As filed with the Securities and Exchange Commission on August 2, 2000
Registration No. _________
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) or 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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TEK DigiTel Corporation
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(Exact name of registrant as specified in its charter)
Wyoming 84-1465503
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20030 Century Blvd., Suite 201
Germantown, MD 20874
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(Address of Principal Executive Offices) (Zip Code)
(301) 916-7600
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(Issuer's Telephone Number)
With a copy to:
Cheryl A. Zeman, Esq.
Jean Svoboda McMaster, Esq.
Shumaker Williams, P.C.
Post Office Box 88
Harrisburg, Pennsylvania 17108
(717) 763-1121
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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NONE
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Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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(Title of Class)
TEK DigiTel Corporation is filing this Form 10-SB voluntarily for the purpose of
making itself a reporting company under the Securities Exchange Act of 1934.
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TABLE OF CONTENTS
PAGE
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FORWARD LOOKING STATEMENTS.....................................................1
PART I ......................................................................1
Item 1. DESCRIPTION OF BUSINESS...............................................1
Our Organization......................................................1
Our Business..........................................................2
Industry Background...................................................3
Our Strategy..........................................................5
Our Products..........................................................8
Our Market Opportunity...............................................12
Distribution Methods of Our Products and Services....................13
Status of Our New Products and Services..............................14
Our Competition......................................................15
Principal Suppliers..................................................17
Current Dependence on a Few Major Customers..........................18
Intellectual Property................................................19
Government Approval..................................................20
Employees............................................................20
RISK FACTORS..................................................................21
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................32
Forward Looking Statements...........................................32
Overview ............................................................33
Recent Developments..................................................35
Results of Operations................................................36
Liquidity and Capital Resources......................................38
Year 2000 Issues.....................................................40
New Accounting Pronouncements........................................40
Item 3. DESCRIPTION OF PROPERTIES............................................41
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...........................................................41
Item 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS......................................................43
Management...........................................................43
Directors and Executive Officers ....................................44
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Advisory Board.......................................................46
Item 6. EXECUTIVE COMPENSATION...............................................46
Summary Compensation Table...........................................47
Excessive Compensation Prohibited....................................48
Option Grants and Option Exercises in Fiscal Year 1999 and
Year-End Option Values...............................................48
Directors' Compensation..............................................48
1997 Employee Stock Compensation Plan................................48
1997 Compensatory Stock Option Plan..................................49
Employment Agreements................................................49
Item 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................51
Item 8. DESCRIPTION OF SECURITIES............................................52
Common Stock.........................................................52
Preferred Stock......................................................53
Series A, Voting Convertible Preferred Stock.........................54
Units ............................................................57
Warrants ............................................................57
Anti-Takeover Provisions.............................................58
Articles of Incorporation............................................58
Securities Laws......................................................59
PART II .....................................................................60
Item 1. MARKET PRICE OF AND DIVIDENDS ON THE COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS............................................60
Dividend Policy......................................................61
Item 2. LEGAL PROCEEDINGS....................................................61
Item 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS........................61
Item 4. RECENT SALES OF UNREGISTERED SECURITIES..............................62
Private Placement Subscription for Common Stock by Tseng Yun Tsai....63
Item 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS............................64
Exceptions to Indemnification Rights.................................64
Exclusion of Director Liability......................................65
WHERE YOU CAN FIND MORE INFORMATION...........................................65
PART F/S ....................................................................F-1
PART III ...................................................................II-1
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FORWARD LOOKING STATEMENTS
Certain statements made in this registration statement are not based on
historical facts, but are intended to be forward looking statements. These
statements can be identified by the use of forward looking terminology such as
"believes", "expects", "may", "will", "should", or "anticipates" or similar
terminology, or by discussions of strategy. These statements reflect the
reasonable judgment of our management with respect to future events and are
subject to risk and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. We cannot guarantee
that our forward looking statements will turn out to be correct or that our
beliefs or goals will not change. Our actual results could be very different
from, and worse than, our expectations for various reasons, including those
discussed in "Risk Factors".
This document contains numerous technological references commonly used in
the telecommunications industry. Please see the glossary of key terms that
explains these terms attached to this registration statement as Exhibit 99.
PART I
Item 1. DESCRIPTION OF BUSINESS
Our Organization
TEK DigiTel Corporation is a Wyoming business corporation. Our principal
executive office is located at 20030 Century Boulevard, Suite 201, Germantown,
Maryland 20874, and our telephone number is (301) 916-7600. We have a sales,
marketing and business development operation in Mississauga, Ontario, Canada,
and a field support engineer in Taiwan, R.O.C.
Our stock is currently quoted in the National Quotation Bureau's Electronic
Quotation Service (EQS) or "Pink Sheets" under the trading symbol TEKI. Our
common stock was quoted on the National Association of Securities Dealers,
Inc.'s (NASD) Over-the-Counter Electronic Bulletin Board (OTC BB) under the
trading symbol TEKI until April 19, 2000, the deadline set by the NASD for
compliance with its eligibility rule. The eligibility rule requires issuers to
register their securities with the Securities and Exchange Commission (SEC) in
order for the issuer's securities to be eligible for quotation on the OTC BB. We
are submitting this registration statement to comply with the eligibility rule
so that our common stock may be relisted on the OTC BB.
On December 22, 1995, ATC Group L.L.C. (ATC LLC) was formed to develop,
manufacture and market a line of communications access products for networks.
Under the terms of an agreement and plan of merger among Diversified
Technologies, Inc., ATC Group, Inc. (ATC Inc.) and ATC LLC, dated June 10, 1998,
ATC LLC merged into ATC Inc., a Maryland corporation and the wholly-owned
subsidiary of Diversified Technologies, Inc., formed solely to facilitate this
merger transaction. The effective date of the merger was July 6, 1998. As a
result of the merger, all of the assets, liabilities and operations of ATC LLC
were merged
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into ATC Inc., and Diversified Technologies, Inc. changed its name to TEK
DigiTel Corporation. Also, pursuant to the merger agreement, the members of ATC
LLC became our officers, directors and majority stockholders.
On July 6, 1998, we issued 6,200,000 shares of common stock and 2,066,667
shares of Series A Voting Convertible Preferred Stock to the members of ATC LLC.
Prior to the merger, Diversified Technologies, Inc. was a non-reporting OTC BB
listed company, with no substantial assets or liabilities and no operations. Our
business development, as described below, essentially commenced on July 6, 1998.
The merger agreement also contained many other provisions that are material to
our operations. Many of these provisions ceased to apply as of July 6, 2000, but
some provisions continue to apply and are described in this registration
statement. A copy of the merger agreement is attached as Exhibit 2 to this
registration statement.
Glocom, Inc., Enghe Chimood, Si Tsong Chang, Thomas W. Yang and Ke-ou Chao
formed ATC LLC. Since our inception, we have developed and marketed proprietary
products and technologies formerly owned by ATC LLC, known as the V-Server
family of products. These products incorporate both software and hardware
technologies originally designed and developed by ATC LLC, as more fully
described later in this registration statement.
As stated above, we are filing this registration statement on Form 10-SB to
comply with the rule changes affecting our eligibility for quotation on the OTC
BB. The rules require us to make information concerning our company more readily
available to the public by becoming a "reporting" company under the Securities
Exchange Act of 1934. This means that we must file various reports with the SEC
in a timely manner. As a result of filing this registration statement, we are
obligated to file with the SEC certain interim and periodic reports, including
an annual report containing audited financial statements. We believe that being
a reporting company and having our common stock relisted on the OTC BB will make
us more attractive to investors and potential business partners.
Our Business
We develop, market and sell Internet telephony solutions targeted at the
next generation Voice over IP (VoIP) based telecommunications companies. Most
Internet telephony system suppliers are focused on developing core IP switching
solutions because their inherent business model assumes that the existing analog
telephone infrastructure will remain the primary network to the home/small
business. We, on the other hand, are focused on developing a customer premise
based Internet telephony solution because we believe the Internet IP cloud will
extend directly to the home and small businesses. We also believe that the
accelerating growth of Internet Cable, Digital Subscriber Loop (DSL) and
Wireless IP will make this a reality sooner rather than later. A permanent
Internet connection to homes and small businesses will be as ubiquitous as the
telephone is today. Our technology, which is located in the home or small
business, converts and then integrates all data and voice services to IP so that
the existing Internet networks can support any new services (voice and data)
without any modifications to the
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Internet cloud. This eliminates any regulatory issues, simplifies the core
network and simplifies network management. Our proprietary server based
architecture, and its Linux based provisioning server, enable these next
generation telecommunications carriers (including most Internet Service
Providers) to easily and quickly deploy subscriber devices into homes and small
businesses and immediately begin offering a full suite of Internet and telephony
solutions.
The market for Internet telephony continues to outpace even the most
liberal forecasts. According to the "1999 Multi-Media Telecommunications Market
Review and Forecast", produced jointly by the Telecommunications Industry
Association and its subsidiary, the Multi-Media Telecommunications Association
(MMTA), IP telephony gateway and gatekeeper revenue is expected to increase from
$459 million in 1999 to $990 million in 2000, to $1.6 billion in 2001 and to
$2.45 billion in 2002.
We were formed to develop a simple and low-cost line of stand alone
Internet telephony gateways that would be distributed through a channel of
distributors. However, early in 1999 it became apparent that the market for
simple gateways would be very limited without ready-to-use Public Switched
Telephone Network (PSTN) gateway services available for these customers. Most
ISPs and next generation telecommunications companies had already built large IP
PSTN gateways. The only thing missing was calls or voice traffic origination and
termination. This forced a change in our product development and marketing
strategies. Our product development strategy was changed to develop a server
based technology that was capable of provisioning a network of hundreds of
thousands or millions of these devices and capable of terminating calls on all
the existing H.323 based PSTN gateways. Our marketing strategy was changed to
target Internet and telephony service providers that could use our gateways to
not only integrate the various services but easily deliver these services
through our sophisticated provisioning server.
We believe that our server base provisioning technology that can fully
interoperate with the existing H.323 based PSTN gateways already installed is
unique in this market and allows for a seamless integration of these
technologies.
Industry Background
The impact of deregulation, competition, convergence and the Internet have
created a turbulent telecommunications industry. Fueled by the allure of free or
inexpensive long-distance communications, IP telephony sits at the heart of the
turbulence. It is seen as an attractive and relatively easily penetrable,
rapidly growing market. International Data Corp. predicted that, by 1999, 60
million Personal Computer (PC) users would be making calls on the Internet,
according to; and, within the next 12 years, InfoTEST International estimates
that 25% of worldwide phone traffic will travel across the Internet. Internet
telephony offers long-distance savings to callers because it bypasses two
Federal Communications Commission (FCC) imposed surcharges. The first are access
charges imposed by local telephone companies on long-distance companies
(international access charges) that represent 40% of the latter's cost. The
second are the long-distance carriers' mandatory contributions to the universal
service fund that typically cost each
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consumer $.93 per month. In addition, enhanced service providers (ESPs),
including ISPs, are not required to pay local exchange carrier (LEC) access
charges. These cost savings will drive business customers to move towards
Internet telephony as the technology becomes reliable and available.
When IP telephony was first introduced in 1995, voice quality was poor and
it was only available in the form of PC to PC connections. To make a call, both
the sender and the recipient needed to be on-line. To eliminate these
inconveniences, PC to phone communication was introduced in 1996. While this
eliminated the need for both users to be on-line, voice quality improvement was
minimal. It was not until 1997, with the introduction of PSTN-to-IP gateways,
that users were able to make calls from phone-to-phone using IP with high voice
quality. Allowing users to make long-distance calls over the Internet, without
either party having to be connected to a PC, launched the IP telephony industry
and led to the consensus among industry experts that IP telephony had finally
achieved widespread viability. To date, market growth in IP telephony equipment
has primarily been focused in central office gateway equipment for use by
Competitive Access Providers (CAPs), Internet Service Providers (ISPs) and
Internet Telephony Service Providers (ITSPs) in building their service
infrastructures. Companies such as Cisco Systems, Northern Telecom, and Lucent
Technologies are the leading companies in the industry and have been targeting
the larger carriers.
A significant challenge facing service providers as they build their
managed IP telephony network infrastructure is being able to provide seamless
services to consumers. As indicated above, currently subscribers originating
voice calls on IP telephony networks must dial a local access number, enter a
PIN, wait for authorization, and finally enter their telephone number. This
process is inefficient and has limited the widespread adoption of VoIP
technology. Consequently, service providers seek to make their networks
transparent to the user and/or indistinguishable between placing calls over
conventional phone lines (PSTN) and VoIP calls. To achieve the requisite level
of transparency, it is necessary to extend the IP telephony access point to
customers' sites, rather than requiring consumers to use conventional phone
lines to obtain access.
Customer Premise Equipment (CPE) is the tool that achieves this level of
transparency, and we believe it represents a growth area within the VoIP gateway
market.
CPE will allow service providers to deliver IP telephony access to
commercial customers via dedicated VoIP lines that connect directly to a
customer's PBX system. The CPE gateway will route PBX traffic across a wide area
network connection to a router at the service provider's site. From there, the
traffic proceeds to the backbone VoIP network.
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Our Strategy
Our strategy is to become the leading supplier of Internet access devices,
including CPE, capable of supporting telephony and data services to small and
medium-sized ISPs who want to become next generation telephone companies. A key
element of this strategy is to partner with Internet telephony service providers
(who provide a full suite of PSTN telephony services) and deliver a bundled
product/service to these ISPs.
Strategic Relationships with Telephony Service Providers
Rather than developing our own PSTN gateway services (like many gateway
suppliers such as Franklin Telecom, I-Link and Intelliswitch), we are
partnering with telephony service providers like Centrecom to enable our
ISP partners to sell 1-800 access, unified messaging, conferencing and
global long distance services using our iGATE platform.
Provisioning and Management Server
The provisioning and management server is critical for enabling small and
medium-sized ISPs to deliver these integrated services without any
additional technical and infrastructure resources. The unique ability of
this provisioning server to coexist with H.323 gatekeepers and compliment
its services will be a cornerstone of our differentiation strategy.
Expand Distribution Worldwide
We believe the largest market for Internet telephony today is outside the
United States due to the high cost of traditional telephony services in
these areas.
Establish Leadership in Auto Install and Activation Technology
The single largest impediment to a broad acceptance of this technology is
the complexity of installing and activating these devices. We believe we
have developed leading edge technology that will enable these devices to be
as easy to install as traditional telephones. We will continue to enhance
this technology and believe we can maintain market leadership in this area.
Our Principal Products and Services and Their Markets
We manufacture a line of network access devices designed to deliver a
variety of voice, data and fax services to the small and medium-sized
business user using the Internet and the PSTN. These services include local
and long-distance voice connectivity, enhanced voice features such as voice
mail, unified messaging and custom calling, as well as basis Internet data
access for multiple users at a single site. We have also developed a number
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of supporting personal computer (PC) client and server-based products to
allow the access devices to be configured and managed to support the
interconnection of users across public Internet or private corporate
Intranets. We plan to continue the development of more features for a more
powerful family of servers providing long-distance telephone service over
the Internet.
Our current V-Server line of products allows service providers and
enterprises to build integrated Value Added Networks over the Internet. The
products integrate basic voice telephony features with IP routing and
state-of-the-art VoIP technology that enables telephone and fax calls to be
made over the public Internet or any private IP infrastructure. Although
the products are designed to interoperate with all existing central office
H.323 gateways and gatekeepers, the products can be deployed as a stand
alone system. We believe that for ISPs to successfully offer IP telephony
services, they must convert voice to data right at the customer's premise.
This is primarily due to the ISP's lack of expertise of managing a
telephone infrastructure. By converting voice traffic to data at the
customer's premise, the ISP can continue to offer the same service they
offer today with minimal additional resources, equipment and expertise.
The devices are stand alone units which are designed to be used with a wide
variety of Internet access services, including Integrated Services Digital
Network (ISDN), Wireless, DSL and cable modem delivery. According to the
Computer Economics study, "Cable modem use will grow from 5.7 million
installed systems in 2000 to 27.6 million systems in 2005. Between 2000 and
2005, the installed base of DSL lines will increase from 2.4 million to
13.8 million."
We plan to enhance our current product line with additional higher
performance platforms as well as enhanced telephony and data functionality.
While the target user for our product will be the small and medium-sized
business owner, the principle channel to this market for our products will be
via service providers who will offer bundled telephony packages which include
our access device. We also market our products via Original Equipment
Manufacturer (OEM) contracts and other vendors who need our low density customer
site platform to complement their current solution set.
Technology Deployed
We develop and manufacture a series of stand alone access devices
designed to deliver enhanced voice and data solutions to small and
medium-sized businesses. While these platforms differ in terms of the
capacity, performance, price levels and features supported, they all
incorporate to some degree the following key technologies:
IP Routing - Connecting a single computer workstation to the Internet is a
fairly simple proposition for the ISP and normally involves installing a
stand alone or internal modem
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card to the computer. However, when the requirement changes to the multiple
workstations normally found in a small and medium-sized business, a device
that can provide a connection between the Local Area Network (LAN) that
links the workstations and the Internet is normally required. This device
is called a "router"; and, in addition to providing a connection between
the Internet and the multiple computer workstations, a router can "share" a
single IP address often provided by the ISP among all the computers and
perform prioritization functions to protect delay-sensitive traffic like
voice.
Voice over IP - The VoIP gateway functionality included in the V-Server
products provides an interface between the traditional voice world and the
Internet. The gateway encodes the analog voice signal from attached
telephone equipment, converts it to a digital representation and then
bundles it into the IP which is used to transport all traffic through the
Internet. Two gateways located at geographically distant locations, but
both connected to the Internet, can be used to facilitate a telephone call
or fax connection without the need for conventional voice lines used to
construct today's PSTN.
Voice Switching - While normally found in the switches used by the service
provider to construct the PSTN and Private Branch Exchange (PBX), voice
switching is the ability to intelligently route voice/fax phone calls based
both upon destinations selected by the end user and the availability of
network resources. The ability for business users in a common facility to
share a set of PSTN lines to initiate and receive phone calls, transfer
calls between each other, utilize voice mail, have calls screened by an
Interactive Voice Response (IVR) mechanism and automatically select lower
cost long distance services are necessary efficiency tools in today's
environment.
GateKeeper Support - As in any other technology area, the VoIP world has a
set of existing and evolving standards for communication between devices
created by different vendors. One of the most critical areas is interaction
between the VoIP Gateway that handles the actual traffic and the GateKeeper
that enables the call to occur. In addition to the basic function of
facilitating the call by helping two gateways locate each other across the
network and supporting the information exchange necessary to get the two
devices communicating, the GateKeeper is a critical element in providing
information for those systems tasked with monitoring usage and generating
customer billing information. As some form of billing is required with any
carrier provided service, interoperability with the GateKeeper is an
important element in any VoIP Gateway. Existing standards like Stand alone
and evolving standards like Session Initiation Protocol (SIP) and Media
Gateway Control Protocol (MGCP) are the key to developing deployable
multi-vendor solutions, as are supporting the existing proprietary
implementations employed by some vendors in areas not yet fully defined by
the standards committee.
Deployable Tools - The large scale propagation of Customer Premise
Equipment (CPE) devices presents a number of issues for a service provider.
To deliver a competitively priced offering, it is often necessary to
control the cost of installing and managing this
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pool of distributed equipment. Key factors in reducing these costs are
tools that eliminate the need for the service provider to actually visit
the customer site. Features that enable customer installation of the
product, including pre-configuration and self-configuration, are very
important, as are management solutions that enable centrally located
technicians to install/diagnose CPE equipment without traveling to the
customer's location. A number of tools, including Simple Network Management
Protocol (SNMP), Telnet, and File Transport Protocol (FTP), are available
to allow devices to be monitored and controlled across the Internet. In
addition, ease of use features such as transparent dialing reduce the need
for training on the part of the actual users and have a positive effect on
reducing support costs and increasing profitability.
Our Products
o Gateways
The V-Server Router/Gateway provides the physical connection between the
customer's telephone equipment, computers, the Internet and the PSTN. In
addition to VoIP gateway functionality, each V-Server includes full IP
routing support to provide traffic control and firewall protection as well
as to prioritize voice and allow more than one computer to share the IP
address provided by the ISP. The ability to configure the V- Server device
using Dual Tone Multi-Frequency (DTMF) is rather unique. Utilizing a
built-in IVR prompter, the IP, ISDN, Point-to-point Protocol (PPP), and
other configuration data can be entered into the device through any Plain
Old Telephone System (POTS) telephone using the DTMF keypad. In addition,
this IVR prompter can be accessed through the normal PSTN, thereby enabling
remote activation. Currently, there are three versions of V-Server devices.
iGATE
Focused on ISDN and Analog Dial Internet connectivity, the iGATE can
be ordered in versions with an Asynchronous Port or an ISDN Basic Rate
Interface (BRI) network port. All iGATE devices have an Ethernet LAN
port to connect to the local computers and two analog voice ports
which can be individually configured as Foreign Exchange Office (FXO)
for PBX or PSTN connection or Foreign Exchange Station (FXS) for
connection to a standard analog telephone. The iGATE can also be
ordered in a gateway-only version (no network port) to connect
telephones to a corporate LAN. Both S/T and U versions of ISDN are
available. This integrated ISDN router can support Point-to-point
Protocol (PPP) (64KB), Multi-Link PPP (MLPPP) (128KB), and our Dual
PPP (two independent PPP calls) to enable quality of service (QOS)
voice to be supported.
