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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, 2001
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)
99 Madison Avenue, Third Floor
New York, New York 10016
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 944-8888
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 31, 2001 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 Balance Sheet as of December 31, 2001 (Unaudited)........................ 3
Condensed Statements of Loss for the Three Months and Six
Months Ended December 31, 2001 and December 31, 2000 (Unaudited)................... 4
Condensed Statement of Stockholders' Deficit for the Six Months
Ended December 31, 2001 (Unaudited)................................................ 5
Condensed Statements of Cash Flows for the Six Months Ended
December 31, 2001 and 2000 (Unaudited)............................................. 6 - 7
Notes to Condensed Financial Statements (Unaudited)................................ 8 - 11
ITEM 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 12 - 16
ITEM 3--Quantitative and Qualitative Disclosures About Market Risk................. 16
Signatures......................................................................... 17
2
DigiTEC 2000, Inc.
Condensed Balance Sheet (Unaudited)
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December 31, 2001
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Assets:
Current:
Cash and cash equivalents $ 155,766
Accounts receivable, net of allowance for bad
debts of $2,092,683 2,868,767
Inventory, net of allowance for obsolescence of $30,037 718,336
Prepaid expenses and other current assets 38,902
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Total Current Assets 3,781,771
Property and equipment, net of accumulated
depreciation of $261,254 130,272
Other assets 156,335
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Total Assets $ 4,068,378
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Liabilities and Stockholders' Deficit
Current Liabilities:
Notes and accounts payable to TecNet, Inc. $ 17,968,327
Accounts payable - trade 1,058,991
Accrued taxes and penalties 2,714,135
Accounts payable and accrued expenses 741,420
Accrued legal expenses 829,663
Allowance for sales returns 1,293,663
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Total Current Liabilities 24,606,199
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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; $100 per share liquidation preference 61
Common Stock, $.001 par value, 100,000,000 shares
authorized; 7,058,998 shares issued and outstanding 7,059
Additional paid-in-capital 18,751,151
Accumulated deficit (39,296,092)
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Total Stockholders' Deficit (20,537,821)
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Total Liabilities and Stockholders' Deficit $ 4,068,378
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See accompanying notes to Condensed Financial Statements.
3
DigiTEC 2000, Inc.
Condensed Statements of Income (Loss) (Unaudited)
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Three Months Ended December 31, Six Months Ended December 31,
2001 2000 2001 2000
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Net sales $ 1,933,067 $14,496,022 $ 6,261,746 $23,370,675
Cost of sales, primarily TecNet 1,898,833 12,480,798 5,831,492 20,279,294
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Gross profit 34,234 2,015,224 430,254 3,091,381
Selling, general and
administrative expenses 804,053 2,442,173 2,191,747 4,355,988
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Loss before other income
(expenses) (769,819) (426,949) (1,761,493) (1,264,607)
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Other income (expenses):
Interest expense (285,376) (233,924) (543,532) (425,043)
Other income (expense) (54,231) 352,730 (8,284) 379,717
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Other income (expenses) 339,607 118,806 551,816 (45,326)
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Net loss $(1,109,426) $ (308,143) $(2,313,309) $(1,309,933)
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Net loss per common share-basic
and diluted $ (0.16) $ (0.04) $ (0.33) $ (0.19)
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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
=======================================================================================================
See accompanying notes to Condensed Financial Statements.
4
DigiTEC 2000, Inc.
and Subsidiary
Condensed Statement of Stockholders' Deficit (Unaudited)
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Six Months Ended December 31, 2001
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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, July 1, 2001 61,050 $ 61 7,058,998 $ 7,059 $ 17,152,818 $(36,982,783) $(19,822,845)
Contributed Capital 63,000 63,000
Disposition of subsidiary -- -- -- -- 1,535,333 -- 1,535,333
Net loss -- -- -- -- -- (2,313,309) (2,313,309)
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Balance, December 31, 2001 61,050 $ 61 7,058,998 $ 7,059 $ 18,751,151 $(39,296,092) $(20,537,821)
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See accompanying notes to Condensed Financial Statements.
5
DigiTEC 2000, Inc.
