UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
|_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-23291
DigiTEC 2000, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
54-1287957
- --------------------------------------------------------------------------------
(I.R.S. Employer Identification No.)
8 West 38th Street, Fifth Floor, New York, New York 10018
- --------------------------------------------------------------------------------
(Address of principal executive offices - Zip code)
Registrant's telephone number, including area code: (212) 944-8888
Former name, former address and former fiscal year, if changes since last
report.
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes |_| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $.001 par value, 7,058,988 outstanding as of May 13,1999.
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Index
================================================================================
Part I - Financial Information
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of March 31, 1999
and June 30, 1998 3
Consolidated Statements of Operations (Loss) for the
Three and Nine Months ended March 31, 1999 and 1998 4
Consolidated Statement of Stockholders' Equity
(Deficit) for the Nine Months ended March 31, 1999 5
Consolidated Statements of Cash Flows for the
Nine Months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
Part II - Other Information
Item 1. Legal Proceedings 22-23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
ITEM 1. CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
(Unaudited)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current:
Cash $ 183,688 $ 108,722
Accounts receivable, net of allowance for bad debts of
$1,305,000 and $1,305,000 respectively (Note 3) 961,011 1,692,222
Inventory 84,785 393,586
Prepaid expenses 88,051 123,953
- --------------------------------------------------------------------------------------------------
Total current assets 1,317,535 2,318,483
Property and equipment, net 156,027 160,040
Customer lists, net of accumulated amortization of $510,417
and $334,000 481,842 373,882
Carrier deposits and other 78,855 287,385
- --------------------------------------------------------------------------------------------------
Total Assets $ 2,034,259 $ 3,139,790
==================================================================================================
Liabilities and Stockholders' Deficit
Current:
Accounts payable - trade $ 7,923,481 $ 1,379,896
Accounts payable and accrued expenses 89,328 464,620
Payable to Premiere Communications, Inc. 583,152 597,132
Accrued legal 75,000 450,188
Accrued settlement expense (Note 4) 139,278 204,126
Accrued research and development 325,000 325,000
Deferred revenue 91,707 955,117
Notes payable - current (Notes 8 and 9) 2,082,032 168,556
Due to related party (Note 9) 100,000
- --------------------------------------------------------------------------------------------------
Total current liabilities 11,408,978 4,544,635
Deferred rent 74,556 89,545
- --------------------------------------------------------------------------------------------------
Total liabilities 11,483,534 4,634,180
- --------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.001 par value, 1,000,000 shares authorized;
61,050 shares Series A outstanding 61 61
Common stock, $.001 par value, 100,000,000 shares authorized;
7,058,988 and 6,814,248 shares issued and outstanding,
respectively 7,059 6,814
Additional paid-in capital 14,591,163 14,174,283
Accumulated deficit (24,047,558) (15,675,548)
- --------------------------------------------------------------------------------------------------
Total stockholders' deficit (9,449,275) (1,494,390)
- --------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficit $ 2,034,259 $ 3,139,790
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,443,787 $ 6,359,998 $10,092,133 $31,166,036
Cost of sales 4,139,457 7,704,321 13,391,715 30,856,362
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit (2,695,670) (1,344,323) (3,299,582) 309,674
Selling, general and administrative expenses 1,667,963 3,057,449 5,072,428 5,021,567
- --------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (4,363,633) (4,401,772) (8,372,010) (4,711,893)
- --------------------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operations of Cellular division (Note 6) -- -- -- (527,061)
Loss from operations of World Access (Note 2) -- -- -- (105,554)
Loss on disposal of Cellular division -- -- -- (75,000)
- --------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations $ -- -- -- (707,615)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss $(4,363,633) $ (4,401,772) $(8,372,010) $(5,419,508)
================================================================================================================================
Net loss per common share-basic and diluted:
From continuing operations $ (.63) $ (.73) $ (1.22) $ (.80)
From discontinued operations -- -- -- (.12)
- --------------------------------------------------------------------------------------------------------------------------------
$ (.63) $ (.73) $ (1.22) $ (.92)
================================================================================================================================
Weighted average number of common and
common equivalent shares outstanding 6,914,544 5,992,867 6,836,618 5,863,359
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statement of Stockholders' Equity (Deficit)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
---------------- ------------------ Additional Accumulated Total stockholders'
Shares Amount Shares Amount paid-in capital deficit equity (deficit)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1998
For the nine months ended 61,050 $61 6,814,248 $6,814 $14,174,283 $(15,675,548) $(1,494,390)
December 31, 1998:
Exercise of Warrants (Note 7) -- -- 44,750 45 67,080 -- 67,125
Warrants accompanying
10% Notes (Note 8) -- -- -- -- 50,000 -- 50,000
Stock Issued for purchase of
assets from Total POS Systems -- -- 200,000 200 299,800 -- 300,000
Net loss -- -- -- -- -- (8,372,010) (8,372,010)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 61,050 $61 7,058,998 $7,059 $14,591,163 $(24,047,558) $(9,449,275)
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Cash Flows
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(8,372,010) $(5,419,508)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization 176,860 165,544
Depreciation 35,921 26,325
Discount on Notes Payable (Note 8) 50,000 --
Deferred rent (14,988) 38,408
Deferred income (863,409) --
Directors Compensation -- 1,248,000
(Increase) decrease in:
Accounts receivable 731,211 (3,029,496)
Inventory 308,801 (251,469)
Prepaid expenses and other assets 244,431 (420,896)
Increase (decrease) in:
Accounts payable and accrued expenses 5,714,276 1,342,654
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities of continuing
operations (1,988,907) (8,985,746)
Net cash used in operating activities of discontinued operations -- (448,874)
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,988,907) (9,434,620)
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (16,726) (72,442)
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (16,726) (72,442)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of Note Payable (25,574) --
Note Payable Auto 4,049 22,699
Proceeds from issuance of 10% Notes (Note 8) 1,200,000 --
Proceeds from exercise of warrants 67,125 2,935,876
Proceeds from investment by Premiere Communications, Inc. -- 6,105,000
Proceeds from related party transaction 100,000 --
Proceeds from issuance of Promissory Notes to TECNet, Inc. 735,000 --
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,080,600 9,063,575
- --------------------------------------------------------------------------------------------------------------
Net decrease in cash 74,967 (443,487)
Cash, beginning of period 108,722 727,197
- --------------------------------------------------------------------------------------------------------------
Cash, end of period $ 183,689 $ 283,710
==============================================================================================================
</TABLE>
6
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
1. Summary of Significant Accounting Policies
(a) Liquidity and Basis of Presentation
The accompanying Consolidated Financial Statements of DigiTEC 2000, Inc.
and Subsidiary (formerly Promo Tel, Inc.) (the "Company"), have been
prepared on the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities, except as
otherwise disclosed, in the normal course of business. However, because of
the Company's recurring losses from operations, such realization of assets
and liquidation of liabilities is subject to significant uncertainty. The
financial statements do not include any adjustments that might result from
the outcome of these uncertainties. Further, the Company's ability to
continue as a going concern is highly dependent near term on its ability
to raise capital, reduce its costs of providing long distance service,
develop its collections tactics, develop market share and achieve
profitable operations thereon, and the ability to generate sufficient cash
flow from operations and financing sources to meet obligations. During the
three quarters of fiscal 1999, the Company issued $1.2 million of its 10%
six-month notes (the "Six Month Notes") with accompanying warrants and
borrowed an additional $835,000 on a demand basis. The majority of the
proceeds was used to make payments to providers of telecommunications
facilities or to satisfy existing financial obligations, and the Company
remains severely undercapitalized. The Six Month Notes matured during
March, 1999 and pursuant to agreement with the holders thereof the Six
Month Notes have been extended for two years from the original maturity
(See Note 10, "Subsequent Events".)
As previously reported, the Company intended to migrate its traffic to its
own facilities, thereby becoming a facilities-based carrier and thereby
increasing its cash flow. To date the Company, due to liquidity problems,
has been unable to generate or finance sufficient capital to fully
implement this strategy. Accordingly, the Company continues negotiate with
Telephone Electronic Corporation ("TEC"), currently a holder of
approximately 22% of the Company's Common Stock, with respect to (i) a
working capital facility to enable the Company to meet its current
operating expenditures, (ii) a long-term operating agreement pursuant to
which the Company's traffic can be originated and terminated through the
network facilities of TecNet, Inc., an affiliate of TEC, including the
traffic the Company anticipates will be generated as a result of
implementation of the Company's offering telecommunication services
through the College Enterprises, Inc. on-campus debit card system, and
(iii) arrangements to finance the equipment and operations of a point of
sale distribution network for the Company's Cards. There can be no
assurances that these negotiations will be successful or that TecNet, Inc.
will continue to handle traffic for the Company or advance funds for
working capital expenditures. Moreover, the Company has accured
significant carrier charges with TecNet, Inc. and third party providers
which it must satisfy. The Company has borrowed a total of $735,000
through March 31, 1999 from TecNet, Inc. pursuant to demand promissory
notes bearing interest at 10% per annum.
As a result of the Company's review of its selling, general and
administrative expenses, it has targeted cost reductions and reduced cash
needs of approximately $2,000,000 during the last three quarters of the
1999 fiscal year. To date, during fiscal 1999, the Company has reduced its
workforce by a total of 21 full-time employees, two of whom were hired
during fiscal 1999, and reduced the working hours of certain other
hourly-compensated personnel. In addition, the Company has consolidated
its executive offices with the intention to sublet a significant portion
of the space originally occupied by the Company. The Company projects
approximately $600,000 of an annual revenue from this subletting, thereby
in large part offsetting its lease expense. There can be no assurance that
further progress toward achievement of these objectives will be made or
that acceptable alternatives will be found.
(b) Business
The Company is primarily engaged in the distribution, marketing and
management of 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.
7
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
(c) 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. Accordingly, the Company had no results of operations for
fiscal years ended prior to June 30, 1996. 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 has not changed. Promo Tel-Nevada had amended its Articles of
Incorporation to change its name from Promo Tel, Inc. to the Company's
current name.
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.
(d) Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and, from March 4, 1999, its wholly owned subsidiary POS TEC Systems, LLC.
All significant intercompany balances have been eliminated. (See Note 6,
"Acquisition of Assets".)
The Consolidated Financial Statements and related notes thereto as of
March 31, 1999 and for the nine and three months ended March 31, 1999 and
1998 are unaudited but, in the opinion of management, include all
adjustments necessary to present fairly the information set forth therein.
These adjustments consist solely of normal recurring accruals. The
Consolidated Balance Sheet for June 30, 1998 was derived from the audited
Consolidated Financial Statements and the Consolidated Balance Sheet for
March 31, 1998 was derived from the unaudited Consolidated Financial
Statements included in the Company's Annual Report on Amendment No. 1 to
Form 10-K/A for the period ended June 30, 1998. These interim financial
statements should be read in conjunction with that report. The interim
results are not necessarily indicative of the results for any future
periods.
8
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
(e) Earnings Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings per Share" for the fiscal year ended
June 30, 1998. The adoption of this standard did not have a material
impact on the Company's income (loss) per share computation. The
computation of income (loss) per common share is based on the weighted
average number of common shares and common stock equivalents (convertible
preferred shares, stock options and warrants), assumed to be outstanding
during the year. The dilutive earnings (loss) per share have not been
presented since the effect of the options and warrants to purchase common
stock and the convertible preferred stock were anti-dilutive. Net income
(loss) per share amounts for all periods have been presented and the
amount for prior period has been restated to comply with provisions of
SFAS 128. 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.
