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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 000-23291
DigiTEC 2000, Inc.
(Exact name of registrant as specified in its charter)
Nevada 54-1287957
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
8 West 38th Street, Fifth Floor
New York, New York 10018
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 944-8888
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The number of outstanding shares of the Registrant's Common Stock, par value
$.001 per share (the "Common Stock") as of December 29, 2000 was 7,058,998.
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DigiTEC 2000, INC.
INDEX TO FORM 10-QSB
Page(s)
-------
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Condensed Consolidated Balance Sheet as of December 31, 2000 (Unaudited).............. 3
Condensed Consolidated Statements of Loss for the Three Months and Six
Months Ended December 31, 2000 and December 31, 1999 (Unaudited)...................... 4
Condensed Consolidated Statement of Stockholders' Deficit for the Six Months
Ended December 31, 2000 (Unaudited).................................................. 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 2000 and the Six Months Ended December 31, 1999 (Unaudited).............. 6
Notes to Condensed Consolidated Financial Statements (Unaudited)...................... 7 - 8
ITEM 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 9 - 14
ITEM 3--Quantitative and Qualitative Disclosures About Market Risk.................... 14
PART II -- OTHER INFORMATION
ITEM 1 - Legal Proceedings............................................................ 14
ITEM 4 - Submission of Matters to a Vote of Security Holders.......................... 15
ITEM 6 - Exhibits and Reports on Form 8-K............................................. 15
Signatures............................................................................ 15
-2-
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Balance Sheet (Unaudited)
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December 31, 2000
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Assets:
Current:
Cash and cash equivalents $ 240,343
Accounts receivable, net of allowance for bad
debts of $1,897,605 5,651,187
Inventory 818,463
Prepaid expenses and other 224,733
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Total Current Assets 6,934,726
Property and equipment, net of accumulated
depreciation of $ 208,481 123,137
Customer lists, net of accumulated amortization
of $166,145 118,675
Other assets 82,923
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Total Assets $ 7,259,461
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Liabilities and Stockholders' Deficit
Current:
Notes and accounts payable to TecNet, Inc. $ 18,627,628
Accounts payable - trade 2,045,751
Accrued taxes and penalties 2,458,962
Accounts payable and accrued expenses 581,946
Payable to Premiere Communications, Inc. 583,152
Accrued legal 643,082
Convertible Debt 300,000
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Total Current Liabilities 25,240,521
Deferred rent 2,436
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Total Liabilities 25,242,957
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Commitments and Contingencies -
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Stockholders' Deficit
Series A Convertible Preferred Stock, $.001 par value, 1,000,000
shares authorized; 61,050 shares issued and outstanding 61
Common Stock, $.001 par value, 100,000,000 shares
authorized; 7,058,998 shares issued and outstanding 7,059
Additional paid-in-capital 17,061,318
Accumulated deficit (35,051,934)
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Total Stockholders' Deficit (17,983,496)
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Total Liabilities and Stockholders' Deficit $ 7,259,461
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See accompanying notes to Condensed Consolidated Financial Statements.
-3-
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statements of Loss (Unaudited)
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Three Months Ended December 31, Six Months Ended December 31,
2000 1999 2000 1999
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Net sales $ 14,496,022 $ 3,331,102 $ 23,370,675 $ 6,218,606
Cost of sales 12,480,798 2,885,572 20,279,294 5,057,552
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Gross profit 2,015,224 445,530 3,091,381 1,161,054
Selling, general and administrative
expenses 2,442,173 1,777,186 4,355,988 3,034,806
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Loss before other income
(expenses) (426,949) (1,331,656) (1,264,607) (1,873,752)
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Other income (expenses):
Interest expense (233,924) (104,049) (425,043) (198,552)
Other income 352,730 (28,600) 379,717 (17,508)
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Other income (expenses) 118,806 (132,649) ( 45,326) (216,060)
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Net loss $ (308,143) $ (1,464,305) $ (1,309,933) $ (2,089,812)
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Net loss per common share-basic
and diluted $ (0.04) $ (0.21) $ (0.19) $ (0.30)
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Weighted average number of common and
common equivalent shares outstanding
used in basic and diluted computations 7,058,998 7,058,998 7,058,998 7,058,998
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See accompanying notes to Condensed Consolidated Financial Statements.
