10QSB 1 f10q_march2001.txt FORM 10-QSB - 3/31/01 ================================================================================ 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 March 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 8 West 38th Street, Fifth Floor New York, New York 10018 (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 March 31, 2001 was 7,058,998. ================================================================================
DigiTEC 2000, INC. INDEX TO FORM 10-QSB Page(s) ------- PART I -- FINANCIAL INFORMATION ITEM 1 -- Financial Statements Condensed Consolidated Balance Sheet as of March 31, 2001 (Unaudited).............. 3 Condensed Consolidated Statements of Loss for the Three Months and Nine Months Ended March 31, 2001 and March 31, 2000 (Unaudited)......................... 4 Condensed Consolidated Statement of Stockholders' Deficit for the Nine Months Ended March 31, 2001 (Unaudited)................................................... 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2001 and the Nine Months Ended March 31, 2000 (Unaudited)................ 6 Notes to Condensed Consolidated Financial Statements (Unaudited)................... 7 - 8 ITEM 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 9 - 13 ITEM 3--Quantitative and Qualitative Disclosures About Market Risk................. 13 Signatures......................................................................... 14
-2- DigiTEC 2000, Inc. and Subsidiary Condensed Consolidated Balance Sheet (Unaudited) ================================================================================ March 31, 2001 -------------------------------------------------------------------------------- Assets: Current: Cash and cash equivalents $ 943,417 Accounts receivable, net of allowance for bad debts of $1,754,546 6,297,392 Inventory 900,341 Prepaid expenses and other 59,266 -------------------------------------------------------------------------------- Total Current Assets 8,200,416 Property and equipment, net of accumulated depreciation of $ 226,668 184,547 Customer lists, net of accumulated amortization Of $ 189,880 94,940 Other assets 271,430 -------------------------------------------------------------------------------- Total Assets $ 8,751,333 ================================================================================ Liabilities and Stockholders' Deficit Current: Notes and accounts payable to TecNet, Inc. $ 21,256,675 Accounts payable - trade 1,062,394 Accrued taxes and penalties 3,143,393 Accounts payable and accrued expenses 650,404 Accrued legal expenses 720,112 -------------------------------------------------------------------------------- Total Liabilities 26,832,978 -------------------------------------------------------------------------------- Commitments and Contingencies - -------------------------------------------------------------------------------- Stockholders' Deficit Series A Convertible Preferred Stock, $.001 par value, 1,000,000 shares authorized; 61,050 shares issued and outstanding 61 Common Stock, $.001 par value, 100,000,000 shares authorized; 7,058,998 shares issued and outstanding 7,059 Additional paid-in-capital 17,121,318 Accumulated deficit (35,210,083) -------------------------------------------------------------------------------- Total Stockholders' Deficit (18,081,645) -------------------------------------------------------------------------------- Total Liabilities and Stockholders' Deficit $ 8,751,333 ================================================================================ See accompanying notes to Condensed Consolidated Financial Statements. -3-
DigiTEC 2000, Inc. and Subsidiary Condensed Consolidated Statements of Loss (Unaudited) ================================================================================================================ Three Months Ended March 31, Nine Months Ended March 31, 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------------------- Net sales $14,980,322 $ 3,314,592 $38,350,997 $ 9,533,198 Cost of sales 13,043,487 3,162,377 33,322,781 8,219,929 ---------------------------------------------------------------------------------------------------------------- Gross profit 1,936,835 152,215 5,028,216 1,313,269 Selling, general and administrative expenses 2,168,566 1,339,850 6,524,554 4,374,656 ---------------------------------------------------------------------------------------------------------------- Loss before other income (expenses) (231,731) (1,187,635) (1,496,338) (3,061,387) ---------------------------------------------------------------------------------------------------------------- Other income (expenses): Interest expense (323,953) (161,631) (748,996) (360,183) Other income (expense) 397,535 (10,342) 777,252 (27,850) ---------------------------------------------------------------------------------------------------------------- Other income (expenses) 73,582 (171,973) 28,256 (388,033) ---------------------------------------------------------------------------------------------------------------- Net loss $ (158,149) $(1,359,608) $(1,468,082) $(3,449,420) ================================================================================================================ Net loss per common share-basic and diluted $ (0.02) $ (0.19) $ (0.21) $ (0.49) ================================================================================================================ 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 Consolidated Financial Statements.
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DigiTEC 2000, Inc. and Subsidiary Condensed Consolidated Statement of Stockholders' Deficit (Unaudited) ================================================================================================================================ Nine Months Ended March 31, 2001 -------------------------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Total --------------- ------------------ Additional Accumulated stockholders' Shares Amount Shares Amount paid-in capital deficit deficit -------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2000 61,050 $61 7,058,998 $7,059 $17,031,318 $(33,742,001) $(16,703,563) Contributed Capital 90,000 90,000 Net loss -- -- -- (1,468,082) (1,468,082) -------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 2001 61,050 $61 7,058,998 $7,059 $17,121,318 $(35,210,083) $(18,081,645) ================================================================================================================================ See accompanying notes to Condensed Consolidated Financial Statements.