(f) Reclassifications
Certain amounts as previously reported have been reclassified to conform
to the fiscal 1999 presentation.
(g) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("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, 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
years beginning after December 15, 1997 and both require comparative
information for earlier years to be restated. Accordingly, the Company has
adopted both the foregoing standards for the accompanying financial
statements. SFAS No. 130 divides comprehensive income into net income and
other comprehensive income, and specifies that an enterprise that has no
items of other comprehensive income in any period presented is not
required to report comprehensive income. Accordingly, since the Company
did not have any items of other comprehensive income in any period
presented, comprehensive income is not separately reported. The adoption
of SFAS No. 131 did not have a material effect on the Company's financial
position or results of operations. The Company continually evaluates 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.
9
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
2. Related Party Transactions
(a) On January 20, 1996, the Company purchased certain Internet service
provider assets consisting primarily of computer hardware, software and
office equipment from 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, 1998
was approximately 22%.
(b) The Company helped establish TecLink, Inc. ("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 a value added reseller contract (the
"Contract") from Hughes Corporation ("Hughes"). The Company received in
the sale $50,000 cash and a 6% per annum promissory note of $2,405,000 due
the earlier of December 31, 1998 or upon the completion of TecLink's
initial public offering. In accordance with the terms of the promissory
note, collateralized by the assets of TecLink, the $250,000 became due
upon the completion of a private placement of TecLink's common stock.
TecLink's management believed that Hughes never met their responsibility
under the 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 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.
(c) During September, 1998, the Company issued $1,200,000 of the Six Month
Notes with warrants to purchase 600,000 shares of the Company's Common
Stock at an exercise price of $2.375 per share (the "$2.375 Warrants"),
subject to certain adjustments. The $2.375 Warrants are exercisable for
10
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
five years from the date of issuance. The exercise price under the $2.375
Warrants was set at the closing price of the Common Stock on September 4,
1998. Nine investors participated in this offering, including an
officer/director and his family, and a director, with related party
investments totaling $600,000. The issuance and sale of the Notes and
$2.375 Warrants are exempt from registration under the Securities Act of
1933, as amended (the "Securities Act") pursuant to Regulation D. See Note
8, "Issuance of 10% Six-Month Notes with Warrants." The Six Month Notes
and Warrants were amended as of the original maturity date of the Notes.
(See Note 10, "Subsequent Events")
3. Concentrations of Credit Risk
The Company experiences risk concentration due to geographic and customer
concentrations and a limited number of suppliers.
(a) Geographic Concentration of Sales
The Company currently distributes and markets its Cards primarily in the
New York/New Jersey metropolitan area (the "Metro Area"). The Company
sells Cards in 29 states, Puerto Rico and the U.S. Virgin Islands. The
Metro Area sales accounted for approximately 81% and 84% of the Company's
total sales for the quarters ended December 31, 1998 and March 31, 1999,
respectively. No other areas accounted for more than 10% of the Company's
sales.
(b) Concentration of Customer Accounts
For the years ended June 30, 1998 and 1997, one master distributor
accounted for approximately 0% and 48% of the Company's accounts
receivable and 19% and 52% of the Company's sales, respectively. During
September 1997, the Company amended its agreement with the master
distributor by terminating the exclusivity clause of the distribution
agreement, and sales to this master distributor declined significantly
thereafter. An additional customer, who replaced a significant portion of
the former master distributor's sales, accounted for approximately 73% of
the Company's accounts receivable as of June 30, 1998, and approximately
19% of the Company's sales for the year ended June 30, 1998. The primary
reason that this customer accounted for an apparently disproportionate
share of receivables at June 30, 1998 versus sales during fiscal 1998 was
the significant ramp-up of sales to this customer during the last four
months of fiscal 1998. During the period from March through June, 1998,
this customer accounted for over $5 million in sales and represented
approximately 72% of the Company's total sales during this four-month
period. The foregoing percentage of sales matched very closely to the 73%
of total accounts receivable due from this customer as of June 30, 1998.
This customer and one additional master distributor accounted for 4% and
18% respectively of the Company's sales for the quarter ended December 31,
1998 and represented 38% and 0% respectively of the Company's accounts
receivable as of December 31, 1998.
During the quarter ended June 30, 1998, due to the increased amount of
receivables aged over 90 days and the related greater risk of asset
impairment, the Company recorded a bad debt reserve of $1,467,000, and
wrote off approximately $223,000 of accounts receivable against that
reserve. The bad debt reserve included approximately $487,000 related to
the foregoing customer which represented 73% of the Company's receivables
as of June 30, 1998. As this customer had previously exhibited a favorable
payment history and had an excellent relationship with the Company, the
Company believed that at least the unreserved portion of the amounts due
from this customer would be collected. Since June 30, 1998 the Company has
received approximately $1,076,000 in payments from this customer, which
amount paid
11
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
off the entire receivable balance from the customer, with the remainder
applying to sales of approximately $1.7 million to this customer
subsequent to June 30, 1998.
The Company has engaged one of the top outside collection agencies in the
United States with respect to collecting overdue accounts. Costs for
collection of such accounts will be on a contingent basis billed to the
Company as a percentage of collected funds. The Company does not expect
any cash requirements associated with implementing this program and
expects that its liquidity position will improve as a result of its
implementation. Concurrently with the foregoing effort, the Company plans
to improve its documentation of processes and procedures by developing a
formal Credit and Collections Policy including, but not limited to,
customer credit file requirements, standard credit application processes
and procedures and standard procedures for the collection of past due
accounts. The Company believes that the combination of the foregoing
actions will result in reduced credit risk to the Company, improved
liquidity and enhanced ability to establish an asset-backed working
capital credit facility due to the increased quality of the receivables
portfolio. Since these planned actions are in an early stage of
implementation, it is not possible at this time to estimate the
anticipated effects, if any, on sales to current customers.
(c) Concentration of Suppliers of Telecommunications Services
Prior to June 30, 1998, the Company purchased its long distance services
primarily from three suppliers of bundled Cards, Frontier Communications,
Inc. ("Frontier"), Premiere Communications, Inc. ("Premiere") and ATI
Telecom, Inc. ("ATI"). For the year ended June 30, 1998, Frontier
accounted for approximately 35%, Premiere accounted for approximately 43%
and ATI accounted for approximately 14%, respectively, of those services.
During the nine month period ended March 31, 1999, none of these suppliers
accounted for more than 10% of purchases of long distance services. During
the nine month period ended March 31, 1999, TecNet, Inc., an affiliate of
TEC, and Allied Communications Holdings ("Allied") became key suppliers of
facilities-based services to the Company, providing approximately 28% and
22% of total communications services purchased by the Company. No other
supplier accounted for more than 10% of such purchases. As of March 31,
1999, the amounts of accounts payable to TecNet, Inc., Frontier, Premiere,
ATI and Allied were approximately $3,789,740, $0, $583,152, $243,015 and
$0, respectively.
4. Accrued Settlement
During March 1998, Vanity Fair Intimates, Inc. ("Vanity Fair") commenced
an action for breach of a sublease agreement, seeking, inter alia,
eviction and judgment against the Company for a total of $472,799. The
matter was settled in September, 1998 for $208,916, to be paid in monthly
installments of approximately $35,000 commencing in September 1998 and
continuing through and including the month of February, 1999. The Company
made the first payment due in September in accordance with the settlement
agreement. However, due to its liquidity problems, the Company failed to
make the payments due in October and November, 1998. Due to the Company's
failure to make the foregoing payments, Vanity Fair gave notice of its
intention to enter a Confession of Judgment for $369,774, less the amount
previously paid by the Company. The Company subsequently negotiated an
alternative payment plan with Vanity Fair, and to date is in compliance
with the revised payment terms.
12
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
5. Settlement of Promissory Note with Frontier
In June, 1998, the Company was served with a Summons and Motion for
Summary Judgment by Frontier seeking judgment on a promissory note (the
"Frontier Note") issued by the Company for $893,061 in connection with
Frontier's termination of its Card division. The outstanding amount on the
Frontier Note as of June 30, 1998 was reflected in accounts payable of the
Company with a balance of approximately $502,000. During August, 1998, the
Company negotiated a settlement with Frontier for $200,000. The Company
satisfied the settlement in September, 1998 and as a result, a security
interest held by Frontier against certain assets of the Company was
removed. This recovery was recognized during the quarter ended September
30, 1998.
6. Acquisition of Assets.
On March 4, 1999, the Company acquired certain point of sale assets of
Total POS Solutions, a Texas limited liability company through its wholly
owned subsidiary, POS TEC Systems, LLC, a Delaware limited liability
company, in exchange for 200,000 shares of the Company's Common Stock. The
assets acquired consisted of primarily of a number of Reseller Agreements
and Pre-paid Long Distance Reseller Agreements pursuant to which cards are
distributed and activated in retail stores.
7. Redemption of $1.50 Warrants
On August 20, 1998, the Company notified the holders of the 52,250
outstanding warrants to purchase shares of the Company's Common Stock at
$1.50 per share (the "$1.50 Warrants") of its election to redeem all
unexercised portions of the $1.50 Warrants at $.10 per share thirty days
following the date of the notice. Upon the expiration of the notice
period, the $1.50 Warrants terminated with respect to any then unexercised
portion and only the right of the $1.50 Warrant holder to receive payment
of the redemption price survived. At the expiration of the notice period,
44,750 of the $1.50 Warrants had been exercised, yielding net proceeds of
$67,125 to the Company, and the remainder have been terminated.
8. Issuance of 10% Six-Month Notes with Warrants
During September, 1998, the Company issued the Six Month Notes with
accompanying $2.375 Warrants to purchase 600,000 shares of the Company's
Common Stock at an exercise price of $2.375 per share, subject to certain
adjustments. The $2.375 Warrants are exercisable for five years from the
date of issuance. The exercise price under the $2.375 Warrants was set at
the closing price of the Common Stock on September 4, 1998. Nine investors
participated in this offering, including an officer/director and his
family, and a director, with related party investments totaling $600,000.
The issuance and sale of the Notes and $2.375 Warrants was exempt from
registration under the Securities Act pursuant to Regulation D. The Six
Month Notes and the $2.375 Warrants were amended and exchanged as of the
original maturity dates of the Six Month Notes (See Note 10, "Subsequent
Events").
The $2.375 Warrants are detachable from the Notes. The amounts
attributable to the debt and the purchase warrants were computed based
upon the relative values of the two securities at the time of issuance.
Accordingly, the value of the $2.375 Warrants was calculated as the
difference between the Net Present Value ("NPV") of the known series of
13
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
cash flows associated with the Six Month Notes using the 10% interest rate
of the Notes and the NPV of the same series of cash flows using a
market-based rate of 19%. The latter rate was determined based upon
several quotations to the Company by non-affiliated potential lenders
during arms-length negotiations of potential financing arrangements. The
value of the $2.375 Warrants so calculated was approximately $50,000,
which was recorded as additional paid-in-capital. The related $50,000
discount on notes payable was being amortized commencing September 15,
1998 over the six-month life of the Six Month Notes, approximately
$29,167, during the first nine months of fiscal 1999. As a result of the
amendment and exchange of the Six Month Notes and $2.375 Warrants, the
related discount on notes payable will be adjusted for the new life of the
New Notes and the value of the New Warrants, each as defined below, for
the following fiscal quarters.
