Conversion Rights. Shares of Series A Preferred Stock are convertible, in
whole or in part, at any time, at the option of the holders thereof, into shares
of Common Stock at a conversion rate of one share of Series A Preferred Stock to
the number of shares of Common Stock that equals the quotient obtained by
dividing (i) $100.00 (as adjusted for stock splits, stock dividends and the
like) plus all accrued but unpaid dividends and distributions on such shares of
Series A Preferred Stock by (ii) $10.395 (the "Conversion Price") as adjusted
under the circumstances described below (the "Conversion Rate"). Thus, the
number of shares of Common Stock to which a holder of Series A Preferred Stock
shall be entitled upon conversion shall be the product of the number of shares
of Series A Preferred Stock owned by the holder and the Commission Rate.
Conversion will be deemed to occur upon surrender of shares of Series A
Preferred Stock.
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Conversion Price Adjustments. The Conversion Price is subject to
adjustment upon the occurrence of certain events, including (i) issuance or
fixing a record date for the determination of holders of Common Stock entitled
to receive a dividend or distribution payable in additional shares of Common
Stock or other securities convertible into or entitling the holder thereof to
receive additional shares of Common Stock ("Common Stock Equivalents") without
payment of additional consideration or a proportionate dividend to holders of
Series A Preferred Stock; and (ii) issuance or sales of Common Stock or Common
Stock Equivalents at a per share consideration less than the Conversion Price
then in effect. No adjustment of the Conversion Price will be required to be
made in any case until cumulative adjustment amounts equal an adjustment of $.01
or more. Any adjustment not so required to be made will be carried forward and
taken into account on subsequent adjustments.
The Company may, at its option, cause all but not less than all of the
shares of Series A Preferred Stock to be converted into Common Stock pursuant to
the terms of the Certificate of Designations on or after March 31, 1999, upon at
least thirty and not more than sixty days notice if the average market price for
the Company's Common Stock for any twenty consecutive trading days ending within
ten days prior to the date of the notice of such redemption shall have equaled
or exceeded 150% of the Conversion Price and the average daily trading volume
during such period is at least 25,000 shares.
Transfer Agent
Intercontinental Registrar and Transfer Agent, Inc. acts as the transfer
agent of the Company with respect to its Common Stock and Series A Preferred
Stock. The transfer agent's address is: P.O. Box 62405, Boulder City, Nevada
89006.
Warrants
All of the Outstanding $1.50 Warrants and $13.20 Warrants to purchase a
total of 1,385,584 shares of Common Stock which were outstanding at March 31,
1998 are for a term of five years commencing April 23, 1996 and are exercisable,
in whole or in part, at any time during their term. Outstanding $1.50 Warrants
and $13.20 Warrants to purchase 52,250 and 1,333,334 shares, respectively, are
exercisable at $1.50 and $13.20 per share. From May, 1997 through March 31,
1998, Exercised $1.50 Warrants to purchase 2,291,498 shares at $1.50 were
exercised by the holders. The Outstanding $1.50 Warrants and the $13.20 Warrants
were issued pursuant to an agreement made in April of 1996 between the Company
and the warrant holders in exchange for trade secrets, customer bases, computer
software and other intangible property, all involved with or related to the
Prepaid Phone Card industry, transferred to the Company by the warrant holders.
The shares underlying the Exercised $1.50 Warrants which have been exercised
were issued as "restricted securities" as such term is defined under the
Securities Act. Unless a Registration Statement under the Securities Act is
effective with respect thereto, the shares of Common Stock to be issued upon
exercise of the Outstanding $1.50 Warrants and $13.20 Warrants will be issued as
"restricted securities".
Options
At March 31, 1998, the Company has options to purchase 1,157,500 shares of
Common Stock outstanding primarily comprised of the following:
(a) As part of Diego Roca's employment agreement, on April 25,
1997, the Company granted him a stock option to purchase
187,500 shares of Common Stock at $14.50 per share. The option
is immediately exercisable and expires on April 25, 2007. On
March 17, 1998, as compensation for services, the Company also
granted him a stock option to purchase 50,000 shares of Common
Stock at $8.1875 per share. The option vests quarterly over a
one-year period and expires on March 17, 2008.
(b) As part of Keith A. McGowan's employment agreement, effective
July 1, 1997, the Company granted him a stock option to
purchase 200,000 shares of Common Stock at $13.00 per share.
The option vests over a two-year period and expires July 1,
2007.
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(c) As part of Lawrence S. Diamond's employment agreement,
effective October 16, 1997, the Company granted him a stock
option to purchase 200,000 shares of Common Stock at $12.25
per share. The option vests quarterly over a two-year period
and expires October 16, 2007.
(d) As part of Maria Karalis' employment agreement, effective
November 17, 1997, the Company granted her a stock option to
purchase 75,000 shares of Common Stock at $9.50 per share. The
option vests quarterly over a two-year period and expires
November 17, 2007.
(e) In consideration for consulting services provided to the
Company, on January 16, 1998 the Company granted Prime
Communications, Inc. an option to purchase 145,000 shares of
Common Stock exercisable at $13.20 per share which vested
immediately and expire January 16, 2008.
(f) On March 17, 1998, in connection with their agreement to serve
as Directors of the Company Francis J. Calcagno, Amy L.
Newmark and Scott Steffey were granted non-qualified stock
options to purchase 100,000, 100,000, and 50,000 shares of
Common Stock, respectively at $8.1875 per share under the
Company's Stock Incentive Plan. The options vest quarterly
over a one-year period and expire on March 17, 2008.
(g) On March 17, 1998, in connection with her continued services
as Director of the Company, Lori Ann Perri was granted a
non-qualified stock option to purchase 50,000 shares of Common
Stock of the Company at $8.1875 per share under the Company's
Stock Incentive Plan. The option vests quarterly over a
one-year period and expires March 17, 2008.
Registration Rights
In connection with the sale of certain assets and property by TEC to the
Company, the Company granted TEC "piggy back" registration rights with respect
to the 1,475,216 shares of Common Stock (the "Shares") issued to TEC as
consideration for the transaction. Until May 1, 1999, if the Company files a
registration statement covering shares of Common Stock on Forms S-1, S-2 or S-3,
TEC has the right to include a portion of the Shares on a pro rata basis to the
number of shares of Common Stock being registered on such registration
statement, subject to certain underwriter cutback provisions. Of the shares of
Common Stock being registered hereunder, 2,343,748 of such shares had
registration rights which will be fully satisfied by the filing of the
Registration Statement of which this Prospectus is a part. The holders of shares
of Series A Preferred Stock have certain registration rights to include the
shares of Common Stock issuable upon conversion of the Series A Preferred Stock
in a registration statement filed by the Company. The Company is registering
such shares of Common Stock in the Registration Statement of which this
Prospectus is a part. If certain timing requirements with respect to this
Registration Statement are not met, the holders of the Series A Preferred Stock
will have the right to demand a registration of the shares of Common Stock. In
addition, at any time that such shares are not subject to an effective
registration statement, the holders of such shares will have the right to
include them on any registration statement the Company files for an underwritten
offering, subject to underwriter cutbacks. The registration rights of the Series
A Preferred Stock holders will cease upon the expiration of a period of 120 days
from the effectiveness of the Registration Statement of which this Prospectus is
a part.
Limitations on Directors' Liability
As permitted by the Nevada Revised Statutes, the Company's Restated
Articles of Incorporation and ByLaws provide that no director or officer of the
Company shall be liable to the Company or its stockholders for damages for the
breach of fiduciary duty in such capacity. Such provision does not eliminate or
limit the liability of any director or officer for (i) acts or omissions which
involve intentional misconduct, fraud or a knowing violation of law or (ii) the
payment of dividends in violation of Private Corporations Law of Nevada Section
78.300. As a result of this provision, the Company and its stockholders may be
unable to obtain monetary damages from a director for breach of his duty of
care. This provision may have the effect of reducing the likelihood of
derivative litigation against directors and officers and may discourage or deter
stockholders or management from bringing a lawsuit against directors for breach
of their duty of care, even though such action, if successful, might otherwise
have benefited the Company and its stockholders.
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Under the Restated Articles of Incorporation and the ByLaws of the
Company, the Company agreed to indemnify and advance expenses to each person who
is or was a director or officer employer or agent of the Company, to the fullest
extent permitted by the Private Corporations Law of Nevada against actions that
may arise against them in such capacities. In addition, the Company has agreed
to indemnify any individual who is a director of the Company and is or was
serving at the request of the Company as a director or officer of any
corporation of any type or kind, domestic or foreign, of any partnership, joint
venture, trust or employee benefit plan to the fullest extent permitted by the
Private Corporations Law of Nevada against actions that may arise against them
in such capacity.
The Board of Directors may alter, amend or repeal the ByLaws of the
Company by the affirmative vote of at least a majority of the entire Board of
Directors, provided that any ByLaws adopted by the Board of Directors may be
amended or repealed by the shareholders. The shareholders may also adopt,
repeal, or amend, the ByLaws of the Company by the affirmative vote of at least
a majority of the shares that are issued and outstanding and entitled to vote.
The Company maintains policies of directors' and officers' liability
insurance for the purpose of indemnification which provide primary coverage of
$2,000,000 and excess coverage of $3,000,000, subject to specified exclusions,
for members of its Board of Directors and executive officers. Nevada
Antitakeover Laws and Certain Charter Provisions
Nevada's "Business Combinations" statute, Nevada Revised Statutes
78.411-78.444, which applies to Nevada corporations having at least 200
stockholders which have not opted-out of the statute, prohibits an "interested
stockholder" from entering into a "combination" with the corporation, unless
certain conditions are met. A "combination" includes (a) any merger or
consolidation with an "interested stockholder", or any other corporation which
is or after the merger or consolidation would be, an affiliate or associate of
the interested stockholder, (b) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of assets, in one transaction or a series of
transactions, to or with an "interested stockholder", having (i) an aggregate
market value equal to 5% or more of the aggregate market value of the
corporation's assets determined on a consolidated basis, (ii) an aggregate
market value equal to 5% or more of the aggregate market value of all
outstanding shares of the corporation or (iii) representing 10% or more of the
earning power or net income of the corporation determined on a consolidated
basis, (c) any issuance or transfer of shares of the corporation or its
subsidiaries, to the stockholders, having an aggregate market value equal to 5%
or more of the aggregate market value of all the outstanding shares of the
corporation, except under the exercise of warrants or rights to purchase shares
offered or a dividend or distribution paid or made pro rata to all stockholders
of the corporation, (d) the adoption of any plan or proposal for the liquidation
or dissolution of the corporation proposed by or under any agreement,
arrangement or understanding, whether or not in writing, with the "interested
stockholder", (e) certain transactions which would have the effect of increasing
the proportionate share of outstanding shares of the corporation owned by the
"interested stockholder", or (f) the receipt of benefits, except proportionately
as a stockholder, of any loans, advances or other financial benefits by an
"interested stockholder". An "interested stockholder" is a person who (i)
directly or indirectly beneficially owns 10% or more of the voting power of the
outstanding voting shares of the corporation or (ii) an affiliate or associate
of the corporation which at any time within three years before the date in
question was the beneficial owner, directly or indirectly, of 10% or more of the
voting power of the then outstanding shares of the corporation.
A corporation to which the statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
shares was approved by the board of directors before the interested stockholder
acquired the shares. If this approval was not obtained, then after the
three-year period expires, the combination may be consummated if all the
requirements in the corporation's articles of incorporation are met and either
(a)(i) the board of directors of the corporation approves, prior to the
"interested stockholder's" date of acquiring shares, or as to which the purchase
of shares by the "interested stockholder" has been approved by the corporation's
board of directors before that date or (ii) the combination is approved by the
affirmative vote of holders of a majority of voting power not beneficially owned
by the "interested stockholder" at a meeting called no earlier than three years
after the date the "interested stockholder" became such or (b) the aggregate
amount of cash and the market value of consideration other than cash to be
received by holders of common shares and holders of any other class or series of
shares meets the minimum requirements set forth in Sections 78.411 through
78.443, inclusive, and prior to the consummation of the combination, except in
limited circumstances, the "interested stockholder" will not have become the
beneficial owner of additional voting shares of the corporation.
