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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 December 31, 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 December 31, 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 December 31, 1999
and the Year Ended June 30, 1999..................................... 3
Condensed Consolidated Statements of Loss for the Three and Six
Months Ended December 31, 1999 and 1998.............................. 4
Condensed Consolidated Statement of Stockholders' Deficit for the
Six Months Ended December 31, 1999................................... 5
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 1999 and 1998..................................... 6
Notes to Condensed Consolidated Financial Statements................. 7 - 12
ITEM 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 13 - 17
ITEM 3--Quantitative and Qualitative Disclosures About Market Risk .. 18
PART II -- OTHER INFORMATION
ITEM 1 - Legal Proceedings .......................................... 19
ITEM 6 - Exhibits and Reports on Form 8-K ........................... 20
Signatures .......................................................... 21
2
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
(Unaudited) (Audited)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current:
Cash and cash equivalents $ 1,140,740 $ 156,756
Due from TecNet, Inc. -- 260,000
Accounts receivable, net of allowance for bad debts
of $847,121 and $847,000 1,933,367 604,586
Inventory 108,377 58,818
Prepaid expenses and other 202,524 133,887
- --------------------------------------------------------------------------------------
Total Current Assets 3,385,008 1,214,047
Property and equipment, net of depreciation of
$139,196 and $113,124 154,803 141,778
Customer lists, net of accumulated amortization of
$71,205 and $583,611 (Note 1(f)) 213,615 261,559
Other assets 83,722 79,355
- --------------------------------------------------------------------------------------
Total Assets $ 3,837,148 $ 1,696,739
=====================================================================================
Liabilities and Stockholders' Deficit
Current:
Payable to Tecnet, Inc. (Note 4) $ 10,820,118 $ 6,849,385
Accounts payable - Trade 2,031,989 2,133,887
Accrued taxes and penalties 960,000 586,804
Payable to Premiere Communications, Inc. 583,152 583,152
Accrued legal 687,669 825,615
Accrued settlement expense 865,587 991,633
Other accrued expenses 762,914 574,720
Notes payable 211,425 221,425
- --------------------------------------------------------------------------------------
Total Current Liabilities 16,922,854 12,766,621
Deferred rent 58,143 66,350
Convertible Debt (Note 4) 1,200,000 1,200,000
- --------------------------------------------------------------------------------------
Total Liabilities 18,180,997 14,032,971
- --------------------------------------------------------------------------------------
Commitments and Contingencies (Note 5)
Stockholders' Deficit
Series A Convertible 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; 7,058,998 shares issued and outstanding 7,059 7,059
Additional paid-in-capital 16,981,318 16,899,123
Accumulated deficit (31,332,287) (29,242,475)
- --------------------------------------------------------------------------------------
Total Stockholders' Deficit (14,343,849) (12,336,232)
- --------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficit $ 3,837,148 $ 1,696,739
=====================================================================================
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statements of Loss (Unaudited)
================================================================================
<TABLE>
<CAPTION>
For the three months ended For the six months ended
December 31, December 31,
1999 1998 1999 1998
(Restated) (Restated)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 3,331,102 2,808,448 6,218,606 8,648,346
Cost of sales 2,885,572 3,471,554 5,057,552 9,504,580
- -------------------------------------------------------------------------------------------------------
Gross profit (loss) 445,530 (663,106) 1,161,054 (856,234)
Selling, general and administrative
expenses 1,777,186 1,888,901 3,034,806 3,669,382
- -------------------------------------------------------------------------------------------------------
Loss before other income
(expenses) (1,331,656) (2,552,007) (1,873,752) (4,525,616)
- -------------------------------------------------------------------------------------------------------
Other Income (expenses)
Interest expense (104,049) (585,000) (198,552) (767,500)
Other income (expenses) (28,600) -- (17,508) --
- -------------------------------------------------------------------------------------------------------
Other expenses (132,649) (585,000) (216,060) (767,500)
- -------------------------------------------------------------------------------------------------------
Net loss (1,464,305) (3,137,007) (2,089,812) (5,293,116)
=======================================================================================================
Net loss per common share-basic
and diluted: (0.21) (0.46) (0.30) (0.77)
=======================================================================================================
Weighted average number of
common and common equivalent
shares outstanding used in basic and diluted 7,058,998 6,858,988 7,058,998 6,836,618
=======================================================================================================
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statement of Stockholders' Deficit (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended December 31, 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 six months ended
December 31, 1999:
Contributed capital 82,195 82,195
Net loss -- -- -- (2,089,812) (2,089,812)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 61,050 $ 61 7,058,998 $ 7,059 $ 16,981,318 $(31,332,287) $(14,343,849)
================================================================================================================================
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statements of Cash Flows (Unaudited)
================================================================================
Six Months Ended December 31,
1999 1998
(Restated)
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss (2,089,812) (5,293,116)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 25,794 12,382
Amortization of customer lists 47,944 19,651
Deferred revenue -- (70,494)
Deferred rent (8,207) --
Impairment of customer lists -- 147,089
Amortization of debt issue cost -- 767,500
Services provided by shareholder 82,195 --
(Increase) decrease in:
Accounts receivable (1,328,781) 439,685
Inventory (49,559) (178,814)
Prepaid expenses and other (73,004) 28,068
Increase (decrease) in:
Accounts payable and accrued expenses 1,540,506 2,706,474
- -------------------------------------------------------------------------------
Net cash used in operating activities (1,852,924) (1,421,575)
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (38,819) (3,675)
- -------------------------------------------------------------------------------
Net cash used in investing activities (38,819) (3,675)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of TecNet notes 2,885,727 --
Proceeds from issuance of promissory notes -- 1,300,000
Repayment of note payable (10,000) (25,575)
Proceeds from exercise of warrants -- 67,125
- -------------------------------------------------------------------------------
Net cash provided by financing activities 2,875,727 1,341,550
- -------------------------------------------------------------------------------
Net increase (decrease) in cash 983,984 (83,700)
Cash and cash equivalents at beginning of period 156,756 108,722
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period 1,140,740 25,022
===============================================================================
See accompanying notes to Condensed Consolidated Financial Statements.
