-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D1GvfGNIwS5Gm8uKLw2xzuyKbiUOhbK6bOZaDFla1tsBwgJsVunYZBhx8t8ZhueH acWqXfd7SOnfix1PMkHRoQ== 0001005477-99-005647.txt : 19991206 0001005477-99-005647.hdr.sgml : 19991206 ACCESSION NUMBER: 0001005477-99-005647 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITEC 2000 INC CENTRAL INDEX KEY: 0001048729 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 541287957 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23291 FILM NUMBER: 99768149 BUSINESS ADDRESS: STREET 1: 8 WEST 38TH ST CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2129448888 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 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 November 14, 1999 was 7,058,998. ================================================================================ DIGITEC 2000, INC. INDEX TO FORM 10-Q Page(s) ------- PART I -- FINANCIAL INFORMATION ITEM 1 -- Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1999 (unaudited) and the Year Ended June 30, 1999......................... 3 Condensed Consolidated Statements of Loss for the Three Months Ended September 30, 1999 and the Three Months Ended September 30, 1998 (unaudited) ......................................................... 4 Condensed Consolidated Statement of Stockholders' Deficit for the Three Months Ended September 30, 1999 (unaudited) ................... 5 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1999 and the Three Months Ended September 30, 1998 (unaudited) .................................................... 6 Notes to Condensed Consolidated Financial Statements (unaudited) .... 7 - 18 ITEM 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations ................................. 19 - 23 ITEM 3--Quantitative and Qualitative Disclosures About Market Risk .. 24 PART II -- OTHER INFORMATION ITEM 1 - Legal Proceedings .......................................... 25 ITEM 6 - Exhibits and Reports on Form 8-K ........................... 26 Signatures .......................................................... 27 This Form 10-Q is being filed to reflect the restatement of certain previously reported financial information as more fully described in Note 3 of the Notes to Condensed Consolidated Financial Statements contained in Part I. Portions of Part I - Item 1 - "Financial Statements" and Part I - Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain information relating to Cost of Sales, Selling, General and Administrative Expenses and Other Expenses for the period ending September 30, 1998 which are amended to reflect adjustments determined to be required during the preparation of the Company's year-end financial statements for the period ending June 30, 1999. Except as set forth in Note 3 to the Condensed Consolidated Financial Statements no other adjustments have been made to the reported financial information for the period ended September 30, 1998. 2 DigiTEC 2000, Inc. and Subsidiary Condensed Consolidated Balance Sheets (Unaudited) ================================================================================
September 30, 1999 June 30, 1999 (Unaudited) - -------------------------------------------------------------------------------------- Assets: Current: Cash and cash equivalents $ 217,279 $ 156,756 Due from TecNet, Inc. (Note 5(c)) -- 260,000 Accounts Receivable, net allowance for bad debts of $847,000 1,298,414 604,586 Inventory 495,217 58,818 Prepaid expenses and other 161,118 133,887 - -------------------------------------------------------------------------------------- Total current assets 2,172,028 1,214,047 Property and equipment, net of depreciation of $126,137 and $113,124 135,444 141,778 Customer lists, net of accumulated amortization of $656,805 and $583,611 (Notes 2(h) and 5) 188,365 261,559 Other assets 79,685 79,355 - -------------------------------------------------------------------------------------- $ 2,575,522 $ 1,696,739 ===================================================================================== Liabilities and Stockholders' Deficit Current: Payable to Tecnet, Inc. (Notes 4 and 5(c)) $ 8,482,744 $ 6,849,385 Accounts payable - Trade (Notes 4 and 8(b)) 2,068,620 2,133,887 Account payable and accrued expenses (Notes 4, 5(g), 6, 8(c) and 6(d)) 1,237,964 1,161,524 Payable to Premiere Communications, Inc. 583,152 583,152 Accrued legal 731,997 825,615 Accrued settlement expense (Note 6) 951,633 991,633 Notes payable - (Notes 5(d) and 6) 221,425 221,425 - -------------------------------------------------------------------------------------- Total current liabilities 14,277,535 12,766,621 Deferred rent (Notes 2(k)) 58,143 66,350 Convertible Debt (Note 5(b)) 1,200,000 1,200,000 - -------------------------------------------------------------------------------------- Total liabilities 15,535,678 14,032,971 - -------------------------------------------------------------------------------------- Commitments and contingencies (Notes 6) Stockholders' deficit Series A Callable at $100 per share, Convertible Preferred Stock, $.001 par value, 1,000,000 shares authorized; 61,050 shares issued and outstanding 61 61 Common Stock, $.001 par value, 100,000,000 shares authorized; 7,058,998 shares issued and outstanding 7,059 7,059 Additional paid-in-capital 16,941,318 16,899,123 Accumulated deficit (29,908,594) (29,242,475) - -------------------------------------------------------------------------------------- Total stockholders' deficit (Notes 8 and 9) (12,960,156) (12,336,232) - -------------------------------------------------------------------------------------- $ 2,575,522 $ 1,696,739 =====================================================================================
See accompanying notes to Condensed Consolidated Financial Statements. 3 DigiTEC 2000, Inc. and Subsidiary Condensed Consolidated Statements of Loss (Unaudited) ================================================================================ Three Months Ended September 30, 1999 1998 (restated) - -------------------------------------------------------------------------------- Net sales (Note 4) $ 2,887,504 $ 5,839,898 Cost of sales (Notes 3 and 4) 2,171,980 6,033,026 - -------------------------------------------------------------------------------- Gross profit (loss) 715,524 (193,128) Selling, general and administrative expenses (Notes 2(h), 3, 4, 9(b)) 1,298,232 1,776,315 - -------------------------------------------------------------------------------- Loss before other income (expenses) (582,708) (1,969,443) - -------------------------------------------------------------------------------- Other Income (expenses) Interest expense (Notes 4 and 5(a)) (94,503) (186,667) Other income 11,092 -- - -------------------------------------------------------------------------------- Other expenses (83,411) (186,667) - -------------------------------------------------------------------------------- Net loss (666,119) (2,156,110) ================================================================================ Net loss per common share-basic and diluted (Notes 4 and 8): (0.09) (0.32) ================================================================================ Weighted average number of common and common equivalent shares outstanding used in basic and diluted 7,058,998 6,819,172 ================================================================================ See accompanying notes to Condensed Consolidated Financial Statements. 4 DigiTEC 2000, Inc. and Subsidiary Condensed Consolidated Statement of Stockholders' Deficit (Unaudited)
