UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
Under Section 12(b) and (g) of the Securities Exchange Act of 1934
DIGITEC 2000, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Nevada 54-1287957
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(State of Incorporation) (I.R.S. Employer Identification)
8 West 38th Street, Fifth Floor
New York, New York 10018
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number (212) 944-8888
Securities to be registered pursuant to 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 None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share
DIGITEC 2000, Inc.
Index to Form 10/A
For the Fiscal Year Ended June 30, 1997
Item Page No.
No.
1 Business.......................................................... 3
2 Financial Information............................................. 10
3 Properties........................................................ 17
4 Security Ownership of Beneficial Owners and Management............ 18
5 Directors and Executive Officers.................................. 19
6 Executive Compensation............................................ 20
7 Certain Relationships and Related Transactions.................... 22
8 Legal Proceedings................................................ 22
9 Market Price of and Dividends on the Registrant's Common
Equity and Other Stockholder Matters.............................. 23
10 Recent Sales of Unregistered Securities........................... 24
11 Description of Registrant's Securities to be Registered........... 25
12 Indemnification of Directors and Officers......................... 27
13 Financial Statements and Supplementary Data....................... 27
14 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... 27
15 Financial Statements and Exhibits................................. 28
2
DIGITEC 2000, Inc.
Form 10/A
For the Year Ended June 30, 1997
Item 1. Business
Overview
DIGITEC 2000, Inc. (formerly Promo Tel, Inc.) (the "Company") is engaged
in the creation, distribution, marketing and management of consumer prepaid
utility telephone calling cards. On October 18, 1996, the Company changed its
current name to more accurately reflect the increased range of
telecommunications business activities in which the Company has become engaged
(see "Company History"). The Company's principal products are the "F/X(TM)" and
"DigiTEC Direct" phone cards which were introduced in May and December 1996,
respectively (See "Telecommunications Products and Services of the Company").
Sales of the F/X(TM) and DigiTEC Direct phone cards currently represent more
than 98% of the total revenues of the Company.
The prepaid telephone card business is a relatively recent development in
the telecommunications service industry. Prepaid local and long distance calling
cards began to develop in the United States during 1988-1989 using a technology
developed in Europe in the early 1980s that relied upon either an embedded
microchip or a magnetic strip on each card and a telephone set device with a
built in "reader" to access information contained on the cards. Although the
microchip and magnetic strip cards were introduced in the U.S. by several
telephone carriers, the results were disappointing and the product did not
attain sales volumes necessary for commercial success. The European technology
was developed primarily as a replacement for coin operated public pay
telephones. This technology worked reasonably well in areas where a monopoly
telephone service provider had the ability to set widespread standards for the
cards, readers, and rates per minute of usage. However, in the U. S. with many
independent telephone providers, several versions of technologies soon developed
that were not compatible (i.e. a caller in the New York metropolitan area ("NY
Metro Area") purchasing one type of card from one provider, was not able to use
that card with other types of telephones installed by that provider or at
certain public payphone installed by other providers). Other drawbacks included
the significant cost of the reader telephone sets, high maintenance costs
associated with the remote reader equipment and the inability to use the card
with non-reader telephone sets.
By 1992, advances in computers and telephone switch technology allowed
several companies to introduce "cards" that could be used from any touch-tone
("DTMF" signaling) telephone in the U.S. This technology relies upon network
based intelligence including the management of the debit card data bases. A card
using this technology merely contains the designated toll free 1-800 access
number, the personal identification number ("PIN") that identifies the card to
the network and instructions for using the card. The card itself contains no
technology such as a chip or magnetic strip. There are no card readers or other
forms of remote special equipment required for use of the card. The card is more
analogous to a "debit account" in which a fixed amount of money is first
deposited and the account is then debited for services as they are used by the
person with access to the PIN number. When the prepaid account balance is
depleted, it is automatically closed by the remote debit card database computer
of the prepaid card provider. Thereafter, the card has no further commercial
value.
The $72.5 billion U.S. long distance industry is dominated by the nation's
three largest long distance providers, AT&T, MCI and Sprint, which together
generated approximately 80.9% of the aggregate revenues of all U.S. long
distance interexchange carriers in 1995. Other long distance companies, some
with national capabilities, accounted for the remainder of the market. Based on
published Federal Communications Commission estimates, toll service revenues of
U.S. long distance interexchange carriers have grown from $38.8 billion in 1984
to $72.5 billion in 1995. The aggregate market share of all interexchange
carriers other than AT&T, MCI and Sprint has grown from 2.6% in 1984 to 17.1% in
1995. During the same period, the market share of AT&T declined from 90.1% to
53%. These aforementioned changes in telecommunications market have created
opportunities for the growth of alternative
3
telecommunications providers.
The market for prepaid phone cards has grown substantially, from an
estimated $25 million in 1992 to an estimated $1.5 billion in 1996, making it
one of the fastest growing segments of the telecommunications industry. Based on
industry reports by "Intele-Card News" magazine and Salomon Smith Barney, the
market is expected to grow to approximately $5 billion within the next four
years. The Company has identified three distinct segments of the prepaid
telephone calling card market. These three segments are utility card products,
corporate/affinity card products and promotional card products. The Company
presently intends to concentrate its efforts in the utility card market.
The Company markets its prepaid telephone cards as a convenient
alternative to credit cards and conventional coin and collect long distance
services. Card operations are supported by remote data base units located on
special switching platforms in the telephone network. The Company currently
distributes and markets its prepaid telephone cards through distributors
primarily in the NY Metro Area and expects to be active in other major U.S.
metropolitan areas by June 1998.
F/X(TM) and DigiTEC Direct phone card users are provided with access to
domestic long distance and international telephone services through toll-free
(1-800 or 1-888 numbers) calls directed to platforms operated by Premiere
Communications, Inc.("Premiere") and Frontier Corporation ("Frontier"). Brand
awareness is developed and promoted by the design of the cards as well as the
high level of customer service provided to the users of the cards.
At the Company's current sales volume, the Company is among the leading
independent providers (those companies not owned or controlled by a regulated
telephone common carrier) of prepaid utility telephone calling card products in
the United States. The Company is currently in negotiations with suppliers to
begin introducing prepaid cellular phone service.
The Company owns all of the outstanding stock of World Access Solutions,
Inc. ("World Access"), a Nevada corporation with offices in Jackson,
Mississippi. World Access provides Internet access and other Internet related
services. (See "Business of Subsidiary"). As of June 30, 1997, management
resolved to discontinue the operations of World Access.
Risk Factors
Forward Looking Statements
The information set forth in this Registration Statement includes "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended (the "33 Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended. The statutory safe harbor for forward looking statements
does not apply to initial public offerings. Words "estimated", "intends",
"believes", "plans", "planning", "expects", and "if" are intended to identify
forward looking statements. Although management believes that the assumptions
made and expectations reflected in the forward looking statements are
reasonable, it must be recognized that there is no assurance that the underlying
assumptions will, in fact, prove to be correct, or that actual future results
will not be different from the Company's expectations.
Dependence on Long Distance Provider
The Company currently depends primarily upon Premiere and Frontier, to
provide the Company with the bundled prepaid phone cards that it resells to its
customers. The Company's ability to resell the phone cards depends upon whether
it can continue to maintain a favorable relationship with its providers. In
September of 1997, the Company entered into two agreements with Premiere
requiring the Company to purchase an aggregate minimum of $81,000,000 of cards
at face value. The agreements expire upon the earlier of September of 1998 or
six months after the last purchase of prepaid phone cards. Premiere may
terminate upon breach of certain conditions. Although the Company believes that
the likelihood of such a termination is remote, the Company does not have a
specific contingency arrangement in place to provide for such termination.
Further, while the Company believes that it will be able to either
4
renew its agreements or negotiate new ones on similar terms with another
provider, the Company does not have any arrangements in place for the period
subsequent to September of 1998.
Competition
The prepaid or debit card sector of the long distance market is highly
competitive and is affected by the constant introduction of new cards and
services by industry participants. Competition in the prepaid card sector of the
long distance business is based upon pricing, customer service and perceived
reliability of the prepaid phone cards. Several of the Company's competitors are
substantially larger and have greater financial, technical and marketing
resources than the Company. The ability of the Company to compete effectively in
the prepaid sector of the long distance market will depend upon the Company's
continued ability to provide highly reliable phone cards at prices competitive
with, or lower than, those charged by its competitors.
Financing Requirements
To date, the Company has financed its operations through cash from
operations and through two offerings under Rule 504 of Regulation D and the
exercise of warrants to purchase the Company's Common Stock at a $1.50 per
share, which aggregated $1,000,000 and $518,250, respectively, of proceeds to
the Company. The Company remains undercapitalized and cannot finance its
expansion as quickly as opportunities arise. In order for the Company to be
successful in its current plans for expansion and to continue with its plans to
construct its own switching platforms (which will cost approximately
$4,200,000), the Company will be required to obtain financing in the aggregate
amount of approximately $6,200,000. To date, the Company has no existing lines
of credit and has not established any sources of such financing. There can be no
assurance that such financing will be available on acceptable terms, or at all,
to the Company.
Litigation
The Company and its Chief Executive Officer have been named as defendants
in a legal action in Mississippi in the case entitled Heritage Graphics, Inc.
("Heritage") vs. Telephone Electronics Corporation ("TEC")(see Item 8. Legal
Proceedings). The complaint alleges, among other things, that the defendants
breached a contractual agreement and conspired to have Heritage go out of
business. Although, the Company and TEC are affiliated through TEC's ownership
of 1,475,126 shares of the Company's Common Stock, the Company has no historical
relationship with Heritage other than being named in the complaint. Prior to the
legal action, Heritage provided graphics and printing services to TEC. The
complaint seeks damages of $500 million. The Company believes that the case has
no merit and intends to vigorously contest the complaint. The case is scheduled
to go to trial August, 1998. There is no assurance as to the outcome of the
litigation. However, in the event of a decision adverse to the Company, the
Company's business, financial condition, operating results and the Company's
stockholders, could be materially adversely affected. While the Company has an
indemnification agreement with TEC which calls for the Company to be indemnified
for all claims regarding Heritage which arose prior to January 20, 1996 (without
limit), the Company could still be liable for judgements in the event TEC was
unable to live up to the indemnification and it is unknown as of this date what
impact it will have, if any, in the event of a decision adverse to the Company.
Outstanding Warrants and Options
As of December 22, 1997 the Company had warrants and options outstanding
to purchase 3,808,949 shares of Company's common stock ("Common Stock") at
exercise prices ranging from $1.50 to $14.50 per share and an average price of
$5.29 per share. Warrants and options outstanding for 3,408,948 shares of Common
stock are immediately exercisable. To the extent that the outstanding warrants
and options are exercised, dilution to the interest of the Company's
stockholders may occur. Further, the terms upon which the Company will be able
to obtain additional equity capital may be adversely affected since the holders
of the outstanding warrants and options can be expected to exercise them at a
time when the Company would, in all likelihood, be able to obtain any needed
capital on terms more favorable to the Company than those provided by the
outstanding warrants and options.
5
Dependence on Key Personnel
The Company is dependent on its ability to retain and motivate high
quality personnel, especially its management and any key technical personnel
that may be needed in connection with the Company's plans to construct its own
switching platform. The loss of services of any of its executive officers or key
employees could have a material adverse effect on the business, operating
results or financial condition of the Company. The Company has empolyment
agreements with its officers (See Item 6. Executive Compensation) but does not
maintain key person life insurance. The Company's future success also depends on
its continuing ability to identify, attract and hire qualified personnel as it
expands it lines of business. There can be no assurance that the Company will be
able to attract and hire qualified technical and managerial personnel in the
future. The inability to attract and retain the necessary personnel could have a
material adverse effect upon the Company's business, operating results or
financial condition.
Market Listing; Volatility of Stock Price
The Company's Common Stock is traded on the NASDAQ Bulletin Board. To
date, the Company's Common Stock has been relatively illiquid and subject to
wide fluctuations. There can be no assurance that an active public market for
the common stock will develop or be sustained. Further, the market price of the
Company's Common Stock will likely continue to be highly volatile based on
quarterly results of operations, announcements of new products or lines of
business by the Company or its competitors or other events or factors.
Major Customers
For the year ended June 30, 1997 CG Com, Inc. ("CG COM"), a master distributor
located in Bronx, N.Y., who had exclusivity in the state of New York for one of
the Company's products, accounted for 54% of the Company's sales. Subsequent to
September 30, 1997, the Company and CG COM agreed to remove the exclusivity
clause in the agreement. For the year ended June 30, 1996, Direct Dial
International, Inc. a distributor which was located in New York City, accounted
for approximately 57% of the Company's sales.
Company History
The Company was organized as a Nevada corporation in May 1987 under the
name Yacht Havens International Corp ("Yacht Havens"). In July, 1995, the
Company changed its name from Yacht Havens International, Inc. to Promo Tel,
Inc. ("Promo Tel-Nevada"). In August 1995, Promo Tel-Nevada merged with a
Delaware corporation, named Promo Tel, Inc. ("Promo Tel-Delaware"). The Company
exchanged 1,333,334 shares of previously unissued and unregistered common stock
for the outstanding common stock of Promo Tel-Delaware. Promo Tel-Delaware's
assets consisted of personnel, sales, marketing and distribution programs and
contacts for the development and sale of prepaid phone cards. In October 1996,
the Company amended its articles of incorporation to its current name. The
Company's principal executive and sales offices are located at 8 West 38th
Street, 5th floor, New York, N.Y. 10018. Its telephone number is (212) 944-8888.
During fiscal 1996 the Company introduced an array of prepaid phone card
products. Although the Company had sales of $17,425,200 for fiscal 1996, during
the last quarter of fiscal 1996 and the first half of fiscal 1997, the Company
experienced customer service problems and could not compete effectively in the
marketplace. However, in October 1996, the Company and Frontier reached an
agreement whereby the Company would resell Frontier's prepaid phone card under
the Company's brand names. As a result of this agreement and a subsequent
agreement with Premier the customer service issues were alleviated and the
Company began to experience consistent sales growth. The Company's sales for the
fourth quarter of fiscal 1997 were approximately $14,000,000 and its sales for
the year ended June 30,1997 reached $26,027,000.
