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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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 54-1287957
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark 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 |_|
The number of outstanding shares of the registrant's common stock, par value
$.001 per share (the "Common Stock") as of November 14, 1999 was 7,058,998.
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<PAGE>
DIGITEC 2000, INC.
INDEX TO FORM 10-Q
Page(s)
-------
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and the Year Ended June 30, 1999......................... 3
Condensed Consolidated Statements of Loss for the Three Months Ended
September 30, 1999 and the Three Months Ended September 30, 1998
(unaudited) ......................................................... 4
Condensed Consolidated Statement of Stockholders' Deficit for the
Three Months Ended September 30, 1999 (unaudited) ................... 5
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1999 and the Three Months Ended September 30,
1998 (unaudited) .................................................... 6
Notes to Condensed Consolidated Financial Statements (unaudited) .... 7 - 18
ITEM 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 19 - 23
ITEM 3--Quantitative and Qualitative Disclosures About Market Risk .. 24
PART II -- OTHER INFORMATION
ITEM 1 - Legal Proceedings .......................................... 25
ITEM 6 - Exhibits and Reports on Form 8-K ........................... 26
Signatures .......................................................... 27
This Form 10-Q is being filed to reflect the restatement of certain previously
reported financial information as more fully described in Note 3 of the Notes to
Condensed Consolidated Financial Statements contained in Part I. Portions of
Part I - Item 1 - "Financial Statements" and Part I - Item 2 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain information relating to Cost of Sales, Selling, General and
Administrative Expenses and Other Expenses for the period ending September 30,
1998 which are amended to reflect adjustments determined to be required during
the preparation of the Company's year-end financial statements for the period
ending June 30, 1999. Except as set forth in Note 3 to the Condensed
Consolidated Financial Statements no other adjustments have been made to the
reported financial information for the period ended September 30, 1998.
2
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Balance Sheets (Unaudited)
================================================================================
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current:
Cash and cash equivalents $ 217,279 $ 156,756
Due from TecNet, Inc. (Note 5(c)) -- 260,000
Accounts Receivable, net allowance for bad debts
of $847,000 1,298,414 604,586
Inventory 495,217 58,818
Prepaid expenses and other 161,118 133,887
- --------------------------------------------------------------------------------------
Total current assets 2,172,028 1,214,047
Property and equipment, net of depreciation of
$126,137 and $113,124 135,444 141,778
Customer lists, net of accumulated amortization of
$656,805 and $583,611 (Notes 2(h) and 5) 188,365 261,559
Other assets 79,685 79,355
- --------------------------------------------------------------------------------------
$ 2,575,522 $ 1,696,739
=====================================================================================
Liabilities and Stockholders' Deficit
Current:
Payable to Tecnet, Inc. (Notes 4 and 5(c)) $ 8,482,744 $ 6,849,385
Accounts payable - Trade (Notes 4 and 8(b)) 2,068,620 2,133,887
Account payable and accrued expenses (Notes 4, 5(g),
6, 8(c) and 6(d)) 1,237,964 1,161,524
Payable to Premiere Communications, Inc. 583,152 583,152
Accrued legal 731,997 825,615
Accrued settlement expense (Note 6) 951,633 991,633
Notes payable - (Notes 5(d) and 6) 221,425 221,425
- --------------------------------------------------------------------------------------
Total current liabilities 14,277,535 12,766,621
Deferred rent (Notes 2(k)) 58,143 66,350
Convertible Debt (Note 5(b)) 1,200,000 1,200,000
- --------------------------------------------------------------------------------------
Total liabilities 15,535,678 14,032,971
- --------------------------------------------------------------------------------------
Commitments and contingencies (Notes 6)
Stockholders' deficit
Series A Callable at $100 per share, Convertible
Preferred Stock, $.001 par value, 1,000,000 shares
authorized; 61,050 shares issued and outstanding 61 61
Common Stock, $.001 par value, 100,000,000 shares
authorized; 7,058,998 shares issued and outstanding 7,059 7,059
Additional paid-in-capital 16,941,318 16,899,123
Accumulated deficit (29,908,594) (29,242,475)
- --------------------------------------------------------------------------------------
Total stockholders' deficit (Notes 8 and 9) (12,960,156) (12,336,232)
- --------------------------------------------------------------------------------------
$ 2,575,522 $ 1,696,739
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</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statements of Loss (Unaudited)
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Three Months Ended September 30, 1999 1998
(restated)
- --------------------------------------------------------------------------------
Net sales (Note 4) $ 2,887,504 $ 5,839,898
Cost of sales (Notes 3 and 4) 2,171,980 6,033,026
- --------------------------------------------------------------------------------
Gross profit (loss) 715,524 (193,128)
Selling, general and administrative
expenses (Notes 2(h), 3, 4, 9(b)) 1,298,232 1,776,315
- --------------------------------------------------------------------------------
Loss before other income
(expenses) (582,708) (1,969,443)
- --------------------------------------------------------------------------------
Other Income (expenses)
Interest expense (Notes 4 and 5(a)) (94,503) (186,667)
Other income 11,092 --
- --------------------------------------------------------------------------------
Other expenses (83,411) (186,667)
- --------------------------------------------------------------------------------
Net loss (666,119) (2,156,110)
================================================================================
Net loss per common share-basic
and diluted (Notes 4 and 8): (0.09) (0.32)
================================================================================
Weighted average number of
common and common equivalent
shares outstanding used in basic and diluted 7,058,998 6,819,172
================================================================================
See accompanying notes to Condensed Consolidated Financial Statements.