9. Due to Related Party
In December, 1998, TecNet, Inc., an affiliate of Telephone Electronic
Corporation ("TEC"), entered into an arrangement with the Company pursuant
to which it assumed certain carrier charges. In addition, TecNet, Inc. has
since November, 1999 provided carrier services to the Company without
current payment. At March 31, 1999, total carrier charges due to third
parties were $5,673,914, including carrier charges due to TecNet, Inc., of
$3,789,740.
On November 2, 1998, Ms. Doreen Porecca, Mr. Magliato's mother in-law,
lent the Company an additional $100,000 on a demand basis bearing interest
at ten percent per annum.
From February 16, 1999 through March 31, 1999, TecNet, Inc. lent the
Company an aggregate of $735,000 pursuant to demand notes bearing interest
at 10% per annum. (See Note 10, "Subsequent Events") The temporary
borrowings by the Company are being used to finance current expenditures
pending negotiations of an agreement to provide interim financing of
current operations while the Company establishes its point of sales
business through its new subsidiary, initiates activities under its letter
agreement with College Enterprises, Inc. ("CEI") pursuant to which the
Company will offer telecommunication services through the CEI network and
implements it's new card program. There are no assurances that the Company
will successfully conclude the negotiations or that the point of sale and
CEI activities or the new card program will be successfully implemented.
10. Subsequent Events
In May, 1999, the Company's 10% Six Month Notes and $2.375 Warrants were
exchanged, as of the original maturity date of such notes, for two year
promissory notes (the "New Notes") in the same principal amounts bearing
interest at 10% per annum which notes are payable interest only for the
first four calendar quarters and interest plus 25% of principal for the
four following calendar quarters and are convertible into Common Stock of
the Company at $1.10 per share, together with Warrants to purchase a total
of 1,800,000 shares of the Company's Common Stock at $1.10 per share (the
"New Warrants").
Since March 31, 1999, the Company has issued additional 10% Promissory
Notes to TecNet, Inc. in the principal amount of $492,415.
14
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL 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 DigiTEC 2000, Inc. (the "Company") included elsewhere in
this Form 10-Q and in conjunction with the corresponding discussion and analysis
included in the Company's Annual Report on Amendment No. 1 to Form 10-K/A (the
"10-K/A") for the year ended June 30, 1998. The information set forth in this
Form 10-Q includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
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, because such forward-looking
statements include risks and uncertainties, 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 differ materially from the Company's
expectations, either expressed or implied by such forward-looking statements.
The Company commenced operations under present management in 1995 to capitalize
upon opportunities in the prepaid phone card sector of the long distance
telecommunications market. The Company's prepaid telephone calling cards
("Cards") provide consumers with a competitive alternative to traditional
calling cards and pre-subscribed long distance telecommunications services. The
Company's total revenues were $35,032,533, $26,027,909 and $17,425,199, and its
net losses were $11,996,759, $3,549,514 and $129,275, for the fiscal years ended
June 30, 1998, 1997 and 1996, respectively, after losses from discontinued
operations of $813,178, $1,069,261 and $0, respectively. The Company sold
approximately six million Cards, of which approximately five million were its
own proprietary branded Cards, and provided more than one hundred million
minutes of telecommunications services, during the fiscal year ended June 30,
1998. During the nine month period ended March 31, 1999, the Company sold
approximately 1.4 million Cards, of which approximately 1.1 million were its own
proprietary branded Cards, and provided approximately thirty-five million
minutes of telecommunications services.
The Company's target markets include ethnic communities with substantial
international long distance calling requirements. For the year ended June 30,
1998 and the nine month period ended March 31, 1999 approximately 75% and 79%
respectively of the Company's total minutes were derived from the sale of
international long distance telecommunications services. Retail 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.
The Company's fiscal 1997 and 1998 sales were derived primarily from the resale
of bundled Cards. The Company resold the Cards at a discount off the retail
value of the Cards to either independent distributors or retail locations,
depending on the locality of distribution. The Company's fiscal 1997 and 1998
cost of sales consisted primarily of the purchase of the Cards at a greater
discount off the face value than the price at which the Cards were resold by the
Company. As a result, the Company received its gross margin on the difference
between discounts given to its customers and the discounts the Company received
from its long distance provider. Since the Cards were sold to the Company as a
bundled product, the supplier was liable to the end user for the long distance
time on the
15
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Cards. At the point of sale, the Company had no further obligation with respect
to the Cards sold and revenues were recognized upon sale of the Cards.
During the last quarter of fiscal 1998 the Company became predominantly a
facilities-based carrier. Under these arrangements the Company negotiated and
was responsible to the long distance carriers and platform providers for the
long distance usage and related platform fee charges incurred in connection with
providing service to the end users. Since the Company was not liable for the
usage and platform fees on the underlying traffic until it was consumed by the
end user, the Company records all sales as deferred revenue until the time on
Cards sold is actually used by the consumer. During the nine month period ended
March 31, 1999, approximately 74% of the Cards sold by the Company were
facilities-based Cards.
Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net Sales. Net Sales for the three months ended March 31, 1999 decreased by
approximately $4,916,211 or 77% from $6,359,998 during the three months ended
March 31, 1998 to $1,443,787 for the three months ended March 31, 1999. The
decrease in sales is due primarily to:
1. The Company terminating, during the quarter ended December 31, 1997,
the exclusivity clause in an agreement with a key master distributor
who accounted for sales of approximately $5.6 million during the
quarter ended September 30, 1997, and the failure to fully replace
the sales accounted for by the distributor.
2. The Company's inability to market its new facilities-based Cards as
rapidly as planned, due to liquidity issues which precluded the
Company from securing facilities as quickly as planned. This lack of
facilities forced the curtailment of sales activities on certain
Cards, since additional sales would have degraded the service
available to all customers due to the lack of adequate facilities to
complete the calls.
3. The Company continued to be unable to market to its distributors
products comparable to the products available in the same period in
the previous year due to the suspension and repricing of two of the
Company's most successful Cards.
In addition to the foregoing, due to the introduction of its branded,
facilities-based Cards during the fourth quarter of fiscal 1998, the Company
began phasing out the sale of its bundled products, which were no longer
competitively priced and which required greater capital resources to market than
the facilities-based Cards. Due to liquidity problems, the Company has been
unable to continue with establishing its own branded facilities-based Cards.
During the three months ended September 30, 1998, the Company's agreement with
Premiere Communications, Inc. ("Premiere") expired. Premiere previously has been
a significant supplier of bundled Cards and telecommunications services to the
Company. Since the expiration of the agreement with Premiere, the Company has
negotiated arrangements with other telecommunications service providers for the
supply of the Company's telecommunications needs.
Cost of Sales. The Company's cost of sales for the three months ended March
31, 1999 decreased to approximately $4,139,457 from $7,704,321 for the three
months ended March 31, 1998. The decrease of $3,564,864 or 46% was primarily
related to the decrease in revenues that the Company experienced in the three
months ended March 31, 1999 as compared to the third quarter in the prior
year. Cost of sales continued to exceed net sales due to the Company not being
able to route its traffic on its least cost providers due to its inability to
prepay the carriers as a result of its limited capital resources, thereby
increasing the cost of goods sold significantly over budgeted amounts.
Gross Profit. For the three months ended March 31, 1999, the Company experienced
a gross loss of approximately $2,695,670 as compared to a gross loss of
approximately $1,344,323 for the three months ended March 31, 1998. The increase
of $1,351,347 was primarily related to the lower volume of sales during the
current period and the higher cost of sales due to the higher facilities costs,
as discussed above. In addition, the initiation of the Company's
facilities-based Cards was accompanied by introductory pricing, thereby further
reducing the gross profit on those sales. During the three months ended March
31, 1999, the Company completed its phase out bundled products since they
were no longer competitively priced and since the Company's agreement with
Premiere, a major supplier of such Cards, had expired.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 1999 decreased
to approximately $1,667,963 from $3,057,449 for the three months ended March
31, 1998. This decrease of $1,389,486 is primarily related to decreases in
personnel instituted by the Company.
Loss from Continuing Operations/Net Loss. The Company incurred a loss from
continuing operations of approximately $4,363,633 for the three months ended
March 31, 1999, as compared to a loss from continuing operations of
approximately $4,401,772 for the three months ended March 31, 1998. The loss is
primarily due to the combination of lower gross margin resulting from the
decreased sales and higher facilities costs but is offset by reductions in
Selling, General and Adminstrative Expenses.
16
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31,
1999
Net Sales. Net Sales for the nine months ended March 31, 1999 decreased by
approximately $20,073,905 or 64% from $31,166,036 during the nine months ended
March 31, 1998 to $10,092,133 for the nine months ended March 31, 1999. Two
master distributors accounted for approximately 20% and 16% of sales during the
nine months ended March 31, 1999. The decrease in sales is due primarily to:
1. The Company terminating, during the quarter ended December 31, 1997,
the exclusivity clause in an agreement with a key master distributor
who accounted for sales of approximately $5.6 million during the
quarter ended September 30, 1997, and the failure to fully replace
the sales accounted for by the distributor.
2. The Company's inability to market its new facilities-based Cards as
rapidly as planned, due to liquidity issues which precluded the
Company from securing facilities as quickly as planned. This lack of
facilities forced the curtailment of sales activities on certain
Cards, since additional sales would have degraded the service
available to all customers due to the lack of adequate facilities to
complete the calls.
The Company continued phasing out the sale of its bundled products, which were
no longer competitively priced and which required greater capital resources to
market than the facilities-based Cards, and has not been able to establish the
facilities-based cards due to liquidity problems.
Cost of Sales. The Company's cost of sales for the nine months ended March 31,
1999 decreased to approximately $13,391,715 from $30,856,362 for the nine months
ended March 31, 1998. The decrease of $17,464,647 or 57% was primarily related
to the decrease in revenues that the Company experienced in the nine months
ended March 31, 1999 as compared to the first two quarters in the prior year.
Cost of sales exceeded net sales due to the Company not being able to route its
traffic on its least cost providers due to its inability to prepay the carriers
as a result of its limited capital resources, thereby increasing the cost of
goods sold significantly over budgeted amounts.
Gross Profit. For the nine months ended March 31, 1999, the Company experienced
a gross loss of approximately $3,299,582 as compared to a gross profit of
approximately $309,674 for the nine months ended March 31, 1999. The decrease of
$3,609,256 or 1,166% was primarily related to the lower volume of sales during
the current period and the higher cost of sales due to the higher facilities
costs, as discussed above. In addition, the transition of the Company's brands
from bundled Cards to facilities-based Cards was accompanied by introductory
pricing, thereby further reducing the gross profit on those sales. During the
nine months ended March 31, 1999, the Company phased out its bundled products
since they were no longer competitively priced and since the Company's agreement
with Premiere, a major supplier of such Cards, had expired, but could not
establish its facilities-based Cards due to liquidity difficulties.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended March 31, 1999 increased to
approximately $5,072,428 from $5,021,567 for the nine months ended March 31,
1998. This increase of $50,861 or 1% is primarily related to:
1. Increases in salaries, wages and personnel-related expenses of
approximately $443,123, as the Company's employee base peaked at 80
full-time employees prior to being reduced to 50.
2. Increases in rent, telephone, general office and non-wage-related
customer service expenses of approximately $462,283, which were
related to the larger workforce.
3. Increases in professional fees of approximately $408,322, primarily
due to increased corporate consulting fees and legal expenses
related to litigation, regulatory filings and financing.
These increases were offset by a decrease in directors compensation of
$1,248,000, which amount represented a one-time noncash charge relating the
grants of options and a decrease in promotion and advertising expenses of
$648,970.