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Nevada law permits a Nevada corporation to "opt out" of the application of
the "Business Combinations" statute by inserting a provision doing so in its
original articles of incorporation. The Company's Articles has such a provision.
The Articles can be amended at any time to subject the Company to the effect of
the "Business Combinations" statutes. Under Nevada law, the Articles may be
amended pursuant to a resolution adopted by the Company's Board and ratified by
a vote of a majority of the voting power of the Company's outstanding voting
stock.
Nevada's "Control Share Acquisition" statute, Nevada Revised Statute
78.378-78.3793, prohibits an acquiror, under certain circumstances, from voting
shares of a target corporation's stock after crossing certain threshold
ownership percentages, unless the acquiror obtains the approval of the target
corporation's stockholders. The statute specifies three thresholds: at least
on-fifth but less than one-third, at least one-third but less than a majority,
and a majority or more, of all the outstanding voting power. Once an acquiror
crosses one of the above thresholds, shares which it acquired in the transaction
taking it over the threshold or within ninety days become "Control Shares" which
are deprived of the right to vote until a majority of the disinterested
stockholders restore that right. A special stockholders' meeting may be called
at the request of the acquiror to consider the voting rights of the acquiror's
shares no more than 50 days (unless the acquiror agrees to a later date) after
the delivery by the acquiror to the corporation of an information statement
which sets forth the range of voting power that the acquiror has acquired or
proposes to acquire and certain other information concerning the acquiror and
the proposed control share acquisition. If no such request for a stockholders'
meeting is made, consideration of the voting rights of the acquiror's shares
must be taken at the next special or annual stockholders' meeting. If the
stockholders fail to restore voting rights to the acquiror or if the acquiror
fails to timely deliver an information statement to the corporation, then the
corporation may, if so provided in its articles of incorporation or bylaws, call
certain of the acquiror's shares for redemption. The Control Share Acquisition
statute also provides that the stockholders who do not vote in favor or
restoring voting rights to the Control Shares may demand payment for the "fair
value" of their shares (which is generally equal to the highest price paid in
the transaction subjecting the stockholder to the statute).
The Control Share Acquisition statute only applies to Nevada corporations
with at least 200 stockholders, including at least 100 record stockholders who
are Nevada residents, and which do business directly or indirectly in Nevada.
While the Company does not currently exceed these thresholds, it may do so in
the future. The Company presently does not "do business" in Nevada within the
meaning of the Control Share Acquisition Statute and it does not plan to do so.
Therefore, the Control Share Acquisition statute does not currently apply to the
Company.
If the Business Combination statute and/or the Control Share Acquisition
statute become applicable to the Company in the future, the cumulative effect of
these terms may be to make it more difficult to acquire and exercise control of
the Company and to make changes in management more difficult.
SHARES ELIGIBLE FOR FUTURE SALE
There are currently outstanding 6,878,298 shares of Common Stock. Assuming
the exercise of the Outstanding $1.50 Warrants and the $13.20 Warrants and the
conversion of the Series A Preferred Stock, the Company will have outstanding
8,851,184 shares of Common Stock. The shares being sold in the Offering by the
Selling Stockholders will be freely tradable without restriction or further
registration under the Securities Act except for any shares purchased by an
"affiliate" of the Company, which will be subject to Rule 144 promulgated under
the Securities Act ("Rule 144").
The remaining outstanding shares are deemed "restricted securities" under
Rule 144 in that they were originally issued and sold by the Company in private
transactions in reliance upon exemptions from the registration provisions of the
Securities Act. Upon completion of the Offering, 1,475,126 of the restricted
securities will be eligible for sale pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
"restricted securities" have been fully paid for and held for at least one year
from the date of issuance by the Company may sell such securities in brokers'
transactions or directly to market makers, provided the number of shares sold in
any three month period does not exceed the greater of (i) 1% of the then issued
and outstanding shares of Common Stock (885,118 shares based on the number of
shares to be outstanding after this Offering) or (ii) the average weekly trading
volume in the public market during the four calendar weeks immediately preceding
the filing of the
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seller's Form 144. Sales under Rule 144 are also subject to certain notice
requirements and the availability of current public information concerning the
Company. After two years have elapsed from the issuance of "restricted
securities" by the company, such shares generally may be sold without by persons
who have not been affiliates of the Company for at least three months. Rule 144
also provides that affiliates who are selling shares which are not "restricted
securities" must nonetheless comply (with the exception of the holding period
requirements) with the same restrictions applicable to Restricted Shares. The
foregoing summary of Rule 144 is not intended to be a complete description
thereof.
In general, under Rule 701 as currently in effect, any employee, officer,
director, consultant or advisor of the Company who purchased shares from the
Company pursuant to a written compensatory benefit plan or written contract
relating to compensation is eligible to resell such shares as of March 29, 1998
in reliance upon Rule 144, but without the requirement to comply with certain
restrictions contained in such rule. Shares obtained pursuant to Rule 701 may be
sold by non-affiliates without regard to the holding period, volume s, or
information or notice of Rule 144, and by affiliates without regard to the
holding period requirements.
The Company intends to file a Form S-8 Registration Statement under the
Securities Act to register all shares of Common Stock issuable under its Stock
Incentive Plan, as well as certain of the shares of Common Stock previously
issued under its Stock Incentive Plan and outside the Stock Incentive Plan
pursuant to individually negotiated compensation packages. This registration
statement is expected to be filed as soon as practicable after the date of this
Prospectus and is expected to become effective immediately upon filing. Shares
covered by such registration statement will be eligible for sale in the public
market after the effective date of such registration statement subject to Rule
144's applicablity to affiliates of the Company. See "Management - Stock
Incentive Plan."
The Company has granted registration rights to certain of its
shareholders. See "Description of Capital Stock - Registration Rights."
As of the date of the Prospectus, 2,062,158 shares of Common Stock
(including shares which may be acquired upon conversion of the Series A
Preferred Stock) are held by persons with the right to cause the Company to
register such shares under the Securities Act under certain circumstances. All
of such shares are entitled, subject to certain restrictions, to include their
shares in any registration of securities by the Company. See "Description of
Capital Stock -- Registration Rights". No predictions can be made about the
effect, if any, that market sales of Common Stock or the availability of Common
Stock for sale will have on the market prices prevailing from time to time.
Nevertheless, sales of substantial amounts of the Common Stock in the public
market may have an adverse impact on the market prices for the Common Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August of 1995, Promo Tel, Inc.(Promo Tel - Delaware), a Delaware
corporation owned by Mr. Magliato was merged into the Company. In the
transaction Mr. Magliato received 1,333,334 shares of the Company's Common
Stock, which were issued as "restricted securities" as defined under the
Securities Act. There was no acquisition cost of the merged company to Mr.
Magliato. The assets of the Delaware corporation acquired by the Company in the
merger consisted of personnel, sales, marketing and distribution programs and
contracts for the development and sale of Prepaid Phone Cards. The parties
agreed to the 1,333,334 share price based on the de minimis value of the public
shell and since the value in the merged entity's business plan would be
accomplished by the assets and personnel received from Promo Tel - Delaware.
In April of 1996, the Company entered into an agreement pursuant to which
the Company was to obtain trade secrets, customer bases and other intangible
property from four individuals and six corporations in exchange for $1.50
Warrants and $13.20 Warrants to purchase an aggregate of 4,203,124 shares of its
Common Stock. $1.50 Warrants to purchase 2,344,648 shares of Common Stock and
$13.20 Warrants to purchase 1,333,334 shares of Common Stock were actually
issued. The remaining $1.50 Warrants to purchase 526,042 shares of Common stock
were held awaiting the delivery of certain assets to the Company. Those assets
were never received, and the Company never issued the remaining $1.50 Warrants
to the three parties from whom assets were not received. Of the warrants issued,
$13.20 Warrants to purchase 1,333,334 and $1.50 Warrants to purchase 2,343,748
shares of Common Stock are exercisable at $13.20 and $1.50 per share,
respectively. The $1.50 Warrants and the $13.20 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.
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During May, 1997 through March 31, 1998, 2,291,498 shares of Common Stock were
issued upon exercise of the $1.50 Warrants at $1.50 per share. There remain
Outstanding $1.50 Warrants to purchase 50,250 shares of Common Stock at an
exercise price of $1.50.
In connection with this transaction, $13.20 Warrants to purchase Common
Stock at $13.20 per share were issued to officers and directors of the Company
as follows: (i) Mr. Magliato - 729,167 shares; (ii) Ms. Perri - 72,917 shares;
and (iii) Mr. Roca - 62,500 shares.
For information with respect to employment agreements between the Company
and its officers and stock option grants to officers see "Management - Executive
Compensation" and "Description of Capital Stock."
In May, 1996, the Company sold certain Internet service provider assets to
TECLink. The Company, which owned 40% of TECLink, received $50,000 and the Note
for $2,405,000, due December 31, 1998, bearing interest at 6% per annum from
TECLink. The remaining stockholders of TECLink had no affiliation to the
Company. The assets sold to TECLink had been purchased from TEC in January 1996
in exchange for 1,475,126 shares of the Company's Common Stock. Due to TECLink's
continuing losses, it ceased operations as of May 31, 1997. The Company and
TECLink entered into an agreement whereby TECLink exchanged its net assets for
satisfaction of the outstanding balance of the Note. The Company recorded a loss
of $1,340,230 as a result of the settlement of the Note. On June 1, 1997 the
Company established World Access with the assets reacquired from TECLink. On
June 30, 1997 management resolved to discontinue the operations of World Access
by selling its assets. On October 1, 1997, the Company entered into the
Agreement to sell the customer base, the equipment and software which services
the customer base and the Company's obligations under its leases for its
premises and telephone equipment to Meta3. The assets sold had a book value of
$988,347. The Agreement calls for Meta3 to pay for the assets sold over a ten
month period, commencing November 1997, based on the number of subscribers in
the identified customer base, adjusted for its attrition rate for the first five
months of the Purchase Period. As of June 30, 1997, the Company recorded a loss
on disposal of $843,347. For the six months ended December 31, 1997, the Company
recorded an additional loss from the discontinued operations of World Access of
$105,554.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon for
the Company by Gilbert L. McSwain of Denver, Colorado.
EXPERTS
The financial statements and schedule included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of said firm
as experts in auditing and accounting.
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GLOSSARY
CAP (Competitive Access Provider) -- A Company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services.
CLEC (Competitive Local Exchange Carrier) -- A CAP that also provides
switched local services, such as local dial tone and Centrex, in competition
with the incumbent local exchange carrier.
Facilities-based carrier is a long distance telephone provider which owns
or has dedicated use of transmission facilities.
FCC -- Federal Communications Commission.
ILECs (Incumbent Local Exchange Carrier) -- The local phone companies
either a BOC or an independent (such as GTE), which provides local exchange
services.
Points of Presence (POPs) -- Physical locations where a long distance
carrier has installed transmission equipment in a service area that serves as,
or relays calls to, a network switching center of that long distance carrier and
connects with the lines of the local telephone company serving the LATA within
which the POP is located.
RBOC (Regional Bell Operating Company) -- The seven telephone companies
established by the 1982 agreement between AT&T and the Department of Justice.
Resale -- Resale by a provider of telecommunications services sold to it
by other providers or carriers on a wholesale basis.
Switch -- A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow telecommunications service providers to connect
calls directly to their destination, while providing advanced features and
recording connection information for future billing.
Traffic -- A generic term includes any and all calls, messages and data
sent and received by means of telecommunications.