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Dual Ethernet
Similar to the iGATE with two voice ports and a local Ethernet
connection, the Dual Ethernet V-Server is focused on broadband
services and can be directly connected to DSL, Wireless or Cable
modems via its second Ethernet port. The ability of the product to be
customer installed on an existing broadband access link makes the
V-Server Dual Ethernet especially attractive to service providers
wishing to avoid the expense of a "re-installation" visit to their
customer sites to add voice support. More importantly, the ability to
offer voice and Internet access using a single IP address (support
Network Address Translation (NAT)), the ability to filter IP addresses
(security) and the ability to provide QOS level using voice
prioritization is only available in a dual Ethernet technology
product. Furthermore, our unique IP exposure feature enables VoIP to
pass through the NAT interface. In addition, PPP over Ethernet (PPPoE)
is in development for many DSL services which require it.
OfficeBuilder (In Prototype)
Combining advanced voice switching with the gateway and routing
functionality found in the other V-Server products, the OfficeBuilder
allows a small office to optimize their communication budget. The
basic OfficeBuilder supports four phones, two PSTN connections and
support for four simultaneous VoIP calls. Additional modules can be
added to expand the device to support more subscribers and PSTN/VoIP
trunks. Like the other V-Server products, full routing support is
provided and the unit has the ability to connect to any form of
Internet access service. The units support integral V90 modem,
Integral ISDN (S/T or U) Router, as well as a dual Ethernet version.
Subscribers can use standard analog phones to utilize the units
advanced call handling features including Call Transfer, Call Forward,
Call Hold, IVR, Music on Hold, Unified Messaging and more.
Provisioning Tools
Dynamic Dialing Administrator (DDA)
V-Server Gateways support a unique "Dual Registration" mode enabling
them to selectively route VoIP calls using either a conventional stand
alone gatekeeper or our own DDA technology on a call-by-call basis.
The LINUX based software product enables the offloading of the
processing of V-Server to V-Server calls from the Stand alone
gatekeeper. The DDA enables the service provider to deliver enhanced
voice services not currently possible with today's stand alone
implementations. The DDA is focused on enhancing not replacing H.323
gatekeepers, allowing the delivery of enhanced telephony services
offering value to the small business operator while improving service
provider profitability.
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These services include:
Phone Directories
The DDA enables the service provider the ability to automatically
create and provide access to phone directories. The phone directories
can be accessed by calling group, area code, country and name.
Furthermore, users can have web access to their directories as well as
to their usage history reports.
ISDN Wake-up
A small office using "on demand" ISDN Internet access can still
receive VoIP calls when disconnected from the Internet. By sensing
VoIP calls to off-line V-Servers and "waking them up" using the PSTN
to trigger them to connect to their ISP, the DDA allows them the same
connection benefits as dedicated users.
Virtual Calling Groups
Clusters of V-Server devices can be grouped into smaller calling
groups that restrict who can call and be called. This feature allows
the service provider to offer "Friends and Family" type calling
packages as well as providing corporate users with their own Virtual
Private Voice Network (VPVN) to connect their offices together. Tiered
service offerings with different rate structures can be constructed
using calling groups of different sizes and by allowing specific users
to be part of multiple groups.
Free Calling Areas
Service Providers deploying PSTN connected V-Server gateways on their
own sites can offer their customers free calling plans to commonly
called destinations as part of a small business package. A group of
distributed V-Servers can "host" phone calls to specified area
code/exchange pair(s) allowing a provider to easily construct and
administer free calling packages to differentiate their offerings from
generic data-only ISP competitors.
Service Partitioning (Virtual ITSPs)
To support partnerships between the primary voice provider and the ISP
reseller, our DDA server provides the ability to partition a block of
users to be independently administered by the ISP reseller. The DDA's
Service
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Partition Consol (SPC) enables a partner to provision and manage a
group of customer accounts remotely using a secure Hyper Test Markup
Language (HTML) based web browser through the Internet.
Authentication Server
The authentication server is an optional feature that enables the
administrator to require authentication (PIN number, pass code, etc.)
before allowing an iGATE to process a call. The iGATE can provide an
IVR message to collect the digits, and then process them through the
DDA authentication server before allowing the call to be completed.
Call Detail Records (CDR) Collection
The DDA can collect the call detail records from each iGATE it
administers and database these records by user for ultimate billing
processing. The CDR contains IP called addresses, phone numbers
called, length of time called and packets generated/received.
Software/Configuration Management
The DDA enables automatic download of configuration data as well as
operating software. Many revisions of software can be supported
simultaneously. As each iGATE registers, the pre-assigned revision of
software for that user is checked and automatic downloading in the
background commences, if necessary. Each iGATE can support two
revisions of software so that it can quickly revert back to a stable
release if necessary. Centralized configuration of users prior to
shipping out units enables quick configuration and secure management.
Unauthorized changes in the configuration of iGATE units will result
in de-registration of the units.
o V-Express
A graphical based interface for configuration, monitoring and management of
the V-Server platforms, this package runs on Microsoft Windows 95, 98
and/or NT platforms. V-Express can be used to manage V-Server devices
connected locally or across the Internet via an IP connection and can
locally store configuration files to allow the quick replacement and
re-configuration of a failed V-Server node.
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<PAGE>
o Services
VoiceServer.net
To assist service providers in deploying new VoIP offerings, we have
used our DDA technology to implement an online Internet Telephony
Portal called VoiceServer.net. Access to this offering is bundled with
each V-Server product shipped enabling the service provider to
implement the DDA features without purchasing and maintaining a
server.
By using VoiceServer.net, service providers can deploy V-Server
Gateways to their customers and include a component of free Internet
Voice calling with their service offerings without incurring the
infrastructure costs associated with implementing these "non-revenue
generating" calls. By offloading the GateKeeper processing for these
calls to the VoiceServer.net portal, providers can focus their efforts
on the revenue generating calls and reduce their GateKeeper and
billing system cost and complexity. Ultimately, this will drive a
tighter relationship between their infrastructure costs and the
incoming revenue needed to fund growth. In addition, during the
planning phase, the removal of the "free call" variable costs will
allow a more predictable business-case analysis.
Our Market Opportunity
The ability to route voice traffic over IP data networks is gaining
widespread acceptance due to the significant cost savings generated by bypassing
long distance and toll charges, equipment cost reduction and wire savings.
Gartner Group's Data Quest states that in 1999, 4.8 billion minutes of telephone
conversations took place through networks based on Internet protocol. Data Quest
estimates that in 2003 Internet telephony will top $50 billion in revenues.
Within the VoIP industry, a number of companies are developing products for
service providers that enable carrier infrastructure to deliver VoIP services,
thereby allowing businesses and the general public to take advantage of VoIP
technology. In our opinion, one business segment has not been actively targeted.
This market is the small to medium enterprise (SME) market, which is our
targeted market and which we believe to be the fastest growing business market
for telecommunications and Internet services in the United States. At present,
in North America alone, this market is a $37 billion technology market.
As the Internet and World Wide Web begin to impact all aspects of business
operations, small office consumers are realizing the need to level the playing
field with larger enterprises by supporting systems to better communicate with
customers, suppliers, and employees. These
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<PAGE>
advances allow SME users to emulate the communication systems of a large
corporation at a fraction of the cost.
As carriers race to deliver high bandwidth services to SMEs and
telecommuters, many consumers will seek out new customer devices that integrate
voice and data. This downward proliferation of networking sophistication is in
its infancy, because, in the past, voice-over packet enabled routers and PBXs
have been far too costly and complex to be used in smaller offices. Rather, most
smaller offices have used a modem and several phone lines. TEK was created to
change the small office environment and launched a family of products marketed
to this segment of consumers yet to embrace advanced communications. We believe
our products will act as a VoIP market catalyst, enabling multiple advanced
functions within a single low-cost integrated device, far surpassing the appeal
of single function consumer alternatives.
Distribution Methods of Our Products and Services
We will primarily distribute our products to the SME business markets
through partnerships with service providers and OEMs. Other distribution
channels include Value Added Resellers (VARs) who will sell to the SIP and
enterprise customer market. A fundamental component to our strategy is to create
distribution channels which supply small and remote users with quick and easy
advanced communications solutions. We are committed to maintaining a direct
sales force to sign up and manage our strategic partners. Currently, our
President is performing sales and marketing activities; however, our plan is to
employ a full-time person as Senior Vice President of Sales and Marketing.
Further, we employ a Vice President of Sales who is focused exclusively on the
Asian market.
Service Providers - The primary focus of our strategy is to distribute our
product in partnership with service providers needing CPE components for
their offerings. By bundling the V-Server with their service package, they
can allow their SME business customers to access their VoIP voice services
using their conventional telephony equipment. We feel that a number of ISPs
will implement voice gateways to become Internet Telephony Service
Providers (ITSPs) and will need this type of access equipment.
In addition, we are finding that many of the remaining ISPs are interested
in forming partnerships with Competitive Local Exchange Providers (CLECs)
to deliver voice services to the ISPs customer base. These CLECs currently
serving a group of local users with conventional PSTN access have an
investment in a voice and billing infrastructure and are looking for market
opportunities to fuel their growth. The customer base and local presence
offered by the ISP present an attractive opportunity to deliver their
telephone services and advanced features (voice messaging, toll free
numbers, unified messaging, etc.) to the ISPs customers using the Internet
access connection and the V-Server at the customer site.
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<PAGE>
To help drive this CLEC/ISP partnership, we developed the "Pronto" program
which is designed to accelerate the speed of deployment of new VoIP
telephony services. Rather than depend upon business customers to purchase
the V-Server unit, Pronto allows service providers to bundle their voice
offering with the unit and charge a monthly access fee. This approach
parallels many of today's cellular phone service offerings and, in our
opinion, is more attractive to business customers. In addition, Pronto
provides the marketing tools and collateral necessary to market this new
service and Pronto partners are provided access to the product packaging,
signage, logos, web site banners and information, posters and even retail
display units to help them promote their offering. We will help the ISPs
and CLECs customize the Pronto marketing collateral to develop their own
"Pronto" service and take advantage of general Pronto promotion work that
we will create with SMEs to promote the concept. In addition, we will help
the service providers work out the technical and financial issues of their
own Pronto offering.
Original Equipment Manufacturer (OEM) - We have established a number of OEM
relationships with firms that provide solutions to service providers as
well as enterprise customers. These OEM partners will sell our devices
under their own name or will implement our technology into their own
platforms. The benefit to OEMs of including our products is that they will
be positioned to provide a more complete end-to-end solution to their
customers. From these opportunities, we will receive compensation either in
the form of sales of V-Server products or royalty payments for every device
our OEM partner manufactures itself.
Value Added Resellers (VAR) - To address the opportunity presented by
enterprise customers looking to implement their own VoIP solution within
their own Intranet or over the Internet, we intend to create a channel
program to establish a network of authorized VARs who will sell and support
our products. In addition, to approach the large number of small ISPs, we
will work with one or more of the tier-two distributors addressing this
environment.
Status of Our New Products and Services
We have three additional development programs planned and in production
stage. We expect to deliver these new platforms in fiscal 2000/2001. These
platforms are in various stages that range from concept to prototype stage.
Because they are not released, we are describing them in very general terms.
Second Generation Gateway/Router - The current V-Server iGATE and Dual
Ethernet platforms are being redesigned to reduce cost, expand
functionality and enable the use of components that can be acquired in
higher volumes. This development is targeted for completion in the third
quarter of 2000 to coincide with the increased shipment volumes of these
products.
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OfficeBuilder - In conjunction with our development partner, Centrepoint,
we are developing a version of the V-Server that will support full PBX
functionality in addition to the current product's routing and VoIP Gateway
support. Full PBX integration will provide such features as Call Forward,
Call Transfer, Call Hold, Interactive Voice Response and Unified Messaging.
This program will also double the current VoIP density by providing a
gateway with four VoIP ports and the ability to logically interconnect
devices via a "stacking" mechanism that will enable us to serve customers
with a larger number of employees. This development is targeted for
completion in the fourth quarter of 2000.
High Density Gateway - The current V-Server platform supports two
simultaneous VoIP "Internet calls" that, when connected to the PBX of a
SME, may not be enough to support its long distance calling requirements.
While additional V-Server devices can be "stacked" to increase the number
of simultaneous calls allowed, a more elegant solution is to provide a
product with a higher density or number of VoIP ports. Construction of a
larger gateway supporting eight or more VoIP sessions reduces the cost and
simplifies management. In addition, the device may make use of a higher
density T1 or ISDN Primary Rate Interface (PRI) to the PBX where one
connection to the V-Server can support up to 30 voice calls. To support a
larger number of voice calls, this product requires an increased level of
processing power over what the current iGATE offers, and, as a result it
will incorporate a higher performance microprocessor. This development is
targeted for completion in the first quarter of 2001.
Our Competition
The industry in which we compete is subject to rapid technological
developments, evolving industry standards and changing consumer needs. The
possibility of voice communications over the Internet first became a reality in
1995. Our future success will depend upon our ability to adapt to this rapidly
changing industry and to continually improve our products and services.
The "Voice over Packet" and specifically the VoIP market is crowded with
many participants. Many of these companies are both our potential competitors
and potential partners. In particular, if another company does not target the
same market but has the same technological focus as us, we may have a basis for
forming a strategic partnership to permit our mutual expansion.
The following table sets forth information concerning our company and those
companies we believe to be our primary competitors. This information is believed
to be accurate as to their current products and services offerings. However, we
cannot assure you that these identified competitors (and other companies) are or
will not offer enhanced products and services superior to ours.
15
<PAGE>
<TABLE>
<CAPTION>
Management
Basic Advanced and
Gateway Gateway Integrated Provisioning Nature/Extent
Company Functionality Features Routing Features of Competition
------- ------------- -------- ------- -------- --------------
<S> <C> <C> <C> <C> <C>
TEK DigiTel Yes High Yes Full Priced in the $300-400 per port
range, the focus is on high
features, and telco level
provisioning for business use.
Aplio Yes None No Limited Priced in the $200 per port range,
the focus is on residential and
casual users.
I-Link Yes Medium No Limited Priced in the $300 per port range,
the focus is on selling I-Link
Service. They do not focus on
selling hardware.
Broadmedia Yes None No Limited Priced in the $200-$300 per port
range, they do not provide a telco
level product, rather it is a
consumer level product targeted at
telcos.
Vive Yes High Yes Limited Priced in the $500 per port range,
the focus is on PBX functionality
and enterprise networks. They
have limited telco provisioning
services integrated into the unit.
Ericson Yes None No Limited Priced in the $250 per port range,
this simple gateway is primarily
targeted at the enterprise point-to-
point market.
Multitech Yes High No Limited Priced in the $300-$850 per port
range, they have established
distribution channels but the
product has no provisioning tools
for telcos. In addition, they lack
an integrated router.
Nextone Yes Medium Yes, but Medium Priced in the $300 per port range,
limited they are focused on telephone
services only and offer limited
integrated services capability.
Their provisioning tools are very
basic.
Mediatrix Yes None No Limited Priced in the $250-$300 per port
range, they are targeting the high
end of the basic gateway market.
They offer no integrated services
support and limited telco level
provisioning.
</TABLE>
We believe the principal competitive factors affecting our market include
breadth and depth of a solution, compatibility with existing applications and
operating systems, a customer
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<PAGE>
base, strategic alliances, core technology, product quality and performance,
customer service, and speed and ease of deployment. We believe our products and
solution currently compete favorably with respect to these factors. However, our
market is relatively new and rapidly evolving.
Some potential competitors have longer operating histories, larger customer
bases, greater brand recognition, and significantly greater financial, marketing
and other resources than we do and may enter strategic or commercial
relationships with larger, more established and well-financed companies. Some
of our competitors may be able to secure alliances with customers and affiliates
on more favorable terms, devote greater resources to marketing and promotional
campaigns and devote substantially more resources to systems development than we
do. In addition, new technologies and the expansion of existing technologies may
increase competitive pressures on us. We may not be able to maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical and
other resources.
Principal Suppliers
The component pieces of our products, while manufactured by only a few
companies, are available from several vendors. We have not experienced
difficulties in purchasing component parts; and, while we have begun to
experience longer lead times for certain components, we do not anticipate any
shortages in the future.
We rely upon direct purchases or licensing agreements with software
providers for some of the software that we use in our products. In 1998, we
entered into an agreement with RADVision, Inc., for a nonexclusive license to
use the H.323 Protocol Stack Software (H.323 protocol) in our V-Server Gateway
system products. This software functions as middleware, enabling our products to
use the H.323 protocol. Under the agreement, we pay RADVision royalties every
quarter, based upon the number of V-Server products we sell.
We consider the RADVision license to be very important to our product.
Building our product without the H.323 protocol would require us to locate an
acceptable alternative or develop our own software, both of which we believe
would entail significant expense.
We also entered into a nonexclusive license agreement with Telogy Networks,
Inc., a subsidiary of Texas Instruments, on March 31, 1998, which permits us to
use Telogy's Golden Gateway Voice Over Packet software in our V-Server product
line. We use the Golden Gateway Voice Over Packet software, in part, to convert
analog information to a digital format. We also consider Telogy's product to be
very important to our product.
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<PAGE>
Current Dependence on a Few Major Customers
As part of our business plan, we enter into strategic partnerships and
alliances. We rely on these alliances to provide the necessary technology to
integrate our products into their products and services. The establishment of
these alliances is also an important component of our overall marketing
strategy. We use alliances as a direct marketing channel for our products, as we
typically sell our products to these companies who include our product in their
bundle of products and services. Further, alliances are important to help ensure
our product's compatibility with other Internet and telephony products on the
market. Our success depends, to a large extent, on the business success of our
strategic partners.
We entered into a Memorandum of Understanding (MOU) with ePHONE Telecom,
Inc. on July 19, 1999, whereby we became strategic partners. ePHONE's business
plan is to become a global telecommunications carrier providing a full range of
telecommunications services, including VoIP services. Our iGATE product will
enable ePHONE to offer a VoIP based fax and voice service from the user end.
ePHONE is actively pursuing market opportunities worldwide.
In November 1999, we entered into a strategic alliance with Centrecom
Incorporated in which both companies agreed to market and sell iGATE Pronto
service as one of Centrecom's service offerings to Centrecom's end-user group.
Since then, we have been testing with Centrecom's IP gateway in order to achieve
100% interoperability. At the same time, Centrecom devoted resources to
improving its overall operational issues. The preparation of the combined forces
has reached its final stage. We anticipate a more rigorous market penetration
from Centrecom during the second half of 2000.
We are in the early stages of establishing our customer base and strategic
relationships in the other parts of the world. Management devotes much of its
time and resources to the development of business relationships with other
technology companies who are potential strategic partners and customers. In
particular, we are directing much of our effort towards establishing
relationships with companies in Asia and the Pacific Rim.
The following table presents our major customers and our sales of V-Server
products to these customers during the year ended December 31, 1999 and the
three month period ended March 31, 2000.
<TABLE>
<CAPTION>
Sales during the
Sales during the three months
year ended ended
Customers December 31, 1999 March 31, 2000 V-Server product type
--------- ----------------- -------------- ---------------------
<S> <C> <C> <C>
ePHONE, Inc., U.S. $30,800 $17,500 U & S/T
Centrecom, U.S. 3,500 57,400 U
Igateway Pte., Ltd., Singapore 1,400 21,000 S/T
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Sales during the
Sales during the three months
year ended ended
Customers December 31, 1999 March 31, 2000 V-Server product type
--------- ----------------- -------------- ---------------------
<S> <C> <C> <C>
Ignite Group, New Zealand - 22,000 Ethernet version
Eicon Technology, Canada - 10,900 U
Other 20,699 20,000 Various
------- --------
TOTALS $56,399 $148,800
======= ========
</TABLE>
------------------
(1) "U" refers to the V-Server product version adapted for use in North
America. The "S/T" V-Server product version is adapted for use in Asia
and Europe. The Ethernet version is for use with Ethernet LANS.
Intellectual Property
We seek to protect our intellectual property through a combination of
o copyright protection,
o patents,
o trademark registrations and common law trademark protection, and
o trade secret laws.
Our V-Server family of products incorporates software and programming codes
developed, designed and owned by us. Copyright law generally protects the source
code of our computer programs, as well as other documentation we create. We also
rely upon trade secret protection for any proprietary confidential information,
such as some of our software and hardware technology.
We do not have any patents or patents pending for our current product line,
but we intend to evaluate the patentability of our current and future products
and to take appropriate action to patent any of our patentable inventions.