Condensed Statements of Cash Flows (Unaudited)
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Six Months Ended December 31,
2001 2000
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Cash flows from operating activities:
Net loss $(2,313,309) $(1,309,933)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debts - net 215,233 104,948
Sales returns (113,437) -
Provision for inventory obsolescence 36,248 -
Depreciation 52,812 37,191
Amortization of intangible assets 23,201 47,470
Deferred rent - (3,570)
Loss on disposal of assets 19,600 -
Services provided by shareholder 63,000 30,000
Changes in operating assets and liabilities;
net of the effects from acquisitions and
divestitures:
(Increase) decrease in:
Accounts receivable - net (27,255) (4,157,971)
Inventory (139,136) (395,175)
Prepaid expenses and other (99,201) (212,017)
Increase (decrease) in:
Accrued taxes and penalties (50,280) -
Accounts payable and accrued expenses
including TecNet 563,484 2,947,504
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Net cash used in operating activities (1,769,040) (2,911,553)
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Cash flows from investing activities:
Capital expenditures (115,205) (36,958)
Net cash sold in divestiture of subsidiary (110,635) -
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Net cash used in investing activities (225,840) (36,958)
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Cash flows from financing activities:
Proceeds from short term loans 1,144,031 -
Proceeds from TecNet notes - 2,640,000
Repayment of notes payable - (617,000)
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Net cash provided by financing activities 1,144,031 2,023,000
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Net decrease in cash and cash equivalents (850,849) (925,511)
Cash and cash equivalents beginning of period 1,006,615 1,165,854
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Cash and cash equivalents end of period $ 155,766 $ 240,343
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See accompanying notes to Condensed Financial Statements.
6
DigiTEC 2000, Inc.
Condensed Statements of Cash Flows (Continued)
Supplemental Cash Flow Information (Unaudited)
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Six Months Ended December 31,
2001 2000
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Detail of divestitures:
Current assets (other than cash) $ 719,570 $ -
Property and equipment - net of depreciation 205,383 -
Intangibles and other noncurrent assets 14,373 -
Current liabilities (1,673,867) -
Disposition of investment in subsidiary 623,906 -
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Net cash sold in divestitures of subsidiary $ (110,635) $ -
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Short-term notes payable to TecNet converted
into equity upon disposition of subsidiary $ 911,427 $ -
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See accompanying notes to Condensed Financial Statements.
7
DigiTEC 2000, Inc. and Subsidiary
Notes to Condensed Financial Statements (Unaudited)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
(a) ORGANIZATION OF BUSINESS
The Company was organized as a Nevada corporation in May 1987 under the
name Yacht Havens International Corp, which was subsequently changed in
July of 1995 to Promo Tel, Inc. ("Promo Tel-Nevada"). In August of 1995,
Promo Tel-Nevada merged with Promo Tel, Inc. ("Promo Tel-Delaware"), a
Delaware corporation, exchanging 1,333,334 shares of the Company's
previously unissued and unregistered common stock for all of the
outstanding shares of common stock of Promo Tel-Delaware. In October of
1996, the Company formally amended its Articles of Incorporation to change
the legal name of the Company to DigiTEC 2000, Inc. ("DigiTEC").
(b) NATURE OF OPERATIONS
DigiTEC is primarily engaged in the creation, distribution and marketing of
consumer prepaid telephone calling cards. The Company's prepaid cards
provide consumers with a competitive alternative to the traditional
pre-subscribed long-distance telecommunications services, credit/calling
cards and conventional coin and other operator assisted long-distance
services. It currently markets its prepaid products throughout the New
York/New Jersey metropolitan area. The Company sells its prepaid telephone
cards in approximately 100 cities in twenty-nine U.S. states.
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
repayment on such notes. As of December 31, 2001 (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.
(c) BASIS OF PRESENTATION
The financial statements 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
Condensed 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
presentation of such financial statements requires management to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates.
The financial information presented for both the three months and six
months ended December 31, 2001 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 both the three
month and six month period ended December 31, 2001 and are not necessarily
indicative of the results that may be expected for a full fiscal year. 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-KSB for the fiscal year
ended June 30, 2001.