59
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Consolidated Financial Statements
Period from May 18, 1995 (inception) to June 30, 1995,
Years Ended June 30, 1996 and 1997
and Six Months Ended December 31, 1996 and 1997
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
================================================================================
Consolidated Financial Statements
Period from May 18, 1995 (inception) to June 30, 1995,
Years Ended June 30, 1996 and 1997
and Six Months Ended December 31, 1996 and 1997
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Index
================================================================================
Report of independent certified public accountants F-3
Consolidated financial statements:
Balance sheets F-4
Statements of operations F-5
Statements of stockholders' equity (deficit) F-6
Statements of cash flows F-7
Notes to consolidated financial statements F-8 - F-27
F-2
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
and Stockholders of DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
We have audited the accompanying consolidated balance sheets of DigiTEC 2000,
Inc. (formerly Promo Tel, Inc.) and subsidiary (World Access Solutions, Inc.) as
of June 30, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the period from May 18, 1995
(inception) to June 30, 1995 and for each of the two years in the period ended
June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.) and subsidiary (World Access Solutions, Inc.) as of
June 30, 1996 and 1997, and the results of their operations and their cash flows
for the period from May 18, 1995 (inception) to June 30, 1995 and for each of
the two years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
----------------
BDO Seidman, LLP
New York, New York
October 22, 1997
F-3
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------
1996 1997 1997
- ----------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current:
Cash $ 141,754 $ 727,197 $ 176,217
Restricted cash (Note 2) 367,363 -- --
Accounts receivable, net of allowance for bad debts of
$26,000, $60,000 and $75,000, respectively
(Note 1(j)) 725,852 1,868,227 3,691,771
Communications equipment inventory, at cost (Note 4) 1,601,105 -- --
Inventory 71,929 218,877 964,932
Prepaid expenses 494,162 11,814 101,639
Due from related parties, net of allowance for bad
debts of $27,000 (Note 3) 176,494 -- --
Net assets of discontinued operations (Notes 3(b) and
9(c)) -- -- 84,398
- ----------------------------------------------------------------------------------------------------
Total current assets 3,578,659 2,826,115 5,018,957
Property and equipment, net 6,616 64,397 118,140
Notes receivable (Note 3(b)) 2,305,000 -- --
Intangibles, net of accumulated amortization of
$9,946, $62,944 and $215,651, respectively 149,197 606,920 491,788
Goodwill, net of accumulated amortization of $5,555 -- -- 494,445
Other assets, net 16,990 29,291 131,287
- ----------------------------------------------------------------------------------------------------
$ 6,056,462 $ 3,526,723 $ 6,254,617
====================================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current:
Accounts payable - communications equipment $ 1,601,105 $ -- $ --
(Note 4)
Accounts payable 761,275 2,842,891 5,950,093
Accrued expenses and other current liabilities -- 290,799 408,706
Note payable - current (Note 1(h)) -- 117,610 192,521
Net liabilities of discontinued operations (Note 3(b)) -- 211,502 --
- ----------------------------------------------------------------------------------------------------
Total current liabilities 2,362,380 3,462,802 6,551,320
Note payable (Note 1(h)) -- 64,390 12,481
Deferred rent -- 71,000 76,000
Deferred income 567,136 -- --
- ----------------------------------------------------------------------------------------------------
Total liabilities 2,929,516 3,598,192 6,639,801
- ----------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 8)
Stockholders' equity (deficit) (Notes 1(b), 3(a), 5, 9
and 11):
Preferred stock, $.001 par value, 1,000,000 shares
authorized; no shares outstanding -- -- --
Common stock, $.001 par value, 100,000,000
shares authorized; 4,664,427, 4,858,418 and
5,117,433 shares issued and outstanding,
respectively 4,664 4,858 5,117
Additional paid-in capital 3,251,557 3,602,462 4,411,779
Accumulated deficit (129,275) (3,678,789) (4,802,080)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) 3,126,946 (71,469) (385,184)
- ----------------------------------------------------------------------------------------------------
$ 6,056,462 $ 3,526,723 $ 6,254,617
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Period from
May 18,
1995
(inception) to
June 30, Six months ended
1995 Year ended June 30, December 31,
---------------------------- -----------------------------
1996 1997 1996 1997
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales (Note 1(j)) $-- $ 17,425,199 $ 26,027,909 $ 4,663,146 $ 24,613,043
Cost of sales -- 16,900,370 25,161,443 4,652,319 22,959,045
- -----------------------------------------------------------------------------------------------------------------------
Gross profit -- 524,829 866,466 10,827 1,653,998
Selling, general and administrative
expenses -- 654,104 2,040,749 666,850 2,069,674
- -----------------------------------------------------------------------------------------------------------------------
Loss before other income
(expenses) -- (129,275) (1,174,283) (656,023) (415,676)
- -----------------------------------------------------------------------------------------------------------------------
Other income (expenses):
Other income -- -- 34,260 -- --
Loss on note satisfaction
(Note 3(b)) -- -- (1,340,230) -- --
- -----------------------------------------------------------------------------------------------------------------------
Other expenses -- -- (1,305,970) -- --
- -----------------------------------------------------------------------------------------------------------------------
Loss from continuing
operations -- (129,275) (2,480,253) (656,023) (415,676)
- -----------------------------------------------------------------------------------------------------------------------
Discontinued operations (Notes 3(b)
and 10):
Loss from operations of Cellular
division -- -- -- -- (527,061)
Loss from operations of World
Access -- -- (175,914) -- (105,554)
Loss on disposal of Cellular
division -- -- -- -- (75,000)
Loss on disposal of World
Access -- -- (893,347) -- --
- -----------------------------------------------------------------------------------------------------------------------
Loss from discontinued
operations -- -- (1,069,261) -- (707,615)
- -----------------------------------------------------------------------------------------------------------------------
Net loss $-- $ (129,275) $ (3,549,514) $ (656,023) $ (1,123,291)
=======================================================================================================================
Net loss per common share - basic
and diluted (Note 1(k)):
From continuing operations $-- $ (.05) $ (.55) $ (.14) $ (.08)
From discontinued operations -- -- (.23) -- (.15)
- -----------------------------------------------------------------------------------------------------------------------
$ (.05) $ (.78) $ (.14) $ (.23)
=======================================================================================================================
Weighted average number of
common and common equivalent
shares outstanding -- 2,599,532 4,579,075 4,664,427 4,972,384
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
================================================================================
<TABLE>
<CAPTION>
Common Stock Stock
------------------------ Additional Accumulated subscriptions
Shares Amount paid-in capital deficit receivable
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, May 18, 1995 (inception) -- $ -- $ -- $ -- $ --
For the period from May 18, 1995
(inception) to June 30, 1995:
Stock issued to founder 1,333,334 1,334 (1,334) -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 1,333,334 1,334 (1,334) -- --
For the year ended June 30, 1996:
Sale of common stock relating to
merger with Promo Tel - Nevada
(Note 1(b)) 59,042 59 (59) -- --
Issuance of stock subscriptions 833,333 833 499,167 -- (440,000)
Issuance of common stock relating to
debt conversion (Note 5(a)) 833,333 833 499,167 -- --
Issuance of options to purchase
common stock in exchange for
customer lists and other intangible
property (Note 5(b)) -- -- 584,143 -- --
Issuance of common stock relating to
asset purchase (Note 3(a)) 1,605,385 1,605 1,670,473 -- --
Payment of stock subscriptions
receivable -- -- -- -- 440,000
Net loss -- -- -- (129,275) --
- -------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 4,664,427 4,664 3,251,557 (129,275) --
For the year ended June 30, 1997:
Acquisition of treasury stock
(Note 3(a)) -- -- -- -- --
Retirement of treasury stock (130,259) (131) (135,145) -- --
Exercise of warrants 324,250 325 486,050 -- --
Net loss -- -- -- (3,549,514) --
- -------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 4,858,418 4,858 3,602,462 (3,678,789) --
For the six months ended December 31,
1997 (unaudited):
Exercise of warrants 206,383 206 309,370 -- --
Acquisition of Ameridial, Inc. (Note 9) 52,632 53 499,947 -- --
Net loss -- -- -- (1,123,291) --
- -------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 (unaudited) 5,117,433 $ 5,117 $ 4,411,779 $(4,802,080) $ --
=========================================================================================================================
<CAPTION>
Treasury Stock Total
------------------------ stockholders'
Shares Amount equity (deficit)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, May 18, 1995 (inception) -- $ -- $ --
For the period from May 18, 1995
(inception) to June 30, 1995:
Stock issued to founder -- -- --
- --------------------------------------------------------------------------------------------
Balance, June 30, 1995 -- -- --
For the year ended June 30, 1996:
Sale of common stock relating to
merger with Promo Tel - Nevada
(Note 1(b)) -- -- --
Issuance of stock subscriptions -- -- 60,000
Issuance of common stock relating to
debt conversion (Note 5(a)) -- -- 500,000
Issuance of options to purchase
common stock in exchange for
customer lists and other intangible
property (Note 5(b)) -- -- 584,143
Issuance of common stock relating to
asset purchase (Note 3(a)) -- -- 1,672,078
Payment of stock subscriptions
receivable -- -- 440,000
Net loss -- -- (129,275)
- --------------------------------------------------------------------------------------------
Balance, June 30, 1996 -- -- 3,126,946
For the year ended June 30, 1997:
Acquisition of treasury stock
(Note 3(a)) 130,259 (135,276) (135,276)
Retirement of treasury stock (130,259) 135,276 --
Exercise of warrants -- -- 486,375
Net loss -- -- (3,549,514)
- --------------------------------------------------------------------------------------------
Balance, June 30, 1997 -- -- (71,469)
For the six months ended December 31,
1997 (unaudited):
Exercise of warrants -- -- 309,576
Acquisition of Ameridial, Inc. (Note 9) -- -- 500,000
Net loss -- -- (1,123,291)
- --------------------------------------------------------------------------------------------
Balance, September 30, 1997 (unaudited) -- $ -- $ (385,184)
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Consolidated Statements of Cash Flows
(Note 7)
================================================================================
<TABLE>
<CAPTION>
Period from
May 18, 1995 Year ended June 30, Six months ended December 31,
(inception) to -------------------------- -----------------------------
June 30, 1995 1996 1997 1996 1997
- --------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ -- $ (129,275) $(3,549,514) $ (656,023) $(1,123,291)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for bad debts -- 53,248 33,752 -- --
Amortization -- 9,946 87,798 26,524 120,686
Depreciation -- 2,545 11,657 3,828 18,699
Loss on write-down of note receivable -- -- 1,340,230 -- --
Deferred income -- 567,136 (567,136) (567,136) --
Deferred rent -- -- 71,000 -- 5,000
(Increase) decrease in:
Accounts receivable -- (752,100) (1,539,648) (39,137) (1,823,544)
Inventory -- (71,929) (146,948) (315,853) (746,055)
Prepaid expenses and other assets 60,000 (530,726) 470,047 417,565 (191,821)
Increase in:
Accounts payable and accrued
expenses -- 761,275 2,372,416 454,448 3,225,110
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used
in) operating activities of
continuing operations 60,000 (89,880) (1,416,346) (675,784) (515,216)
Net cash provided by (used in) operating
activities of discontinued operations -- -- 976,272 -- (295,900)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used
in) operating activities 60,000 (89,880) (440,074) (675,784) (811,116)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures -- (9,160) (69,439) (20,727) (72,442)
Purchase of communications equipment -- (533,625) -- -- --
Proceeds from sale of assets -- 50,000 -- -- --
Proceeds from repayment of related party
loans -- -- 41,218 42,000 --
Related party loans granted -- (68,218) -- -- --
Payment received on note receivable -- 100,000 200,000 200,000 --
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided
by investing activities -- (461,003) 171,779 221,273 (72,442)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from note payable-auto -- -- -- -- 23,002
Proceeds from issuance of convertible debt -- 500,000 -- -- --
Proceeds from exercise of warrants -- -- 486,375 -- 309,576
Proceeds from stock subscriptions -- 500,000 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by
financing activities -- 1,000,000 486,375 -- 332,578
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 60,000 449,117 218,080 (454,511) (550,980)
Cash (including restricted cash of $367,363 at
June 30, 1996), beginning of period -- 60,000 509,117 509,117 727,197
- --------------------------------------------------------------------------------------------------------------------------
Cash (including restricted cash of $367,363 at
June 30, 1996), end of period $ 60,000 $ 509,117 $ 727,197 $ 54,606 $ 176,217
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
1. Summary of (a) Business
Significant
Accounting Policies DigiTEC 2000, Inc. and Subsidiary (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
principally throughout the New York tri-state
metropolitan area.