4
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statement of Stockholders' Deficit (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
- --------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Total
--------------- ----------------- Additional Accumulated stockholders'
Shares Amount Shares Amount paid-in capital deficit deficit
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1999 61,050 $ 61 7,058,998 $ 7,059 $ 16,899,123 $(29,242,475) $(12,336,232)
For the three months ended
September 30, 1999:
Contributed capital (Note 5(c)) 42,195 42,195
Net loss -- -- -- (666,119) (666,119)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 61,050 $ 61 7,058,998 $ 7,059 $ 16,941,318 $(29,908,594) $(12,960,156)
================================================================================================================================
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statements of Cash Flows (Unaudited)
================================================================================
Three Months Ended September 30, 1999 1998
(restated)
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss (666,119) $(2,156,110)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 13,013 12,382
Amortization of customer lists 73,194 19,651
Deferred revenue -- 853,112
Deferred rent (8,207) --
Amortization of debt issue cost (Note 5(a)) -- 186,667
Services provided by shareholder (Note 5(c)) 42,195 --
(Increase) decrease in:
Due from TecNet, Inc. 260,000 --
Accounts receivable (693,828) (1,155,527)
Inventory (436,399) (60,910)
Prepaid expenses and other (27,231) 43,478
Carrier deposits and other (330) --
Increase (decrease) in:
Payable to Tecnet, Inc. 696,189 --
Accounts payable - trade (65,267) 933,245
Accounts payable and accrued expenses 76,440 262,795
Payable to Premiere Communications, Inc. -- --
Accrued Legal (93,618) (232,569)
Accrued settlement (40,000) (34,819)
- --------------------------------------------------------------------------------
Net cash used in operating activities (869,698) (1,328,605)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (6,679) (2,243)
- --------------------------------------------------------------------------------
Net cash used in investing activities (6,679) (2,243)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of TecNet notes 937,170 --
Proceeds from issuance of promissory notes -- 1,200,000
Repayment of Prime Communications loan -- (25,574)
Proceeds from exercise of warrants -- 67,125
- --------------------------------------------------------------------------------
Net cash provided by financing activities 937,170 1,241,551
- --------------------------------------------------------------------------------
Net increase (decrease) in cash 60,523 (89,297)
Cash and cash equivalents beginning of period 156,756 108,722
- --------------------------------------------------------------------------------
Cash and cash equivalents end of period 217,279 19,425
================================================================================
See accompanying notes to consolidated financial statements.
6
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
(a) Liquidity and Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of
DigiTEC 2000, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes
required by general accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included in operating results for the three month period ended
September 30, 1999 and are not necessarily indicative of the results that
may be expected for a full fiscal year.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K
for the year ended June 30, 1999.
The accompanying Condensed Consolidated Financial Statements have been
prepared on the basis that the Company 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, significant arrearages on trade payables, such realization of
assets and satisfaction 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 the willingness and ability of TecNet, Inc. ("TecNet"), a wholly
owned subsidiary of Telephone Electronic Corporation ("TEC"), a holder of
approximately 21% of the Company's Common Stock, to finance the Company's
telecommunications products and services and working capital short-falls
and TecNet's and the Company's ability to provide reliable and competitive
prepaid telephone cards. Additionally, the Company's stability is
dependent upon its ability to raise capital, develop market share, achieve
profitable operations, and to generate sufficient cash flow from
operations and financing to meet obligations.
In November, 1998, the Company, due to network and ensuing liquidity
problems, initiated a strategy of focusing on sales, marketing and
distribution in lieu of developing as a facilities-based carrier. In
connection with the Company's initiation of this new strategy, TecNet
began to provide significant telecommunications services, to finance
operations and carry the unprocessed minutes on the Company's remaining
facilities based Cards, as hereinafter defined. Total telecommunications
services provided by TecNet amounted to approximately $4.4 million during
the period November 1998 through April 1999. No written agreement with
respect to the terms of payment for those services has been made to date.
In February, 1999, the Company began to receive funds for operating cash
flows on a semi-monthly basis from TecNet through the issuance of demand
promissory notes. These funds were used to finance the Company's
operations. As of September 30, 1999, the Company had borrowed $2,561,360
in the form of demand promissory notes from TecNet. Beginning May, 1999,
the Company terminated its facilities based products and TecNet became the
primary supplier of bundled cards to the Company. There can be no
assurance that the Company will be able to continue to finance its
operations and continue to obtain bundled cards at comparable rates
through TecNet. Currently however, the Company continues to be dependent
on TecNet providing financing and telelcommunications support to the
Company.