We have applied for federal registration of our trademarks V-Server,
B-Server, iGATE and PRONTOCONNECT in the United States. Federal trademark
registrations help to ensure an entity's exclusive right to use a name for a
product or service in the United States. State common law generally protects any
of our marks that we have used exclusively in the marketplace, regardless of
registration. We use the V-Server and iGATE marks in connection with our V-
Server iGATE product. We anticipate using the B-Server mark in connection with a
network access server designed for branch offices and remote access over
satellites. Our PRONTOCONNECT service applies our DDA technology which allows
internet fax/voice calls without software, microphones or speakers. These
trademark applications are pending. Even if these applications mature into
federal registrations, a third party still may challenge our trademark rights.
Additionally, third parties may infringe upon our trademark rights which could
result in legal fees and other costs to us if we choose to take legal action
against the persons.
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<PAGE>
Government Approval
Our products must meet the specific certification requirements for
telecommunications equipment of each country where we sell our products.
In the United States, under the Communications Act of 1934 and regulations
of the Federal Communications Commission (FCC), our products must comply with
certain frequency emissions and other limitations. Our V-Server iGATE products
have been tested for compliance with Part 15A. Also, under FCC regulations,
terminal equipment to the telephone network must comply with numerous technical
requirements, including noise and hazardous voltage limitations. Labeling
requirements also apply. We have received Part 68 FCC approval for our V-Server
product; and, to the best of our knowledge, the V-Server product is in
compliance with all FCC requirements.
In addition, Underwriters Laboratories Inc. (UL) tested the V-Server iGATE
product and found that the product met its safety standards.
We also obtained Canadian approvals which are equivalent to the U.S. FCC
approvals.
In Europe, the S/T units and the Ethernet units have the CE mark of
approval. This CE mark includes the equivalent of the FCC and UL approvals and
enables the sale of products to all countries in the European Economic
Community.
Further, we have obtained approval for the ISDN interface in the United
States, Canada and Europe.
The Dual Ethernet versions are approved in the United States, Canada and
Europe.
We are also seeking approvals and certifications for our products in
several additional countries.
Employees
As of June 30, 2000, we employ 19 full-time employees in our Germantown,
Maryland office, including 4 administrative employees, 13 employees devoted to
research and development and 2 employees in sales and marketing. In addition, we
have 5 full-time sales and marketing consultants located in Mississauga,
Ontario, Canada, as well as a key hardware architect, and a field support
engineer in Taiwan, R.O.C. who performs customer support in Taiwan, Hong Kong
and China.
20
<PAGE>
RISK FACTORS
Certain statements included in this Form 10-SB which use the terms
"estimate", "project", "intend", "expect" and other similar expressions are
intended to identify forward-looking statements within the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those contemplated by the forward-looking statements, including the factors
set forth in this section and elsewhere in this Form 10-SB. Although we believe
that the assumptions underlying the forward-looking statements contained in this
Form 10-SB are reasonable, any of the assumptions could prove to be inaccurate.
Therefore, we make no assurance that the forward-looking statements in this Form
10-SB will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included in this registration
statement, the inclusion of this information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.
We wish to make our current investors, prospective investors and other
readers aware of the risks that we believe exist that could seriously harm our
business, operating results or financial condition and cause our common stock to
decline in value if they occur.
We have a limited operating history on which you can evaluate our business
and prospects.
As described in full under Item 1. "Description of Business", in December
1995 we formed ATC LLC, which was merged with and into ATC Inc., a wholly-owned
subsidiary of Diversified, in July 1998. ATC Inc. and its parent, prior to the
merger, had no substantial assets or liabilities and no operations. Diversified,
however, was listed on the OTC BB. ATC LLC was merged with these entities in
order to obtain that listing. We introduced our first V-Server product, the
iGATE, to the market in May 1999. Accordingly, we only have a limited operating
history on which you can evaluate our business and our prospects. In addition,
our prospects must be considered in light of the risks encountered by companies
like us in developing products and services in new and rapidly evolving markets.
Some of the risks we face include our ability to attract and retain customers;
hire aggressively to expand our services, sales and marketing efforts; negotiate
and maintain favorable strategic relationships; and plan and manage our growth
effectively. If we fail to manage these risks successfully, our business could
be harmed.
We have incurred losses since our inception and expect to incur losses in
the future.
We have incurred operating losses since our inception in 1998. In 1999 and
1998, we incurred net losses of approximately $2,162,000 and $1,081,992,
respectively. We introduced our products to market in 1999 and have had limited
sales as our product gains market acceptance and we develop our sales and
marketing channels. While we expect our sales to increase in the future, we
cannot assure you that we will experience such growth. Our future prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in new and rapidly evolving industries. To address
these risks and
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<PAGE>
achieve profitability and increased sales levels, we must, among other things,
establish and increase market acceptance of our products and systems, respond
effectively to competitive pressures, offer high quality customer service and
support, introduce, on a timely basis, advanced versions and enhancements of our
products and successfully market and support such advanced versions and
enhancements.
We expect to continue to incur operating losses in 2000 and 2001 and may
incur operating losses thereafter. We cannot assure you that we will achieve or
sustain significant sales or profitability in the future.
We have not been able to fund our operations from cash generated by our
business, and we may not be able to do so in the future.
We intend to fund our operations and other capital needs for the next
twelve months substantially from the remaining proceeds of a private placement
completed in 1999, and the redemption and exercise of the common stock purchase
warrants issued in that offering. However, we cannot assure you that such funds
will be sufficient for these purposes, or that funds from the exercise of
currently outstanding common stock purchase warrants will be received. We may
require substantial amounts of these proceeds for our future expansion,
operating costs and working capital. We currently do not have a line of credit
with a commercial bank and with the exception of outstanding warrants to
purchase our common stock, which we believe will be exercised in 2000, we have
made no other arrangement to obtain any future financing.
Failure to secure needed additional financing, if and when needed, may have
a material adverse effect on our business, financial condition and results of
operations. If additional funds are raised through the issuance of equity
securities, the net tangible book value per share may decrease, the percentage
ownership of our current stockholders may be diluted and such equity securities
may have rights, preferences or privileges senior or more advantageous to our
common stockholders.
We also can provide no assurance that additional financing will be
available on terms favorable to us, or at all. If adequate funds are unavailable
or are not available on acceptable terms, we may not be able to take advantage
of unanticipated opportunities, develop new products or otherwise respond to
competitive pressures. Such inability could have a material adverse effect on
our business, financial condition or results of operations.
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<PAGE>
Our common stock is currently listed on the Pink Sheets.
Our common stock is currently quoted on the Electronic "Pink Sheets" under
the symbol "TEKI." Prior to April 20, 2000, we were traded on the OTC BB, a
service provided by the Nasdaq Stock Market, Inc. Our common stock was removed
from the OTC BB in accordance with NASD Market Rule 6530, requiring that we
register our common stock with the SEC. We intend to re-establish our common
stock on the OTC BB after this registration statement is effective, the SEC has
completed its review of this Form 10-SB, if any, and we have filed any
amendments that the SEC may require.
Purchases and sales of our stock are subject to the penny stock
regulations.
Our stock has a market price of less than $5.00 per share. The SEC has
adopted regulations which generally define "penny stock" to be any equity
security that has a market price (as defined) less than $5.00 per share or an
exercise price less than $5.00 per share, subject to certain exceptions. During
periods when our common stock does not qualify for inclusion on the OTC BB, the
common stock will be subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a disclosure statement relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our common stock and may affect the ability of investors to sell our
common stock in the public market.
Internet-related stock prices are especially volatile and this volatility
may depress our stock price.
The stock market has from time to time experienced significant price and
volume fluctuations which have particularly affected the market prices of the
stocks of high technology and Internet-related companies, including companies
like us, and which may be unrelated or disproportionate to the operating
performance of particular companies. Factors such as quarterly variations in
actual or anticipated operating results, changes in earnings estimates by
analysts, market conditions in the industry, analysts' reports, announcements by
competitors, regulatory actions or other events or factors, including the risk
factors described in this registration
23
<PAGE>
statement and general economic conditions may have a significant effect on the
market price of our common stock. This broad market and industry volatility may
reduce the value of our common stock, regardless of our operating performance.
Due to this volatility, the value of our common stock could significantly
decrease.
We have never paid dividends and have no intentions of doing so in the
future.
We have never paid dividends on our common stock and do not expect to pay
any dividends for the foreseeable future.
Because certain existing stockholders own a large percentage of our voting
stock, other stockholders' voting power may be limited.
Our founders, executive officers, directors and their affiliates
beneficially own or control approximately 13% of our common stock and 48% of our
convertible preferred stock. Each share of convertible preferred Series A stock
has three votes in matters requiring the vote of our stockholders. As such, as
shown in the table under Item 4, "Security Ownership of Certain Beneficial
Owners and Management", these stockholders control approximately 20% of the
voting power. Furthermore, each share of convertible preferred Series A stock is
convertible into six shares of common such; such conversion of preferred shares
by our executive officers and directors would result in an even greater
percentage of control. The conditions required for the conversion of preferred
shares are described under Item 8, "Description of Securities - Preferred
Stock". In addition, we have one investor/stockholder who beneficially owns
approximately 39% of our issued and outstanding common stock and holds total
voting ownership of 31%. As a result, if those stockholders act together, they
will have the ability to control all matters submitted to our stockholders for
approval, including the election and removal of directors and the approval of
any merger, consolidation or sale of all or substantially all of our assets.
These stockholders may make decisions that are adverse to your interests. See
our discussion under Item 4, "Security Ownership of Certain Beneficial Owners
and Management", for more information about the ownership of our outstanding
shares.
The market for our products is in its early stages of development and may
fail to mature into a sustainable market.
Our products and services facilitate voice, fax and data transmission
primarily over the Internet. The market for these products and services is in
its early stages of development and is rapidly evolving and it is possible that
a viable market may fail to emerge or be sustainable. We cannot predict the
level of demand and market acceptance for our products and services. If the
market for our products and services does not continue to mature, our business
will be harmed.
24
<PAGE>
If the Internet does not continue to grow as a medium for voice
communications, our business will suffer.
The technology that allows voice communications over the Internet is still
in its early stages of development. Historically, the sound quality of Internet
calls has been poor. As the industry has grown, sound quality has improved, but
the technology requires further refinement. Additionally, the Internet's
capacity constraints may impede the acceptance of Internet telephony. Callers
could experience delays, errors in transmissions or other interruptions in
service. Making telephone calls over the Internet must also be accepted as an
alternative to traditional telephone service. Because the Internet telephony
market is new and evolving, predicting the size of this market and its growth
rate is difficult. If our market fails to develop, then we will be unable to
grow our customer base and our opportunity for profitability will be harmed.
We are completely dependent on the infrastructure of the Internet for our
success.
The success of our products is dependent on, among other things, the
continued expansion of the Internet and its network infrastructure. We cannot
assure you that the infrastructure or complementary products necessary to make
the Internet a viable commercial network will continue to be developed. In
particular, we cannot assure you that the Internet will retain its current
pricing structure with regard to volume, distance (the physical location of any
user) and the lack of varying rates for different times of day. Moreover,
critical issues concerning the commercial use of the Internet (including
security, reliability, cost, ease of use and access and quality of service)
remain unresolved and may affect the growth of Internet use. We cannot assure
you that the Internet will be able to meet additional demands or its users'
evolving requirements on a timely basis, at a commercially reasonable cost, or
at all. While we anticipate the continued evolution of the Internet and related
infrastructure, any failure to develop accordingly could have a material adverse
impact on our business, financial condition or results of operations.
Our products can be vulnerable to computer viruses or similar disruptive
problems. Computer viruses or problems caused by third parties could lead to
interruptions, delays or termination of service. Furthermore, inappropriate use
of the Internet by third parties could potentially jeopardize the security of
confidential information, which may deter certain potential customers from
ordering and using our products. Until more comprehensive security technologies
are developed, the security and privacy concerns of existing and potential users
may inhibit the growth of the Internet industry in general and the market for
our products in particular.
If we are unable to meet the rapid technological changes our existing
products and services could become obsolete.
We are involved in the development and introduction of new products and
applications. A number of risks are inherent in this process. The development of
new technologies and products is increasingly complex and uncertain and this can
delay the introduction of new technology and products. It further requires close
collaboration and continued technological advancement involving multiple
hardware and software design teams and outside suppliers of key components. The
failure of any one of these elements could cause new products to fail to
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meet specifications or to miss aggressive time tables that we may establish. As
the variety and complexity of our product lines increase, the process of
planning production and inventory levels also becomes more difficult.
Short product life cycles place a premium on our ability to manage the
transition from current products to new products. Our results could be adversely
affected by factors such as development or manufacturing delays, variations in
product costs, and delays in customer purchases of existing products in
anticipation of the introduction of new products and the rapidly changing
landscape of emerging standards.
The markets for our products have only recently begun to develop, and are
rapidly evolving as characterized by an increasing number of market entrants who
have introduced or developed products and services. As is typical in the case of
a new and rapidly evolving industry, demand and market acceptance for recently
introduced technology products and services are subject to a high level of
uncertainty. Broad acceptance of our technology, products and systems is
critical to our success and ability to generate revenues. Acceptance of our
technology, products and services will be highly dependent on the functionality,
reliability, stability and performance of the products and systems, and
particularly of the success of the initial implementation of our products and
services. In addition, acceptance of our technology will depend on matters
beyond our control such as the introduction of competing products or
technologies into the market before our new technologies and products. We cannot
assure you that voice and audio communications over the Internet will become
widespread, that connections between IP networks and the PSTN will become
widespread or that our Internet Telephony Service Provider (ITSP) and
telecommunications oriented products will gain market acceptance. The adaptation
process can be time consuming and costly to both us and our customers and the
acceptance of the product or service may depend, to a substantial extent, on the
success of the adaptation.
Because the market for our products is new and evolving, it is difficult to
predict its future growth rate, if any, and the size of our market. We cannot
assure you that the market for our products and services will develop or that
our products will achieve market acceptance. If the market fails to develop,
develops more slowly than expected, or if our products do not achieve market
acceptance, our business, financial condition or results of operations will be
materially adversely affected.
Furthermore, products offered by us may contain undetected errors or
defects when first introduced or as new versions are released. Our introduction
of products with reliability, quality or compatibility problems could result in
reduced revenues and orders, uncollectible accounts receivable, delays in
collecting accounts receivable and additional costs. We cannot assure you that,
despite testing by us or by our customers, errors will not be found in our
products after commencement of commercial deployment. Errors of this sort could
result in product redevelopment costs and loss of, or delay in, market
acceptance. In addition, we cannot assure
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you that we will not experience in the future significant product returns
through both retail and other distribution channels. Any such event could have a
material adverse effect on our business, financial condition or results of
operations.
We may not be able to increase market awareness and sales of our products
and services if we do not expand our sales and distribution capabilities.
We need to substantially expand our sales and distribution efforts in order
to increase market awareness and sales of our V-Server solution and the related
services we offer. We are an early stage company and need to develop a sales
force. We must have a sales force with an industry and technology focused
background. Competition for qualified sales and marketing personnel is intense,
and we might not be able to hire and retain adequate numbers of these persons to
maintain our growth. New hires will require training and take time to achieve
full productivity. If we are unable to successfully grow our sales capabilities,
we may be unable to expand our relationships in this way, or at all, and our
revenues may not increase as planned.
We cannot be certain that we can attract or retain a sufficient number of
highly qualified technical personnel and consultants. Customers that purchase
our solution typically engage our technical staff to assist with support,
design, consulting and implementation. We believe that growth in our sales
depends on our ability to provide our customers with these services, either
directly or through partners. As a result, we plan to increase the number of our
technical personnel and consultants to meet these needs. New technical personnel
will require training and education and take time to reach full productivity. To
meet our customers' implementation needs, we may be required to use costly
third-party consultants to supplement our internal resource capabilities.
Competition for qualified personnel is intense, particularly because we are in a
new market and only a limited number of individuals have developed the skills
required to provide the services our customers require. Our business may be
harmed if we are unable to hire and retain new technical personnel and
consultants.
Our reputation and future revenue would be harmed if we experience any
issues with our V-Server technology.
To date, we have only had limited sales of our V-Server product. We
currently expect the sale of these products and related services to account for
most of our future revenues. If any of our future customers are unable to
successfully use our products, our reputation could be damaged, which could harm
our business. In addition, factors negatively affecting the pricing of or demand
for VoIP products, such as increased competition or rapid technological change,
could cause our revenues to decline.
Competition could reduce our market share and decrease our revenue.
Some of our competitors have longer operating histories, greater name
recognition, larger installed customer bases and significantly greater
financial, technical and marketing resources
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than us. The competition in the VoIP communications market is very strong.
Competition includes telecommunications companies, data communication companies
and pure voice over IP companies as well as product and service companies. See
Item 1, "Competition", for a list of some of our competitors.
If we are forced to lower our prices below current levels, we cannot assure
you that we will be able to successfully launch our new products or compete
successfully and effectively against other companies' product offerings.
Various innovative voice, audio, video and other communications
alternatives, that may compete with our products are often introduced, and may
be introduced in the future. These new communication alternatives may be based
on traditional telephone lines, the Internet, cable networks or optical wires
and may be combined with other computing and broadcasting capabilities.
We expect that additional companies will compete in the Internet voice and
audio communications market. In the future, we may also develop and introduce
other products with new or additional telecommunications capabilities or
services. As a result of any such development or introductions, we may compete
directly with telephone companies and other telecommunications providers.
Additional competitors may include companies that currently provide computer
software products and services such as telephone, media, publishing and cable
television. The ability of some of our competitors to bundle other Internet
services and other products with Internet voice products could give those
competitors an advantage over us.
We currently rely on a small number of customers for our revenue.
We began sales of our V-Server in May 1999, with substantially all of our
revenue having been derived from sales to a relatively small number of
customers. Since our inception through March 31, 2000, sales to one customer
totaled 24% of our product sales or $48,300. Similar or greater concentration of
our net sales among a limited number of customers may occur in the future. In
this event, any material decrease in net sales to any one of our largest
customers that is not matched by corresponding increases in net sales to new or
existing customers could have a material adverse effect on our financial
condition and results of operations. We cannot assure you that we will receive
orders from any existing customers or from new customers.
Our success and competitive position depends on our ability to protect our
proprietary technology.
Our success depends, in part, upon our intellectual property rights. To
date, we have relied primarily on a combination of trade secret, trademark and
copyright laws, and non-disclosure and other contractual restrictions on
copying and distribution to protect our proprietary technology and our brand
names. We have not yet filed any patents related to our technology. Litigation
to enforce our intellectual property rights or protect our trade secrets could
result in
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substantial costs and may not be successful. Any inability to protect our
intellectual property rights could seriously harm our business, operating
results and financial condition. In addition, the laws of certain foreign
countries may not protect our intellectual property rights to the same extent as
do the laws of the United States. Our means of protecting our intellectual
property rights in the United States or abroad may not be adequate to fully
protect our intellectual property rights.
Furthermore, the laws of some foreign countries may not protect
intellectual property rights to the same extent as do the laws of the United
States. It may be difficult for us to enforce certain of our intellectual
property rights against third parties who may have acquired intellectual
property rights by filing unauthorized applications in foreign countries to
register the marks that we use because of their familiarity with our worldwide
operations. Since Internet-related industries such as ours are exposed to the
intellectual property laws of numerous foreign countries and trademark rights
are territorial, the enforceability and scope of protection of our intellectual
property is uncertain. The unauthorized use of our intellectual property by
third parties may damage our brand.
Defending against intellectual property infringement claims could be
expensive and disruptive to our business.
We are subject to claims of intellectual property infringement, which could
divert management resources and harm our reputation.
We cannot be certain that our products and services do not or will not
infringe upon valid patents, trademarks, copyrights or other intellectual
property rights held or claimed by third parties. Third parties may claim that
we have infringed their patent, trademark, copyright or other proprietary
rights. It is also possible that claims will be made for indemnification
resulting from allegations of infringement. Claims like these could divert
management's attention, affect our reputation and otherwise harm our business.
In addition, intellectual property claims could be asserted against us as a
result of the use by us, our customers or other third parties of our products.
These claims could include claims by our consultants and employees that
intellectual property they developed does not belong to us. Any claims, with or
without merit, could be time consuming, costly, cause product shipment delays or
require that we enter into royalty or licensing agreements. These licenses might
not be available on reasonable terms, or at all. As a result, any claim like
this could harm our business. Additionally, we may incur substantial expenses in
defending against these third party infringement claims, regardless of their
merit. Successful infringement claims against us may result in substantial
monetary liability or may materially disrupt the conduct of our business.
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We rely on third-party technologies, and a termination of any of our
relationships with third-party vendors could adversely affect our revenues and
business.
We rely in part on technology that we license from third parties. We
integrate this technology with internally developed software to perform key
functions. For example, our products and services incorporate technology
licensed from RADVision and Telogy. These third party technology licenses might
not continue to be available to us on commercially reasonable terms, or at all.
This technology may contain defects that we cannot control. The loss of any of
these technology licenses could cause delays in introducing our products or
services until equivalent technology, if available, is identified, licensed and
integrated. Delays in introducing our products and services could harm our
business.
Our executive officers and certain key personnel are critical to our
business and these officers and key personnel may not remain with us in the
future.