8
DigiTEC 2000, Inc. and Subsidiary
Notes to Condensed Financial Statements (Unaudited)
The accompanying unaudited Condensed 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 and other payables, such
realization of assets and satisfaction of liabilities are subject to
significant uncertainty. The unaudited Condensed Financial Statements do
not include any adjustments that might result from the outcome of this
uncertainty.
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
shortfalls, and the ability of the Company and TecNet to provide reliable
and competitive prepaid telephone cards. 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. TecNet is a wholly owned
subsidiary of Telephone Electronics Corporation ("TEC") and is a holder of
approximately 21% of DigiTEC'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.
(d) PRINCIPLES OF CONSOLIDATION
The Condensed Financial Statements include the accounts of DigiTEC and all
of its subsidiaries (collectively the "Company") in which it owns a
majority interest. All significant intercompany transactions of
consolidated subsidiaries have been eliminated.
Investments in nonconsolidated companies in which the Company has a 20 to
50 percent interest or otherwise has the ability to exercise significant
influence over the operating and financial policies are accounted for using
the equity method. Under the equity method, original investments are
recorded at cost and adjusted by the Company's proportionate share of
undistributed earnings or losses of such companies. Investment ownership of
less than 20 percent is accounted for under the cost method.
As more fully described in footnote 1(j), the Company's Board of Directors
approved a series of transactions resulting in the reorganization and
merger of its subsidiary POS TEC Systems, LLC ("POS TEC"), with Everything
Prepaid, Inc. ("EP"), due to the Company's inability to provide the
requisite financing for POS TEC's current and future operations. As a
result of the reorganization and dilution of ownership, POS TEC is no
longer included within the consolidated financial statements of the Company
effective October 2, 2001.
(e) 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. These costs primarily include the charge
for related telecommunications services from TecNet which amounted to
approximately 85% of the sales price of the cards, net of discounts and the
printing costs of the underlying calling cards.
The Company provides appropriate provisions for prepaid phone card sales
returns in the same period as the related revenues.
(f) DEFERRED INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and any operating loss or tax credit carry
forwards. 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
9
DigiTEC 2000, Inc. and Subsidiary
Notes to Condensed Financial Statements (Unaudited)
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 carry forwards.
(g) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 is effective
for all business combinations initiated after June 30, 2001. SFAS No. 141
will require companies to recognize acquired identifiable intangible assets
separately from goodwill if control over the future economic benefits of
the asset results from contractual or other legal rights or the intangible
asset is capable of being separated or divided and sold, transferred,
licensed, rented or exchanged. The Standards will require the value of a
separately identifiable intangible asset meeting any of the above criteria
to be measured at fair value. SFAS No. 142 requires companies to cease
amortizing goodwill acquired through business combinations. However, SFAS
No. 142 requires that companies assess acquired goodwill for impairment
upon adoption of the statement, and at least annually, at the lowest
individual reporting unit level that can be distinguished, physically and
operationally, for internal reporting purposes, from the other activities,
operations, and assets of the entity, utilizing a two-step approach. The
Company expects to implement SFAS No. 142 effective July 1, 2002, and
believes that such adoption will not have a material effect on the
Company's results of operations or financial position.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations and costs associated with the retirement of
tangible long-lived assets. The Company is required to implement SFAS No.
143 on July 1, 2002, and has not yet determined the impact that this
statement will have on its results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" and establishes accounting and
reporting standards for long-lived assets to be disposed of by sale. This
standard applies to all long-lived assets, including discontinued
operations. SFAS No. 144 requires that those assets be measured at the
lower of carrying amount or fair value less cost to sell. SFAS No. 144 also
broadens the reporting of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity that will be eliminated from the ongoing operations of the entity in
a disposal transaction. The Company is required to implement SFAS No. 144
on July 1, 2002, and has not yet determined the impact that this statement
will have on its results of operations or financial position.
In September 2000, the Emerging Issues Task Force ("EITF") of the FASB
reached a final consensus on Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs". EITF 00-10 is effective for fiscal year 2001 and
addresses the income statement classification of amounts charged to
customers for shipping and handling, as well as costs incurred related to
shipping and handling. The Company classifies shipping and handling costs
billed to customers as revenues and costs incurred relating to shipping and
handling as costs of sales, which is in accordance with the consensus in
EITF 00-10.