(b) Business
DigiTEC 2000, Inc. and subsidiary (the "Company") is primarily engaged in
the distribution, marketing and sales of prepaid telephone calling cards
("Cards"). It currently markets its telephone calling card products
principally throughout the New York tri-state metropolitan area.
7
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
2. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and from March 4, 1999 through June 30, 1999, its wholly owned subsidiary,
POS TEC Systems, LLC ("POS TEC"). All significant intercompany balances
and transactions have been eliminated. (See Notes 5 and 9.)
(b) Use of Estimates
In preparing the consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and
revenues and expenses during the reported periods. Actual results could
differ from those estimates.
(c) Revenue Recognition
Sales of bundled Cards from third-party providers for which the Company
acts solely as a distributor are recorded at the sale price of the Card
and are recognized upon delivery. The related cost of the Cards is
simultaneously charged to cost of sales.
Revenue from the sale of proprietary, branded, facilities-based prepaid
phone Cards and the related costs of providing long distance services are
recognized as the telephone calls are completed by end users. A monthly
access fee of $.25 per Cards is recognized at the beginning of each month
commencing thirty days after the first use of the Card. Unused calling
time is recognized into income on the expiration date of the Card, twelve
months after activation, subject to applicable state escheat laws. Amounts
collected prior to the recording of revenue are classified as Deferred
Revenue. As of April 30, 1999, the Company no longer provided
facilities-based Cards.
Revenue from Point of Sale ("POS") sales, in particular, sales by the
Company's subsidiary POS TEC, are recognized upon activation of Cards.
Activation occurs when the end-user purchases a card from a retailer.
Related costs of the Cards is simultaneously charged to the cost of sales.
(d) Allowance for Bad Debts
The Company maintains an allowance for bad debts to provide for estimated
future losses due to lack of collectibility of customers' accounts. These
allowances are based on a detailed analysis of delinquencies, an
assessment of overall risks, management's evaluation of probable losses,
historical performance, and the credit grade of certain customers.
Specific accounts are written off when the probability of loss has been
established in amounts determined to cover such losses after considering
the customer's financial condition. (See Note 3(c))
(e) Cash and Cash Equivalents
The Company considers cash and cash equivalents as those highly liquid
investments purchased with original maturities of three months or less.
The risk associated with cash and cash equivalents in banks is considered
low as management utilizes financial institutions with a credit quality of
at least AA.
8
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
(f) Inventory
Inventory, consisting primarily of unactivated Cards and is stated at the
lower of cost or market. Cost is determined by the first-in, first-out
(FIFO) method.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are calculated using the straight-line method over the estimated useful
lives of the assets ranging from 3 to 5 years.
(h) Customer Lists
Customer lists were purchased from third parties during 1999 and 1998.
These costs are amortized on a straight-line basis over the estimated
useful lives of the customer bases acquired, which approximate three
years. The Company periodically evaluates the recoverability of these
intangibles based on several factors, including management's intention
with respect to the acquired assets and the estimated future
non-discounted cash flows expected to be generated by such assets. During
the fourth quarter of fiscal 1999, management adjusted their valuations of
several customer lists.
(i) Deferred Rent
The Company accounts for rent on a straight-line basis over the term of
the leases. The effect of such adjustments for the fiscal quarter ended
September 30, 1999 and the year ended June 30, 1999 was approximately
$8,000 and $23,000, respectively.
(j) Advertising Costs
All advertising costs are expensed as incurred and included in selling,
general and administrative expenses.
9
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
(k) Deferred Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and any operating loss or tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date of such change.
Adequate reserves against deferred tax assets which may not be utilized
have been provided.
(l) Loss Per Share
The computation of loss per common share is based on the weighted average
number of common shares and common stock equivalents (convertible debt,
convertible preferred shares, stock options and warrants), assumed to be
outstanding during the year. The dilutive losses 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.
(m) Fair Value of Financial Instruments
The carrying values of financial instruments, including cash and notes
payable at September 30, 1999 and June 30, 1999 approximate fair value as
of those dates because of the relatively short-term maturity of these
instruments and because their interest rates approximate current market
rates.
(n) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") no. 133, "Accounting for
Derivative Instruments and Hedging Activities", requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. Historically, the Company
has not entered into derivatives contracts either to hedge existing risks
or for speculative purposes. Accordingly, the Company does not expect
adoption of the new standard on January 1, 2000 to affect its financial
statements.
3. Restatement
During the course of the audit of the Company's Consolidated Financial
Statements for the year ended June 30, 1999, the Company became aware of
certain required adjustments, primarily the fair valuation of the warrants
issued in connection with the $1.2 million financing during the quarter
ended September 30, 1998 and their related amortization. In addition, the
Company failed to record federal excise tax obligations. The Condensed
Consolidated Financial Statements for the period ending September 30, 1998
are hereby restated to reflect the following adjustments as summarized
below:
Three Months ended
September 30, 1998
Net income, as previously reported $(1,710,815)
Adjustments-Increase (Decrease):
Cost of sales 175,197
Selling, general and administrative expenses 83,431
Other Expenses 186,667
-----------
445,295
Net income, as adjusted $(2,156,110)
===========
Per share amounts
Basic and diluted
As previously reported (0.25)
Adjustments (.07)
-----------
As adjusted $ (0.32)
===========
4. Concentrations of Credit Risk
The Company experiences risk concentration due to geographic and customer
concentrations and a limited number of suppliers.