Our future success depends upon the continued service of our executive
officers and other key personnel. If we lose the services of one or more of our
executive officers or key employees, or if one or more of them decide to join a
competitor or otherwise compete directly or indirectly with us, our business,
operating results and financial condition could be harmed. In particular, our
founders, Enghe Chimood, our Co-Chairman of the Board and Chief Executive
Officer, Thomas Yang, our Co-Chairman of the Board and Chief Operating Officer
and Ke-ou Chao, our Chief Technology Officer, would be particularly difficult to
replace. The loss of any of these individuals, or other future key employees,
would have a material adverse effect on us.
Our business and growth will suffer if we are unable to successfully hire
and retain key personnel.
We believe that our future success depends in large part on our ability to
attract, train, motivate and retain highly skilled employees. We may be unable
to retain our key employees or retain other highly qualified employees in the
future. The failure to attract and retain the necessary managerial, marketing,
merchandising, operational, customer service, technical, financial or
administrative personnel could harm our business. In addition, as we grow and
add additional product and service offerings, we anticipate a need to further
develop and expand our products. Competition for highly skilled and qualified
technical people is intense. We cannot be certain we will be able to attract and
retain a sufficient number of qualified technical people or outside consultants.
Our articles of incorporation provide our officers and directors with
certain indemnifications.
Our Articles of Incorporation provide that our directors and officers will
not be personally liable to the company or its stockholders for monetary damages
for breach of the fiduciary duty of care as a director or officer. Conversely,
directors and officers are liable for:
o any breach of duty of loyalty to the company or its stockholders,
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o facts and omissions not in good faith or those which involve
intentional misconduct or a knowing violation of law,
o willful or negligent violation of Wyoming law with respect to payments
of dividends, and
o any transaction from which a director involved derived an improper
personal benefit.
Thus, under certain circumstances, neither the company nor the stockholders
would be able to recover damages even if directors take actions that harm the
company.
Government regulations are still evolving and significant legal
uncertainties could affect us.
Currently, in the United States, few laws or regulations are directly
applicable to voice and audio communications over the Internet or Internet
commerce generally. However, changes in the regulatory environment, particularly
in regulations relating to the telecommunications industry, could have an
adverse effect on our business. The increased acceptance of voice and audio
communications over the Internet could result in intervention by governmental
regulatory agencies in the United States or elsewhere in the world under
existing or newly enacted legislation and in the imposition of fees or charges
on users and providers of products and services in this area. For example, until
now, the FCC has prohibited local telephone companies from charging Internet
service providers the type of "access charges" that apply to long distance
telephone carriers. In April 1998, however, the FCC submitted a report to
Congress in which it stated that Phone-to-Phone IP telephony bears the
characteristics of telecommunications services, which would subject providers of
such services to access charge and universal support obligations, and other
common carrier regulations. The FCC for now has decided to defer a definitive
resolution of this issue to specific cases as they are brought before it.
Although members of Congress, the Administration, and the public have strongly
supported the forbearance of telecommunications regulations on services provided
through the Internet, it is uncertain at this time what action the FCC will take
when a case is brought before it. From time to time members of Congress have
considered bills that would variously either impose new restrictions or
regulations on IP telephony or restrict agencies from imposing such restrictions
or regulations. Bills regarding the Internet are expected to remain the subject
of Congressional interest into the foreseeable future. It is not possible to
determine whether any such bills will become law and what effect future
legislation would have on our business.
Additionally, the European Commission has requested comments on the
regulatory status of voice on the Internet. There can be no assurance that such
intervention or imposition of fees or charges would not have a material adverse
impact upon the acceptance and attractiveness of Internet voice communications.
Legislative proposals from international, federal and state
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government bodies could also impose additional regulations and obligations upon
on-line service providers. The growing popularity and use of the Internet,
generally, has increased public focus and could lead to increased pressure on
legislatures to impose regulations with respect to, among other things, user
privacy, pricing and the characteristics and quality of products and services.
We are unable to predict the impact, if any, that future legislation, legal
decisions or regulations concerning the Internet may have on our business,
financial condition or results of operations. While we are not aware of any
proposed federal regulation directly affecting our business, we cannot predict
the likelihood that any future legislation will be enacted, nor the financial
impact, if any, of such resulting regulation. In the future, we may also develop
and introduce other products with new or additional telecommunications
capabilities or services, which could be subject to existing federal government
regulations or result in the imposition of new government regulations, either in
the United States or elsewhere.
If one or more of these risks or uncertainties occurs or if our underlying
assumptions prove incorrect, our actual results, performance or achievements in
2000 and beyond could differ materially from those expressed in, or implied by,
the forward-looking statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Prior to April 19, 2000, our common stock was traded on the OTC Bulletin
Board, a service operated by the Nasdaq Stock Market, Inc. under the trading
symbol "TEKI". Our common stock was removed from the OTC Bulletin Board in
accordance with NASD Market Rule 6530, and we are currently listed in the
electronic pink sheets. We intend to re-list our common stock on the OTC
Bulletin Board after the Securities and Exchange Commission has completed its
review of this Form 10-SB and any required amendments.
On the following pages we present management's discussion and analysis of
financial condition and results of operations. You should read this information
in conjunction with our consolidated financial statements and notes included in
this registration statement. The following financial review is presented on a
consolidated basis and is intended to provide a comparison of our financial
performance for the years ended December 31, 1998 and 1999 and for the
three-month periods ended March 31, 1999 and 2000.
Forward Looking Statements
Except for the historical information contained in this registration
statement, this "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward looking statements that
involve a number of risks and uncertainties, including the risks described under
"Risk Factors" and "Forward Looking Statements" above as well as elsewhere in
this registration statement.
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Overview
TEK DigiTel Corporation, formerly known as Diversified Technologies, Inc.,
is a Wyoming corporation with a limited operating history. Our wholly-owned
Maryland operating subsidiary, ATC Inc., was incorporated in June1998 to
facilitate the merger with and conversion of ATC LLC into a corporate entity. We
are a hardware technology equipment developer that provides integrated
communication solutions for the small to medium size enterprise and small
office/home marketplace. By integrating traditional PBX technology with data
routing, the latest advances in VoIP technology and sophisticated Linux based
server technology, we are producing Internet access devices used by the new
generation of service providers to deploy integrated voice, fax and data
services to their customers.
We have a limited operating history on which to base an evaluation of our
business and prospects. Similar to other companies in their early stages of
development, and particularly for companies in the rapidly evolving technology
industry, our prospects must be considered in light of the risks frequently
encountered. We set forth what we believe to be the risks in the "Risk Factor"
section of this registration statement. To address these risks, we must, among
other things, successfully continue to develop and execute our business and
marketing plan, continue to expand and otherwise improve our products, and
increase our operating infrastructure. We can provide no assurances that we will
be successful in addressing the risks we face, and the failure to do so could
prevent us from being successful.
The following table lists in chronological order, some of the major
milestones we have accomplished during the evolution of our company and our
products. The table is not meant to be all-inclusive, but merely serves to
highlight our progress.
Date Major Milestone
---- ---------------
December 1995 Formed ATC LLC, the predecessor company to TEK DigiTel.
February 1998 Completed the prototype of our router product.
Installed, for evaluation and alpha field trial
purposes, our first V-Server iGATE product, in Mongolia.
July 1998 ATC LLC merged with Diversified Technologies, Inc.,
changed its name to TEK DigiTel and became a public
company listed on the OTC BB.
February 1999 Completed our first prototype of the V-Server iGATE
product. Installed, for evaluation and field trial
purposes, our first V-Server iGATE product in Asia.
March 1999 First beta test of the iGATE product initiated in North
America, Canada and several European countries.
May 1999 Began sales of our V-Server products.
July 1999 Entered into a strategic alliance with ePHONE in which
ePHONE agreed to purchase 500 of our iGATE products.
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Date Major Milestone
---- ---------------
October 1999 Launched the Pronto service package to help ISPs and
CLECs deploying iGATE massively.
November 1999 Beta test initiated in Asia including Taiwan, Hong Kong,
China and New Zealand.
June 2000 Beta test completed in most of the countries
participating. Announced Office Builder product with
embedded PBX function.
July 2000 Latest software version released. Ready for mass
deployment of iGATE product.
August 2000 Filed SEC Form 10-SB in order to regain listing on the
OTC BB.
We incurred net operating losses in each period since our inception; and,
we expect to incur additional losses for the foreseeable future, primarily as a
result of our building the corporate infrastructure necessary for continued
product development and enhancement, for increased sales and marketing efforts
and for research activities. As of March 31, 2000, we had accumulated a deficit
of $4,150,904.
We believe that our success depends, in large part, on our ability to
create market awareness and acceptance for our products, raise additional
operating capital to grow operations, build technology infrastructures and
continue product research and development.
Currently, our primary source of revenues is from the sale of our V-Server
products. We are also investigating other applications for the V-Server products
and marketing channels. The principal end-users of our products and solutions
are small and medium enterprise users. We strategically partner with Internet
service providers, including traditional and new telecommunications carriers, in
order to distribute our products to the end-users. We also maintain a direct
sales organization, OEM relationships and value added resellers for sales
targets other than service providers.
Since the introduction of our V-Server products to market, we have
generated a significant percentage of our revenues through several of our
strategic partners, including ePHONE and Centrecom. The reader is referred the
table under Item 1, "Description of Business - Current Dependence on a Few Major
Customers", which details the sales of our V-Server products to our major
customers. We are currently highly dependent upon the sales of our products to
these partners. In July 1999, we entered into an agreement to sell 500 iGATE
units to ePHONE. ePHONE purchases represented 55% and 12% of our product sales
revenue during the year ended December 31, 1999 and the three months ended March
31, 2000, respectively.
We believe that our current dependency on a few customers is due to the
recent introduction of our V-Server products to market. We are planning to
restructure and expand our
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direct sales force and develop an indirect sales channel, targeting VARs and
OEMs. We also plan to continue to expand our global distribution channels. We
currently have strategic alliances with Centrecom, ePHONE, DialDigital and
Centrepoint Technologies; and, we intend to continue to pursue additional
relationships with other companies in the future.
The market for our products and solutions is in the early stages of
development and is characterized by rapid technological change, evolving
industry standards, changes in end-user requirements, intense competition by
more established industry participants and frequent new product introductions
and enhancements. As is typical in the case of new and rapidly emerging
technologies, demand and market acceptance are subject to a high level of
uncertainty. Broad acceptance of our products by customers and end-users is
critical to our success and ability to generate revenues.
Recent Developments
Our primary focus in the first quarter of 2000 was to finalize the
development of the manufacturing methods that enable us to achieve high volume
production (in excess of 5,000 units per month). In addition, we significantly
expanded our marketing effort on establishing the Pronto brand awareness and
reseller readiness. We anticipate incurring increasing sales and marketing costs
during the future. We have also conducted product field trials in additional
countries in Asia, Europe and South America. This effort is time consuming, but
necessary, since the local telecommunication environment may be quite different
from country to country.
We developed the Pronto brand package, which includes all the essential
materials, such as a business plan and marketing collateral, to enable a service
provider to launch a telephony service. In addition, we established agreements
with telephone resellers like CentreCom and ePHONE to bundle their services with
our solution. We plan to work with our current telephony service partners,
Centrecom, NexBell, ePHONE, Spiritec and ACS Compro to offer Pronto services to
all ISPs interested in selling voice services.
The first prototype of the PBX version of the product, OfficeBuilder, a
co-development with Centrepoint Technologies, is currently being tested. We
expect this product to move into commercial production in the fourth quarter of
2000. Initial customer trials are scheduled in the third quarter of 2000.
In addition to minor enhancements to these platforms, we plan to undertake
the development of a new base platform which will be capable of supporting up to
30 VoIP calls simultaneously. This development is targeted for the fourth
quarter of 2000.
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Results of Operations
Three Months Ended March 31, 2000 Compared with Three Months Ended
March 31, 1999
We recorded revenues from product sales of $148,800 and $2,400 for the
three month periods ended March 31, 2000 and March 31, 1999, respectively. Units
purchased during the three months ended March 31, 1999 were purchased in order
to evaluate our product.
During the three months ended March 31, 2000, the majority of our product
sales were generated through our direct sales organization. As discussed above,
we are in the process of expanding our sales and marketing efforts and our
global distribution channels through the development of indirect sales channels
and the expansion of our direct sales force.
Cost of product sales for the three months ended March 31, 2000 was
$103,555. This represents a reduction in the cost of units produced in the three
months ended March 31, 1999, and during all of 1999, as our manufacturing
process matured.
Sales and marketing expenses for the three months ended March 31, 1999 and
March 31, 1998 were $146,758 and $16,501, respectively. The increase in sales
and marketing expenses in all periods was primarily due to the expansion of the
Company's sales and marketing staff related to the introduction of our products
to market. We anticipate that our sales and marketing expenses will continue to
increase in future periods as we continues to build our direct sales force and
expand our distribution channels and marketing activities.
General and administrative expenses for the three months ended March 31,
2000 and March 31, 1999 were $372,333 and $158,176, respectively. The increase
in general and administrative expenses during 2000 was due to the expansion of
our corporate infrastructure primarily through the addition of personnel, as
well as increased legal and accounting fees incurred in preparation of this Form
10-SB. While we anticipate professional fees will decrease in the future as a
percent of revenue, we expect overall, that our general and administrative costs
will continue to increase in 2000 and beyond, as we implement our business plan
and expand our employee base.
Following our costs related to payroll and related expenses, the greatest
costs we incurred during the three months ended March 31, 2000, was related to
legal and accounting fees incurred in the preparation of the necessary
documentation to comply with the NASD's OTC BB eligibility rules which is why we
are filing this registration statement. Once we become an SEC reporting company,
we will be required to comply with the SEC's reporting requirements that include
filing annual and periodic reports, proxy statements and other information. We
expect our legal and accounting costs to decrease from those incurred in the
first three months of 2000.
Research and development expenses for the three months ended March 31, 2000
and March 31, 1999 were $289,556 and $294,354. We are continuing to expend
efforts on the development efforts on our V-Server products. We anticipate that
research and development expenses will increase in future periods as we expand
our existing research and development programs in order to enhance our products
and develop new products.
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There was no provision for federal or state income taxes for the period
from our inception due to our operating losses. At March 31, 2000 and March 31,
1999, we had net operating loss carry forward for income tax purposes. A
valuation allowance has been established and, accordingly, no benefit has been
recognized for our net operating losses and other deferred tax assets.
Years Ended December 31, 1999 and 1998
We recorded revenues of $214,399 and $73,402 for the years ended December
31, 1999 and 1998, respectively as follows.
December 31, 1999 December 31, 1998
----------------- -----------------
Product sales $ 56,399 $ -
Licence revenue 150,000 -
Contract revenue 8,000 73,402
-------- -------
$214,399 $73,402
======== =======
In May 1999, we introduced our V-Server products to the market, and
recorded sales of $56,399 from the sales of our iGATE units. We had no product
sales during 1998. During 1999, we also recognized $150,000 relating to a
licensing fee for the manufacture of our V-Server products that was terminated
and under which we have no continuing obligations. This license provided
Franklin Telecom with the right to manufacture the iGATE unit under its own
brand name. We do not anticipate that, under our current business model, we will
enter into any future licensing agreement like the one we entered into with
Franklin. As such, we do not expect licensing revenue to be significant in the
future. We also recognized contract revenue of $8,000 and $73,402 for the years
ended December 31, 1999 and 1998, respectively. We stopped providing contract
services during 1999 and focused on completing our V-Server products and,
therefore, performed very little contract-type engagements for others. We
believe that we will not provide any significant contract services in the
future.
The first shipment of our V-Server iGATE product occurred in May 1999 and,
therefore, the December 31, 1999 results do not reflect a full year of sales
activities.
During 1999, the majority of our product sales were generated through our
direct sales organization. As discussed above, we are in the process of
expanding our sales and marketing efforts and our global distribution channels
through the development of indirect sales channels and the expansion of our
direct sales force.
Cost of product sales for the year ended December 31, 1999 was $67,590,
which was greater than our sales revenue. This was not unexpected because we
experienced higher than expected raw material and component costs, due to us
purchasing limited quantities during the initial production of our products. In
addition, during the initial production of our products, we also experienced
inefficiencies in the manufacturing process. As was described above, the cost
37
<PAGE>
of production per unit has declined during the three months ended March 31,
2000; and, we anticipate that this trend will continue. We have recently
completed a cost reduction design for our current iGATE product and will
introduce this into the manufacturing cycle in September 2000. We believe that,
based on our current manufacturing arrangements, the cost of product sales will
continue to decline on a per unit basis and that cost of product sales as a
percent of product sales will decrease as the manufacturing process for our
V-Server products matures. In the future, we expect our gross profit margins to
be roughly 30-40%, which is in line with typical gateway/router hardware
margins. Currently we use a local manufacturer to produce our iGATE units, have
entered into an agreement for manufacture of our products in Taiwan, and are
investigating other manufacturing locations.
Sales and marketing expenses for the years ended December 31, 1999 and 1998
were $652,817 and $29,614, respectively. The increase in sales and marketing
expenses in all periods was primarily due to the expansion of the Company's
sales and marketing staff related to the introduction of our products to market.
We anticipate that sales and marketing expenses will continue to increase in
future periods as we continue to build our direct sales force and expand our
distribution channels and marketing activities.
General and administrative expenses for the years ended December 31, 1999
and 1998 were $651,423 and $493,033, respectively. The increase in general and
administrative expenses during 1999 was due to the expansion of our corporate
infrastructure primarily through the addition of personnel, as well as increased
legal and accounting fees incurred in preparation of this Form 10-SB. While we
anticipate professional fees will decrease in the future, we expect that our
general and administrative costs will continue to increase in 2000 and beyond as
we implement our business plan and expand our employee base.
Research and development expenses for the years ended December 31, 1999 and
1998 were $1,012,934 and $611,498, respectively. During both 1999 and 1998, we
concentrated our development efforts on our V-Server products. All research and
development costs have been expensed as they were incurred. We anticipate that
research and development expenses will increase in future periods as we expand
our existing research and development programs in order to enhance our products
and develop new products.
There was no provision for federal or state income taxes for the period
from our inception due to our operating losses. At December 31, 1999 and 1998,
we had a net operating loss carry forward for income tax purposes. A valuation
allowance has been established and, accordingly, no benefit has been recognized
for our net operating losses and other deferred tax assets.
Liquidity and Capital Resources
Since our inception, we have financed our operations through the sales of
equity securities in private placements; and, since that date through December
31, 1999, we have raised approximately $3,400,000. During the six months ended
June 30, 2000, we sold an additional
38
<PAGE>
4,000,500 shares for $2,200,500. As of December 31, 1999, we had $477,682 in
cash. We currently have no bank loans or any available lines of credit for our
use.
Net cash used in operating activities during the years ended December 31,
1999 and 1998 was $2,048,245 and $700,027, respectively. The net cash used in
operating activities was related to the Company's expansion and funding of its
research and development and sales and marketing activities as well as its
corporate infrastructure.
Net cash used in investing activities during the years ended December 31,
1999 and 1998 was $67,715 and $18,823 for the purchase of computer and test
equipment and office furniture.
Subsequent to December 31, 1999, we sold 4,000,500 shares of our common
stock for $2,200,500.
Net cash provided by financing activities for the year ended December 31,
1999 was $2,457,263. The proceeds during this period resulted from the sale of
125,000 shares of common stock for $48,127, net of offering costs, the exercise
of previously issued common stock purchase warrants for 2,377,024 shares of our
common stock for $413,795, the sale of 2,000,000 common stock units, each unit
consisting of one share of common stock and four common stock purchase warrants,
each to purchase one share of common stock at prices ranging from $0.50 to $0.65
per share for proceeds of $1,992,091, net of offering costs, and the exercise of
stock options by employees for the purchase of 32,500 shares of common stock for
$3,250.
Net cash provided by financing activities for the year ended December 31,
1998 was $746,205. The proceeds during this period resulted from (i) the sale of
1,600,000 common stock units, each unit consisting of one share of common stock
and three common stock purchase warrants, each to purchase one share of common
stock at prices ranging from $0.12 to $0.22 per share for proceeds of $160,000,
(ii) the sale of 651,083 shares of common stock and 217,026 shares of preferred
stock for $200,000, and (iii) the exercise of previously issued common stock
purchase warrants for 2,422,976 shares of our common stock for $386,205.
We have no material commitments other than those under office and equipment
operating leases. As a result of the expansion of our research and development
and sales and marketing activities, capital expenditures may increase in future
periods primarily due to the purchase of computer and test related equipment. We
anticipate that, based on our present plans and assumptions, our current cash
balances will be sufficient to enable us to sustain our current and planned
operations for a period of at least 12 months. If our estimates or assumptions
prove to be incorrect, we may require additional capital. Additional funding,
whether obtained through public or private debt or equity financing or from
strategic alliances, may not be available when needed or may not be available on
terms acceptable to us. Failure to secure additional financing, if and when
needed, may have a material adverse effect on our business, financial condition
and results of operations.