Loss from Continuing Operations. The Company incurred a loss from continuing
operations of approximately $8,372,010 for the nine months ended March 31, 1999,
as compared to a loss from continuing operations of approximately $4,711,893 for
the nine months ended March 31, 1998. This loss is primarily due to the
combination of lower gross margin resulting from the decreased sales and higher
facilities costs, coupled with the write off of $495,312 of amounts related to
cancelled Card print jobs and expired Cards previously purchased.
17
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Liquidity and Capital Resources
The Consolidated Financial Statements of the Company have been prepared on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities, except as otherwise disclosed, in the
normal course of business. However, because of the Company's recurring losses
from operations, such realization of assets and liquidation of liabilities is
subject to significant uncertainty. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties. Further,
the Company's ability to continue as a going concern is highly dependent near
term on its ability to raise capital, reduce its costs of providing long
distance service, develop its collections tactics, develop market share and
achieve profitable operations thereon, and the ability to generate sufficient
cash flow from operations and financing sources to meet obligations.
As previously reported, the Company intended to migrate its traffic to its own
facilities, thereby becoming a facilities-based carrier and thereby increasing
its cash flow. To date the Company, due to liquidity problems, has been unable
to generate or finance sufficient capital to fully implement this strategy.
Accordingly, the Company has entered into negotiations with Telephone Electronic
Corporation ("TEC"), currently a holder of approximately 22% of the Company's
Common Stock, with respect to (i) a working capital facility to enable the
Company to meet its current operating expenditures, (ii) a long-term operating
agreement pursuant to which the Company's traffic can be originated and
terminated through the network facilities of TecNet, Inc., an affiliate of TEC,
including the traffic the Company anticipates will be generated as a result of
implementation of the Company's offering telecommunication services through the
College Enterprises, Inc. on-campus debit card system, and (iii) arrangements to
finance the equipment and operations of a point of sale distribution network for
the Company's Cards. There can be no assurances that these negotiations will be
successful or that TecNet, Inc. will continue to handle traffic for the Company
or advance funds for working capital expenditures. Moreover, the Company has
accured significant carrier charges with TecNet, Inc. and third party providers
which it must satisfy.
To date, the Company has funded its operations through: (i) two offerings, which
aggregated $1,000,000 of proceeds to the Company; (ii) the exercise of
approximately 2,280,000 warrants to purchase shares of the Common Stock of the
Company at $1.50 per share (the "$1.50 Warrants"), which aggregated
approximately $3,400,000 of proceeds to the Company; (iii) sale of 61,050 shares
of the Company's Series A Preferred Stock, which resulted in the elimination of
an accounts payable balance to Premiere totaling approximately $6,105,000; (iv)
sale of $1,200,000 principal amount of the Company's Notes with the $2.375
Warrants which have been exchanged for two year promissory notes and the
Warrants; (v) the sale of a $100,000 demand promissory note bearing 10% interest
per annum; and (vi) the sale of an aggregate of $1,227,415 in demand promissory
notes bearing 10% interest per annum (including sales of $492,415 of principal
amount of notes since March 31, 1999), all in offerings exempt from registration
under the Securities Act.
The Company has no existing bank lines of credit and has not established any
sources for such financing. During June 1998, the Company initiated discussions
with several entities regarding short-term financing related to accounts
receivable to provide funding for the immediate internal expansion of the
business. As of May 18, 1999, no such arrangement has been consummated. The
Company believes that such an arrangement can be consummated, but also believes
that the potential terms of such an arrangement will be more favorable following
the implementation of the additional credit and collection activities discussed
in Note 3(b) to the Consolidated Financial Statements. However, there can be no
assurance that such funding will be available to the Company, or if available,
will be available in either a timely manner or upon terms and conditions which
are acceptable to the Company.
During the nine month periods ended March 31, 1999 and 1998, the Company's major
components of cash flow were as follows:
NINE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
------------- -----------
Net cash used in operating activities ......... $(1,988,907) $(9,434,620)
Net cash used in investing activities ......... (16,726) (72,442)
Net cash provided by financing activities ..... 2,080,600 $ 9,063,575
----------- ----------
Net increase in cash .......................... $ 74,967 $ (443,487)
=========== ==========
Net cash used by operating activities during the nine months ended March 31,
1999 was $1,988,907 as compared to $9,434,620 for the nine months ended March
31, 1998. The decrease of approximately $7,445,713 was caused by a net loss of
$8,372,010 for the nine months ended March 31, 1999 as compared to net loss of
$5,419,508 for the nine months ended March 31, 1998 and an increase in accounts
payable and accrued expenses of $5,714,276 for the nine months ended March 31,
1999 as compared to an increase of $1,342,654 for the nine months ended March
31, 1998.
18
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
During the nine months ended March 31, 1999 the Company experienced a much
smaller increase in sales and inventory, as compared to the corresponding prior
year period.
To date, capital expenditures have not been material. Cash used in investing
activities for nine month periods ended March 31, 1999 and 1998 related solely
to capital expenditures of approximately $16,726 for the nine months ended
March 31, 1999 and $72,442 for the nine months ended March 31, 1998.
Cash provided from financing activities of $2,080,600 during the nine month
period ended March 31, 1999 consisted of $1,935,000 net proceeds from the
Company's sale of the Notes, $67,000 proceeds from the exercise of certain $1.50
Warrants and $147,000 demand note sales less payments of approximately $25,000
related to the Prime Communications, Inc. note payable.
For the nine month period ended March 31, 1999, the Company experienced a
substantial operating loss of $8,372,010 and used $1,988,907 cash in operating
activities. The Company's cash position at March 31, 1999 approximated $183,689
and its working capital deficit approximated $10,091,443. Of the Company's
working capital deficit, approximately $91,707 consists of deferred revenue,
which represents sales for which provision of the underlying telecommunications
service has not yet been rendered or paid for by the Company. This does not
represent an immediate cash requirement. However, due to operating losses and
the Company's expansion, the Company remains severely undercapitalized and to
date has not been able to finance its expansion as quickly as opportunities have
arisen. During the nine months ended March 31, 1999, the Company has experienced
substantial difficulty in making timely payments to its vendors and satisfying
other financial obligations, including payments to its landlord, employees and
the providers of its telecommunications facilities, professional services and
other general corporate services. Because of the lack of liquidity and the
difficulty in making payments to the providers of certain telecommunications
facilities, the Company has not been able to add the requisite facilities as
rapidly as planned, and the Company's sales of Cards has been adversely
affected.
19
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
The Company has engaged one of the top outside collection agencies in the United
States with respect to collecting overdue accounts. Costs for collection of such
accounts will be on a contingent basis billed to the Company as a percentage of
collected funds. The Company does not expect any cash requirements associated
with implementing this program and expects that its liquidity position will
improve as a result of its implementation. Concurrently with the foregoing
effort, the Company plans to improve its documentation of processes and
procedures by developing a formal Credit and Collections Policy including, but
not limited to, customer credit file requirements, standard credit application
processes and procedures and standard procedures for the collection of past due
accounts. The Company believes that the combination of the foregoing actions
will result in reduced credit risk to the Company, improved liquidity and
enhanced ability to establish an asset-backed working capital credit facility
due to the increased quality of the receivables portfolio. Since these planned
actions are in an early stage of implementation, it is not possible at this time
to estimate the anticipated effects, if any, on sales to current customers.
TEC, a holder of approximately 22% of the Company's issued and outstanding
Common Stock, in December, 1998, (i) intervened with certain of the Company's
traffic-providers and (ii) through an affiliate, TecNet, Inc., (a) continues to
originate and terminate domestic and international telecommunications traffic
for the Company and (b) lent $1,227,415 to the Company on a demand basis through
May 14, 1999, thereby reducing the immediate and short-term capital shortfall of
the Company. The Company is in the process of negotiating a long-term operating
agreement and working capital facility with TEC. However, there can be no
assurances that the parties will reach an agreement or that TecNet, Inc. will
continue to originate and terminate telecommunications traffic for the Company
and purchase demand notes of the Company.
Seasonality
The business of the Company does not experience significant seasonality.
Inflation
Management does not believe that inflation has had, or is expected to have, any
significant adverse impact on the Company's financial condition or results of
operations.
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.
None of the Company's Card activations are date-dependent. All activations and
deactivations are based on payment and usage only, as a normal debit account
works. Further, the Company currently is not utilizing any integrated software
which will be impacted significantly by the Year 2000 Issue. As a result,
20
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
the Company does not anticipate 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.
In addition, the Company continues the process of contacting its key suppliers
and other vendors to assure that they have addressed the Year 2000 issue as
regards continuing provision of services to the Company.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("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, 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 years
beginning after December 15, 1997 and both require comparative information for
earlier years to be restated. Accordingly, the Company has adopted both the
foregoing standards for the accompanying financial statements for the quarter
ended September 30, 1998. SFAS No. 130 divides comprehensive income into net
income and other comprehensive income, and specifies that an enterprise that has
no items of other comprehensive income in any period presented is not required
to report comprehensive income. Accordingly, since the Company did not have any
items of other comprehensive income in any period presented, comprehensive
income is not separately reported. The adoption of SFAS No. 131 did not have a
material effect on the Company's financial position or results of operations.
The Company continually evaluates 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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
notes payable at March 31, 1999 and June 30, 1998, respectively, 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.
21
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
ITEM 1. LEGAL PROCEEDINGS
In June of 1996, the Company became a co-defendant in a legal action in the
Circuit Court for the First Judicial District of Hinds County in Jackson,
Mississippi in the case entitled Heritage Graphics, Inc. ("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. The case is set for trial
on September 7, 1999 in Jackson, Mississippi.
In October of 1997, the Company initiated a lawsuit against IDT Corporation
("IDT"), CG Com, Inc. ("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 "Distribution 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,
which was denied by the court. Subsequently, the Company discontinued the action
against Mr. Gomez and CG Com. The action seeks $50 million in damages for
tortious interference with the Distribution Agreement against IDT. The Amended
Complaint alleges, among other things 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. This matter was settled on
or about January 28, 1998 pursuant to a Settlement Agreement with IDT which
provides the Company with certain services at rates negotiated between the
parties.
During March 1998, Vanity Fair Intimates, Inc. ("Vanity Fair") commenced an
action entitled Vanity Fair Intimates, Inc. formerly known as Vanity Fair Mills,
Inc. v. Promo Tel, Inc. also known as and/or trading as Digitec 2000, Inc., in
the Civil Court of the City of New York for the County of New York, L&T Index
No. 066018-98 seeking eviction and judgment against the Company for a total of
$472,799. The matter was settled in September, 1998 for $208,916, to be paid in
monthly installments of approximately $35,000 commencing in September 1998 and
continuing through and including the month of February, 1999. The Company made
the first payment due in September in accordance with the settlement agreement.
However, due to its liquidity problems, the Company failed to make the payments
due in October and November, 1998. Due to the Company's failure to make the
foregoing payments, Vanity Fair gave notice of its intention to enter a
Confession of Judgment for $369,774, less the amount previously paid by the
Company. The Company subsequently negotiated an alternative payment plan with
Vanity Fair, and to date is in compliance with the revised payment terms.
22
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
In June, 1998, the Company was served in an action entitled Michael Bodian, as
Chapter 11 Trustee of Communications Network Corp. ("Conetco"), a/k/a Conetco v.