10
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
(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, Mexico and the U.S. Virgin Islands.
The Metro Area sales accounted for approximately 96% of the Company's
total sales for the quarter ended September 30, 1999. No other areas
accounted for more than 10% of the Company's sales.
(b) Concentration of Customer Accounts
The Company utilizes master distributors to distribute its prepaid cards.
The master distributors and their respective percentages of sales and
accounts receivables for period ending are:
Distributor Sales Accounts receivables
1999 1999
September 30 September 30
------------ --------------------
Phonecard Wholesalers 0% 16%
TMG 23% 27%
No other customer accounted for more than 10% of sales or outstanding
accounts reveivable.
(c) Concentration of Suppliers
The Company purchased 86% and 34% of total purchases from TecNet in the
first fiscal quarter ended September 30, 1999 and the fiscal year ended
June 30, 1999, respectively. No other supplier accounted for more than 10%
of purchases.
11
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
12
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
5. Related Party Transactions
(a) During September, 1998, the Company issued $1,200,000 of 10% Six-month
Notes (the "Notes") and 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
were exercisable for five years from the date of issuance. The exercise
price under the $2.375 Warrants were 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,
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. The fair value of the
$2.375 Warrants of $1,120,000 was recorded as debt issue costs and was
amortized to interest expense over a six-month period beginning September,
1998. Amortization for the three months ending September 30, 1998 was
$186,667.
(b) On May 15, 1999 the Company exchanged the Notes for 10% Two-Year
promissory notes convertible into shares of common stock at $1.10 a share
(the "Convertible Debt") which provided for quarterly interest only
payments for the first year and quarterly principal payments with interest
in the second year. The $2.375 Warrants were concurrently exchanged for
new warrants providing for the purchase of up to 1,800,000 shares of
Common Stock at $1.10 (the "$1.10 Warrants"). The exchange of the Notes
and $2.375 Warrants was exempt from registration under the Securities Act
pursuant to Section 4 thereof. The exercise price of the Convertible Debt
and $1.10 Warrants was based on the market value of the common stock as of
the maturity date of the Notes. As the market price of the common stock
was $4.3125 on May 15, 1999, the Company recorded a refinancing charge of
$1,200,000 to reflect the intrinsic value of the Convertible Debt up to
its gross proceeds. No fair value was allocated to the debt issue costs
associated with the warrants. To date the Company has remained current
with the terms and interest payments of the Convetible Debt.
(c) In November 1998, as part of its transition to becoming a sales, marketing
and distribution company, the Company reached a verbal agreement with
TecNet to carry the remaining unprocessed minutes on the Company's
facilities-based debit cards. In February 1999 the Company began funding
its operating short fall through the sale of demand promissory notes to
TecNet. The demand promissory notes bear interest at the rate of 10% per
annum. The Company has no commitment from TecNet for continued financing.
Subsequently, in the fourth quarter of fiscal 1999, the Company reached a
verbal agreement with TecNet to sell their bundled cards, resulting in
approximately $2,549,000 of revenue, and approximately $682,000 of gross
margin, in the first fiscal quarter of fiscal 2000. Also during first
quarter of fiscal 2000, the Company was provided a consultant through
TecNet. Total services rendered amounted to approximately $42,000, which
was accounted for as a capital contribution. The following presents the
detail of the payble to TecNet at September 30, 1999:
Demand notes payable $2,561,360
Payable for bundled phone cards 1,530,217
Payable for telecommunication services 4,391,167
==========
$8,482,744
==========
Included in demand notes payable as of June 30, 1999 is a note in the
amount of $260,000 which was not funded until July 2, 1999.
(d) In October, 1998, the Company borrowed an additional $100,000 from a
member of officer/director's family.
(e) In May 1999, the Board of Directors declared directors fee of $30,000
which is included in accrued expenses.
13
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
6. Litigation
14
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
The Company and its Chief Executive Officer have been named as defendants
in a legal action in Mississippi in the case entitled, Heritage Graphics,
Inc. ("Heritage") vs. Telephone Electronics Corporation. The compliant
alleges, among other things, that the defendants breached a contractual
agreement and conspired to have Heritage go out of business. The compliant
seeks damages of $500,000,000. The case is in discovery. Management
believes such litigation will not have a material adverse effect on the
financial condition or operations of the Company, and is defending the
suit vigorously and asserting appropriate counterclaims. The case is
scheduled for trial on September 5, 2000.
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 the 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. This recovery of $358,000 was recorded as a reduction in
costs of sales during 1999.
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 $1.37
million of telecommunication services provided to the Company by Qwest. In
May 1999, they executed a settlement agreement pursuant to which the
Company would pay in nine monthly installments commencing December, 1999 a
total of $887,000 and TecNet would satisfy the remaining $490,000. The
$887,000 is reflected in accrued settlement expenses as of June 30, 1999.