39
<PAGE>
We may, until we become financially self-sufficient, have to moderate our
activities to fit the funds we have available. We anticipate the proceeds from
the sale of the currently outstanding warrants will be sufficient to fund all of
our equipment purchases and operating capital requirements for at least the next
year.
We are currently generating positive cash flow from the sale of our iGATE
products before overhead allocation. As we expand our sales and marketing
efforts to sell our V-Server family of products and services, we have begun to
generate additional revenues and believe that our revenues will continue to
increase as we implement our business plan.
We currently lease, and plan to continue to lease, all facilities. During
2000, we anticipate that our significant capital expenditure will be
approximately $300,000 for laboratory and diagnostic equipment, $300,000 in
software licenses and $200,000 for prototypes of our products under development.
Year 2000 Issues
We did not experience any significant problems associated with Year 2000
issues; and, we are not aware that any of our suppliers or vendors are
experiencing any such problems.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", or SFAS 133. SFAS 133 requires us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through net income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in the other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings. SFAS 133 is effective for our fiscal year ending
December 31, 2001. We do not currently hold any derivatives and do not expect
this pronouncement to materially impact our results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". The
SAB expresses the SEC's views on applying generally accepted accounting
principles to revenue recognition in financial statements. We do not expect the
application of the SAB to have a material impact on our financial statements,
however, certain SEC staff interpretations of the SAB have not been published
and may have an effect on the applicability of the SAB in relation to our
consolidated financial statements.
40
<PAGE>
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25". With the exception of
certain provisions that required earlier application, this interpretation is
effective for all applicable transactions beginning July 1, 2000. We do not
expect that the adoption of this interpretation will have a material impact on
our financial statements.
Item 3. DESCRIPTION OF PROPERTIES
Our principal executive offices are located at 20030 Century Boulevard,
Suite 201, in Germantown, Maryland. We presently lease 7,147 square feet of
office space in the Century XXI Office Complex in Germantown, Maryland, which is
in the greater metropolitan Baltimore/Washington, D.C. area. The term of the
lease commenced on December 17, 1999, and will terminate on December 16, 2004,
subject to an option to renew.
We also lease shared office space in Mississauga, Ontario, Canada, which is
in the vicinity of Toronto. We use this office space for our sales and marketing
and our Canadian developmental operations.
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth information, as of June 30, 2000, with
respect to the following beneficial owners of our common stock for:
o each person or group of persons, who we know beneficially own more than
5% of any class of our outstanding stock;
o each of our executive officers named in the Summary Compensation Table;
o each of our directors; and
o all executive officers and directors as a group.
In general, under the SEC's rules, a person is deemed to be a "beneficial
owner" of a security if that person has or shares the power to vote or direct
the voting of such security or has the power to dispose or direct the
disposition of such security. A person is also deemed to be the beneficial owner
of any securities of which the person has the right to acquire beneficial
ownership within 60 days.
At June 30, 2000, 22,954,500 shares of our common stock were issued and
outstanding, along with approximately 2,892,000 shares reserved for issuance
upon the exercise of outstanding options and warrants eligible for exercise into
shares of common stock, or for issuance pursuant to employee stock awards,
within 60 days. At June 30, 2000, we also had
41
<PAGE>
2,066,667 issued and outstanding shares of Series A voting convertible preferred
stock which is the only issued and outstanding series of preferred stock.
516,667 of these Series A shares are eligible for automatic conversion into
shares of common stock at a conversion rate of 6:1, pursuant to the merger
agreement and our amended Articles of Incorporation, as described in
"Description of Securities - Preferred Stock", under Item 8.
Unless otherwise indicated, the address for each listed stockholder is: c/o
TEK DigiTel Corporation, 20030 Century Blvd., Suite 201, Germantown, Maryland
20874. To the best of our knowledge, except as indicated in the footnotes to
this table and pursuant to applicable community property laws, the persons named
in the table have sole voting and investment power with respect to all shares of
common and Series A preferred stock.
The following table provides information on the beneficial ownership of our
securities as of June 30, 2000.
<TABLE>
<CAPTION>
Shares of
Percent Series A
Shares of of Convertible
Common Outstanding Preferred Percent of
Stock Shares of Stock Preferred Total Percent of
Name and Address of Beneficially Common Beneficially Series A Voting
5% Holder Owned Stock(1) Owned(2) Stock Ownership(3)
------------------- ------------ ------------ ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Si Tsong Chang 859,599 3.3% 286,533 13.9% 5.4%
13759 Saratoga Vista
Saratoga, CA 95070
Glocom, Inc. 1,073,442 4.2% 357,813 17.3% 6.7%
20010 Century Blvd.
Suite 300
Germantown, MD 20874
Tseng Yun Tsai 10,000,000(4) 38.7% -0- 0.0% 31.2%
218 Sec. 2 Tun
Hwa S. Rd.
Taipei, Taiwan
Directors and Executive Officers
Enghe Chimood 971,654 3.8% 323,884 15.7% 6.1%
Rocco DiCarlo 300,000(5) 1.2% -0- 0.0% 1.0%
Thomas Yang 1,127,760(6) 4.4% 375,922 18.2% 7.0%
Ke-ou Chao 896,462 3.5% 298,822 14.5% 5.6%
Executive Officers and 3,295,876(5)(6) 12.9% 998,628 48.3% 19.7%
Directors, as a Group
(4 persons)
</TABLE>
42
<PAGE>
-----------------
(1) Percentage calculated based on 22,954,500 shares of common stock issued
and outstanding and approximately 2,892,417 shares under option or
warrant, exercisable within 60 days after June 30, 2000, or due for
issuance pursuant to stock awards within 60 days after June 30, 2000.
Calculation excludes common stock issuable upon conversion of preferred
shares eligible for conversion.
(2) The Series A voting convertible preferred shares are eligible for
conversion into shares of common stock at a rate of six shares of
common stock for each share of preferred stock owned under certain
conditions, as described under Item 8, "Description of Securities -
Preferred Stock".
(3) Each share of Series A voting convertible preferred stock entitles its
holder to cast three votes on every matter placed before stockholders
for consideration. Each share of common stock entitles its holder to
one vote. As a result, percentages are calculated based on a total of
6,200,001 votes for all outstanding Series A voting convertible
preferred stock and 25,846,917 votes for common stock outstanding or
under option or warrant, exercisable within 60 days after June 30,
2000.
(4) Includes currently exercisable warrants to purchase 2,000,000 shares of
common stock at $0.65 per share.
(5) As of the date of this filing, Mr. DiCarlo has met the proposed
performance criteria for the purchase of 300,000 shares under an option
to purchase a total of 1,500,000 shares of common stock. The option to
purchase the remaining 1,200,000 shares has not vested.
(6) Includes 400,000 shares owned individually by Mr.Yang's spouse and 200,000
owned by Mr. Yang as custodian for his minor son.
Item 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Management
Our bylaws provide for a Board of Directors consisting of one to five
directors. Currently, our Board consists of three directors. Each director, with
the exception of Messrs. Chimood, Yang and Chao, our current directors, who will
remain directors pursuant to their employment agreements until June 2002, is
generally elected to serve for a one-year term, until the next annual meeting of
stockholders and until his successor has been duly elected and qualified. The
Board of Directors elects officers annually. Generally, officers serve at the
Board's discretion, except that Messrs. Yang, Chimood and Chao each have an
employment agreement to serve as officers until June 30, 2002. Also, we may
enter into employment agreements with other officers.
Pursuant to the merger agreement, Messrs. Thomas Yang, Enghe Chimood and
Ke-Ou Chao are serving as directors and executive officers until July 6, 2001.
In the merger agreement, the former ATC LLC members also agreed to vote all of
their shares in favor of electing the above-mentioned persons to the Board of
Directors through July 2001. The merger agreement also provided for the
selection of a fourth director to serve for this three-year period following the
merger. Mr. Robert Clarke originally served as the fourth director but resigned
effective September 7, 1999, and has not been replaced.
43
<PAGE>
In addition, under the private placement subscription agreement with Tseng
Yun Tsai, Mr. Tsai has the right to appoint one director to our Board of
Directors annually and the right to appoint two directors to our Board of
Directors annually upon the exercise of all of the warrants purchased by Mr.
Tsai. Because Mr. Tsai has not yet exercised all of his warrants, at the 2000
annual meeting, he will have the right to appoint one director, subject to the
approval of the stockholders.
Directors and Executive Officers
The following table sets forth the names, ages and positions of our
directors and executive officers.
Age as of
Name June 30, 2000 Position
---- ------------- --------
Enghe Chimood 46 Chief Executive Officer;
Co-Chairman of the Board
Rocco DiCarlo 44 President
Thomas Yang 49 Chief Operating Officer;
Co-Chairman of the Board
Ke-Ou Chao 42 Vice President, Engineering; Chief
Technical Officer; Director;
Corporate Secretary
The following descriptions set forth the length of service of each of our
directors and executive officers and the principal occupations of these
individuals during the past five years.
Enghe Chimood, Chief Executive Officer; Co-Chairman of the Board
Mr. Chimood, one of our founders, has served as an executive officer of the
company since our inception. He currently serves as our Chief Executive Officer.
He is responsible for the overall management of the company and for the
development of our hardware and manufacturing. He has extensive experience in
the design and development of telecommunications products based on embedded
distributed microprocessors. Prior to founding our company, Mr. Chimood spent
more than 13 years in related senior management and technical management
positions with Hughes Network Systems, GTE Telenet Communications Corporation,
Pilot Research Associates and, most recently, Orbital Communications
Corporation, where he was employed as a principal engineer. He holds a B.S.
degree in Electrical Engineering from National Taiwan University and a M.S.
degree in Computer Science from the Georgia Institute of Technology. Mr. Chimood
also completed all the course work necessary to earn his Ph.D. in Engineering
Administration from George Washington University, but has yet to prepare his
doctoral dissertation.
44
<PAGE>
Rocco DiCarlo, President
Mr. DiCarlo joined our company in December 1998 as Vice President of
Technology. In March 1999, he was appointed by the Board of Directors to serve
as our President. Mr. DiCarlo is currently located in our Canadian office. We
have not yet finalized an employment agreement with Mr. DiCarlo. As our
President, Mr. DiCarlo is responsible for leading our overall vision and for
product development, policy and strategy decisions. A 16-year veteran of
Motorola, Inc., having spent more than 8 years in senior management positions,
Mr. DiCarlo most recently served as Director of New Markets Development at
Motorola's Internet and Networking Group. Mr. DiCarlo graduated from the
University of Waterloo with a B.A.Sc. Electrical Engineering degree and a
M.A.Sc. Management Sciences degree.
Thomas Yang, Chief Operating Officer; Co-Chairman of the Board
Mr. Yang, one of our founders, currently serves as our Chief Operating
Officer and has served our company in various executive capacities since our
inception. Mr. Yang is responsible for our day to day management. Mr. Yang also
provides marketing/sales support to the Pacific Rim countries of China, Taiwan,
and Hong Kong due to his relationships with key individuals in these regions.
Mr. Yang has extensive experience in the management, design, development and
network integration of large-scale networking products, including digital and
hybrid switching systems for packet-based wide area networks. Prior to founding
our company, Mr. Yang amassed nearly 20 years of experience in voice and data
communications, holding key management positions for industry leaders including
Bell Atlantic, IBM, GTE and Data General. Mr. Yang was the Director of
Engineering at I-NET from 1995 to 1996. He also recently served as Program
Manager for Glocom, Inc. from 1996 to 1998. Mr. Yang received a B.S. Electrical
Engineering degree from the University of Illinois and an M.S. Electrical
Engineering degree from George Washington University.
Ke-Ou Chao, Vice President, Engineering; Chief Technical Officer; Director;
Corporate Secretary
Mr. Chao, one of our founders, currently serves as our Vice President of
Engineering, Chief Technical Officer, and Corporate Secretary and is responsible
for leading the development of all software for our products. Mr. Chao has
extensive experience in the design, implementation and testing of
telecommunication products based on embedded distributed microprocessors. In
addition, Mr. Chao has extensive related experience, having spent more than 15
years in senior development and management positions at leading networking
companies such as GTE Telenet, Hughes Network Systems, Data General and
Pulsecom. Major accomplishments include developing TCP/IP, SONET, and ATM
product lines. Mr. Chao received his M.S. Electrical Engineering degree from
George Washington University.
45
<PAGE>
Advisory Board
On October 1, 1999, our Board of Directors authorized the establishment of
a five member advisory board to assist our management team in shaping our
business, technology, and product strategies. The role of the advisory board
includes the following:
o provide strategic guidance to our management team;
o solicit and present an objective "outside view" from peers in and out
of the advisory board members' respective industries;
o counsel management on a regular basis on issues such as
organizational structure, infrastructure, governance, growth
opportunities, market position and other issues vital to the
success of the company; and
o provide our management with leads on talented individuals needed to
fill key positions.
We anticipate that this group will be comprised of industry leaders and
notable industry consultants who can lend their extensive industry and business
experience to our management team. On November 29, 1999, the Board of Directors
appointed Joseph A. Crupi as the first member of our advisory board. Mr. Crupi
is the President and CEO of Telogy Networks, Inc., a Texas Instrument company.
As compensation for his board membership, Mr. Crupi was granted an option to
purchase 30,000 shares of our common stock with an exercise price of $.50 per
share. Twenty-five percent, or 7,500, of the total number of options granted
vest every three months beginning on November 29, 1999. Mr. Crupi also receives
a $300 per diem for each advisory board meeting attended at our offices.
Further, Mr. Crupi will be reimbursed for his travel expenses incurred in
furtherance of our business.
Item 6. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid to our Chief Executive Officer and our other officers by our company for
their services in all capacities rendered during 1999 and 1998.
46
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation:
Securities
Underlying
Name Principal Position(1) Year Salary Bonus Options
---- --------------------- ---- ------- ----- -----------
<S> <C> <C> <C> <C> <C>
Enghe Chimood Chief Executive 1999 $71,015 - -
Officer, Co-Chairman
of the Board
1998(2) 56,193 - -
Rocco DiCarlo President 1999 120,000 - -
1998(3) - - 1,500,000(3)
Thomas Yang Chief Operating 1999 78,652 - -
Officer, Co-Chairman
of the Board
1998(2) 46,537 - -
Ke-Ou Chao Vice President, 1999 70,769 - -
Engineering; Chief
Technical Officer; 1998(2) 56,193 - -
Director
</TABLE>
----------------
(1) The positions shown are the principal positions held during fiscal
1999.
(2) This individual was a founder of and employed by ATC LLC prior to its
merger with us on July 6, 1998. Compensation received from ATC LLC is
not included above.
(3) Mr. DiCarlo was appointed Vice President in December 1998 but received
no compensation until 1999. The terms and conditions of the long term
compensation options granted to Mr. DiCarlo are more fully described
below.
The amount of other annual compensation received by each named executive
officer consisted primarily of the use of company-owned vehicles and did not
exceed either $50,000 or 10% of each executive's annual salary and bonus.
47
<PAGE>
Excessive Compensation Prohibited
Under the merger agreement, during the first year following the merger, no
prior member of ATC LLC may receive annual compensation with a cash value
exceeding $60,000. The agreement further provides that the compensation may be
increased to $70,000 during the second year following the merger and that the
Board may override these restrictions by unanimous vote based on extraordinary
efforts. By the unanimous adoption of a resolution on September 30, 1998, the
Board of Directors increased the $60,000 limit during the first year following
the merger to $70,000, based on the extraordinary efforts of the prior members
of ATC LLC. Messrs. Chimood, Yang and Chao are prior members of ATC LLC; Mr.
DiCarlo is not a prior member of ATC LLC.
Option Grants and Option Exercises in Fiscal Year 1999 and Year-End Option
Values
We did not grant any of the executives named above in the Summary
Compensation Table any stock options in 1999; and, none of the named executives
exercised any options during 1999. Rocco DiCarlo is the only named executive who
currently owns stock options. On Mr. DiCarlo's date of employment, December 16,
1998, we agreed to grant Mr. DiCarlo options to purchase 1,500,000 shares of
common stock at the exercise price of $.10 per share. These options vest upon
the attainment of certain performance milestones, as follows:
o 300,000 shares may be purchased upon Mr. DiCarlo's completion of our
research and development plan.
o 300,000 shares may be purchased upon our attainment of $1,250,000 in
quarterly sales.
o 300,000 shares may be purchased upon our attainment of $5,000,000 in
quarterly sales.
o 600,000 shares may be purchased upon our attainment of $7,500,000 in
quarterly sales.
Mr. DiCarlo's options expire 10 years from the date of grant.
As of December 31, 1999, Mr. DiCarlo had attained the first milestone and,
as a result, the option to purchase 300,000 shares was exercisable. The
remaining options to purchase 1,200,000 shares are currently unexercisable.
Based on the fair market value of our common stock as of the end of 1999, the
300,000 exercisable options had an aggregate value of $441,000, and the
1,200,000 unexercisable options had an aggregate value of $1,764,000.
Directors' Compensation
The directors receive no cash compensation for their services as directors.
All of the members of the Board, Messrs. Chimood, Yang and Chao, are also
executive officers and receive salaries and other compensation as described
above.
1997 Employee Stock Compensation Plan
Our predecessor, Diversified Technologies, Inc., adopted the 1997 Employee
Stock Compensation Plan (the ESC Plan) for employees, officers, directors and
advisors to the company on
48
<PAGE>
January 18, 1997. The ESC Plan is attached to this registration statement as
Exhibit 10.5. Pursuant to the terms of the merger agreement, this plan remained
in effect after the merger's effective date. Under the terms of this plan,
1,000,000 shares of common stock were reserved for issuance upon the grant of
awards under this plan. The ESC Plan expires on January 17, 2002. The Board of
Director's Compensation Committee (or the full Board) is responsible for the
administration of the ESC Plan and has sole power to award common shares
pursuant to the plan. Awards of ESC Plan shares may be made as compensation for
services rendered, directly or in lieu of other compensation payable, as a bonus
in recognition of past service or performance, or may be sold to eligible
persons. ESC Plan shares awarded other than for services rendered may not be
sold for less than their fair value on the grant date. As of June 30, 2000,
194,000 common shares had been awarded under this plan.
1997 Compensatory Stock Option Plan
Our predecessor, Diversified Technologies, Inc., adopted the 1997
Compensatory Stock Option Plan (the CSO Plan) for employees on January 18, 1997.
The CSO Plan is attached as Exhibit 10.4. Pursuant to the terms of the merger
agreement, this plan remained in effect after the merger's effective date. Under
the terms of the CSO Plan, as modified in 1999, 4,500,000 shares of common stock
were reserved for issuance upon the exercise of options granted under this Plan
and our 1999 New Hired Employee Stock Compensation policy. The CSO Plan provides
for the issuance of non-statutory stock options that are not intended to qualify
as "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. The plan expires on January 17, 2007. Our
Board of Directors may appoint the Board's Compensation Committee (provided it
consists of at least two members of the Board who are Non-Employee Directors) as
administrator of this plan. Currently, the full Board is responsible for the
duties allocated to the Compensation Committee. CSO Plan options will be granted
at exercise prices determined by the Board of Directors, but the exercise price
may not be less than 85% of the fair market value of the common stock on the
date of the option grant. As of June 30, 2000, 2,282,250 stock options have been
granted under this plan. On May 1, 1999, the Board of Directors, by resolution,
authorized 3,000,000 shares of common stock to be issued and added to the CSO
Plan, in conjunction with its establishment of the 1999 New Hired Employee Stock
Compensation policy. The directors' unanimous written consent, which established
a policy for awarding new employees stock and stock options, based on the ESC
Plan and CSO Plan, is attached as Exhibit 10.6.
Employment Agreements
On April 22, 1999, we entered into an executive employment agreement with
Thomas Yang, and on January 20, 2000, we entered into executive employment
agreements with Ke-Ou Chao and Enghe Chimood. The employment agreements are
attached as Exhibits 10.1, 10.2 and 10.3. The agreements terminate on June 30,
2002, without a renewal option. During the term of the agreements,
o Mr. Chimood shall serve as Chief Executive Officer and Co-Chairman of
the Board;
o Mr. Yang shall serve as Chief Operating Officer and Co-Chairman of the
Board; and
o Mr. Chao shall serve as Vice President, Engineering and Director.
49
<PAGE>
The executives shall devote substantially all of their business time and effort
to our business. Under the agreements, the executives receive the following
annual base salaries:
Enghe Chimood Thomas Yang Ke-Ou Chao
------------- ----------- ----------
April 22, 1999- N/A $60,000, N/A
June 30, 1999 pro-rated
July 1, 1999 - N/A $70,000 N/A
June 30, 2000
January 20, 2000 - $70,000, N/A $70,000,
June 30, 2000 pro-rated pro-rated
July 1, 2000 - $150,000(1) $150,000(1) $150,000(1)
June 30, 2001
July 1, 2001 - $170,000 $150,000 $150,000
June 30, 2002
-------------
(1) In July 2000, this executive decided to defer $80,000 of his base salary,
for the period beginning July 1, 2000 and ending June 30, 2001, until a
later date.