-4-
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statement of Stockholders' Deficit (Unaudited)
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Six Months Ended December 31, 2000
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Preferred Stock Common Stock Total
--------------- ----------------- Additional Accumulated stockholders'
Shares Amount Shares Amount paid-in capital deficit deficit
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Balance, June 30, 2000 61,050 $ 61 7,058,998 $ 7,059 $ 17,031,318 $(33,742,001) $(16,703,563)
Contributed Capital 30,000 30,000
Net loss -- -- -- (1,309,933) (1,309,933)
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Balance, December 31, 2000 61,050 $ 61 7,058,998 $ 7,059 $ 17,061,318 $(35,051,934) $(17,983,496)
====================================================================================================================
See accompanying notes to Condensed Consolidated Financial Statements.
-5-
DigiTEC 2000, Inc.
and Subsidiary
Condensed Consolidated Statements of Cash Flows (Unaudited)
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Six Months Ended December 31,
2000 1999
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Cash flows from operating activities:
Net loss $ (1,309,933) $ (2,089,812)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debts - net 104,948 -
Depreciation 37,191 25,794
Amortization of customer lists 47,470 47,944
Deferred rent (3,570) (8,207)
Services provided by shareholder 30,000 82,195
(Increase) decrease in:
Accounts receivable (4,157,971) (1,328,781)
Inventory (395,175) (49,559)
Prepaid expenses and other (212,017) (73,004)
Increase (decrease) in:
Accounts payable and accrued expenses 2,947,504 1,540,506
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Net cash used in operating activities (2,911,553) (1,852,924)
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Cash flows from investing activities:
Capital expenditures (36,958) (38,819)
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Net cash used in investing activities (36,958) (38,819)
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Cash flows from financing activities:
Proceeds from issuance of TecNet notes 2,640,000 2,885,727
Repayment of notes payable (617,000) (10,000)
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Net cash provided by financing activities 2,023,000 2,875,727
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Net increase (decrease) in
cash and cash equivalents (925,511) 983,984
Cash and cash equivalents beginning of period 1,165,854 156,756
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Cash and cash equivalents end of period $ 240,343 $ 1,140,740
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See accompanying notes to Condensed Consolidated Financial Statements.
-6-
DigiTEC 2000, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. The Company and Significant Accounting Policies:
(a) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements,
which includes the accounts of DigiTEC 2000, Inc. (the "Company") for the
entire presented period and those of its wholly owned subsidiary, POS TEC
Systems, LLC ("POS TEC") from the date of acquisition have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements. Although the Company believes that the
disclosures included on the face of the interim consolidated financial
statements and in the accompanying footnotes are adequate to ensure that
the information presented is not misleading, certain key information and
disclosures have been condensed or otherwise omitted pursuant to the SEC
rules and regulations noted above. The financial information presented for
the three months and six months ended December 31, 2000 has not been
audited by independent auditors; however, in the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included in operating results for the six
month period ended December 31, 2000 and are not necessarily indicative of
the results that may be expected for a full fiscal year. All significant
intercompany transactions and balances have been eliminated in
consolidation.
The information outlined in this Form 10-QSB should be read in conjunction
with the audited consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2000.
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared on the basis that the Company is a going concern, which
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. However, because of the Company's
recurring losses from operations, accumulated deficit, negative working
capital and significant arrearages on trade payables, such realization of
assets and satisfaction of liabilities are subject to significant
uncertainty. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. Furthermore, the
Company's ability to continue as a going concern is highly dependent in the
near term on both the willingness and ability of TecNet, Inc. ("TecNet") to
finance the Company's telecommunications products and services and working
capital short-falls and the ability of the Company and TecNet to provide
reliable and competitive prepaid telephone cards. TecNet is a wholly owned
subsidiary of Telephone Electronics Corporation ("TEC") and is a holder of
approximately 21% of the Company's outstanding common stock. Additionally,
the Company's overall stability is highly dependent upon its ability to
raise working capital, to increase market share while developing existing
markets and improving overall customer retention, to achieve profitable
operations and to generate sufficient cash flows from operating and
financing activities to meet its obligations as they become due.