On October 18, 1996, the Company changed its name
to DigiTEC 2000, Inc.
(b) Organization
On July 11, 1995, Promo Tel, Inc., a Delaware
corporation ("Promo Tel-Delaware"), merged (the
"Merger") into Promo Tel, Inc., a Nevada
corporation ("Promo Tel-Nevada"). Immediately
prior to the Merger, Promo Tel-Nevada changed its
name from Yacht Havens International Corp. ("Yacht
Havens"). The surviving corporation remained Promo
Tel, Inc. Pursuant to the terms of the Merger,
Promo Tel-Nevada, which had 59,042 shares of its
common stock previously outstanding, exchanged
with the sole stockholder of Promo Tel-Delaware an
aggregate of 1,333,334 shares of previously
unissued $.001 Promo Tel-Nevada common stock for
the outstanding shares of Promo Tel-Delaware's
outstanding common stock.
Since the Merger resulted in voting control by the
stockholder of Promo Tel-Delaware and Promo
Tel-Delaware had the personnel and owned all the
assets to be utilized for its ongoing business,
the Merger was treated as a recapitalization of
Promo Tel-Delaware and the sale of 59,042 shares
of previously issued Promo Tel-Nevada common stock
for the net assets of Promo Tel-Nevada ($-0-).
Promo Tel-Delaware is the continuing entity for
financial reporting purposes, and the financial
statements prior to July 11, 1995 represent its
financial position and results of operations. The
assets, liabilities and results of operations of
Promo Tel-Nevada are included as of July 11, 1995.
The Company was formed on May 18, 1995 and
commenced operations in July 1995.
F-8
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
Although Promo Tel-Delaware is deemed to be the
acquiring corporation for financial accounting and
reporting purposes, the legal status of Promo
Tel-Nevada as the surviving corporation will not
change. Promo Tel-Nevada had amended its Articles
of Incorporation to change its name from Promo
Tel, Inc. to the Company's current name (Note
1(a)).
In September 1996, the Board of Directors of the
Company approved a reverse stock split of the
Company's common stock. 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 3(b) and
9(b)), its wholly-owned subsidiaries, World Access
Solutions, Inc. ("World Access") and Ameridial,
Inc. ("Ameridial"). All significant intercompany
balances and transactions have been eliminated.
The consolidated financial statements and related
notes thereto as of December 31, 1997 and for the
six months ended December 31, 1996 and 1997 are
unaudited but, in the opinion of management,
include all adjustments necessary to present
fairly the information set forth therein. These
adjustments consist solely of normal recurring
accruals. The interim results are not necessarily
indicative of the results for any future periods.
(d) Deferred Rent
The Company accounts for rent on a straight-line
basis over the term of the leases. The effect of
such adjustment for the year ended June 30, 1997
and the six months ended December 31, 1997 was
$71,000 and $5,000, respectively. No adjustment
was necessary for all other periods presented.
F-9
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
(e) Use of Estimates
In preparing the consolidated financial statements
in conformity with generally accepted accounting
principles, management is required to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at
the date of the consolidated financial statements
and revenues and expenses during the reported
period. Actual results could differ from those
estimates.
(f) Revenue Recognition
Sales from third-party prepaid phone cards for
which the Company acts solely as a distributor are
recognized upon delivery.
Sales from the sale of proprietary, branded
prepaid phone cards are deferred and recognized
upon completion of telephone calls by end users.
Sales under this program were terminated during
the first quarter of fiscal 1997.
(g) Inventory
Inventory, consisting primarily of telephone
calling cards, is stated at the lower of cost or
market. Cost is determined by the first-in,
first-out (FIFO) method.
(h) Intangibles and Amortization
(i) Goodwill
The excess over the fair value of net assets
of acquired businesses arises from business
combinations accounted for as purchases and
is being amortized over 15 years. The
Company's operational policy for the
assessment and measurement of any impairment
in the value of excess of cost over net
assets acquired which is other than temporary
is to evalute the recoverability and
remaining life of its goodwill and determine
whether the goodwill should be completely or
partially written off or the amortization
period accelerated. The Company will
recognize an impairment of goodwill if
undiscounted estimated future operating cash
flows of the acquired businesses are
determined to be less than the carrying
amount of goodwill. If the Company determines
that goodwill has been impaired, the Company
will reflect the impairment through a
reduction in the carrying amount of goodwill,
in an amount equal to the excess of the
carrying amount of the goodwill over the
amount of the undiscounted estimated
operating cash flows.
(ii) Customer Lists
Intangibles include the costs to acquire
customer lists. As part of one of the
customer acquisition agreements, the Company
entered into an 8% per annum note payable for
$182,000. The note is unsecured with payments
commencing on November 1, 1997 and continuing
until the last payment which is due October
1, 1998. The maturities of the note are
$117,610 for the year ended June 30, 1998
with the remainder due during the year ended
June 30, 1999.
F-10
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
The Company periodically evaluates the
recoverability of these intangibles based on
several factors, including management's intention
with respect to these acquired assets and the
estimated future nondiscounted cash flows expected
to be generated by such assets. To date, the
Company has not recorded any impairment on its
intangibles.
Amortization is computed on a straight-line basis
over the estimated useful lives of the intangibles
which approximate three years.
(i) Income Taxes
Deferred tax assets and liabilities are recorded
for the estimated future tax effects attributable
to temporary differences between the bases of
assets and liabilities recorded for financial and
tax reporting purposes.
(j) Risk Concentration
(i) Accounts Receivable
At June 30, 1996, approximately 60% and 57%,
respectively, of trade receivables and sales
were accounted for by one customer.
For the year ended June 30, 1997 and the six
months ended December 31, 1997, one master
distributor accounted for approximately 48%
and 5% of the Company's accounts receivable
and 54% and 26% of the Company's sales,
respectively. An additional customer
accounted for 28% of the Company's accounts
receivable and 7% of the Company's sales for
the six months ended December 31, 1997.
During September 1997, the Company amended
its agreement with the master distributor by
terminating the exclusivity clause of the
distribution agreement.
(ii) Suppliers
The Company purchases its long distance
products primarily from two long distance
providers.
F-11
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
(k) Earnings Per Share
In December 1996, the Financial Accounting
Standards Board ("FASB") 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 affect 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 have 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)).
(l) Advertising Costs
The Company expenses all advertising costs as
incurred.
(m) Fair Value of Financial Instruments
The carrying values of financial instruments,
including cash and note receivable at June 30,
1996 and cash and note payable at June 30, 1997
and December 31, 1997, approximate fair value as
of those dates because of the relatively
short-term maturity of these instruments.
(n) Reclassifications
Certain amounts as previously reported have been
reclassified to conform to the 1997 presentation.
F-12
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
(o) Recent Accounting Pronouncements
The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" for the year
ended June 30, 1996. The adoption of SFAS No. 121
did not have a material effect on the Company's
consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS
No. 123 establishes a fair value method for
accounting for stock-based compensation plans
either through recognition or disclosure. The
Company's adoption of employee stock-based
compensation provisions of SFAS No. 123 as of July
1, 1996 required disclosure of the pro forma net
income and pro forma net income per share amounts
assuming the fair value method was adopted July 1,
1995. The adoption of this standard did
not impact the Company's results of operations,
financial position or cash flows.
In 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.
F-13
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
In June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and
Related Information", which supersedes Statement
No. 14, "Financial Reporting for Segments of a
Business Enterprise". SFAS No. 131 establishes
standards for the reporting of certain information
about operating segments by public companies, in
both annual and interim financial statements. SFAS
No. 131 defines an operating segment as a
component of an enterprise for which separate
financial information is available and whose
operating results are reviewed regularly by the
chief operating decision-maker to make decisions
about resources to be allocated to the segment and
to assess its performance.
SFAS Nos. 130 and 131 are both effective for
financial statements for periods beginning after
December 15, 1997 and both require comparative
information for earlier years to be restated. The
adoption of Statement No. 130 is not expected to
have a material effect on the Company's financial
position or results of operations. The adoption of
SFAS No. 131 will have no effect on the Company's
financial position or results of operations and
the Company is currently reviewing SFAS No. 131 in
order to fully evaluate the impact, if any, the
adoption of the provisions of this Statement will
have on future financial disclosures.
2. Restricted Cash At June 30, 1996, the Company had an agreement with a
long distance service provider to maintain an amount on
deposit, in a specified bank account, for unused
activated time on prepaid telephone calling cards. This
agreement was terminated in September 1996.
F-14
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
3. Related Party (a) On January 20, 1996, the Company purchased certain
Transactions internet service provider assets consisting
primarily of computer hardware, software and
office equipment from Telephone Electronics
Corporation ("TEC") in exchange for 1,605,385
shares of the Company's restricted common stock
valued at approximately $1.7 million based on the
estimated fair values of the assets received.
TEC is a communications company headquartered in
Jackson, Mississippi that provides local and long
distance telephone exchange services and provides
other telecommunications services nationally.
Subsequent to the purchase date, the purchase
agreement was amended to reflect certain assets
which were not delivered by TEC, resulting in a
receivable from TEC of $135,276 at June 30, 1996.
In November 1996, TEC returned 130,259 of the
Company's shares to the Company. TEC's current
ownership interest at June 30, 1997 was
approximately 30%.
(b) The Company owns 40.3% of the outstanding common
stock of TecLink, Inc. ("TecLink"). The Company
helped establish TecLink as a Mississippi-based
internet service provider by selling to TecLink
certain internet service provider assets,
intellectual property, computer hardware, software
and office equipment (that it had previously
purchased from TEC and others) as well as an
exclusive value added reseller distribution
contract from Hughes Corporation ("Hughes") (see
Note 4). 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 promissory 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 on 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
F-15
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
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 its note receivable from
TecLink ($2,105,000). As a result, the Company
recorded a loss of $1,340,230. The Company
maintained its right to part of any proceeds that
TecLink may receive from its claims against
Hughes. The Company established World Access as a
wholly-owned subsidiary providing internet access
with the net assets re-acquired from TecLink. As
of June 30, 1997, management determined that it
needed to focus on its core business and would
discontinue the operations of World Access by
selling its net assets.
On October 1, 1997, the Company entered into an
agreement (the "Agreement") to sell the customer
base, the related hardware related to servicing
the customer base and its obligations under World
Access' leases for its premises and telephone
equipment to Meta3, Inc. ("Meta3"), a Mississippi
corporation in a similar line of business. The
Agreement calls for Meta3 to pay for the
subscribers at $10 per month per customer for ten
months. The amount to be paid will be adjusted by
the identified customer base's net attrition rate
for the first five months of the purchase period.
As a result of the Agreement and the Company's
plan to dispose of the remaining assets and
liabilities, the Company recorded a loss on
disposal of $893,347 for the year ended June 30,
1997. For the six months ended December 31, 1997,
the Company incurred an additional loss of
$105,554 on the discontinued operations of World
Access. At June 30, 1997 and December 31, 1997,
$175,000 and $50,000, respectively, remains
F-16
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
accrued for the estimated loss related to the
operations of World Access for the year ended June
30, 1998. The Company does not anticipate any
additional charges to be recognized related to
World Access' operations. The assets and
liabilities of World Access, adjusted for the
Agreement, are as follows:
June 30, December 31,
1997 1997
--------------------------------------------------
Cash $ 15,566 $ --
Accounts receivable 46,874 23,000
Inventory 146,650 123,000
Receivable from Meta3 270,000 246,000
Prepaid expenses and
other assets 28,800 12,000
Equipment 38,153 -
Accounts payable (338,271) (132,497)
Other liabilities (419,274) (230,000)
--------------------------------------------------
Net (liabilities) assets
of World Access $(211,502) $ 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.