(h) 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.
(i) RELATED PARTY TRANSACTIONS
TecNet continues to provide consulting services, financing and
telecommunications support to the Company on an on-going basis. As the
primary provider of bundled prepaid calling card services to the Company
and the sole carrier for carrying the traffic and processing the minutes
related to the prepaid calling cards, TecNet provided approximately $1.8
million and $4.0 million in telecommunications services for the three month
and six month period ended December 31, 2001. In addition, TecNet provided
10
DigiTEC 2000, Inc. and Subsidiary
Notes to Condensed Financial Statements (Unaudited)
approximately $32,000 and $63,000 of consulting services to the Company
during the three months and six months ended December 31, 2001, which have
been accounted for as a capital contributions.
However, 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.
(j) REORGANIZATION OF POS TEC
On July 3, 2001, the Board of Directors of DigiTEC decided to reorganize
POS TEC from an LLC to a Chapter C corporation to enable POS TEC to raise
additional capital from other investors. DigiTEC formed a new Nevada
corporation, Everything Prepaid, Inc. ("EP").
EP was organized with authorized capital of 10,000,000 of common stock and
1,000,000 of preferred stock with all shares having a $.01 par value. The
preferred stock may be issued with such relative rights, privileges and
qualifications as determined by EP's Board of Directors. Upon its
organization EP issued 1,000 shares of its common stock to DigiTEC for
$1,000. POS TEC was then merged into EP with DigiTEC receiving 99,000
shares of EP's common stock. At the time of the merger, DigiTEC and TecNet,
Inc., an indirect 21% owner of DigiTEC, each agreed to convert certain
intercompany debt and temporary loans of POS TEC assumed by EP in the
Merger into shares of EP's common stock at $1.00 per share resulting in the
issuance of 911,427 shares to TecNet, Inc. and 988,573 shares to DigiTEC.
Short term loans of approximately $1.1 million were issued by various
related parties to Everything Prepaid, Inc. during the quarter ended
September 30, 2001, until such time as the reorganization of
POSTEC/Everything Prepaid, Inc. could be finalized. The $1.1 million in
short term loans were subsequently converted into common stock of
Everything Prepaid, Inc., as further discussed below.
On September 27, 2001 and after unsuccessful attempts to raise additional
capital for EP, the Company concluded that it was unable to assist or
participate in the further necessary financing of EP and approved a
transaction in which an aggregate of 8,000,000 shares of EP's common stock
were sold on October 2, 2001 at $.25 per share for total proceeds of
$2,000,000. The purchasers of this stock include: (i) Telephone Electronics
Corporation (TEC), a principal shareholder of DigiTEC; (ii) persons who are
principals or associates of TEC or TecNet, Inc.; (iii) affiliates of EP;
and (iv) the President of DigiTEC. As a result of the additional $2 million
capitalization, the Company's ownership percentage in EP was reduced to
approximately 11%, and therefore EP has been accounted for as an investee
and no longer included within the consolidated financial statements of the
Company effective October 2, 2001.
As a result of the transactions noted above, the Company recognized a
capital contribution of approximately $1.5 million, primarily related to
the conversion of certain temporary loans due to TecNet and the infusion of
cash by TEC, TecNet and other related/non-related investors for equity
ownership in EP.
(k) SUBSEQUENT EVENTS
TecNet continues to provide consulting services, financing and
telecommunications support. The Company has continued to be financed
through advances from its joint customer deposit account with TecNet, Inc.
with the acquiescence of TecNet, Inc. 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.
On January 11, 2002, the Company's Board of Directors accepted an informal
verbal offer from TecNet and/or a group of its associates to loan up to
$1,200,000 to the Company. The terms of the proposed loan call for the
payment of interest only for 12 months with amortization of the loan over
the following 36 months to be secured by the Company's accounts receivable
and such other terms as are negotiated between the parties. Pending
completion of the loan, the Company will have to rely upon additional
advances from the joint customer deposit account.
11
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 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 target markets include ethnic
communities with substantial international long distance calling requirements.