6
Telecommunications Products and Services of the Company
Prepaid Cards
The principal products of the Company are telephone network access
products commonly referred to as prepaid utility calling cards, the F/X(TM) and
DigiTEC Direct phone cards, that allow users to access domestic long distance,
international long distance, and local telephone services from any touch tone
("DTMF" signaling) telephone set in the U.S. Users purchase the F/X(TM) and
DigiTEC Direct phone cards in denominations of $5.00, $10.00, $20.00, and $50.00
at retail outlets such as convenience stores, vending machines, newsstands,
delicatessens, gasoline stations, check cashing centers, supermarkets, and drug
stores. Each phone card has printed on the back a toll-free access number (1-800
or 1-888) and a PIN that is unique to that card. F/X(TM) and DigiTEC Direct
phone cards are currently available with instructions in English, Spanish and
Chinese. The Company has plans to introduce cards with instructions in Korean,
Japanese and German. When the toll-free access number is entered, the user is
connected to a debit or prepaid card platform switch in the telephone network
that provides interactive voice prompts in the user selected language through
the call process. After entering the PIN, the user may dial one or more
destination telephone numbers in the same manner as a normal telephone call. The
interactive voice prompts in the platform advise the user of the minutes
remaining available on that card for the dialed destination. The prepaid account
balance associated with each card is managed by the platform which automatically
deducts for usage. Upon use of all the minutes stored in the card's account, the
debit card database computer automatically instructs the debit platform to
terminate the account associated with the card. Usage charges are based upon
values in a "rate deck" stored in the computer database connected to the
platform. Different rates may be set for domestic long distance, international
calls by country of destination and for local calls. The Company provides 24
hour customer service operators to answer service calls related to using the
cards.
Marketing and Distribution
The Company distributes the F/X(TM) and DigiTEC Direct phone cards
primarily through independent distributors. Distributors purchase cards from the
Company at a discount from the face amount of the card. Distributor discounts
range from 26% to 37% (depending on the product) of the face amount of the card
with the size of the discount determined by the volume of card purchases. Master
distributor agreements provide for limited exclusivity in defined metropolitan
areas, subject to the master distributor maintaining an agreed upon monthly
volume of card purchases. A master distributor has the right to enter into local
distribution agreements with sub-distributors in his territory which the Company
is not party to. Terms of the discount offered to the sub-distributor are
negotiated directly between the master distributor and the sub-distributor. A
master distributor is responsible to supply the subdistributor and may also
sell directly to retailers. The Company retains the right to supply national
accounts directly within the master distributor's territory as well as its own
direct retail accounts. A national account is generally defined as a large
retailer that operates in more than one state. Distributors sell the cards to
retail outlets at discounts of 15% to 25%. Most of the expenses that are
incurred in the course of distribution of the F/X(TM) and DigiTEC Direct phone
cards are the responsibility of the Company. The Company also expects to
distribute its prepaid cellular products through certain of its master
distributors and through direct sales to check cashing firms, kiosk operators
and other retail outlets.
The Company currently depends primarily upon Premiere, to provide the
Company with the bundled prepaid phone cards that it resells to its customers.
The Company's ability to resell the phone cards depends upon whether it can
continue to maintain a favorable relationship with its providers. In September
of 1997, the Company entered into two agreements with Premiere requiring the
Company to purchase an aggregate minimum of $81,000,000 of cards at face value.
The agreements expire upon the earlier of September of 1998 or six months after
the last purchase of prepaid phone cards. Premiere may terminate upon breach of
certain conditions. Although the Company believes that the likelihood of such a
termination is remote, the Company does not have a specific contingency
arrangement in place to provide for such termination. Further, while the Company
believes that it will be able to either renew its agreements or negotiate new
ones on similar terms with another provider, the Company does not have any
arrangements in place for the period subsequent to September of 1998.
7
Prepaid Cellular Phone Service
The 1996 total revenues for the wireless industry was approximately $23.6
billion, with a total of 44 million cellular phone subscribers, representing an
increase of approximately 6% over 1995. Cellular analysts estimate that
approximately 30% to 50% of all applications for cellular service are initially
denied due to the applicant's credit history. This represents a large target
audience for prepaid cellular phones.
In May of 1997, the Company introduced its prepaid cellular phone service.
The Company intends to have the phones co-branded with the "DigiFone" and/or
"DigiFone Select" logos for purchase by consumers at selected retail outlets or
authorized customer agents. DigiFone is sold through retailers or agents ready
to be activated by the end user. The customer purchases the phone and calls a
customer service number provided to them to activate the phone. Included in the
purchase price of the phone is 30 minutes of local airtime and two months'
access. The customer may then purchase additional airtime through retailers in
increments of 30, 60 or 200 minutes. The rate per minute varies based on the
volume purchased by the customer and includes two months of access.
DigiFone Select is an alternative switch based prepaid cellular phone
whereby the customer either purchases a phone from, or brings in an existing
cellular phone to, one of the Company authorized agents. The customer pays an
activation fee and is required to purchase a minium $25 of airtime. The customer
is assigned a cellular phone number. In order for the the customer to have
continued service, they are required to purchase additional airtime cards within
a two month period.
Under either of the services, the customer does not sign a service
contract.
Regulation
As a reseller of prepaid phone cards and services, the Company is not
subject to any government regulation.
Employees
The Company had 61full-time employees, including three of its officers, as
of December 22, 1997.
Business of Subsidiary
The Company's wholly-owned subsidiary, World Access, commenced its
operations on June 1, 1997. The Company established World Access as a
Mississippi based internet provider with assets which the Company had reacquired
from TecLink, Inc. ("TecLink"), an affiliate of the Company. In May, 1996, the
Company sold certain internet service provider assets to TecLink. The Company,
which owned 40% of TecLink, received $50,000 and a $2,405,000 promissory note
(the "Note"), due December 31, 1998, bearing interest at 6% per annum from
TecLink. The assets sold to TecLink had been purchased primarily from TEC in
January 1996 in exchange for 1,475,126 shares of the Company's Common Stock. Due
to TecLink's continuing losses, it ceased operations as of May 31, 1997. The
Company and TecLink entered into an agreement whereby TecLink exchanged its net
assets for satisfaction of the outstanding balance of the Note. The Company
recorded a loss of $1,340,230 as a result of the settlement of the Note (See
Item 7. Certain Relationships and Related Transactions).
For the year ended June 30, 1997, revenues from the operations of World
Access were not material. Further, as of June 30, 1997, management resolved to
discontinue the operations of World Access by selling its net assets. On October
1, 1997, the Company entered into an agreement (the "Agreement") to sell the
customer base, the equipment and software which services the customer base and
the Company's obligations under its leases for its premises and telephone
equipment to Meta3, Inc. ("Meta3"), a Mississippi corporation in a similar
business. The Agreement calls for Meta3 to pay for the assets sold over a ten
month period (the "Purchase Period"), commencing November, 1997, based on number
of subscribers in the identified customer base, adjusted for its attrition rate
for the first five months of the Purchase Period. As of June 30, 1997, the
Company recorded a loss on disposal of $893,347. The assets sold had a book
value of $988,347. For the three months ended September 30, 1997, the Company
recorded an additional loss from the discontinued operations of World Access
8
of $105,554.
Trademarks
The brand names F/X(TM) and TEC Direct(TM) are registered trademarks of
the Company. The Company's trademark for DigiTEC Direct is currently in
registration. The Company currently has plans to file DigiFone and DigiFone
Select for trademark status. As the Company develops new products and variants
of the F/X and the TECDirect trademarks, it intends to file additional trademark
applications. There can be no assurance that the Company will receive
registration for any applied for trademarks or that any registered trademark
will provide the Company with any significant marketing or industry recognition,
protection, advantage or benefit.
9
Item 2. Financial Information
Selected Consolidated Financial Data
The following selected consolidated financial data for the period from May
18, 1995 (inception) to June 30, 1995 and the years ended June 30, 1996 and 1997
are derived from the consolidated financial statements of the Company which have
been audited by BDO Seidman, LLP, independent certified public accountants,
whose report is included elsewhere herein. The selected consolidated financial
data should be read in conjunction with, and are qualified in their entirety by,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements included
elsewhere in this Registration Statement.
PERIOD FROM
MAY 18, 1995
(INCEPTION) YEAR ENDED JUNE 30, THREE MONTHS ENDED SEPTEMBER 30,
TO JUNE 30, --------------------------- --------------------------------
1995 1996 1997 1996 1997
==============================================================================
Consolidated Statements
of Operations Data:
Sales ...................................... $ -- $ 17,425,199 $ 6,027,909 $ 2,532,301 $ 13,322,142
Cost of sales .............................. -- 16,900,370 25,161,443 2,623,720 12,238,339
Gross profit (loss) ........................ -- 524,829 866,466 (91,419) 1,083,803
Selling, general and administrative expenses -- 654,104 2,040,749 297,266 921,608
Income (loss) from operations .............. -- (129,275) (1,174,283) (388,685) 162,195
Other expenses (income), net ............... -- -- (1,305,970) -- --
Income (loss) from continuing operations ... $ -- $ (129,275) $ (2,480,253) $ (388,685) $ 162,195
Net Income (loss) .......................... $ -- $ (129,275) $ (3,549,514) $ (388,685) $ 56,641
Net Income (loss) per share:
From continuing operations ............. $ -- $ (.05) $ (.55) $ (.08) $ .03
From discontinued operations ........... $ -- $ -- $ (.23) $ -- $ (.02)
Net Income (loss) per share ............ $ $ (.05) $ (.78) $ (.08) $ .01
Weighted average common shares outstanding . -- 2,599,532 4,579,075 4,664,427 4,858,654
AT JUNE 30, AT SEPTEMBER 30,
------------------------------------------- -----------------------------
1995 1996 1997 1996 1997
==============================================================================
Consolidated Balance Sheets Data:
Working capital (deficit) .................. $ -- $ 1,216,279 $ (636,687) $ 731,576 $ (588,595)
Total assets ............................... $ -- $ 6,056,462 $ 3,526,723 $ 5,286,112 $ 3,949,165
Long-term debt ............................. $ -- $ -- $ 64,390 $ -- $ --
Total stockholders' equity (deficit) ....... $ -- $ 3,126,946 $ (71,469) $(2,738,261) $ 17,047
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the
consolidated financial statements included elsewhere in this Registration
Statement.
Introduction
The Company was founded in 1995 to exploit the prepaid phone card sector
of the long distance phone service market.
The Company's fiscal 1997 sales to date have been primarily derived from
the resale of bundled prepaid telephone cards. The Company resells the cards, at
a discount off the face value of the cards to either master distributors or
retail outlets, depending on the locality of distribution. The Company's fiscal
1997 cost of sales consist primarily of the purchase of the prepaid card at a
greater discount off the face value than what they sell it for, thereby
receiving its gross margin on the difference of discounts given to its customers
and the discounts the Company receives from its long distance provider. Since
the card is sold to the Company as a bundled product, the long distance provider
is liable to the end user for the time remaining on the cards. At the point of
sale, the Company has no further obligation towards the cards sold. The Company
believes that its ability to negotiate competitive rates with its long distance
providers, attract certain master distributors and to connect with certain
ethnic markets are the primary reasons for its sales increases in fiscal 1997.
While the Company has been able to negotiate fair and competitive rates
from its long distance providers, the Company intends to lessen its dependence
on such providers to a certain extent through the construction of its own
platform. As a result of the deployment of the Company's own platform, the
Company would look to negotiate more competitive rates with its long distance
providers. Based on the Company's cost analysis, the total cost per call under
the platform is expected to be less than the bundled card product that it
presently purchases. This is expected to have positive impact on the Company's
gross margins as well as its cash generated from operations. The Company may
continue to purchase the cards as a bundled product. The Company is presently
negotiating for the construction of its platform, however it has not yet entered
into any definitive agreements related to the purchase of such equipment to date
or the related financing of such equipment.
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996
Sales. Sales for the three months ended September 30, 1997 increased by
$10,789,841 or 426% over the first quarter of the prior year. For the three
months ended September 30, 1996, the Company's sales were only $2,532,301
primarily due to the Company introducing its first bundled products (cards
purchased from a provider) with the Company's brand names, under an agent of
World Com Network Services, Inc. during this quarter and also competing in a
highly competitive marketplace. Further, the Company terminated selling its own
switchless unbundled products (platform switching and minutes provided by an
independent third party), which were both unreliable and not competitively
priced, and selling other competitors' cards which it had done during fiscal
1996.
During the second quarter of fiscal 1997, the Company negotiated an
agreement with Frontier and later with Premiere. This resulted in the offering
of more reliable and competitively priced products by the Company that became
more recognizable by consumers, thereby increasing brand awareness. As a result,
the Company's sales for the first quarter of fiscal 1997 were $13,322,142. CG
COM, who had exclusivity in the state of New York for one of the Company's
products, accounted for 42% of sales during the three months ended September 30,
1997. CG COM resold the cards to sub-distributors and retailers in credit
challenged residential areas within the New York Metro Area. Subsequent to
September 30, 1997, the Company and CG COM agreed to remove the exclusivity
clause in the agreement. The Company does not anticipate an extended period of
decreased sales as a result of this change since the Company has the proper
infrastructure in place to deliver products directly to the sub-distributors and
retailers. Due to this change and expansion into new geographic areas of
distribution, the Company anticipates that its concentration of sales with any
particular customer will be significantly reduced for fiscal 1998.
11
Cost of Sales. The Company's cost of sales for the three months ended
September 30, 1997 increased to $12,238,339 from $2,623,720 for the three months
ended September 30, 1996. The increase of $9,614,619 or 366% was primarily
related to the increase in revenues that the Company experienced in the three
months ended September 30, 1997 as compared to the first quarter in the prior
year.