The amount of the settlement was the same as the original amount of the
cost of sales as TecNet charged the Company for the amount it assumed.
In June, 1998, the Company was served in an action entitled Michael
Bodian, as Chapter 11 Trustee of Communications Network Corp. a/k/a
Conetco ("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 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 Nassau 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. Judgement on
the motion was rendered in favor of the Company and Prime has sought a
rehearing and commenced a pleniary action. The Company and Prime are
currently negotiating a settlement of the matter.
On March 18, 1999, in the Supreme Court of the State of New York for the
County of Kings, the Weeks-Lerman Group, LLC ("Weeks-Lerman") brought suit
against the Company alleging that it provided the Company with work, labor
and services and/or sold and delivered goods to the Company in the amount
of approximately $76,000. Weeks-Lerman seeks that amount together with
interest from June 23, 1998, costs and disbursements. Presently, the
Company is exploring settlement possibilities with Weeks-Lerman. The
Company is not in a position to express an opinion as to the probable
outcome of this matter.
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. However, due to its liquidity
problems, the Company failed to make the payment due in October and
November 1998 and Vanity Fair gave notice of its intention to enter a
Confession of Judgment against the Company for $369,774, less amounts
previously paid. The Company subsequently negotiated an alternative
payment plan with Vanity Fair, and to date is in compliance with the
revised payment terms.
On October 20, 1999, Union Telecard Alliance LLC filed suit entitled Union
Telecard Alliance LLC v Digitec 2000, Inc., TecNet Inc. in Supreme Court
of the State of New York, New York County against the Company to recover
$462,000 for Cards sold to the Company. The Company has not had sufficient
time to review the complaint and accordingly is not in a position to
express an opinion as to the probable outcome of this matter.
15
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
7. Regulatory Requirements
The Company is currently evaluating various tax and other regulatory
assessments to determine their applicability to the Company's operations.
As these operations expand, the Company may become subject to additional
tariffs and the federal and state regulatory charges. During first quarter
of fiscal 2000 and the fourth quarter of fiscal 1999, the Company accrued
approximately $125,000 and $462,000, respectively, relating to various
taxes, penalties and interest related to unfiled tax returns.
8. Stockholders' Equity
Series A Convertible Preferred Stock
The 61,050 shares of $.001 par value voting Series A Convertible Preferred
Stock was received on March 31, 1998 in lieu of outstanding trade payables
(See Note 6). The Series A Preferred Stock is convertible into common
stock at any time at Premiere's option and the Company has the right to
require Premiere to convert the Series A Preferred Stock after March 31,
1999. The Certificate of Designation (the "Certificate of Designation")
for the Series A Preferred Stock provides for certain voting, liquidation
and registration rights and calculates the conversion by multiplying
61,050, the number of shares of Series A Preferred Stock issued in
connection with the Investment Agreement by $100, the Investment Amount as
defined in the Certificate of Designation and then dividing by $8.3463,
the Conversion Price as defined in the Certificate of Designation,
resulting in a total of 731,462 shares of common stock to be issued under
the Investment Agreement subject to adjustment for certain subsequent
securities issues. The Company may call the redemption of each share of
Series A Preferred Stock at any time for $100 a share plus accrued
dividends, if any.
16
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
17
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
9. Acquisition
On March 4, 1999, the Company, through POS TEC, acquired the assets,
property and business of TOTAL POS SOLUTIONS, LLC in return for 200,000
shares of Common Stock. The shares were valued at $1.50. per share based
on the market price on February 24, 1999 the date of the Asset Purchase
Agreement. The acquisition was recorded under purchase accounting with the
customer list acquired valued by management at approximately $285,000, to
be amortized over 3 years in addition to other miscellaneous assets.
Operating results for the acquired company are included in the Company's
financial statements since March 4, 1999.
10. Subsequent Events
(a) Subsequent to September 30, 1999, the Company borrowed an additional
$166,864 from TecNet pursuant to demand promissory notes bearing 10%
interest per annum. The Company has purchased an additional $2,050,000 of
bundled card financed by TecNet since September 30, 1999. TecNet continues
as of the date of this report to finance telecommunication services and
cash flow needs of the Company. There is no written agreement pursuant to
which these funds and services are provided by TecNet other than demand
promissory notes issued by the Company upon advances of funds by TecNet.
There can be no assurances that such financing will be continued by
TecNet.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements, including the notes thereto, and other
detailed information regarding the Company included elsewhere in this Form 10-Q.
Certain statements set forth below regarding matters that are not historical
facts, such as statements concerning the expansion and growth of the Company,
future growth in the demand for Prepaid Phone Cards and the Company's plans to
become a sales, marketing and distribution company, are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Because such forward-looking statements include risks
and uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
under "Business--Risk Factors".
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 Phone Cards provide
consumers with a competitive alternative to traditional calling cards and
presubscribed long distance telecommunications services. The Company's total
revenues were $10,394,558 $35,032,533 and $26,027,909, and its net losses were
$13,566,927, $11,996,759 and $3,549,514 for the fiscal years ended June 30,
1999, 1998 and 1997, respectively, after losses from discontinued operations of
$0, $813,178 and $1,069,261, respectively.
