UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)*
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[_] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-23291
DigiTEC 2000, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
54-1287957
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(I.R.S. Employer Identification No.)
8 West 38th Street, Fifth Floor, New York, New York 10018
- --------------------------------------------------------------------------------
(Address of principal executive offices - Zip code)
Registrant's telephone number, including area code: (212) 944-8888
Former name, former address and former fiscal year, if changes since last
report.
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes __ No __
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $.001 par value, 6,858,988 outstanding as of February 17,1999.
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Index
================================================================================
Part I - Financial Information
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of December 31, 1998
and June 30, 1998 3
Consolidated Statements of Operations (Loss) for the
Three and Six Months ended December 31, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity
(Deficit) for the Six Months ended December 31, 1998 5
Consolidated Statements of Cash Flows for the
Six Months ended December 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
Part II - Other Information
Item 1. Legal Proceedings 22-23
Item 4. Submission of Matters to a Vote of Secutiry Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
* This amended Form 10-Q is being filed to reflect the restatement of certain
previously reported financial information as more fully described in Note 3 of
Notes to Condensed Consolidated Financial Statements contained herein. Portions
of Part I-Item 1.-"Financial Statements", Part I-Item 2-"Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Exhibit
27-"Financial Data Schedule" contain information relating to Customer Lists,
Deferred Debt, Insurance Costs, Accounts Payable and Accrued Expenses,
Additional Paid-in Capital, Accumulated Deficit, Cost of Sales, Gross Profit
(Loss), Selling, General and Administrative Expenses, Operating Loss, Interest
Expense, Net Loss, Cash Flows from Operating Activities, Amortization of Debt
Issuance Costs and Impairment of Customer Lists for the period ending December
31, 1998 which are amended to reflect adjustments determined to be required
during the preparation of the Company's year-end financial statements for the
period ending June 30, 1999. Except as set forth in Note 3 to the Condensed
Consolidated Financial Statements, no other adjustments have been made to the
reported financial information for the period ended December 31, 1998.
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
ITEM 1. CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
(Unaudited)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current:
Cash $ 25,022 $ 108,722
Accounts receivable, net of allowance for bad debts of
$1,305,000 and $1,305,000 respectively (Note 3) 1,252,536 1,692,222
Inventory 572,400 393,586
Prepaid expenses 112,241 123,953
- --------------------------------------------------------------------------------------------------
Total current assets 1,962,199 2,318,483
Property and equipment, net 151,333 160,040
Deferred debt issuance costs 352,500
Customer lists, net of accumulated amortization of $353,208
and $334,000 207,142 373,882
Carrier deposits and other 271,030 287,385
- --------------------------------------------------------------------------------------------------
Total Assets $ 2,944,204 $ 3,139,790
==================================================================================================
Liabilities and Stockholders' Deficit
Current:
Accounts payable - trade $ 4,651,489 $ 1,379,896
Accounts payable and accrued expenses 484,176 464,620
Payable to Premiere Communications, Inc. 597,132 597,132
Accrued legal -- 450,188
Accrued settlement expense (Note 4) 69,639 204,126
Accrued research and development 325,000 325,000
Deferred revenue 884,623 955,117
Note payable - current (Note 8) 1,342,981 168,556
Due to related party (Note 9) 100,000
- --------------------------------------------------------------------------------------------------
Total current liabilities 8,455,040 4,544,635
Deferred rent 89,545 89,545
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Total liabilities 8,544,585 4,634,180
- --------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.001 par value, 1,000,000 shares authorized;
61,050 shares Series A outstanding 61 61
Common stock, $.001 par value, 100,000,000 shares authorized;
6,858,988 and 6,814,248 shares issued and outstanding,
respectively 6,859 6,814
Additional paid-in capital 15,361,363 14,174,283
Accumulated deficit (20,968,664) (15,675,548)
- --------------------------------------------------------------------------------------------------
Total stockholders' deficit (5,600,381) (1,494,390)
- --------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficit $ 2,944,204 $ 3,139,790
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
December 31, December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,808,448 $ 11,432,730 $ 8,648,346 $ 24,613,043
Cost of sales 3,471,554 10,943,831 9,504,580 22,959,045
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) (663,106) 488,899 (856,234) 1,653,998
Selling, general and administrative expenses 1,888,901 1,222,451 3,669,382 2,069,674
- --------------------------------------------------------------------------------------------------------------------------------
Operating loss (2,552,007) (733,552) (4,525,616) (415,676)
Other income (expense):
Interest expense (585,000) -- (767,500) --
- --------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (3,137,007) (733,552) (5,293,116) (415,676)
- --------------------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operations of Cellular division (Note 6) -- (371,380) -- (527,061)
Loss from operations of World Access (Note 2) -- -- -- (105,554)
Loss on disposal of Cellular division -- (75,000) -- (75,000)
- --------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations $ -- (446,380) -- (707,615)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss $(3,137,007) $ (1,179,932) $(5,293,116) $ (1,123,291)
================================================================================================================================
Net loss per common share-basic and diluted:
From continuing operations $ (.46) $ (.14) $ (0.77) $ (.08)
From discontinued operations -- (.09) -- (.15)
- --------------------------------------------------------------------------------------------------------------------------------
$ (.46) $ (.23) $ (0.77) $ (.23)
================================================================================================================================
Weighted average number of common and
common equivalent shares outstanding 6,858,988 5,050,649 6,836,618 4,954,649
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statement of Stockholders' Equity (Deficit)
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
---------------- ------------------ Additional Accumulated Total stockholders'
Shares Amount Shares Amount paid-in capital deficit equity (deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1998
For the six months ended 61,050 $61 6,814,248 $6,814 $14,174,283 $(15,675,548) $(1,494,390)
December 31, 1998:
Exercise of Warrants (Note 7) -- -- 44,750 45 67,080 -- 67,125
Warrants accompanying
10% Notes (Note 8) -- -- -- -- 1,120,000 -- 1,120,000
Net loss -- -- -- -- -- (5,293,116) (5,293,116)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 61,050 $61 6,858,998 $6,859 $15,361,363 $(20,968,664) $(5,600,381)
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Cash Flows
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,293,116) $(1,123,291)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization 19,651 120,686
Amortization of debt issuance costs (Note 8) 767,500
Impairment of customer lists 147,089
Depreciation 12,382 18,699
Deferred rent -- 5,000
Deferred income (70,494) --
(Increase) decrease in:
Accounts receivable 439,685 (1,823,544)
Inventory (178,814) (746,055)
Prepaid expenses and other assets 28,068 (191,821)
Increase (decrease) in:
Accounts payable and accrued expenses 2,706,474 3,225,110
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities of continuing
operations (1,421,575) (515,216)
Net cash used in operating activities of discontinued operations -- (295,900)
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,421,575) (811,116)
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (3,675) (72,442)
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (3,675) (72,442)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of Note Payable (25,575) --
Note Payable Auto -- 23,002
Proceeds from issuance of 10% Notes (Note 8) 1,200,000 --
Proceeds from exercise of warrants 67,125 309,576
Proceeds from related party transaction 100,000
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,341,550 332,578
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (83,700) (550,980)
Cash, beginning of period 108,722 727,197
- --------------------------------------------------------------------------------------------------------------
Cash, end of period $ 25,022 $ 176,217
==============================================================================================================
</TABLE>
6
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
1. Summary of Significant Accounting Policies
(a) Liquidity and Basis of Presentation
The accompanying Consolidated Financial Statements of DigiTEC 2000, Inc.
and Subsidiary (formerly Promo Tel, Inc.) (the "Company"), have been
prepared on the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities, except as
otherwise disclosed, in the normal course of business. However, because of
the Company's recurring losses from operations, such realization of assets
and liquidation of liabilities is subject to significant uncertainty. The
financial statements do not include any adjustments that might result from
the outcome of these uncertainties. Further, the Company's ability to
continue as a going concern is highly dependent near term on its ability
to raise capital, reduce its costs of providing long distance service,
develop its collections tactics, develop market share and achieve
profitable operations thereon, and the ability to generate sufficient cash
flow from operations and financing sources to meet obligations. During the
first quarter of fiscal 1999, the Company issued $1.2 million of its 10%
six-month notes (the "Notes") with accompanying warrants and borrowed an
additional $100,000 on a demand basis from a relative of the Chairman of
the Company. The majority of the proceeds was used to make payments to
providers of telecommunications facilities or to satisfy existing
financial obligations, and the Company remains severely undercapitalized.