Gross Profit. Gross profit for the three months ended September 30, 1997
was $1,083,803 as compared to a gross loss of $91,411 for the three months ended
September 30, 1996. During the three months ended September 30, 1996, the
Company terminated its switchless unbundled products since it had taken numerous
returns for cards that it had sold in that quarter that were unreliable and not
competitively priced. Further, the Company introduced its first Company branded
bundled products at very steep discounts in order to gain market share. As a
result, the Company reported a gross loss for that period. During the three
months ended September 30, 1997, the Company's gross profit significantly
increased over the prior year due to the Company's large increase in market
share and its ability to negotiate competitive rates with its current providers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 1997 increased
to $921,608 from $297,266 for the three months ended September 30, 1996. This
increase of $624,342 or 210% is primarily related to an increase in salaries and
personnel related expenses of $326,425 as the Company's employees increased to
41 full-time employees by September 30, 1997. The increase in employees has been
fueled by the increase in operations as well as the commencement of a cellular
operations division. The Company's rent expense increased to $72,543 or 242%
primarily related to rental payments under the lease for the Company's new
distribution and administrative headquarters which the Company began occupying
April 1, 1997. Advertising, repairs and maintenance and travel and entertainment
increased by $68,522, $20,155 and $27,068, respectively, primarily related to an
increase in the Company's business. The Company's professional fees also
increased by $81,871 primarily in connection with the Company's role in the
Heritage litigation (See Item 8. Legal Proceedings) as well as having increased
needs for accounting and corporate consulting. Amortization related to
intangibles increased by $42,866 primarily due to the acquisition of customer
bases during fiscal 1997. Insurance expense also increased by $34,952 primarily
due to the Company obtaining directors' and officers' liability insurance at the
end of fiscal 1997. These increases were offset by a decrease of $36,672 in bad
debt expense. The Company anticipates its overhead expenses to continue to
increase during fiscal 1998 as it continues to add the necessary operational and
administrative infrastructure to support the anticipated growth of the Company.
Income (Loss) from Continuing Operations. The increase in income from
continuing operations of $550,880 for the three months ended September 30, 1997
as compared to September 30, 1996 is primarily related to the Company
terminating its unbundled products and replacing them with the bundled products
that it currently sells.
Loss from Discontinued Operations. As of June 30, 1997, management
resolved that it would discontinue the operations of World Access. The Company
recognized a net loss for the operations of World Access of $105,554 for the
three months ended September 30, 1997. At September 30, 1997, the Company had
$50,000 recorded as part of other liabilities for the estimated additional loss
from World Access' operations for the year ended June 30, 1998. The Company
does not anticipate any additional charges to be recognized related to World
Access' operations.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Sales. Sales for the year ended June 30, 1997 increased to $26,027,909
from $17,425,199 for the fiscal year ended June 30, 1997 representing an
increase of 49.4%. During the last half of fiscal 1997, the Company terminated
its switchless unbundled products and introduced a bundled product which it
purchased from Frontier (and later from Premiere). With the Company offering
more competitive rates, the Company's revenues for the fourth quarter of fiscal
1997 were approximately $14,000,000. CG COM accounted for approximately 54% of
the Company's sales during fiscal 1997.
Cost of Sales. The Company's cost of sales for the year ended June 30,
1997 increased to $25,161,443 from $16,900,370 for the fiscal year ended June
30, 1996. The increase of $8,261,073 or 48.9% was primarily related to the
increase in revenues that the Company experienced in the last half of fiscal
1997.
12
Gross Profit. Gross profit for the year ended June 30, 1997 was $886,466
as compared to $524,829 or an increase of $341,637 or 65.1%. The increase in
gross profit is entirely related to the Company's ability, in the last half of
fiscal 1997, to offer cards whose rates per minute were more competitive in its
pricing and the Company's ability to offer a card which was reliable to the end
user.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 1997 increased to $2,040,749
from $654,104 for the year ended June 30, 1996. This increase of $1,386,645 or
212.0% is primarily related to an increase in salaries and personnel related
expenses of $463,683 as the Company's officers received raises and bonuses of
$175,000 and the Company's employees increased to 29 full-time employees by June
30, 1997. The Company's rent expense increased to $92,308 or 177% primarily
related to the Company recording a $71,000 non-cash charge for the straight
lining of its rental payments under the lease for the Company's new distribution
and administrative headquarters which the Company began occupying April 1, 1997.
Advertising, telephone, office expense, bad debt expense, bank charges, repairs
and maintenance and travel and entertainment increased by $186,291, $54,898,
$54,702, $51,562, $42,418, $32,116 and $25,569, respectively, primarily related
to an increase in the Company's business. The Company's professional fees also
increased by $131,326 primarily in connection with the Company's role in the
Heritage litigation (See Item 8. Legal Proceedings) as well as having increased
needs for accounting and corporate consulting. The Company also recorded
amortization related to its intangibles of $87,798 primarily due to the
acquisition of customer bases during fiscal 1997.
Other Expenses. During 1996, the Company helped establish TecLink as a
Mississippi-based Internet service provider by selling to TecLink certain
Internet service provider assets, intellectual property, computer hardware,
software and officer equipment (that it had previously purchased from TEC and
others) as well as an exclusive value added reseller distribution contract for
Direct PC satellite dishes from Hughes Corporation ("Hughes"). In exchange for
these assets, the Company received $50,000 cash and the Note for $2,405,000 due
the earlier of December 31, 1998 or upon the completion of TecLink's initial
public offering ("IPO"). The Note was collateralized by the assets of TecLink.
$250,000 became due upon the completion of a private placement of TecLink's
common stock.
TecLink and Hughes never reached an accord related to Hughes
responsibilities under its agreement and TecLink experienced losses resulting
from not being able to proceed with its initial business plan. As a result of
this and other factors, TecLink's IPO was never consummated. Due to the
continuing losses, the Company entered into an agreement to acquire the net
assets of TecLink as partial satisfaction of the outstanding balance of the Note
from TecLink ($2,105,000). The Company recorded a loss on the Note satisfaction
of $1,340,230. On June 1, 1997, the Company established World Access as a
wholly-owned subsidiary providing Internet access with the assets reacquired
from TecLink. As of June 30, 1997, management determined that it needed to focus
on its core business and would discontinue the operations of World Access by
selling its net assets. On October 1, 1997, the Company entered into the
Agreement to sell the customer base, the equipment and software which services
the customer base and the Company's obligations under its leases for its
premises to Meta3, Inc. The assets sold had a book value of $988,347. The
Agreement calls for Meta3 to pay for the assets sold over a ten month period,
commencing November, 1997, based on number of subscribers in the identified
customer base, adjusted for its attrition rate for the first five months of the
Purchase Period.
Loss from Continuing Operations. The Company's switchless unbundled
product, which was terminated and replaced by the offering of bundled products
during the second half of the year, had not been a profitable, nor a reliable
product. It is primarily for this reason that the Company experienced a loss
(before other expenses) of $1,174,283 for the year ended June 30, 1997. The
Company further experienced a loss on the Note satisfaction (as described above)
of $1,340,230. As a result, the Company's loss from continuing operations was
$2,480,253.
Loss from Discontinued Operations. As described above, management
resolved, as of June 30, 1997 that it would discontinue the operations of World
Access. As a result of the Agreement, the Company accrued a loss on disposal of
$893,347. World Access reported a net loss from operations of $175,914 for the
one month ended June 30, 1997.
Net Loss. Due to its market and customer service issues related to its
products during the first half of fiscal 1997 and losses related to TecLink and
World Access, the Company recorded a net loss of $3,549,514 for the year
13
ended June 30, 1997.
Year Ended June 30, 1996 Compared to Period May 18, 1995 (Inception) to June 30,
1995
While the Company began as of May 18, 1995, it was primarily a shell
entity until July, 1995, at which point employees whose contacts were vital to
the Company were hired by the Company and the Company began to strategize its
way into the prepaid sector of the long distance telecommunications market.
Sales. Sales for the year ended June 30, 1996 was $17,425,199 as the
Company began to exploit the contacts that were introduced to the Company
through certain employees of the Company. Sales were primarily make to
distributors who were selling the cards in credit challenged residential areas
within the NY Metro Area.
Cost of Sales. The Company's cost of sales for the year ended June 30,
1996 was $16,900,370 which is directly related to the cards sold during that
year.
Gross Profit. Gross profit for the year ended June 30, 1996 was $524,829
or 3.0% of sales. In it's efforts to gain market share, the Company was selling
the cards with little markup over cost.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 1996 were $654,104. The
expenses were comprised primarily of salaries and personnel related expenses of
$261,339 and organization expenses of $86,518 related to various corporate
filings in order to establish the Company. The Company also had rent of $51,801
for its then current premises for its distributions and administrative
headquarters.
Net Loss. As a result of the Company's strategy to increase market share,
the Company recorded a loss of $129,275 for the year ended June 30, 1996.
Liquidity and Capital Resources
To date, the Company has experienced losses from continuing operations. It
has financed its operations through certain equity transactions completed in the
prior fiscal year, the exercise of warrants in the current fiscal year and
through operating cash flow. While the Company reported operating income for its
fourth quarter of fiscal 1997 and believes that it will be profitable for fiscal
1998, it remains significantly undercapitalized. The Company's growth in its
last quarter of fiscal 1997 and during the first quarter of fiscal 1998, have
outpaced its cash flow availability. The Company currently has plans to put its
own switching platforms in place, however that will be dependent on its ability
to raise financing in the near future.
The Company's major components of cash flow are as follows:
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1997 1996 1997
Net cash used in operating activities $ (89,880) $ (440,074) $ (488,869) $ (238,278)
Net cash (used in) provided by investing
activities (461,003) 171,779 179,063 (40,167)
Net cash provided by financing activities 1,000,000 486,375 -- 31,875
----------- ----------- ----------- -----------
Net increase (decrease) in cash $ 449,117 $ 218,080 $ (309,806) $ (246,570)
=========== =========== =========== ===========
Net cash used by operating activities during the three months ended
September 30, 1997 was $238,278 as compared to $488,869 for the three months
ended September 30, 1996. The decrease of $250,591 is primarily related to net
income of $56,641 for the three months ended September 30, 1997 as compared to
the net loss of $388,685 for
14
the three months ended September 30, 1996. Further, non-cash charges had a net
increase of $316,407, of which the largest was for the reduction of deferred
income as of September 30, 1996 relating to the Company's unbundled products at
that time. In addition, the Company had a net increase in amortization of
$42,866 relating to its intangibles. Other significant operating changes, which
are primarily related to the Company's growth during the first quarter of fiscal
1998, are net increases in accounts receivable, inventory and accounts payable
and other liabilities of $122,894, $614,588 and $577,717, respectively.
Net cash used by operating activities during fiscal 1997 was $440,074 as
compared to $89,880 for fiscal 1996. The increase of $350,194 is primarily
related to the net loss of $3,549,514 for the year ended June 30,1997 as
compared to the net loss of $129,275 for the year ended June 30, 1996. This is
partially offset by a net increase in non-cash charges of $374,426. The most
significant of the non-cash charges is the loss on write-down of the Note,
described above, of $1,340,230. In addition, the Company recorded amortization
related to its intangibles of $87,798 and recorded deferred rent of $71,000
relating to the straight lining of its rental payments under the lease for its
new distribution and administrative facility. Other significant operating
changes, which are primarily related to the Company's growth during the last
half of fiscal 1997 are net increases in accounts receivable and accounts
payable and other liabilities of $787,548 and $1,581,141, respectively. Prepaid
expenses and other current assets had a net decrease of $1,000,773, primarily
related to prepaid time the Company had at the end of fiscal 1996 related to
certain products that it terminated in the first half of fiscal 1997.
The decrease in cash provided by investing activities for the three months
ended September 30, 1997 of $219,230 is primarily related to the Company
receiving $150,000 in cash related to the TecLink Note during the three months
ended September 30, 1996.
The increase in cash provided by investing activities for fiscal 1997 of
$632,782 is primarily related to purchased communication equipment valued at
$533,625 during fiscal 1996 which was sold as part of the TecLink transaction
during fiscal 1996. In addition, the Company received $200,000 and $150,000 in
cash related to the TecLink transaction and the Note during fiscal 1997 and
1996, respectively.
The increase in cash provided by financing activities for the three months
ended September 30, 1997 for $31,875 is primarily related to the exercise of
warrants to purchase 21,250 shares of the Company's Common Stock at $1.50 per
share.
The decrease in cash provided by financing activities of $513,625 is
primarily related to the Company receiving $486,375 during fiscal 1997 for the
exercise of warrants to purchase 324,250 shares of the Company's common stock at
$1.50 per share as compared to the Company receiving $1,000,000 during fiscal
1996 for the two offerings which were completed under Rule 504 of Regulation D
during that year. A total of l,666,666 shares were sold as a result of the two
offerings (see Item 10. Recent Sales of Unregistered Securities).
In April of 1996, the Company entered into an agreement whereby it enabled
the Company to issue warrants to purchase an aggregate of 4,203,124 shares of
its Common Stock to four individuals and six corporations in exchange for trade
secrets, customer bases and other intangible property. Warrants to purchase
3,677,082 shares of the Company's Common Stock were actually issued. The
remaining warrants to purchase 526,042 shares of Common Stock were held awaiting
the delivery of certain assets to the Company. Those assets were never received
and the Company never issued the warrants to the three parties. Of the warrants
issued, warrants to purchase 1,333,334 and 2,343,748 shares of Common Stock are
exercisable at $13.20 and $1.50 per share, respectively. The warrants have a
term of five years commencing April 23, 1996 and are callable by the Company,
upon 30 days notice, at a call price of $.10 per warrant to purchase one share.
As of December 22,1997, 530,633 shares of Common Stock have been issued related
to the exercise of warrants at $1.50 per share.
To date, capital expenditures have not been material. However, if the
Company is capable of obtaining financing to fund the purchase of equipment and
software related to switching platforms, the Company plans to purchase
$1,200,000 of such equipment and software by December 31, 1997 and would look to
purchase an additional $3,000,000 of equipment and software by December 31,
1998.
15
The Company, during fiscal 1997, acquired the customer bases of certain of
its distributors through the release of their outstanding obligations to the
Company. In connection with one of these transactions, the Company agreed to a
$182,000 note payable with interest at 8% per annum. The payments under this
note commence November 1, 1997 with the last payment being due October 1, 1998.
The Company currently depends upon primarily Premiere, to provide the
Company with the bundled prepaid phone cards that it resells to its customers.
The Company's ability to resell the phone cards depends upon whether it can
continue to maintain a favorable relationship with its providers. In September
of 1997, the Company entered into two agreements with Premiere requiring the
Company to purchase an aggregate minimum of $81,000,000 of cards at face value.