In addition, under the terms of the agreements, the above executives will
also receive customary employee benefits which include health and life insurance
and use of a company leased vehicle.
The employment agreements also contain provisions in the event of the
company's change of control or if the executive's employment is involuntarily
terminated, without serious cause, as defined in the agreements, and without
breach of the agreement's non-compete, confidentiality and certain other
provisions, by the entity acquiring control of us.
o We must pay the executive his earned but unpaid base salary and
incentive compensation as of the date of termination; and
o any shares of Series A voting convertible preferred stock owned by the
executive will automatically convert into shares of our common stock.
These executives must also maintain the confidentiality of certain
information about the company and have agreed that any intellectual property
they develop resulting from their services to the company will belong to us, the
presumption being, as stated in the agreements, that any intellectual property
developed or worked on by the executive at any time during his employment will
be the result of his services under his employment agreement. The agreements
also contain a non-compete provision, whereby the executives agree not to
compete directly or indirectly with us during their employment and for two years
following their termination of employment.
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<PAGE>
Item 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Apart from the employment agreements described under Item 6, and the
issuance of stock, warrants and stock options to our directors and officers, as
described elsewhere in this registration statement under Items 1, 4 and 6, we
have not entered into and do not intend to enter into any material transactions
with any of our directors, executive officers, principal stockholders, or their
associates, except as described below.
On August 28, 1999, Tseng Yun Tsai agreed to make a short-term,
interest-free loan to us in the amount of $500,000. We used the proceeds of the
loan for general corporate purposes, and the amount was deemed an advance toward
the subscription price for our private placement offering of common stock to Mr.
Tsai. On October 18, 1999, Mr. Tsai became our largest beneficial stockholder
when he subscribed for 2,000,000 shares of common stock and for warrants to
purchase 8,000,000 additional shares of common stock. The total purchase price
of the shares and warrants was $1,000,000, and Mr. Tsai tendered the remaining
subscription price. See Part II, Item 4.
On July 19, 1999, we entered into a Memorandum of Understanding with ePHONE
which is described in Item 1, "Dependence on a Few Major Customers". Robert
Clarke was at that time one of our directors and the President of ePHONE.
Transactions with Promoters
In July, 1998, we completed a merger with and into ATC Inc., a wholly-owned
subsidiary of Diversified Technologies, Inc. The merger was a reverse
acquisition and is accounted for as a recapitalization of ATC LLC with ATC LLC
as the acquirer. Following the merger, the company's name was changed to TEK
DigiTel Corporation. In the merger, Diversified Technologies, Inc. issued
6,200,000 shares of common stock and 2,06,667 shares of Series A voting
convertible preferred stock in exchange for all outstanding equity interests in
ATC LLC.
A group of promoters, referred to as N. E. Group, helped to facilitate the
merger. In a Memorandum of Understanding between ATC LLC and N. E. Group, dated
March 22, 1998, N. E. Group agreed to assist ATC LLC in "going public" and in
fund raising. Specifically, N. E. Group stated its commitment to raise, on a
best efforts basis, a private placement of $1.0 million, as well as certain
additional capital funding. The $1.0 million private placement was later
included in the merger agreement as the threshold amount of capital necessary to
be raised within certain timeframes to prevent the automatic conversion of each
Series A voting convertible preferred share into six shares of common stock.
Through the merger transactions with Diversified Technologies, Inc., later TEK
DigiTel Corporation, N. E. Group was able to meet its goal of helping ATC LLC
"go public" because Diversified Technologies, Inc. was a publicly traded company
on the OTC BB.
Pursuant to an amendment to the ATC LLC operating agreement, dated June 1,
1998, and agreed to by ATC LLC's prior members and the promoters, each promoter
received a membership interest in ATC LLC immediately prior to the merger, such
interest being converted into our shares at
51
<PAGE>
the effective time of the merger transactions. The already-existing members of
ATC LLC agreed to decrease their own membership interests in order to grant
these promoters membership interests in ATC LLC for their services.
Item 8. DESCRIPTION OF SECURITIES
Our authorized capital stock consists of an aggregate of 70,000,000 shares
of all classes. Fifty million (50,000,000) shares are designated as common stock
and twenty million (20,000,000) shares are designated as preferred stock, all
without par value.
Once duly issued for consideration called for, all shares of common stock
and preferred stock are considered fully paid and non-assessable, provided the
company has received a binding legal obligation of the purchaser for any balance
due. Also, so long as the Board of Directors has not established a particular
class or series of common or preferred stock, the Board of Directors may amend
the voting rights, preferences and other rights of stockholders.
Common Stock
Our articles of incorporation authorize us to issue 50,000,000 shares of
common stock, of which 22,954,500 shares were issued and outstanding as of June
30, 2000. The Board of Directors may issue shares of common stock without
stockholder approval, as long as authorized but unissued shares are available.
The Board of Directors also has the authority to issue any class or series
of common stock and to determine the powers, preferences and rights of the
shares of such class or series. The common stock may have such voting powers and
other preferences and rights as the Board of Directors may determine. Unless
otherwise determined by the Board of Directors at the time of issuing common
shares, each common share shall be the same class, without any designation,
preference or other special rights, and shall have unlimited voting rights, each
holder of record being entitled to one vote for each share. The Board of
Directors has not issued a class or series of common stock nor issued any common
stock with voting rights different from the standard right to one vote per
share. The holders of the currently outstanding common shares are entitled to
one vote for each share held on all matters presented to them. The affirmative
vote of the majority of the shares is sufficient to effect any corporate action
upon which stockholders may or must vote. Shares of common stock do not carry
cumulative voting rights. Thus, holders of more than 50% of the shares have the
power to elect all directors and, as a practical matter, to control the company.
Stockholders are not entitled to preemptive rights, and the shares are not
subject to redemption. Under our bylaws, the Chairman of the Board, the
President, a majority of the Board of Directors, or stockholders holding in the
aggregate at least 10% of the outstanding common stock may call a special
meeting of stockholders.
Common stockholders are entitled to receive, pro rata, dividends when and
as declared by the Board out of funds legally available. We may only pay
dividends to common stockholders after
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<PAGE>
paying any required dividends on preferred stock. Currently, the Series A voting
convertible preferred stockholders are entitled to share proportionately in
dividends on common stock. Also, prior to paying dividends on the common stock,
we may be required to set aside sums in a sinking fund for the purchase or
redemption of shares of any class or series of preferred stock. Currently, no
sinking fund provision exists. Upon our liquidation, dissolution or winding up,
the common stockholders are entitled to share ratably in our assets legally
available for distribution to our stockholders after payment of liabilities and
after payment to preferred stockholders.
Preferred Stock
Under our articles of incorporation, the Board of Directors has the
authority to issue any class or series of preferred stock and to determine the
powers, preferences and rights of the shares of such class of series. Rights and
preferences which the Board of Directors may determine upon issuing a class or
series of preferred shares include:
o the rate of dividend,
o preferential dividend rights over other series of preferred shares,
o redemption rights,
o provision for a sinking fund for the redemption or purchase of shares,
o rights upon liquidation, and
o conversion rights.
The preferred stockholders are entitled to receive all dividends declared
by the Board of Directors in preference to the common stock holders. So long as
any shares of preferred stock are outstanding, we may not
o pay a dividend on common stock,
o make a distribution on common stock,
o purchase or redeem any common stock
unless all dividends on all classes and series of preferred stock with respect
to all past dividend periods and the current dividend period have been paid and
unless we have met our obligations under any sinking fund provision.
In the event of dissolution or liquidation, the holders of shares of each
class or series of preferred stock outstanding are entitled to receive out of
our net assets, in accordance with any preferences between the series and
classes, the amount per share as fixed by the Board of Directors, prior to any
distribution or payment to the common stock holders.
Except as otherwise provided by the Board of Directors, the shares of
preferred stock have no voting power with respect to any matter whatsoever.
53
<PAGE>
Series A, Voting Convertible Preferred Stock
The Board of Directors of our predecessor, Diversified Technologies, Inc.,
designated, pursuant to the Wyoming Business Corporation Act and its Articles of
Incorporation, a total of 2,100,000 shares of its authorized but unissued shares
of Preferred Stock as the Series A, Voting Convertible Preferred Stock, par
value $.001 per share (the Series A preferred stock). At the effective date of
the merger, July 7, 1998, TEK issued 2,066,667 shares of the Series A preferred
stock to the members of ATC LLC, along with 6,200,000 shares of common stock, in
exchange for the member's ownership interests in ATC LLC. As of June 30, 2000,
2,066,667 preferred shares were issued and outstanding. Shares of Series A
preferred stock may be issued for any consideration as the Board may determine,
whether cash, property or other assets. Once duly issued for the consideration
called for, shares of the Series A preferred stock are considered fully paid and
non-assessable.
The Series A preferred stockholders are not entitled to receive any
dividends. However, if a dividend is declared on our common stock or on any
series of preferred stock ranking equal or junior to the Series A preferred
stock, then Series A preferred stockholders are entitled to receive a
proportional share of the dividend, based upon the proportion of the number of
shares of Series A preferred stock then outstanding to the total number of
shares of common and preferred stock entitled to share in the dividend.
The shares of Series A preferred stock are not subject to redemption. Each
share of Series A preferred stock may, subject to all terms and conditions and
subject to adjustment, be converted, at the option of the holder, into six fully
paid, non-assessable shares of common stock, no par value per share. When
issued, each share of Series A preferred stock was subject to four conversion
conditions. The conversion conditions need not be satisfied in any particular
order, nor is the satisfaction of any conversion condition dependent upon the
prior satisfaction of any other conversion condition. The Series A preferred
stock shares were also subject to an automatic conversion provision which
provides that shares of Series A preferred stock be converted into six shares of
common stock if certain capital-raising conditions were not met by a set date.
However, by unanimous written agreement, on April 24, 2000, all of the Series A
preferred stockholders waived their right to immediately convert their Series A
preferred stock into shares of common stock and instead agreed to be bound by
the conversion rates and the conditions as set forth in the table below. The
Waiver of Conversion Rights of Series A Preferred Stockholders is attached as
Exhibit 4.4. At this time, the first conversion provision has been triggered;
but, no Series A preferred stock shares have been converted into shares of
common stock.
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<PAGE>
Each share of Series A preferred stock may be converted into six fully
paid, non-assessable shares of common stock, subject to the following conversion
conditions:
<TABLE>
<CAPTION>
Conversion
Conversion Conditions* Rate Status
---------------------- ---------- ------
<S> <C> <C> <C>
o 1/4 of the shares of Series A preferred stock held may be 6:1 Condition achieved in
converted when our two-port Voice Server has May 1999
successfully completed original beta testing by a customer,
as evidenced by the customer's final written acceptance
specifying all testing carried out and test results.**
o 1/4 of the shares of Series A preferred stock held may be 6:1 Condition not achieved
converted when our four-port Voice Server has as of June 30, 2000
successfully completed original beta testing by a customer,
as evidenced by the customer's final written acceptance
specifying all testing carried out and test results.**
o 1/4 of the shares of Series A preferred stock held may be 6:1 Condition not achieved
converted when the company and all subsidiaries have on as of June 30, 2000
a combined basis achieved an aggregate of $5,000,000 in
booked sales, evidenced by firm purchase orders, firm
distribution agreements, license agreements, royalty
agreements or other written agreements committing
contracting parties to purchase a minimum specified dollar
amount of product (collectively, the "Sales Agreements"),
subject to no condition, contingency or limitations other
than product delivery and satisfying technical
specifications made part of the Sales Agreements.***
o 1/4 of the shares of Series A preferred stock held may be 6:1 Condition not achieved
converted when the company and all subsidiaries have on as of June 30, 2000
a combined basis achieved an aggregate of $10,000,000 in
booked sales, evidenced by Sales Agreements that are not
subject to any condition, contingency or limitation other
than product delivery and satisfying technical
specifications made part of the Sales Agreements.***
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Conversion
Conversion Conditions* Rate Status
---------------------- ---------- ------
<S> <C> <C> <C>
o Automatic Conversion at Maximum Conversion Rate. 6:1 Condition triggered
Notwithstanding the provisions above, if the Company has as of March 8, 1999, but
not realized $1,000,000 in cash or other value from an waived by unanimous
securities prior to offering of our deduction of written agreement of all
deduction of offering-related expenses and other non- Series A preferred
operating expenses not to exceed $100,000, (the stockholders on April 24,
Qualifying Amount) within 6 months following the date 2000
of original issuance of the Series A preferred stock (July 7,
1998), then each share of Series A preferred stock shall,
automatically and without any requirement to satisfy any
conversion conditions and without need of any further
action on the part of holders of Series A preferred stock
except to surrender the Series A preferred stock
certificates to the company's secretary for conversion, be
converted into and thereafter represent 6 shares of our
common stock; provided however, that if on the date
which is 6 months following the original issue date, a total
of at least $650,000 has then been realized by the
company in cash or other value from an offering of our
securities prior to deductions, then the six-month period in
which the company must raise the Qualifying Amount
shall be extended to 8 months following the original issue
date.
</TABLE>
----------------
* The four conversion conditions need not be satisfied in any particular
order, nor is the satisfaction of any conve rsion condition dependent upon
the prior satisfaction of any other conversion condition.
** In addition to the customer's final written acceptance as called for,
our full board of directors must by unanimous vote determine that the
customer's beta testing occurred as represented in the final written
acceptance and that such testing was reasonably appropriate to evaluate
fitness of the tested device for its intended use.
*** In addition to the booked sales required, our full board of directors must
by unanimous vote determine that all Sales Agreements which evidence the
booked sales are valid, arm's length agreements and appropriate to our
operations.
The shares of common stock into which shares of Series A preferred stock
are converted will not be registered under the Securities Act of 1933 (the Act).
Rather, they will be issued in reliance on Section 4(2) of the Act or Rule 505
or Rule 506 of Regulation D under the Act, or Regulation S under the Act or any
other available exemption from registration. Conversion occurs on the date a
Series A preferred stock certificate is presented to our corporate secretary or
registrar and transfer agent, properly endorsed and accompanied by the
appropriate fee payable for issuance of the conversion shares.
In the event we voluntarily or involuntarily liquidate, dissolve or
wind up, the Series A preferred stockholders will be subordinate to all of our
creditors claims and to claims of the holders of every series of our preferred
stock ranking senior upon liquidation to the Series A preferred stock, but
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<PAGE>
are otherwise entitled to receive a liquidation preference, before any payment
is made to common stockholders or any series of preferred stock ranking junior
to the Series A preferred stock. After the payment of any liquidation and any
liquidation preferences payable to holders of any other series of preferred
stock, the Series A preferred stockholders share ratably with the common
stockholders and all series of preferred stock ranking on a parity with or
junior to the Series A preferred stock our assets available for distribution to
our stockholders.
Series A preferred stockholders are entitled to vote in elections of
directors and on other matters generally as to which our stockholders may vote.
Each share of Series A preferred stock is entitled to cast three votes on every
matter placed before stockholders. The shares of Series A preferred stock vote
with the common shares and not as a separate class. Any matter which requires
the approval of the Series A preferred stockholders requires only the
affirmative vote of a majority of the votes cast by the holders of those shares,
voting as a separate class, at any lawful meeting of those holders which
commences with a quorum; or, if those shares vote by means of written consent in
lieu of a meeting, the concurrence of only a majority of the Series A preferred
stockholders is necessary.
Units
Pursuant to the merger agreement, we sold and issued 1,600,000 units at a
price of $.10 per unit, each unit consisting of
o one share of common stock;
o one Class A common stock purchase warrant exercisable until April 30,
1999 to purchase one share of common stock at a price of $.12 per share;
o one Class B common stock purchase warrant exercisable until April 30,
1999 to purchase one share of common stock at a price of $.16 per
share; and
o one Class C common stock purchase warrant exercisable until April 30,
1999 to purchase one share of common stock at a price of $.22 per share,
all intended to raise funds for operations.
All of these classes of warrants were exercised for an aggregate price of
$800,000.
Warrants
Class D, Class E, Class F and Class G Warrants
Pursuant to a unit subscription agreement we entered into with Mr. Tseng
Yun Tsai, dated October 18, 1999, Mr. Tsai subscribed for 2,000,000 units for a
total price of $1,000,000. Each unit consists of one common share and:
o one Class D Warrant, entitling the holder to purchase a further share
at an exercise price of U. S. $.50 per share until November 30, 1999;
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<PAGE>
o one Class E Warrant, entitling the holder to purchase a further share
at an exercise price of U. S. $.50 per share until March 31, 2000;
o one Class F Warrant, entitling the holder to purchase a further share
at an exercise price of U. S. $.60 per share until August 31, 2000; and
o one Class G Warrant, entitling the holder to purchase a further share
at an exercise price of U. S. $.65 per share until August 31, 2001.
The warrants are subject to the terms and conditions contained in the
subscription agreement. The subscription agreement provides for an appropriate
adjustment in class and number of warrant shares issuable pursuant to any
exercise thereof upon the occurrence of certain stated events including any
subdivision, consolidation or reclassification of common shares.
The shares forming part of the units, the warrants and the warrant shares
have not been registered under the Act or under the securities laws of any state
and, therefore, cannot be resold unless they are registered or exempt from such
registration.
As of June 30, 2000, Mr. Tsai has exercised all of the Class D, E and F
warrants.
Anti-Takeover Provisions
The Wyoming Business Corporation Act and our articles of incorporation
provide numerous provisions that may be deemed to be anti-takeover in nature,
both as to purpose and effect.
The overall effect of the various anti-takeover provisions might be to
deter a tender offer that a majority of our stockholders might view to be in
their best interests. The offer could include, among other things, a substantial
premium over the market price at that time. In addition, anti-takeover
provisions may have the effect of assisting our current management in retaining
its position and placing it in a better position to resist changes that
stockholders want to make if they were dissatisfied with the conduct of our
business.
Articles of Incorporation
Our articles of incorporation contain a number of provisions that could be
considered anti- takeover in purpose and effect. These provisions include:
o the authorization of 50,000,000 shares of common stock;
o the authorization of 20,000,000 shares of preferred stock; and
o the lack of preemptive rights for our stockholders to subscribe to
purchase additional shares of stock on a pro rata basis.
The additional shares of common and preferred stock and the decision not to
provide stockholders with preemptive rights to the stock provide our Board of
Directors with as much
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<PAGE>
flexibility as possible to issue additional shares, without further stockholder
approval, for proper corporate purposes, including:
o financing
o acquisitions
o stock dividends
o stock splits
o employee incentive plans
o other similar purposes
Another provision that could be considered "anti-takeover" in nature is the
decision not to provide for cumulative voting with respect to the election of
directors, as is permitted by the Wyoming Business Corporation Act. Cumulative
voting entitles each stockholder to as many votes as equal the number of shares
owned by him multiplied by the number of directors to be elected. A stockholder
may cast all of these votes for one candidate or distribute them among any two
or more candidates. The Board of Directors believes that each director should
represent and act in the interest of all stockholders and not any special group
of stockholders. The absence of cumulative voting means that a majority of the
outstanding shares can elect all the members of the Board of Directors. Although
we have approximately 61 stockholders of record, the Board of Directors
recognizes that the absence of cumulative voting makes it more difficult to gain
representation on the Board of Directors.
Securities Laws
By filing this registration statement and registering our common stock with
the SEC under Section 12(g) of the Securities Exchange Act of 1934, we will
become subject to the periodic reporting, proxy solicitation and insider trading
requirements of the Securities Exchange Act. In addition, we will become subject
to the registration and prospectus delivery requirements of the Securities Act
of 1933 and to similar requirements under state securities laws. Our executive
officers, directors and those who are beneficial owners of more than 10% of our
issued and outstanding shares of common stock will become subject to
restrictions affecting their right to sell their shares of common stock.
Specifically, each of these persons will become subject to the beneficial
ownership reporting requirements under the short-swing profit recapture
provisions of Section 16 of the Securities Exchange Act and may sell shares of
our common stock only:
o in compliance with the provisions of SEC Rule 144;
o in compliance with the provisions of another applicable exemption from
the registration requirements of the Securities Act of 1933; or
o pursuant to an effective registration statement filed with the SEC
under the Securities Act of 1933.
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<PAGE>
PART II
Item 1. MARKET PRICE OF AND DIVIDENDS ON THE COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
Our common stock is currently quoted on the National Quotations Bureau's
Electronic Quotation Service ("Pink Sheets") under the trading symbol TEKI.
Prior to April 20, 2000, our common stock was quoted on the OTC Bulletin Board,
a service provided by the NASDAQ Stock Market, Inc. Our common stock was removed
from the OTC BB in accordance with NASD Market Rule 6530, requiring that we
register our common stock with the SEC. We intend to re-list our common stock on
the OTC BB after the SEC has completed its review of this Form 10-SB and any
required amendments. As of June 30, 2000, we had 53 holders of record of our
common stock. Approximately one-third of our 22,954,500 outstanding shares were
held in street name by an unknown number of beneficial owners. We believe the
principal market area for our stock is the United States, although we also have
investors in Canada and Taiwan.