The Company's prepaid phone cards provide consumers with a competitive
alternative to traditional calling cards and presubscribed long distance
telecommunications services. Retail rates in the international long distance
market have declined in recent years and, as competition in this segment of the
telecommunications industry continues to intensify, the Company believes that
this downward trend in rates is likely to continue. Although there can be no
assurance, the Company believes that any reduction in rates will be offset in
whole or in part by efficiencies attributable to the planned expansion of the
Company's services as well as by lower transmission costs per minute resulting
from the Company's increased volume of minutes. In addition, the Company expects
to produce favorable operating results in the future by increasing it's 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.
The Company's total revenues were approximately $50,309,000, $13,733,000, and
$10,395,000, and its net losses were approximately $3,241,000, $4,500,000, and
$13,567,000 for the fiscal years ended June 30, 2001, 2000 and 1999,
respectively.
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 obtain
competitive bundled prepaid cards from TecNet on favorable terms. However, 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, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2000
NET SALES:
Sales, net of discount and returns, decreased approximately $12.6 million (87%)
to approximately $1.9 million for the three month period ended December 31, 2001
as compared to approximately $14.5 million for the three month period ended
December 31, 2000. The Company attributes the overall decrease in net sales of
its prepaid calling card products to increases in the per-minute rates on its
prepaid calling cards. The Company expects to increase overall sales in future
periods by working directly with TecNet to introduce new products which are cost
competitive and which will focus on the specific needs of its target markets. In
addition, the Company expects to utilize its future cash flows from operations
for the expansion of its existing master distributor network and other
distribution channels and the development of prospective markets for its prepaid
products.
12
COST OF SALES:
The Company's cost of sales decreased approximately $10.6 million (85%) to
approximately $1.9 million for the three month period ended December 31, 2001 as
compared to approximately $12.5 million for the three month period ended
December 31, 2000. The overall cost of sales decrease is directly related to the
decreased volume of prepaid cards sales discussed above.
GROSS PROFIT:
The Company realized a gross profit of approximately $34,000 for the three month
period ended December 31, 2001 as compared to a gross profit of approximately
$2.0 million for the three month period ended December 31, 2000. The gross
profit decline is due to the overall decrease in the volume of prepaid card
sales noted above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
The Company's selling, general and administrative expenses decreased
approximately $1.6 million (67%) to approximately $804,000 for the three month
period ended December 31, 2001 as compared to approximately $2.4 million for the
three month period ended December 31, 2000. The overall decrease is related to
the combined effect of several factors. Factors directly related to the
significant decrease in overall sales of the Company's prepaid cards during the
quarter ended December 31, 2001 include an overall decrease in federal excise
taxes of approximately $520,000, decreased shipping and fulfillment charges of
approximately $110,000, a decrease of approximately $92,000 in advertising and
promotional expenses, a decrease in commissions expense of approximately
$17,000, offset by an increase in telephone related expenses of approximately
$27,000. In addition, the Company experienced a decrease in payroll and employee
benefit costs of approximately $243,000 and a decrease in contract labor cost of
approximately $91,000 due primarily to a decrease in the total number of
employees of the Company attributable to the reduced sales volumes noted above.
Other contributing factors include decreased rent expenses of approximately
$92,000, an overall decrease in office and office related expenses of
approximately $19,000, a decrease in insurance expense of approximately $20,000,
decreased amortization charges of approximately $9,000, a decrease in other
miscellaneous expenditures of approximately $7,000, an increase in software
development expense of approximately $36,000, a decrease in travel and business
related expenditures of approximately $16,000 and an overall decrease in repair
and maintenance expenses of approximately $6,000. In addition, the Company's
professional services expenses decreased approximately $56,000, and overall
shareholder relations and director's fees decreased approximately $26,000 from
the prior presented period.
LOSS BEFORE OTHER INCOME (EXPENSES):
The Company's loss before other income (expenses) of approximately $770,000 for
the three month period ended December 31, 2001 increased approximately $343,000
(80%) as compared to the loss before other income (expenses) of approximately
$427,000 for the three month period ended December 31, 2000. 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 $459,000 (386%) to
approximately $340,000 (expense, net), for the three month period ended December
31, 2001 as compared to approximately $119,000 (income, net), for the three
month period ended December 31, 2000. The overall change is primarily due to
combined effect of several factors. Current period interest expense related to
the 10% demand promissory notes payable to TecNet increased approximately
$51,000, current period penalties and interest attributed to accrued federal
excise tax obligations decreased approximately $39,000, and current period
interest income decreased approximately $17,000. Additionally, current period
miscellaneous income decreased approximately $430,000 primarily related to a
one-time non-recurring credit to income of approximately $408,000 recorded
during the quarter ended December 31, 2000 related to the settlement of
outstanding trade payables with a vendor.