As previously reported, the Company intended to migrate its traffic to its
own facilities, thereby becoming a facilities-based carrier and thereby
increasing its cash flow. To date the Company, due to liquidity problems,
has been unable to generate or finance sufficient capital to fully
implement this strategy. Accordingly, the Company has entered into
negotiations with Telephone Electronic Corporation ("TEC"), currently a
holder of approximately 22% of the Company's Common Stock, with respect to
(i) a working capital facility to enable the Company to meet its current
operating expenditures, (ii) a long-term operating agreement pursuant to
which the Company's traffic can be originated and terminated through the
network facilities of TecNet, Inc., an affiliate of TEC, including the
traffic the Company anticipates will be generated as a result of
implementation of the Company's offering telecommunication services
through the College Enterprises, Inc. on-campus debit card system, and
(iii) arrangements to finance the equipment and operations of a point of
sale distribution network for the Company's Cards. There can be no
assurances that these negotiations will be successful or that TecNet, Inc.
will continue to handle traffic for the Company or advance funds for
working capital expenditures. Moreover, the Company has accured
significant carrier charges with TecNet, Inc. and third party providers
which it must satisfy.
As a result of the Company's review of its selling, general and
administrative expenses, it has targeted cost reductions and reduced cash
needs of approximately $2,000,000 during the last three quarters of the
1999 fiscal year. To date, during fiscal 1999, the Company has reduced its
workforce by a total of 19 full-time employees, two of whom were hired
during fiscal 1999, and reduced the working hours of certain other
hourly-compensated personnel. In addition, the Company has consolidated
its executive offices with the intention to sublet a significant portion
of the space originally occupied by the Company. The Company projects
approximately $600,000 of an annual revenue from this subletting, thereby
in large part offsetting its lease expense. There can be no assurance that
further progress toward achievement of these objectives will be made or
that acceptable alternatives will be found.
(b) Business
The Company is primarily engaged in the distribution, marketing and
management of Cards. It currently markets its telephone calling card
products principally throughout the New York tri-state metropolitan area.
On October 18, 1996, the Company changed its name to DigiTEC 2000, Inc.
7
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
(c) Organization
On July 11, 1995, Promo Tel, Inc., a Delaware corporation ("Promo
Tel-Delaware"), merged (the "Merger") into Promo Tel, Inc., a Nevada
corporation ("Promo Tel-Nevada"). Immediately prior to the Merger, Promo
Tel-Nevada changed its name from Yacht Havens International Corp. ("Yacht
Havens"). The surviving corporation remained Promo Tel, Inc. Pursuant to
the terms of the Merger, Promo Tel-Nevada, which had 59,042 shares of its
common stock previously outstanding, exchanged with the sole stockholder
of Promo Tel-Delaware an aggregate of 1,333,334 shares of previously
unissued $.001 Promo Tel-Nevada common stock for the outstanding shares of
Promo Tel-Delaware's outstanding common stock.
Since the Merger resulted in voting control by the stockholder of Promo
Tel-Delaware and Promo Tel-Delaware had the personnel and owned all the
assets to be utilized for its ongoing business, the Merger was treated as
a recapitalization of Promo Tel-Delaware and the sale of 59,042 shares of
previously issued Promo Tel-Nevada common stock for the net assets of
Promo Tel-Nevada ($-0-).
Promo Tel-Delaware is the continuing entity for financial reporting
purposes, and the financial statements prior to July 11, 1995 represent
its financial position and results of operations. The assets, liabilities
and results of operations of Promo Tel-Nevada are included as of July 11,
1995. The Company was formed on May 18, 1995 and commenced operations in
July 1995. Accordingly, the Company had no results of operations for
fiscal years ended prior to June 30, 1996. Although Promo Tel-Delaware is
deemed to be the acquiring corporation for financial accounting and
reporting purposes, the legal status of Promo Tel-Nevada as the surviving
corporation has not changed. Promo Tel-Nevada had amended its Articles of
Incorporation to change its name from Promo Tel, Inc. to the Company's
current name.
In September 1996, the Board of Directors of the Company approved a
reverse stock split of the Company's common stock. Each stockholder of
record on October 18, 1996 received one share of new common stock for each
six shares of common stock held. The equity accounts of the Company and
all disclosures have been retroactively adjusted to reflect the
recapitalization and the one-for-six reverse stock split.
(d) Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and, from June 1, 1997 through October 1997, its wholly-owned subsidiary,
World Access Solutions, Inc. ("World Access"). All significant
intercompany balances and transactions have been eliminated. (See Note 2.)
The Consolidated Financial Statements and related notes thereto as of
December 31, 1998 and for the six and three months ended December 31, 1998
and 1997 are unaudited but, in the opinion of management, include all
adjustments necessary to present fairly the information set forth therein.
These adjustments consist solely of normal recurring accruals. The
Consolidated Balance Sheet for June 30, 1998 was derived from the audited
Consolidated Financial Statements included in the Company's Annual Report
on Amendment No. 1 to Form 10-K/A for the period ended June 30, 1998.
These interim financial statements should be read in conjunction with that
report. The interim results are not necessarily indicative of the results
for any future periods.
8
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
(e) Earnings Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings per Share" for the fiscal year ended
June 30, 1998. The adoption of this standard did not have a material
impact on the Company's income (loss) per share computation. The
computation of income (loss) per common share is based on the weighted
average number of common shares and common stock equivalents (convertible
preferred shares, stock options and warrants), assumed to be outstanding
during the year. The dilutive earnings (loss) per share have not been
presented since the effect of the options and warrants to purchase common
stock and the convertible preferred stock were anti-dilutive. Net income
(loss) per share amounts for all periods have been presented and the
amount for prior period has been restated to comply with provisions of
SFAS 128. The weighted average shares have been retroactively adjusted to
reflect the exchange of the 1,333,334 shares and the one-for-six reverse
stock split.
(f) Reclassifications
Certain amounts as previously reported have been reclassified to conform
to the fiscal 1999 presentation.
(g) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which established
standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by,
or distributions to, owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the reporting of certain information about
operating segments by public companies in both annual and interim
financial statements. SFAS No. 131 defines an operating segment as a
component of an enterprise for which separate financial information is
available and whose operating results are reviewed regularly by the chief
operating decision maker to make decisions about resources to be allocated
to the segment and to assess its performance.
SFAS Nos. 130 and 131 are both effective for financial statements for
years beginning after December 15, 1997 and both require comparative
information for earlier years to be restated. Accordingly, the Company has
adopted both the foregoing standards for the accompanying financial
statements. SFAS No. 130 divides comprehensive income into net income and
other comprehensive income, and specifies that an enterprise that has no
items of other comprehensive income in any period presented is not
required to report comprehensive income. Accordingly, since the Company
did not have any items of other comprehensive income in any period
presented, comprehensive income is not separately reported. The adoption
of SFAS No. 131 did not have a material effect on the Company's financial
position or results of operations. The Company continually evaluates SFAS
No. 131 in order to fully evaluate the impact, if any, the adoption of the
provisions of this Statement will have on future financial disclosures.
(h) Customer Lists
Customer Lists were purchased from third parties during 1999, 1998 and
1997. These costs are amortized on a straight-line basis over the
estimated useful lives of the customer bases acquired, which approximate
three years. The Company periodically evaluates the recoverability of
these intangibles based on several factors, including management's
intention with respect to the acquired assets and the estimated future
non-discounted cash flows expected to be generated by such assets. During
the second quarter of fiscal 1999, management adjusted their valuations of
several customer lists. Based on management's evaluations, the Company
recorded approximately $147,000 as an impairment of these intangibles.