(b) Revenue Recognition
Sales of bundled prepaid calling cards from third-party providers for which
the Company acts solely as a distributor are recorded at the sales price of
the card and are recognized as revenue upon delivery to the Company's
customers. The related costs are simultaneously charged to the cost of
sales accounts upon such delivery.
Revenue from Point of Sale ("POS") sales by the Company's subsidiary POS
TEC, are recognized upon the initial activation by the retailer upon the
sale of the underlying prepaid calling card to the end user. The related
costs are simultaneously charged to the respective cost of sales accounts
upon the activation of the card.
-7-
DigiTEC 2000, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
(c) Deferred Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and any operating loss or tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date of such change. The Company
has established a full valuation allowance against its entire net deferred
tax asset due to uncertainty of realizing certain tax credits and loss
carryforwards.
(d) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended
by SFAS Nos. 137 and 138, which requires companies to recognize all
derivatives contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. Historically, the Company has not
entered into derivative contracts either to hedge existing risks or for
speculative purposes. The adoption of the statement, effective July 1,
2000, by the Company did not have a material effect on the Company's
consolidated results of operations or financial position.
In December 1999, Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements", was issued. SAB No. 101 summarizes
the Securities and Exchange Commission's ("SEC") staff view on applying
accounting principles generally accepted in the United States of America to
revenue recognition. The Company will implement SAB No. 101 prior to the
fourth quarter of fiscal year 2001. The Company believes that the adoption
of SAB No. 101 will not have a material impact on its revenue recognition.
(e) Segment Disclosures
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in the prior fiscal year. SFAS 131
established standards for the way that public business enterprises report
financial information on operating business segments. As the Company has
only one reportable business segment, prepaid telecommunications services,
the adoption and implementation of the disclosure and reporting
requirements did not significantly affect the presentation of the results
of operation or financial position of the Company.
(f) TecNet Borrowings
TecNet continues to provide consulting services, financing and
telecommunications support. During the six months ended December 31, 2000,
the Company borrowed $2,640,000 from TecNet and subsequent to December 31,
2000 and through February 12, 2001, the Company borrowed an additional
$152,000 from TecNet pursuant to 10% demand promissory notes bearing an
annual rate of interest of ten percent. As there is no formalized agreement
between the parties, there can be no assurance that TecNet will continue to
provide such services, to finance the current operations or to provide the
Company with bundled prepaid calling cards at comparable rates in future
periods.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements, including the notes thereto, and
other detailed information regarding the Company included elsewhere in this Form
10-QSB. Certain statements set forth below regarding matters that are not
historical facts, such as statements concerning the expansion and growth of the
Company, future growth in the demand for prepaid phone cards and the Company's
plans to become a sales, marketing and distribution company, are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Because such forward-looking statements include risks
and uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements.
The Company commenced operations under present management in 1995 to capitalize
upon opportunities in the prepaid phone card sector of the long distance
telecommunications market. The Company's prepaid phone cards provide consumers
with a competitive alternative to traditional calling cards and presubscribed
long distance telecommunications services. The Company's total revenues were
$13,733,119, $10,394,558 and $35,032,533, and its net losses were $4,499,526,
$13,566,927, and $11,996,759 for the fiscal years ended June 30, 2000, 1999 and
1998, respectively, after losses from discontinued operations of $0, $0 and
$813,178, respectively.