Three Months Ended September 30, 1999 - -------------------------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Total --------------- ----------------- Additional Accumulated stockholders' Shares Amount Shares Amount paid-in capital deficit deficit - -------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1999 61,050 $ 61 7,058,998 $ 7,059 $ 16,899,123 $(29,242,475) $(12,336,232) For the three months ended September 30, 1999: Contributed capital (Note 5(c)) 42,195 42,195 Net loss -- -- -- (666,119) (666,119) - -------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1999 61,050 $ 61 7,058,998 $ 7,059 $ 16,941,318 $(29,908,594) $(12,960,156) ================================================================================================================================
See accompanying notes to Condensed Consolidated Financial Statements. 5 DigiTEC 2000, Inc. and Subsidiary Condensed Consolidated Statements of Cash Flows (Unaudited) ================================================================================ Three Months Ended September 30, 1999 1998 (restated) - -------------------------------------------------------------------------------- Cash flows from operating activities: Net loss (666,119) $(2,156,110) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 13,013 12,382 Amortization of customer lists 73,194 19,651 Deferred revenue -- 853,112 Deferred rent (8,207) -- Amortization of debt issue cost (Note 5(a)) -- 186,667 Services provided by shareholder (Note 5(c)) 42,195 -- (Increase) decrease in: Due from TecNet, Inc. 260,000 -- Accounts receivable (693,828) (1,155,527) Inventory (436,399) (60,910) Prepaid expenses and other (27,231) 43,478 Carrier deposits and other (330) -- Increase (decrease) in: Payable to Tecnet, Inc. 696,189 -- Accounts payable - trade (65,267) 933,245 Accounts payable and accrued expenses 76,440 262,795 Payable to Premiere Communications, Inc. -- -- Accrued Legal (93,618) (232,569) Accrued settlement (40,000) (34,819) - -------------------------------------------------------------------------------- Net cash used in operating activities (869,698) (1,328,605) - -------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (6,679) (2,243) - -------------------------------------------------------------------------------- Net cash used in investing activities (6,679) (2,243) - -------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of TecNet notes 937,170 -- Proceeds from issuance of promissory notes -- 1,200,000 Repayment of Prime Communications loan -- (25,574) Proceeds from exercise of warrants -- 67,125 - -------------------------------------------------------------------------------- Net cash provided by financing activities 937,170 1,241,551 - -------------------------------------------------------------------------------- Net increase (decrease) in cash 60,523 (89,297) Cash and cash equivalents beginning of period 156,756 108,722 - -------------------------------------------------------------------------------- Cash and cash equivalents end of period 217,279 19,425 ================================================================================ See accompanying notes to consolidated financial statements. 6 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies (a) Liquidity and Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements of DigiTEC 2000, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by general accepted accounting principles for complete financial statements. 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 three month period ended September 30, 1999 and are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 1999. The accompanying 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, except as otherwise disclosed, in the normal course of business. However, because of the Company's recurring losses from operations, significant arrearages on trade payables, such realization of assets and satisfaction of liabilities is subject to significant uncertainty. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Further, the Company's ability to continue as a going concern is highly dependent near term on the willingness and ability of TecNet, Inc. ("TecNet"), a wholly owned subsidiary of Telephone Electronic Corporation ("TEC"), a holder of approximately 21% of the Company's Common Stock, to finance the Company's telecommunications products and services and working capital short-falls and TecNet's and the Company's ability to provide reliable and competitive prepaid telephone cards. Additionally, the Company's stability is dependent upon its ability to raise capital, develop market share, achieve profitable operations, and to generate sufficient cash flow from operations and financing to meet obligations. In November, 1998, the Company, due to network and ensuing liquidity problems, initiated a strategy of focusing on sales, marketing and distribution in lieu of developing as a facilities-based carrier. In connection with the Company's initiation of this new strategy, TecNet began to provide significant telecommunications services, to finance operations and carry the unprocessed minutes on the Company's remaining facilities based Cards, as hereinafter defined. Total telecommunications services provided by TecNet amounted to approximately $4.4 million during the period November 1998 through April 1999. No written agreement with respect to the terms of payment for those services has been made to date. In February, 1999, the Company began to receive funds for operating cash flows on a semi-monthly basis from TecNet through the issuance of demand promissory notes. These funds were used to finance the Company's operations. As of September 30, 1999, the Company had borrowed $2,561,360 in the form of demand promissory notes from TecNet. Beginning May, 1999, the Company terminated its facilities based products and TecNet became the primary supplier of bundled cards to the Company. There can be no assurance that the Company will be able to continue to finance its operations and continue to obtain bundled cards at comparable rates through TecNet. Currently however, the Company continues to be dependent on TecNet providing financing and telelcommunications support to the Company. (b) Business DigiTEC 2000, Inc. and subsidiary (the "Company") is primarily engaged in the distribution, marketing and sales of prepaid telephone calling cards ("Cards"). It currently markets its telephone calling card products principally throughout the New York tri-state metropolitan area. 7 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) ================================================================================ 2. Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and from March 4, 1999 through June 30, 1999, its wholly owned subsidiary, POS TEC Systems, LLC ("POS TEC"). All significant intercompany balances and transactions have been eliminated. (See Notes 5 and 9.) (b) Use of Estimates In preparing the consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates. (c) Revenue Recognition Sales of bundled Cards from third-party providers for which the Company acts solely as a distributor are recorded at the sale price of the Card and are recognized upon delivery. The related cost of the Cards is simultaneously charged to cost of sales. Revenue from the sale of proprietary, branded, facilities-based prepaid phone Cards and the related costs of providing long distance services are recognized as the telephone calls are completed by end users. A monthly access fee of $.25 per Cards is recognized at the beginning of each month commencing thirty days after the first use of the Card. Unused calling time is recognized into income on the expiration date of the Card, twelve months after activation, subject to applicable state escheat laws. Amounts collected prior to the recording of revenue are classified as Deferred Revenue. As of April 30, 1999, the Company no longer provided facilities-based Cards. Revenue from Point of Sale ("POS") sales, in particular, sales by the Company's subsidiary POS TEC, are recognized upon activation of Cards. Activation occurs when the end-user purchases a card from a retailer. Related costs of the Cards is simultaneously charged to the cost of sales. (d) Allowance for Bad Debts The Company maintains an allowance for bad debts to provide for estimated future losses due to lack of collectibility of customers' accounts. These allowances are based on a detailed analysis of delinquencies, an assessment of overall risks, management's evaluation of probable losses, historical performance, and the credit grade of certain customers. Specific accounts are written off when the probability of loss has been established in amounts determined to cover such losses after considering the customer's financial condition. (See Note 3(c)) (e) Cash and Cash Equivalents The Company considers cash and cash equivalents as those highly liquid investments purchased with original maturities of three months or less. The risk associated with cash and cash equivalents in banks is considered low as management utilizes financial institutions with a credit quality of at least AA. 8 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) ================================================================================ (f) Inventory Inventory, consisting primarily of unactivated Cards and is stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. (g) Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets ranging from 3 to 5 years. (h) Customer Lists Customer lists were purchased from third parties during 1999 and 1998. These costs are amortized on a straight-line basis over the estimated useful lives of the customer bases acquired, which approximate three years. The Company periodically evaluates the recoverability of these intangibles based on several factors, including management's intention with respect to the acquired assets and the estimated future non-discounted cash flows expected to be generated by such assets. During the fourth quarter of fiscal 1999, management adjusted their valuations of several customer lists. (i) Deferred Rent The Company accounts for rent on a straight-line basis over the term of the leases. The effect of such adjustments for the fiscal quarter ended September 30, 1999 and the year ended June 30, 1999 was approximately $8,000 and $23,000, respectively. (j) Advertising Costs All advertising costs are expensed as incurred and included in selling, general and administrative expenses. 9 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) ================================================================================ (k) 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. Adequate reserves against deferred tax assets which may not be utilized have been provided. (l) Loss Per Share The computation of loss per common share is based on the weighted average number of common shares and common stock equivalents (convertible debt, convertible preferred shares, stock options and warrants), assumed to be outstanding during the year. The dilutive losses per share have not been presented since the effect of the options and warrants to purchase common stock and the convertible preferred stock were anti-dilutive. (m) Fair Value of Financial Instruments The carrying values of financial instruments, including cash and notes payable at September 30, 1999 and June 30, 1999 approximate fair value as of those dates because of the relatively short-term maturity of these instruments and because their interest rates approximate current market rates. (n) Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") no. 133, "Accounting for Derivative Instruments and Hedging Activities", 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 derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2000 to affect its financial statements. 3. Restatement During the course of the audit of the Company's Consolidated Financial Statements for the year ended June 30, 1999, the Company became aware of certain required adjustments, primarily the fair valuation of the warrants issued in connection with the $1.2 million financing during the quarter ended September 30, 1998 and their related amortization. In addition, the Company failed to record federal excise tax obligations. The Condensed Consolidated Financial Statements for the period ending September 30, 1998 are hereby restated to reflect the following adjustments as summarized below: Three Months ended September 30, 1998 Net income, as previously reported $(1,710,815) Adjustments-Increase (Decrease): Cost of sales 175,197 Selling, general and administrative expenses 83,431 Other Expenses 186,667 ----------- 445,295 Net income, as adjusted $(2,156,110) =========== Per share amounts Basic and diluted As previously reported (0.25) Adjustments (.07) ----------- As adjusted $ (0.32) =========== 4. Concentrations of Credit Risk The Company experiences risk concentration due to geographic and customer concentrations and a limited number of suppliers. 10 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) ================================================================================ (a) Geographic Concentration of Sales The Company currently distributes and markets its Cards primarily in the New York/New Jersey metropolitan area (the "Metro Area"). The Company sells Cards in 29 states, Puerto Rico, Mexico and the U.S. Virgin Islands. The Metro Area sales accounted for approximately 96% of the Company's total sales for the quarter ended September 30, 1999. No other areas accounted for more than 10% of the Company's sales. (b) Concentration of Customer Accounts The Company utilizes master distributors to distribute its prepaid cards. The master distributors and their respective percentages of sales and accounts receivables for period ending are: Distributor Sales Accounts receivables 1999 1999 September 30 September 30 ------------ -------------------- Phonecard Wholesalers 0% 16% TMG 23% 27% No other customer accounted for more than 10% of sales or outstanding accounts reveivable. (c) Concentration of Suppliers The Company purchased 86% and 34% of total purchases from TecNet in the first fiscal quarter ended September 30, 1999 and the fiscal year ended June 30, 1999, respectively. No other supplier accounted for more than 10% of purchases. 