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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 October 10, 2000 was 7,058,998.
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DigiTEC 2000, INC.
INDEX TO FORM 10-QSB
Page(s)
-------
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Condensed Consolidated Balance Sheet as of September 30,
2000 (Unaudited) ....................................................... 3
Condensed Consolidated Statements of Loss for the Three Months Ended
September 30, 2000 and the Three Months Ended September 30,
1999 (Unaudited) ....................................................... 4
Condensed Consolidated Statement of Stockholders' Deficit for the
Three Months Ended September 30, 2000 (Unaudited) ...................... 5
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2000 and the Three Months Ended
September 30, 1999 (Unaudited) ......................................... 6
Notes to Condensed Consolidated Financial Statements (Unaudited) ....... 7 - 8
ITEM 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 8 - 12
ITEM 3--Quantitative and Qualitative Disclosures About Market Risk ..... 12
PART II -- OTHER INFORMATION
ITEM 1 - Legal Proceedings ............................................. 12 - 13
ITEM 6 - Exhibits and Reports on Form 8-K .............................. 13
Signatures ............................................................. 13
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DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Balance Sheet (Unaudited)
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September 30, 2000
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Assets:
Current:
Cash and cash equivalents $ 2,065,055
Accounts receivable, net allowance for bad
debt of $1,903,237 2,012,964
Inventory 331,509
Prepaid expenses and other 159,802
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Total Current Assets 4,569,330
Property and equipment, net of accumulated
depreciation of $189,118 127,748
Customer lists, net of accumulated amortization of
$142,410 142,410
Other assets 82,523
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Total Assets $ 4,922,011
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Liabilities and Stockholders' Deficit
Current:
Notes and accounts payable to TecNet, Inc. $ 17,112,649
Accounts payable - Trade 1,418,824
Accrued taxes and penalties 1,744,448
Accounts payable and accrued expenses 484,515
Payable to Premiere Communications, Inc. 583,152
Accrued legal 649,555
Convertible Debt 600,000
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Total Current Liabilities 22,593,143
Deferred rent 4,221
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Total Liabilities 22,597,364
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Commitments and Contingencies
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Stockholders' Deficit
Series A Convertible Preferred Stock, $.001 par value,
1,000,000 shares authorized; 61,050 shares issued and
outstanding 61
Common Stock, $.001 par value, 100,000,000 shares
authorized; 7,058,998 shares issued and outstanding 7,059
Additional paid-in-capital 17,061,318
Accumulated deficit (34,743,791)
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Total Stockholders' Deficit (17,675,353)
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Total Liabilities and Stockholders' Deficit $ 4,922,011
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See accompanying notes to Condensed Consolidated Financial Statements.
3
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DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statements of Loss (Unaudited)
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Three Months Ended September 30,
2000 1999
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Net sales $ 8,874,653 $ 2,887,504
Cost of sales 7,798,496 2,171,980
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Gross profit 1,076,157 715,524
Selling, general and administrative
expenses 1,913,815 1,298,232
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Loss before other income
(expenses) (837,658) (582,708)
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Other income (expenses):
Interest expense (191,119) (94,503)
Other income 26,987 11,092
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Other expenses (164,132) (83,411)
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Net loss $(1,001,790) (666,119)
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Net loss per common share-basic
and diluted $ (0.14) (0.09)
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Weighted average number of common and common
equivalent shares outstanding used in basic
and diluted computations 7,058,998 7,058,998
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See accompanying notes to Condensed Consolidated Financial Statements.