The Company's target markets include ethnic communities with substantial
international long distance calling requirements. Retail rates in the
international long distance market have declined in recent years and, as
competition in this segment of the telecommunications industry continues to
intensify, the Company believes that this downward trend in rates is likely to
continue. Although there can be no assurance, the Company believes that any
reduction in rates will be offset in whole or in part by efficiencies
attributable to the planned expansion of the Company's services as well as by
lower transmission costs per minute resulting from the Company's increased
volume of minutes.
In November of 1998 the Company initiated a strategy of focusing on the sales,
marketing and distribution of prepaid telephone calling cards. In connection
with the initiation of such strategy, TecNet began to provide significant
telecommunications services to the Company and to finance its current
operations. In February of 1999, the Company began to receive semi-monthly
operating cash inflows from TecNet through the issuance of 10% demand promissory
notes. Although TecNet has not made any formal demands for the repayment of the
advances, no formal written agreement exists between the Company and TecNet to
support TecNet's continuing deferral of such amounts. As of December 31, 2000
(and through the issuance date of this filing), the Company is totally dependent
on TecNet to provide consulting services, financing and telecommunications
support until it has achieved profitable operations. However, there can be no
assurance that TecNet can or will continue to provide such services, to finance
the current operations or to provide the Company with bundled prepaid calling
cards at comparable rates in future periods.
The unaudited Condensed Consolidated Financial Statements of the Company have
been prepared on the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities, except as otherwise
disclosed, in the normal course of business. However, because of the Company's
recurring losses from operations and significant arrearages on trade payables,
such realization of assets and satisfaction of liabilities is subject to
significant uncertainties. The unaudited Condensed Consolidated Financial
Statements do not include any adjustments that might result from the outcome of
these uncertainties. Furthermore, the Company's ability to continue as a going
concern is highly dependent in the near term on both the willingness and ability
of TecNet to finance the Company's telecommunications products and services and
working capital short-falls, and the ability of the Company and TecNet to
provide reliable and competitive prepaid telephone cards. Additionally, the
Company's stability is dependent upon its ability to raise capital, to develop
market share, to achieve profitable operations and to generate sufficient cash
flow from operations and financing sources to meet obligations.
The Company believes that future growth is dependent on the continued receipt of
operational and financial support from TecNet, providing customers with a high
quality prepaid product at a competitive price, and the ability to terminate the
-9-
related minutes on TecNet's network facilities at favorable rates. In addition,
the Company expects to produce favorable operating results in the future by
increasing its existing retail distribution market, to introduce new products to
its target market which are cost competitive on a per minute basis and to
capitalize upon economies of scale within existing markets. There can be no
assurance that the Company will continue to receive the support of TecNet or be
able to achieve favorable operating results in future periods.
Operations
Three Months Ended December 31, 2000 Compared to Three Months Ended December 31,
1999
Net Sales:
Sales, net of discount and returns, increased approximately $11.2 million (339%)
to approximately $14.5 million for the three month period ended December 31,
2000 as compared to approximately $3.3 million for the three month period ended
December 31, 1999. The overall increase is attributed to the Company's strategy
of focusing on the sales, marketing and distribution of prepaid telephone
calling cards within its target market and the termination of its unprofitable
proprietary branded facilities-based cards. By abandoning its prior strategy and
through the infusion of operating capital by TecNet, the Company has been able
to increase overall sales by focusing on the specific needs of its target market
and utilizing its cash flows for the development of existing and prospective
markets. The Company's revenues are based on both the dollar value and the total
number of cards sold, and the Company was able to significantly increase the
total number of prepaid cards sold during the three month period ended December
31, 2000 through its master distributor network. The Company has been able to
realize market growth by offering cost competitive prepaid calling cards
utilizing the favorable pricing obtained from TecNet on bundled products.
Cost of Sales:
The Company's cost of sales increased approximately $9.6 million (331%) to
approximately $12.5 million for the three month period ended December 31, 2000
as compared to approximately $2.9 million for the three month period ended
December 31, 1999. The overall cost of sales increase is directly related to the
increased volume of minutes associated with the increased sales of prepaid cards
discussed above, offset by the Company's ability to realize cost savings by not
paying facilities-based carrier charges, fixed cost circuit charges or private
line charges to route the customers' calls by reselling bundled prepaid products
obtained from TecNet (which are terminated on TecNet's network).