11 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) ================================================================================ 12 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) ================================================================================ 5. Related Party Transactions (a) During September, 1998, the Company issued $1,200,000 of 10% Six-month Notes (the "Notes") and warrants to purchase 600,000 shares of the Company's Common Stock at an exercise price of $2.375 per share (the "$2.375 Warrants"), subject to certain adjustments. The $2.375 Warrants were exercisable for five years from the date of issuance. The exercise price under the $2.375 Warrants were set at the closing price of the Common Stock on September 4, 1998. Nine investors participated in this offering, including an officer/director and his family, and a director, totaling $600,000. The issuance and sale of the Notes and $2.375 Warrants are exempt from registration under the Securities Act of 1933, as amended ("the "Securities Act") pursuant to Regulation D. The fair value of the $2.375 Warrants of $1,120,000 was recorded as debt issue costs and was amortized to interest expense over a six-month period beginning September, 1998. Amortization for the three months ending September 30, 1998 was $186,667. (b) On May 15, 1999 the Company exchanged the Notes for 10% Two-Year promissory notes convertible into shares of common stock at $1.10 a share (the "Convertible Debt") which provided for quarterly interest only payments for the first year and quarterly principal payments with interest in the second year. The $2.375 Warrants were concurrently exchanged for new warrants providing for the purchase of up to 1,800,000 shares of Common Stock at $1.10 (the "$1.10 Warrants"). The exchange of the Notes and $2.375 Warrants was exempt from registration under the Securities Act pursuant to Section 4 thereof. The exercise price of the Convertible Debt and $1.10 Warrants was based on the market value of the common stock as of the maturity date of the Notes. As the market price of the common stock was $4.3125 on May 15, 1999, the Company recorded a refinancing charge of $1,200,000 to reflect the intrinsic value of the Convertible Debt up to its gross proceeds. No fair value was allocated to the debt issue costs associated with the warrants. To date the Company has remained current with the terms and interest payments of the Convetible Debt. (c) In November 1998, as part of its transition to becoming a sales, marketing and distribution company, the Company reached a verbal agreement with TecNet to carry the remaining unprocessed minutes on the Company's facilities-based debit cards. In February 1999 the Company began funding its operating short fall through the sale of demand promissory notes to TecNet. The demand promissory notes bear interest at the rate of 10% per annum. The Company has no commitment from TecNet for continued financing. Subsequently, in the fourth quarter of fiscal 1999, the Company reached a verbal agreement with TecNet to sell their bundled cards, resulting in approximately $2,549,000 of revenue, and approximately $682,000 of gross margin, in the first fiscal quarter of fiscal 2000. Also during first quarter of fiscal 2000, the Company was provided a consultant through TecNet. Total services rendered amounted to approximately $42,000, which was accounted for as a capital contribution. The following presents the detail of the payble to TecNet at September 30, 1999: Demand notes payable $2,561,360 Payable for bundled phone cards 1,530,217 Payable for telecommunication services 4,391,167 ========== $8,482,744 ========== Included in demand notes payable as of June 30, 1999 is a note in the amount of $260,000 which was not funded until July 2, 1999. (d) In October, 1998, the Company borrowed an additional $100,000 from a member of officer/director's family. (e) In May 1999, the Board of Directors declared directors fee of $30,000 which is included in accrued expenses. 13 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) ================================================================================ 6. Litigation 14 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) ================================================================================ The Company and its Chief Executive Officer have been named as defendants in a legal action in Mississippi in the case entitled, Heritage Graphics, Inc. ("Heritage") vs. Telephone Electronics Corporation. The compliant alleges, among other things, that the defendants breached a contractual agreement and conspired to have Heritage go out of business. The compliant seeks damages of $500,000,000. The case is in discovery. Management believes such litigation will not have a material adverse effect on the financial condition or operations of the Company, and is defending the suit vigorously and asserting appropriate counterclaims. The case is scheduled for trial on September 5, 2000. On June 9, 1998, the Company was served with a Summons and Motion for Summary Judgment by Frontier in a case entitled Frontier Communications International, Inc. v. Digitec 2000, Inc. in the Supreme Court of the State of New York, County of Monroe 5390196 seeking judgment on a promissory note (the "Frontier Note") issued by the Company for $893,061 in connection with Frontier's termination of its Card division. The outstanding amount on the Frontier Note at the time was approximately $558,000, which was reflected in the accounts payable of the Company. On June 19, 1998, the Company paid approximately $56,000 on the Frontier Note, reducing the balance to approximately $502,000. On August 6, 1998, the Company negotiated a settlement with Frontier for $200,000. The Company satisfied the settlement in September 1998, and as a result, a security interest held by Frontier against certain assets of the Company was removed. This recovery of $358,000 was recorded as a reduction in costs of sales during 1999. The Company was served on March 30, 1999 in an action by Qwest Communications Corporation ("Qwest") entitled Qwest Communications Corporation v Digitec 2000, Inc., in the United States District Court for the Southern District of New York, seeking payment for approximately $1.37 million of telecommunication services provided to the Company by Qwest. In May 1999, they executed a settlement agreement pursuant to which the Company would pay in nine monthly installments commencing December, 1999 a total of $887,000 and TecNet would satisfy the remaining $490,000. The $887,000 is reflected in accrued settlement expenses as of June 30, 1999. The amount of the settlement was the same as the original amount of the cost of sales as TecNet charged the Company for the amount it assumed. In June, 1998, the Company was served in an action entitled Michael Bodian, as Chapter 11 Trustee of Communications Network Corp. a/k/a Conetco ("Conetco") v. Digitec 2000,Inc. f/k/a Promo Tel. Inc., Bankruptcy Case No. 96-B-53504 (PCB), Adv. Proc. No. 98-8621-A, pending in the United States Bankruptcy Court, Southern District of New York, wherein the plaintiff alleges that a preferential payment or fraudulent transfer in the amount of $150,800 was made to the Company by Magic Communications, Inc. ("Magic"), an affiliate of Conetco. Conetco, a reseller of long distance telecommunications services which it purchased from WorldCom Network Services ("WorldCom"), sold prepaid telephone debit cards through Magic which acted as its master sales agent. After WorldCom terminated Conetco's access to its long distance network because of Conetco's failure to pay its large outstanding balance, the debit cards became useless. Conetco alleges that a "refund" of $150,800 in the form of a credit was given by Magic to the Company as a result of cash refunds that the Company had given to its customers on account of returned debit cards. An answer asserting numerous defenses, including that the Company never received the "refund" in question, has been filed on behalf of the Company. On March 10, 1999, the Company was served with a Motion for Summary Judgement by Prime Communications (NY) Inc. ("Prime") in a case entitled Prime Communications (NY), Inc v Digitec 2000, Inc. in the Supreme Court of the State of New York, County of Nassau seeking judgement on a promissory note issued by the Company for $147,000, which note was issued in connection with the acquisition of certain assets from Prime. The outstanding amount on the note is approximately $121,425. The Company has countermoved against Prime alleging failure of Prime to deliver the contemplated consideration and