The agreements expire upon the earlier of September of 1998 or six months after
the last purchase of prepaid phone cards. Premiere may terminate upon breach of
certain conditions. Although the Company believes that the likelihood of such a
termination is remote, the Company does not have a specific contingency
arrangement in place to provide for such termination. Further, while the Company
believes that it will be able to either renew its agreements or negotiate new
ones on similar terms with another provider, the Company does not have any
arrangements in place for the period subsequent to September of 1998.
The Company believes that its current cash requirements can be funded by
its operations for the next twelve months. To date, the Company has financed its
operations through cash from operations and two offerings under Rule 504 of
Regulation D and the exercise of warrants to purchase the Company's Common Stock
at a $1.50 per share which aggregated $1,000,000 and $518,250, respectively, in
proceeds to the Company. The Company remains undercapitalized and cannot finance
its expansion as quickly as opportunities arise. In order for the Company to be
successful in its current plans for expansion and to continue with its plans to
construct its own switching platforms (which will cost approximately
$4,200,000), the Company will be required to obtain financing in the aggregate
amount of approximately $6,200,000. To date, the Company has no existing lines
of credit and has not established any sources of such financing. There can be no
assurance that such financing will be available on acceptable terms, or at all,
to the Company.
Seasonality
The business of the Company does not experience significant seasonality.
Inflation
Management does not believe that inflation has had, or is expected to have
any significant adverse impact on the Company's financial condition or results
of operations.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123, " Accounting for
Stock Based Compensation." SFAS No.123 established a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. The Company adopted the employee stock-based compensation provision
of SFAS No. 123 by disclosing the pro forma net income and pro forma net income
per share amounts, assuming the fair value method was adopted July 1, 1995. The
adoption of this standard did not impact the Company's consolidated results of
operations, financial position or cash flow.
In December 1996, the FASB issued SFAS No. 128, "Earnings Per Share",
which is effective for both interim and annual periods ending after December 15,
1997. SFAS No. 128 requires all prior period earnings per share data to be
restated to conform to the provisions of the statement. The Company will adopt
SFAS No.128 for the three and six-months ended December 31, 1997. The adoption
of this standard is not expected to have material effect on the Company's
earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which established
16
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by, or distributions to, owners.
Among other disclosures, SFAS No.130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No.130, effective for all years beginning after December 31, 1997,
requires comparative information for earlier years and early adoption is
permitted. The Company intends to adopt SFAS No. 130 effective July 1, 1998.
Results of operations and financial position will be unaffected by
implementation of this standard.
The Year 2000 Issue
Many existing computer programs use only two digits to identify a year in
their date fields. These programs were designed and developed without
considering the impact of the upcoming change in the century (the "Year 2000
Issue"). If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. The Company is not currently utilizing
any integrated software which will be significantly impacted by the Year 2000
Issue. As a result, the Company does not anticipate any significant expense in
ensuring that the Company has adequately provided for any corrections to its
existing hardware or software. Furthermore, the Company is currently evaluating
an upgrade of its financial and accounting software and has obtained
documentation from vendors of such software supporting that the Year 2000 Issue
has been addressed.
Item 3. Properties
The Company occupies leased premises of approximately 20,000 square feet
on two floors at 8 West 38th Street, New York, New York. The lease provides for
10,000 rentable square feet per floor, with a base rental of $14.50 per square
foot per annum or approximately $24,200 per month, commencing July 1, 1997 and
annual fixed increases of 2.5% in lieu of payment for operating expenses. The
lease expires on March 30, 2001.
The Company's present use of the premises involves: 2,000 square feet for
reception and common areas; 1,400 square feet for executive offices; 1,000
square feet for conference rooms; 1,500 square feet for shipping and receiving;
and the remainder is for working areas.
The Company also maintains a sales and distribution office in Phoenix,
Arizona in leased premises containing 1,360 square feet. The lease is for a
two-year term which commenced in April of 1997 and provides for an annual rent
of approximately $19,000 the first term year and $20,000 the second term year.
World Access occupies leased premises in Suite 1510 at 125 South Congress
Street, Jackson, Mississippi. The offices contain 4,750 square feet. The lease
is for a five year term commencing June 1, 1997 and ending May 31, 2002. The
monthly rental for the first three years is $5,940 per month, $6,237 per month
in the fourth year and $6,336 per month in the fifth year. As part of the
Agreement with Meta3, Meta3 has agreed to accept the obligation under the lease
for World Access' premises.
17
Item 4. Security Ownership of Beneficial Owners and Management
The following table sets forth information as of December 22, 1997 with
respect to shares of the Company's Common Stock (its only class of outstanding
securities) held of record by each of its named executive officers, directors,
all of its named executive officers and directors as a group and each
shareholder who or which owns more than 5% of the Company's outstanding Common
Stock. The Company believes that the beneficial owners of the Common Stock
listed below have sole investment and voting power with respect to such shares.
- --------------------------------------------------------------------------------------------------------
(1) (2) (3) (4)
Amount and Nature
Name and Relationship of Shares Beneficially
Address To Company Owned(1) (2) Percent of Class(2)
- --------------------------------------------------------------------------------------------------------
Frank C. Magliato Chief Executive Officer, 2,116,677(3) 23.7%
President and Director
Telephone Electronics Stockholder 1,475,126 16.5%
Corporation
Walter Frank
700 Southwest Street
Jackson, MS 39201
Lori Ann Perri Director 72,917 0.8%
31 Spruce Street
Great Neck, NY 10021
Diego Roca Vice President of Operations 250,000 2.8%
and Secretary
Lawrence S. Diamond Vice President of Sales and 200,000 2.2%
Marketing
Keith A. McGowan Vice President of Finance 200,000 2.2%
All Named Executive Officers Officers & Directors 2,839,594 31.7%
and Directors as a Group
(5 Persons)
- --------------------------------------------------------------------------------------------------------
(1) The securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set forth
in the regulations of the Securities and Exchange Commission ("SEC")
and, accordingly, may include securities owned by or for, among
others, the spouse, children or certain other relatives of such
person. The same shares may be beneficially owned by more than one
person. Beneficial ownership may be disclaimed as to certain of the
securities.
(2) Includes shares underlying the options and warrants held by the
listed persons.
(3) Includes 250,000 shares held in trust for Kendall Magliato, daughter
of Mr. Magliato.
18
Item 5. Directors and Executive Officers
The following table sets forth information regarding the directors and
executive officers of the Company.
Name Age Position
---- --- --------
Frank C. Magliato 46 Chief Executive Officer, President and Director
Lori Ann Perri 33 Director
Diego E. Roca 30 Vice President of Operations and Secretary
Lawrence S. Diamond 53 Vice President of Sales and Marketing
Keith A. McGowan 35 Vice President of Finance
The principal occupation for the past five years, and other biographical
information with respect to each of the directors and executive officers of the
Company is as follows:
Frank C. Magliato has served as Chief Executive Officer, President and a
director of the Company since June of 1995. From February of 1993 to June of
1995, he was employed as President of Windsor Associates of New York City, a
telecommunications consulting firm. From December of 1988 to February of 1993,
he was employed as President of Telecorp Funding, Inc. and subsidiaries, a
telecommunications company in New York City. Mr. Magliato received a Bachelor of
Science degree in Engineering from Rensselaer Polytechnic Institute in 1973.
Lori Ann Perri, CPA, sibling of Frank C. Magliato, has served as a
director of the Company since November of 1995. She has been employed by the
publishing division of Time, Inc. in New York City since August of 1995 and
presently serves as an Assistant Director of Finance. From August of 1993 to
August of 1995, she was employed by Computer Dynamics, Inc. of Virginia Beach,
Virginia as Director of Finance and Accounting. Ms. Perri received a Bachelor of
Science degree in Accounting from Hofstra University in 1987. She is a member of
the American Institute of Certified Public Accountants and the New York State
Society of Certified Public Accountants.
Diego E. Roca began employment with the Company during July of 1995 on a
part-time basis. He began full-time employment during September 1996 and was
given the position of Vice President of Operations. From October of 1991 to May
of 1995, he was employed by Telecorp Funding , Inc. and subsidiaries . He served
as Assistant Controller in 1991 and became Controller in 1992. From May of 1995
to September of 1996, he served as a consultant to various entities in the
telecommunications industry. Mr. Roca received a Bachelor of Science degree in
Accounting from Queens College in 1992.
Lawrence S. Diamond, began employment as the Vice President of Sales and
Marketing effective October 16, 1997. From August of 1994 to October of 1997, he
was Vice President, Mergers and Acquisitions of Crescent Public Communications,
Inc., a wholly-owned division of AMNEX, Inc. ("AMNEX") and Director of Investor
Relations for AMNEX. From January of 1993 to August of 1994, he served as
President of Empire State Public Communications, an association of public
communication products and service providers doing business in the state of New
York. From January of 1989 to January of 1993, he was employed by Telecorp
Public Communciations, Inc., a telecommunications company in New York City. Mr.
Diamond received a Bachelor of Business Administration degree in Accounting and
Taxation from Pace University in 1968.
Keith A. McGowan, CPA, became the Vice President of Finance effective
July 1, 1997. Prior to joining the Company, he was a Partner with BDO Seidman,
LLP. He commenced his career with BDO Seidman, LLP in November of 1985 and
serviced primarily publicly-held companies. Mr. McGowan received a Bachelor of
Science degree in Accounting from Adelphi University in 1984. He is a member of
the American Institute of Certified Public Accountants and the New York State
Society of Certified Public Accountants.
19
Item 6. Executive Compensation
The following table sets forth information with respect to the aggregate
remuneration paid by the Company to the Chief Executive Officer and one other
most highly compensated officer (the "Named Executives") of the Company for the
period from May 18, 1995 (inception) to June 30, 1995 and the fiscal years ended
June 30, 1996 and 1997.
- -------------------------------------------------------------------------------------------------------
Long Term Compensation
Annual Compensation Awards
(a) (b) (c) (d) (e)
- -------------------------------------------------------------------------------------------------------
Securities Underlying
Name and Salary Bonus Options/SARs
Principal Position Year ($) ($) (#)
- -------------------------------------------------------------------------------------------------------
Frank C. Magliato, Chief Executive Officer, 1997 $125,000 $35,000 --
President and Director
1996 $ 70,000 $ -- --
1995 $ -- $ -- --
Diego E. Roca, Vice President of Operations
and Secretary 1997 $ 75,342 $25,000 187,500
1996 $ 5,200 $ -- --
1995 $ -- $ -- --
- -------------------------------------------------------------------------------------------------------
Employment Agreements
The Company has entered into separate employment agreements with Messrs.
Magliato, Roca, Diamond and McGowan. Except with respect to the positions to be
occupied, the duties to be performed and the renumeration to be paid, the
agreements are on identical terms and conditions and provide for (i) a term of
three years commencing April 25, 1997 for Messrs. Magliato and Roca, July 1,
1997 for Mr. McGowan and October 16, 1997 for Mr. Diamond.; (ii) the Board of
Directors to review each employee's base salary at least annually during the
term and may increase it at the Board's discretion; (iii) if an employee's
service is terminated by the Company without cause, for the payment of the
employee's then base salary for the remainder of the term; (iv) that in the
event of the death of an employee, for the payment of the employee's then base
salary to the employee's surviving spouse or estate as is applicable; (v) the
full participation by the employee in the Company's benefits available to the
Company's other employees; (vi) that all trade secrets, inventions, work
product, methods, software and similar property which relate to the Company's
business and are developed by the employee are the property of the Company;
(vii) in the event of either the employee's voluntary termination of employment,
the employee's involuntary termination for cause or the employee's failure to
accept an extension of the employment agreement on substantially similar terms,
the employee agrees not to conduct any activity competitive to the Company for a
period of two years from the termination; and (viii) other terms customarily
contained in similar employment agreements. Messrs. Magliato, Roca, Diamond and
McGowan will devote full-time to the affairs of the Company.
The employment agreements provide for base salaries as follows: (i) Mr.
Magliato-$175,000 in fiscal 1998, $225,000 in fiscal 1999 and $250,000 in fiscal
2000; (ii) Mr. Roca-$150,000 in fiscal 1998, $200,000 in fiscal 1999 and
$225,000 in fiscal 2000; (iii) Mr. McGowan-$140,000 in fiscal 1998, $190,000 in
fiscal 1999 and $215,000 in fiscal 2000; and(iv) Mr. Diamond-$120,000 in fiscal
1998, $170,000 in fiscal 1999 and $195,000 in fiscal 2000.
In addition to the base salaries, the employment agreements provide for an
annual performance bonus commencing in the fiscal year ending June 30, 1998 to
each of the three officers equivalent to a percentage of the Company's adjusted
annual net income before depreciation and amortization, interest and income tax
as follows: (i) Mr. Magliato- 2%; (ii) Mr. Roca- 1.5%; (iii) Mr. McGowan-1.25%;
and (iv) Mr. Diamond - 1.25%.
20
Stock Option Grants
The following table sets forth information regarding grants of options to
purchase Common Stock made by the Company during the year ended June 30, 1997 to
the Named Executives.
Option/SAR Grants in Last Fiscal Year
- ------------------------------------------------------------------------------------------------------------------
Potential Realized Value
At Assumed Annual Rates of Stock Price
Appreciation for Individual Grant
Individual Grants Option Term(2)
- ------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
- ------------------------------------------------------------------------------------------------------------------
Percent of
Number of Total
securities Options/SARs
underlying Granted to
Options/SARs Employees in Exercise or
Granted Fiscal Year Base Price Expiration
Name (#) (1) (%) ($/Share) Date 5% 10%
- ------------------------------------------------------------------------------------------------------------------
Diego E. Roca 187,500 100 14.50 4/24/07 $1,709,207 $4,332,987
- -------------------------------------------------------------------------------------------------------------------
(1) Options granted above vest at the date of grant and expire ten years
from date of grant.
(2) Disclosures of the 5% and 10% assumed compound rates of stock
appreciation are mandated by the rules of the SEC and do not
represent the Company's estimate or projection of future common
stock prices. The actual value realized may be greater or less that
the potential realizable value set forth in the table.
The following table sets forth information concerning the year-end value of
unexercised in-the-money options held by each of the Named Executives.