The Company's target markets include ethnic communities with substantial
international long distance calling requirements. 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. See "Business--Risk Factors--Competition."
As previously reported, the Company initiated a strategy of becoming a
facilities based carrier in April, 1998. To accomplish this strategy the Company
migrated its brands to dedicated platforms. However, because the Company was
unable to fund carrier deposits and prepay for telecommunications services, the
Company was unable to secure sufficient network facilities and competitive
rates, with the result that the Company was unable to market its new
facility-based Cards as quickly as planned and was forced to accept returns of
Cards due to the failure of the Cards to properly process calls. The liquidity
difficulties of the Company were further aggrevated by the returns of Cards and
loss of control of proceeds call minutes. Accordingly, in November, 1998, due to
network and liquidity problems, including those caused by the termination and
repricing of the Company's Cards by Premiere (see "Company History"), which
prevented the Company from implementing its strategy of becoming a
facilities-based carrier, the Company initiated its current strategy to become a
sales, marketing and distribution company for significant providers of
telecommunication services. In this connection, the Company has been advanced
both significant telecommunications services and funds by TecNet to finance its
operations during this transition period. The Company will continue to be
dependent upon TecNet until it fully implements its new strategy and has
profitable operations. TecNet is not obligated by any written agreement to
continue advancing telecommunications services or funds to the Company.
The Condensed 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, significant arrearages on trade payables, such
realization of assets and satisfaction of liabilities is subject to significant
uncertainties. The Condensed Consolidated 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 willingness and ability of TecNet to finance the
Company's telecommunications products and services and working capital
shortfalls and TecNet's and the Company's ability to provide reliable and
competitive Cards. Additionally, the Company's stability is dependent up on its
ability to raise capital, develop market share, achieve profitable operations
and to generate sufficient cash flow from operations and financing sources to
meet obligations.
The Company believes that its further growth is dependent on continued
financial support from TecNet and on its ability to continue to receive from
TecNet facilities, competitive rates and quality service that allow the Company
to (i) introduce LACs in many of the markets in which it currently distributes
Cards or into which it expands, (ii) increase the retail distribution of its
products, (iii) introduce additional products and services, (iv) continue to
attract consumers with significant international long distance usage and (v)
capitalize upon economies of scale.
Recent monthly operations have achieved reductions in working capital
short-falls and the Company believes that increased sales in the third quarter
of fiscal 2000 will result in positive cash flow. The Company will continue to
be dependent during this period on TecNet's providing financing to the Company.
19
<PAGE>
Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net Sales. Net Sales for the three months ended September 30, 1999 decreased by
approximately $2,952,394 or 51% from $5,839,898 during the three months ended
September 30, 1998 to $2,887,504 for the three months ended September 30, 1999.
As previously reported, in November, 1998, the Company, due to network and
ensuing liquidity problems, initiated a strategy of focusing on sales, marketing
and distribution in lieu of developing as a facilities-based carrier. In order
to implement this new strategy, the Company suspended sales of its proprietary
branded facilities based cards in the third and fourth quarters of fiscal 1999.
The Company reintroduced its cards in bundled programs in the fourth quarter of
fiscal 1999 and is currently redeveloping market acceptance of its branded cards
provided by TecNet.
Cost of Sales. The Company's cost of sales for the three months ended September
30, 1999 decreased to $2,171,980 from $6,033,026, as amended for the three
months ended September 30, 1998. The decrease of $3,861,046 or 64% was primarily
related to the decrease in revenues that the Company experienced in the three
months ended September 30, 1999 as compared to the first quarter in the prior
year and the use of bundled card relieved the Company of the high costs of its
facilities based cards.
Gross Profit. For the three months ended September 30, 1999, the Company had a
gross profit of $715,524 as compared to a gross loss of $193,128, as amended for
the three months ended September 30, 1998. The gross profit of $715,524 compared
to the gross loss of $193,128 is due primarily to the Company's use of bundled
cards purchased from TecNet which did not have the high costs which the Company
was previously forced to employ in connection with its facilities-base programs.
In addition, the Company was able to obtain favorable credit terms from TecNet
in connection with the Company's purchase of the bundled cards.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 1999 decreased
to $1,298,232 from $1,776,315 for the three months ended September 30, 1998, as
amended. This decrease of $478,083 or 27% is primarily related to:
1. Decreases in salaries, wages and personnel-related expenses of
approximately $253,000, as the Company's employee base decreased
from 80 employees on September 30, 1998 to 47, including 2 part-time
employees, by September 30, 1999 in connection with the Company's
transition to a sales and marketing organization. The decrease in
employees was related to sales activities.
2. Decreases in rent, telephone, general office, consulting services
and non-wage-related customer service expenses of approximately
$272,000, which were related to the larger workforce.
Loss before other Income (Expenses). The Company incurred a loss before other
income (expenses) of $582,708 for the three months ended September 30, 1999, as
compared to a loss of $1,969,443 for the three months ended September 30, 1998,
as amended. The decrease in loss before other income (expense) is primarily due
to a combination of the gross profit achieved by the Company, reduced selling,
general and administrative expenses incurred during the quarter ended September
30, 1999.