seeks damages against Prime. Judgement on the motion was rendered in favor of the Company and Prime has sought a rehearing and commenced a pleniary action. The Company and Prime are currently negotiating a settlement of the matter. On March 18, 1999, in the Supreme Court of the State of New York for the County of Kings, the Weeks-Lerman Group, LLC ("Weeks-Lerman") brought suit against the Company alleging that it provided the Company with work, labor and services and/or sold and delivered goods to the Company in the amount of approximately $76,000. Weeks-Lerman seeks that amount together with interest from June 23, 1998, costs and disbursements. Presently, the Company is exploring settlement possibilities with Weeks-Lerman. The Company is not in a position to express an opinion as to the probable outcome of this matter. During March 1998, Vanity Fair Intimates, Inc. ("Vanity Fair") commenced an action entitled Vanity Fair Intimates, Inc. formerly known as Vanity Fair Mills, Inc. v. Promo Tel, Inc. also known as and/or trading as Digitec 2000, Inc., in the Civil Court of the City of New York for the County of New York, L&T Index No. 066018-98 seeking eviction and judgment against the Company for a total of $472,799. The matter was settled in September, 1998 for $208,916, to be paid in monthly installments of approximately $35,000 commencing in September 1998 and continuing through and including the month of February, 1999. However, due to its liquidity problems, the Company failed to make the payment due in October and November 1998 and Vanity Fair gave notice of its intention to enter a Confession of Judgment against the Company for $369,774, less amounts previously paid. The Company subsequently negotiated an alternative payment plan with Vanity Fair, and to date is in compliance with the revised payment terms. On October 20, 1999, Union Telecard Alliance LLC filed suit entitled Union Telecard Alliance LLC v Digitec 2000, Inc., TecNet Inc. in Supreme Court of the State of New York, New York County against the Company to recover $462,000 for Cards sold to the Company. The Company has not had sufficient time to review the complaint and accordingly is not in a position to express an opinion as to the probable outcome of this matter. 15 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) ================================================================================ 7. Regulatory Requirements The Company is currently evaluating various tax and other regulatory assessments to determine their applicability to the Company's operations. As these operations expand, the Company may become subject to additional tariffs and the federal and state regulatory charges. During first quarter of fiscal 2000 and the fourth quarter of fiscal 1999, the Company accrued approximately $125,000 and $462,000, respectively, relating to various taxes, penalties and interest related to unfiled tax returns. 8. Stockholders' Equity Series A Convertible Preferred Stock The 61,050 shares of $.001 par value voting Series A Convertible Preferred Stock was received on March 31, 1998 in lieu of outstanding trade payables (See Note 6). The Series A Preferred Stock is convertible into common stock at any time at Premiere's option and the Company has the right to require Premiere to convert the Series A Preferred Stock after March 31, 1999. The Certificate of Designation (the "Certificate of Designation") for the Series A Preferred Stock provides for certain voting, liquidation and registration rights and calculates the conversion by multiplying 61,050, the number of shares of Series A Preferred Stock issued in connection with the Investment Agreement by $100, the Investment Amount as defined in the Certificate of Designation and then dividing by $8.3463, the Conversion Price as defined in the Certificate of Designation, resulting in a total of 731,462 shares of common stock to be issued under the Investment Agreement subject to adjustment for certain subsequent securities issues. The Company may call the redemption of each share of Series A Preferred Stock at any time for $100 a share plus accrued dividends, if any. 16 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) ================================================================================ 17 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) ================================================================================ 9. Acquisition On March 4, 1999, the Company, through POS TEC, acquired the assets, property and business of TOTAL POS SOLUTIONS, LLC in return for 200,000 shares of Common Stock. The shares were valued at $1.50. per share based on the market price on February 24, 1999 the date of the Asset Purchase Agreement. The acquisition was recorded under purchase accounting with the customer list acquired valued by management at approximately $285,000, to be amortized over 3 years in addition to other miscellaneous assets. Operating results for the acquired company are included in the Company's financial statements since March 4, 1999. 10. Subsequent Events (a) Subsequent to September 30, 1999, the Company borrowed an additional $166,864 from TecNet pursuant to demand promissory notes bearing 10% interest per annum. The Company has purchased an additional $2,050,000 of bundled card financed by TecNet since September 30, 1999. TecNet continues as of the date of this report to finance telecommunication services and cash flow needs of the Company. There is no written agreement pursuant to which these funds and services are provided by TecNet other than demand promissory notes issued by the Company upon advances of funds by TecNet. There can be no assurances that such financing will be continued by TecNet. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements, including the notes thereto, and other detailed information regarding the Company included elsewhere in this Form 10-Q. 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. Factors that could cause actual results to differ materially include, but are not limited to, those discussed under "Business--Risk Factors". 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 $10,394,558 $35,032,533 and $26,027,909, and its net losses were $13,566,927, $11,996,759 and $3,549,514 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively, after losses from discontinued operations of $0, $813,178 and $1,069,261, 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. See "Business--Risk Factors--Competition." As previously reported, the Company initiated a strategy of becoming a facilities based carrier in April, 1998. To accomplish this strategy the Company migrated its brands to dedicated platforms. However, because the Company was unable to fund carrier deposits and prepay for telecommunications services, the Company was unable to secure sufficient network facilities and competitive rates, with the result that the Company was unable to market its new facility-based Cards as quickly as planned and was forced to accept returns of Cards due to the failure of the Cards to properly process calls. The liquidity difficulties of the Company were further aggrevated by the returns of Cards and loss of control of proceeds call minutes. Accordingly, in November, 1998, due to network and liquidity problems, including those caused by the termination and repricing of the Company's Cards by Premiere (see "Company History"), which prevented the Company from implementing its strategy of becoming a facilities-based carrier, the Company initiated its current strategy to become a sales, marketing and distribution company for significant providers of telecommunication