(i) Regulatory Requirements
The Company is currently evaluating various tax and other regulatory
assessments to determine their applicability to the Company's operations.
As these operations expand, the Company may become subject to additional
tariffs and the federal and state regulatory charges. During the first 6
months of fiscal 1999, the Company accrued approximately $375,000 relating
to various taxes, penalties and interest related to unfiled tax returns.
9
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
2. Related Party Transactions
(a) On January 20, 1996, the Company purchased certain Internet service
provider assets consisting primarily of computer hardware, software and
office equipment from TEC in exchange for 1,605,385 shares of the
Company's restricted Common Stock valued at approximately $1.7 million
based on the estimated fair values of the assets received. TEC is a
communications company headquartered in Jackson, Mississippi that provides
local and long distance telephone exchange services and provides other
telecommunications services nationally. Subsequent to the purchase date,
the purchase agreement was amended to reflect certain assets which were
not delivered by TEC, resulting in a receivable from TEC of $135,276 at
June 30, 1996. In November 1996, TEC returned 130,259 of the Company's
shares to the Company. TEC's current ownership interest at June 30, 1998
was approximately 22%.
(b) The Company helped establish TecLink, Inc. ("TecLink") as a
Mississippi-based Internet service provider by selling to TecLink certain
Internet service provider assets, intellectual property, computer
hardware, software and office equipment (that it had previously purchased
from TEC and others) as well as a value added reseller contract (the
"Contract") from Hughes Corporation ("Hughes"). The Company received in
the sale $50,000 cash and a 6% per annum promissory note of $2,405,000 due
the earlier of December 31, 1998 or upon the completion of TecLink's
initial public offering. In accordance with the terms of the promissory
note, collateralized by the assets of TecLink, the $250,000 became due
upon the completion of a private placement of TecLink's common stock.
TecLink's management believed that Hughes never met their responsibility
under the contract, as such, TecLink was never able to fully implement its
business plan. As a result of this and other factors, TecLink's initial
public offering was never consummated and TecLink continued to experience
losses. Due to the continuing losses, the Company entered into an
agreement to acquire the net assets as partial satisfaction of its
outstanding balance of its note receivable from TecLink ($2,105,000). As a
result, the Company recorded a loss of $1,340,230. The Company established
World Access as a wholly-owned subsidiary providing Internet access with
the net assets re-acquired from TecLink.
As of June 30, 1997, management determined that it needed to focus on its
core business and would discontinue the operations of World Access by
selling its net assets.
On October 1, 1997, the Company entered into an agreement (the
"Agreement") to sell the customer base, the hardware related to servicing
the customer base and its obligations under World Access' leases for its
premises and telephone equipment to Meta3, Inc. ("Meta3"), a Mississippi
corporation in a similar line of business. The Agreement calls for Meta3
to pay for the subscribers at $10 per month per customer for ten months.
The amount to be paid was to be adjusted by the identified customer base's
net attrition rate for the first five months of the purchase period. As a
result of the Agreement and the Company's plan to dispose of the remaining
assets and liabilities, the Company recorded a loss on disposal of
$893,347 for the year ended June 30, 1997. At June 30, 1997, $175,000 was
accrued for the estimated remaining expenses related to the disposal of
World Access. For the year ended June 30, 1998, the Company recorded an
actual loss of $171,593 on the disposal, which represents a complete
write-off of all net assets of World Access.
10
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
3. Restatement
During the course of the audit of the Company's Consolidated Financial
Statements for the year ended June 31, 1999, the Company became aware of
certain required adjustments, primarily the fair valuation of the warrants
issued in connection with the $1.2 million financing during the quarter
ended September 30, 1998 and their related amortization. In addition, the
Company failed to record federal excise tax obligations. The Condensed
Consolidated Financial Statements for the period ending December 31, 1998
are hereby restated to reflect the following adjustments as summarized
below:
Six Months ended
December 31, 1998
Net loss, as previously reported $(4,008,377)
Adjustments-Increase (Decrease):
Cost of Sales 252,322
Selling, general and administrative expenses 264,917
Interest Expense 767,500
-----------
1,284,739
Net loss, as adjusted $(5,293,116)
===========
Per share amounts
Basic and diluted
As previously reported (0.59)
Adjustments (0.18)
-----------
As Adjusted $ (0.77)
===========
4. Concentrations of Credit Risk
The Company experiences risk concentration due to geographic and customer
concentrations and a limited number of suppliers.
(a) Geographic Concentration of Sales
The Company currently distributes and markets its Cards primarily in the
New York/New Jersey metropolitan area (the "Metro Area"). The Company
sells Cards in 29 states, Puerto Rico and the U.S. Virgin Islands. The
Metro Area sales accounted for approximately 85% and 81% of the Company's
total sales for the quarters ended September 30, 1998 and December 31,
1998, respectively. No other areas accounted for more than 10% of the
Company's sales.
(b) Concentration of Customer Accounts
For the years ended June 30, 1998 and 1997, one master distributor
accounted for approximately 0% and 48% of the Company's accounts
receivable and 19% and 52% of the Company's sales, respectively. During
September 1997, the Company amended its agreement with the master
distributor by terminating the exclusivity clause of the distribution
agreement, and sales to this master distributor declined significantly
thereafter. An additional customer, who replaced a significant portion of
the former master distributor's sales, accounted for approximately 73% of
the Company's accounts receivable as of June 30, 1998, and approximately
19% of the Company's sales for the year ended June 30, 1998. The primary
reason that this customer accounted for an apparently disproportionate
share of receivables at June 30, 1998 versus sales during fiscal 1998 was
the significant ramp-up of sales to this customer during the last four
months of fiscal 1998. During the period from March through June, 1998,
this customer accounted for over $5 million in sales and represented
approximately 72% of the Company's total sales during this four-month
period. The foregoing percentage of sales matched very closely to the 73%
of total accounts receivable due from this customer as of June 30, 1998.
This customer and one additional master distributor accounted for 4% and
18% respectively of the Company's sales for the quarter ended December 31,
1998 and represented 38% and 0% respectively of the Company's accounts
receivable as of December 31, 1998.
During the quarter ended June 30, 1998, due to the increased amount of
receivables aged over 90 days and the related greater risk of asset
impairment, the Company recorded a bad debt reserve of $1,467,000, and
wrote off approximately $223,000 of accounts receivable against that
reserve. The bad debt reserve included approximately $487,000 related to
the foregoing customer which represented 73% of the Company's receivables
as of June 30, 1998. As this customer had previously exhibited a favorable
payment history and had an excellent relationship with the Company, the
Company believed that at least the unreserved portion of the amounts due
from this customer would be collected. Since June 30, 1998 the Company has
received approximately $1,076,000 in payments from this customer, which
amount paid
11
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
off the entire receivable balance from the customer, with the remainder
applying to sales of approximately $1.7 million to this customer
subsequent to June 30, 1998.
The Company has initiated discussions with one of the top outside
collection agencies in the United States with respect to collecting
overdue accounts, and intends to retain that agency, or another such
agency of similar reputation, for that purpose. Costs for collection of
such accounts will be on a contingent basis billed to the Company as a
percentage of collected funds; therefore, the Company does not expect any
cash requirements associated with implementing this program and expects
that its liquidity position will improve as a result of its
implementation. Concurrently with the foregoing effort, the Company plans
to improve its documentation of processes and procedures by developing a
formal Credit and Collections Policy including, but not limited to,
customer credit file requirements, standard credit application processes
and procedures and standard procedures for the collection of past due
accounts. The Company believes that the combination of the foregoing
actions will result in reduced credit risk to the Company, improved
liquidity and enhanced ability to establish an asset-backed working
capital credit facility due to the increased quality of the receivables
portfolio. Since these planned actions are in an early stage of
implementation, it is not possible at this time to estimate the
anticipated effects, if any, on sales to current customers.