Aggregated Option/SAR Exercises And Fiscal Year-end Option/SAR Values
- -----------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised In-the- Money
Unexercised Options/SARs at Fiscal Options/SARs at Fiscal Year End
Year-End(#) ($)(1)
- -----------------------------------------------------------------------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
- -----------------------------------------------------------------------------------------
Diego E. Roca 187,500/- $-/$-
- -----------------------------------------------------------------------------------------
(1) Based on a year-end fair market value of the underlying securities
equal to $13.00 per share.
Compensation Committee Interlocks and Insider Participation
At the present time, the Company has not yet established a formal Compensation
Committee. It is the Company's intention, in connection with its plans to expand
its Board of Directors, to create a Compensation Committee of independent
directors during fiscal 1998. To date, Mr. Magliato has participated in the
Board deliberations relating to executive compensation.
Performance Graph
Due to the illiquidity of the Company's Common Stock and the amount of shares of
its Common Stock which are restricted from trading (over 50% of outstanding
shares at June 30, 1997), a performance graph has not been disclosed in the
Registration Statement. Such information, in the opinion of management, would be
misleading to the investor. From May 18, 1995 to June 30, 1996, the Company's
Common Stock has been very thinly traded on the OTC Bulletin Board.
21
Item 7. Certain Relationships and Related Transactions
In August of 1995, Promo Tel, Inc.(Promo Tel - Delaware), a Delaware
corporation owned by Mr. Magliato was merged into the Company. In the
transaction Mr. Magliato received 1,333,334 shares of the Company's Common
Stock, which were issued as "restricted securities" as defined under the 33 Act.
There was no acquisition cost of the merged company to Mr. Magliato. The assets
of the Delaware corporation acquired by the Company in the merger consisted of
personnel, sales, marketing and distribution programs and contracts for the
development and sale of prepaid phone cards. The parties agreed to the 1,333,334
share price based on the di minimis value of the public shell and since the
value in the merged entity's business plan would be accomplished by the assets
and personnel received from Promo Tel - Delaware.
In April of 1996, the Company entered into an agreement whereby it enabled
the Company to issue warrants to purchase an aggregate of 4,203,124 shares of
its Common Stock to four individuals and six corporations in exchange for trade
secrets, customer bases and other intangible property. Warrants to purchase
3,677,082 shares of the Company's common stock were actually issued. The
remaining warrants to purchase 526,042 shares of Common stock were held awaiting
the delivery of certain assets to the Company. Those assets were never received
and the Company never issued the warrants to the three parties. Of the warrants
issued, warrants to purchase 1,333,334 and 2,343,748 shares of Common Stock are
exercisable at $13.20 and $1.50 per share, respectively. The warrants have a
term of five years commencing April 23, 1996 and are callable by the Company,
upon 30 days notice, at a call price of $.10 per warrant to purchase one share.
During May through December 22, 1997, 530,633 shares of Common Stock were issued
upon exercise of warrants at a $1.50 per share.
In connection with this transaction, warrants to purchase Common Stock at
$13.20 per share were issued to officers and directors of the Company as
follows, (i) Mr. Magliato - 729,167 shares; (ii) Ms. Perri - 72,917 shares; and
(iii) Mr. Roca - 62,500 shares.
For information with respect to employment agreements between the Company
and its officers and stock option grants to officers, see Item 6. Executive
Compensation and Item 11. Description of Registrant's Securities To Be
Registered.
In May, 1996, the Company sold certain internet service provider assets to
TecLink. The Company, which owned 40% of TecLink, received $50,000 and the Note
for $2,405,000, due December 31, 1998, bearing interest at 6% per annum from
TecLink. The remaining stockholders of TecLink had no affiliation to the
Company. The assets sold to TecLink had been purchased from TEC in January 1996
in exchange for 1,475,126 shares of the Company's Common Stock. Due to TecLink's
continuing losses, it ceased operations as of May 31, 1997. The Company and
TecLink entered into an agreement whereby TecLink exchanged its net assets for
satisfaction of the outstanding balance of the Note. The Company recorded a loss
of $1,340,230 as a result of the settlement of the Note. On June 1, 1997 the
Company established World Access with the assets reacquired from TecLink. On
June 30, 1997 management resolved to discontinue the operations of World Access
by selling its assets. On October 1, 1997, the Company entered into the
Agreement to sell the customer base, the equipment and software which services
the customer base and the Company's obligations under its leases for its
premises and telephone equipment to Meta3. The assets sold had a book value of
$988,347. The Agreement calls for Meta3 to pay for the assets sold over a ten
month period, commencing November 1997, based on the number of subscribers in
the identified customer base, adjusted for its attrition rate for the first five
months of the Purchase Period. As of June 30, 1997, the Company recorded a loss
on disposal of $843,347. For the three months ended September 30, 1997, the
Company recorded an additional loss from the discontinued operations of World
Access of $105,554.
Item 8. Legal Proceedings
In June of 1996, the Company became a co-defendant in a legal action in
the Circuit Court for the First Judicial District of Hinds County in Jackson,
Mississippi in the case entitled Heritage Graphics Inc., et. al. v. Telephone
Electronics Corporation, et. al. Civ. No. 251-96-000492. The named plaintiffs in
the action are: Heritage Graphics, Inc.; Thomas L. Gould, Jr.; Suzanne G. Gould;
and Rainey Scott. The named defendants in the action are: Telephone Electronics
Corporation d/b/a TecLink; Teclink, Inc.; the Company; Asynchronous
Technologies, Inc.; Barbara Scott;
22
Ronald D. Anderson, Sr. d/b/a Anderson Engineering; Walter Frank; and Frank
Magliato. The second Amended Complaint filed in the action alleges a wide-spread
conspiracy on the part of all of the defendants to destroy Heritage and to
eliminate it as a competitor in the Internet services provider market. The heart
of the complaint's allegations concerns an alleged joint venture. Through the
vehicle of this prospective joint venture, the Company and others allegedly
duped Heritage into surrendering its trade secrets, its services, its
intellectual property, its expertise, etc. to the Company. The complaint alleges
that, in essence, the deal materialized, Heritage's owners never received the
stock, and Heritage was never "rolled into" a new entity, TECLink, Inc. The
complaint's lesser allegations are that (i) defendants conspired to slander the
business reputations of Heritage and Tom Gould; and (ii) TEC and the Company are
jointly and severally liable to it for $268,245 worth of production work and
consulting services provided over the September to December 1995 time period.
Although, the Company and TEC are affiliated through TEC's ownership of
1,475,126 shares of the Company's Common Stock, the Company has no historical
relationship with Heritage other than being named in the complaint. Prior to the
legal action, Heritage provided graphics and printing services to TEC.
The plaintiffs seek damages of $500 million.
The Company is not aware of any evidence to support the plaintiffs claim
of a joint venture. The Company believes that plaintiffs' claims are without
merit. Further, the Company believes that its counter claims are sufficiently
well grounded to offset any judgement entered against the Company.
The case is scheduled to go to trial August of 1998. While the Company has
an indemnification agreement with TEC which calls for the Company to be
indemnified for all claims regarding Heritage which arose prior to January 20,
1996 (without limit), the Company could still be liable for judgements against
the Company in the event TEC was unable to live up to the indemnification,
further, it is unknown as of this date what impact the indemnification will
have, if any, in the event of a decision adverse to the Company.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Other Stockholder Matters
The Company's Common Stock has been and is being quoted and traded on an
inconsistent basis on the OTC Bulletin Board, under the trading symbol "DGTT"
since October 15, 1996. Prior to October 15, 1996, it so traded under the symbol
"PROE".
The following table sets forth the high and low closing bid and ask prices
as reported on the OTC Bulletin Board for the periods indicated.
Period (1) High(1) Low(1)
-----------------------------------------------------------------
Year Ending June 30, 1996 (2):
First Quarter $27.00 $24.00
Second Quarter 30.00 25.50
Third Quarter 30.00 15.00
Fourth Quarter 36.00 12.00
Year Ending June 30, 1997 (2):
First Quarter $36.00 $18.00
Second Quarter 30.00 9.88
Third Quarter 13.50 9.88
Fourth Quarter 15.50 13.00
Year Ending June 30, 1998 (2):
First Quarter $15.88 $13.00
October 1, 1997
Through
December 18, 1997 $ 6.25 $ 5.50
-----------------------------------------------------------------
(1) High and low closing bid and ask prices prior to October 15,
1996 have been retroactively adjusted to give effect to the
Company's 6:1 reverse stock split of its Common Stock.
(2) For the years ended June 30, 1996 and 1997 and the period July 1,
1997 through December 18, 1997, the Company's Common Stock was
thinly traded. Further, over-the-counter market qoutations may
not necessarily represent actual transactions.
23
As of December 22, 1997, there were approximately 764 holders of record of
the Company's Common Stock.
The Company has paid no dividends for the years ended June 30, 1996 and
1997 and the Company has no current plans to pay dividends in the foreseeable
future. The Company plans to retain earnings, if any, to finance development and
expansion of the Company's operations. Payment of cash dividends, if any, in the
future will be determined by the Company's Board of Directors in light of future
earnings, capital requirements, financial condition and other relevant
considerations.
At December 22, 1997, the Company had warrants and options outstanding for
3,808,949 shares of the Company's Common Stock. The Company has agreed to file a
file a Registration Statement under the 33 Act with respect to all outstanding
shares of restricted common stock acquired through the exercise of warrants and
3,808,949 shares of common stock underlying outstanding warrants and options.
Item 10. Recent Sales of Unregistered Securities
Information with respect to all securities sold by the Company during the
period from May 18, 1995 (inception) to June 30, 1995 and the fiscal years ended
June 30, 1996 and 1997 without the offer and sale thereof being registered under
the 33 Act, is as follows:
1. On August 10, 1995 the Company issued 1,333,334 shares of its $.001
par value Common Stock to Mr. Magliato in connection with the merger
of Promo-Tel-Delaware wholly owned by Mr. Magliato into the Company.
The assets acquired by the Company in the merger consisted of sales,
marketing and distribution programs and contracts for the
development and sale of prepaid phone cards. No person or entity
acted as an underwriter with respect to the transaction. The shares
were issued as "restricted securities" under the 33 Act and in
reliance upon the exemption from the registration requirements of
Section 5 of the 33 Act set out in Section 4(2) thereof. Mr.
Magliato acquired the shares for investment, the certificate issued
to represent the securities contains an appropriate restrictive
legend denoting their status as "restrictive securities" and stop
transfer restrictions on the certificates have been filed with the
Company's transfer agent;
2. During the period from August 16, 1995 through October 31, 1995, the
Company offered and sold to individual and corporate public
investors an aggregate of 833,333 shares of its $.001 par value
Common Stock at $.60 per share for an aggregate of $500,000. No
person or entity acted as an underwriter with respect to the
offering. The offering was made directly by the Company and no
commissions were paid on any sales. The offering was made in
reliance upon the exemption from the registration requirements of
Section 5 of the 33 Act provided in Rule 504 of Regulation D adopted
by the SEC under the 33 Act. A Form D with respect to the offering
has been filed with the SEC;
3. In April of 1996, the Company entered into an agreement whereby it
enabled the Company to issue warrants to purchase an aggregate of
4,203,124 shares of its Common Stock to four individuals and six
corporations in exchange for trade secrets, customer bases and other
intangible property. Warrants to purchase 3,677,082 shares of the
Company's common stock were actually issued. The remaining warrants
to purchase 526,042 shares of Common stock were held awaiting the
delivery of certain assets to the Company. Those assets were never
received and the Company never issued the warrants to the three
parties. Of the warrants issued, warrants to purchase 1,333,334 and
2,343,748 shares of Common Stock are exercisable at $13.20 and $1.50
per share, respectively. The warrants have a term of five years
commencing April 23, 1996 and are callable by the Company, upon 30
days notice, at a call price of $.10 per warrant to purchase one
share. No person or entity acted as an underwriter with respect to
the transaction. The warrants were, and absent a then effective
Registration Statement, any shares acquired upon exercise thereof
will be issued as "restricted securities". The shares acquired upon
exercise thereof, nor any interest therein may be assigned or
transferred, if such would occasion a violation of Section 5 of the
33 Act The warrants and the shares underlying them have been and are
being offered in reliance upon the exemption from the registration
requirements of Section 5 of the
24
33 Act provided in Section 4(2) thereof;
4. On January 20, 1996, the Company issued 1,475,126 shares of $.001
par value Common Stock to TEC in exchange for telecommunication
service provider assets valued by the parties for purposes of the
exchange at $1,564,724. No person acted as an underwriter with
respect to the transaction. The shares were issued as "restricted
securities" and in reliance upon the exemption from the registration
requirements of Section 5 of the 33 Act set out in Section 4(2)
thereof. TEC acquired the shares for investment, the certificates
issued to represent the shares contain an appropriate restrictive
legend denoting their status as "restricted securities" and stop
transfer restrictions on the certificates have been filed with the
Company's transfer agent;
5. During the month of May of 1996, the Company offered and sold an
aggregate of 833,333 shares of its $.001 par value Common Stock to
individual and corporate investors who had loaned money to the
Company in exchange for cancellation of the debt at $.60 per share
of a total of $500,000. No person or entity acted as an underwriter
with respect to the offering. The offering was made directly by the
Company and no commissions were paid on any sales. The offering was
made in reliance upon the exemption from the registration
requirements of Section 5 of the 33 Act provided in Rule 504 of
Regulation D. A Form D with respect to the offering was filed with
the SEC;
6. During the period from May to December 22, 1997, Warrants to
purchase 530,633 shares of Common Stock at $1.50 per share were
exercised. No person or entity acted as an underwriter in the
transaction. The shares were issued as "restricted securities" and
in reliance upon the exemption from the registration requirements of
Section 5of the 33 Act set out in Section 4(2) thereof. The
certificates issued to represent the shares contain is appropriate
restrictive legend denoting their status as "restricted securities"
and stop transfer restrictions on the certificates have been filed
with the Company's transfer agent. These shares are to be included
in a Registration Statement to be filed under the 33 Act.
Item 11. Description of Registrant's Securities to be Registered
The Company's authorized capitalization consists of 100,000,000 shares of
$.001 par value Common Stock ("Common Stock") and 1,000,000 shares of $.001 par
value of preferred stock ("Preferred Stock"). As of December 22, 1997, there
were 5,064,801 shares of Common Stock outstanding, no shares of Preferred Stock
outstanding and there are no outstanding options, warrants or other rights to
acquire shares of Preferred Stock. As of December 22, 1997, the Company has
outstanding warrants to purchase 3,146,449 shares of Common Stock. On that date,
the Company had outstanding options to purchase 662,500 shares of its Common
Stock. For details on these warrants and options, see Warrants and Options
below.