Digitec 2000, Inc. f/k/a Promo Tel, Inc., Bankruptcy Case No. 96-B-53504 (PCB),
Adv. Proc. No. 98-8621-A, pending in the United States Bankruptcy Court,
Southern District of New York, wherein the plaintiff alleges that a preferential
payment or fraudulent transfer in the amount of $150,800 was made to the Company
by Magic Communications, Inc. ("Magic"), an affiliate of Conetco. Conetco, a
reseller of long distance telecommunications services which it purchased from
WorldCom Network Services ("WorldCom"), sold prepaid telephone debit cards
through Magic which acted as its master sales agent. After WorldCom terminated
Conetco's access to its long distance network because of Conetco's failure to
pay its large outstanding balance, the debit cards became useless. Conetco
alleges that a "refund" of $150,800 in the form of a credit was given by Magic
to the Company as a result of cash refunds that the Company had given to its
customers on account of returned debit cards. An answer asserting numerous
defenses, including that the Company never received the "refund" in question,
has been filed on behalf of the Company.
On June 9, 1998, the Company was served with a Summons and Motion for Summary
Judgment by Frontier in a case entitled Frontier Communications International,
Inc. v. Digitec 2000, Inc. in the Supreme Court of the State of New York, County
of Monroe 5390196 seeking judgment on a promissory note (the "Frontier Note")
issued by the Company for $893,061 in connection with Frontier's termination of
its Card division. The outstanding amount on the Frontier Note at that time was
approximately $558,000, which was reflected in the accounts payable of the
Company. On June 19, 1998, the Company paid approximately $56,000 on the
Frontier Note, reducing the balance to approximately $502,000. On August 6,
1998, the Company negotiated a settlement with Frontier for $200,000. The
Company satisfied the settlement in September 1998, and as a result, a security
interest held by Frontier against certain assets of the Company was removed.
The Company was served on March 30, 1999 in an action by Qwest Communications
Corporation ("Qwest") entitled Qwest Communications Corporation v Digitec 2000,
Inc., in the United States District Court for the Southern District of New York,
seeking payment for approximately $1.36 million of telecommuncation services
provided to the Company by Qwest. The parties have exchanged draft settlement
agreements pursuant to which the Company would pay in nine monthly installments
commencing October 1, 1999 a total of $887,174 and TecNet, Inc would satisfy the
remaining $489,874. There are no assurances that the proposed settlement will be
consummated. If the proposed settlement is not consummated, the Company will
vigorously defend the action.
On March 10, 1999, the Company was served with a Motion for Summary Judgement by
Prime Communications (NY) Inc. ("Prime") in a case entitled Prime Communications
(NY), Inc v Digitec 2000, Inc. in the Supreme Court of the State of New York,
County of Suffolk seeking judgement on a promissory note issued by the Company
for $147,000, which note was issued in connection with the acquisition of
certain assets from Prime. The outstanding amount on the note is approximately
$121,425. The Company has countermoved against Prime alleging failure of Prime
to deliver the contemplated consideration and seeks damages against Prime. The
Company and Prime are currently negotiating a settlement of the matter.
ITEM 2. CHANGES IN SECURITIES
As of March 1999, the Company exchanged its 10% Six Month Notes and accompanying
warrants providing for the purchase of 600,000 shares of its Common Stock at
$2.37 a share for two year promissory notes and accompanying Warrants to
purchase 1,800,000 shares of Common Stock at a purchase price of $1.10 per
share. The new notes bear interest at 10% per annum and are payable interest
only for the first four calendar quarters and interest and 25% of principal for
the second four calendar quarters. The Warrants are exercisable in whole or in
part prior to March, 2003. The exchange was carried pursuant to an exemption
from registration under the Securities Act of 1933, as amended, provided by
Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company's 10% Six Month Notes in the principal amount of $1,200,000 were not
paid at maturity. Accrued interest was paid on such notes soon after maturity.
The Notes with the accompanying Warrants were exchanged for new notes and
warrants thereby curing the default (See Note 10 to the accompanying
Consolidated Financial Statements).
23
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2.1 Asset Purchase Agreement, dated as of February
24, 1999, among DigiTEC 2000, Inc., Pos Tec
Systems, LLC and Total POS Solutions, LLC.
10.1-10% Promissory Note (Tec Net, Inc.)
10.2 Note and Warrant Exchange Letter
Exhibit 27-Financial Data Schedule.
(b) Reports on Form 8-K
None.
24
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 21, 1999 DigiTEC 2000, Inc.
-----------------------------------------
(Registrant)
By: /s/ Frank C. Magliato
-------------------------------------
Frank C. Magliato
Chief Executive Officer, President
and Director
May 21, 1999 By: /s/ Diego E. Roca
-------------------------------------
Diego E. Roca
Senior Vice President, Chief
Operating Officer, Treasurer, Chief
Financial Officer and Secretary
25
ASSET PURCHASE AGREEMENT
THIS AGREEMENT, made as of February 24, 1999, by and among DIGITEC
2000, INC., a Nevada corporation ("Digitec"), POS TEC SYSTEMS, LLC., a Delaware
limited liability company ("PT", and together with Digitec, the "Buyers"), and
TOTAL POS SOLUTIONS, L.L.C., a Texas limited liability company (the "Seller").
W I T N E S S E T H:
THAT WHEREAS, Digitec desires to acquire through its wholly-owned
subsidiary, PT, from the Seller, and the Seller desires to transfer to PT,
substantially all of the assets, properties and business of the Seller in
exchange for shares of common stock, par value $.001 per share (the "Common
Stock") of Digitec, all upon the terms and conditions hereinafter set forth;
WHEREAS, in order to carry out the foregoing objectives, the Seller
and Buyers desire to enter into this Agreement (this "Agreement");
NOW, THEREFORE, in consideration of the mutual promises hereinafter
set forth, the parties agree as follows:
1. Warranties and Representations:
(a) The Seller warrants and represents to Buyers as follows:
(i) The Seller is and on the Closing Date specified herein will be a
limited liability company duly organized, validly existing and in good standing
under the laws of Texas and is and will then be entitled to own its properties
and to conduct its business in the places where such properties are now owned or
leased or such business is now conducted. The Seller's
<PAGE>
2
activities do not and on the Closing Date (as hereinafter defined) will not
require the Seller to be qualified to do business as a foreign corporation in
any jurisdiction. The Seller's entire authorized capital and membership
interests on the Closing Date will be as set forth on Exhibit A hereto. There
are and on the Closing Date will be no existing options, warrants or rights of
any kind to purchase from or sell to the Seller, or to cause it to issue,
membership interests in Seller.
(ii) (A) The books of account of the Seller fairly and correctly
reflect its income, expenses, assets and liabilities in accordance with
generally accepted accounting principles consistently applied; (B) the financial
statements of the Seller as at and for the years ended December 31, 1997 and
1998, prepared by the Seller, including the related notes, fairly present the
financial position of the Seller as of said dates and the results of its
operations for such years; and (C) said financial statements show all material
liabilities and commitments of the Seller, direct or contingent, as of said
dates, and the Seller has no material liabilities or commitments, direct or
contingent, that are not reflected in said financial statements except such
current liabilities as have been incurred since the dates thereof in the
ordinary course of business. Without limiting the foregoing, said balance sheets
contained as of the dates thereof adequate reserves for accrued domestic and
foreign income and other taxes, uncollectible accounts receivable, obsolescence,
depreciation and price redetermination and renegotiation under government
contracts, and except as disclosed therein the amounts shown in said balance
sheets and the related statements of income and retained earnings do not differ
materially from the amounts used by the Seller in determining income tax
liabilities.
<PAGE>
3
(iii) The Seller has and on the Closing Date will have good and
marketable title in fee simple to all assets shown in its records and books of
account, including without limitation the assets set forth on Exhibit B hereto
(the "Transferred Assets"). The Seller is not and on the Closing Date will not
be the lessee of any real property.
(iv) The Seller has and on the Closing Date will have valid leases
under which it is entitled to use in its business all personal property of which
it is the lessee, and it has no knowledge of any default under any such lease.
(v) The Seller owns and on the Closing Date will own the copyrights,
trademarks and trade names and registrations therefor specified in Exhibit B,
and it has granted and will grant no licenses to use such copyrights, trademarks
or trade names and knows of no claim to the effect that any other person has a
right to use any of such copyrights, trademarks or trade names. No other
copyrights, trademarks or trade names are owned by the Seller or are used in its
business.
(vi) All taxes imposed by the United States or by any foreign
country or by any state, municipality, subdivision or instrumentality of the
United States or of any foreign country or by any other taxing authority, which
are due or payable by the Seller, and all price redetermination or renegotiation
claims asserted or that may be asserted against it, have been paid in full or
adequately provided for by reserves shown in the records and books of account of
the Seller and will be so paid or provided for on the Closing Date. All income
tax returns for the Seller have been examined and accepted by the taxing
authorities having jurisdiction thereof through the year ended December 31,
1997, and no extension of time for the assessment of
<PAGE>
4
deficiencies for any such years is in effect. The Seller has no knowledge of any
unassessed tax deficiency proposed or threatened against it. In the event
additional taxes of any kind shall be assessed against the Seller with respect
to periods prior to the Closing Date (including without limitation taxes
accruing in respect of the operations of the Seller between the date of the most
recent of the aforesaid financial statements and the Closing Date), such
additional taxes, together with interest and penalties, if any, will be paid by
the Seller after the Closing Date or by its members and will not be paid by the
Buyers, and the Seller agrees to hold Buyers harmless against all such
additional taxes, interest and penalties.
(vii) The consummation of the transactions contemplated by this
Agreement will not result in the breach of any term or provision of the
Certificate of Formation or Operating Agreement of the Seller or result in the
breach of any term or provision of, or constitute a default or result in the
acceleration of any obligation under, any loan agreement, indenture, financing
agreement or any other agreement or instrument of any kind to which the Seller
is a party.
(viii) The Seller is not a party to or bound by any contract or
commitment except as set forth in Exhibit B hereof (the "Contracts"). Each of
the Contracts is and on the Closing Date will be (unless it expires by its terms
prior thereto) valid and binding and enforceable against the other party or
parties thereto in accordance with its terms.
(ix) There are no actions or proceedings pending by or against the
Seller before any court, administrative agency or arbitrator, and there are no
pending, threatened or imminent litigations, governmental investigations, claims
of infringement of patents, copyrights or trademarks, or governmental claims,
complaints or prosecutions involving the Seller, which
<PAGE>
5
could adversely and materially affect its business or the ownership or value of
its properties and assets. The Seller is not subject to any injunction, order or
decree of any court or administrative agency.
(x) (A) Seller has and on the Closing Date will have all permits,
licenses, orders and approvals of the Federal Communications Commission and all
other federal, state, local or foreign governmental or regulatory bodies
required for it to carry on its business as presently conducted; (B) all such
permits, licenses, orders and approvals are described in Exhibit B and are in
full force and effect and no suspension or cancellation of any of them is
threatened; and (C) none of such permits, licenses, orders or approvals will be
affected by the consummation of the transactions described in this Agreement.
(xi) During the period from the date of its most recent financial
statement referred to in paragraph l(a)(ii) hereof which covers a period of a
full year to the date hereof, the Seller has conducted its business according to
the ordinary and usual course of business and has maintained its records and
books of account in a manner that fairly and correctly reflects its income,
expenses, assets and liabilities in accordance with generally accepted
accounting principles consistently applied, and there has been and as of the
Closing Date there will have been no material adverse change since such date in
the condition, financial or otherwise, or in the business or properties of the
Seller. During such period the Seller has not made any capital distributions
with respect to any membership interests.