(c) Concentration of Suppliers of Telecommunications Services
Prior to June 30, 1998, the Company purchased its long distance services
primarily from three suppliers of bundled Cards, Frontier Communications,
Inc. ("Frontier"), Premiere Communications, Inc. ("Premiere") and ATI
Telecom, Inc. ("ATI"). For the year ended June 30, 1998, Frontier
accounted for approximately 35%, Premiere accounted for approximately 43%
and ATI accounted for approximately 14%, respectively, of those services.
During the six month period ended December 31, 1998, none of these
suppliers accounted for more than 10% of purchases of long distance
services. During the six month period ended December 31, 1998, TecNet,
Inc., an affiliate of TEC, and Allied Communications Holdings ("Allied")
became key suppliers of facilities-based services to the Company,
providing approximately 14% and 28% of total communications services
purchased by the Company. No other supplier accounted for more than 10% of
such purchases. As of December 31, 1998, the amounts of accounts payable
to TecNet, Inc., Frontier, Premiere, ATI and Allied were approximately
$1,297,078, $0, $597,132, $293,014 and $61,422, respectively.
4. Accrued Settlement
During March 1998, Vanity Fair Intimates, Inc. ("Vanity Fair") commenced
an action for breach of a sublease agreement, seeking, inter alia,
eviction and judgment against the Company for a total of $472,799. The
matter was settled in September, 1998 for $208,916, to be paid in monthly
installments of approximately $35,000 commencing in September 1998 and
continuing through and including the month of February, 1999. The Company
made the first payment due in September in accordance with the settlement
agreement. However, due to its liquidity problems, the Company failed to
make the payments due in October and November, 1998. Due to the Company's
failure to make the foregoing payments, Vanity Fair gave notice of its
intention to enter a Confession of Judgment for $369,774, less the amount
previously paid by the Company. The Company subsequently negotiated an
alternative payment plan with Vanity Fair, and to date is in compliance
with the revised payment terms.
12
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
5. Settlement of Promissory Note with Frontier
In June, 1998, the Company was served with a Summons and Motion for
Summary Judgment by Frontier seeking judgment on a promissory note (the
"Frontier Note") issued by the Company for $893,061 in connection with
Frontier's termination of its Card division. The outstanding amount on the
Frontier Note as of June 30, 1998 was reflected in accounts payable of the
Company with a balance of approximately $502,000. During August, 1998, the
Company negotiated a settlement with Frontier for $200,000. The Company
satisfied the settlement in September, 1998 and as a result, a security
interest held by Frontier against certain assets of the Company was
removed. This recovery was recognized in the financial statements for the
quarter ended September 30, 1998.
6. Discontinued Operations of Cellular Division
On December 31, 1997, management decided to abandon the operations of its
cellular division as a result of the Company's continuing plan to conserve
assets to focus on and expand its core business. The operations of the
cellular division ceased completely by February 1, 1998. The Company
recorded a loss from discontinued operations of $155,681 for the three
months ended September 30, 1997 and $527,061 for the year ended June 30,
1998, the majority of which losses were incurred due to the write down of
cellular division assets. As of June 30, 1998, the assets of this division
had been completely written off, and the Company does not anticipate any
additional charges to be recognized related to disposal of its cellular
division. Sales for fiscal 1998 were immaterial.
7. Redemption of $1.50 Warrants
On August 20, 1998, the Company notified the holders of the 52,250
outstanding warrants to purchase shares of the Company's Common Stock at
$1.50 per share (the "$1.50 Warrants") of its election to redeem all
unexercised portions of the $1.50 Warrants at $.10 per share thirty days
following the date of the notice. Upon the expiration of the notice
period, the $1.50 Warrants terminated with respect to any then unexercised
portion and only the right of the $1.50 Warrant holder to receive payment
of the redemption price survived. At the expiration of the notice period,
44,750 of the $1.50 Warrants had been exercised, yielding net proceeds of
$67,125 to the Company, and the remainder have been terminated.
8. Issuance of 10% Six-Month Notes with Warrants
During September, 1998, the Company issued $1,200,000 of 10% Six-month
Notes (the "Notes") and warrants to purchase 600,000 shares of the
Company's Common Stock at an exercise price of $2.375 per share (the
"$2.375 Warrants"), subject to certain adjustments. The $2.375 Warrants
were exercisable for five years from the date of issuance. The exercise
price under the $2.375 Warrants were set at the closing price of the
Common Stock on September 4, 1998. Nine investors participated in this
offering, including an officer/director and his family, and a director,
totaling $600,000. The issuance and sale of the Notes and $2.375 Warrants
are exempt from registration under the Securities Act of 1933, as amended
(the "Securities Act") pursuant to Regulation D. The fair value of the
$2.375 Warrants was recorded as debt issue costs and will be amortized to
Interest expenses over a six-month period beginning with September, 1998.
Amortization through December, 1998 amounted to $767,500.
13
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 1. Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
================================================================================
9. Due to Related Party
In December, 1998, TecNet, Inc., an affiliate of Telephone Electronic
Corporation ("TEC"), entered into an arrangement with the Company pursuant
to which it assumed certain carrier charges. In addition, TecNet, Inc. has
since November, 1999 provided carrier services to the Company without
current payment. At December 31, 1998, total carrier charges due to third
parties were $3,286,557 and carrier charges due to TecNet, Inc. were
$1,297,078.
On November 2, 1998, Ms. Doreen Porecca, Mr. Magliato's mother in-law,
lent the Company an additional $100,000 on a demand basis bearing interest
at ten percent per annum.
10. Subsequent Event
On February 16, 1999, TecNet, Inc. lent the Company $200,000 pursuant to a
demand note bearing interest at 10% per annum. This temporary borrowing by
the Company was used to finance current expenditures pending negotiations
of an agreement with the Company to provide interim financing of current
operations while the Company establishes its point of sales business and
initiates activities under its letter agreement with College Enterprises,
Inc. ("CEI") pursuant to which the Company will offer telecommunication
services through the CEI network. There are no assurances that the Company
will successfully conclude the negotiations or that the point of sale or
CEI activities will be successfully implemented.
14
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements, including the notes thereto, and other detailed
information regarding DigiTEC 2000, Inc. (the "Company") included elsewhere in
this Form 10-Q and in conjunction with the corresponding discussion and analysis
included in the Company's Annual Report on Amendment No. 1 to Form 10-K/A (the
"10-K/A") for the year ended June 30, 1998. The information set forth in this
Form 10-Q includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
words "estimated," "intends," "believes," "plans," "planning," "expects," and
"if" are intended to identify forward-looking statements. Although management
believes that the assumptions made and expectations reflected in the
forward-looking statements are reasonable, because such forward-looking
statements include risks and uncertainties, it must be recognized that there is
no assurance that the underlying assumptions will, in fact, prove to be correct,
or that actual future results will not differ materially from the Company's
expectations, either expressed or implied by such forward-looking statements.
The Company commenced operations under present management in 1995 to capitalize
upon opportunities in the prepaid phone card sector of the long distance
telecommunications market. The Company's prepaid telephone calling cards
("Cards") provide consumers with a competitive alternative to traditional
calling cards and pre-subscribed long distance telecommunications services. The
Company's total revenues were $35,032,533, $26,027,909 and $17,425,199, and its
net losses were $11,996,759, $3,549,514 and $129,275, for the fiscal years ended
June 30, 1998, 1997 and 1996, respectively, after losses from discontinued
operations of $813,178, $1,069,261 and $0, respectively. The Company sold
approximately six million Cards, of which approximately five million were its
own proprietary branded Cards, and provided more than one hundred million
minutes of telecommunications services, during the fiscal year ended June 30,
1998. During the six month period ended December 31, 1998, the Company sold
approximately 1.3 million Cards, of which approximately 1 million were its own
proprietary branded Cards, and provided approximately twelve million minutes of
telecommunications services.
The Company's target markets include ethnic communities with substantial
international long distance calling requirements. For the year ended June 30,
1998 and the six month period ended December 31, 1998 approximately 75% and 79%
respectively of the Company's total minutes were derived from the sale of
international long distance telecommunications services. Retail rates in the
international long distance market have declined in recent years and, as
competition in this segment of the telecommunications industry continues to
intensify, the Company believes that this downward trend in rates is likely to
continue. Although there can be no assurance, the Company believes that any
reduction in rates will be offset in whole or in part by efficiencies
attributable to the planned expansion of the Company's services as well as by
lower transmission costs per minute resulting from the Company's increased
volume of minutes.