6
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, which
include the accounts of DigiTEC 2000, Inc. (the "Company") for the entire period
presented and those of its wholly owned subsidiary, POS TEC Systems, LLC ("POS
TEC") from the date of acquisition ("March 4, 1999"), 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 generally accepted accounting principles for complete financial statements.
Although the Company believes that the disclosures included on the face of the
interim consolidated financial statements and in the accompanying footnotes are
adequate to ensure that the information presented is not misleading, certain key
information and disclosures have been condensed or otherwise omitted pursuant to
the SEC rules and regulations noted above. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain amounts
in prior presented periods have been restated to conform with generally accepted
accounting principles.
The financial information presented for the three months and six months ended
December 31, 1999 has not been audited by independent public accountants;
however, in the opinion of management, all adjustments (which included only
normal recurring adjustments) necessary to present fairly the results of
operations for the three-month and six-month periods have been included therein.
The results of operations for the first six months of the year are not
necessarily indicative of the results of operations which might be expected for
the entire fiscal year.
The information outlined in this Form 10-Q should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1999.
The accompanying unaudited 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 and significant arrearages on trade
payables, such realization of assets and the satisfaction of the related
liabilities is subject to significant uncertainty. The financial statements do
not include any adjustments that might result from the outcome of these
uncertainties. Furthermore, the Company's ability to continue as a going concern
is highly dependent in the near term on both the willingness and ability of
TecNet, Inc. ("TecNet") to finance the Company's telecommunications products and
services and working capital short-falls, and the ability of the Company and
TecNet to provide reliable and competitive prepaid telephone cards. TecNet is a
wholly owned subsidiary of Telephone Electronics Corporation ("TEC") and is a
holder of approximately 21% of the Company's outstanding common stock.
Additionally, the Company's overall stability is highly dependent upon its
ability to raise working capital, to increase market share while developing
existing markets and improving overall customer retention, to achieve profitable
operations and to generate sufficient operating cash flows from operating and
financing activities to meet current obligations as they become due.
In lieu of continuing the development of its operations as a facilities-based
carrier, in November of 1998 the Company initiated a strategy of focusing on the
sales, marketing and distribution of prepaid telephone calling cards. In
connection with the initiation of such strategy, TecNet began to provide
significant telecommunications services to the Company, as well as to finance
its current operations and to carry the unprocessed minutes on the Company's
remaining facilities-based calling cards. In February of 1999, the Company began
to receive semi-monthly operating cash inflows from TecNet through the issuance
of demand promissory notes. As of December 31, 1999, the Company had an
outstanding balance on such loans from TecNet in the amount of $2,885,727 and
TecNet provided approximately $2.4 million and $4.4 million in telecommunication
services for the three months and six months ended December 31, 1999. As of
December 31, 1999, no formal written agreement exists between the Company and
TecNet with respect to the terms of repayment for such services.
Beginning in May of 1999, the Company terminated its facilities-based products
and TecNet became the primary provider of bundled prepaid calling cards to the
Company and the sole carrier for carrying the traffic and processing the minutes
related to the prepaid calling cards. As of December 31, 1999 (and through the
issuance date of this interim report), the Company is totally dependent on
TecNet to provide consulting services, financing and telecommunications support.
However, there can be no assurance that TecNet can or will continue to provide
such services, to finance the current operations or to provide the Company with
bundled prepaid calling cards at comparable rates in future periods.
7
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
(b) Nature of Operations
DigiTEC 2000, Inc. (and its wholly owned subsidiary) is primarily engaged in the
distribution, marketing and sales of prepaid telephone calling cards. It
currently markets its prepaid products principally throughout the New York/New
Jersey metropolitan area (the "Metro Area"). The Company also sells its
prepaid telephone calling cards in approximately 100 cities, twenty-nine states.