(xii) Neither this Agreement, the financial statements mentioned in
paragraph l(a)(ii) hereof, the Exhibits hereto nor any other certificate,
statement or document furnished or to
<PAGE>
6
be furnished to Buyers by or on behalf of the Seller pursuant to or in
connection with the transactions contemplated by this Agreement contains or will
contain any misstatement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
(xiii) Subject to the approval of its members as provided at the end
of this Agreement, the execution and delivery of this Agreement by the Seller
have been duly and validly authorized, and all requisite limited liability
action has been taken to make it valid and binding upon the Seller in accordance
with its terms.
(xiv) Seller and each Member of Seller is acquiring the Purchase
Shares (as hereinafter defined) for its own account, for investment and with no
present intention of distributing or reselling the Purchase Shares (as
hereinafter defined), but without prejudice, however, to Seller's right at all
times to sell or otherwise dispose of all or any part of the Purchase Shares
under a registration statement filed under the Securities Act of 1933, as
amended (the "Act"), or in a transaction exempt from the registration
requirements of such Act and, in the event the facts so warrant, evidenced by an
opinion of counsel reasonably satisfactory to the Buyers.
(xv) Seller and each Member of Seller is (A) an "accredited
investor," as that term is defined in Regulation D under the Act and (B) Seller
and each Member of Seller has such knowledge, skill, sophistication and
experience in business and financial matters, based on actual participation,
that it is capable of evaluating the merits and risks of an investment in the
Purchase Shares and the suitability thereof as an investment.
<PAGE>
7
(xvi) Seller and each Member of Seller understands and agrees that
the Purchase Shares will bear the legend set forth thereon in Exhibit C hereto.
(b) Buyers warrant and represent to the Seller as follows:
(i) (A) Digitec is and on the Closing Date will be a corporation
duly organized, validly existing and in good standing under the laws of the
State of Nevada and entitled to own its properties and conduct its business in
the places where such properties are now owned and such business is now
conducted; (B) PT is and on the Closing Date will be a limited liability company
duly organized, validly existing and in good standing under the laws of the
State of Delaware and entitled to own its properties and conduct its business in
the places where such properties are now owned and such business is now
conducted.
(ii) The execution and delivery of this Agreement by the Buyers will
have been duly and validly authorized and all requisite corporate or limited
liability action will have been taken to make it valid and binding upon the
Buyers in accordance with its terms.
(iii) The consummation of the transactions contemplated by this
Agreement will not result in the breach of any term or provision of the
Certificate of Incorporation or Bylaws of Digitec or the Certificate of
Formation or the Operating Agreement of PT or result in the breach of any term
or provision of, or constitute a default or result in the acceleration of any
obligation under, any agreement or other instrument to which either of Buyers is
a party.
(iv) The Forms 10-K, including Amendment No. 1 to Form 10-K/A and
10-Q, for the periods ending June 30, 1997 and June 30, 1998 and September 30
and December 31, 1997 and March 31, June 30 and December 31, 1998, together with
the Registration Statement
<PAGE>
8
on Form S-1 with respect to Digitec's Common Stock filed with the Securities and
Exchange Commission on April 20, 1998 as amended and declared effective on June
30, 1998 and as subsequently "stickered" are accurate and complete as of the
date of filing ("SEC Documents"). The consolidated balance sheets of Digitec and
its subsidiaries as of June 30, 1997 and June 30, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows of
Digitec and its subsidiaries for the fiscal years ended on such date, such
annual statement accompanied by a report thereon containing an opinion without
qualifications except as therein noted, by BDO Seidman & Co., was prepared in
accordance with generally accepted accounting principles consistently applied,
except for accounting changes noted in such reports, and present fairly the
financial position of Digitec and its subsidiaries as of such dates and the
results of their operations for such periods. The unaudited consolidated balance
sheets of Digitec and its subsidiaries as of such dates in such reports and
statements of operations, stockholders' equity and cash flows of Digitec and its
subsidiaries for the quarterly periods ended on said dates, copies of which have
been furnished to Seller, have been prepared in accordance with generally
accepted accounting principles consistently applied and present fairly the
financial position of Digitec and its subsidiaries as of such dates and the
results of their operations for such periods.
(v) Since December 31, 1998, except as set forth in Exhibit C, there
has been no change in the properties, business, prospects, profits or condition
(financial or otherwise) of Digitec and its subsidiaries except changes in the
ordinary course of business.
<PAGE>
9
(vi) Except as set forth in the SEC Documents, there are no actions,
suits, investigations, arbitrations or other proceedings pending or, to the best
knowledge of Digitec or any of its subsidiaries, threatened against or affecting
Digitec or any subsidiary in any court or before any governmental authority or
arbitration board or tribunal which, if adversely determined, would materially
and adversely affect the properties, business, profits or condition (financial
or otherwise) of Digitec and its subsidiaries or the ability of Digitec to
perform its obligations contained in this Agreement. Neither Digitec nor any
subsidiary is in default with respect to any order of any court, governmental
authority or arbitration board or tribunal, which default could have a material
adverse effect on the condition (financial or otherwise) of Digitec and its
subsidiaries taken as a whole.
(c) (i) Notwithstanding any investigation conducted before or after the
closing, the parties shall be entitled to rely upon the warranties and
representations set forth herein, and the obligations of the parties with
respect thereto shall survive the closing and continue in full force and effect
until the seventh anniversary of the Closing Date, at which time all warranties
and representations set forth in this Agreement and all liability of the parties
with respect thereto shall terminate, except for warranties and representations
relating to taxes and except for claims relating to any other warranties or
representations which are asserted in writing on or before the seventh
anniversary of the Closing Date. Warranties and representations concerning taxes
and all liability of the parties with respect thereto shall continue in effect
until finally disposed of in accordance with paragraph l(a)(vi) hereof. The
liability of all parties with respect to all other
<PAGE>
10
warranties and representations as to which timely claims have been asserted in
writing shall continue until such claims have been finally decided, settled or
adjudicated.
(ii) The Seller, and the members of the Seller shall be jointly and
severally liable for all breaches of the warranties and representations
hereunder.
<PAGE>
11
2. Assets to Be Transferred:
(a) The Seller agrees to transfer (free and clear of all liens and
encumbrances) to PT on the Closing Date, subject to the terms and conditions set
forth in this Agreement, the Transferred Assets.
(b) The Seller shall assign and transfer to PT on the Closing Date (and,
where necessary, to obtain and deliver to PT on the Closing Date consents
authorizing the transfer and assignment to PT of, or the substitution of PT for
the Seller under) the Contracts. Notwithstanding the foregoing, this Agreement
shall not constitute an agreement to assign any such Contract if an attempted
assignment thereof, without the consent of the other party thereto, would
constitute a breach thereof, or would in any material way adversely affect the
rights of the Seller thereunder, but if any such consent shall not be obtained
or if any attempted assignment would be ineffective or would impair the Seller's
rights thereunder so that PT would not in effect acquire the benefit of all such
rights, then the Seller shall act as PT's agent in order to obtain for it the
benefits thereunder, and the Seller will cooperate with the Buyers in any other
reasonable arrangement designed to provide such benefits for the Buyers.
(c) Notwithstanding the foregoing the Seller shall be entitled to retain
from the properties to be transferred to the Buyers hereunder the minute books,
record books and seal of the Seller, the rights of the Seller under this
Agreement. Seller shall be dissolved and its Articles of Dissolution filed
promptly after the Closing Date. All books and records retained by the Seller
shall be open for inspection by the Buyers during regular business hours after
the Closing
<PAGE>
12
Date, and the Buyers may at their own expense make such copies of and excerpts
from such books and records as it may deem desirable.
3. Consideration for Transferred Assets:
(a) The Buyers shall purchase the Transferred Assets for 200,000 shares of
Common Stock.
(b) As further consideration for said assets, the Buyers shall execute and
deliver to the Seller at the closing an undertaking by the Buyers to assume all
liabilities, obligations and commitments of the Seller accruing on and after the
Closing Date under and with respect to only the Contracts.
4. Investigation by the Buyers:
During the period from the date of this Agreement to the Closing
Date, the Buyers shall be given free access to the offices, records, files,
stock books, minute books, books of account and copies of tax returns of the
Seller for the purpose of conducting an investigation of its financial
condition, status, liabilities, contracts, business operations, property and
title thereto, litigation, patents, trademarks, copyrights and all other matters
relating to its business, properties and assets, through the Buyers' employees
or independent public accountants or outside business consultants.
5. The Closing:
The closing of the sale and purchase of the Transferred Assets shall
be on March 4, 1999, or such later date as may be mutually agreed upon in
writing by the Buyers and the Seller (the "Closing Date") at 10:00 A.M. at a
place to be mutually agreed upon. At the closing:
<PAGE>
13
(a) The Buyers shall deliver to the Seller:
(i) The Purchase Shares:
(ii) The undertaking for assumption of the Seller's liabilities in
accordance with paragraph 3(b) of this Agreement.
(b) The Seller shall deliver to Buyers:
(i) Such deeds, bills of sale, evidences of indebtedness,
certificates of deposit, securities, assignments, documents, instruments,
insurance policies and endorsements, opinions of counsel, certifications, title
policies, notices, assurances and other instruments and documents as counsel for
the Buyers may reasonably require as necessary or desirable for transferring,
assigning and conveying hereunder to the Buyers good and marketable title to the
Transferred Assets.
(ii) An instrument evidencing that the members of the Seller
(personally, or by duly authorized and executed proxies or powers of attorney),
owning the requisite number of the membership interests of the Seller, in
proceedings duly held for the purpose of approving the transactions under this
Agreement in accordance with applicable law, voted affirmatively for said
transactions, and certifying that no members of the Seller have brought or may
bring any appraisal proceedings or other proceedings available to dissenting
members, or have or will entertain similar remedies with respect to their
membership interests as permitted under applicable law in connection with the
transactions set forth under this Agreement.
(iii) A certificate signed by officers of the Seller stating that
the warranties and representations of the Seller under this Agreement are true
as of the Closing Date.
<PAGE>
14
6. Conduct of Business Pending Closing:
During the period from the date hereof to the Closing Date, the
Seller shall conduct its operations according to its ordinary and usual course
of business and shall maintain its records and books of account in a manner that
fairly and correctly reflects its income, expenses and liabilities in accordance
with generally accepted accounting principles consistently applied and without
any change in the accounting methods and principles reflected in the most recent
of the financial statements mentioned in paragraph 1 (a)(ii) hereof.
7. Payment of Expenses:
(a) All costs and expenses, including, without limitation, legal fees and
taxes, incurred by the Seller or its members in negotiating this Agreement or in
consummating the transactions contemplated hereby shall be paid by the Seller or
the members of the Seller after the Closing Date and shall not be paid by the
Buyers.
(b) Each of the parties warrants to the other that it has not employed any
broker or finder in connection with this transaction.
8. Actions After the Closing :
Subsequent to the closing each party to this Agreement shall at the
request of the other furnish, execute and deliver such documents, instruments,
opinions of counsel, certificates, notices or other further assurances as
counsel for the requesting party shall reasonably require as necessary or
desirable to effect complete consummation of this Agreement or in connection
with the preparation and filing of reports required or requested by governmental
agencies, and other regulatory bodies.
<PAGE>
15
9. Termination:
This Agreement may be terminated under any of the following
circumstances by notice given on or before the Closing Date:
(a) The Buyers shall have the right to terminate if during the period from
the date hereof to the Closing Date any of the following shall occur:
(i) The Seller shall suffer any loss from fire, flood, explosion or
other casualty which substantially affects the conduct of its business or,
irrespective of insurance, the value of its assets.