Gross Profit:
The Company realized a gross profit of approximately $2.0 million for the three
month period ended December 31, 2000 as compared to a gross profit of
approximately $446,000 for the three month period ended December 31, 1999. The
gross profit realized is directly related to the Company's use of bundled
prepaid cards purchased from TecNet which did not have the higher costs of
facilities-based cards, as well as the cost savings from not having to pay fixed
circuit costs and private line charges on activated cards, offset by the
increase in cost of sales due to factors noted above. In addition, the Company
was able to obtain more favorable short-term financing rates from TecNet in
connection with the purchase of the bundled prepaid cards, which helped to
facilitate the increase in overall net sales.
Selling, General and Administrative Expenses:
The Company's selling, general and administrative expenses increased
approximately $665,000 (33%) to approximately $2.4 million for the three month
period ended December 31, 2000 as compared to approximately $1.8 million for the
three month period ended December 31, 1999. The overall increase is related to
the combined effect of several factors. Factors include increased payroll and
employee benefit costs of approximately $115,000 and increased contract labor
costs of approximately $85,000 from the prior presented period, due primarily to
-10-
the commencement of POS TEC's operations in August of 1999, and an increase in
the total number of employees of the Company due to the increased volume of
sales realized during the current fiscal year. Additionally, the Company
experienced an increase in federal excise taxes of approximately $295,000,
increased shipping charges of approximately $90,000, and an increase of
approximately $80,000 in advertising and promotional expenses related to the
significant increase in overall sales of the Company's prepaid cards during the
quarter ended December 31, 2000.
Loss before other Income (Expenses):
The Company's loss before other income (expenses) of approximately $427,000 for
the three month period ended December 31, 2000 decreased approximately $905,000
(68%) as compared to the loss before other income (expense) of approximately
$1,332,000 for the three month period ended December 31, 1999. The overall
increase is directly related to the combination of factors noted above for net
sales, cost of sales and selling, general and administrative expenses.
Other Income (Expenses):
The Company's other income (expenses) changed approximately $251,000 (189%) to
approximately $119,000 income, net, for the three month period ended December
31, 2000 as compared to approximately $133,000 expense, net, for the three month
period ended December 31, 1999. The overall change is primarily related to the
increase in current period interest expense of approximately $130,000 related to
both the 10% demand promissory notes payable to TecNet and the outstanding
Convertible Debt, an increase in penalties and interest attributed to accrued
federal excise tax obligations of approximately $33,000, offset by an increase
in interest and other miscellaneous income of approximately $14,000, and a
one-time non-recurring credit to income of approximately $408,000 related to the
settlement of outstanding trade payables with a vendor during the quarter ended
December 31, 2000.
Net Loss:
The Company's net loss of approximately $308,000 for the three month period
ended December 31, 2000 decreased by approximately $1.2 million (81%) as
compared to the net loss of approximately $1,464,000 for the three month period
ended December 31, 1999. The overall increase is directly related to the factors
noted above for gross profit and other income (expenses).
Six Months Ended December 31, 2000 Compared to Six Months Ended December 31,
1999
Net Sales:
Sales, net of discount and returns, increased approximately $17.2 million (277%)
to approximately $23.4 million for the six month period ended December 31, 2000
as compared to approximately $6.2 million for the six month period ended
December 31, 1999. The overall increase is attributed to the Company's strategy
of focusing on the sales, marketing and distribution of prepaid telephone
calling cards within its target market and the termination of its unprofitable
proprietary branded facilities-based cards. By abandoning its prior strategy and
through the infusion of operating capital by TecNet, the Company has been able
to increase overall sales by focusing on the specific needs of its target market
and utilizing its cash flows for the development of existing and prospective
markets instead of purchasing costly network infrastructure. The Company's
revenues are now based on both the dollar value and the total number of cards
sold, and the Company was able to significantly increase the total number of
prepaid cards sold during the six month period ended December 31, 2000 through
its master distributor network. The Company has been able to realize market
growth by offering cost competitive prepaid calling cards utilizing the
favorable pricing obtained from TecNet on bundled products.