(c) Revenue Recognition
The sales of bundled prepaid calling cards from third-party providers for which
the Company acts solely as a distributor are recorded at the sales price of the
card and are recognized as revenue upon delivery to the end user customer. The
related costs are simultaneously charged to the respective cost of sales
accounts upon such delivery.
The revenue from the sale of proprietary, branded, facilities-based prepaid
phone cards, along with the related costs of providing the long distance
services, are recognized as the telephone calls are initiated and completed by
the end user. Weekly and monthly access fees per card is recognized at the
beginning of each month commencing thirty-days after the first usage of the
underlying card. Any unused prepaid calling time is recognized as income upon
the expiration date of the related calling card or twelve months after the
initial activation of the related calling card subject to the applicable escheat
laws of the governing state. Any amounts collected prior to the recording of
revenue by the Company are classified as Deferred Revenue. As of April 30, 1999,
the Company no longer provides facilities-based prepaid calling cards to its
customers.
Revenue from Point of Sale ("POS") transactions by the Company's subsidiary, POS
TEC, are recognized upon the initial activation by the retailer upon the sale of
the underlying prepaid calling card to the end user. The related costs are
simultaneously charged to the respective cost of sales accounts upon the
activation of the card.
(d) Allowance for Bad Debt
The Company maintains an allowance for bad debts to adequately provide for
estimated future losses due to the overall lack of collectibility of customers'
accounts. The recorded allowances are based on the Company's detailed analysis
of delinquencies, assessments of overall risk related to the entity's
operations, evaluations of probable future losses and historical performance and
the credit worthiness of certain key customers. Specific customer accounts are
written off when the probability of a future loss has been established based on
a careful consideration of the customer's financial condition.
(e) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all demand
deposits, time deposits and certificates of deposit purchased with an original
maturity of three months or less to be cash equivalents.
(f) Customer Lists
During 1998 and 1999, customer lists were purchased from third parties and
amortized on a straight-line basis over the estimated useful lives of the
customer bases acquired, which approximates three years. The Company
periodically evaluates the overall recoverability of these intangible assets
based on 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 year 1999, management recorded a
charge to current operations of approximately $147,089 to reflect the write-down
of the carrying value of these intangibles based on such assessments.
Additionally, during the second quarter of fiscal year 2000 the Company wrote
off $560,350 of fully amortized customer lists.
(g) Fair Value of Financial Instruments
The carrying value of financial instruments, which includes cash and notes
payable, at December 31, 1999 and June 30, 1999 approximates fair value as of
such dates, due to the relatively short-term maturity of such instruments and
the fact that the underlying interest rates approximate current market rates of
interest.
8
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
(h) Earnings (Loss) Per Share
The Company presents earnings per share ("EPS") in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No.
128 requires the dual presentation of basic EPS and diluted EPS on the face of
the statements of operations. Basic earnings per share is computed by dividing
net income by the weighted average number of common shares outstanding, and
diluted earnings per share is based on net income divided by the weighted
average number of common shares outstanding together with all dilutive potential
common shares outstanding. Since the Company incurred losses for all of the
periods presented, the dilutive net loss per share has not been presented due to
the fact that the conversion of options, warrants and preferred stock to
Weighted Average Common Shares would be anti-dilutive. Therefore there is no
difference between basic and diluted earnings per share.
(i) Segment Information
The Company adopted the Financial Accounting Standard Board's Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") in the prior fiscal year. SFAS
131 establishes standards for the way that public business enterprises report
financial information on operating business segments and requires that selected
information be reported on such segments in interim financial reports. As the
Company has only one reportable business segment, prepaid telecommunications
services, the adoption and implementation of the disclosure and reporting
requirements did not significantly affect the presentation of the results of
operation or financial position of the Company.
2. Restatement of Prior Period Balances
During the audit of the Company's consolidated financial statements for the
fiscal year ended June 30, 1999, the Company became aware of certain required
adjustments. These restatements primarily included the fair valuation and
amortization of stock warrants issued in connection with the issuance of $1.2
million of financing in the quarter ended September 30, 1998, and the failure to
record federal excise tax obligations related to the sale of its prepaid calling
cards to end users. The condensed consolidated financial statements for the
period ending December 31, 1998 are hereby restated as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, 1998 December 31, 1998
----------------- -----------------
<S> <C> <C>
Net Income, as previously reported ............ $(2,297,563) $(4,008,377)
Adjustments:
Cost of sales .............................. 77,125 252,322
Selling, general and administrative expenses 177,319 264,917
Other expenses ............................. 585,000 767,500
----------- -----------
839,444 1,284,739
Net income, as adjusted ....................... $(3,137,007) $(5,293,116)
=========== ===========
Per share amounts, as previously reported ..... $ (.33) $ (.59)
Adjustments ................................... (.13) (.18)
----------- -----------
Per share amounts, as adjusted ................ $ (.46) $ (.77)
=========== ===========
</TABLE>
3. Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to credit risk,
consist primarily of cash balances in excess of FDIC coverage and trade
receivables. Cash balances on deposit are placed with high credit quality
financial institutions. Although cash balances on deposit may from time to time
exceed the FDIC limits of coverage, the Company limits the amount of exposure in
any one financial institution and believes that no significant concentrations of
credit risk exists with respect to its cash deposits as of the date of the
presented condensed consolidated balance sheet.