4. Communications The Company purchased communications equipment
Equipment from Hughes which allows high speed
Inventory satellite-based access service for both internet
and private network applications. Subsequently,
the Company decided not to enter this line of
business and sold this equipment to TecLink (Note
3(b)) and assigned the Company's rights and
obligations under the exclusive value added
reseller distribution agreement to TecLink, as
well as its payables relating to this equipment to
its vendor. The vendor agreed to the assignment of
the equipment and the distribution agreement, and
settled the liability for amounts already paid to
Hughes.
F-17
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
5. Stockholders'
Equity (a) In December 1995 and May 1996, the Company
received an aggregate of $1,000,000 as a result of
completing two offerings under Rule 504 of
Regulation D.
(b) At June 30, 1997, the Company had an option
agreement with one of its officers and had one
stock option plan. The agreement and plan are more
fully described below. The Company applies
Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees",
and related Interpretations in accounting for the
agreements and the plan. Under APB No. 25, when
the exercise price of the Company's employee stock
options equals the market price of the underlying
stock on the date of the grant, no compensation
cost is recognized. The following is a summary of
the agreements and the option plan:
(i) On April 25, 1997, the Company granted a
stock option to one of its officers, as part
of his employment agreement, to purchase
187,500 shares of common stock at $14.50 per
share. The option is exercisable at the date
of grant and expires ten years from the date
of grant.
(ii) In April 1997, the Company's Board of
Directors adopted the Company's Stock
Incentive Plan (the "Plan") which provided
for the granting of up to 600,000 shares of
common stock, subject to the approval of the
Plan by the stockholders of the Company on
or before April 24, 1998. As of June 30,
1997, no options had been granted under the
Plan.
SFAS No. 123, "Accounting for Stock-Based
Compensation", requires the Company to provide pro
forma information regarding net income and
earnings per share as if compensation cost for the
Company's stock options had been determined in
accordance with the fair value-based method
prescribed in SFAS No. 123. The Company estimates
the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing
model with the following weighted average
assumptions used for grants in fiscal 1996 and
1997, respectively: no dividends paid for all
years; expected volatility of 30% for all years;
weighted average risk-free interest rate of 5.9%;
and an expected life of 1 year.
F-18
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
Under the accounting provisions of SFAS No. 123,
the Company's net loss and net loss per share from
continuing operations would have been increased to
the pro forma amounts indicated below.
Year ended June 30, 1997
--------------------------------------------------
Net loss from continuing operations:
As reported $2,480,253
Pro forma $2,590,662
Net loss per share from continuing operations:
As reported $ (.55)
Pro forma $ (.57)
==================================================
The following table contains information on stock
options for the three year period ended June 30,
1997:
Weighted
Exercise average
Option price range exercise
shares per share price
--------------------------------------------------
Outstanding and -- $ -- $ --
exercisable,
June 30,
1995 and 1996 --
Granted 187,500 14.50 14.50
--------------------------------------------------
Outstanding and
exercisable,
June 30, 1997 187,500 $14.50 $14.50
==================================================
The weighted average fair value of the options
granted in fiscal 1997 was $0.59 per share.
F-19
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
The weighted average remaining contractual life of
the outstanding and exercisable options as of June
30, 1997 is 9.8 years.
(c) Warrants
In April 1996, the Company entered into an
agreement which enabled the Company to issue
warrants to purchase 4,203,124 shares of common
stock to various individuals and corporations in
exchange for trade secrets, customer bases,
software 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 two parties to
deliver their promised assets to the Company.
Those assets were never received and the Company
did not issue the remaining warrants. The warrants
issued have a term of five years from date of
grant and are immediately exercisable. The Company
may call the warrants at a price of $.10 per share
of common stock.
The following table contains information on
warrants for the three-year period ended June 30,
1997:
Weighted
Exercise average
Warrant price range exercise
shares per share price
--------------------------------------------------
Outstanding and $ $
exercisable,
June 30, 1995 -- -- --
Granted 3,677,082 1.50-13.20 3.01
--------------------------------------------------
Outstanding and
exercisable,
June 30, 1996 3,677,082 1.50-13.20 3.01
Exercised (324,250) 1.50 1.50
--------------------------------------------------
Outstanding and
exercisable,
June 30, 1997 3,352,832 $1.50-13.20 $3.16
==================================================
F-20
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
The weighted average remaining contractual life of
the outstanding and exercisable warrants as of
June 30, 1997 is 3.8 years.
6. Income Taxes The tax effects of temporary differences that give rise
to deferred tax assets are as follows:
June 30, 1996 1997
-------------------------------------------------------
Net operating loss carryforwards $ -- $ 876,000
Loss on World Access -- 313,000
Deferred rent -- 25,000
Allowance for bad debts 18,000 21,000
Other 1,000 43,000
-------------------------------------------------------
Total deferred tax assets 19,000 1,278,000
Less valuation allowance (19,000) (1,278,000)
-------------------------------------------------------
Net deferred tax assets $ -- $ --
=======================================================
The ultimate realization of the deferred tax assets is
dependent on the generation of future taxable income
during the period in which the temporary differences
become deductible. Based on the Company's historical
earnings, management has established a valuation
allowance equal to the tax effects of the Company's
deferred tax assets at June 30, 1996 and 1997.
The Company's net operating loss carryforwards of
approximately $2,500,000 as of June 30, 1997, are
available to offset future Federal taxable income, if
any, through 2012 and may be subject to various
limitations.
F-21
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
7. Supplemental Cash Supplemental disclosures of cash flow information are as
Flow Information follows:
<TABLE>
<CAPTION>
Six months ended
Year ended June 30, December 31,
----------------------- ---------------------
1996 1997 1996 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-cash investing and financing
activities:
Return of common stock $ -- $ 135,276 $ -- $ --
Write-off of receivables for
acquisition of customer
lists -- 363,521 -- --
Note received from sale of
assets 2,405,000 -- -- --
Common stock issued for
assets purchased 1,672,078 -- -- --
Common stock issued for
conversion of debt 500,000 -- -- --
Common stock issued in
exchange for all
outstanding shares of
Ameridial -- -- -- 500,000
Transfer of Hughes
communications
equipment and related
payable -- 1,601,105 -- --
Communications equipment
and related payable
obtained from Hughes 1,601,105 -- -- --
Acquisition of the net assets
of TecLink in satisfaction
of note receivable -- 764,770 -- --
===================================================================================
</TABLE>
F-22
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
8. Commitments and (a) Leases
Contingencies
The Company leases its office space under a
noncancelable operating lease agreement which
expires in June 30, 2002. Rent expense for the
years ended June 30, 1996 and 1997 was
approximately $52,000 and $144,000, respectively.
Future minimum rentals required as of June 30,
1997 under all noncancellable operating leases
(exclusive of renewals) are as follows:
Fiscal year ended June 30,
--------------------------------------------------
1998 $ 287,500
1999 314,600
2000 307,200
2001 314,900
2002 240,000
--------------------------------------------------
$1,464,200
==================================================
(b) 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. 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 case is in discovery.
The Company believes such litigation will not have
a material adverse effect on the financial
condition of the Company, and is defending the
suit vigorously and asserting appropriate
counterclaims.
F-23
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
(c) Employment Agreements
The Company has employment agreements with three
of its officers. The aggregate minimum payments
under the agreements are as follows:
June 30,
--------------------------------------------------
1998 $465,000
1999 565,000
2000 690,000
--------------------------------------------------
$1,720,000
==================================================
Subsequent to June 30, 1997, the Company entered
into four additional employment agreements with an
officer and three employees which resulted in an
increase of $259,875, $457,000 and $512,000 in
aggregate minimum payments for the years ended
June 30, 1998, 1999 and 2000, respectively.
(d) Commitment to Frontier Corporation
At June 30, 1997, the Company had a commitment to
Frontier Corporation for the purchase of prepaid
telephone cards. The agreement, which is for the
period of October 30, 1996 through January 30,
1998, calls for the Company to purchase $10
million of cards at face value. As of June 30,
1997, the Company had purchased in excess of this
commitment.
F-24
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
(e) Distribution Agreement with Premiere
Communications, Inc.
On September 25 and 26, 1997, the Company entered
into one year distribution agreements with
Premiere Communications, Inc. ("Premiere"). These
agreements call for the Company to purchase cards
with an aggregate minimum face value of $81
million, with a minimum of $4,000,000 of cards a
month beginning January 1998, at discounts ranging
from 23.5% to 41.75% off the face value of the
cards. Failure to purchase the minimum value will
result in the Company being required to pay
Premiere an amount equal to the retail value of
the unsold cards less the applicable discount that
would have been payable on such cards by August
31, 1998. As of December 31, 1997, the Company has
purchased approximately $13,554,000 toward this
commitment.
9. Acquisition of On October 31, 1997, the Company entered into an
Ameridial agreement for the acquisition of all of the outstanding
shares of Ameridial, in exchange for 52,632 shares of
the Company's common stock. Ameridial was established to
negotiate and resell rates between international long
distance carriers. 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. Operating results for Ameridial were immaterial
to the Company and, accordingly, pro forma results have
not been provided.
F-25
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
10. Discontinued On December 31, 1997, management adopted a formal plan
Operations of to abandon the operations of its conventional cellular
Cellular Division 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 $527,061 for
the 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 ceased completely by February 1, 1998.
11. Subsequent Events (a) Exercise of Warrants
In February and March 1998, warrants to purchase
1,760,865 shares of the Company's common stock
were exercised resulting in net proceeds to the
Company of $2,641,298. In connection with certain
of these exercises, the Company granted certain
registration rights which include a registration
statement on Form S-1 to be filed by the 45th
calendar day from the closing date of the
exercises. Failure to file the registration
statement will result in the obligation of the
Company to pay the holders of such shares a
penalty equal to 1% per month, pro-rated daily, of
the proceeds received from the exercises, within
15 days of its accrual.
F-26
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information for December 31, 1996 and 1997 is unaudited)
================================================================================
(b) Investment Agreement with Premiere
On March 31, 1998, the Company entered into an
agreement with Premiere (the "Investment
Agreement") in which Premiere received 61,050
shares of $.001 par value voting Series A
Preferred Stock, valued by the Board of Directors
at $6,105,093 which represented Premiere's
outstanding accounts receivable balance as of that
date. The $6,105,093 included $4,636,981 which was
attributable to phone cards purchased in the
normal course of business with the $1,468,112
representing a one-time charge on March 31, 1998
from Premiere for extra minutes processed by
Premiere on cards activated by the Company. The
$1,468,112 was charged to operations during the
quarter ended March 31, 1998. The Series A
Preferred Stock is convertible into common stock
at any time at Premier's option and the Company
has the right to require Premiere to convert the
Series A Preferred Stock after March 31, 1999. The
Certificate of Designation (the "Certificate of
Designation") for the Series A Preferred Stock
provides for certain voting, liquidation, and
registration rights and calculates the conversion
by multiplying 61,050, the number of shares of
Series A Preferred Stock issued in connection with
the Investment Agreement by $100, the Investment
Amount as defined in the Certificate of
Designation and then dividing by $10.395, the
Conversion Price as defined in the Certificate of
Designation, resulting in a total of 587,302
shares of common stock to be issued under the
Investment Agreement. The Company may call the
redemption of each share of Series A Preferred
Stock at any time for $100 a share plus accrued
dividends.