Other Income (Expenses). Other expenses decreased $103,256 from $186,667 for the
quarter ended September 30 1998, as amended to $83,411 for the quarter ended
September 30, 1999 or 56%. The decrease of $103,256 is primarily related to the
amortization of debt issue costs during the quarter ended September 30, 1998.
Net Loss. For the quarter ended September 30, 1999, the Company realized a net
loss of $666,119, as compared to net loss of $2,156,110, as amended for the
quarter ended September 30, 1998. The decrease in net loss is primarily due to a
combination of the gross profit achieved by the Company, the decrease in
selling, general and administrative expenses as discussed above and the decrease
in other expenses.
20
<PAGE>
Liquidity and Capital Resources
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; (v) issuance of a $100,000 10% promissory note to an officer/director
family member; (vi) exchange of the notes and warrants referred to in (iv); and
the sale of $2,561,360 in demand promissory notes to TecNet, 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.
During the quarters ended September 30, 1999 and 1998, the Company's major
components of cash flow were as follows:
QUARTER ENDED SEPTEMBER 30,
----------------------------
1999 1998
----------- -----------
Net cash used in operating activities .......... $ (869,968) $(1,328,605)
Net cash used in investing activities .......... (6,679) (2,243)
Net cash provided by financing activities ...... 937,170 1,241,551
----------- -----------
Net decrease in cash ........................... $ 60,523 $ (89,297)
=========== ===========
Net cash used by operating activities during the quarter ended September 30,
1999 was $869,968 as compared to $1,328,605 for the quarter ended September 30,
1998. The decrease of approximately $459,000 was caused by a decrease in the net
loss of approximately $1,490,000 for the quarter ended September 30, 1999 as
compared to the quarter ended September 30, 1999 offset by decreases in deferred
revenue due to the Company terminating its facilities based operations and the
decrease in amortization of debt issue costs.
21
<PAGE>
To date, capital expenditures have not been material. Cash used in investing
activities for both the quarters ended September 30, 1999 and 1998 related
solely to capital expenditures of approximately $7,000 for the quarter ended
September 30, 1999 and $2,000 for the quarter ended September 30, 1998.
Cash provided from financing activities of approximately $937,000 during the
quarter ended September 30, 1999 consisted of net proceeds from the Company's
sale of the notes to TecNet. During the quarter ended September 30, 1998, cash
provided from financing activities of $1,200,000 related solely to the proceeds
from the Company sale of the Company's 10% Notes.
For the quarter ended September 30, 1999, the Company experienced a operating
loss of approximately $666,000 and used approximately $870,000 cash in operating
activities. The Company's cash position at September 30, 1999 approximated
$217,000 and its working capital deficit approximated $12,106,000.
Since June 30, 1998, the Company has raised cash through the issuance of
$1,200,000 principal amount of its 10% Notes, which were subsequently exchanged
for the Convertible Debt. The majority of this cash was previously used by the
Company to make facility deposits and to prepay for facilities usage and to
address existing obligations. Since November, 1998, the Company has been
dependent upon TecNet financing its short-fall in cash flow to finance
operations and the provision of telecommunications services by TecNet. In
addition, the Company has imposed a fifty percent deferral of its two
executive's salaries and subleased a portion of it headquarters to reduce the
short fall in cash requirements. As the Company increasingly sells more of its
Cards, its capital requirements are expected to progressively decline on a
monthly basis until the Company begins to generate positive cash flow, which the
Company believes will occur during the second half of the 2000 fiscal year.
The Company expects capital requirements of approximately $2.0 million during
fiscal 2000, before it begins to generate positive cash flow during the second
half of fiscal 2000. The foregoing amount includes further expansion of the
Company's LACs into additional cities and expanding the Company's distribution
network. If cash needs prove to be greater than contemplated, the Company will
need to slow its expansion of its LAC offerings to additional cities during 2000
to fund its operating shortfall during the second half of fiscal 1999 or until
the Company becomes cash flow positive. Also, the Company expects to consider
other financing opportunities during the 2000 fiscal year. The Company believes
that with the continued support of TecNet, internally generated cash from
operations in the latter half of fiscal 2000 will be sufficient to fund its
operations throughout the 2000 fiscal year. There can be no assurance that the
foregoing external sources of financing will be available to the Company, or
that the Company's projections for positive cash generation commencing in the
second half of fiscal 2000 will be realized.
The Company's ability to implement its new strategy to become a sales, marketing
and distribution company and to generate sufficient cash flow to begin to
address its obligations to TecNet and other suppliers will be dependent upon
continued financing by TecNet of cash flow needs and continued financing of
telecommunications services by TecNet. In addition, the Company will need to
raise long-term capital. There can be no assurance that such financing will
continue to be available to the Company from TecNet or that long-term financing
will be obtained, or if available, will be available in either a timely manner
or upon terms and conditions acceptable to the Company.
22
<PAGE>
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 on or after January 1, 2000.