(ii) The Buyers shall learn of any fact or condition with respect to
the business, properties, assets or earnings of the Seller which is materially
at variance with one or more of the warranties or representations of the Seller
set forth in this Agreement or which in the Buyers' opinion materially and
adversely affects such business, properties, assets or earnings or the
ownership, value or continuance thereof.
(iii) The Seller shall have failed to obtain prior to the Closing
Date consents authorizing the transfer to PT of, or the substitution of PT for
the Seller under, any Contracts material to the business of the Seller and the
Buyers has not been furnished with assurance satisfactory to the Buyers that PT
will acquire the benefit of any such Contracts subsequent to the Closing Date.
(iv) The Seller shall fail to meet their obligations described under
paragraph 5 of this Agreement.
<PAGE>
16
(v) This Agreement shall not have been approved by the members of
the Seller.
(vi) There shall be any actual or threatened litigation challenging
the validity or legality of this Agreement or the consummation thereof or
seeking to restrain or invalidate any of the transactions contemplated hereunder
which would, in the judgment of the Board of Directors of Digitec, based upon
the advice of counsel, involve expense or lapse of time which would be
materially adverse to the interests of the Buyers.
(b) The Seller shall have the right to terminate if during the period from
the date hereof to the Closing Date any of the following shall occur:
(i) The Buyers shall suffer any loss from fire, flood, explosion or
other casualty which substantially affects the conduct of its business or,
irrespective of insurance, the value of its assets.
(ii)) The Buyers shall fail to meet their obligations described
under paragraph 5 of this Agreement.
10. No Liability for Failure of Consummation in Certain Cases:
If this Agreement shall not be consummated because of inability of
the Seller or the Buyers by reason of causes beyond their respective control to
carry out performance as contemplated by this Agreement, neither party shall be
liable to the other for loss, damage or expense and the only remedy of either
party shall be to terminate this Agreement.
11. Notices:
<PAGE>
17
All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly delivered if delivered
in person or if sent by first-class air mail postage prepaid or by telegraph:
(a) if to the Seller, to the President thereof, 101 E. Park Boulevard,
Suite 600, Plano, Texas 75074.
(b) if to the Buyers, to the President thereof, 8 West 38th Street, New
York, New York 10036.
12. Persons Bound:
This Agreement shall be binding upon and shall inure to the benefit
of the undersigned parties and their respective successors and permitted
assigns. This Agreement may not be assigned in whole or in part without the
express written consent of the other parties.
13. Applicable Law:
This Agreement shall be controlled, construed and enforced in
accordance with the laws of the State of New York.
14. Counterparts:
This Agreement may be executed simultaneously in several
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
<PAGE>
18
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day first above written.
DIGITEC 2000, INC.
By /s/ Frank C. Magliato
------------------------------------
Frank C. Magliato President
Attest:
TOTAL POS SOLUTIONS, L.L.C.
/s/ Diego E. Roca
- -----------------------
By /s/ Claude L. Ricks, III
------------------------------------------
Claude L. Ricks, III, Authorized Signatory
Attest:
/s/ Claude L. Ricks, III
- ------------------------
For the purposes of irrevocably approving, and consenting to, the
foregoing Asset Purchase Agreement and the transactions contemplated thereby for
all purposes under the Texas Limited Liability Company Act, Vernon's Annotated
Revised Civil Statutes of the State of Texas and other applicable law and
expressly adopting the provisions of paragraphs 1(a)(xiv) to (xvi), Article
1528n et seq, the undersigned members of Total POS Solutions, L.L.C. have duly
executed below.
/s/ Claude L. Ricks, III /s/ William H. Koop
- --------------------------- ----------------------------
Claude L. Ricks, III William H. Koop
42 Santa Rosa Circle 799 Franklin Avenue
Wylie, TX 75098 Suite 500
Franklin lakes, NJ 07417
/s/ Robert H. Kaulbach, Jr. /s/ Jerry Kenchel
- --------------------------- ----------------------------
Robert H. Kaulbach, Jr. Jerry Kenchel
3912 Promontory Point 336 Melrose Drive
Plano, TX 75075 Suite 13C
Richardson, TX 75080
/s/ Robert H. Kaulbach, Sr.
- ---------------------------
Robert H. Kaulbach, Sr.
234 Woodcrest Drive
Richardson, TX 75080
<PAGE>
Exhibit A
Seller's Members, their Capital Contributions and
Company Percentages
Initial Capital
Member and Address Contributions Company Percentage
- ------------------ ------------- ------------------
Claude L. Ricks, III 0 20.000%
42 Santa Rosa Circle
Wylie, TX 75098
Robert H. Kaulbach, Jr. 0 5.000%
3912 Promontory Point
Plano, TX 75075
Robert H. Kaulbach, Sr. 0 5.000%
234 Woodcrest Drive
Richardson, TX 75080
William H. Koop $170,000 65.000%
799 Franklin Avenue
Suite 500
Franklin Lakes, NJ 07417
Jerry Kenchel
336 Melrose Drive
Suite 13C
Richardson, TX 75080 0 5.000%
DIGITEC 2000, INC.
10% PROMISSORY NOTE
No. ___ ________, 1999
DIGITEC 2000, INC., a Nevada corporation (the 'Company'), for value
received, hereby promises to pay ON DEMAND to TECNET, INC., a Mississippi
corporation, the principal sum of _______________________________________
(________) and to pay interest (computed on the basis of a 360-day year of
twelve 30-day months) on the principal amount hereof from time to time unpaid at
the rate of Ten Percent (10%) per annum.
Payments of principal, premium, if any, and interest shall be made in such
coin or currency of the United States of America as at the time of payment is
legal tender for the payment of public and private debts by wire transfer in
immediately available funds over the Federal Wire Transfer System to the
registered holder hereof at the written instruction of the registered holder
hereof or, at the option of the registered holder hereof, in such manner and at
such other place in the United States of America as the registered holder hereof
shall have designated to the Company in writing. If any amount of principal,
premium, if any, or interest on or in respect of this Note becomes due and
payable on any date which is not a Business Day, such amount shall be payable on
the next Business Day. "Business Day" means any day other than a Saturday,
Sunday, statutory holiday or other day on which banks in New York, New York are
required by law to close or are customer closed.
The Company's obligations under this Note are unconditional and not
subject to deduction, diminution, abatement, counter-claim, defense or set-off
for any reason whatsoever. The Company's obligations hereunder shall not be
subordinate to any other indebtedness of the Company.
This Note is registered on the books of the Company and is transferable
only by surrender thereof at the office of the Company in New York, New York,
duly endorsed or accompanied by a written instrument of transfer duly executed
by the registered holder of this Note or its attorney duly authorized in
writing. Payment of or on account of principal, premium, if any, and interest on
this Note shall be made only to or upon the order in writing of the registered
holder.
DIGITEC 2000, INC.
By:
--------------------------
Its:
------------------
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY
STATE SECURITIES OR BLUE SKY LAWS. THIS NOTE MAY NOT BE OFFERED, SOLD, ASSIGNED,
PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION
UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR
EXEMPTIONS FROM SUCH REGISTRATION, AS EVIDENCED BY AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY.
DIGITEC 2000, INC.
8 West 38th Street
New York, NY 10018
$1,200,000 10% Six Month Notes
and
Warrants to Purchase Common Stock
May 19, 1999
To the Holders of the Notes and Warrants
identified in Schedule I
Gentlemen:
On May 19, 1999, the Board of Directors of Digitec 2000, Inc. (the
"Company"), authorized the Company to offer an exchange of the outstanding
$1,200,000 principal amount of its 10% Six Month Notes (the "Old Notes") issued
pursuant to the Note Purchase Agreements, dated as of September 1, 1998, and
accompanying Warrants to purchase shares of the Common Stock, $.001 par value
per share (the "Common Stock"), of the Company at an exercise price of $2.375
per share. Pursuant to this offer of exchange, the Company is offering to
exchange, effective as of the maturity of the Old Notes, the Old Notes for
promissory notes (the "New Notes") in like principal amount, bearing the same
interest and providing for one year of quarterly payments of interest only,
followed by a second year with quarterly payments equal to 25% of the original
principal amount plus accrued interest on the unpaid principal, which New Notes
will be convertible into shares of the Company's Common Stock at the rate of
$1.10 of principal for each share of Common Stock (the "Conversion Price"). In
addition, pursuant to this offer of exchange, the outstanding warrants (the "Old
Warrants") will be exchanged for warrants (the "New Warrants") providing for the
purchase of three times the number of shares of Common Stock covered by Old
Warrants at a price per share of $1.10 (the "New Exercise Price"). The New Notes
and New Warrants will be dated the Maturity Date of the Old Notes.
Both the Conversion Price and the New Exercise Price are set at the
average closing price of the Common Stock for the month of March, 1999, the
month of the original maturity of the Old Note. The form of New Notes and New
Warrants are attached hereto as Exhibit A and B, respectively. Upon surrender of
your Old Notes and Old Warrants, the New Notes and New Warrants will be issued
and promptly delivered to you.
This offer of exchange will remain open until the close of business
on May 21, 1999 and may be accepted by any Holder by executing and faxing to the
Company a copy of this offer in the space provided below. Upon receipt of
acceptance by a Holder, the Old Notes and Old Warrants held by such Holder shall
be deemed amended to reflect the terms of the New Notes
<PAGE>
2
and New Warrants in like amounts without further action by Holder or the Company
and the registration provisions of the Note and Warrant Purchase Agreements,
dated as of September 1, 1998, will be amended to provide that the shares of
Common Stock issuable pursuant to the New Warrants will be registered as soon as
practicable by the Company.
To exchange your Old Notes and Old Warrants, they should be
delivered by Federal Express to the Company's counsel, Patterson, Belknap, Webb
& Tyler LLP, 1133 Avenue of the Americas, New York, New York 10036, Attention:
John E. Schmeltzer, III, Esq., as promptly as possible and the Company will
forward duly executed Notes and Warrants.
DIGITEC 2000, INC.
By:___________________________
Name: Frank C. Magliato
Title: President
Exchange offer accepted as
of the 15th day of May, 1999
________________________________
<PAGE>
Exhibit A
DIGITEC 2000, INC.
10% TWO YEAR NOTE
DUE MARCH __, 2001
No. N- _____, 2001
DIGITEC 2000, INC., a Nevada corporation (the "Company"), for value
received, hereby promises to pay to
----------------
Or Registered Holders
The Principal Amount of
ONE HUNDRED THOUSAND
DOLLARS ($100,000)
and to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) on the principal amount from time to time remaining unpaid hereon at the
rate of Ten Percent (10%) per annum from the date hereof until maturity, payable
each ninety days after issuance and at maturity. The entire then outstanding
principal amount and the unpaid interest shall be payable on ______, 2001. The
principal amount of this Note shall be payable in four equal installments on the
fifth through eighth interest payment dates.
Payments of principal, premium, if any, and interest shall be made in such
coin or currency of the United States of America as at the time of payment is
legal tender for the payment of public and private debts by wire transfer in
immediately available funds over the Federal Wire Transfer System to the
registered holder hereof at the written instruction of the registered holder
hereof or, at the option of the registered holder hereof, in such manner and at
such other place in the United States of America as the registered holder hereof
shall have designated to the Company in writing. If any amount of principal,
premium, if any, or interest on or in respect of this Note becomes due and
payable on any date which is not a Business Day, such amount shall be payable on
the next Business Day. "Business Day" means any day other than a Saturday,
Sunday, statutory holiday or other day on which banks in New York, New York are
required by law to close or are customer closed.