The following table sets forth the high and low bid prices for our common
stock as reported for each quarterly period since it began trading on the OTC BB
in August 1998. Prior to the merger, the common stock of Diversified
Technologies, Inc. was not actively traded; and, therefore, no price information
is available. The prices are inter-dealer prices, do not include retail mark up,
mark down or commission and may not necessarily represent actual transactions.
Market Price
2000 High Low
---- ---- ---
First Quarter $4.50 $1.40
Second Quarter 1.38 .94
1999 High Low
---- ---- ---
First Quarter $1.25 $.44
Second Quarter .85 .43
Third Quarter .77 .51
Fourth Quarter 2.25 .49
1998 High Low
---- ---- ---
Third Quarter $.94 $.46
Fourth Quarter 1.75 .51
On June 30, 2000, the closing quotation for our common stock as reported in
the Pink Sheets was $1.22. You should obtain current market quotations for our
common stock because the market price of our stock may fluctuate greatly. You
can obtain these quotations from various websites or by calling your broker.
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<PAGE>
Dividend Policy
We have never declared or paid a cash dividend on our common or preferred
stock, and do not intend to pay any cash dividends in the foreseeable future. We
intend to retain earnings, if any, to finance the development and expansion of
our business. Paying dividends in the future will depend upon, among other
things, our ability to generate earnings, need for capital and overall financial
condition.
Item 2. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings, nor are our directors
or officers. We have no knowledge of any pending legal proceedings to which
those parties owning 5% or more of our stock are a party. We are not aware of
any legal proceedings contemplated, or threatened by or against us.
Item 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On April 21, 2000, our Board of Directors unanimously approved the change
of our independent accountants for the audits of our consolidated financial
statements for the years ended December 31, 1998 and 1999, from Reznick Fedder &
Silverman (Reznick) to Grant Thornton, LLP, and on June 1, 2000, we engaged
Grant Thornton, LLP as our independent accountants.
Reznick served as the independent accountant for both ATC LLC, prior to the
merger with Diversified, and for Diversified. The reports of Reznick for the
fiscal years ended December 31, 1997, for both ATC LLC and Diversified,
contained no adverse opinions, disclaimer of opinions or qualification or
modification as to uncertainty, audit scope or accounting principles. However,
such reports did contain explanatory paragraphs relating to each company's
ability to continue as a going concern.
Following the merger, we engaged Reznick as our independent accountant to
conduct audits of our December 31, 1998 and 1999 consolidated financial
statements. On April 21, 2000, our board of directors unanimously agreed to
dismiss Reznick as our independent accountants, prior to their completion of
these audits.
During the fiscal years ended December 31, 1998 and December 31, 1999, and
the interim period from January 1, 2000 through April 21, 2000, we had no
disagreements with Reznick on any accounting principles or practices, financial
statement disclosures or auditing scope or procedure, which, if not resolved to
the satisfaction of Reznick would have caused them to make reference to the
subject matter of the disagreement in connection with their reports. No event
described in paragraph (a)(1)(iv) of Item 304 of Regulation S-B promulgated by
the SEC has occurred within our fiscal years
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<PAGE>
ending December 31, 1998 and December 31, 1999, or the period from January 1,
2000 through April 21, 2000.
We did not consult with Grant Thornton during the fiscal years ended
December 31, 1998 and December 31, 1999, and the interim period from January 1,
2000 through June 1, 2000 on any matter which was the subject of any
disagreement or any reportable event or on the application of accounting
principles to a specified transaction, either completed or proposed.
Item 4. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth sales of our securities from the date of the
merger through June 30, 2000 without registration under the Securities Act of
1933. Prior to the merger with ATC LLC, our predecessor, Diversified
Technologies, Inc., sold 1,000,000 shares of its common stock pursuant to
Regulation D, Rule 504 for $245.
<TABLE>
<CAPTION>
Amount
Sold Persons/
Title of (# of Total Offering Exemption Class of Persons
Date Security shares) Price Relied Upon to Whom Sold
---- -------- ------- -------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
July 7, 1998 Common Stock 6,200,000 None - Issued Rules 505/506 Members of ATC LLC
pursuant to
Merger
Agreement
July 7, 1998 Series A Voting 2,066,667 None - Issued Rules 505/506 Members of ATC LLC
Convertible pursuant to
Preferred Stock Merger
Agreement
July, 1998 - Common Stock 6,400,000 $1,000,000 Reg. D/Rule 504 Certain Prior Members
April, 1999 of ATC LLC and John
D. Brasher, Jr., Esquire
(1)
August 28, 1998 Common Stock 155,000 None-Employee sec. 4(2) Private Employees
Stock Award Offering
under 1997
Employee Stock
Compensation
Plan
August 6, 1999 Common Stock 125,000 $50,000 Reg. S Wen-Tsung Wu
October 18, 1999 Common Stock 2,000,000 $1,000,000 Reg. S Tseng Yun Tsai
November 22, 1999 Common Stock 2,000,000 $1,000,000(2) Reg. S Tseng Yun Tsai
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Amount
Sold Persons/
Title of (# of Total Offering Exemption Class of Persons
Date Security shares) Price Relied Upon to Whom Sold
---- -------- ------- -------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Various dates in Common Stock 37,000 None- Employee sec. 4(2) Private Employer
1999 Stock Award Offering
under 1997
Employee Stock
Compensation
Plan
Various dates in Common Stock 32,500 $3,250 (Exercise sec. 4(2) Private Employees/Consultants
1999 of Stock Options Offering
at $.10 per
share)
January 26, 2000 Common Stock 2,000,000 $1,000,000(2) Reg. S Tseng Yun Tsai
June 20, 2000 Common Stock 2,000,000 $1,200,000(2) Reg. S Tseng Yun Tsai
</TABLE>
-------------
(1) These ATC LLC Members include Goa Telengut, Pierre Theberge, Robert G.
Clarke, Vista Capital Corporation, First Atlantic Equities Ltd., Mirmar
Investments Ltd., Christopher Cory and Canadian Energy Funding, Inc. Mr.
Brasher was the attorney for Diversified Technologies, Inc. and provided
legal services relating to the merger with ATC LLC.
(2) Mr. Tsai exercised 2,000,000 Class D warrants, 2,000,000 Class E warrants
and 2,000,000 Class F warrants, pursuant to his private placement
subscription agreement dated October 18, 1999.
Private Placement Subscription for Common Stock by Tseng Yun Tsai
In a private placement of our securities, exempt under Regulation S from
the registration requirements of the Securities Act of 1933, Tseng Yun Tsai, a
citizen and resident of Taiwan, R.O.C., a non-affiliate, entered into a
subscription agreement with us on October 18, 1999, whereby Mr. Tsai agreed to
purchase 2,000,000 shares of our common stock at a purchase price of $.50 per
share and the following detachable warrants:
o 2,000,000 Class D Warrants entitling Mr. Tsai to purchase the same
number of shares of common stock at an exercise price of $.50 per
share until November 30, 1999;
o 2,000,000 Class E Warrants entitling Mr. Tsai to purchase the same
number of shares of common stock at an exercise price of $.50 per
share until March 31, 2000;
o 2,000,000 Class F Warrants entitling Mr. Tsai to purchase the same
number of shares of common stock at an exercise price of $.60 per
share until August 31, 2000; and
o 2,000,000 Class G Warrants entitling Mr. Tsai to purchase the
same number of shares of common stock at an exercise price of
$.65 per share until August 31, 2001.
Under the subscription agreement, Mr. Tsai has the right to appoint one
director to our Board of Directors annually upon completion of the offering and
the right to appoint two directors to our Board of Directors annually upon the
exercise of all of the warrants he purchased.
63
<PAGE>
Item 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Wyoming law, our articles of incorporation provide that we
may indemnify any person who was or is a party or threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, whether formal or informal by
reason of the fact that he is or was or has agreed to become a director,
officer, employee or agent of ours, or is or was serving or has agreed to serve
at our request, as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or by reason
of any action alleged to have been taken or admitted in such capacity against
costs, charges, expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding any appeal therefrom,
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to our best interests and, with respect to any criminal action or
proceeding, have no reasonable cause to believe his conduct was unlawful. To the
extent that a director, officer, or employee of the corporation has been
successful on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, in defense of any action, suit or
proceeding, or in defense of any claim, issue, or matter therein, he may be
indemnified against all costs and expenses (including attorneys' fees) actually
and reasonably incurred by him or on his behalf in connection therewith. We may
also bear the costs, charges and expenses incurred by a person in defending a
civil or criminal action, suit or proceeding in advance of the final disposition
of such action, suit or proceeding upon their promise to repay such sums if it
is ultimately determined that they are not entitled to indemnification. These
expenditures could be substantial and may not be recouped, even if we are so
entitled. In so far as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, we have been informed that,
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in that Act and is, therefore,
unenforceable.
Exceptions to Indemnification Rights
We are not obligated, pursuant to the terms of our articles of amendment:
o to indemnify or advance expenses to any person with respect to
proceedings or claims initiated or brought voluntarily by him
or her and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to
indemnification under our articles of incorporation or any
other statute or law or otherwise as required under the
Wyoming Business Corporation Act, such indemnification or
advancement of expenses may be provided by the corporation in
specific cases if the board of directors finds it to be
appropriate;
o to indemnify any person for any expenses incurred by him or her with
respect to any proceedings instituted by him or her to enforce or
interpret our articles of incorporation, if a court of competent
jurisdiction determines that each of the material assertions made by
him or her in such proceedings was not made in good faith or was
frivolous;
64
<PAGE>
o to indemnify any person for expenses or liabilities of any
type whatsoever (including, but not limited to, judgments,
fines, ERISA, excise taxes or penalties, and amounts paid in
settlement) which have been paid directly to him or her by an
insurance carrier and a policy of officers', directors'
liability insurance maintained by the corporation; or
o to indemnify any person for expenses or the payment of profits
arising from the purchase and sale by him or her of securities
in violation of Section 16(b) of the Securities Exchange Act
of 1934, or any similar or successor statute.
Exclusion of Director Liability
Pursuant to Wyoming law, our articles of incorporation exclude personal
liability on the part of our directors to us or any stockholder for monetary
damages for breach of his fiduciary duty as a director, except for liability
for:
o any breach of a directors' duty of loyalty to us or our stockholders,
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o for improper payment of dividends, or
o for any transaction from which the director derives an improper
personal benefit. This exclusion of liability does not limit any
right with which a director may have to be indemnified and does not
affect any directors' liability under federal or applicable state
securities laws.
WHERE YOU CAN FIND MORE INFORMATION
Prior to filing this registration statement, we were not subject to the
informational requirements of the Securities Exchange Act of 1934, and, thus,
have not previously filed reports, proxy statements and other information with
the Securities and Exchange Commission. However, after the effective date of
this registration statement, our subsequent reports, proxy statements and other
information required to be filed with the SEC will be available for inspection
and copying at the public reference facilities maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. We are an electronic filer with the SEC.
The SEC maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of the SEC's web site is:
http://www.sec.gov. Our web site address is: http://www.tekdigitel.com.
--------------------------
65
<PAGE>
You should rely only on the information contained in this registration
statement or to which we have referred you. We have not authorized anyone to
provide any information or to make any representation that is different. The
information in this registration statement is only accurate as of the date of
this registration statement.
66
<PAGE>
PART F/S
TEK DIGITEL CORPORATION
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT................................................F-2
CONSOLIDATED BALANCE SHEETS.................................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS.......................................F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.............................F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................................F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of TEK DigiTel Corporation
We have audited the accompanying consolidated balance sheet of TEK DigiTel
Corporation and subsidiary (the "Company") as of December 31, 1999, and the
related consolidated statements of operations, stockholder's equity, and cash
flows for each of the two years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of TEK DigiTel Corporation and subsidiary as of
December 31, 1999, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Grant Thornton, LLP
-----------------------
Vienna, Virginia
July 3, 2000
F-2
<PAGE>
TEK DIGITEL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
Asset
Current Assets:
Cash $ 477,682 $ 690,902
Accounts receivable 34,385 107,389
Inventory 371,432 337,244
Prepaid expenses and other current assets 171,563 155,560
----------- -----------
Total Current Assets 1,055,062 1,291,095
Property and equipment, net 66,877 81,804
Other assets 102,973 87,573
----------- -----------
$ 1,224,912 $ 1,460,472
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 169,873 $ 135,984
Accrued expenses 89,223 93,633
Unearned revenue 269,200 251,300
----------- -----------
Total Current Liabilities 528,296 480,917
----------- -----------
Commitments and Contingencies - -
Stockholders' Equity:
Preferred stock, no par value, 20,000,000 shares 435,798 435,798
authorized, of which 2,100,000 has been
designated as convertible Series A voting
preferred stock. At both December 31, 1999 and
March 31, 2000, 2,066,667 shares of
convertible Series A voting preferred stock
were issued and outstanding.
Common stock no par value, 50,000,000 shares 3,362,353 4,362,853
authorized, 18,949,500 and 20,954,500 shares
issued and outstanding at December 31, 1999
and March 31, 2000, respectively.
Other - stock options 631,325 631,325
Deferred compensation (343,438) (299,517)
Accumulated deficit (3,389,422) (4,150,904)
----------- -----------
Total Stockholders' Equity 696,616 979,555
----------- -----------
$ 1,224,912 $ 1,460,472
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
TEK DIGITEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------ -----------------------------
1998 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product sales $ - $ 56,399 $ 148,800 $ 2,400
License revenue - 150,000 - -
Contract sales - related party 60,832 - - -
Contract sales - other 12,570 8,000 - -
----------- ----------- ----------- -----------
Total revenue 73,402 214,399 148,800 2,400
----------- ----------- ----------- -----------
Operating expenses:
Cost of sales 31,470 67,590 103,555 2,325
Sales and marketing 29,614 652,817 146,758 16,501
General and administrative 493,033 651,423 372,333 158,176
Research and development 611,498 1,012,934 289,556 294,354
----------- ----------- ----------- -----------
Total operating expenses 1,165,615 2,384,764 912,202 471,356
----------- ----------- ----------- -----------
Loss from operations (1,092,213) (2,170,365) (763,402) (468,956)
Other income 10,221 8,277 1,920 265
----------- ----------- ----------- -----------
Net loss $(1,081,992) $(2,162,088) $ (761,482) $ (468,691)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted $ (0.15) $ (0.14) $ (0.04) $ (0.03)
=========== =========== =========== ===========
Weighted average common shares
outstanding - basic and diluted 6,994,648 15,383,154 20,393,951 13,817,174
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
TEK DIGITEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- -----------------------
Other- Accum-
No Par No Par Stock ulated
Shares Value Shares Value Options Deficit
--------- -------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 1,642,977 $178,467 4,928,917 $ 89,233 $ - $ (145,342)
Sale of ATC Group LLC interest for
cash, converted to capital stock 217,026 133,333 651,083 66,667 - -
Issuance of shares pursuant to the
merger with Diversified
Technologies, Inc. 1,000,000 245 - -
Issuance of shares for services 206,664 123,998 1,620,000 87,000 - -
Sale of common stock units for cash 1,600,000 160,000 - -
Exercise of common stock purchase
warrants 2,422,976 386,205 - -
Issuance of common stock to employees 155,000 85,250 - -
Recognition of deferred compensation
on stock options 347,850 -
Amortization of deferred compensation - -
Net loss - (1,081,992)
--------- -------- ---------- ---------- -------- -----------
Balance, December 31, 1998 2,066,667 435,798 12,377,976 874,600 347,850 (1,227,334)
Issuance of common stock pursuant to
the exercise of stock purchase
warrants - - 2,377,024 413,795 - -
Issuance of common stock units in
private placement, net - - 4,000,000 1,992,091 - -
Issuance of common stock in private
placement, net - - 125,000 48,127 - -
Common stock issued to employees - - 37,000 30,490 - -
Exercise of stock options - - 32,500 3,250 - -
Recognition of deferred compensation
on stock options - - - - 283,475 -
Amortization of deferred compensation - - - - - -
Net loss - - - - - (2,162,088)
--------- -------- ---------- ---------- -------- -----------
Balance, December 31,1999 2,066,667 435,798 18,949,500 3,362,353 631,325 (3,389,422)
Exercise of common stock purchase
warrants - - 2,000,000 1,000,000 - -
Stock options exercised - - 5,000 500 - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - (761,482)
--------- -------- ---------- ---------- -------- -----------
Balance, March 31, 2000 (unaudited) 2,066,667 $435,798 20,954,500 $4,362,853 $631,325 $(4,150,904)
========= ======== ========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Deferred Total
Compen- Stockholder's
sation Equity
--------- -------------
<S> <C> <C>
Balance, January 1, 1998 $ - $ 122,358
Sale of ATC Group LLC interest for
cash, converted to capital stock - 200,000
Issuance of shares pursuant to the
merger with Diversified
Technologies, Inc. - 245
Issuance of shares for services - 210,998
Sale of common stock units for cash - 160,000
Exercise of common stock purchase
warrants - 386,205
Issuance of common stock to employees - 85,250
Recognition of deferred compensation
on stock options (347,850) -
Amortization of deferred compensation 38,650 38,650
Net loss - (1,081,992)
--------- ----------
Balance, December 31, 1998 (309,200) 121,714
Issuance of common stock pursuant to
the exercise of stock purchase
warrants - 413,795
Issuance of common stock units in
private placement, net - 1,992,091
Issuance of common stock in private
placement, net - 48,127
Common stock issued to employees (27,340) 3,150
Exercise of stock options - 3,250
Recognition of deferred compensation
on stock options (283,475) -
Amortization of deferred compensation 276,577 276,577
Net loss - (2,162,088)
--------- ----------
Balance, December 31,1999 (343,438) 696,616
Exercise of common stock purchase
warrants - 1,000,000
Stock options exercised - 500
Amortization of deferred compensation 43,921 43,921
Net loss - (761,482)
--------- ----------
Balance, March 31, 2000 (unaudited) $(299,517) $ 979,555
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
TEK DIGITEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
---------------------------- ------------------------
1998 1999 2000 1999
----------- ----------- ---------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net Loss $(1,081,992) $(2,162,088) $ (761,482) $(468,691)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 9,847 25,916 9,911 4,093
Amortization of deferred compensation 38,650 276,577 43,921 29,956
Issuance of preferred and common stock to non-
employees for services 211,245 - - -
Issuance of common stock to employees for
services 85,250 3,150 - -
Changes in operating assets and liabilities
Increase in accounts receivables - (34,385) (73,004) (1,549)
(Increase) decrease in inventory - (371,432) 34,188 -
(Increase) decrease in prepaids and other
current assets (22,533) (149,030) 16,003 10,533
(Increase) decrease in other assets (117,525) 14,552 15,400 16,567
Increase (decrease) in accounts payable 81,206 87,349 (33,889) 24,919
Increase (decrease) in accrued expenses 95,825 (8,054) 4,410 (16,785)
Increase (decrease) in unearned revenue - 269,200 (17,900) -
----------- ----------- ---------- ---------
Net cash used in operating activities (700,027) (2,048,245) (762,442) (400,957)
----------- ----------- ---------- ---------
Cash Flows From Investing Activities
Purchases of property and equipment (18,823) (67,715) (24,838) (10,000)
----------- ----------- ---------- ---------
Cash Flows From Financing Activities
Sale of ATC Group LLC capital interest,
converted capital stock 200,000 - - -
Proceeds from issuance of common stock units 160,000 1,040,218 - -
Proceeds from the exercise of stock purchase
warrants 386,205 1,413,795 1,000,000 364,687
Proceeds from the exercise of stock options - 3,250 500 -
----------- ----------- ---------- ---------
Net cash provided by financing activities 746,205 2,457,263 1,000,500 364,687
----------- ----------- ---------- ---------
Net change in cash and cash equivalents 27,355 341,303 213,220 (46,270)
Cash at beginning of year 109,024 136,379 477,682 136,379
----------- ----------- ---------- ---------
Cash at end of year $ 136,379 $ 477,682 $ 690,902 $ 90,109
=========== =========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
TEK DIGITEL CORPORATION
Notes to Consolidated Financial Statements
Note 1 - Organization and Description of the Business
TEK DigiTel Corporation (the "Company") was formed as ATC Group LLC in
December 1995. In July 1998, the Company merged with and into ATC Group, Inc., a
wholly-owned subsidiary of Diversified Technologies, Inc. ("Diversified"). The
merger was in effect a reverse acquisition, and was accounted for as a
recapitalization as more fully described in Note 3 below.
The Company is a state-of-the-art technology company that develops and
manufactures Internet access devices used by service providers to offer
integrated voice/data services to the small and medium size business. In
addition, the Company has developed the software and services necessary to help
them deploy and manage these devices and offer sophisticated voice services to
their customers.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, ATC Group, Inc. (ATC Inc.). Intercompany
accounts and transactions have been eliminated in consolidation.
The unaudited consolidated interim financial statements as of March 31,
2000, and for the three-month periods ended March 31, 2000 and 1999, included
herein, have been prepared by the Company without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and note disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the SEC's rules and regulations relating to
interim financial statements. These interim financial statements reflect all
adjustments, consisting only of normal recurring adjustments that, in the
opinion of management, are necessary to present fairly the consolidated
financial position and the consolidated results of operations of the Company for
the period indicated. Results of operations for the interim period are not
necessarily indicative of the results of operations for the full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents.