F-27
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Period from May 18, 1995 (inception) to June 30, 1995
and Years Ended June 30, 1996 and 1997
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
================================================================================
Schedule II - Valuation and Qualifying Accounts
Period from May 18, 1995 (inception) to June 30, 1995
and Years Ended June 30, 1996 and 1997
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Index
================================================================================
Report of independent certified public accountants S-2
Schedule II - Valuation and qualifying accounts S-3
S-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
and Stockholders of DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
The audits referred to in our report dated October 22, 1997 relating to the
consolidated financial statements of DigiTEC 2000, Inc. (formerly Promo Tel,
Inc.) and subsidiary (World Access Solutions, Inc.), which is contained in Part
II of this Registration Statement, included the audits of the financial
statement schedule listed in the accompanying index for the period May 18, 1995
(inception) to June 30, 1995 and for the years ended June 30, 1996 and 1997.
This financial statement schedule is the responsibility of management. Our
responsibility is to express an opinion on this schedule based on our audits.
In our opinion, the financial statement Schedule II, Valuation and Qualifying
Accounts, presents fairly, in all material respects, the information set forth
therein.
/s/ BDO Seidman, LLP
----------------
BDO Seidman, LLP
New York, New York
October 22, 1997
S-2
<PAGE>
DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
================================================================================
<TABLE>
<CAPTION>
Year ended June 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
Balance at Charged to Balance at
beginning costs and Other end of
of period expenses changes Deductions period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserves and allowances
deducted from asset
accounts:
Allowance for bad
debts $26,000 $34,000 $ -- $ -- $60,000
======================================================================================================================
Year ended June 30, 1996
- ----------------------------------------------------------------------------------------------------------------------
Reserves and allowances
deducted from asset
accounts:
Allowance for bad
debts $ -- $26,000 $ -- $ -- $26,000
======================================================================================================================
Period May 18, 1995 (inception) to June 30, 1995
- ----------------------------------------------------------------------------------------------------------------------
Reserves and allowances
deducted from asset
accounts:
Allowance for bad
debts $ -- $ -- $ -- $ -- $ --
======================================================================================================================
</TABLE>
S-3
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary............................................ 5
Risk Factors.................................................. 12
Dividend Policy............................................... 19
Capitalization................................................ 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 23
Business...................................................... 31
Market Price of and Dividends on the Registrant's
Common Equity and Other Stockholder Matters................ 42
Management.................................................... 43
Use of Proceeds .............................................. 48
Plan of Distribution.......................................... 48
Selling Stockholders.......................................... 48
Security Ownership of Beneficial Owners
and Management............................................ 49
Description of Capital Stock ................................. 50
Shares Eligible for Future Sale............................... 56
Certain Relationships and Related Transactions................ 57
Legal Matters................................................. 58
Experts....................................................... 58
60
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution(1)
Amount
------
Filing fee, Securities and Exchange Commission ............ $11,791.67
American Stock Exchange listing fee ....................... $17,500.00
Fees and expenses of accountants .......................... $10,000.00
Fees and expenses of counsel .............................. $25,000.00
Printing and engraving expenses ........................... $ 4,000.00
Blue sky fees and expenses ................................ $ 5,000.00
Miscellaneous ............................................. $ 7,700.00
----------
Total ............................................... $80,991.67
(1) The amounts set forth above, except for the filing fees for
the Securities and Exchange Commission and for the American
Stock Exchange listing fee, are in each case estimated.
Item 14. Indemnification of Directors and Officers
Limitations on Liability of Directors and Officers
The Company's Restated Articles of Incorporation provide that a director
or officer shall not be liable for damages to the Company or its stockholders
for breach of fiduciary duty except for acts of omission that involve
intentional misconduct, fraud or a knowing violation of law and unlawful
dividend payments under Nevada Private Corporations Law Section 78.300.
Indemnification of Directors, Officers and Others
Section 78.751 of the Nevada Private Corporations Law, a corporation
provides as follows:
1. A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by
or in the right of the corporation, by reason of the fact that
he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the action, suit
or proceeding if he acted in good faith and in a manner which
he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its
equivalent, does not, of itself, create a presumption that the
person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any
criminal action or proceeding, he had reasonable cause to
believe that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of
the fact that he is or was a director, officer,
61
<PAGE>
employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including
amounts paid in settlement and attorneys' fees actually and
reasonably incurred by him in connection with the defense or
settlement of the action or suit if he acted in good faith and
in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter
as to which such a person has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals
therefrom, to be liable to the corporation or for amounts paid
in settlement to the corporation, unless and only to the
extent that the court in which the action or suit was brought
or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnity for
such expenses as the court deems proper.
3. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in
subsections 1 and 2, or in defense of any claim, issue or
matter therein, he must be indemnified by the corporation
against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense.
4. Any indemnification under subsections 1 and 2, unless ordered
by a court or advanced pursuant to subsection 5, must be made
by the corporation only as authorized in the specific case
upon a determination that indemnification of the director,
officer, employee or agent is proper under the circumstances.
The determination must be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a
quorum consisting of directors who were not
parties to the acting, suit or proceeding;
(c) If a majority vote a quorum consisting of
directors who were not parties to the action, suit
or proceeding so orders, by independent legal
counsel in a written opinion; or
(d) If a quorum consisting of directors who were not
parties to the action, suit or proceeding cannot
be obtained, by independent legal counsel in a
written opinion.
5. The articles of incorporation, the bylaws or an agreement made
by the corporation may provide that the expenses of officers
and directors incurred in defending a civil or criminal
action, suit or proceeding must be paid by the corporation as
they are incurred and in advance of the final disposition of
the action, suit or proceeding, upon receipt of an undertaking
by or on behalf of the director or officer to repay the amount
if it is ultimately determined by a court of competent
jurisdiction that he is not entitled to be indemnified by the
corporation. The provisions of this subsection do not affect
any rights to advancement of expenses to which corporate
personnel other than directors or officers may be entitled
under any contract or otherwise by law.
6. The indemnification and advancement of expenses authorized in
or ordered by a court pursuant to this section;
(a) Does not exclude any other rights to which a
person seeking indemnification or advancement of
expenses may be entitled under the articles of
incorporation or any bylaw, agreement, vote of
stockholders or disinterested directors or
otherwise, for either an action in his official
capacity or an action in another capacity while
holding his office, except that indemnification,
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unless ordered by a court pursuant to subsection 2
or for the advancement of expenses made pursuant
to subsection 5, may not be made to or on behalf
of any director or officer if a final adjudication
establishes that his acts or omissions involved
intentional misconduct, fraud or a knowing
violation of the law and was material to the cause
of action.
(b) Continues for a person who has cased to be a
director, officer, employee or agent and inures to
the benefit of the heirs, executors and
administrators of such a person.
Article XI of the Company's Restated Articles of Incorporation
provide that except as may be set forth in the ByLaws of the Company it shall
have the right to indemnify any person for any liability or expenses incurred by
that person by reason of the fact that he was a director, officer, employee or
agent of the Company and has the right to advance or pay the expenses of
directors and officers in defending civil or criminal suit or proceeding to the
full extent provided by the Private Corporation Law of Nevada.
Article X of the Company's ByLaws contain the following provisions.
"Section 1. Definitions:
For the purpose of this Article X, the following terms shall have the
meanings set forth below:
(a) "Corporation" includes the Corporation and any domestic or
foreign predecessor entity of the Corporation in a merger, consolidation or
other transaction in which the predecessor's existence ceased upon consummation
of the transaction.
(b) "Director" means an individual who is or was a Director of
the Corporation and an individual who, while a director of the Corporation, is
or was serving[s] at the Corporation's request as a Director, Officer, partner,
Trustee, Employee, or Agent of any other foreign or domestic corporation or of
any partnership, joint venture, trust, other enterprise or employee benefit
plan. A Director shall be considered to be serving an employee benefit plan at
the Corporation's request if his duties to the Corporation also impose duties on
or otherwise involve services by him to the plan or to participants in or
beneficiaries of the plan.
(c) "Expenses" include attorney fees.
(d) "Liability" means the obligation to pay a judgment,
settlement, penalty, fine (including an excise tax assessed with respect to an
employee benefit plan), or reasonable expense incurred with respect to a
proceeding.
(e) "Official capacity", when used with respect to a director,
means the office of Director of the Corporation, and, when used with respect to
an individual other than a Director, means the office of the Corporation held by
the Officer or the employment or agency relationship undertaken by the employee
or agent on behalf of the Corporation. "Official capacity" does not include
service for any other foreign or domestic corporation or for any partnership,
joint venture, trust other enterprise or employee benefit plan.
(f) "Party" includes an individual who was, is, or is
threatened to be made a named defendant in a proceeding.
(g) "Proceeding" means any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or formal."
"Section 2. Permissive Indemnification:
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(a) Except as provided is paragraph (d) of this Section 2, the
Corporation may indemnify against liability incurred in any proceeding an
individual made a party to the proceeding because he is or was a director if:
(i) he conducted himself in good faith; (ii) he reasonable believed: (A) in the
case of conduct in his official capacity with the Corporation, that his conduct
was in the Corporation's best interest; or (B) in all other cases, that his
conduct was at least not opposed to the Corporation's best interests; and (iii)
in the case of any criminal proceeding, he had no reasonable cause to believe
his conduct was unlawful.
(b) A director's conduct with respect to an employee benefit
plan for a purpose he reasonably believed to be in the interest of the
participants in or beneficiaries of the plan is conduct that satisfies the
requirements of subparagraph (B) of subparagraph (ii) of paragraph (a) of this
Section 2. A Director's conduct with respect to any employee benefit plan for a
purpose that did not reasonably believe to be in the interests of the
participants in or beneficiaries of the plan shall be deemed not to satisfy the
requirements of subparagraph (i) of paragraph (a) of this Section 2.
(c) The termination of any proceeding by judgment, order,
settlement or conviction, or upon a plea of nolo contendere or its equivalent,
is not of itself determinative that the individual did not meet the standard of
conduct set forth in paragraph (a) of this Section 2.
(d) The Corporation may not indemnify a director under this
Section 2 either: (i) in connection with a proceeding by or in the right of the
Corporation in which the Director was adjudged liable to the Corporation; or
(ii) in connection with any proceeding charging improper personal benefit to the
Director, whether or not involving action in his official capacity, in which he
was adjudged liable on the basis that personal benefit was improperly received
by him.
(e) Indemnification permitted under this Section 2 in
connection with a proceeding by or in the right of the Corporation is limited to
reasonable expenses incurred in connection with this proceeding."
"Section 3. Mandatory Indemnification:
Unless limited by the Articles of Incorporation, the Corporation shall be
required to indemnify a person who is or was a Director of the Corporation and
who was wholly successful, on the merits or otherwise, in defense of any
proceeding to which he was a party against reasonable expenses incurred by him
in connection with the proceeding."
"Section 4. Court-Ordered Indemnification:
Unless limited by the Articles of Incorporation, a director who is or was
party to a proceeding may apply for indemnification to the court conducting the
proceeding or to another court of competent jurisdiction. On receipt of an
application, the court, after giving any notice the court considers necessary,
may order indemnification in the following manner:
(a) If it is determined the Director is entitled to mandatory
indemnification under Section 3, the court shall order indemnification, in which
case the court shall also order the Corporation to pay the Director's reasonable
expense incurred to obtain court-ordered indemnification.
(b) If it determines that the Director is fairly and
reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not the Director met the standard of conduct set forth
in paragraph (a) of Section 2 or was adjudged liable in the circumstances
described in paragraph (d) of Section 2, the court may order such
indemnification as the court deems proper; except that the indemnification with
respect to any proceeding in which liability shall have been judged in the
circumstances described in paragraph (d) of Section 2 is limited to reasonable
expenses incurred."
"Section 5. Determination:
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(a) The Corporation may not indemnify a Director under Section
2 unless authorized in the specific case after a determination has been made the
indemnification of the Director is permissible in the circumstances because he
has met the standard of conduct set forth in paragraph (a) of Section 2.