13
NET LOSS:
The Company's net loss of approximately $1.1 million for the three month period
ended December 31, 2001 increased by approximately $801,000 (260%) as compared
to the net loss of approximately $308,000 for the three month period ended
December 31, 2000. The overall increase is directly related to the factors noted
above for gross profit and other income (expenses).
SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2000
NET SALES:
Sales, net of discount and returns, decreased approximately $17.1 million (73%)
to approximately $6.3 million for the six month period ended December 31, 2001
as compared to approximately $23.4 million for the six month period ended
December 31, 2000. The Company attributes the overall decrease in net sales of
its prepaid calling card products to increases in the per-minute rates on its
prepaid calling cards. The Company expects to increase overall sales in future
periods by working directly with TecNet to introduce new products which are cost
competitive and which will focus on the specific needs of its target markets. In
addition, the Company expects to utilize its future cash flows from operations
for the expansion of its existing master distributor network and other
distribution channels and the development of prospective markets for its prepaid
products.
COST OF SALES:
The Company's cost of sales decreased approximately $14.4 million (71%) to
approximately $5.8 million for the six month period ended December 31, 2001 as
compared to approximately $20.3 million for the six month period ended December
31, 2000. The overall cost of sales decrease is directly related to the
decreased volume of prepaid cards sales discussed above.
GROSS PROFIT:
The Company realized a gross profit of approximately $430,000 for the six month
period ended December 31, 2001 as compared to a gross profit of approximately
$3.1 million for the six month period ended December 31, 2000. The gross profit
decline is due to the overall decrease in the volume of prepaid card sales noted
above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
The Company's selling, general and administrative expenses decreased
approximately $2.2 million (50%) to approximately $2.2 million for the six month
period ended December 31, 2001 as compared to approximately $4.4 million for the
six month period ended December 31, 2000. The overall decrease is related to the
combined effect of several factors. Factors directly related to the significant
decrease in overall sales of the Company's prepaid cards during the quarter
ended December 31, 2001 include an overall decrease in federal excise taxes of
approximately $769,000, decreased shipping and fulfillment charges of
approximately $155,000, a decrease of approximately $181,000 in advertising and
promotional expenses, a decrease in commissions expense of approximately
$19,000, offset by an increase in telephone related expenses of approximately
$41,000. In addition, the Company experienced a decrease in payroll and employee
benefit costs of approximately $527,000 and a decrease in contract labor cost of
approximately $151,000 due primarily to a decrease in the total number of
employees of the Company attributable to the reduced sales volumes noted above.
Other contributing factors include decreased rent expenses of approximately
$141,000, an overall decrease in office and office related expenses of
approximately $52,000, a decrease in insurance expense of approximately $17,000,
decreased amortization charges of approximately $44,000, an increase in other
miscellaneous expenditures of approximately $27,000, an increase in software
development expense of approximately $33,000, a decrease in travel and business
related expenditures of approximately $32,000 and an overall increase in repair
and maintenance expenses of approximately $21,000. In addition, the Company's
professional services expenses decreased approximately $138,000, and overall
shareholder relations and director's fees decreased approximately $27,000 from
the prior presented period.
LOSS BEFORE OTHER INCOME (EXPENSES):
The Company's loss before other income (expenses) of approximately $1.8 million
for the six month period ended December 31, 2001 increased approximately
$497,000 (39%) as compared to the loss before other income (expenses) of
14
approximately $1.3 million for the six month period ended December 31, 2000. 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 $506,000 (1117%) to
approximately $552,000 (expense, net), for the six month period ended December
31, 2001 as compared to approximately $45,000 (expense, net), for the six month
period ended December 31, 2000. The overall change is primarily due to combined
effect of several factors. Current period interest expense related to the 10%
demand promissory notes payable to TecNet increased approximately $118,000,
current period penalties and interest attributed to accrued federal excise tax
obligations decreased approximately $143,000, and current period interest income
decreased approximately $17,000. Additionally, current period miscellaneous
income decreased approximately $514,000 primarily related to a one-time
non-recurring credit to income of approximately $408,000 recorded during the six
months ended December 31, 2000 related to the settlement of outstanding trade
payables with a vendor.