Common Stock The shares of Common Stock currently outstanding are fully
paid and non-assessable. The holders of Common Stock do not have any preemptive
rights to acquire shares of any capital stock of the Company. In the event of
liquidation of the Company, assets then legally available and able for
distribution to the holders of Common Stock (assets remaining after payment or
provision for payment of all debts and of all preferential liquidation payments
to holders of any outstanding Preferred Stock) will be distributed in pro rata
shares among the holders of Common Stock in proportion to their stock holdings.
Each stockholder is entitled to one vote for each share of Common Stock
held by such stockholder. A quorum for a meeting of the stockholders is one-half
of the shares of capital stock entitled to vote at that meeting. There is no
right to cumulate votes for the election of directors. This means that holder of
more than 50% of the shares voting for the election of directors can elect 100%
of the directors if they choose to do so; and in such event, the holders of the
remaining shares voting for the election of directors will not be able to elect
any person or persons to the Board of Directors.
Holders of Common Stock are entitled to dividends when, and if, declared
by the Board of Directors, out of
25
funds legally available; and then, only after all preferential dividends have
been paid on any outstanding Preferred Stock. The Company has not had any
earnings and it does not presently contemplate the payment of any cash dividends
in the foreseeable future.
Preferred Stock The Company's articles of incorporation authorize its
Board of Directors to issue Preferred Stock in one or more series and to fix and
state the designations, powers, preferences, qualifications, limitation,
restrictions and relative rights of the shares of each such series. The
directors may determine among other things, the annual dividend rates, whether
dividends are to be cumulative or non-cumulative, whether the Preferred Stock is
subject to redemption and, if so, the manner of redemption and the redemption
price, the preference of the Preferred Stock over any other series of Preferred
Stock or Common Stock on liquidation or dissolution of the Company, and sinking
fund or other retirement provisions for the Stock and any conversion or exchange
rights or other privileges of the holders to acquire the Preferred Stock or
Common Stock of the Company. The Board of Directors may also determine the
number of shares in each series, the voting rights of each series and the
consideration for which the Preferred Stock may be issued.
Holders of Preferred Stock may have the right to receive dividends and
payments in the event of liquidation of the Company prior to the holders of
Common Stock and any issued Preferred Stock may also have other rights which
adversely affect the rights of the holders of Common Stock. The holders of
Preferred Stock do not have any preemptive rights to acquire shares of any
capital stock of the Company. The Company does not have any present plans to
issue any Preferred Stock.
Transfer Agent Intercontinental Registrar and Transfer Agent, Inc. acts as
the transfer agent of the Company with respect to its Common Stock. The transfer
agent's address is: P.O. Box 62405, Boulder City, Nevada 89006. There are
presently no shares of Preferred Stock outstanding, and accordingly, there is no
transfer agent for the Preferred Stock.
Warrants All of the warrants to purchase a total of 3,146,449 shares of
Common Stock which were outstanding at December 22, 1997 are for a term of five
years commencing April 23, 1996 and are exercisable, in whole or in part, at any
time during their term. Warrants to purchase 1,813,115 and 1,333,334 shares are
exercisable at $1.50 and $13.20 per share, respectively. During May through
December 22, 1997, warrants to purchase 530,633 shares at $1.50 were exercised
by the holders. The outstanding warrants were issued pursuant to an agreement
made in April of 1996 between the Company and the warrant holders in exchange
for trade secrets, customer bases, computer software and other intangible
property, all involved with or related to the prepaid telephone card industry,
transferred to the Company by the warrant holders. The shares underlying the
warrants were and are to be issued as "restricted securities" as that term is
defined under the 33 Act. Unless a Registration Statement under the 33 Act is
effective with respect thereto, the shares of Common Stock to be issued upon
exercise of a warrant will be issued as "restricted securities".
Options At December 22, 1997, the Company has options to purchase 662,500
shares of Common Stock outstanding primarily comprised of the following:
(a) On April 25, 1997, the Company granted a stock option to Mr. Roca,
as part of his employment agreement, to purchase 187,500 shares of
Common Stock at $14.50 per share. The option is immediately
exercisable and expires on April 25, 2007.
(b) As part of Mr. McGowan's employment agreement, effective July 1,
1997, the Company granted a stock option to purchase 200,000 shares
of Common Stock at $13.00 per share. The option vests over two years
and expires July 1, 2007.
(c) As part of Mr. Diamond's employment agreement, effective October 16,
1997, the Company granted a stock option to purchase 200,000 shares
of Common Stock at $12.25 per share. The option vests over two
years and expires October 16, 2007.
26
The Board of Directors of the Company has adopted a Stock Incentive Plan
(the "Plan") under which stock options, stock appreciation rights or
"restricted" or unrestricted stock awards, for up to 600,000 shares of the
Company's Common Stock, may be granted subject to the approval of the Plan by
the stockholders of the Company on or before April 24, 1998. Options may be
granted under the Plan to officers, directors, employees and consultants of the
Company. Stock options granted under the Plan may be incentive stock options
under Section 422 of the Internal Revenue Code ("Code") or non-qualified stock
options.
Upon approval by the Company's stockholders, the Plan will be administered
by a committee of the Board of Directors, the members of which must be
non-employees of the Company and outside directors as defined by the Code. Prior
to such vote, the existing Board of Directors have authority to administer the
Plan. Subject to certain restrictions set out in the Plan and the Code with
respect to incentive stock options, and up to a limit of 100,000 shares in any
one fiscal year to any one individual, the Committee has full discretion and
power as to the form and terms of an option or other right granted under the
Plan. As of December 22, 1997, the Company had not granted any options, rights
or awards under the Plan.
Item 12. Indemnification of Directors and Officers
Limitations on Liability of Directors and Officers
The Company's Articles of Incorporation provide that a director or officer
shall not be liable for damages to the Company or its stockholders for breach of
fiduciary duty except for acts of omission that involve intentional misconduct,
fraud or a knowing violation of law and unlawful dividend payments under Nevada
Revised Statutes.
Indemnification of Directors, Officers and Others
The Company's Articles of Incorporation provide that it shall have the
right to indemnify any person for any liability or expenses incurred by that
person by reason of the fact that he was a director, officer, employee or agent
of the Company and has the right to advance or pay the expenses of directors and
officers in defending civil or criminal suit or proceeding to the full extent
provided by the Private Corporation Law of Nevada.
The Company's Bylaws provide that it shall to the fullest extent permitted
by law indemnify its directors, officers and others who were or are a party or
are threatened to be made a party to any threatened, pending or completed
action, suit or proceeding.
The Company also maintains policies of directors' and officers' liability
insurance for the purpose of indemnification.
Item 13. Financial Statements and Supplementary Data
The financial statements and schedule required as part of this
Registration Statement are included beginning on the index pages F-1 and S-1,
respectively, of this Registration Statement.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the Company's last two fiscal years there were no changes in or
disagreements with accountants on accounting and financial disclosure of the
type required to be disclosed in this Item.
27
Item 15. Financial Statements and Exhibits
The financial statements required as part of this Registration Statement
are included beginning on the index page F-1 of this Registration Statement.
Exhibits required by Item 601 of Regulation S-K are included as Part II to
this Registration Statement.
28
SIGNATURES
In accordance with Section 12 of the Securities Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITEC 2000, Inc.
Date: December 22, 1997 By /s/ Frank C. Magliato
-----------------------------
Frank C. Magliato
Chief Executive Officer,
President and Director
In accordance with the Securities Act of 1934, as amended, this
Registration Statement has been signed below by the persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: December 22, 1997 By /s/ Diego E. Roca
-----------------------------
Diego E. Roca
Vice President of Operations
and Secretary
Date: December 22, 1997 By /s/ Lori Ann Perri
-----------------------------
Lori Ann Perri
Director
Date: December 22, 1997 By /s/ Lawrence S. Diamond
-----------------------------
Lawrence S. Diamond
Vice President of Sales
and Marketing
Date: December 22, 1997 By /s/ Keith A. McGowan
-----------------------------
Keith A. McGowan
Vice President of Finance
29
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
================================================================================
Consolidated Financial Statements
Period from May 18, 1995 (inception) to June 30, 1995,
Years Ended June 30, 1996 and 1997
and Three Months Ended September 30, 1996 and 1997
F-1
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Index
================================================================================
Report of independent certified public accountants F-3
Consolidated financial statements:
Balance sheets F-4
Statements of operations F-5
Statements of stockholders' equity (deficit) F-6
Statements of cash flows F-7
Notes to consolidated financial statements F-8 - F-23
F-2
Report of Independent Certified Public Accountants
To the Board of Directors
and Stockholders of DigiTEC 2000, Inc.
(formerly Promo Tel, Inc.)
We have audited the accompanying consolidated balance sheets of DigiTEC 2000,
Inc. and subsidiary (formerly Promo Tel, Inc.) as of June 30, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the period from May 18, 1995 (inception) to June 30, 1995 and for each
of the two years in the period ended June 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DigiTEC 2000, Inc.
and subsidiary as of June 30, 1996 and 1997, and the results of their operations
and their cash flows for the period from May 18, 1995 (inception) to June 30,
1995 and for each of the two years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
- ----------------------------
BDO Seidman, LLP
New York, New York
October 22, 1997
F-3
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Consolidated Balance Sheets
============================================================================================================
June 30,
------------------------------- September 30,
1996 1997 1997
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current:
Cash $ 141,754 $ 727,197 $ 480,627
Restricted cash (Note 2) 367,363 - -
Accounts receivable, net of allowance for bad debts of
$26,000, $60,000 and $75,000, respectively
(Note 1(j)) 725,852 1,868,227 1,961,785
Communications equipment inventory, at cost (Note 4) 1,601,105 - -
Inventory 71,929 218,877 802,677
Prepaid expenses 494,162 11,814 27,434
Due from related parties, net of allowance for bad
debts of $27,000 (Note 3) 176,494 - -
- ------------------------------------------------------------------------------------------------------------
Total current assets 3,578,659 2,826,115 3,272,523
Property and equipment 6,616 64,397 96,559
Notes receivable (Note 3(b)) 2,305,000 - -
Intangibles, net of accumulated amortization of
$9,946, $62,944 and $156,647, respectively 149,197 606,920 550,792
Other assets, net 16,990 29,291 29,291
- ------------------------------------------------------------------------------------------------------------
$6,056,462 $ 3,526,723 $ 3,949,165
============================================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current:
Accounts payable - communication equipment (Note 4) $1,601,105 $ - $ -
Accounts payable 761,275 2,842,891 3,273,668
Accrued expenses and other current liabilities - 290,799 307,676
Note payable - current (Note 1(h)) - 117,610 182,000
Net liabilities of discontinued operations (Note 3(b)) - 211,502 97,774
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 2,362,380 3,462,802 3,861,118
Note payable (Note 1(h)) - 64,390 -
Deferred rent - 71,000 71,000
Deferred income 567,136 - -
- ------------------------------------------------------------------------------------------------------------
Total liabilities 2,929,516 3,598,192 3,932,118
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 8 and 9)
Stockholders' equity (deficit) (Notes 1(b), 3(a) and 5):
Preferred stock, $.001 par value, 1,000,000 shares
authorized; no shares outstanding - - -
Common stock, $.001 par value, 100,000,000 shares
authorized; 4,664,427, 4,858,418 and 4,879,668
shares issued and outstanding, respectively 4,664 4,858 4,879
Additional paid-in capital 3,251,557 3,602,462 3,634,316
Accumulated deficit (129,275) (3,678,789) (3,622,148)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) 3,126,946 (71,469) 17,047
- ------------------------------------------------------------------------------------------------------------
$6,056,462 $ 3,526,723 $ 3,949,165
============================================================================================================
See accompanying notes to consolidated financial statements.