Trade receivables subject the Company to the potential for credit risk and
business concentration risk. The Company extends credit to customers generally
on an unsecured basis in the normal course of business, and performs ongoing
evaluations of its customers' financial condition to help reduce overall credit
risk. Allowances are maintained for potential credit losses and such losses have
historically been within management's overall expectations. Although sales
within the Metro Area of New York and New Jersey accounted for more than 90% of
the Company's total sales for both the three months and six month period ended
December 31, 1999, the Company believes that the credit risks are moderated
because of the geographical dispersion of its target market, the cost
competitiveness of its prepaid
9
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
product in relation to other suppliers, its utilization of a master distribution
and vender route sales network and the realized (and forecasted) growth in new
markets within the United States and in Mexico.
For the six-month period ended December 31, 1999 the Company had two significant
customers which accounted for the following percentages of overall operating
revenues and trade receivables:
<TABLE>
<CAPTION>
Operating Revenues Trade Receivables
---------------------- ----------------------
$ Amount Percentage $ Amount Percentage
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
TMG .............. $2,288,921 37% $ 584,245 21%
Central Jersey ... 622,025 10% 326,346 12%
</TABLE>
4. Related Party Transactions
During September of 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"),
exercisable for a period of five years from the date of original issuance. The
exercise price of the underlying warrants was calculated as the closing price of
the Company's common stock on September 4, 1998, subject to certain adjustments.
Nine investors participated in the offering, and officers/directors of the
Company and immediate family members of such parties purchased $600,000 of the
total offering. The issuance and sale of the Notes and the $2.375 Warrants were
exempt from registration under the Securities Act of 1933 (the "Securities
Act"), as amended by Regulation D. The $1,200,000 fair value of the $2.375
Warrants was recorded as debt issue costs and amortized to interest expense over
a six-month period beginning September 30, 1998. Amortization expense for the
six months ended December 31, 1998 was $767,500.
On May 15, 1999, the Company exchanged the Notes for 10% two-year promissory
notes convertible into shares of the Company's common stock (the "Convertible
Debt") at $1.10 per share. Furthermore, the Convertible Debt provided for
quarterly payments of interest only during the first twelve months of issuance,
and quarterly payments of both interest and principal commencing in the second
year. The $2.375 Warrants were concurrently exchanged for new warrants which
provided for the purchase of up to 1,800,000 shares of the Company's common
stock at an exercise price of $1.10 per share (the "$1.10 Warrants"), calculated
as the market value of the common stock as of the maturity date of the Notes.
The exchange of the notes and the warrants were exempt from registration under
the Securities Act pursuant to Section 4 thereof. As the market price of the
Company's 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 the full amount of its gross proceeds. No fair value was
allocated to the debt issue costs associated with such warrants. To date, the
Company has remained current with the terms and interest payments of the related
Convertible Debt.
In October of 1998, the Company borrowed $100,000 from an immediate family
member of an officer/director of the Company.
In November of 1998, the Company reached a verbal agreement with TecNet to carry
the remaining unprocessed minutes on the Company's facilities-based debit cards.
In February of 1999, the Company began funding its operating shortfalls through
the issuance of demand promissory notes to TecNet bearing an annual interest
rate of approximately 10%. Subsequently in the fourth quarter of 1999, the
Company reached a verbal agreement with TecNet whereby TecNet would become the
primary provider of bundled prepaid calling cards to the Company and the sole
carrier for carrying the traffic and processing the minutes related to the
prepaid calling cards. In addition, TecNet provided approximately $42,000 of
consulting services to the Company during the first quarter of fiscal year 2000
which has been accounted for as a capital contribution. As of December 31, 1999
(and through the issuance date of this interim report), the Company is totally
dependent on TecNet to provide consulting services, financing and
telecommunications support. However, there can be no assurance that TecNet can
or will continue to provide such services, to finance the current operations or
to provide the Company with bundled prepaid calling cards at comparable rates in
future periods.
The following illustrates the detail of amounts owed to TecNet as of December
31, 1999:
Demand notes payable ....................................... $ 2,885,727
Trade payable for bundled prepaid phone cards .............. 3,386,806
Trade payable for telecommunications services .............. 4,391,167
Accrued interest payable ................................... 156,418
-----------
$10,820,118
===========
10
<PAGE>
DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
5. Commitments and Contingencies
The Company and its chief Executive Officer have been named as defendants in a
legal action in Mississippi in the case entitled Heritage Graphics, Inc.