services. In this connection, the Company has been advanced both significant telecommunications services and funds by TecNet to finance its operations during this transition period. The Company will continue to be dependent upon TecNet until it fully implements its new strategy and has profitable operations. TecNet is not obligated by any written agreement to continue advancing telecommunications services or funds to the Company. The 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, significant arrearages on trade payables, such realization of assets and satisfaction of liabilities is subject to significant uncertainties. The Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of these uncertainties. Further, the Company's ability to continue as a going concern is highly dependent near term on willingness and ability of TecNet to finance the Company's telecommunications products and services and working capital shortfalls and TecNet's and the Company's ability to provide reliable and competitive Cards. Additionally, the Company's stability is dependent up on its ability to raise capital, develop market share, achieve profitable operations and to generate sufficient cash flow from operations and financing sources to meet obligations. The Company believes that its further growth is dependent on continued financial support from TecNet and on its ability to continue to receive from TecNet facilities, competitive rates and quality service that allow the Company to (i) introduce LACs in many of the markets in which it currently distributes Cards or into which it expands, (ii) increase the retail distribution of its products, (iii) introduce additional products and services, (iv) continue to attract consumers with significant international long distance usage and (v) capitalize upon economies of scale. Recent monthly operations have achieved reductions in working capital short-falls and the Company believes that increased sales in the third quarter of fiscal 2000 will result in positive cash flow. The Company will continue to be dependent during this period on TecNet's providing financing to the Company. 19 Operations Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 Net Sales. Net Sales for the three months ended September 30, 1999 decreased by approximately $2,952,394 or 51% from $5,839,898 during the three months ended September 30, 1998 to $2,887,504 for the three months ended September 30, 1999. As previously reported, in November, 1998, the Company, due to network and ensuing liquidity problems, initiated a strategy of focusing on sales, marketing and distribution in lieu of developing as a facilities-based carrier. In order to implement this new strategy, the Company suspended sales of its proprietary branded facilities based cards in the third and fourth quarters of fiscal 1999. The Company reintroduced its cards in bundled programs in the fourth quarter of fiscal 1999 and is currently redeveloping market acceptance of its branded cards provided by TecNet. Cost of Sales. The Company's cost of sales for the three months ended September 30, 1999 decreased to $2,171,980 from $6,033,026, as amended for the three months ended September 30, 1998. The decrease of $3,861,046 or 64% was primarily related to the decrease in revenues that the Company experienced in the three months ended September 30, 1999 as compared to the first quarter in the prior year and the use of bundled card relieved the Company of the high costs of its facilities based cards. Gross Profit. For the three months ended September 30, 1999, the Company had a gross profit of $715,524 as compared to a gross loss of $193,128, as amended for the three months ended September 30, 1998. The gross profit of $715,524 compared to the gross loss of $193,128 is due primarily to the Company's use of bundled cards purchased from TecNet which did not have the high costs which the Company was previously forced to employ in connection with its facilities-base programs. In addition, the Company was able to obtain favorable credit terms from TecNet in connection with the Company's purchase of the bundled cards. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 1999 decreased to $1,298,232 from $1,776,315 for the three months ended September 30, 1998, as amended. This decrease of $478,083 or 27% is primarily related to: 1. Decreases in salaries, wages and personnel-related expenses of approximately $253,000, as the Company's employee base decreased from 80 employees on September 30, 1998 to 47, including 2 part-time employees, by September 30, 1999 in connection with the Company's transition to a sales and marketing organization. The decrease in employees was related to sales activities. 2. Decreases in rent, telephone, general office, consulting services and non-wage-related customer service expenses of approximately $272,000, which were related to the larger workforce. Loss before other Income (Expenses). The Company incurred a loss before other income (expenses) of $582,708 for the three months ended September 30, 1999, as compared to a loss of $1,969,443 for the three months ended September 30, 1998, as amended. The decrease in loss before other income (expense) is primarily due to a combination of the gross profit achieved by the Company, reduced selling, general and administrative expenses incurred during the quarter ended September 30, 1999. Other Income (Expenses). Other expenses decreased $103,256 from $186,667 for the quarter ended September 30 1998, as amended to $83,411 for the quarter ended September 30, 1999 or 56%. The decrease of $103,256 is primarily related to the amortization of debt issue costs during the quarter ended September 30, 1998. Net Loss. For the quarter ended September 30, 1999, the Company realized a net loss of $666,119, as compared to net loss of $2,156,110, as amended for the quarter ended September 30, 1998. The decrease in net loss is primarily due to a combination of the gross profit achieved by the Company, the decrease in selling, general and administrative expenses as discussed above and the decrease in other expenses. 20 Liquidity and Capital Resources To date, the Company has funded its operations through: (i) two offerings, which aggregated $1,000,000 of proceeds to the Company; (ii) the exercise of approximately 2,280,000 warrants to purchase shares of the Common Stock of the Company at $1.50 per share (the "$1.50 Warrants"), which aggregated approximately $3,400,000 of proceeds to the Company; (iii) sale of 61,050 shares of the Company's Series A Preferred Stock, which resulted in the elimination of an accounts payable balance to Premiere totaling approximately $6,105,000; (iv) sale of $1,200,000 principal amount of the Company's Notes with the $2.375 Warrants; (v) issuance of a $100,000 10% promissory note to an officer/director family member; (vi) exchange of the notes and warrants referred to in (iv); and the sale of $2,561,360 in demand promissory notes to TecNet, all in offerings exempt from registration under the Securities Act. The Company has no existing bank lines of credit and has not established any sources for such financing. During June 1998, the Company initiated discussions with several entities regarding short-term financing related to accounts receivable to provide funding for the immediate internal expansion of the business. During the quarters ended September 30, 1999 and 1998, the Company's major components of cash flow were as follows: QUARTER ENDED SEPTEMBER 30, ---------------------------- 1999 1998 ----------- ----------- Net cash used in operating activities .......... $ (869,968) $(1,328,605) Net cash used in investing activities .......... (6,679) (2,243) Net cash provided by financing activities ...... 