NET LOSS:
The Company's net loss of approximately $2.3 million for the six month period
ended December 31, 2001 increased by approximately $1.0 million (77%) as
compared to the net loss of approximately $1.3 million for the six month period
ended December 31, 2000. The overall increase is directly related to the factors
noted above for gross profit and other income (expenses).
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 $18.6 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,
------------------------------
2001 2000
------------ -----------
Net cash used in operating activities......... $(1,769,040) $(2,911,553)
Net cash used in investing activities......... (225,840) (36,958)
Net cash provided by financing activities..... 1,144,031 2,023,000
----------- ----------
Net change in cash and cash equivalents....... $ (850,849) $ (925,511)
=========== ==========
The Company's net cash used in operating activities decreased approximately $1.1
million (40%) to $(1,769,040) for the six months ended December 31, 2001 as
compared to $(2,911,553) for the six months ended December 31, 2000. The overall
decrease in net cash used in operating activities for the six months ended
December 31, 2001 is related to the combined effect of several key factors.
These include an increase in the net provision for bad debt of approximately
$110,000, a decrease in the allowance for sales returns of approximately
$113,000, an increase in the collection velocity of accounts receivable of
approximately $4.1 million, an increase in the net loss of approximately $1.0
million, a decrease in the cash flow effect of accounts payable and other
accrued expenses of approximately $2.4 million, a decrease in the cash flow
effect of accrued taxes and penalties of approximately $50,000, a decrease in
the cash flow effect of prepaid expenses and other assets of approximately
$113,000 and a decrease in the cash flow effect of inventory of approximately
$256,000.
15
Cash used in investing activities for the six months ended December 31, 2001 is
related to capital expenditures of approximately $115,000 and approximately
$111,000 net cash sold in the divestiture of the Company's subsidiary. Cash used
in investing activities for the six months ended December 31, 2000 is related to
capital expenditures of approximately $37,000.
During the six months ended December 31, 2001, cash provided from financing
activities related solely to the issuance of approximately $1.1 million in
short-term debt to a related party of the Company. During the six months ended
December 31, 2000, cash provided from financing activities related primarily to
the issuance of approximately $2.6 million of 10% demand promissory note to
TecNet, the repayment of approximately $17,000 in principal on an outstanding
loan with a family member of an officer/director of the Company, and the
repayment of approximately $600,000 in principal to the holders of the $1.2
million promissory notes.
The Company expects capital requirements of approximately $1.0 million during
fiscal 2002. The foregoing amount includes the necessary capital to further the
expansion of the Company's prepaid products into additional cities and expanding
the Company's existing master distribution network. As the Company increases the
sales of its bundled prepaid products, its capital requirements are expected to
progressively decline. 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 2002.
Since June 30, 1999, the Company has raised cash primarily through the issuance
of 10% demand promissory notes payable to TecNet. Since February 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.
The Company expects to consider other financing opportunities during the 2002
fiscal year. The Company believes that with the continued support of TecNet,
internally generated cash from operations in fiscal 2002 will be sufficient to
fund its operations throughout the 2002 fiscal year. Although the Company has
achieved significant improvements in cash flows from operations, it does not
expect to achieve positive cash flows from operations in the foreseeable future.
Additionally, 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 internal cash generation from current operations will be realized.
The Company's ability to expand its operations as 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, 2001, the Company experienced an operating
loss of approximately $778,000 and used approximately $1.8 million of cash in
operating activities. The Company's cash position at December 31, 2001
approximated $156,000 and its working capital deficit approximated $20.8
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, 2001 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.
16
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 14, 2002 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 14, 2002 By: /s/ Diego E. Roca
--------------------------------
Diego E. Roca
Senior Vice President, Chief
Accounting Officer, Treasurer,
Secretary and Director
17