F-4
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Consolidated Statements of Operations
=============================================================================================================================
Period from
May 18, 1995 Year ended June 30, Three months ended September 30,
(inception) to --------------------------- --------------------------------
June 30, 1995 1996 1997 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Net sales (Note 1(j)) $ -- $ 17,425,199 $ 26,027,909 $ 2,532,301 $ 13,322,142
Cost of sales -- 16,900,370 25,161,443 2,623,720 12,238,339
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) -- 524,829 866,466 (91,419) 1,083,803
Selling, general and administrative
expenses -- 654,104 2,040,749 297,266 921,608
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before other income
(expenses) -- (129,275) (1,174,283) (388,685) 162,195
- -----------------------------------------------------------------------------------------------------------------------------
Other income (expenses):
Other income -- -- 34,260 -- --
Loss on note satisfaction (Note 3(b)) -- -- (1,340,230) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Other expenses -- -- (1,305,970) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations -- (129,275) (2,480,253) (388,685) 162,195
Discontinued operations (Note 3(b)):
Loss from operations of World Access -- -- (175,914) -- (105,554)
Loss on disposal of World Access -- -- (893,347) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ -- $ (129,275) $ (3,549,514) $ (388,685) $ 56,641
=============================================================================================================================
Net income (loss) per common share:
From continuing operations $ -- $ (.05) $ (.55) $ (.08) $ .03
From discontinued operations -- -- (.23) -- (.02)
- -----------------------------------------------------------------------------------------------------------------------------
$ -- $ (.05) $ (.78) $ (.08) $ .01
=============================================================================================================================
Weighted average number of common and
common equivalent shares outstanding -- 2,599,532 4,579,075 4,664,427 4,858,654
=============================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Consolidated Statements of Stockholders' Equity (Deficit)
====================================================================================================================
Common Stock Stock
--------------------- Additional Accumulated subscriptions
Shares Amount paid-in-capital deficit receivable
- --------------------------------------------------------------------------------------------------------------------
Balance, May 18, 1995 (inception) -- $ -- $ -- $ -- $ --
For the period from May 18, 1995
(inception) to June 30, 1995:
Stock issued to founder 1,333,334 1,334 (1,334) -- --
- --------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 1,333,334 1,334 (1,334) -- --
For the year ended June 30, 1996:
Sale of common stock relating to
merger with Promo Tel - Nevada
(Note 1(b)) 59,042 59 (59) -- --
Issuance of stock subscriptions 833,333 833 499,167 -- (440,000)
Issuance of common stock relating to
debt conversion (Note 5(a)) 833,333 833 499,167 -- --
Issuance of options to purchase
common stock in exchange for
customer lists and other intangible
property (Note 5(b)) -- -- 584,143 -- --
Issuance of common stock relating to
asset purchase (Note 3(a)) 1,605,385 1,605 1,670,473 -- --
Payment of stock subscriptions
receivable -- -- -- -- 440,000
Net loss -- -- -- (129,275) --
- --------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 4,664,427 4,664 3,251,557 (129,275) --
For the year ended June 30, 1997:
Acquisition of treasury stock
(Note 3(a)) -- -- -- -- --
Retirement of treasury stock (130,259) (131) (135,145) -- --
Exercise of warrants 324,250 325 486,050 -- --
Net loss -- -- -- (3,549,514) --
- --------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 4,858,418 4,858 3,602,462 (3,678,789) --
For the three months ended September 30,
1997 (unaudited):
Exercise of warrants 21,250 21 31,854 -- --
Net income -- -- -- 56,641 --
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 (unaudited) 4,879,668 $ 4,879 $ 3,634,316 $(3,622,148) $ --
====================================================================================================================
Treasury Stock Total
------------------------- stockholders'
Shares Amount equity (deficit)
- ---------------------------------------------------------------------------------------
Balance, May 18, 1995 (inception) $ -- $ --
For the period from May 18, 1995
(inception) to June 30, 1995:
Stock issued to founder -- -- --
- ---------------------------------------------------------------------------------------
Balance, June 30, 1995 -- -- --
For the year ended June 30, 1996:
Sale of common stock relating to
merger with Promo Tel - Nevada
(Note 1(b)) -- -- --
Issuance of stock subscriptions -- -- 60,000
Issuance of common stock relating to
debt conversion (Note 5(a)) -- -- 500,000
Issuance of options to purchase
common stock in exchange for
customer lists and other intangible
property (Note 5(b)) -- -- 584,143
Issuance of common stock relating to
asset purchase (Note 3(a)) -- -- 1,672,078
Payment of stock subscriptions
receivable -- -- 440,000
Net loss -- -- (129,275)
- ---------------------------------------------------------------------------------------
Balance, June 30, 1996 -- -- 3,126,946
For the year ended June 30, 1997:
Acquisition of treasury stock
(Note 3(a)) 130,259 (135,276) (135,276)
Retirement of treasury stock (130,259) 135,276 --
Exercise of warrants -- -- 486,375
Net loss -- -- (3,549,514)
- ---------------------------------------------------------------------------------------
Balance, June 30, 1997 -- -- (71,469)
For the three months ended September 30,
1997:
Exercise of warrants -- -- 31,875
Net income -- -- 56,641
- ---------------------------------------------------------------------------------------
Balance, September 30, 1997 (unaudited) -- $ -- $ 17,047
=======================================================================================
See accompanying notes to consolidated financial statements.
F-6
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Consolidated Statements of Cash Flows
(Note 7)
================================================================================
Period from
May 18, 1995 Year ended June 30, Three months ended September 30,
(inception) to ---------------------------- --------------------------------
June 30, 1995 1996 1997 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ -- $ (129,275) $(3,549,514) $ (388,685) $ 56,641
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Provision for bad debts -- 53,248 33,752 -- 15,000
Amortization -- 9,946 87,798 13,262 56,128
Depreciation -- 2,545 11,657 1,066 8,005
Loss on write-down of note
receivable -- -- 1,340,230 -- --
Deferred income -- 567,136 (567,136) (251,602) --
Deferred rent -- -- 71,000 -- --
(Increase) decrease in:
Accounts receivable -- (752,100) (1,539,648) 14,336 (108,558)
Inventory -- (71,929) (146,948) 30,788 (583,800)
Prepaid expenses and other assets 60,000 (530,726) 470,047 222,029 (15,620)
Increase (decrease) in:
Accounts payable and accrued
expenses -- 761,275 2,372,416 (130,063) 447,654
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by
(used in) operating
activities of continuing
operations 60,000 (89,880) (1,416,346) (488,869) (124,550)
Net cash provided by operating activities
of discontinued operations -- -- 976,272 -- (113,728)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by
(used in) operating
activities 60,000 (89,880) (440,074) (488,869) (238,278)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures -- (9,160) (69,439) (12,938) (40,167)
Purchase of communications equipment -- (533,625) -- -- --
Proceeds from sale of assets -- 50,000 -- -- --
Proceeds from repayment of related party
loans -- -- 41,218 42,001 --
Related party loans granted -- (68,218) -- -- --
Payment received on note receivable -- 100,000 200,000 150,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by
(used in) investing
activities -- (461,003) 171,779 179,063 (40,167)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of convertible debt -- 500,000 -- -- --
Proceeds from exercise of warrants -- -- 486,375 -- 31,875
Proceeds from stock subscriptions -- 500,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by
financing activities -- 1,000,000 486,375 -- 31,875
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 60,000 449,117 218,080 (309,806) (246,570)
Cash (including restricted cash of $367,363
at June 30, 1996), beginning of period -- 60,000 509,117 509,117 727,197
- ------------------------------------------------------------------------------------------------------------------------------------
Cash (including restricted cash of $367,363
and $172,088 at June 30, 1996 and
September 30, 1996, respectively),
end of period $ 60,000 $ 509,117 $ 727,197 $ 199,311 $ 480,627
====================================================================================================================================
See accompanying notes to consolidated financial statements.
F-7
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
1. Summary of (a) Business
Significant
Accounting Policies DigiTEC 2000, Inc. and Subsidiary (formerly
Promo Tel, Inc., the "Company") is primarily
engaged in the distribution, marketing and
management of prepaid telephone calling cards.
It currently markets its telephone calling card
products principally throughout the New York
tri-state metropolitan area.
On October 18, 1996, the Company changed its
name to DigiTEC 2000, Inc.
(b) Organization
On July 11, 1995, Promo Tel, Inc., a Delaware
corporation ("Promo Tel-Delaware"), merged (the
"Merger") into Promo Tel, Inc., a Nevada
corporation ("Promo Tel-Nevada"). Immediately
prior to the Merger, Promo Tel-Nevada changed
its name from Yacht Havens International Corp.
("Yacht Havens"). The surviving corporation
remained Promo Tel, Inc. Pursuant to the terms
of the Merger, Promo Tel-Nevada, which had
59,042 shares of its common stock previously
outstanding, exchanged with the sole
stockholder of Promo Tel-Delaware an aggregate
of 1,333,334 shares of previously unissued
$.001 Promo Tel-Nevada common stock for the
outstanding shares of Promo Tel- Delaware's
outstanding common stock.
Since the Merger resulted in voting control by
the stockholder of Promo Tel-Delaware and Promo
Tel-Delaware had the personnel and owned all
the assets to be utilized for its ongoing
business, the Merger was treated as a
recapitalization of Promo Tel- Delaware and the
sale of 59,042 shares of previously issued
Promo Tel-Nevada common stock for the net
assets of Promo Tel- Nevada ($-0-).
Promo Tel-Delaware is the continuing entity for
financial reporting purposes, and the financial
statements prior to July 11, 1995 represent its
financial position and results of operations.
The assets, liabilities and results of
operations of Promo Tel-Nevada are included as
of July 11, 1995.
The Company was formed on May 18, 1995 and
commenced operations in July 1995.
F-8
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
Although Promo Tel-Delaware is deemed to be the
acquiring corporation for financial accounting
and reporting purposes, the legal status of
Promo Tel-Nevada as the surviving corporation
will not change. Promo Tel-Nevada had amended
its Articles of Incorporation to change its
name from Promo Tel, Inc. to the Company's
current name (Note 1(a)).
In September 1996, the Board of Directors of
the Company approved a reverse stock split of
the Company's common stock. Each stockholder of
record on October 18, 1996 received one share
of new common stock for each six shares of
common stock held.
The equity accounts of the Company and all
disclosures have been retroactively adjusted to
reflect the recapitalization and the one-
for-six reverse stock split.
(c) Principles of Consolidation
The consolidated financial statements include
the accounts of the Company and, from June 1,
1997 (Note 3(b)), its wholly-owned subsidiary,
World Access Solutions, Inc. ("World Access").
All significant intercompany balances and
transactions have been eliminated.
The consolidated financial statements and
related notes thereto as of September 30, 1997
and for the three months ended September 30,
1996 and 1997 are unaudited but, in the opinion
of management, include all adjustments
necessary to present fairly the information set
forth therein. These adjustments consist solely
of normal recurring accruals. The interim
results are not necessarily indicative of the
results for any future periods.
(d) Deferred Rent
The Company accounts for rent on a
straight-line basis over the term of the
leases. The effect of such adjustment for the
year ended June 30, 1997 was $71,000. No
adjustment was necessary for all other periods
presented.
F-9
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
(e) Use of Estimates
In preparing the consolidated financial
statements in conformity with generally
accepted accounting principles, management is
required to make estimates and assumptions that
affect the reported amounts of assets and
liabilities and the disclosure of contingent
assets and liabilities at the date of the
consolidated financial statements and revenues
and expenses during the reported period. Actual
results could differ from those estimates.
(f) Revenue Recognition
Sales from third-party prepaid phone cards for
which the Company acts solely as a distributor
are recognized upon delivery.
Sales from the sale of proprietary, branded
prepaid phone cards are deferred and recognized
upon completion of telephone calls by end
users. Sales under this program were terminated
during the first quarter of fiscal 1997.
(g) Inventory
Inventory, consisting primarily of telephone
calling cards, is stated at the lower of cost
or market. Cost is determined by the first-in,
first-out (FIFO) method.
(h) Intangibles and Amortization
Intangibles include the costs to acquire
customer lists. As part of one of the customer
acquisition agreements, the Company entered
into an 8% per annum note payable for $182,000.
The note is unsecured with payments commencing
on November 1, 1997 and continuing until the
last payment which is due October 1, 1998. The
maturities of the note are $117,610 for the
year ended June 30, 1998 with the remainder due
during the year ended June 30, 1999.
F-10
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
The Company periodically evaluates the
recoverability of these intangibles based on
several factors, including management's
intention with respect to these acquired assets
and the estimated future nondiscounted cash
flows expected to be generated by such assets.
To date, the Company has not recorded any
impairment on its intangibles.
Amortization is computed on a straight-line
basis over the estimated useful lives of the
intangibles which approximate three years.
(i) Income Taxes
Deferred tax assets and liabilities are
recorded for the estimated future tax effects
attributable to temporary differences between
the bases of assets and liabilities recorded
for financial and tax reporting purposes.
(j) Risk Concentration
(i) Accounts Receivable
At June 30, 1996, approximately 60% and
57%, respectively, of trade receivables
and sales were accounted for by one
customer. For the year ended June 30,
1997 and the three months ended September
30, 1997, one master distributor
accounted for approximately 48% and 33%
of the Company's accounts receivable and
54% and 42% of the Company's sales,
respectively.
Subsequent to September 30, 1997, the
Company terminated the exclusivity clause
of the distribution agreement. As a
result, the Company's concentration of
sales to one customer will be reduced for
the year ended June 30, 1998.
(ii) Suppliers
The Company purchases its long distance
products primarily from two long distance
providers.
F-11
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
(k) Earnings Per Share
Earnings (loss) per share is calculated using
weighted average shares outstanding during the
period. The weighted average shares have been
retroactively adjusted to reflect the exchange
of the 1,333,334 shares and the one-for-six
reverse stock split (Note 1(b)). Options and
warrants to purchase common stock are not
included in the earnings per share calculation
because they are anti-dilutive.
(l) Advertising Costs
The Company expenses all advertising costs as
incurred.
(m) Fair Value of Financial Instruments
The carrying values of financial instruments,
including cash and note receivable at June 30,
1996 and cash and note payable at June 30, 1997
and September 30, 1997, approximate fair value
as of those dates because of the relatively
short-term maturity of these instruments.
(n) Reclassifications
Certain amounts as previously reported have
been reclassified to conform to the 1997
presentation.
(o) Recent Accounting Pronouncements
The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed
of" for the year ended June 30, 1996. The
adoption of SFAS No. 121 did not have a
material effect on the Company's consolidated
financial statements.
F-12
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
In October 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS
No. 123 establishes a fair value method for
accounting for stock-based compensation plans
either through recognition or disclosure. The
Company's adoption of employee stock-based
compensation provisions of SFAS No. 123 as of
July 1, 1996 will require disclosure of the pro
forma net income and pro forma net income per
share amounts assuming the fair value method
was adopted July 1, 1995. The adoption of this
standard did not impact the Company's results
of operations, financial position or cash
flows.
In December 1996, the FASB issued SFAS No. 128,
"Earnings Per Share", which is effective for
both interim and annual periods ending after
December 15, 1997. SFAS No. 128 requires that
all prior period earnings per share data be
restated to conform to this statement. The
Company will adopt SFAS No. 128 for the three
and six months ended December 31, 1997. The
adoption of this standard is not expected to
have a material effect on the Company's
earnings per share.
In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income", which
established standards for reporting and display
of comprehensive income, its components and
accumulated balances. Comprehensive income is
defined to include all changes in equity except
those resulting from investments by, or
distributions to, owners. Among other
disclosures, SFAS No. 130 requires that all
items that are required to be recognized under
current accounting standards as components of
comprehensive income be reported in a financial
statement that is displayed with the same
prominence as other financial statements.
SFAS No. 130, effective for all years beginning
after December 31, 1997, requires comparative
information for earlier years to be restated
and early adoption is permitted. The Company
intents to adopt SFAS No. 130 effective July 1,
1998. Results of operations and financial
position will be unaffected by implementation
of this standard.
F-13
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
2. Restricted Cash At June 30, 1996, the Company had an agreement
with a long distance service provider to
maintain an amount on deposit, in a specified
bank account, for unused activated time on
prepaid telephone calling cards. This agreement
was terminated in September 1996.