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DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statement of Stockholders' Deficit (Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
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Preferred Stock Common Stock Total
--------------- -------------------- Additional Accumulated stockholders'
Shares Amount Shares Amount paid-in capital deficit deficit
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<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 2000 61,050 $ 61 7,058,998 $ 7,059 $ 17,031,318 $(33,742,001) $(16,703,563)
Contributed Capital 30,000 30,000
Net loss -- -- -- (1,001,790) (1,001,790)
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Balance, September 30, 2000 61,050 $ 61 7,058,998 $ 7,059 $ 17,061,318 $(34,743,791) $(17,675,353)
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</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statements of Cash Flows (Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,001,790) $(666,119)
Adjustments to reconcile net loss to net cash used
in operating activities:
Provision for bad debts - net 85,580 --
Depreciation 17,828 13,013
Amortization of customer lists 23,735 73,194
Deferred rent (1,785) (8,207)
Services provided by shareholder 30,000 42,195
(Increase) decrease in:
Due from TecNet, Inc. -- 260,000
Accounts receivable (500,380) (693,828)
Inventory 91,779 (436,399)
Prepaid expenses and other (146,686) (27,561)
Increase (decrease) in:
Accounts payable and accrued expenses 908,126 573,744
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Net cash used in operating activities (493,593) (869,968)
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Cash flows from investing activities:
Capital expenditures (22,206) (6,679)
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Net cash used in investing activities (22,206) (6,679)
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Cash flows from financing activities:
Proceeds from issuance of TecNet notes 1,732,000 937,170
Repayment of notes payable (317,000) --
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Net cash provided by financing activities 1,415,000 937,710
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Net increase in cash
and cash equivalents 899,201 60,523
Cash and cash equivalents beginning of period 1,165,854 156,756
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Cash and cash equivalents end of period $ 2,065,055 $ 217,279
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</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
6
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DigiTEC 2000, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. The Company and Significant Accounting Policies:
(a) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements, which
includes the accounts of DigiTEC 2000, Inc. (the "Company") for the entire
presented period and those of its wholly owned subsidiary, POS TEC Systems, LLC
("POS TEC") from the date of acquisition have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by accounting principles generally accepted
in the United States of America 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. The financial information presented
for the three months ended September 30, 2000 has not been audited by
independent auditors; however, 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, 2000 and are not necessarily indicative of the results that
may be expected for a full fiscal year. All significant intercompany
transactions and balances have been eliminated in consolidation.
The information outlined in this Form 10-QSB should be read in conjunction with
the audited consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2000.
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 in the normal
course of business. However, because of the Company's recurring losses from
operations, accumulated deficit, negative working capital and significant
arrearages on trade payables, such realization of assets and satisfaction of
liabilities are subject to significant uncertainty. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. 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 cash flows from operating and financing
activities to meet its obligations as they become due.
(b) Revenue Recognition
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 Company's customers. The
related costs are simultaneously charged to the cost of sales accounts upon such
delivery.
Revenue from Point of Sale ("POS") sales 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.
(c) 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
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liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date of such change. The Company has established a full
valuation allowance against its entire net deferred tax asset due to uncertainty
of realizing certain tax credits and loss carryforwards.
(d) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS Nos. 137 and 138, which 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 derivative
contracts either to hedge existing risks or for speculative purposes. The
adoption of the statement, effective July 1, 2000, by the Company did not have a
material effect on the Company's consolidated results of operations or financial
position.
In December 1999, Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements", was issued. SAB No. 101 summarizes the
Securities and Exchange Commission's ("SEC") staff view on applying accounting
principles generally accepted in the United States of America to revenue
recognition. The Company will implement SAB No. 101 prior to the fourth quarter
of fiscal year 2001. The Company believes that the adoption of SAB No. 101 will
not have a material impact on its revenue recognition.
(e) Segment Disclosures
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in the prior fiscal year. SFAS 131 established
standards for the way that public business enterprises report financial
information on operating business segments. 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.
(f) TecNet Borrowings
TecNet continues to provide consulting services, financing and
telecommunications support. During the three months ended September 30, 2000,
the Company borrowed $1,732,000 from TecNet and subsequent to September 30, 2000
and through November 10, 2000, the Company borrowed an additional $335,000 from
TecNet pursuant to 10% demand promissory notes bearing an annual rate of
interest of ten percent. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements, including the notes thereto, and
other detailed information regarding the Company included elsewhere in this Form
10-QSB. 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
$13,733,119, $10,394,558 and $35,032,533, and its net losses were $4,499,526,
$13,566,927, and $11,996,759 for the fiscal years ended June 30, 2000, 1999 and
1998, respectively, after losses from discontinued operations of $0, $0 and
$813,178, respectively.
8
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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.
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
10% 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 September 30, 2000 (and through the issuance date of this filing), 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 unaudited 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 unaudited 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 upon its ability to raise capital, to develop
market share, to achieve profitable operations and to generate sufficient cash
flow from operations and financing sources to meet obligations.
The Company believes that future growth is dependent on the continued receipt of
operational and financial support from TecNet, providing 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. There can be no
assurance that the Company will continue to receive the support of TecNet or be
able to achieve favorable operating results in future periods.
Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Net Sales:
Sales, net of discount and returns, increased approximately $6 million (207%) to
approximately $8.9 million for the three month period ended September 30, 2000
as compared to approximately $2.9 million for the three month period ended
September 30, 1999. 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 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 based on both the dollar value and the total number
of cards sold, and the Company was able to significantly increase the total
number of prepaid cards sold during the three month period ended September 30,
2000 through its master distributor network. The Company has been able to
realize market growth by offering cost competitive prepaid calling cards
utilizing the favorable pricing obtained from TecNet on bundled products.
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Cost of Sales:
The Company's cost of sales increased approximately $5.6 million (259%) to
approximately $7.8 million for the three month period ended September 30, 2000
as compared to approximately $2.2 million for the three month period ended
September 30, 1999. The overall cost of sales increase in excess of the net
sales increase is directly related to the Company's issuance of greater
discounts on its prepaid products to key customers due to increased competition,
which offset the Company's ability to realize cost savings by not paying
facilities-based carrier charges, fixed cost circuit charges or private line
charges to route the customers' calls by reselling bundled prepaid products
obtained from TecNet (which are terminated on TecNet's network).
Gross Profit:
The Company realized a gross profit of approximately $1.1 million for the three
month period ended September 30, 2000 as compared to a gross profit of
approximately $716,000 for the three month period ended September 30, 1999. 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, offset by the
increase in cost of sales due to larger volume discounts noted above. 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 increased
approximately $616,000 (47%) to approximately $1.9 million for the three month
period ended September 30, 2000 as compared to approximately $1.3 million for
the three month period ended September 30, 1999. The overall increase is related
to the combined effect of several factors. The Company realized cost savings
from the consulting, financing and telecommunications support services provided
by TecNet on its behalf during the three months ended September 30, 2000. In
addition, the Company realized a reduction in amortization expense from that of
prior presented periods due to fully amortized customer lists in the current
period. Overall rent expense declined from the prior period due to the fact that
the Company sublet under-utilized office space to third parties. Offsetting
factors include an increase of approximately $110,000 related to audit fees in
connection with the filing of the Company's annual report to stockholders,
increased payroll costs of approximately $145,000 over the prior presented
period, the overall increase in federal excise taxes of approximately $380,000
and increased shipping charges of approximately $18,000 related to the
significant increase in overall sales of the Company's prepaid cards during the
quarter ended September 30, 2000.
Loss before other Income (Expenses):
The Company's loss before other income (expenses) of approximately $838,000 for
the three month period ended September 30, 2000 increased approximately $255,000
(44%) as compared to the loss before other income (expense) of approximately
$583,000 for the three month period ended September 30, 1999. The overall
increase 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 expenses, net, increased approximately $81,000 (97%) to
approximately $164,000 for the three month period ended September 30, 2000 as
compared to approximately $83,000 for the three month period ended September 30,
1999. The overall increase is primarily related to the increase in current
period interest expense of approximately $97,000 related to both the 10% demand
promissory notes payable to TecNet and the outstanding Convertible Debt.
Net Loss:
The Company's net loss of approximately $1 million for the three month period
ended September 30, 2000 increased by approximately $336,000 (50%) as compared
to the net loss of approximately $666,000 for the three month period ended
September 30, 1999. The overall increase is directly related to the factors
noted above for gross profit and other income (expenses).
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Liquidity and Capital Resources
Financing Requirements
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 (as subsequently exchanged, the "10% Notes"); (v) issuance of a
$100,000 10% promissory note to an officer/director family member; and (vi) the
infusion of approximately $17 million of operating capital through the issuance
of 10% 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 and have been utilized to fund the Company's current operations.
The Company has no existing bank lines of credit and has not established any
sources for such financing.
The Company's major components of cash flow are as follows:
QUARTER ENDED SEPTEMBER 30,
-----------------------------
2000 1999
----------- ---------
Net cash used in operating activities .... $ (493,593) $(869,968)
Net cash used in investing activities .... (22,206) (6,679)
Net cash provided by financing activities 1,415,000 937,170
----------- ---------
Net increase in cash ..................... $ 899,201 $ 60,523
=========== =========
The Company's net cash used in operating activities decreased approximately
$376,000 (43%) to $(493,593) for the three months ended September 30, 2000 as
compared to $(869,968) for the three months ended September 30, 1999. The
overall decrease in net cash used in operating activities for the three months
ended September 30, 2000 is related to the combined effect of an increase in the
net loss of approximately $336,000, an increase in the collections of accounts
receivable of approximately $279,000, an increase in the cash flow effect of
accounts payable and accrued expenses of approximately $334,000, an increase in
the cash flow effect of inventory of approximately $528,000, a decrease in the
amortization of purchased customer lists of approximately $50,000, a decrease in
current receivables from TecNet of approximately $260,000, and an increase in
prepaid expenses and other assets of approximately $119,000.