The Company's fiscal 1997 and 1998 sales were derived primarily from the resale
of bundled Cards. The Company resold the Cards at a discount off the retail
value of the Cards to either independent distributors or retail locations,
depending on the locality of distribution. The Company's fiscal 1997 and 1998
cost of sales consisted primarily of the purchase of the Cards at a greater
discount off the face value than the price at which the Cards were resold by the
Company. As a result, the Company received its gross margin on the difference
between discounts given to its customers and the discounts the Company received
from its long distance provider. Since the Cards were sold to the Company as a
bundled product, the supplier was liable to the end user for the long distance
time on the
15
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Cards. At the point of sale, the Company had no further obligation with respect
to the Cards sold and revenues were recognized upon sale of the Cards.
During the last quarter of fiscal 1998 the Company became predominantly a
facilities-based carrier. Under these arrangements the Company negotiated and
was responsible to the long distance carriers and platform providers for the
long distance usage and related platform fee charges incurred in connection with
providing service to the end users. Since the Company was not liable for the
usage and platform fees on the underlying traffic until it was consumed by the
end user, the Company records all sales as deferred revenue until the time on
Cards sold is actually used by the consumer. During the six month period ended
December 31, 1998, approximately 77% of the Cards sold by the Company were
facilities-based Cards.
Operations
Three Months Ended December 31, 1998 Compared to Three Months Ended December 31,
1997
Net Sales. Net Sales for the three months ended December 31, 1998 decreased by
approximately $8,624,282 or 75% from $11,432,730 during the three months ended
December 31, 1997 to $2,808,448 for the three months ended December 31, 1998.
Two master distributors accounted for approximately 0% and 22% respectively of
sales during the three months ended December 31, 1998. The decrease in sales is
due primarily to:
1. The Company terminating, during the quarter ended December 31, 1997,
the exclusivity clause in an agreement with a key master distributor
who accounted for sales of approximately $5.6 million during the
quarter ended September 30, 1997, and the failure to fully replace
the sales accounted for by the distributor.
2. The Company's inability to market its new facilities-based Cards as
rapidly as planned, due to liquidity issues which precluded the
Company from securing facilities as quickly as planned. This lack of
facilities forced the curtailment of sales activities on certain
Cards, since additional sales would have degraded the service
available to all customers due to the lack of adequate facilities to
complete the calls.
3. For the quarter ended December 31, 1998, the Company was not able to
market to its distributors products comparable to the products
available in the same period in the previous year due to the
suspension and repricing of two of the Company's most successful
Cards.
In addition to the foregoing, due to the introduction of its branded,
facilities-based Cards during the fourth quarter of fiscal 1998, the Company
began phasing out the sale of its bundled products, which were no longer
competitively priced and which required greater capital resources to market than
the facilities-based Cards. Due to liquidity problems, the Company has been
unable to continue with establishing its own branded facilities-based Cards.
During the three months ended September 30, 1998, the Company's agreement with
Premiere Communications, Inc. ("Premiere") expired. Premiere previously has been
a significant supplier of bundled Cards and telecommunications services to the
Company. Since the expiration of the agreement with Premiere, the Company has
negotiated arrangements with other telecommunications service providers for the
supply of the Company's telecommunications needs.
Cost of Sales. The Company's cost of sales for the three months ended December
31, 1998 decreased to approximately $3,471,554, as adjusted from $10,943,831 for
the three months ended December 31, 1997. The decrease of $7,472,277 or 68% was
primarily related to the decrease in revenues that the Company experienced in
the three months ended December 31, 1998 as compared to the second quarter in
the prior year. Cost of sales continued to exceed net sales due to the Company
not being able to route its traffic on its least cost providers due to its
inability to prepay the carriers as a result of its limited capital resources,
thereby increasing the cost of goods sold significantly over budgeted amounts.
Gross Profit (Loss). For the three months ended December 31, 1998, the Company
experienced a gross loss of approximately $663,106, as adjusted, as compared to
a gross profit of approximately $488,899 for the three months ended December 31,
1997. The decrease of $1,152,005 was primarily related to the lower volume of
sales during the current period and the higher cost of sales due to the higher
facilities costs, as discussed above. In addition, the initiation of the
Company's facilities-based Cards was accompanied by introductory pricing,
thereby further reducing the gross profit on those sales. During the three
months ended December 31, 1998, the Company continued to phase out its bundled
products since they were no longer competitively priced and since the Company's
agreement with Premiere, a major supplier of such Cards, had expired.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended December 31, 1998 increased
to $1,888,901, as adjusted, from $1,222,451 for the three months ended December
31, 1997. This increase of $666,450 is primarily related to increases in
personnel related to the Company's initiation of its facilities-based services,
which the Company has been unable to fully establish due to liquidity problems
and recognition of impairment of customer lists.
Loss from Continuing Operations/Net Loss. The Company incurred a loss from
continuing operations of approximately $3,137,007, as adjusted, for the three
months ended December 31, 1998, as compared to a loss from continuing operations
of approximately $733,552 for the three months ended December 31, 1997. This
increased loss is primarily due to the combination of lower gross margin
resulting from the decreased sales and higher facilities costs. In addition, the
Company incurred Interest Expense of $585,000 in connection with the exchange of
its 10% Promissory Notes and related warrant.
16
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Six Months Ended December 31, 1998 Compared to Six Months Ended December 31,
1997
Net Sales. Net Sales for the six months ended December 31, 1998 decreased by
approximately $15,964,697 or 65% from $24,613,043 during the six months ended
December 31, 1997 to $8,648,346 for the six months ended December 31, 1998. Two
master distributors accounted for approximately 13% and 11% respectively of
sales during the six months ended December 31, 1998. The decrease in sales is
due primarily to:
1. The Company terminating, during the quarter ended December 31, 1997,
the exclusivity clause in an agreement with a key master distributor
who accounted for sales of approximately $5.6 million during the
quarter ended September 30, 1997, and the failure to fully replace
the sales accounted for by the distributor.
2. The Company's inability to market its new facilities-based Cards as
rapidly as planned, due to liquidity issues which precluded the
Company from securing facilities as quickly as planned. This lack of
facilities forced the curtailment of sales activities on certain
Cards, since additional sales would have degraded the service
available to all customers due to the lack of adequate facilities to
complete the calls.
The Company continued phasing out the sale of its bundled products, which were
no longer competitively priced and which required greater capital resources to
market than the facilities-based Cards, and has not been able to establish the
facilities-based cards due to liquidity problems.
Cost of Sales. The Company's cost of sales for the six months ended December 31,
1998 decreased to approximately $9,504,580, as adjusted, from $22,959,045 for
the six months ended December 31, 1997. The decrease of $13,454,465 or 59% was
primarily related to the decrease in revenues that the Company experienced in
the six months ended December 31, 1998 as compared to the first two quarters in
the prior year. Cost of sales exceeded net sales due to the Company not being
able to route its traffic on its least cost providers due to its inability to
prepay the carriers as a result of its limited capital resources, thereby
increasing the cost of goods sold significantly over budgeted amounts.
Gross Profit. For the six months ended December 31, 1998, the Company
experienced a gross loss of approximately $856,234, as adjusted, as compared to
a gross profit of approximately $1,653,998 for the six months ended December 31,
1997. The decrease of $2,510,232 or 152% was primarily related to the lower
volume of sales during the current period and the higher cost of sales due to
the higher facilities costs, as discussed above. In addition, the transition of
the Company's brands from bundled Cards to facilities-based Cards was
accompanied by introductory pricing, thereby further reducing the gross profit
on those sales. During the six months ended December 31, 1998, the Company
phased out its bundled products since they were no longer competitively priced
and since the Company's agreement with Premiere, a major supplier of such Cards,
had expired, but could not establish its facilities-based Cards due to liquidity
difficulties.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended December 31, 1998 increased to
approximately $3,669,382, as adjusted, from $2,069,674 for the six months ended
December 31, 1997. This increase of $1,599,708 or 78% is primarily related to:
1. Increases in Cost of Sales of $252,322 due to various
telecommunications taxes.