("Heritage") vs. Telephone Electronics Corporation. The complaint alleges, among
other things, that the defendants breached a contractual agreement and conspired
to have Heritage go out of business. The complaint seeks damages of
$500,000,000. The case is in discovery. Management believes such litigation will
not have a material adverse effect on the financial condition or the results of
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
Judgement 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 judgement 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 of 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. The
gain on the restructuring of the debt 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 of 1999, they executed a settlement
agreement pursuant to which the Company would pay nine monthly installments
commencing in December of 1999 for a total of $887,000, with TecNet agreeing to
satisfy the remaining $475,000. The Company paid approximately $117,000 to Qwest
related to the settlement agreement for the six-month period ended December 31,
1999 and the balance owed of $738,043 is reflected in the accrued settlement
expenses on the condensed consolidated balance sheet as of December 31, 1999.
TecNet has paid approximately $15,000 to Qwest related to its share of the
settlement obligation during the six-month period ending December 31, 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
Conteco'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. Management believes such litigation will
not have a material adverse effect on the financial condition or the results of
operations 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 balance of which was 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. In March of 2000, a
judgement was rendered in favor of Prime for $134,000.
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, L&T Index No. 066018-98 seeking
eviction and judgement 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 Judgement
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.
The $583,152 payable to Premiere Communications, Inc. relates to billings by
Premiere for the purchase of prepaid phone cards which are currently being
disputed by the Company. Management believes that it has a meritorious position
with respect to such matters due to breach of contract and repricing issues
surrounding the original terms of the purchase agreement. The Company is not in
a position to express an opinion as to the probable outcome of this matter.
Therefore due to the overall uncertainty surrounding the accrual, the liability
remains unchanged from the prior presented period.
The Company is currently evaluating various tax and regulatory assessments to
determine their overall applicability to its current operations. As the
Company's operations continue to expand, the Company may become subject to
additional tariffs and both state and federal regulatory charges. The Company
accrued approximately $374,000 and $462,000 for various taxes, penalties and
interest related to unfiled tax returns for the periods ended December 31, 1999
and 1998, respectively.
11
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DigiTEC 2000, Inc.
and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
================================================================================
6. Stockholder's Equity
The 61,050 shares of $.001 par value voting Series A Convertible Preferred Stock
was issued on March 31, 1998 to Premiere in lieu of payment of the outstanding
trade payable balance owed by the Company. The Series A Preferred Stock is
convertible into common stock of the Company at any time by Premiere and the
Company has the right to require Premiere to convert such Preferred Stock after
March 31, 1999. The Certificate of Designation for the Series A Convertible
Preferred Stock provides for certain voting, liquidation and registration rights
for the holder. The conversion of such stock is calculated by multiplying the
number of shares of Series A Convertible Preferred Stock (61,055) issued in
connection with the Premier Investment Agreement by $100 (the Investment Amount
as defined in the Certificate of Designation) divided by $8.3463 (the Conversion
Price as defined in the Certificate of Designation) which results in a total of
731,462 shares of common stock to be issued subject to certain subsequent
securities issues. The Company may call the redemption of each share of Series A
Convertible Preferred Stock at any time for $100 a share plus any applicable
accrued dividends.
7. Acquisitions
On March 4, 1999, the Company (through its subsidiary POS TEC) acquired the
assets, property and business of TOTAL POS SOLUTIONS, LLC in exchange for
200,000 shares of the Company's common stock. The shares of common stock were
valued at $1.50 per share based on the market price on the Closing Date
("February 24, 1999") of the Asset Purchase Agreement. The acquisition was
recorded utilizing the purchase method of accounting and the Company valued the
underlying customer lists obtained under the transaction at approximately
$285,000 to be amortized over a period of thirty-six months. The operating
results of the acquired entity have been included within the Company's
consolidated financial statements since March 4, 1999.
8. Subsequent Events
Subsequent to December 31, 1999, the Company borrowed an additional $979,000
from TecNet pursuant to demand promissory notes bearing an annual rate of
interest of ten percent. As of the date of this interim report, TecNet continues
to provide consulting services, financing and telecommunications support. As
there is no formalized agreement between the parties, there can be no assurance
that TecNet will continue to provide such services, to finance the current
operations or to provide the Company with bundled prepaid calling cards at
comparable rates in future periods.
12
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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.
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.