3. Related Party (a) On January 20, 1996, the Company purchased
Transactions certain internet service provider assets
consisting primarily of computer hardware,
software and office equipment from Telephone
Electronics Corporation ("TEC") in exchange for
1,605,385 shares of the Company's restricted
common stock valued at approximately $1.7
million based on the estimated fair values of
the assets received.
TEC is a communications company headquartered
in Jackson, Mississippi that provides local and
long distance telephone exchange services and
provides other telecommunications services
nationally.
Subsequent to the purchase date, the purchase
agreement was amended to reflect certain assets
which were not delivered by TEC, resulting in a
receivable from TEC of $135,276 at June 30,
1996. In November 1996, TEC returned 130,259 of
the Company's shares to the Company. TEC's
current ownership interest at June 30, 1997 was
approximately 30%.
F-14
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
(b) The Company owns 40.3% of the outstanding
common stock of TecLink, Inc. ("TecLink"). The
Company helped establish TecLink as a
Mississippi-based internet service provider by
selling to TecLink certain internet service
provider assets, intellectual property,
computer hardware, software and office
equipment (that it had previously purchased
from TEC and others) as well as an exclusive
value added reseller distribution contract from
Hughes Corporation ("Hughes") (see Note 4). The
Company received in the sale $50,000 cash and a
6% per annum promissory note of $2,405,000 due
the earlier of December 31, 1998 or upon the
completion of TecLink's initial public
offering. The promissory note was
collateralized by the assets of TecLink.
$250,000 became due upon the completion of a
private placement of TecLink's common stock.
The Company accounted for its investment in
TecLink's common stock on the equity method. As
a result of TecLink's loss for the year ended
June 30, 1996, the investment was written down
to $-0- as of that date. The Company did not
reduce its carrying value of the note at June
30, 1996 since it received the first $250,000
upon its due date and believed that its
security interest in the assets of TecLink was
sufficient at June 30, 1996 to cover the
balance of the note. Hughes and TecLink never
reached an accord as to Hughes'
responsibilities under the distribution
contract. As such, TecLink was never able to
fully implement its business plan. As a result
of this and other factors, TecLink's initial
public offering was never consummated and
TecLink continued to experience losses. Due to
the continuing losses, the Company entered into
an agreement to acquire the net assets as
partial satisfaction of its outstanding balance
of its note receivable from TecLink
($2,105,000). As a result, the Company recorded
a loss of $1,340,230. The Company maintained
its right to part of any proceeds that TecLink
may receive from its claims against Hughes. The
Company established World Access as a
wholly-owned subsidiary providing internet
access with the net assets re-acquired from
TecLink. As of June 30, 1997, management
determined that it needed to focus on its core
business and would discontinue the operations
of World Access by selling its net assets.
F-15
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
On October 1, 1997, the Company entered into an
agreement (the "Agreement") to sell the
customer base, the related hardware related to
servicing the customer base and its obligations
under World Access' leases for its premises and
telephone equipment to Meta3, Inc. ("Meta3"), a
Mississippi corporation in a similar line of
business. The Agreement calls for Meta3 to pay
for the subscribers at $10 per month per
customer for ten months. The amount to be paid
will be adjusted by the identified customer
base's net attrition rate for the first five
months of the purchase period. As a result of
the Agreement and the Company's plan to dispose
of the remaining assets and liabilities, the
Company recorded a loss on disposal of $893,347
for the year ended June 30, 1997. For the three
months ended September 30, 1997, the Company
incurred an additional loss of $105,554 on the
discontinued operations of World Access. At
June 30, 1997 and September 30, 1997, $175,000
and $50,000, respectively, is included in other
liabilities for the estimated loss related to
the operations of World Access for the year
ended June 30, 1998. The Company does not
anticipate any additional charges to be
recognized related to World Access' operations.
The assets and liabilities of World Access,
adjusted for the Agreement, are as follows:
June 30, September 30,
1997 1997
----------------------------------------------------------------
Cash $ 15,566 $ 254
Accounts receivable 46,874 58,936
Inventory 146,650 123,025
Receivable from Meta3 270,000 270,000
Prepaid expenses 28,800 3,080
Equipment 38,153 17,017
Accounts payable (338,271) (339,900)
Other liabilities (419,274) (230,186)
----------------------------------------------------------------
Net liabilities of World Access $ (211,502) $ (97,774)
================================================================
F-16
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
The Company intends to use the proceeds from
the sale of the assets to Meta3, as well as the
proceeds from the sale or collection of the
remaining assets, to liquidate the liabilities.
4. Communications The Company purchased communications equipment
Equipment from Hughes which allows high speed satellite-
Inventory based access service for both internet and
private network applications. Subsequently, the
Company decided not to enter this line of
business and sold this equipment to TecLink
(Note 3(b)) and assigned the Company's rights
and obligations under the exclusive value added
reseller distribution agreement to TecLink, as
well as its payables relating to this equipment
to its vendor. The vendor agreed to the
assignment of the equipment and the
distribution agreement, and settled the
liability for amounts already paid to Hughes.
5. Stockholders' Equity (a) In December 1995 and May 1996, the Company
received an aggregate of $1,000,000 as a result
of completing two offerings under Rule 504 of
Regulation D.
(b) At June 30, 1997, the Company had an option
agreement with one of its officers and had one
stock option plan. The agreement and plan are
more fully described below. The Company applies
Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees",
and related Interpretations in accounting for
the agreements and the plan. Under APB No. 25,
when the exercise price of the Company's
employee stock options equals the market price
of the underlying stock on the date of the
grant, no compensation cost is recognized. The
following is a summary of the agreements and
the option plan:
(i) On April 25, 1997, the Company granted a
stock option to one of its officers, as
part of his employment agreement, to
purchase 187,500 shares of common stock
at $14.50 per share. The option is
exercisable at the date of grant and
expires ten years from the date of grant.
F-17
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
(ii) In April 1997, the Company's Board of
Directors adopted the Company's Stock
Incentive Plan (the "Plan") which
provided for the granting of up to
600,000 shares of common stock, subject
to the approval of the Plan by the
stockholders of the Company on or before
April 24, 1998. As of June 30, 1997, no
options had been granted under the Plan.
SFAS No. 123, "Accounting for Stock-Based
Compensation", requires the Company to provide
pro forma information regarding net income and
earnings per share as if compensation cost for
the Company's stock options had been determined
in accordance with the fair value-based method
prescribed in SFAS No. 123. The Company
estimates the fair value of each stock option
at the grant date by using the Black-Scholes
option-pricing model with the following
weighted average assumptions used for grants in
fiscal 1996 and 1997, respectively: no
dividends paid for all years; expected
volatility of 30% for all years; weighted
average risk- free interest rate of 5.9%; and
an expected life of 1 year.
Under the accounting provisions of SFAS No.
123, the Company's net loss and net loss per
share from continuing operations would have
been increased to the pro forma amounts
indicated below.
Year ended June 30, 1997
-------------------------------------------------------------------
Net loss from continuing operations:
As reported $2,480,253
Pro forma $2,590,662
Net loss per share from continuing operations:
As reported $ (.55)
Pro forma $ (.57)
===================================================================
F-18
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
The following table contains information on stock options for the three year
period ended June 30, 1997:
Weighted
Exercise average
Option price range exercise
shares per share price
----------------------------------------------------------------
Outstanding and -- $ -- $ --
exercisable, June 30,
1995 and 1996 -- $ -- $ --
Granted 187,500 14.50 14.50
----------------------------------------------------------------
Outstanding and
exercisable, June 30,
1997 187,500 $14.50 $14.50
================================================================
The weighted average fair value of the options
granted in fiscal 1997 was $0.59 per share.
The weighted average remaining contractual life
of the outstanding and exercisable options as
of June 30, 1997 is 9.8 years.
(c) Warrants
In April 1996, the Company entered into an
agreement which enabled the Company to issue
warrants to purchase 4,203,124 shares of common
stock to various individuals and corporations
in exchange for trade secrets, customer bases,
software and other intangible property.
Warrants to purchase 3,677,082 shares of the
Company's common stock were actually issued.
The remaining warrants to purchase 526,042
shares of common stock were held awaiting the
two parties to deliver their promised assets to
the Company. Those assets were never received
and the Company did not issue the remaining
warrants. The warrants issued have a term of
five years from date of grant and are
immediately exercisable. The Company may call
the warrants at a price of $.10 per share of
common stock.
F-19
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
The following table contains information on
warrants for the three-year period ended June
30, 1997:
Weighted
Exercise average
Warrant price range exercise
shares per share price
------------------------------------------------------------------
Outstanding and
exercisable, June 30,
1995 -- $ -- $ --
Granted 3,677,082 1.50-13.20 3.01
------------------------------------------------------------------
Outstanding and
exercisable, June 30,
1996 3,677,082 1.50-13.20 3.01
Exercised (324,250) 1.50 1.50
------------------------------------------------------------------
Outstanding and
exercisable, June 30,
1997 3,352,832 $1.50-13.20 $3.16
------------------------------------------------------------------
The weighted average remaining contractual life of the outstanding
and exercisable warrants as of June 30, 1997 is 3.8 years.
6. Income Taxes The tax effects of temporary differences that give rise to
deferred tax assets are as follows:
June 30, 1996 1997
----------------------------------------------------------
Net operating loss carryforwards $ -- $ 876,000
Loss on World Access -- 313,000
Deferred rent -- 25,000
Allowance for bad debts 18,000 21,000
Other 1,000 43,000
----------------------------------------------------------
Total deferred tax assets 19,000 1,278,000
Less valuation allowance (19,000) (1,278,000)
----------------------------------------------------------
Net deferred tax assets $ -- $ --
==========================================================
F-20
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
The ultimate realization of the deferred tax assets
is dependent on the generation of future taxable
income during the period in which the temporary
differences become deductible. Based on the Company's
historical earnings, management has established a
valuation allowance equal to the tax effects of the
Company's deferred tax assets at June 30, 1996 and
1997.
The Company's net operating loss carryforwards of
approximately $2,500,000 are available to offset
future Federal taxable income, if any, through 2012
and may be subject to various limitations.
7. Supplemental Cash Supplemental disclosures of cash flow information are
Flow Information as follows:
Year ended June 30, 1996 1997
-------------------------------------------------------------------------
Non-cash investing and financing activities:
Return of common stock $ -- $ 135,276
Write-off of receivables for acquisition of
customer lists -- 363,521
Note received from sale of assets 2,405,000 --
Common stock issued for assets purchased 1,672,078 --
Common stock issued for conversion of debt 500,000 --
Transfer of Hughes communications
equipment and related payable -- 1,601,105
Communications equipment and related
payable obtained from Hughes 1,601,105 --
Acquisition of the net assets of TecLink in
satisfaction of note receivable -- 764,770
==========================================================================
F-21
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
8. Commitments and (a) Leases
Contingencies
The Company leases its office space under a
noncancelable operating lease agreement which
expires in June 30, 2002. Rent expense for the
years ended June 30, 1996 and 1997 was
approximately $52,000 and $144,000,
respectively. Future minimum rentals required
as of June 30, 1997 under all noncancellable
operating leases (exclusive of renewals) are as
follows:
Fiscal year ended June 30,
-----------------------------------------------
1998 $ 287,500
1999 314,600
2000 307,200
2001 314,900
2002 240,000
-----------------------------------------------
$ 1,464,200
===============================================
(b) Litigation
The Company and its Chief Executive Officer
have been named as defendants in a legal action
in Mississippi in the case entitled, Heritage
Graphics, Inc. ("Heritage") vs. Telephone
Electronics Corporation. The complaint alleges,
among other things, that the defendants
breached a contractual agreement and conspired
to have Heritage go out of business. The
complaint seeks damages of $500 million. The
case is in discovery. The Company believes such
litigation will not have a material adverse
effect on the financial condition of the
Company, and is defending the suit vigorously
and asserting appropriate counterclaims.
F-22
DigiTEC 2000, Inc.
and Subsidiary
(formerly Promo Tel, Inc.)
Notes to Consolidated Financial Statements
(Information for September 30, 1996 and 1997 is unaudited)
================================================================================
(c) Employment Agreements
The Company has employment agreements with
three of its officers. The aggregate minimum
payments under the agreements are as follows:
June 30,
-----------------------------------------------
1998 $ 465,000
1999 565,000
2000 690,000
-----------------------------------------------
$1,720,000
===============================================
(d) Commitments to Provider
At June 30, 1997, the Company had a commitment
to Frontier Corporation for the purchase of
prepaid telephone cards. The agreement, which
is for the period of October 30, 1996 through
January 30, 1998, calls for the Company to
purchase $10 million of cards at face value. As
of June 30, 1997, the Company had purchased in
excess of this commitment.
9. Subsequent Event On September 25 and 26, 1997, the Company entered
into one year distribution agreements with Premiere
Communications, Inc. The agreements call for the
Company to purchase an aggregate of $81 million of
cards at face value. As part of one of the
agreements, the Company entered into a $6 million,
15% per annum, note payable due December 31, 1997
with any purchases paid for by that date offsetting
the note payable.
F-23
DIGITEC 2000, INC.
EXHIBIT INDEX
Exhibit #
- ---------
* 3.(i) Articles of Incorporation
* 3.(ii) Bylaws
27 Financial Data Schedule
* 99.1 Articles of Merger and Agreement and Plan of Merger
* 99.2 Sublease Agreement between Vanity Fair Intimates, Inc. and Promo
Tel, Inc.
* 99.3 TECLink Promissory Note and Agreement
* 99.4 Asset Purchase Agreement by and Between World Access Solutions,
Inc. and Meta3, Inc.
* 99.5 Agreement and Plan of Reorganization and amendments
* 99.6 Telephone Electronics Corporation Agreement and amendments
* 99.7 TECLink Note Satisfaction Agreement
* 99.8 Premiere Communications, Inc. Independent Distributor Agreements
* 99.9 CG Com, Inc. Independent Master Distributor Agreements
* 99.10 Frank Magliato Employment Agreement
* 99.11 Diego Roca Employment Agreement
* 99.12 Keith McGowan Employment Agreement
* 99.13 DigiTEC 2000, Inc. Stock Incentive Plan
* 99.14 Report of Independent Certified Public Accountants' on Schedule II
- Valuation and Qualifying Accounts
99.15 Larry Diamond Employment Agreement
99.16 Frontier Communications International Inc. Prepaid Telephone
Services Distributor Agreement
* Previously filed