Cost of Sales:
The Company's cost of sales increased approximately $15.2 million (298%) to
approximately $20.3 million for the six month period ended December 31, 2000 as
-11-
compared to approximately $5.1 million for the six month period ended December
31, 1999. The overall cost of sales increase is directly related to the
increased volume of minutes associated with the increased sales of prepaid cards
discussed above, offset by the Company's ability to realize cost savings by not
paying facilities-based carrier charges, fixed cost circuit charges or private
line charges to route the customers' calls by reselling bundled prepaid products
obtained from TecNet (which are terminated on TecNet's network).
Gross Profit:
The Company realized a gross profit of approximately $3.1 million for the six
month period ended December 31, 2000 as compared to a gross profit of
approximately $1.2 million for the six month period ended December 31, 1999. The
gross profit realized is directly related to the Company's use of bundled
prepaid cards purchased from TecNet which did not have the higher costs of
facilities-based cards, as well as the cost savings from not having to pay fixed
circuit costs and private line charges on activated cards, offset by the
increase in cost of sales noted above. In addition, the Company was able to
obtain more favorable short-term financing rates from TecNet in connection with
the purchase of the bundled prepaid cards, which helped to facilitate the
increase in overall net sales.
Selling, General and Administrative Expenses:
The Company's selling, general and administrative expenses increased
approximately $1.3 million (43%) to approximately $4.4 million for the six month
period ended December 31, 2000 as compared to approximately $3.0 million for the
six month period ended December 31, 1999. The overall increase is related to the
combined effect of several factors. Factors include an increase of approximately
$27,000 in rent expense from the prior presented period due to the relocation of
POS TEC's operations in December 1999 and the termination of the Company's
subleasing arrangements with third parties during the current fiscal year. The
Company experienced an increase in payroll and employee benefit costs of
approximately $315,000 and an increase in contract labor costs of approximately
$140,000 due primarily to the commencement of POS TEC's operations in August of
1999, and an increase in the total number of employees of the Company due to the
increased volume of sales realized during the current fiscal year. Additionally,
the overall increase in federal excise taxes of approximately $678,000 and
increased shipping charges of approximately $145,000 is related to the
significant increase in the total number of prepaid cards sold during the
quarter ended December 31, 2000.
Loss before other Income (Expenses):
The Company's loss before other income (expenses) of approximately $1.3 million
for the six month period ended December 31, 2000 decreased approximately
$609,000 (32%) as compared to the loss before other income (expense) of
approximately $1.9 million for the six month period ended December 31, 1999. The
overall increase is directly related to the combination of factors noted above
for net sales, cost of sales and selling, general and administrative expenses.
Other Income (Expenses):
The Company's other expenses, net, decreased approximately $171,000 (79%) to
approximately $45,000 for the six month period ended December 31, 2000 as
compared to approximately $216,000 for the six month period ended December 31,
1999. The overall decrease is primarily related to the increase in current
period interest expense of approximately $227,000 related to both the 10% demand
promissory notes payable to TecNet and the outstanding Convertible Debt, and an
increase in penalties and interest attributed to accrued federal excise tax
obligations of approximately $96,000, offset by an increase in interest and
other miscellaneous income of approximately $94,000, and a one-time
non-recurring credit to income of approximately $408,000 related to the
settlement of outstanding trade payables with a vendor during the quarter ended
December 31, 2000.
Net Loss:
The Company's net loss of approximately $1.3 million for the six month period
ended December 31, 2000 decreased by approximately $780,000 (37%) as compared to
the net loss of approximately $2.1 million for the six month period ended
December 31, 1999. The overall increase is directly related to the factors noted
above for gross profit and other income (expenses).