937,170 1,241,551 ----------- ----------- Net decrease in cash ........................... $ 60,523 $ (89,297) =========== =========== Net cash used by operating activities during the quarter ended September 30, 1999 was $869,968 as compared to $1,328,605 for the quarter ended September 30, 1998. The decrease of approximately $459,000 was caused by a decrease in the net loss of approximately $1,490,000 for the quarter ended September 30, 1999 as compared to the quarter ended September 30, 1999 offset by decreases in deferred revenue due to the Company terminating its facilities based operations and the decrease in amortization of debt issue costs. 21 To date, capital expenditures have not been material. Cash used in investing activities for both the quarters ended September 30, 1999 and 1998 related solely to capital expenditures of approximately $7,000 for the quarter ended September 30, 1999 and $2,000 for the quarter ended September 30, 1998. Cash provided from financing activities of approximately $937,000 during the quarter ended September 30, 1999 consisted of net proceeds from the Company's sale of the notes to TecNet. During the quarter ended September 30, 1998, cash provided from financing activities of $1,200,000 related solely to the proceeds from the Company sale of the Company's 10% Notes. For the quarter ended September 30, 1999, the Company experienced a operating loss of approximately $666,000 and used approximately $870,000 cash in operating activities. The Company's cash position at September 30, 1999 approximated $217,000 and its working capital deficit approximated $12,106,000. Since June 30, 1998, the Company has raised cash through the issuance of $1,200,000 principal amount of its 10% Notes, which were subsequently exchanged for the Convertible Debt. The majority of this cash was previously used by the Company to make facility deposits and to prepay for facilities usage and to address existing obligations. Since November, 1998, the Company has been dependent upon TecNet financing its short-fall in cash flow to finance operations and the provision of telecommunications services by TecNet. In addition, the Company has imposed a fifty percent deferral of its two executive's salaries and subleased a portion of it headquarters to reduce the short fall in cash requirements. As the Company increasingly sells more of its Cards, its capital requirements are expected to progressively decline on a monthly basis until the Company begins to generate positive cash flow, which the Company believes will occur during the second half of the 2000 fiscal year. The Company expects capital requirements of approximately $2.0 million during fiscal 2000, before it begins to generate positive cash flow during the second half of fiscal 2000. The foregoing amount includes further expansion of the Company's LACs into additional cities and expanding the Company's distribution network. If cash needs prove to be greater than contemplated, the Company will need to slow its expansion of its LAC offerings to additional cities during 2000 to fund its operating shortfall during the second half of fiscal 1999 or until the Company becomes cash flow positive. Also, the Company expects to consider other financing opportunities during the 2000 fiscal year. The Company believes that with the continued support of TecNet, internally generated cash from operations in the latter half of fiscal 2000 will be sufficient to fund its operations throughout the 2000 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 in the second half of fiscal 2000 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. 22 Seasonality The business of the Company does not experience significant seasonality. Inflation Management does not believe that inflation has had, or is expected to have, any significant adverse impact on the Company's financial condition or results of operations. The Year 2000 Issue Many existing computer programs use only two digits to identify a year in their date fields. These programs were designed and developed without considering the impact of the upcoming change in the century (the "Year 2000 Issue"). If not corrected, many computer applications could fail or create erroneous results on or after January 1, 2000. During the last two fiscal quarters of 1999, the Company surveyed its internal hardware and software to determine operational performance in connection with the Year 2000 Issue. The survey has resulted in a determination that the Company's internal systems will operate properly on and after January 1, 2000. In this connection a number of upgrades supplied by manufacturers have been installed. In addition, the Company's newly installed accounting system (Solomon) has been confirmed by the manufacturer as Year 2000 Issue compliant. In addition, the Company has contacted its key supplier, TecNet, and other vendors to assure that they have addressed the Year 2000 Issue as regards continuing provision of services to the Company and received assurances that the Year 2000 Issue has been addressed. The Company is dependent on TecNet to provide a Year 2000 Issue compliant product and service. Management has received assurance that TecNet has addressed the issues and implemented a viable Year 2000 Issue contingency plan for all of the products and services utilized by the Company. None of the Company's Card activations are date-dependent. All activations and deactivations are based on payment and usage only, as a normal debit account works. As all of the Company's telecommunication services are provided bundled by TecNet, the Company and TecNet have reviewed the potential issues raised by the Year 2000 Issue for the multiple carriers used by TecNet and have developed alternate routing plans to maintain uninterupted service in the event one or more carriers experiences difficulties on or after January 1, 2000. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") no. 133, "Accounting for Derivative Instruments and Hedging Activities", 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 derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2000 to affect its financial statements. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not hold any derivatives or investments that are subject to market risk. The carrying values of financial instruments, including cash and notes payable at September 30, 1999 and June 30, 1999, respectively, approximate fair value as of those dates because of the relatively short-term maturity of these instruments which eliminates any potential market risk associated with such instruments. 