2. Increases in salaries, wages and personnel-related expenses of
approximately $401,000, as the Company's employee base increased
from 41 full-time employees to 80, including six part-time
employees, by September 30, 1998. The increase in employees was
related to an expansion of the Company's internal route distribution
network and expanded customer service.
3. Increases in rent, telephone, general office and non-wage-related
customer service expenses of approximately $358,339, which were
related to the larger workforce.
4. Increases in professional fees of approximately $483,120, primarily
due to increased corporate consulting fees and legal expenses
related to litigation, regulatory filings and financing.
Increase of $273,250 in selling, general and administrative expenses was caused
by write offs of customer lists and estimated penalties on excise taxes.
Loss from Continuing Operations. The Company incurred a loss from continuing
operations of approximately $5,293,116, as adjusted, for the six months ended
December 31, 1998, as compared to a loss from continuing operations of
approximately $415,676 for the six months ended December 31, 1997. This loss is
primarily due to the combination of lower gross margin resulting from the
decreased sales and higher facilities costs, coupled with higher selling,
general and administrative expenses incurred during the period. In addition, the
Company incurred Interest expense of $767,500 in connection with the exchange
of its 10% Promissory Notes and related warrants.
Loss from Discontinued Operations. The Company incurred no losses from
discontinued operations for the six months ended December 31, 1998 as compared
to a loss from discontinued operations of $707,615 related to the discontinued
operations of the cellular division for the period ended December 31, 1997.
Net Loss. For the six months ended December 31, 1998, the Company realized a
total net loss of $5,293,116, as adjusted, as compared to net loss of $1,123,291
for the six months ended September 30, 1997. This loss is due to the lower gross
margin on decreased sales coupled with the substantial increase in selling,
general and administrative expenses as discussed above, including interest
expense.
17
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Liquidity and Capital Resources
The Consolidated Financial Statements of the Company have been prepared on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities, except as otherwise disclosed, in the
normal course of business. However, because of the Company's recurring losses
from operations, such realization of assets and liquidation of liabilities is
subject to significant uncertainty. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties. Further,
the Company's ability to continue as a going concern is highly dependent near
term on its ability to raise capital, reduce its costs of providing long
distance service, develop its collections tactics, develop market share and
achieve profitable operations thereon, and the ability to generate sufficient
cash flow from operations and financing sources to meet obligations.
As previously reported, the Company intended to migrate its traffic to its own
facilities, thereby becoming a facilities-based carrier and thereby increasing
its cash flow. To date the Company, due to liquidity problems, has been unable
to generate or finance sufficient capital to fully implement this strategy.
Accordingly, the Company has entered into negotiations with Telephone Electronic
Corporation ("TEC"), currently a holder of approximately 22% of the Company's
Common Stock, with respect to (i) a working capital facility to enable the
Company to meet its current operating expenditures, (ii) a long-term operating
agreement pursuant to which the Company's traffic can be originated and
terminated through the network facilities of TecNet, Inc., an affiliate of TEC,
including the traffic the Company anticipates will be generated as a result of
implementation of the Company's offering telecommunication services through the
College Enterprises, Inc. on-campus debit card system, and (iii) arrangements to
finance the equipment and operations of a point of sale distribution network for
the Company's Cards. There can be no assurances that these negotiations will be
successful or that TecNet, Inc. will continue to handle traffic for the Company
or advance funds for working capital expenditures. Moreover, the Company has
accured significant carrier charges with TecNet, Inc. and third party providers
which it must satisfy.
To date, the Company has funded its operations through: (i) two offerings, which
aggregated $1,000,000 of proceeds to the Company; (ii) the exercise of
approximately 2,280,000 warrants to purchase shares of the Common Stock of the
Company at $1.50 per share (the "$1.50 Warrants"), which aggregated
approximately $3,400,000 of proceeds to the Company; (iii) sale of 61,050 shares
of the Company's Series A Preferred Stock, which resulted in the elimination of
an accounts payable balance to Premiere totaling approximately $6,105,000; (iv)
sale of $1,200,000 principal amount of the Company's Notes with the $2.375
Warrants; (v) the sale of a $100,000 demand promissory note bearing 10% interest
per annum; and (vi) the sale of a $200,000 demand promissory note bearing 10%
interest per annum, all in offerings exempt from registration under the
Securities Act.
The Company has no existing bank lines of credit and has not established any
sources for such financing. During June 1998, the Company initiated discussions
with several entities regarding short-term financing related to accounts
receivable to provide funding for the immediate internal expansion of the
business. As of February 18, 1999, no such arrangement has been consummated. The
Company believes that such an arrangement can be consummated, but also believes
that the potential terms of such an arrangement will be more favorable following
the implementation of the additional credit and collection activities discussed
in Note 3(b) to the Consolidated Financial Statements. However, there can be no
assurance that such funding will be available to the Company, or if available,
will be available in either a timely manner or upon terms and conditions which
are acceptable to the Company.
During the six month periods ended December 31, 1998 and 1997, the Company's
major components of cash flow were as follows:
SIX MONTHS ENDED DECEMBER 31,
------------------------------
1998 1997
------------- -----------
Net cash used in operating activities ......... $(1,421,575) $ (811,116)
Net cash used in investing activities ......... (3,675) (72,442)
Net cash provided by financing activities ..... 1,341,550 332,578
----------- ----------
Net decrease in cash .......................... $ (83,700) $ (550,980)
=========== ==========
Net cash used by operating activities during the six months ended December 31,
1998 was $1,421,575 as compared to $811,116 for the six months ended December
31, 1997. The increase of $610,459 was caused by a net loss of $5,293,116 for
the six months ended December 31, 1998 as compared to net loss of $1,123,291 for
the six months ended December 31, 1997 and an increase in accounts payable and
accrued expenses of $2,706,474 for the six months ended December 31, 1998 as
compared to an increase of $3,225,110 for the six months ended December 31,
1997.
18
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
During the six months ended December 31, 1998 the Company experienced a much
smaller increase in sales and inventory, as compared to the corresponding prior
year period.
To date, capital expenditures have not been material. Cash used in investing
activities for six month periods ended December 31, 1998 and 1997 related solely
to capital expenditures of approximately $3,675 for the six months ended
September 30, 1998 and $72,442 for the six months ended December 31, 1997.
Cash provided from financing activities of $1,341,550 during the six month
period ended December 31, 1998 consisted of $1,200,000 net proceeds from the
Company's sale of the Notes, $67,000 proceeds from the exercise of certain $1.50
Warrants and $100,000 demand note sale less payments of approximately $25,000
related to the Prime Communications, Inc. note payable.
For the six month period ended December 31, 1998, the Company experienced a
substantial operating loss of $5,293,116 and used $1,421,575 cash in operating
activities. The Company's cash position at December 31, 1998 approximated
$25,000 and its working capital deficit approximated $6,073,000. Of the
Company's working capital deficit, approximately $823,000 consists of deferred
revenue, which represents sales for which provision of the underlying
telecommunications service has not yet been rendered or paid for by the Company.
This does not represent an immediate cash requirement. However, due to operating
losses and the Company's expansion, the Company remains severely
undercapitalized and to date has not been able to finance its expansion as
quickly as opportunities have arisen. During the six months ended December 31,
1998, the Company has experienced substantial difficulty in making timely
payments to its vendors and satisfying other financial obligations, including
payments to its landlord, employees and the providers of its telecommunications
facilities, professional services and other general corporate services. Because
of the lack of liquidity and the difficulty in making payments to the providers
of certain telecommunications facilities, the Company has not been able to add
the requisite facilities as rapidly as planned, and the Company's sales of Cards
has been adversely affected.
The Company continues to negotiate with a shareholder group for a $1.25 million
revolving line of credit. There can be no assurance that this line of credit
will be available to the Company, or, if available, will be available in either
a timely manner or upon terms and conditions which are acceptable to the
Company.