-12-
Liquidity and Capital Resources
Financing Requirements
To date, the Company has funded its operations through: (i) two offerings, which
aggregated $1,000,000 of proceeds to the Company; (ii) the exercise of
approximately 2,280,000 warrants to purchase shares of the Common Stock of the
Company at $1.50 per share (the "$1.50 Warrants"), which aggregated
approximately $3,400,000 of proceeds to the Company; (iii) sale of 61,050 shares
of the Company's Series A Preferred Stock, which resulted in the elimination of
an accounts payable balance to Premiere totaling approximately $6,105,000; (iv)
sale of $1,200,000 principal amount of the Company's Notes with the $2.375
Warrants (as subsequently exchanged, the "10% Notes"); (v) issuance of a
$100,000 10% promissory note to an officer/director family member; and (vi) the
infusion of approximately $20 million of operating capital through the issuance
of 10% demand promissory notes and the extension of trade credit by TecNet. All
of the above offerings were exempt from registration under the applicable
Securities Act and have been utilized to fund the Company's current operations.
The Company has no existing bank lines of credit and has not established any
sources for such financing.
The Company's major components of cash flow are as follows:
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
2000 1999
----------- ---------
Net cash used in operating activities....... $(2,911,553) $(1,852,924)
Net cash used in investing activities....... (36,958) (38,819)
Net cash provided by financing activities.. 2,023,000 2,875,727
----------- ----------
Net change in cash and cash equivalents..... $ (925,511) $ 983,984
=========== ==========
The Company's net cash used in operating activities increased approximately $1.0
million (57%) to $(2,911,553) for the six months ended December 31, 2000 as
compared to $(1,852,924) for the six months ended December 31, 1999. The overall
increase in net cash used in operating activities for the six months ended
December 31, 2000 is related to the combined effect of a decrease in the net
loss of approximately $780,000, a decrease in the cash flow effect of accounts
receivable of approximately $2.7 million, an increase in the cash flow effect of
accounts payable and accrued expenses of approximately $1.4 million, a decrease
in the cash flow effect of inventory of approximately $346,000, and a decrease
in cash flow effect of prepaid expenses and other assets of approximately
$139,000.
To date, capital expenditures have not been material. Cash used in investing
activities for both the six months ended December 31, 2000 and 1999 related
solely to capital expenditures of approximately $37,000 for the six months ended
December 31, 2000 and approximately $39,000 for the six months ended December
31, 1999.
During the six months ended December 31, 2000, cash provided from financing
activities related primarily to the issuance of approximately $2.6 million in
promissory notes to TecNet, the repayment of approximately $600,000 in principal
to the holders of the $1.2 million promissory notes, and the repayment of
approximately $17,000 in principal on an outstanding loan with a family member
of an officer/director of the Company. During the six months ended December 31,
1999, cash provided from financing activities related primarily to the issuance
of $2.9 million of 10% demand promissory note to TecNet, and the repayment of
approximately $10,000 in principal on an outstanding loan with a family member
of an officer/director of the Company.
Since June 30, 1999, the Company has raised cash primarily through the issuance
of 10% demand promissory notes payable to TecNet. Since November of 1999, the
Company has been dependent on TecNet financing its shortfalls in cash flows and
current operations and the provisioning of telecommunication services by TecNet.
In addition, the Company has imposed a fifty-percent deferral of its two
executives' salaries. As the Company increases the sales of its bundled prepaid
products, its capital requirements are expected to progressively decline.
Although the Company has achieved significant improvements in cash flows from
operations, it does not expect to achieve positive cash flows from operations
until any earlier than the end of fiscal year 2001.
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The Company expects capital requirement needs of approximately $1.5 million
during the latter half fiscal 2001, before it begins to generate positive cash
flow by the end of fiscal year 2001. The foregoing amount includes further
expansion of the Company's prepaid products into additional cities and expanding
the Company's existing master distribution network. If cash needs prove to be
greater than contemplated, the Company will need to slow the expansion of its
prepaid product offerings to additional cities during fiscal year 2001. Also,
the Company expects to consider other financing opportunities during the 2001
fiscal year. The Company believes that with the continued support of TecNet,
internally generated cash from operations in fiscal 2001 will be sufficient to
fund its operations throughout the 2001 fiscal year. There can be no assurance
that the foregoing external sources of financing will be available to the
Company, or that the Company's projections for positive cash generation
commencing at the end of fiscal year 2001 will be realized.