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. As a result, the Company was unable to market its new facilities-based
cards as quickly as originally planned and was forced to accept returns of
product from distributors. The liquidity problems of the Company were further
aggravated by the loss of control over processed call minutes and termination of
customer's calls on the Company's network, as well as the increased costs of
sales attributed to the repricing of the Company's cards by Premiere. In lieu of
continuing the development of its operations as a facilities-based carrier, in
November of 1998 the Company initiated a strategy of focusing on the sales,
marketing and distribution of prepaid telephone calling cards. In connection
with the initiation of such strategy, TecNet began to provide significant
telecommunications services to the Company, as well as to finance its current
operations and to carry the unprocessed minutes on the Company's remaining
facilities-based calling cards. In February of 1999, the Company began to
receive semi-monthly operating cash inflows from TecNet through the issuance of
demand promissory notes. However, no formal written agreement exists between the
Company and TecNet with respect to the terms of repayment for such services. As
of December 31, 1999 (and through the issuance date of this interim report), the
Company is totally dependent on TecNet to provide consulting services, financing
and telecommunications support until it has achieved profitable operations.
However, there can be no assurance that TecNet can or will continue to provide
such services, to finance the current operations or to provide the Company with
bundled prepaid calling cards at comparable rates in future periods.
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 and 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. Furthermore, the Company's ability to continue as a going
concern is highly dependent in the near term on both the willingness and ability
of TecNet to finance the Company's telecommunications products and services and
working capital short-falls, and the ability of the Company and TecNet to
provide reliable and competitive prepaid telephone 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 future growth is highly dependent on the
continued receipt of operational and financial support from TecNet, to provide
customers with a high quality prepaid product at a competitive price, and the
ability to terminate the related minutes on TecNet's network facilities at
favorable rates. In addition, the Company expects to produce favorable operating
results in the future by increasing its existing retail distribution market, to
introduce new products to its target market which are cost competitive on a per
minute basis and to capitalize upon economies of scale within existing markets.
13
<PAGE>
Operations
Three Months Ended December 31, 1999 Compared to Three Months Ended December 31,
1998
Net Sales. Net Sales increased approximately $523,000 (19%) to $3,331,102 for
the three month period ended December 31, 1999 as compared to $2,808,448 for the
three month period ended December 31, 1998 (as restated). The overall increase
is attributed to the Company's strategy of focusing on the sales, marketing and
distribution of prepaid telephone calling cards within its target market and the
termination of its unprofitable proprietary branded facilities-based cards. By
abandoning its prior strategy of becoming a facilities-based carrier and through
the infusion of operating capital by TecNet, the Company has been able to
increase overall sales by directly focusing on the specific needs of its target
market and utilizing its cash flows for the development of existing and
prospective markets instead of purchasing costly network infrastructure. The
Company's revenues are now effectively based on minutes-of-usage time by the end
user and the Company was able to significantly increase the number of prepaid
minutes sold during the three month period ended December 31, 1999 through its
master distributor networks. The Company has been able to realize market growth
due to the fact that it can offer a cost competitive prepaid calling card by
passing the favorable pricing obtained from TecNet on the bundled products
obtained to its end users.
Cost of Sales. The Company's cost of sales decreased approximately $586,000
(17%) to $2,885,572 for the three month period ended December 31, 1999 as
compared to $3,471,554 for the three month period ended December 31, 1998 (as
restated). The overall decrease is directly related to the Company's abandonment
of its prior strategy of becoming a facilities-based carrier. By focusing its
efforts on reselling bundled prepaid products obtained from TecNet (which are
terminated on TecNet's network), the Company was able to realize cost savings by
not paying facilities-based carrier charges, fixed cost circuit charges or
private line charges to route the customers' calls.
Gross Profit. The Company realized a gross profit of approximately $446,000 for
the three month period ended December 31, 1999 as compared to a gross loss of
$663,000 for the three month period ended December 31, 1998 (as restated). The
gross profit realized is directly related to the Company's use of bundled
prepaid cards purchased from TecNet which did not have the higher costs of
facilities based cards, as well as the cost savings from not having to pay fixed
circuit costs and private line charges on activated cards. In addition, the
Company was able to obtain more favorable short-term financing rates from TecNet
in connection with the purchase of the bundled prepaid cards, which helped to
facilitate the increase in overall net sales.
Selling, General and Administrative Expenses. The Company's selling, general
and administrative expenses decreased approximately $112,000 (6%) to $1,777,186
for the three month period ended December 31, 1999 as compared to $1,888,901 for
the three month period ended December 31, 1998 (as restated). The overall
decrease is related to the combined effect of several factors. Salaries, wages
and related taxes and benefits declined from the prior presented period due to a
reduction in the number of employees. The Company realized considerable cost
savings from the consulting, financing and telecommunications support services
provided by TecNet on its behalf for the quarter ended December 31, 1999. In
addition, the Company realized reductions in both depreciation and amortization
expense from that of prior presented periods due to fully amortized customer
lists in the current period and sale/retirement of facilities based network
equipment. Finally, overall rent expense declined from the prior period due to
the fact that the Company sublet under utilized office space to external third
parties.