During the last two fiscal quarters of 1999, the Company surveyed its
internal hardware and software to determine operational performance in
connection with the Year 2000 Issue. The survey has resulted in a determination
that the Company's internal systems will operate properly on and after January
1, 2000. In this connection a number of upgrades supplied by manufacturers have
been installed. In addition, the Company's newly installed accounting system
(Solomon) has been confirmed by the manufacturer as Year 2000 Issue compliant.
In addition, the Company has contacted its key supplier, TecNet, and other
vendors to assure that they have addressed the Year 2000 Issue as regards
continuing provision of services to the Company and received assurances that the
Year 2000 Issue has been addressed.
The Company is dependent on TecNet to provide a Year 2000 Issue compliant
product and service. Management has received assurance that TecNet has addressed
the issues and implemented a viable Year 2000 Issue contingency plan for all of
the products and services utilized by the Company.
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.
As all of the Company's telecommunication services are provided
bundled by TecNet, the Company and TecNet have reviewed the potential issues
raised by the Year 2000 Issue for the multiple carriers used by TecNet and have
developed alternate routing plans to maintain uninterupted service in the event
one or more carriers experiences difficulties on or after January 1, 2000.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") no. 133, "Accounting for Derivative
Instruments and Hedging Activities", requires companies to recognize all
derivatives contracts as either assets or liabilities in the balance sheet and
to measure them at fair value. Historically, the Company has not entered into
derivatives contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of the new standard
on January 1, 2000 to affect its financial statements.
23
<PAGE>
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 September 30, 1999 and June 30, 1999, 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.
24
<PAGE>
PART 2--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 5, 2000 in Jackson, Mississippi.
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. However,
due to its liquidity problems, the Company failed to make the payment due in
October and November 1998 and Vanity Fair gave notice of its intention to enter
a Confession of Judgment against the Company for $369,774, less amounts
previously paid. The Company subsequently negotiated an alternative payment plan
with Vanity Fair, and to date is in compliance with the revised payment terms.
In June, 1998, the Company was served in an action entitled Michael
Bodian, as Chapter 11 Trustee of Communications Network Corp. a/k/a Conetco
("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. The Company believes that the
plaintiffs' claims are without merit. The company intends to vigorously
contest this case. An answer asserting numerous defenses, including that the
Company never received the "refund" in question, has been filed on behalf of the
Company, and a pre-trial conference is scheduled for November 2, 1999.
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 $1.37 million of
telecommuncation services provided to the Company by Qwest. The parties have
executed settlement agreements pursuant to which the Company would pay in nine
monthly installments, commencing December, 1999, a total of $887,000 and TecNet
would satisfy the remaining $490,000.
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.
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 Nassau 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. Judgement on the motion was rendered in favor of the Company and
Prime has sought a rehearing and commenced a pleniary action. The Company and
Prime are currently negotiating a settlement of the matter.
On March 18, 1999 the Company was served with a complaint by the
Weeks-Lerman Group, LLC ("Weeks-Lerman") in a case entitled Weeks-Lerman Group
LLC v Digitec 2000 Inc., in the Supreme Court of the State of New York for the
County of Kings. Weeks-Lerman alleges that it provided the Company with work,
labor and services and/or sold and delivered goods to the Company in the amount
of $75,988.31. Weeks-Lerman seeks that amount together with interest from June
23, 1998, costs and disbursements. Presently, the Company is exploring
settlement possibilities with Weeks-Lerman. The Company is not in a position to
express an opinion as to the probable outcome of this matter.
On October 20, 1999, Union Telecard Alliance LLC filed suit entitled Union
Telecard Alliance LLC v Digitec 2000, Inc., TecNet Inc. in Supreme Court of the
State of New York, New York County against the Company to recover $462,000 for
Cards sold to the Company. The Company has not had sufficient time to review the
complaint and accordingly is not in a position to express an opinion as to the
probable outcome of this matter.
25
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27-Financial Data
(b) Reports on Form 8-K
None
26
<PAGE>
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: December 2, 1999 DigiTEC 2000, Inc.
(Registrant)
By: /s/ Frank C. Magliato
------------------------------------
Frank C. Magliato
Chief Executive Officer, President,
Chairman of the Board of Directors and
Chief Financial Officer
December 2, 1999 By: /s/ Diego E. Roca
------------------------------------
Diego E. Roca
Senior Vice President, Chief
Accounting Officer, Treasurer and
Secretary
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Financial Statements for the quarter ended 9/30/98 for DigiTEC 2000, Inc. and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 217,279
<SECURITIES> 0
<RECEIVABLES> 1,298,414
<ALLOWANCES> 0
<INVENTORY> 495,217
<CURRENT-ASSETS> 2,172,028
<PP&E> 135,444
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,575,522
<CURRENT-LIABILITIES> 14,277,535
<BONDS> 0
0
61
<COMMON> 7,059
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,575,522
<SALES> 2,887,504
<TOTAL-REVENUES> 2,887,504
<CGS> 2,171,980
<TOTAL-COSTS> 3,470,212
<OTHER-EXPENSES> 83,411
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (666,119)
<INCOME-TAX> 0
<INCOME-CONTINUING> (666,119)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (666,119)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