19
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
The Company continued discussions with one of the top outside collection
agencies in the United States with respect to collecting overdue accounts, and
intends to retain that agency, or another such agency of similar reputation, for
that purpose. Costs for collection of such accounts will be on a contingent
basis billed to the Company as a percentage of collected funds; therefore, the
Company does not expect any cash requirements associated with implementing this
program and expects that its liquidity position will improve as a result of its
implementation. Concurrently with the foregoing effort, the Company plans to
improve its documentation of processes and procedures by developing a formal
Credit and Collections Policy including, but not limited to, customer credit
file requirements, standard credit application processes and procedures and
standard procedures for the collection of past due accounts. The Company
believes that the combination of the foregoing actions will result in reduced
credit risk to the Company, improved liquidity and enhanced ability to establish
an asset-backed working capital credit facility due to the increased quality of
the receivables portfolio. Since these planned actions are in an early stage of
implementation, it is not possible at this time to estimate the anticipated
effects, if any, on sales to current customers.
TEC, a holder of approximately 22% of the Company's issued and outstanding
Common Stock, in December, 1998, (i) intervened with certain of the Company's
traffic-providers and (ii) through an affiliate, TecNet, Inc., (a) began to
originate and terminate domestic and international telecommunications traffic
for the Company and (b) lent $200,000 to the Company on a demand basis, thereby
reducing the immediate and short-term capital shortfall of the Company. The
Company is in the process of negotiating a long-term operating agreement and
working capital facility with TEC. However, there can be no assurances that the
parties will reach an agreement or that TecNet, Inc. will continue to originate
and terminate telecommunications traffic for the Company.
Seasonality
The business of the Company does not experience significant seasonality.
Inflation
Management does not believe that inflation has had, or is expected to have, any
significant adverse impact on the Company's financial condition or results of
operations.
The Year 2000 Issue
Many existing computer programs use only two digits to identify a year in their
date fields. These programs were designed and developed without considering the
impact of the upcoming change in the century (the "Year 2000 Issue"). If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000.
None of the Company's Card activations are date-dependent. All activations and
deactivations are based on payment and usage only, as a normal debit account
works. Further, the Company currently is not utilizing any integrated software
which will be impacted significantly by the Year 2000 Issue. As a result,
20
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
the Company does not anticipate significant expense in ensuring that the Company
has adequately provided for any corrections to its existing hardware or
software. Furthermore, the Company is currently evaluating an upgrade of its
financial and accounting software and has obtained documentation from vendors of
such software stating that the Year 2000 Issue has been addressed.
In addition, the Company has begun the process of contacting its key suppliers
and other vendors to assure that they have addressed the Year 2000 issue as
regards continuing provision of services to the Company.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income", which established standards for reporting
and display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by, or distributions to, owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes
standards for the reporting of certain information about operating segments by
public companies in both annual and interim financial statements. SFAS No. 131
defines an operating segment as a component of an enterprise for which separate
financial information is available and whose operating results are reviewed
regularly by the chief operating decision maker to make decisions about
resources to be allocated to the segment and to assess its performance.
SFAS Nos. 130 and 131 are both effective for financial statements for years
beginning after December 15, 1997 and both require comparative information for
earlier years to be restated. Accordingly, the Company has adopted both the
foregoing standards for the accompanying financial statements for the quarter
ended September 30, 1998. SFAS No. 130 divides comprehensive income into net
income and other comprehensive income, and specifies that an enterprise that has
no items of other comprehensive income in any period presented is not required
to report comprehensive income. Accordingly, since the Company did not have any
items of other comprehensive income in any period presented, comprehensive
income is not separately reported. The adoption of SFAS No. 131 did not have a
material effect on the Company's financial position or results of operations.
The Company continually evaluates SFAS No. 131 in order to fully evaluate the
impact, if any, the adoption of the provisions of this Statement will have on
future financial disclosures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold any derivatives or investments that are subject to
market risk. The carrying values of financial instruments, including cash and
notes payable at December 31, 1998 and June 30, 1998, respectively, approximate
fair value as of those dates because of the relatively short-term maturity of
these instruments which eliminates any potential market risk associated with
such instruments.
21
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
ITEM 1. LEGAL PROCEEDINGS
In June of 1996, the Company became a co-defendant in a legal action in the
Circuit Court for the First Judicial District of Hinds County in Jackson,
Mississippi in the case entitled Heritage Graphics, Inc. ("Heritage"), et. al.
v. Telephone Electronics Corporation, et. al. Civ. No. 251-96-000492. The named
plaintiffs in the action are: Heritage Graphics, Inc.; Thomas L. Gould, Jr.;
Suzanne G. Gould; and Raine Scott. The named defendants in the action are:
Telephone Electronics Corporation d/b/a TECLink; TECLink, Inc.; the Company;
Asynchronous Technologies, Inc.; Barbara Scott; Ronald D. Anderson, Sr. d/b/a
Anderson Engineering; Walter Frank; and Frank C. Magliato. The second Amended
Complaint filed in the action alleges a conspiracy on the part of all of the
defendants to destroy Heritage and to eliminate it as a competitor in the
Internet services provider market. The Company and others allegedly duped
Heritage into surrendering its trade secrets, its services, its intellectual
property, its expertise, etc. to the Company. The complaint's lesser allegations
are that (i) defendants conspired to slander the business reputations of
Heritage and Tom Gould; and (ii) TEC and the Company are jointly and severally
liable to it for $268,245 worth of production work and consulting services
provided over the September to December 1995 time period. The plaintiffs seek
damages of $500 million. The Company believes that the plaintiffs' claims are
without merit. Further, the Company believes that its counterclaims are
sufficiently well grounded to offset any judgment entered against the Company.
The Company intends to vigorously contest this case. The case is set for trial
on September 7, 1999 in Jackson, Mississippi.
In October of 1997, the Company initiated a lawsuit against IDT Corporation
("IDT"), CG Com, Inc. ("CG Com"), and Carlos Gomez in the Supreme Court of the
State of New York for the County of New York (Index No. 604920/97). The Company
initially sought and was granted a temporary restraining order which enjoined CG
Com and Carlos Gomez from distributing Prepaid Phone Cards of IDT, a competitor
of the Company, which the Company alleged was in violation of an Independent
Master Distributor Agreement (the "Distribution Agreement") with the Company
which provided for CG Com and Carlos Gomez to act as exclusive distributors of
the Company's Prepaid Phone Cards in the state of New York. The Amended
Complaint sought preliminary injunctive relief against both CG Com and IDT,
which was denied by the court. Subsequently, the Company discontinued the action
against Mr. Gomez and CG Com. The action seeks $50 million in damages for
tortious interference with the Distribution Agreement against IDT. The Amended
Complaint alleges, among other things that IDT entered into its distributorship
arrangement with CG Com and Mr. Gomez with full knowledge of the business
relationship between the Company and those parties. This matter was settled on
or about January 28, 1998 pursuant to a Settlement Agreement with IDT which
provides the Company with certain services at rates negotiated between the
parties.
During March 1998, Vanity Fair Intimates, Inc. ("Vanity Fair") commenced an
action entitled Vanity Fair Intimates, Inc. formerly known as Vanity Fair Mills,
Inc. v. Promo Tel, Inc. also known as and/or trading as Digitec 2000, Inc., in
the Civil Court of the City of New York for the County of New York, L&T Index
No. 066018-98 seeking eviction and judgment against the Company for a total of
$472,799. The matter was settled in September, 1998 for $208,916, to be paid in
monthly installments of approximately $35,000 commencing in September 1998 and
continuing through and including the month of February, 1999. The Company made
the first payment due in September in accordance with the settlement agreement.
However, due to its liquidity problems, the Company failed to make the payments
due in October and November, 1998. Due to the Company's failure to make the
foregoing payments, Vanity Fair gave notice of its intention to enter a
Confession of Judgment for $369,774, less the amount previously paid by the
Company. The Company subsequently negotiated an alternative payment plan with
Vanity Fair, and to date is in compliance with the revised payment terms.