To date, capital expenditures have not been material. Cash used in investing
activities for both the three months ended September 30, 2000 and 1999 related
solely to capital expenditures of approximately $22,000 for the three months
ended September 30, 2000 and approximately $7,000 for the three months ended
September 30, 1999.
During the three months ended September 30, 2000, cash provided from financing
activities related primarily to the issuance of approximately $1.7 million in
promissory notes to TecNet, the repayment of approximately $300,000 in principal
to the holders of the $1.2 million promissory notes, and the repayment of
approximately $17,000 in principal on an outstanding loan with a family member
of an officer/director of the Company. During the three months ended September
30, 1999, cash provided from financing activities related primarily to the
issuance of $937,000 of 10% demand promissory note to TecNet.
Since June 30, 1999, the Company has raised cash primarily through the issuance
of 10% demand promissory notes payable to TecNet. Since November of 1999, 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
executives' salaries and has subleased a portion of its
11
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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. Although the Company has achieved
significant improvements in cash flows from operations, it does not expect to
achieve positive cash flows from operations until the end of fiscal year 2001.
The Company expects capital requirements of approximately $2.0 million during
fiscal 2001, before it begins to generate positive cash flow by the end of
fiscal year 2001. 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 2001. Also, the Company
expects to consider other financing opportunities during the 2001 fiscal year.
The Company believes that with the continued support of TecNet, internally
generated cash from operations in fiscal 2001 will be sufficient to fund its
operations throughout the 2001 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 at the
end of fiscal year 2001 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.
For the three months ended September 30, 2000, the Company experienced an
operating loss of approximately $838,000 and used approximately $494,000 of cash
in operating activities. The Company's cash position at September 30, 2000
approximated $2.1 million and its working capital deficit approximated $18
million. The Company remains undercapitalized and to date has not been able to
finance its expansion as quickly as opportunities have arisen.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold any derivatives or investments that are subject to
material market risk. The carrying values of financial instruments, including
cash and notes payable at September 30, 2000 approximates fair value as of such
date, due to the short-term maturity of such instruments and the fact that the
underlying interest rates approximates current market rates of interest.
PART 2--OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its Chief Executive Officer were named as defendants 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")
vs. Telephone Electronics Corporation. A settlement agreement was executed on
September 21, 2000. As a result of the agreement, the Company was not required
to contribute any funds towards the settlement award and all claims pending
against the Company and its Chief Executive Officer were duly discharged.
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
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approximately $1.37 million of telecommunication services provided to the
Company by Qwest. In May 1999, the parties executed a settlement agreement
pursuant to which the Company would pay nine monthly installments commencing
December, 1999 for a total of $887,000, with TecNet agreeing to satisfy the
remaining $475,000. The Company paid approximately $252,000 to Qwest as final
payment under the executed settlement agreement during the three months ended
September 30, 2000.
On June 28, 2000, Innovative Telecom Corporation ("Innovative") commenced an
arbitration proceeding before the American Arbitration Association in Boston,
Massachusetts asserting claims in the amount of $604,979 related to unpaid fees
and charges for services rendered in connection with the platform and switching
services performed on behalf of the Company until approximately July of 1999.
The Company has asserted counterclaims against Innovative in the amount of $3.9
million based on lost profits and additional expenses incurred as the result of
the poor quality of Innovative's software and network switching services. The
Company is presently exploring settlement possibilities with Innovative and
believes that any such settlement, if realized, will not have a material adverse
effect on the financial condition or the results of operations of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27-Financial Data
(b) Reports on Form 8-K
Current Report on Form 8-K filed July 10, 2000 reporting under Item 4,
Changes in Registrant's Certifying Accountant, and amended on Form 8-K/A
filed July 25, 2000 reporting under Item 7, Exhibits.
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: November 13, 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
November 13, 2000 By: /s/ Diego E. Roca
------------------------------------
Diego E. Roca
Senior Vice President, Chief
Accounting Officer, Treasurer and
Secretary
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