The Company's ability to implement its new strategy to become a sales, marketing
and distribution company and to generate sufficient cash flow to begin to
address its obligations to TecNet and other suppliers will be dependent upon
continued financing by TecNet of cash flow needs and continued financing of
telecommunications services by TecNet. In addition, the Company will need to
raise long-term capital. There can be no assurance that such financing will
continue to be available to the Company from TecNet or that long-term financing
will be obtained, or if available, will be available in either a timely manner
or upon terms and conditions acceptable to the Company.
For the six months ended December 31, 2000, the Company experienced an operating
loss of approximately $1.3 million and used approximately $2.9 million of cash
in operating activities. The Company's cash position at December 31, 2000
approximated $240,000 and its working capital deficit approximated $18.3
million. The Company remains undercapitalized and to date has not been able to
finance its expansion as quickly as opportunities have arisen.
Inflation
Management does not believe that inflation has had, or is expected to have, any
significant adverse impact on the Company's financial condition or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold any derivatives or investments that are subject to
material market risk. The carrying values of financial instruments, including
cash and notes payable at December 31, 2000 approximates fair value as of such
date, due to the short-term maturity of such instruments and the fact that the
underlying interest rates approximates current market rates of interest.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
On June 28, 2000, Innovative Telecom Corporation ("Innovative") commenced an
arbitration proceeding before the American Arbitration Association in Boston,
Massachusetts asserting claims in the amount of $604,979 related to unpaid fees
and charges for services rendered in connection with the platform and switching
services performed on behalf of the Company until approximately July of 1999.
The Company asserted counterclaims against Innovative in the amount of $3.9
million based on lost profits and additional expenses incurred as the result of
the poor quality of Innovative's software and network switching services. A
settlement agreement was executed on November 21, 2000. As a result of the
agreement, the Company was not required to pay Innovative for any of the claims
asserted against the Company, and both parties agreed to discharge any and all
liabilities presently existing (as of the date of the settlement) arising from
such business association. Under the terms of the agreement, the Company wrote
off approximately $408,000 of trade payables due to Innovative to income for the
quarter ended December 31, 2000.
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Item 4. Submission of Matters to a Vote of Security Holders
(a) An Annual Meeting of the shareholders of the Company was held November 28,
2000 pursuant to proxy material filed pursuant to regulation 14A under the
Securities Exchange Act of 1934.
(b) The directors of the Company who were elected at the meeting are: (i) Frank
C. Magliato; (ii) Francis J. Calcagno; (iii) Cloyce C. Clark, Jr.; and (iv)
Lori Ann Perri.
(c) The matters voted on at the meeting and the balloting results are:
(1) Election of directors:
Name Votes For Votes Against or Withheld
---- --------- -------------------------
Frank C. Magliato 5,795,988 9,290
Francis J. Calcagno 5,795,988 9,290
Cloyce C. Clark, Jr. 5,795,988 9,290
Lori Ann Perri 5,795,988 9,290
(2) Approval of the appointment of Deloitte & Touche, LLP as the
independent auditors of the Company was ratified and approved by a
vote of 5,799,978 for and 5,300 against or withheld.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
Current Report on Form 8-K filed October 30, 2000 reporting under Item 5,
Other Events.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 12, 2001 DigiTEC 2000, Inc.
(Registrant)
By: /s/ Frank C. Magliato
-------------------------------------------
Frank C. Magliato
Chief Executive Officer, President,
Chairman of the Board of Directors and
Chief Financial Officer
February 12, 2001 By: /s/ Diego E. Roca
-------------------------------------------
Diego E. Roca
Senior Vice President, Chief
Accounting Officer, Treasurer and
Secretary
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