22
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
In June, 1998, the Company was served in an action entitled Michael Bodian, as
Chapter 11 Trustee of Communications Network Corp. ("Conetco"), a/k/a Conetco v.
Digitec 2000, Inc. f/k/a Promo Tel, Inc., Bankruptcy Case No. 96-B-53504 (PCB),
Adv. Proc. No. 98-8621-A, pending in the United States Bankruptcy Court,
Southern District of New York, wherein the plaintiff alleges that a preferential
payment or fraudulent transfer in the amount of $150,800 was made to the Company
by Magic Communications, Inc. ("Magic"), an affiliate of Conetco. Conetco, a
reseller of long distance telecommunications services which it purchased from
WorldCom Network Services ("WorldCom"), sold prepaid telephone debit cards
through Magic which acted as its master sales agent. After WorldCom terminated
Conetco's access to its long distance network because of Conetco's failure to
pay its large outstanding balance, the debit cards became useless. Conetco
alleges that a "refund" of $150,800 in the form of a credit was given by Magic
to the Company as a result of cash refunds that the Company had given to its
customers on account of returned debit cards. An answer asserting numerous
defenses, including that the Company never received the "refund" in question,
has been filed on behalf of the Company.
On June 9, 1998, the Company was served with a Summons and Motion for Summary
Judgment by Frontier in a case entitled Frontier Communications International,
Inc. v. Digitec 2000, Inc. in the Supreme Court of the State of New York, County
of Monroe 5390196 seeking judgment on a promissory note (the "Frontier Note")
issued by the Company for $893,061 in connection with Frontier's termination of
its Card division. The outstanding amount on the Frontier Note at that time was
approximately $558,000, which was reflected in the accounts payable of the
Company. On June 19, 1998, the Company paid approximately $56,000 on the
Frontier Note, reducing the balance to approximately $502,000. On August 6,
1998, the Company negotiated a settlement with Frontier for $200,000. The
Company satisfied the settlement in September 1998, and as a result, a security
interest held by Frontier against certain assets of the Company was removed.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
23
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to, and voted upon by, the
stockholders of the Company in conjunction with the 1998 Annual Meeting of
Shareholders held on November 18, 1998 in New York, New York:
1. The election of four directors to serve until the next Annual
Meeting of Shareholders or until their successors shall be duly
elected and qualified;
2. The approval of an amendment of the Company's Stock Incentive Plan;
3. The ratification of the appointment of BDO Seidman, LLP ("BDO") as
the Company's independent certified public accountants for fiscal
1998; and
4. The transaction of such other business as may properly come before
the Annual Meeting or any adjournment thereof.
With respect to the election of directors, the Board designated five
nominees for election as directors to the Board to serve until the 1999 Annual
Meeting or until their successors are duly elected and qualified. The five
nominees consisted of Mr. Frank C. Magliato, the Company's Chief Executive
Officer and a director, Ms. Amy Newmark, a director, Ms. Lori Ann Perri, a
director, Mr. Francis J. Calcagno, a director and Mr. Scott W. Steffey, a
director. Ms. Newmark withdrew her nomination prior to the Annual Meeting. The
stockholders approved the election of the four remaining nominees to the Board
by the affirmative vote of a majority of the shares of Common Stock present, in
person or by proxy, and entitled to vote at the Annual Meeting. Each of the
foregoing nominees received the following votes:
NAME FOR WITHHELD
------------------ --------- --------
Mr. Frank C. Magliato 5,319,234 40,015
Ms. Lori Ann Perri 5,319,234 40,025
Mr. Francis J. Calcagno 5,319,234 40,025
Mr. Scott W. Steffey 5,319,234 40,025
With respect to the amendment of the Company's Stock Incentive Plan, the Board
of Directors adopted an amendment to the Plan increasing the number of shares of
Common Stock reserved for issuance under the Plan from 600,000 shares to
1,600,000 shares and recommended approval thereof to the stockholders. The
stockholders approved the amendment by the affirmative vote of a majority of the
Shares of Common Stock, present, in person or by proxy, and entitled to vote at
the Annual Meeting. The proposal received the following votes:
FOR AGAINST ABSTAIN
--------- ------- -------
3,968,261 109,525 17,683
With respect to the appointment of independent auditors for the Company for the
1999 fiscal year, the Board proposed that the stockholders approve the
appointment of BDO Seidman, LLP to serve as the independent auditors of the
Company for the 1999 fiscal year. BDO Seidman, LLP served as the Company's
independent auditors for the 1998 fiscal year. The stockholders approved the
appointment by the affirmative vote of a majority of the shares of Common Stock
present, in person or by proxy, at the Annual Meeting. The proposal received the
following votes:
FOR AGAINST ABSTAIN
--------- ------- -------
5,319,134 32,615 7,500
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2-10% Promissory Note.
Exhibit 27-Financial Data Schedule.
(b) Reports on Form 8-K
None.
24
<PAGE>
DigiTEC 2000, Inc.
and Subsidiaries
(formerly Promo Tel, Inc.)
Part II - Other Information
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: March 16, 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
March 16, 2000 By: /s/ Diego E. Roca
--------------------------------------
Diego E. Roca
Senior Vice President, Treasurer,
Chief Accounting Officer and Secretary
25
DIGITEC 2000, INC.
10% PROMISSORY NOTE
No. 1-A February 16, 1999
DIGITEC 2000, INC., a Nevada corporation (the "Company"), for value
received, hereby promises to pay to TECNET, INC., a Mississippi corporation, the
principal sum of TWO HUNDRED THOUSAND DOLLARS ($200,000) ON DEMAND.
Payments of principal, premium, if any, and interest shall be made in such
coin or currency of the United States of America as at the time of payment is
legal tender for the payment of public and private debts by wire transfer in
immediately available funds over the Federal Wire Transfer System to the
registered holder hereof at the written instruction of the registered holder
hereof or, at the option of the registered holder hereof, in such manner and at
such other place in the Untied States of America as the registered holder hereof
shall have designated to the Company in writing. If any amount of principal,
premium, if any, or interest on or in respect of this Note becomes due and
payable on any date which is not a Business Day, such amount shall be payable on
the next Business Day. "Business Day" means any day other than a Saturday,
Sunday, statutory holiday or other day on which banks in New York, New York are
required by law to close or are customer closed.
The Company's obligations under this Note are unconditional and not
subject to deduction, diminution, abatement, counter-claim, defense or set-off
for any reason whatsoever. The Company's obligations hereunder shall not be
subordinate to any other indebtedness of the Company.
This Note is registered on the books of the Company and is transferable
only by surrender thereof at the office of the Company in New York, New York,
duly endorsed or accompanied by a written instrument of transfer duly executed
by the registered holder of this Note or its attorney duly authorized in
writing. Payment of or on account of principal, premium, if any, and interest on
this Note shall be made only to or upon the order in writing of the registered
holder.
DIGITEC 2000, INC.
By: /s/ Frank C. Magliato
--------------------------------
Its: President/CEO
----------------------------
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY
STATE SECURITIES OR BLUE SKY LAWS. THIS NOTE MAY NOT BE OFFERED, SOLD, ASSIGNED,
PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION
UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR
EXEMPTIONS FROM SUCH REGISTRATION, AS EVIDENCED BY AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet as of December 31, 1998 and the unaudited
consolidated statement of operations for the six months ended December 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 25,022
<SECURITIES> 0
<RECEIVABLES> 1,252,536
<ALLOWANCES> 1,305,000
<INVENTORY> 572,400
<CURRENT-ASSETS> 1,962,199
<PP&E> 151,333
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,944,204
<CURRENT-LIABILITIES> 8,455,040
<BONDS> 0
0
0
<COMMON> 6,859
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,944,204
<SALES> 8,648,346
<TOTAL-REVENUES> 8,648,346
<CGS> 9,504,580
<TOTAL-COSTS> 9,504,580
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,293,116)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,293,116)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,293,116)
<EPS-BASIC> (.77)
<EPS-DILUTED> (.77)
</TABLE>