(b) The determination required to be made by a paragraph (a)
of this Section 5 shall be made: (i) by the Board of Directors by a majority
vote of a quorum, which quorum shall consist of Directors not parties to the
proceeding; or (ii) if a quorum cannot be obtained, by a majority vote of a
committee of the Board designated by the Board, which committee shall consist of
two or more directors not parties to the proceeding; except that directors who
are parties to the proceeding may participate in the designation of Directors
for the committee.
(c) If the quorum cannot be obtained or the committee cannot
be established under paragraph (b) of this Section 5, or even if a quorum is
obtained or a committee designated if such quorum or committee so directs, the
determination required to be made by paragraph (a) or this Section 5 shall be
made; (i) by independent legal counsel selected by a vote of the Board of
Directors or the committee in the manner specified in subparagraph (i) or (ii)
of paragraph (b) of this Section 5, or, if a quorum of the full Board cannot be
obtained and a committee cannot be established, by independent legal counsel
selected by a majority vote of the full Board; or (ii) by the shareholders.
(d) Authorization of indemnification and evaluation as to
reasonableness of expenses shall be made in the same manner as the determination
that indemnification is permissible; except that, if the determination that
indemnification is permissible is made by independent legal counsel,
authorization of indemnification and evaluation as to reasonableness of expenses
shall be made by the body that selected said counsel."
"Section 6. Payment in Advance.
(a) The Corporation may pay for or reimburse the reasonable
expenses incurred by a Director who is a party to the proceeding in advance of
the final disposition of the proceeding if (i) the director furnishes the
Corporation with a written affirmation of his good-faith belief that he has met
the standard of conduct described in subparagraph (i) of paragraph (a) of
Section 2; (ii) the director furnishes the Corporation with a written
undertaking, executed personally or on behalf, to repay the advance if it is
determined that he did not meet such standard of conduct; (iii) a determination
is made that the facts then known to those making the determination would not
preclude indemnification under this Section 6.
(b) The undertaking required by subparagraph (ii) of paragraph
(a) of this Section 6 shall be an unlimited general obligation of the Director,
but need not be secured and may accepted without reference to financial ability
to make repayment."
"Section 7. Indemnification of Officers, Employees, and Agents:
Unless limited by the Articles of Incorporation:
(a) An officer of the Corporation who is not a Director is
entitled to mandatory indemnification pursuant to Section 3 of this Article X
and is entitled to apply for court-ordered indemnification pursuant to Section 4
of this Article X in each case to the same extent as a Director;
(b) The Corporation may indemnify and advance expenses
pursuant to Section 6 of this Article X to an officer, employee or agent of the
Corporation who is not a Director to the same extent as a Director; and
(c) The Corporation may purchase and maintain insurance on
behalf of an individual who is or was a Director, Officer, employee, fiduciary
or agent of the Corporation and who, while a Director, Officer, employee,
fiduciary or agent of the Corporation, is or was serving at the request of the
Corporation as a Director Officer, partner, trustee, employee, fiduciary or
agent of any other foreign or domestic corporation or of any partnership joint
venture, trust, other enterprises or employee benefit plan against any liability
asserted against or incurred by him in any such capacity or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
him against such liability under the provisions of this section."
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"Section 9. Notice to Shareholders:
Any indemnification of or advance of expenses to a director in
accordance with this Article X, if arising out of a proceeding by or on behalf
of the Corporation, shall be reported in writing to the shareholders with or
before the notice of the next shareholders' meeting."
The Company also maintains policies of directors' and officers'
liability insurance for the purpose of indemnification, which provides primary
coverage of $2,000,000 and excess coverage of $3,000,000, subject to specified
exclusions.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Registrant pursuant to the foregoing provision, the Registrant
has been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities
Information with respect to all securities sold by the Company during the
period from May 18, 1995 (inception) to June 30, 1995, the fiscal years ended
June 30, 1996 and 1997 and during the first three fiscal quarters of the fiscal
year ending June 30, 1998 without the offer and sale thereof being registered
under the Securities Act is as follows:
1. On August 10, 1995, the Company issued 1,333,334 shares of its
$.001 par value Common Stock to Mr. Magliato in connection
with the merger of Promo-Tel-Delaware wholly owned by Mr.
Magliato into the Company. The assets acquired by the Company
in the merger consisted of sales, marketing and distribution
programs and contracts for the development and sale of Prepaid
Phone Cards. No person or entity acted as an underwriter with
respect to the transaction. The shares were issued as
"restricted securities" under the Securities Act and in
reliance upon the exemption from the registration requirements
of Section 5 of the Securities Act set out in Section 4(2)
thereof. Mr. Magliato acquired the shares for investment, the
certificate issued to represent the securities contains an
appropriate restrictive legend denoting their status as
"restricted securities" and stop transfer restrictions on the
certificates have been filed with the Company's transfer
agent;
2. During the period from August 16, 1995 through October 31,
1995, the Company offered and sold to individual and corporate
public investors an aggregate of 833,333 shares of its $.001
par value Common Stock at $.60 per share for an aggregate of
$500,000. No person or entity acted as an underwriter with
respect to the offering. The offering was made directly by the
Company and no commissions were paid on any sales. The
offering was made in reliance upon the exemption from the
registration requirements of Section 5 of the Securities Act
provided in Rule 504 of Regulation D adopted by the Commission
under the Securities Act. A Form D with respect to the
offering has been filed with the Commission. Purchasers of the
shares of Common Stock acquired the shares for investment. An
appropriate restrictive legend denoting their status as
"restricted securities" and stop transfer restrictions and the
certificates have been filed with the Company's transfer
agent.;
3. In April of 1996, the Company entered into an agreement
pursuant to which the Company was to obtain from four
individuals and six corporations trade secrets, customer bases
and other intangible property in exchange for warrants to
purchase an aggregate of 4,203,124 shares of its Common Stock.
Warrants to purchase 3,677,082 shares of Common Stock were
actually issued. The remaining warrants to purchase 526,042
shares of Common stock were held awaiting the delivery of
certain assets to the Company. Those assets were never
received and the Company never issued the warrants to the
three parties from whom the assets were not received. Of the
warrants issued, warrants to purchase 1,333,334 and 2,343,748
shares of
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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. No person or entity acted as an
underwriter with respect to the transaction. The warrants
were, and absent a then effective registration statement, any
shares acquired upon exercise thereof will be or have been
issued as "restricted securities". The shares acquired upon
exercise thereof, nor any interest therein may be assigned or
transferred, if such would occasion a violation of Section 5
of the Securities Act. The warrants and the shares of Common
Stock underlying them have been and are being offered in
reliance upon the exemption from the registration requirements
of Section 5 of the Securities Act provided in Section 4(2)
thereof. These shares are included in this Registration
Statement;
4. On January 20, 1996, the Company issued 1,475,126 shares of
$.001 par value Common Stock to TEC in exchange for
telecommunication service provider assets valued by the
parties for purposes of the exchange at $1,564,724. No person
acted as an underwriter with respect to the transaction. The
shares were issued as "restricted securities" and in reliance
upon the exemption from the registration requirements of
Section 5 of the Securities Act set out in Section 4(2)
thereof. TEC acquired the shares for investment, the
certificates issued to represent the shares contain an
appropriate restrictive legend denoting their status as
"restricted securities" and stop transfer restrictions on the
certificates have been filed with the Company's transfer
agent;
5. During the month of May of 1996, the Company offered and sold
an aggregate of 833,333 shares of its $.001 par value Common
Stock to individual and corporate investors who had loaned
money to the Company in exchange for cancellation of the debt
at $.60 per share of a total of $500,000. No person or entity
acted as an underwriter with respect to the offering. The
offering was made directly by the Company and no commissions
were paid on any sales. The offering was made in reliance upon
the exemption from the registration requirements of Section 5
of the Securities Act provided in Rule 504 of Regulation D. A
Form D with respect to the offering was filed with the
Commission. Purchasers of the shares of Common Stock acquired
the shares for investment. An appropriate restrictive legend
denoting their status as "restricted securities" and stop
transfer restrictions and the certificates have been filed
with the Company's transfer agent;
6. On April 24, 1997, the Company issued an option to purchase
187,500 shares of its $.001 par value Common Stock at $14.50
per share to Diego Roca in connection with his employment
agreement with the Company. The option was issued in reliance
on Rule 701 promulgated under the Securities Act ("Rule 701");
7. On July 1, 1997, the Company issued an option to purchase
200,000 shares of its $.001 par value Common Stock at $13.00
per share to Keith McGowan in connection with his employment
agreement with the Company. The option was issued in reliance
on Rule 701;
8. On October 16, 1997, the Company issued an option to purchase
200,000 shares of its $.001 par value Common Stock at $12.25
per share to Lawrence Diamond in connection with his
employment agreement with the Company. The option was issued
in reliance on Rule 701;
9. On November 11, 1997, the Company granted an option to
purchase 75,000 share of its $.001 par value Common Stock at
$9.50 per share to Maria Karalis in connection with her
employment agreement with the Company. The option was issued
in reliance on Rule 701;
10. On January 16, 1998, the Company granted an option to purchase
145,000 shares of its $.001 par value Common Stock at $13.20
per share to Prime Communications, Inc. in connection with
consulting services provided to the Company. The option was
granted in reliance upon the exemption from the registration
requirements of Section 5 of the Securities Act set out in
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Section 4(2) hereof and sale of the shares upon exercise of
the option will be registered on a registration statement on
Form S-8 as soon as practicable;
11. During the period from May, 1997 to March 31, 1998, Warrants
to purchase 2,291,498 shares of Common Stock were exercised.
No person or entity acted as an underwriter in the
transaction. The shares were issued as "restricted securities"
and in reliance upon the exemption from the registration
requirements of Section 5 of the Securities Act set out in
Section 4(2) thereof. The certificates issued to represent the
shares contain an appropriate restrictive legend denoting
their status as "restricted securities" and stop transfer
restrictions on the certificates have been filed with the
Company's transfer agent. These shares are included in this
Registration Statement;
12. On March 17, 1998, the Company granted Amy Newmark, Frank
Calcagno, Scott Steffey and Lori Perri each an option to
purchase 100,000, 100,000, 50,000 and 50,000 shares of Common
Stock respectively in connection with their service as
directors of the Company. The options were issued under the
Company's Stock Incentive Plan, vest quarterly over a one year
period and expire on March 17, 2008. The options were issued
in reliance upon the exemption from the registration
requirements of Section 5 of the Securities Act set out in
Section 4(2) thereof;
13. On March 17, 1998, the Company granted Diego Roca an option to
purchase 50,000 shares of Common Stock in connection with his
continued employment with the Company as Vice President of
Operation, Secretary and Treasurer. The option was issued
under the Company's Stock Incentive Plan, vests quarterly over
a one year period and expires on March 17, 2008. The option
were issued in reliance upon the exemption from the
registration requirements of Section 5 of the Securities Act
set out in Section 4(2) thereof;
14. On March 31, 1998, the Company issued 61,050 shares of Series
A Preferred Stock to Premiere Communication, Inc. in exchange
for the discharge of an account payable to Premiere of
$6,105,093.15. No person or entity acted as an underwriter
with respect to this transaction, and no commissions were paid
in the sale of the shares of Series A Preferred Stock. The
shares were issued as "restricted securities" and in reliance
upon the exemption from the registration requirements of
Section 5 of the Securities Act set out in Section 4(2)
thereof. Premiere acquired the shares for investments and
certificates issued to represent the shares contain an
appropriate restrictive legend denoting their status as
"restricted securities" and stop transfer restrictions on the
certificates have been filed with the Company's transfer
agent. These shares of Common Stock issuable upon conversion
of the shares of Series A Preferred Stock are included in this
Registration Statement.