24 PART 2--OTHER INFORMATION Item 1. Legal Proceedings In June of 1996, the Company became a co-defendant in a legal action in the Circuit Court for the First Judicial District of Hinds County in Jackson, Mississippi in the case entitled Heritage Graphics, Inc. ("Heritage"), et. al. v. Telephone Electronics Corporation, et. al. Civ. No. 251-96-000492. The named plaintiffs in the action are: Heritage Graphics, Inc.; Thomas L. Gould, Jr.; Suzanne G. Gould; and Raine Scott. The named defendants in the action are: Telephone Electronics Corporation d/b/a TECLink; TECLink, Inc.; the Company; Asynchronous Technologies, Inc.; Barbara Scott; Ronald D. Anderson, Sr. d/b/a Anderson Engineering; Walter Frank; and Frank C. Magliato. The second Amended Complaint filed in the action alleges a conspiracy on the part of all of the defendants to destroy Heritage and to eliminate it as a competitor in the Internet services provider market. The Company and others allegedly duped Heritage into surrendering its trade secrets, its services, its intellectual property, its expertise, etc. to the Company. The complaint's lesser allegations are that (i) defendants conspired to slander the business reputations of Heritage and Tom Gould; and (ii) TEC and the Company are jointly and severally liable to it for $268,245 worth of production work and consulting services provided over the September to December 1995 time period. The plaintiffs seek damages of $500 million. The Company believes that the plaintiffs' claims are without merit. Further, the Company believes that its counterclaims are sufficiently well grounded to offset any judgment entered against the Company. The Company intends to vigorously contest this case. The case is set for trial on September 5, 2000 in Jackson, Mississippi. During March 1998, Vanity Fair Intimates, Inc. ("Vanity Fair") commenced an action entitled Vanity Fair Intimates, Inc. formerly known as Vanity Fair Mills, Inc. v. Promo Tel, Inc. also known as and/or trading as Digitec 2000, Inc., in the Civil Court of the City of New York for the County of New York, L&T Index No. 066018-98 seeking eviction and judgment against the Company for a total of $472,799. The matter was settled in September, 1998 for $208,916, to be paid in monthly installments of approximately $35,000 commencing in September 1998 and continuing through and including the month of February, 1999. However, due to its liquidity problems, the Company failed to make the payment due in October and November 1998 and Vanity Fair gave notice of its intention to enter a Confession of Judgment against the Company for $369,774, less amounts previously paid. The Company subsequently negotiated an alternative payment plan with Vanity Fair, and to date is in compliance with the revised payment terms. In June, 1998, the Company was served in an action entitled Michael Bodian, as Chapter 11 Trustee of Communications Network Corp. a/k/a Conetco ("Conetco") v. Digitec 2000,Inc. f/k/a Promo Tel. Inc., Bankruptcy Case No. 96-B-53504 (PCB), Adv. Proc. No. 98-8621-A, pending in the United States Bankruptcy Court, Southern District of New York, wherein the plaintiff alleges that a preferential payment or fraudulent transfer in the amount of $150,800 was made to the Company by Magic Communications, Inc. ("Magic"), an affiliate of Conetco. Conetco, a reseller of long distance telecommunications services which it purchased from WorldCom Network Services ("WorldCom"), sold prepaid telephone debit cards through Magic which acted as its master sales agent. After WorldCom terminated Conetco's access to its long distance network because of Conetco's failure to pay its large outstanding balance, the debit cards became useless. Conetco alleges that a "refund" of $150,800 in the form of a credit was given by Magic to the Company as a result of cash refunds that the Company had given to its customers on account of returned debit cards. The Company believes that the plaintiffs' claims are without merit. The company intends to vigorously contest this case. An answer asserting numerous defenses, including that the Company never received the "refund" in question, has been filed on behalf of the Company, and a pre-trial conference is scheduled for November 2, 1999. The Company was served on March 30, 1999 in an action by Qwest Communications Corporation ("Qwest") entitled Qwest Communications Corporation v Digitec 2000, Inc., in the United States District Court for the Southern District of New York, seeking payment for approximately $1.37 million of telecommuncation services provided to the Company by Qwest. The parties have executed settlement agreements pursuant to which the Company would pay in nine monthly installments, commencing December, 1999, a total of $887,000 and TecNet would satisfy the remaining $490,000. On June 9, 1998, the Company was served with a Summons and Motion for Summary Judgment by Frontier in a case entitled Frontier Communications International, Inc. v. Digitec 2000, Inc. in the Supreme Court of the State of New York, County of Monroe 5390196 seeking judgment on a promissory note (the "Frontier Note") issued by the Company for $893,061 in connection with Frontier's termination of its Card division. The outstanding amount on the Frontier Note at that time was approximately $558,000, which was reflected in the accounts payable of the Company. On June 19, 1998, the Company paid approximately $56,000 on the Frontier Note, reducing the balance to approximately $502,000. On August 6, 1998, the Company negotiated a settlement with Frontier for $200,000. The Company satisfied the settlement in September 1998, and as a result, a security interest held by Frontier against certain assets of the Company was removed. On March 10, 1999, the Company was served with a Motion for Summary Judgement by Prime Communications (NY) Inc. ("Prime") in a case entitled Prime Communications (NY), Inc v Digitec 2000, Inc. in the Supreme Court of the State of New York, County of Nassau seeking judgement on a promissory note issued by the Company for $147,000, which note was issued in connection with the acquisition of certain assets from Prime. The outstanding amount on the note is approximately $121,425. The Company has countermoved against Prime alleging failure of Prime to deliver the contemplated consideration and seeks damages against Prime. Judgement on the motion was rendered in favor of the Company and Prime has sought a rehearing and commenced a pleniary action. The Company and Prime are currently negotiating a settlement of the matter. On March 18, 1999 the Company was served with a complaint by the Weeks-Lerman Group, LLC ("Weeks-Lerman") in a case entitled Weeks-Lerman Group LLC v Digitec 2000 Inc., in the Supreme Court of the State of New York for the County of Kings. Weeks-Lerman alleges that it provided the Company with work, labor and services and/or sold and delivered goods to the Company in the amount of $75,988.31. Weeks-Lerman seeks that amount together with interest from June 23, 1998, costs and disbursements. Presently, the Company is exploring settlement possibilities with Weeks-Lerman. The Company is not in a position to express an opinion as to the probable outcome of this matter. On October 20, 1999, Union Telecard Alliance LLC filed suit entitled Union Telecard Alliance LLC v Digitec 2000, Inc., TecNet Inc. in Supreme Court of the State of New York, New York County against the Company to recover $462,000 for Cards sold to the Company. The Company has not had sufficient time to review the complaint and accordingly is not in a position to express an opinion as to the probable outcome of this matter. 25 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27-Financial Data (b) Reports on Form 8-K None 26 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: December 2, 1999 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 December 2, 1999 By: /s/ Diego E. Roca ------------------------------------ Diego E. Roca Senior Vice President, Chief Accounting Officer, Treasurer and Secretary 27 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Consolidated Financial Statements for the quarter ended 9/30/98 for DigiTEC 2000, Inc. and is qualified in its entirety by reference to such financial statements. 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 217,279 0 1,298,414 0 495,217 2,172,028 135,444 0 2,575,522 14,277,535 0 0 61 7,059 0 2,575,522 2,887,504 2,887,504 2,171,980 3,470,212 83,411 0 0 (666,119) 0 (666,119) 0 0 0 (666,119) (.09) (.09)
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