F-7
<PAGE>
Supplemental Cash Flow Information
For the years ended December 31, 1999 and 1998, the Company paid no income
taxes or interest.
Inventory
Inventories are stated at the lower of cost, utilizing the first-in,
first-out method, or market. Inventory consists primarily of hardware components
used in the assembly of iGATE servers.
Property and Equipment
Property and equipment are stated at original cost and are depreciated
using an accelerated depreciation method over the estimated useful lives of the
assets, ranging from three to five years. Routine repairs and maintenance are
expensed as incurred.
Revenue Recognition
Product sales revenue is generally recognized upon product shipment.
Contract services revenue is recognized when the services are performed. During
the year ended December 31, 1999, the Company recognized license revenue related
to a one-time non-exclusive license to manufacture the Company's products which
was terminated and under which the Company has no continuing obligation.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock- Based Compensation." Under
APB No. 25, compensation expense is based on the difference, if any, on the date
of the grant, between the fair value of the Company's stock and the exercise
price.
The Company accounts for non-employee stock-based awards in which services
are the consideration received for the equity instruments issued based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measured.
Net Loss per Share
The Company reports basic and diluted earnings per share. Basic earnings
per share excludes dilution and is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net income (loss), adjusted by the
assumed conversion of any potential common share equivalents, including stock
options, stock purchase warrants and convertible Series A voting preferred
stock, by the weighted number of common shares and common share equivalents
(unless their effect is anti-dilutive) outstanding.
F-8
<PAGE>
Income Taxes
Deferred income taxes result primarily from temporary differences between
financial and tax reporting. Deferred tax assets and liabilities are determined
based on the differences between the financial statement bases and tax bases of
assets and liabilities using enacted tax rates. A valuation allowance is
recorded to reduce a deferred tax asset to that portion that is expected to more
likely than not be realized.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The statement
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in fair
value and gains or losses depends on the intended use of the derivative and its
resulting designation. The statement was originally effective for fiscal years
beginning after June 15, 1999. In July 1999, FASB delayed implementation of this
standard for one year, to June 30, 2000. The Company will adopt SFAS No. 133 in
the first quarter of 2001. The Company does not expect the adoption of SFAS No.
133 will have a material effect on its consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements. The SAB expresses the SEC's views on
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company does not expect the application of the SAB to
have a material impact on its financial statements, however, certain SEC staff
interpretations of the SAB have not been published and may have an effect on the
applicability of the SAB in relation to the Company's financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25". With the exception of
certain provisions that required earlier application, this interpretation is
effective for all applicable transactions beginning July 1, 2000. The Company
does not expect that the adoption of this interpretation will have a material
impact on its financial statements.
Note 3 - Merger with Diversified Technologies, Inc.
On June 18, 1998, ATC Group LLC (ATC LLC) and ATC Inc. were merged, with
ATC Inc. being the surviving corporation. ATC Inc. was formed solely to
facilitate this merger, and is a wholly- owned subsidiary of Diversified.
Diversified's name was changed to TEK DigiTel Corporation upon consummation of
the merger. The members of ATC LLC received, in exchange for 100% of their
ownership interest in ATC LLC, 6,200,000 shares of common stock and 2,066,667
shares of convertible Series A voting preferred stock. Each share of convertible
Series A voting preferred stock is convertible, subject to certain terms and
conditions described in Note 6, into six shares of the Company's common stock.
The effective date of the merger was July 6, 1998. Prior to the merger,
Diversified was a non-reporting Over-the-Counter Electronic Bulletin Board ("OTC
BB") listed company with no significant assets or liabilities, and no
operations.
For accounting purposes, the acquisition has been treated as a
recapitalization of ATC LLC, with ATC LLC as the acquirer (reverse acquisition).
The historical financial statements prior to July 6, 1998 are those of ATC LLC.
ATC LLC, ATC Inc. and Diversified executed the merger transaction as a
reorganization. Neither ATC LLC, any of its members, ATC Inc. or Diversified
recognized any gain or loss as a result of the merger.
F-9
<PAGE>
Note 4 - Inventory
Inventory consisted of the following at December 31, 1999 and March 31,
2000:
1999 2000
--------- -----------
(unaudited)
Raw materials $ 103,126 $ 157,005
Work in process, net 257,135 22,980
Finished goods 11,171 157,259
--------- ---------
$ 371,432 $ 337,244
========= =========
Note 5 - Property and Equipment
Property and equipment consisted of the following at December 31, 1999 and
March 31, 2000:
1999 2000
--------- -----------
(unaudited)
Computer and test equipment $ 79,922 $ 101,854
Furniture, fixtures and office equipment 33,732 36,638
--------- ---------
113,654 138,492
Less: Accumulated depreciation 46,777 56,688
--------- ---------
$ 66,877 $ 81,804
========= =========
Note 6 - Stockholders' Equity
The January 1, 1998 retained earnings has been adjusted to reflect capital
contributions in the form of salary forgiveness totaling $50,000 during 1996 and
1997 not previously recorded.
Formation of the Company and Merger with Diversified
During 1998, prior to its merger with Diversified, ATC LLC sold $200,000 of
member interests to investors. In connection with the merger described below,
the Company exchanged these interests into 432,479 shares of common stock and
144,159 shares of Series A voting convertible preferred stock. The Company
issued an individual 208,604 shares of common stock and 72,867 shares of Series
A voting convertible preferred stock as a fee for arranging this investment.
On June 15, 1998, Diversified entered into a Fixed Services Agreement with
John D. Brasher, an officer of Diversified, to provide legal services to the
Company related to the merger. The Agreement stated that the value of the
services being offered was $25,000. The Agreement provides for the payment of
these services to be made by the issuance of 1,000,000 shares of the Company's
common stock via the exercise of a stock warrant issued to John D. Brasher with
an exercise price of $0.025 per share. Mr. Brasher received 1,000,000 common
shares in exchange for providing $25,000 of legal services that were expensed in
1998.
F-10
<PAGE>
Pursuant to the Agreement and Plan of Merger, the Company agreed to sell
1,600,000 units at a price of $0.10 per unit. Each unit consisted of one share
of common stock; one Class A common stock purchase warrant exercisable until
April 30, 1999 to purchase one share of the Company's common stock for $0.12 per
share; one Class B common stock purchase warrant exercisable until April 30,
1999 to purchase one share of the Company's common stock for $0.16 per share;
and one Class C common stock purchase warrant exercisable until April 30, 1999
to purchase one share of the Company's common stock for $0.22 per share. [The
Company sold, on July 24, 1998, all the units to an individual who was an
officer of Diversified. All the warrants were exercised during 1998 and 1999.]
On June 18, 1998, ATC LLC was merged with and into ATC Inc. ATC Inc. was
formed solely to facilitate this merger and is a wholly-owned subsidiary of
Diversified. Diversified's name was changed to TEK DigiTel Corporation upon
consummation of the merger. The members of ATC LLC received, in exchange for
100% of their ownership interest in ATC LLC, 6,200,000 shares common stock and
2,066,667 shares of Series A, Voting Convertible Preferred Stock. The effective
date of the merger was July 6, 1998. Prior to the merger with ATC LLC,
Diversified had 1,000,000 shares of common stock issued and outstanding which
became issued and outstanding shares of the Company.
In connection with the merger, the NE Group received a commission of
620,000 shares of the Company's common stock and 206,664 shares of the Company's
convertible Series A preferred stock for services related to the merger. These
services were estimated by management to have a fair market value of
approximately $186,000 based on a value per share of common stock of $0.10.
Management believes that this price was representative of the market value of
the Company's common stock at that time, evidenced by the sales price of $0.10
per share received in a private offering of units at the time of the merger.
Series A Voting Convertible Preferred Stock
The Company has authorized 20,000,000 shares of preferred stock, no par
value, of which the Company has designated a total of 2,100,000 shares as Series
A Voting Convertible Preferred Stock (the Series A preferred stock).
The shares of Series A preferred stock are not subject to redemption. Each
share of Series A preferred stock may, subject to certain terms and conditions
as outlined below, be converted, at the option of the holder, into six shares of
the Company's common stock.
On March 8, 1999, because the Company had not met certain conditions
related to the conversion of the Series A Preferred Stock, it was subject to the
automatic conversion into six shares of common stock. However, by unanimous
written agreement, on April 24, 2000, all of the Series A preferred stockholders
waived their right to immediately convert their Series A preferred stock and
agreed to be bound by the conversion rates and the conversion conditions as set
forth in the table below. These conversion conditions need not be satisfied in
any particular order, nor is the satisfaction of any conversion condition
dependent upon the prior satisfaction of any other conversion condition.
F-11
<PAGE>
As of December 31, 1999, the first conversion provision had been achieved,
however no Series A preferred stock shares had been converted into shares of
common stock as of that date.
<TABLE>
<CAPTION>
Conversion
Conversion Conditions Rate Status
--------------------- ---------- ------
<S> <C> <C> <C>
(i) 1/4 of the shares of Series A preferred stock held 6:1 Condition achieved in
may be converted when the Company's two port May 1999
Voice Server has successfully completed
original beta testing by a customer.
(ii) 1/4 of the shares of Series A preferred stock held 6:1 Condition not yet
may be converted when the Company's four achieved
port Voice Server has successfully completed
original beta testing by a customer.
(iii) 1/4 of the shares of Series A preferred stock held 6:1 Condition not yet
may be converted when the Company has achieved
recorded an aggregate of $5,000,000 in sales.
(iv) 1/4 of the shares of Series A preferred stock held 6:1 Condition not yet
may be converted when the Company has achieved
recorded an aggregate of $10,000,000 in sales.
</TABLE>
Series A preferred stockholders are entitled to vote in elections of
directors and on other matters generally as to which the Company's stockholders
may vote. Each share of Series A preferred stock is entitled to cast three votes
on every matter placed before stockholders. The shares of Series A preferred
stock vote with the common shares and not as a separate class.
The Series A preferred stockholders are not entitled to receive any
dividends. However, if a dividend is declared on the Company's common stock or
on any series of preferred stock ranking equal or junior to the Series A
preferred stock then Series A preferred stockholders are entitled to receive a
proportional share of the dividend.
Private Placement Offerings
On October 18, 1999, the Company entered into a Private Placement Agreement
for the sale of 2,000,000 units under an exemption from registration provided by
Regulation S with an individual for $0.50 per unit. Each unit consists of one
share of the Company's common stock, and four warrants, Class D, E, F and G,
exercisable at various dates through August 31, 2001. The Class D and Class E
warrants are exercisable at $0.50 per share, the Class F warrant is exercisable
at $0.60 per share, and the Class G warrant is exercisable at $0.65 per share.
As of December 31, 1999, this individual had exercised the Class D warrant,
investing an additional $1,000,000 for the purchase of 2,000,000 shares.
Subsequent to December 31, 1999, this individual exercised the Class E and F
warrants, investing an additional $2,200,000 for the purchase of 4,000,000
shares. The outstanding Class G warrant is currently exercisable.
During 1999, the Company also sold 125,000 shares of common stock to an
individual for a total investment of $50,000. The Company incurred $1,873 of
legal fees related to this investment, and has recorded these fees as an offset
to the investment.
F-12
<PAGE>
Note 7 - Stock Based Compensation
The Company adopted the 1997 Employee Stock Compensation Plan (the ESC
Plan) for employees, officers, directors and advisors of the Company in January
1997. The Company reserved 1,000,000 shares of common stock for issuance under
the ESC Plan. The ESC Plan expires on January 17, 2002. Awards of ESC Plan
shares may be made as compensation for services rendered, directly or in lieu of
other compensation payable, as a bonus in recognition of past service or
performance, or may be sold to eligible employees.
The Company also adopted the 1997 Compensatory Stock Option Plan (the CSO
Plan) for employees in January 1997. The Company reserved 4,500,000 shares of
common stock for issuance upon the exercise of options granted under the CSO
Plan. The CSO Plan provides only for the issuance of non-statutory stock options
which are not intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended. The CSO
Plan expires on January 17, 2007. CSO Plan options will be granted at exercise
prices determined by the Board of Directors or other CSO Plan administrator, but
the exercise price may not be less than 85% of the fair market value of the
common stock on the date of the grant of the option. Stock options granted under
the CSO Plan generally vest ratably over a three-year period and expire 10 years
from the date of the grant.
During the years ended December 31, 1999 and 1998, the Company granted
37,000 and 155,000 shares of common stock to employees, respectively. The shares
issued in 1999 become fully vested at various times during 2000 and the shares
issued in 1998 were fully vested when granted. The Company has recorded
compensation expense of $3,150 and $85,250 related to these stock grants for the
years ended December 31, 1999 and 1998. The Company has also recorded deferred
compensation of $27,340 related to the stock grants in 1999.
The following table summarizes stock option transactions:
Weighted
Number of Average
Shares Exercise Price
--------- --------------
Outstanding at January 1, 1998 - -
Options granted in 1998 1,073,000 $.10
---------
Outstanding at December 31, 1998 1,073,000 .10
Options exercised (32,500) .10
Options granted in 1999 1,206,750 .68
---------
Outstanding at December 31, 1999 2,247,250 .40
=========
Exercisable at December 31, 1999 632,194 .11
=========
F-13
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted Weighted
Number Average Average Number Average
of Exercise Contract of Exercise
Shares Price Life (Yrs) Shares Price
--------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.10 Exercise price 1,044,250 0.10 2.98 623,417 0.10
$0.50 Exercise price 78,000 0.50 2.23 3,777 0.50
$0.60 Exercise price 370,000 0.60 3.00 - 0.60
$0.75 Exercise price 755,000 0.75 2.99 5,000 0.75
</TABLE>
The Company accounts for stock options granted to employees in accordance
with APB No. 25. Under APB No. 25, when the exercise price of the Company's
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. The Company recorded compensation
expense of $276,577 and $38,650 related to options which were granted with the
exercise price less than market price in the years ended December 31, 1999 and
1998, respectively. The Company has provided additional pro forma disclosures as
required by SFAS No. 123, "Accounting for Stock-Based Compensation".
For disclosure purposes, the fair value of each stock option is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for stock options and rights to
receive stock in 1999 and 1998; no annual dividends, expected volatility of 30%,
risk-free interest rate ranging of 5% and expected life of three years. The
weighted-average fair values of the stock options granted in 1999 and 1998 were
$0.33 and $0.45, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of normal publicly traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
Had compensation cost been based upon the fair value of the option on the
date of grant, as prescribed by SFAS No. 123, the Company's pro forma net loss
and pro forma net loss per share for the years ended December 31, 1999 and 1998
using the Black-Scholes option pricing model would have been approximately
$2,169,000 and $0.14 and $1,083,000 and $0.15, respectively.
Note 8 - Income Taxes
No provision for U.S. federal or state income taxes have been recorded in
any period, as the Company has incurred operating losses since its inception.
F-14
<PAGE>
Deferred income taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes as of
December 31, 1999 are as follows:
1999
-----------
Net operating loss tax carryforwards 1,074,000
Research and development credit carryforwards 45,000
Other 23,000
-----------
1,142,000
Less: valuation allowance (1,142,000)
-----------
Deferred tax assets $ -
===========
Realization of deferred tax assets is dependent upon future earnings, if
any. The Company has recorded a full valuation allowance against its deferred
tax assets since management believes it is more likely than not that these
assets will not be realized. No income tax benefit has been recorded for all
periods presented because of the valuation allowance.
At December 31, 1999, the Company has available, for U.S. income tax
purposes, net operating loss carryforwards of approximately $2,718,000, which
can be used to offset future taxable income through 2019 and a credit for
research and development costs of approximately $45,000. There can be no
assurance that the Company will realize the benefit of the net operating loss or
research and development credit carryforwards. In addition, the Company's
utilization of its net operating loss carryforward may be limited pursuant to
Internal Revenue Code Section 382, due to cumulative changes in ownership in
excess of 50% within a three year period.
The primary difference in the Company's federal statutory income tax rate
and the Company's effective rate is primarily attributed to the impact of state
income taxes and the recording of a full valuation allowance.
Note 9 - Related Party Transactions
During the years ended 1998 and 1999, the Company rented office space,
purchased consulting services, and acted as a subcontractor from one of its
stockholders. During the years ended December 31, 1999 and 1998, the Company
paid this stockholder $30,250 and $13,750 for such services. In addition, during
the year ended December 31, 1998 the Company recognized consulting revenue of
$60,832 for technical consulting services provided by this stockholder. In
January 2000, the Company relocated its offices and no longer leases office
space from this party.
Note 10 - Commitments and Contingencies
Operating Leases
The Company leases office space and equipment under non-cancelable
operating leases expiring at various times through 2005. Total rent expense for
all operating leases was $50,361 and $41,292 for the years ended December 31,
1999 and 1998, respectively. Future minimum lease payments under non-cancelable
operating leases as of December 31, 1999 are $131,873 in 2000; $136,333 in 2001;
$130,419 in 2002; $127,788 in 2003 and $124,884 in 2004.
F-15
<PAGE>
Note 11 - Major Customers
A limited number of customers have historically accounted for a significant
portion of the Company's net revenues. Customers that represented in excess of
10% of the Company's product sales are as follows:
March 31, 2000 December 31, 1999
-------------- -----------------
Customer A 10% 54%
Customer B 26% -
Customer C 14% -
Customer D 19% -
All of the license revenue recognized by the Company during the year ended
December 31, 1999 was received from one company. In addition, during the year
ended December 31, 1998, the Company recognized consulting revenue from three
customers. As described in Note 9, $60,832 or 83% of the total contract revenue
recognized during the year ended December 31, 1998 for technical consulting
services provided to a company who is also a stockholder. The remaining
customers provided 10% and 7% of consulting revenues.
Note 12 - Operations and Liquidity
As shown in the accompanying financial statements, the Company has incurred
operating losses since its inception, and has accumulated a deficit of
$3,389,422 at December 31, 1999. The Company's continued existence is dependent
upon its ability to develop profitable operations, successfully introduce its
products to market and if necessary, raise additional financing to fund future
operations. Subsequent to December 31, 1999, an existing investor in the Company
exercised currently outstanding warrants, purchasing 4,000,000 shares of the
Company's common stock for $2,200,000. This investor currently holds exercisable
warrants for the purchase of an additional 2,000,000 shares of the Company's
common stock for $1,300,000. Management believes that this investor will
exercise this warrant during 2000, even though it does not expire until August
2001. In addition, management believes that cash on hand, proceeds from the
warrants exercised in 2000, and cash flow from operations will be sufficient to
meet its operating needs through December 31, 2000, even without the exercise of
the currently outstanding warrant.
F-16
<PAGE>
PART III
Item 1. Index to and Description of Exhibits.
Exhibit
Number Exhibit Name
------ ------------
2 Agreement and Plan of Merger by and among Diversified Technologies,
Inc., ATC Group, Inc. and ATC Group L.L.C., dated June 10, 1998.
3(i) Articles of Incorporation of the Registrant, as amended.
3(ii) Bylaws of the Registrant.
4.1 Agreement and Plan of Merger by and among Diversified Technologies,
Inc., ATC Group, Inc. and ATC Group L.L.C., dated June 10, 1998.
(Filed as Exhibit 2.)
4.2 Form of Stock Certificate of Common Stock.
4.3 Form of Stock Certificate for Series A, Voting Convertible Preferred
Stock.
4.4 Form of Waiver of Conversion Rights of Series A Preferred Stock.
9 Agreement and Plan of Merger by and among Diversified Technologies,
Inc., ATC Group, Inc. and ATC Group L.L.C., dated June 10, 1998
(voting trust agreement appearing in Section 1.5).
(Filed as Exhibit 2.)
10.1 Employment Agreement, as amended, dated January 20, 2000, between the
Registrant and Enghe Chimood.
10.2 Employment Agreement, dated April 22, 1999, as amended, between the
Registrant and Thomas Yang.
10.3 Employment Agreement, dated January 20, 1999, as amended, between the
Registrant and Ke-Ou Chao.
10.4 Diversified Technologies, Inc. 1997 Compensatory Stock Option Plan.
10.5 Diversified Technologies, Inc. 1997 Employee Stock Compensation Plan.
II-1
<PAGE>
Exhibit
Number Exhibit Name
------- ------------
10.6 Unanimous Written Consent of the Board of Directors, dated May 1,
1999, concerning an amendment to the Diversified Technologies, Inc.
1997 Compensatory Stock Option Plan and the 1997 Employee Stock
Compensation Plan
10.7 Unit Subscription Agreement, dated October 18, 1999, between the
Registrant and Tseng Yun Tsai.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99 Glossary of Key Telecommunications Terms
II-2
<PAGE>
SIGNATURE PAGE
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereto duly authorized.
TEK DigiTel Corporation
(Registrant)
Date: August 1, 2000 By: /s/ Enghe Chimood
----------------------------------
Enghe Chimood,
Chief Executive Officer and
Co-Chairman of the Board
II-3