Item 16. Exhibits and financial statement schedules
Exhibits
EXHIBIT INDEX
Exhibit No. Description
=========== =================================================================
2.1 Articles of Merger and Agreement and Plan of Merger (Incorporated
by reference herein to Exhibit 99.1 of the Company's Form 10
filed with the Commission on October 30, 1997 Registration
Statement File No. 000-23291)
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Exhibit No. Description
=========== =================================================================
2.2 Agreement and Plan of Reorganization and Amendments (Incorporated
by reference herein to Exhibit 99.5 of the Company's Form 10
filed with the Commission on October 30, 1997 Registration
Statement File No. 000-23291)
3.1 Restated Articles of Incorporation (Incorporated by reference
herein to Exhibit 3(i) of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000- 23291)
3.2 Amended and Restated ByLaws (Incorporated by reference herein to
Exhibit (3)(ii) of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration File No. 000-23291)
4.1 Certificate of Designations of Series A Preferred Stock*
4.2 Forms of Option Agreement*
4.3 Forms of Warrant Agreement*
4.4 Certificate of Designations for Series A Preferred Stock*
5 Legal Opinion of Gilbert L. McSwain of Denver, Colorado*
10.1 Services Agreement by and between Innovative Telecom Corporation
and Digitec 2000, Inc. dated March 13, 1998*
10.2 Promissory Note for $893,060.78 from the Company to Frontier
Communications International, Inc*
10.3 Sublease agreement between Vanity Fair Intimates, Inc. and Promo
Tel, Inc. (Incorporated by reference herein to Exhibit 99.2 of
the Company's Form 10 filed with the Commission on October 30,
1997 Registration Statement File No. 000-23291)
10.4 TECLink Promissory Note and Agreement (Incorporated by reference
herein to Exhibit 99.3 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.5 Asset Purchase Agreement by and between World Access Solutions,
Inc. and Meta3, Inc. (Incorporated by reference herein to Exhibit
99.4 of the Company's Form 10 filed with the Commission on
October 30, 1997 Registration Statement File No. 000-23291)
10.6 Telephone Electronics Corporation Agreement and Amendments
(Incorporated by reference herein to Exhibit 99.6 of the
Company's Form 10 filed with the Commission on October 30, 1997
Registration Statement File No. 000-23291)
10.7 TECLink Note Satisfaction Agreement (Incorporated by reference
herein to Exhibit 99.7 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.8 Premiere Communications Agreement (Incorporated by reference
herein to Exhibit 99.8 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.9 CG Com, Inc. Independent Master Distributor Agreement
(Incorporated by reference herein to Exhibit 99.9 of the
Company's Form 10 filed with the Commission on October 30, 1997
Registration Statement File No. 000-23291)
10.10 Frank C. Magliato Employment Agreement (Incorporated by reference
herein to Exhibit 99.10 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.11 Diego E. Roca Employment Agreement (Incorporated by reference
herein to Exhibit 99.11 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.12 Keith A. McGowan Employment Agreement (Incorporated by reference
herein to Exhibit 99.12 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
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Exhibit No. Description
=========== =================================================================
10.13 DIGITEC 2000, Inc. Stock Incentive Plan (Incorporated by
reference herein to Exhibit 99.13 of the Company's Form 10 filed
with the Commission on October 30, 1997 Registration Statement
File No. 000-23291)
10.14 Larry S. Diamond Employment Agreement (Incorporated by reference
herein to Exhibit 99.14 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.15 Frontier Communications International, Inc. Prepaid Telephone
Services Distributor Agreement (Incorporated by herein to Exhibit
99.15 of the Company's Form 10 filed with the Commission on
October 30, 1997 Registration Statement File No. 000-2329)
10.16 Ameridial, Inc. Acquisition Agreement*
10.17 Investment Agreement by and between Premiere Communications Inc.
and Digitec 2000, Inc. dated March 31, 1998*
10.18 Investor Agreement by and between Frank Magliato and Prime
Communications, Inc., dated March 31, 1998*
10.19 Letter of Agreement by and between Digitec 2000, Inc. and College
Enterprise Inc. dated December 22, 1997*
10.20 Warranty Bill of Sale and Assignment and Related Agreement by and
betwteen Digitec 2000, Inc. and Premiere Communications, Inc.
dated _______, 1998*
21 Subsidiaries of Registrant.*
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Gilbert L. McSwain of Denver, Colorado (included in
Exhibit 5)*
24 Powers of Attorney (see signature page)
27 Financial Data Schedule
* To be filed.
Financial Statement Schedules
Item 16. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Consolidated Financial Statements:
The Consolidated Financial Statements filed as part of
this Registration Statement are listed in the accompanying Index on
page F-2.
2. Consolidated Financial Statement Schedule:
The Consolidated Financial Statement Schedule filed as
part of this Registration Statement is listed in the accompanying
Index on page S-1.
Schedules other than those listed in the accompanying
index are omitted for the reason that they are either not required,
not applicable, or the required information is included in the
Consolidated Financial Statements or notes thereto.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration
statement: (i) to include any prospectus required by section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the
prospectus any facts or events arising after the effective date of
the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and (iii) to
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include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement; provided, however, that clauses (i) and (ii) of this
paragraph do not apply if the information required to be included in
a post-effective amendment by those clauses is contained in periodic
reports filed by the Registrant pursuant to section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement,
(2) That, for the purpose of determining liability under
the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof,
(3) To remove from the registration by means of
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
71
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of New York,
State of New York, on the 20th day of April, 1998.
DIGITEC 2000, Inc.
By /s/ Frank C. Magliato
----------------------------------
Frank C. Magliato
Chief Executive Officer,
President and Director
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Frank Magliato as his
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Date: April 20, 1998 /s/ Diego E. Roca
--------------------------------------
Diego E. Roca
Vice President of Operations,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
Date: April 20, 1998
--------------------------------------
Lori Ann Perri
Director
Date: April 20, 1998 /s/ Francis J. Calcagno
--------------------------------------
Francis J. Calcagno
Director
72
<PAGE>
Date: April 20, 1998 /s/ Scott W. Steffey
--------------------------------------
Scott W. Steffey
Director
Date: April 20, 1998 /s/ Amy L. Newmark
--------------------------------------
Amy L. Newmark
Director
73
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
=========== =================================================================
2.1 Articles of Merger and Agreement and Plan of Merger (Incorporated
by reference herein to Exhibit 99.1 of the Company's Form 10
filed with the Commission on October 30, 1997 Registration
Statement File No. 000-23291)
2.2 Agreement and Plan of Reorganization and Amendments (Incorporated
by reference herein to Exhibit 99.5 of the Company's Form 10
filed with the Commission on October 30, 1997 Registration
Statement File No. 000-23291)
3.1 Restated Articles of Incorporation (Incorporated by reference
herein to Exhibit 3(i) of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000- 23291)
3.2 Amended and Restated ByLaws (Incorporated by reference herein to
Exhibit (3)(ii) of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration File No. 000-23291)
4.1 Certificate of Designations of Series A Preferred Stock*
4.2 Forms of Option Agreement*
4.3 Forms of Warrant Agreement*
4.4 Certificate of Designations for Series A Preferred Stock*
5 Legal Opinion of Gilbert L. McSwain of Denver, Colorado*
10.1 Services Agreement by and between Innovative Telecom Corporation
and Digitec 2000, Inc. dated March 13, 1998*
10.2 Promissory Note for $893,060.78 from the Company to Frontier
Communications International, Inc*
10.3 Sublease agreement between Vanity Fair Intimates, Inc. and Promo
Tel, Inc. (Incorporated by reference herein to Exhibit 99.2 of
the Company's Form 10 filed with the Commission on October 30,
1997 Registration Statement File No. 000-23291)
10.4 TECLink Promissory Note and Agreement (Incorporated by reference
herein to Exhibit 99.3 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.5 Asset Purchase Agreement by and between World Access Solutions,
Inc. and Meta3, Inc. (Incorporated by reference herein to Exhibit
99.4 of the Company's Form 10 filed with the Commission on
October 30, 1997 Registration Statement File No. 000-23291)
10.6 Telephone Electronics Corporation Agreement and Amendments
(Incorporated by reference herein to Exhibit 99.6 of the
Company's Form 10 filed with the Commission on October 30, 1997
Registration Statement File No. 000-23291)
10.7 TECLink Note Satisfaction Agreement (Incorporated by reference
herein to Exhibit 99.7 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.8 Premiere Communications Agreement (Incorporated by reference
herein to Exhibit 99.8 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.9 CG Com, Inc. Independent Master Distributor Agreement
(Incorporated by reference herein to Exhibit 99.9 of the
Company's Form 10 filed with the Commission on October 30, 1997
Registration Statement File No. 000-23291)
10.10 Frank C. Magliato Employment Agreement (Incorporated by reference
herein to Exhibit 99.10 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
74
<PAGE>
Exhibit No. Description
=========== =================================================================
10.11 Diego E. Roca Employment Agreement (Incorporated by reference
herein to Exhibit 99.11 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.12 Keith A. McGowan Employment Agreement (Incorporated by reference
herein to Exhibit 99.12 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.13 DIGITEC 2000, Inc. Stock Incentive Plan (Incorporated by
reference herein to Exhibit 99.13 of the Company's Form 10 filed
with the Commission on October 30, 1997 Registration Statement
File No. 000-23291)
10.14 Larry S. Diamond Employment Agreement (Incorporated by reference
herein to Exhibit 99.14 of the Company's Form 10 filed with the
Commission on October 30, 1997 Registration Statement File No.
000-23291)
10.15 Frontier Communications International, Inc. Prepaid Telephone
Services Distributor Agreement (Incorporated by herein to Exhibit
99.15 of the Company's Form 10 filed with the Commission on
October 30, 1997 Registration Statement File No. 000-2329)
10.16 Ameridial, Inc. Acquisition Agreement*
10.17 Investment Agreement by and between Premiere Communications Inc.
and Digitec 2000, Inc. dated March 31, 1998*
10.18 Investor Agreement by and between Frank Magliato and Prime
Communications, Inc., dated March 31, 1998*
10.19 Letter of Agreement by and between Digitec 2000, Inc. and College
Enterprise Inc. dated December 22, 1997*
10.20 Warranty Bill of Sale and Assignment and Related Agreement by and
betwteen Digitec 2000, Inc. and Premiere Communications, Inc.
dated _______, 1998*
21 Subsidiaries of Registrant.*
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Gilbert L. McSwain of Denver, Colorado (included in
Exhibit 5)*
24 Powers of Attorney (see signature page)
27 Financial Data Schedule
* To be filed.
Consent of Independent Certified Public Accountants
DigiTEC 2000, Inc.
New York, NY
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated October 22, 1997, relating to the
consolidated financial statements of DigiTEC 2000, Inc. (formerly Promo Tel,
Inc.) and subsidiary (World Access Solutions, Inc.), which is contained in the
Prospectus, and our report dated October 22, 1997, relating to the schedule,
which is contained in Part II of the Registration Statement.
We also consent to the reference to us under the captions "Selected Financial
Data" and "Experts" in the Prospectus.
/s/ BDO Seidman, LLP
----------------
BDO Seidman, LLP
New York, New York
April 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
consolidated balance sheet as of June 30, 1997 and the audited consolidated
statement of operations for the year then ended and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 727,197
<SECURITIES> 0
<RECEIVABLES> 1,928,227
<ALLOWANCES> 60,000
<INVENTORY> 218,877
<CURRENT-ASSETS> 2,826,115
<PP&E> 64,397
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,526,115
<CURRENT-LIABILITIES> 3,462,802
<BONDS> 0
0
0
<COMMON> 4,858
<OTHER-SE> (76,327)
<TOTAL-LIABILITY-AND-EQUITY> 3,526,115
<SALES> 26,027,909
<TOTAL-REVENUES> 26,027,909
<CGS> 25,161,443
<TOTAL-COSTS> 25,161,443
<OTHER-EXPENSES> 1,305,970
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,480,253)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,480,253)
<DISCONTINUED> (1,069,261)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,549,514)
<EPS-PRIMARY> (.78)
<EPS-DILUTED> (.78)
</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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<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>