Loss before other Income (Expenses). The Company's realized loss before other
income (expenses) of approximately $1.3 million for the three month period ended
December 31, 1999 improved significantly as compared to the gross loss of
approximately $2.5 million for the three month period ended December 31, 1998
(as restated). The overall improvement is directly related to the combination of
factors noted above for net sales, cost of sales and selling, general and
administrative expenses.
Other Income (Expenses). The Company's other income (expenses) decreased
approximately $452,000 (77%) to $132,649 for the three month period ended
December 31, 1999 as compared to $585,000 for the three month period ended
December 31, 1998 (as restated). The overall decline is related to the
amortization of debt issue costs of the $2.375 Warrants in the prior presented
period offset by interest expense related to the long-term financing rates
obtained from TecNet to finance current operations.
Net Loss. The Company's realized net loss of approximately $1.5 million for the
three month period ended December 31, 1999 improved significantly as compared to
the gross loss of $3.1 million for the three month period ended December 31,
1998 (as restated). The overall improvement is directly related to the factors
noted above for gross profit and other income (expenses).
14
<PAGE>
Operations
Six Months Ended December 31, 1999 Compared to Six Months Ended December 31,
1998
Net Sales. Net Sales decreased approximately $2.4 million (28%) to $6,218,606
for the six month period ended December 31, 1999 as compared to $8,648,346 for
the six month period ended December 31, 1998 (as restated). The overall decline
for the six month period ended December 31, 1999 is attributed to the Company's
transition from facilities based cards to branded bundled prepaid telephone
cards.
Cost of Sales. The Company's cost of sales decreased approximately $4.4 million
(47%) to $5,057,552 for the six month period ended December 31, 1999 as compared
to $9,504,580 for the six month period ended December 31, 1998 (as restated).
The overall decrease is directly related to the Company's abandonment of its
prior strategy of becoming a facilities-based carrier. By focusing its efforts
on reselling bundled prepaid products obtained from TecNet (which are terminated
on TecNet's network), the Company was able to realize cost savings by not paying
facilities-based carrier charges, fixed cost circuit charges or private line
charges to route the customers' calls.
Gross Profit. The Company realized a gross profit of approximately $1.6 million
for the six month period ended December 31, 1999 as compared to a gross loss of
$856,234 for the six month period ended December 31, 1998 (as restated). The
gross profit realized is directly related to the Company's use of bundled
prepaid cards purchased from TecNet which did not have the higher costs of
facilities based cards, as well as the cost savings from not having to pay fixed
circuit costs and private line charges on activated cards. In addition, the
Company was able to obtain more favorable short-term financing rates from TecNet
in connection with the purchase of the bundled prepaid cards, which helped to
facilitate the increase in overall net sales.
Selling, General and Administrative Expenses. The Company's selling, general
and administrative expenses decreased approximately $635,000 (17%) to $3,034,806
for the six month period ended December 31, 1999 as compared to $3,669,382 for
the six month period ended December 31, 1998 (as restated). The overall decrease
is related to the combined effect of several factors. Salaries, wages and
related taxes and benefits declined from the prior presented period due to a
reduction in the number of employees. The Company realized considerable cost
savings from the consulting, financing and telecommunications support services
provided by TecNet on its behalf for the quarter ended December 31, 1999. In
addition, the Company realized reductions in both depreciation and amortization
expense from that of prior presented periods due to fully amortized customer
lists in the current period and sale/retirement of facilities based network
equipment. Finally, overall rent expense declined from the prior period due to
the fact that the Company sublet under utilized office space to external third
parties.
Loss before other Income (Expenses). The Company's realized loss before other
income (expenses) of approximately $3.2 million for the six month period ended
December 31, 1999 improved significantly as compared to the gross loss of $4.5
million for the six month period ended December 31, 1998. The overall
improvement is directly related to the combination of factors noted above for
net sales, cost of sales and selling, general and administrative expenses.
Other Income (Expenses). The Company's other income (expenses) decreased
approximately $551,000 (72%) to $216,060 for the six month period ended December
31, 1999 as compared to $767,500 for the six month period ended December 31,
1998 (as restated). The overall decline is related to the amortization of debt
issue costs of the $2.375 Warrants in the prior presented period offset by
interest expense related to the long-term financing rates obtained from TecNet
to finance current operations.
Net Loss. The Company's realized net loss of approximately $2.1 million for the
six month period ended December 31, 1999 improved significantly as compared to
the gross loss of $5.3 for the three month period ended December 31, 1998 (as
restated). The overall improvement is directly related to the factors noted
above for gross profit and other income (expenses).
15
<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; and (vi) the infusion of $10,663,700 of operating
capital through the issuance of demand promissory notes and the extension of
trade credit by TecNet. All of the above offerings were exempt from registration
under the applicable Securities Act".
The Company has no existing bank lines of credit and has not established any
sources for such financing.