The initial Conversion Price shall be $______. The Conversion Price is
subject to adjustment from time to time in the same manner as the Exercise Price
in the Warrant issued in connection with this Note. Irrespective of any
adjustment in the Conversion Price, this Note may continue to express the same
initial Conversion Price as is presently stated herein.
<PAGE>
The holder of this Note shall have the right, at such holder's option, at
any time, to convert all or any part of the principal amount of this Note (in a
minimum amount of $1,000 or any integral multiple thereof) into Common Stock,
$.001 par value per share (the "Common Stock"), of the Company at the initial
Conversion Price or, in case an adjustment of the Conversion Price shall have
taken place, then at the Conversion Price as last adjusted and in effect at the
date this Note or any portion hereof is surrendered for conversion. In order to
exercise such conversion privilege the holder shall surrender this Note (with
the instructions as to amount to be converted annexed hereto properly completed
and executed) at the principal office of the Company for the Common Stock (or at
such other place as the Company and the holder hereof shall agree upon in
writing). Upon such surrender of this Note, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
holder of this Note and in such name or names as the holder hereof may
designate, a certificate or certificates for the number of shares of Common
Stock so purchased upon the conversion of this Note. Such certificate or
certificates shall be deemed to have been issued and any person so designated to
be named herein shall be deemed for all purposes to have become a holder of
record of such Common Stock as of the close of business on the date of the
surrender of this Note as aforesaid.
Each certificate for shares of Common Stock shall contain an appropriate
legend to be substantially in the form set forth on this Note.
The Company shall pay all interest on this Note or specified portion
hereof surrendered for conversion accrued to the date of surrender of this Note
as aforesaid. In the event that this Note is converted in part only, the Company
shall, upon such conversion, execute and deliver to the holder hereof, at the
expense of the Company, a new Note or Notes of authorized denominations in
principal amounts equal to the unconverted portion of this Note and bearing
interest from the date to which interest has been paid on this Note.
The Company shall not be required to issue fractions of any share of
Common Stock on the conversion of this Note. If any fraction of any share of
Common Stock would, except for the provisions of this paragraph, be issuable on
the conversion of this Note, the Company shall purchase such fraction for an
amount in cash equal to the value of such fractions computed on the basis of the
closing price for Common Stock on the last trading day prior to the date of
conversion of this Note.
The Company's obligations under this Note are unconditional and not
subject to deduction, diminution, abatement, counter-claim, defense or set-off
for any reason whatsoever. The Company's obligations hereunder shall not be
subordinate to any other indebtedness of the Company.
This Note is one of the 10% Two Year Notes of the Company in the aggregate
principal amount of up to $1,200,000.00 issued in exchange for the 10% Six Month
Notes of the Company issued under and pursuant to the terms and provisions of
separate and several Note and Warrant Purchase Agreements, each dated as of
September 1, 1998 (the "Purchase Agreements"), entered into by the Company with
the purchasers named therein; and this Note and the holder hereof are
<PAGE>
entitled equally and ratably with the holders of all other Notes outstanding
under the Purchase Agreements to all the benefits provided for thereby or
referred to therein, to which Purchase Agreements reference is hereby made for
the statement thereof. Said Purchase Agreements also provide for the issuance of
Warrants of the Company to purchase its common stock and provide for the
adjustment of the Exercise Price of such Warrant at Article VI thereof. Upon the
issurance of this Note the provisions of Article VI of the Purchase Agreements
shall be deemed incorporated herein with the substitution of the term
"Conversion Price" for the term "Exercise Price."
This Note is registered on the books of the Company and is transferable
only by surrender thereof at the office of the Company in New York, New York,
duly endorsed or accompanied by a written instrument of transfer duly executed
by the registered holder of this Note or its attorney duly authorized in
writing. Payment of or on account of principal, premium, if any, and interest on
this Note shall be made only to or upon the order in writing of the registered
holder.
This Note and the other Notes under the Purchase Agreements are not
subject to prepayment or redemption at the option of the Company prior to its or
their expressed maturity date except on the terms and conditions and in the
amount and with premium, if any, provided for herein and in the Purchase
Agreements. The Company agree to make required prepayments on account of said
Notes in accordance with the provisions of this Note and the Purchase
Agreements.
THIS NOTE, THE NOTE AND WARRANT PURCHASE AGREEMENTS AND THE OTHER
DOCUMENTS CONTEMPLATED THEREBY, INCLUDING BUT NOT LIMITED TO, THE WARRANTS,
SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO THE
CONFLICTS OF LAWS PRINCIPLES THEREOF) AND THE LAWS OF THE UNITED STATES OF
AMERICA.
DIGITEC 2000, INC.
By: __________________________________
Its: President
THIS NOTE IS SUBJECT TO THE TERMS AND PROVISIONS OF A NOTE AND WARRANT PURCHASE
AGREEMENT, DATED AS OF SEPTEMBER 1, 1998, BETWEEN DIGITEC 2000, INC. (THE
"COMPANY") AND THE PURCHASER NAMED THEREIN (AS SUCH AGREEMENT MAY BE
SUPPLEMENTED, MODIFIED, AMENDED, OR RESTATED FROM TIME TO TIME, THE
"AGREEMENT"). COPIES OF THE AGREEMENT ARE AVAILABLE AT THE OFFICES OF THE
COMPANY.
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY
STATE SECURITIES OR BLUE SKY LAWS. THIS NOTE MAY NOT BE OFFERED, SOLD, ASSIGNED,
PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION
UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR
EXEMPTIONS FROM SUCH REGISTRATION, AS EVIDENCED BY AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY.
<PAGE>
Exhibit B
THESE WARRANTS AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF ARE ISSUED IN
EXCHANGE FOR THE ORIGINAL WARRANTS ISSUED UNDER, AND ARE SUBJECT TO THE TERMS
AND PROVISIONS OF, NOTE AND WARRANT PURCHASE AGREEMENTS, DATED AS OF SEPTEMBER
1, 1998, BETWEEN DIGITEC 2000, INC. (THE "COMPANY") AND THE PURCHASERS NAMED
THEREIN (AS SUCH AGREEMENT MAY BE SUPPLEMENTED, MODIFIED, AMENDED, OR RESTATED
FROM TIME TO TIME, THE "AGREEMENT"). COPIES OF THE AGREEMENT ARE AVAILABLE AT
THE OFFICES OF THE COMPANY.
THESE WARRANTS AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THESE WARRANTS HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE
SECURITIES OR BLUE SKY LAWS. NEITHER THE WARRANTS NOR ANY OF SUCH SHARES MAY BE
OFFERED, SOLD, ASSIGNED, PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF REGISTRATION UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR
BLUE SKY LAWS OR EXEMPTIONS FROM SUCH REGISTRATION, AS EVIDENCED BY AN OPINION
OF COUNSEL AS PROVIDED FOR IN THE AGREEMENT.
WARRANT CERTIFICATE
Certificate Number Certificate for
W-
- ------------ --------------------------------
This Certificate is Transferable
in New York, New York
DIGITEC 2000, INC.
Incorporated under the Laws of the State of Nevada
<PAGE>
THIS CERTIFIES THAT, ___________ for value received, the registered
holder hereof or registered assigns (the "Holder"), is entitled to purchase from
Digitec 2000, Inc., a Nevada corporation (the "Company"), at any time after the
date hereof and until 5:00 P.M., Eastern Standard Time, _________, 2003 at the
purchase price of $_____ per share (the "Exercise Price"), as adjusted pursuant
to Article 6 of the Note and Warrant Purchase Agreements, dated as of September
1, 1999, among the Company and the original Purchasers named therein (the
"Purchase Agreements"), the number of shares of Common Stock, $.001 par value
per share, of the Company (the "Common Stock") which is equal to the number of
Warrants set forth above. The number of shares purchasable upon exercise of this
Warrant and the Exercise Price per share shall be subject to adjustment from
time to time as set forth in the Purchase Agreements. This Warrant shall not be
redeemable by the Company and the Company shall take no action prior to
September 8, 2003 to terminate this Warrant. This Warrant is issued under and in
accordance with the Purchase Agreement and is subject to the terms of the
Purchase Agreement, to all of which terms every holder of this Warrant
Certificate consents by acceptance hereof.
A copy of the Purchase Agreement may be obtained for inspection by
the Holder hereof upon written request to the Company.
This Warrant may be exercised in whole or in part by presentation of
this Warrant with the Election to Exercise at the end hereof duly executed and
simultaneous payment of the Exercise Price (subject to adjustment) at the office
of the Company in New York, New York. Payment of such price shall be made at the
option of the Holder hereof in cash, by check or by surrender of Notes.
Upon any partial exercise of this Warrant, there shall be issued to
the Holder hereof a new Warrant Certificate in respect of the shares of Common
Stock as to which this Warrant shall not have been exercised. No fractional
shares will be issued upon the exercise of this Warrant, but the Company shall
pay the cash value (as determined pursuant to the Purchase Agreements) of any
fraction of a share of Common Stock upon the exercise of one or more Warrants.
This Warrant Certificate may be exchanged either separately or in
combination with other Warrant Certificates for new Warrant Certificates
representing the same aggregate number of Warrants as are evidenced by the
Warrant Certificate or Warrant Certificates exchanged. This Warrant Certificate
is transferable at the office of the Company in New York, New York in the manner
and subject to the limitation set forth in the Purchase Agreements.
This Warrant does not entitle any Holder hereof to any of the rights
of a stockholder of the Company.
Dated: _________, 1999.
DIGITEC 2000, INC.
By: By:
------------------------- ---------------------------
Secretary President
<PAGE>
Notice of the call will be given as
provided in the Warrant Purchase Agreement
ELECTION TO EXERCISE
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant for, and to purchase thereunder,
shares of Common Stock, as provided for therein.
Please issue a certificate or certificates for such shares of Common
Stock in the name of, and pay any cash for any fractional share to:
Name: _____________________________________
Signature: _____________________________________
Taxpayer Identification Number: _____________________________________
Address: _____________________________________
Note: The above signature should correspond
exactly with the name on the face of
this Warrant Certificate or with the
name of assignee appearing in
assignment form below.
Signature Guaranteed
AND, if said number of shares shall not be all the shares purchasable under the
within Warrant, a new Warrant Certificate is to be issued in the name of said
undersigned for the balance remaining of the shares purchasable thereunder less
any fraction of a share paid in cash and delivered to the address stated above.
<PAGE>
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and
transfers unto __________________________________________ (Taxpayer
Identification Number: _________________________) the within Warrant, together
with all right, title and interest therein, and does hereby irrevocably
constitute and appoint _________________________ attorney, to transfer said
Warrant on the books of the within-named Company with full power of substitution
in the premises.
Dated: __________________, 19__
_____________________________________
Note: The above signature should correspond
exactly with the name on the face of
this Warrant Certificate.
Signature Guaranteed
______________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet as of March 31, 1999 and the unaudited
consolidated statement of operations for the nine months ended March 31, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 183,688
<SECURITIES> 0
<RECEIVABLES> 961,011
<ALLOWANCES> 0
<INVENTORY> 84,785
<CURRENT-ASSETS> 1,317,535
<PP&E> 156,027
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,034,259
<CURRENT-LIABILITIES> 11,408,978
<BONDS> 0
0
0
<COMMON> 7,059
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,034,259
<SALES> 10,092,133
<TOTAL-REVENUES> 10,092,133
<CGS> 13,391,715
<TOTAL-COSTS> 13,391,715
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,372,010)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,372,010)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,372,010)
<EPS-PRIMARY> (1.22)
<EPS-DILUTED> (1.22)
</TABLE>