During the six months ended December 31, 1999 and 1998, the Company's major
components of cash flow were as follows:
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
1999 1998
----------- ------------
Net cash used in operating activities .......... $(1,852,924) $(1,421,575)
Net cash used in investing activities .......... (38,819) (3,675)
Net cash provided by financing activities ...... 2,875,727 1,341,550
----------- -----------
Net increase (decrease) in cash ................ $ 983,984 $ (83,700)
=========== ===========
The Company's net cash used by operating activities increased approximately
$431,000 (30%) to $(1,852,924) for the six month period ended December 31, 1999
as compared to $(1,421,575) for the six month period ended December 31, 1998 (as
restated). The overall increase in net cash used by operating activities is
related to the combined effect of a decrease in net loss of approximately $3.2
million, an increase in accounts receivable of $889,000, and a $1.2 million
increase in accounts payable and accrued expenses. In addition the overall
increase is impacted by the amortization of $768,000 of debt issue costs and
$147,000 of customer list impairment in the prior period.
16
<PAGE>
To date, capital expenditures have not been material. Cash used in investing
activities for both the six months ended December 31, 1999 and 1998 related
solely to capital expenditures of approximately $39,000 for the six months ended
December 31, 1999 and $3,600 for the six months ended December 31, 1998.
During the six months ended December 31, 1998, cash provided from financing
activities of $1,300,000 related primarily to the proceeds of the Company's
sales of 10% Notes and the sale of a $100,000 10% promissory note payable to an
immediate family member of an officer/director of the Company.
For the six months ended December 31, 1999, the Company experienced a operating
loss of approximately $1,873,000 and used approximately $1,853,000 cash in
operating activities. The Company's cash position at December 31, 1999
approximated $1,140,740 and its working capital deficit approximated
$14,343,549.
Since June 30, 1998, the Company has raised cash through the issuance of
$1,200,000 of 10% Notes and the issuance of 10% demand promissory notes payable
to TecNet. Since November of 1998, the Company has been dependent on TecNet
financing its shortfalls in cash flows and current operations and the
provisioning of telecommunication services by TecNet. In addition, the Company
has imposed a fifty-percent deferral of its two executive's salaries and has
subleased a portion of its corporate headquarters to reduce the overall cash
shortfalls. As the Company increases the sales of its bundled prepaid products,
its capital requirements are expected to progressively decline. The Company
believes that it will achieve positive cash flows from operations in the second
half of fiscal year 2000.
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 prepaid products into additional cities and expanding the Company's
existing master distribution network. If cash needs prove to be greater than
contemplated, the Company will need to slow the expansion of its prepaid product
offerings to additional cities during fiscal year 2000. 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.
17
<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 December 31, 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.
18
<PAGE>
PART 2--OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its chief Executive Officer have been named as defendants in a
legal action in Mississippi in the case entitled Heritage Graphics, Inc.
("Heritage") vs. Telephone Electronics Corporation. The complaint alleges, among
other things, that the defendants breached a contractual agreement and conspired
to have Heritage go out of business. The complaint seeks damages of
$500,000,000. The case is in discovery. Management believes such litigation will
not have a material adverse effect on the financial condition or the results of
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
Judgement 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 judgement 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 of 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. The
gain on the restructuring of the debt 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 of 1999, they executed a settlement
agreement pursuant to which the Company would pay nine monthly installments
commencing in December of 1999 for a total of $887,000, with TecNet agreeing to
satisfy the remaining $475,000. The Company paid approximately $117,000 to Qwest
related to the settlement agreement for the six-month period ended December 31,
1999 and the balance owed of $738,043 is reflected in the accrued settlement
expenses on the condensed consolidated balance sheet as of December 31, 1999.
TecNet has paid approximately $15,000 to Qwest related to its share of the
settlement obligation during the six-month period ending December 31, 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
Conteco'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. Management believes such litigation will
not have a material adverse effect on the financial condition or the results of
operations 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 balance of which was 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. In March of 2000, a
judgement was rendered in favor of Prime for $134,000.
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, L&T Index No. 066018-98 seeking
eviction and judgement 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 Judgement
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.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27-Financial Data
(b) Reports on Form 8-K
None
20
<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: April 4, 2000 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
April 4, 2000 By: /s/ Diego E. Roca
------------------------------------
Diego E. Roca
Senior Vice President, Chief
Accounting Officer, Treasurer and
Secretary
21
<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> DEC-31-1999
<CASH> 1,140,740
<SECURITIES> 0
<RECEIVABLES> 1,933,367
<ALLOWANCES> 0
<INVENTORY> 108,377
<CURRENT-ASSETS> 202,524
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,837,148
<CURRENT-LIABILITIES> 16,922,854
<BONDS> 0
0
61
<COMMON> 7,059
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,837,148
<SALES> 6,218,606
<TOTAL-REVENUES> 6,218,606
<CGS> 5,057,552
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 216,060
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,089,812)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,089,812)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> (.30)
<EPS-DILUTED> (.30)
</TABLE>