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DigiTEC 2000, Inc. and Subsidiary Condensed Consolidated Statements of Cash Flows (Unaudited) ================================================================================================== Nine Months Ended March 31, 2001 2000 -------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $(1,468,082) $(3,449,420) Adjustments to reconcile net loss to net cash used in operating activities: Provision for bad debts - net 118,900 400,000 Depreciation 60,928 39,671 Amortization of customer lists 71,205 71,679 Deferred rent (6,006) (24,621) Services provided by shareholder 90,000 132,195 (Increase) decrease in: Accounts receivable (4,818,128) (1,597,796) Inventory (477,053) (80,258) Prepaid expenses and other (235,057) 348,451 Increase (decrease) in: Accrued taxes and penalties 2,671,240 505,606 Accounts payable and accrued expenses 944,234 2,138,415 -------------------------------------------------------------------------------------------------- Net cash used in operating activities (3,047,819) (1,516,078) -------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (122,105) (39,544) -------------------------------------------------------------------------------------------------- Net cash used in investing activities (122,105) (39,544) -------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of TecNet notes 3,864,487 2,721,321 Repayment of notes payable (917,000) (173,300) -------------------------------------------------------------------------------------------------- Net cash provided by financing activities 2,947,487 2,548,021 -------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (222,437) 992,399 Cash and cash equivalents beginning of period 1,165,854 156,756 -------------------------------------------------------------------------------------------------- Cash and cash equivalents end of period $ 943,417 $ 1,149,155 ================================================================================================== See accompanying notes to Condensed Consolidated Financial Statements.
-6- DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) 1. The Company and Significant Accounting Policies: (a) Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements, which includes the accounts of DigiTEC 2000, Inc. (the "Company") and those of its wholly owned subsidiary, POS TEC Systems, LLC ("POS TEC") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Although the Company believes that the disclosures included on the face of the interim consolidated financial statements and in the accompanying footnotes are adequate to ensure that the information presented is not misleading, certain key information and disclosures have been condensed or otherwise omitted pursuant to the SEC rules and regulations noted above. The financial information presented for the three months and nine months ended March 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 the nine month period ended March 31, 2001 and are not necessarily indicative of the results that may be expected for a full fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. The information outlined in this Form 10-QSB should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, because of the Company's recurring losses from operations, accumulated deficit, negative working capital and significant arrearages on trade payables, such realization of assets and satisfaction of liabilities are subject to significant uncertainty. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Furthermore, the Company's ability to continue as a going concern is highly dependent in the near term on both the willingness and ability of TecNet, Inc. ("TecNet") to finance the Company's telecommunications products and services and working capital short-falls and the ability of the Company and TecNet to provide reliable and competitive prepaid telephone cards. TecNet is a wholly owned subsidiary of Telephone Electronics Corporation ("TEC") and is a holder of approximately 21% of the Company's outstanding common stock. Additionally, the Company's overall stability is highly dependent upon its ability to raise working capital, to increase market share while developing existing markets and improving overall customer retention, to achieve profitable operations and to generate sufficient cash flows from operating and financing activities to meet its obligations as they become due. (b) Revenue Recognition Sales of bundled prepaid calling cards from third-party providers for which the Company acts solely as a distributor are recorded at the sales price of the card and are recognized as revenue upon delivery to the Company's customers. The related costs are simultaneously charged to the cost of sales accounts upon such delivery. Revenue from Point of Sale ("POS") sales by the Company's subsidiary POS TEC, are recognized upon the initial activation by the retailer upon the sale of the underlying prepaid calling card to the end user. The related costs are simultaneously charged to the respective cost of sales accounts upon the activation of the card. -7- DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) (c) Deferred Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and any operating loss or tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change. The Company has established a full valuation allowance against its entire net deferred tax asset due to uncertainty of realizing certain tax credits and loss carryforwards. (d) Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138, which requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. The adoption of the statement, effective July 1, 2000, by the Company did not have a material effect on the Company's consolidated results of operations or financial position. In December 1999, Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", was issued. SAB No. 101 summarizes the Securities and Exchange Commission's ("SEC") staff view on applying accounting principles generally accepted in the United States of America to revenue recognition. The Company will implement SAB No. 101 during the fourth quarter of fiscal year 2001. The Company believes that the adoption of SAB No. 101 will not have a material impact on its revenue recognition. (e) Segment Disclosures The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" in the prior fiscal year. SFAS 131 established standards for the way that public business enterprises report financial information on operating business segments. As the Company has only one reportable business segment, prepaid telecommunications services, the adoption and implementation of the disclosure and reporting requirements did not significantly affect the presentation of the results of operation or financial position of the Company. (f) TecNet Borrowings TecNet continues to provide consulting services, financing and telecommunications support. During the nine months ended March 31, 2001, the Company borrowed approximately $3.9 million from TecNet pursuant to demand promissory notes bearing an annual rate of interest of ten percent. As there is no formalized agreement between the parties, there can be no assurance that TecNet will continue to provide such services, to finance the current operations or to provide the Company with bundled prepaid calling cards at comparable rates in future periods. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements, including the notes thereto, and other detailed information regarding the Company included elsewhere in this Form 10-QSB. Certain statements set forth below regarding matters that are not historical facts, such as statements concerning the expansion and growth of the Company, future growth in the demand for prepaid phone cards and the Company's plans to become a sales, marketing and distribution company, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Because such forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. The Company commenced operations under present management in 1995 to capitalize upon opportunities in the prepaid phone card sector of the long distance telecommunications market. The Company's prepaid phone cards provide consumers with a competitive alternative to traditional calling cards and presubscribed long distance telecommunications services. The Company's total revenues were $13,733,119, $10,394,558 and $35,032,533, and its net losses were $4,499,526, $13,566,927, and $11,996,759 for the fiscal years ended June 30, 2000, 1999 and 1998, respectively, after losses from discontinued operations of $0, $0 and $813,178, respectively. The Company's target markets include ethnic communities with substantial international long distance calling requirements. Retail rates in the international long distance market have declined in recent years and, as competition in this segment of the telecommunications industry continues to intensify, the Company believes that this downward trend in rates is likely to continue. Although there can be no assurance, the Company believes that any reduction in rates will be offset in whole or in part by efficiencies attributable to the planned expansion of the Company's services as well as by lower transmission costs per minute resulting from the Company's increased volume of minutes. In November of 1998 the Company initiated a strategy of focusing on the sales, marketing and distribution of prepaid telephone calling cards. In connection with the initiation of such strategy, TecNet began to provide significant telecommunications services to the Company and to finance its current operations. In February of 1999, the Company began to receive semi-monthly operating cash inflows from TecNet through the issuance of 10% demand promissory notes. Although TecNet has not made any formal demands for the repayment of the advances, no formal written agreement exists between the Company and TecNet to support TecNet's continuing deferral of repayment on such notes. As of March 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. The unaudited Condensed Consolidated Financial Statements of the Company have been prepared on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities, except as otherwise disclosed, in the normal course of business. However, because of the Company's recurring losses from operations and significant arrearages on trade payables, such realization of assets and satisfaction of liabilities is subject to significant uncertainties. The unaudited Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of these uncertainties. Furthermore, the Company's ability to continue as a going concern is highly dependent in the near term on both the willingness and ability of TecNet to finance the Company's telecommunications products and services and working capital short-falls, and the ability of the Company and TecNet to provide reliable and competitive prepaid telephone cards. Additionally, the Company's stability is dependent upon its ability to raise capital, to develop market share, to achieve profitable operations and to generate sufficient cash flow from operations and financing sources to meet obligations. The Company believes that future growth is dependent on the continued receipt of operational and financial support from TecNet, providing customers with a high quality prepaid product at a competitive price, and the ability to obtain competitive bundled prepaid cards from TecNet on favorable terms. In addition, the Company expects to produce favorable operating results in the future by -9- increasing its existing retail distribution market, to introduce new products to its target market which are cost competitive on a per minute basis and to capitalize upon economies of scale within existing markets. There can be no assurance that the Company will continue to receive the support of TecNet or be able to achieve favorable operating results in future periods. Operations Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000 Net Sales: Sales, net of discount and returns, increased approximately $11.7 million (352%) to approximately $15.0 million for the three month period ended March 31, 2001 as compared to approximately $3.3 million for the three month period ended March 31, 2000. The overall increase is attributed to the Company's strategy of focusing on the sales, marketing and distribution of prepaid telephone calling cards within its target market and the termination of its unprofitable proprietary branded facilities-based cards. By abandoning its prior strategy and through the infusion of operating capital by TecNet, the Company has been able to increase overall sales by focusing on the specific needs of its target market and utilizing its cash flows for the development of existing and prospective markets. The Company's revenues are based on both the dollar value and the total number of cards sold, less discounts, and the Company was able to significantly increase the total number of prepaid cards sold during the three month period ended March 31, 2001 through its master distributor network and other distribution channels. The Company has been able to realize market growth by offering cost competitive prepaid calling cards utilizing the favorable pricing obtained from TecNet on bundled products. Cost of Sales: The Company's cost of sales increased approximately $9.8 million (312%) to approximately $13.0 million for the three month period ended March 31, 2001 as compared to approximately $3.2 million for the three month period ended March 31, 2000. The overall cost of sales increase is directly related to the increased volume of prepaid cards sales discussed above. Gross Profit: The Company realized a gross profit of approximately $1.9 million for the three month period ended March 31, 2001 as compared to a gross profit of approximately $152,000 for the three month period ended March 31, 2000. The gross profit realized is directly related to the Company's use of bundled prepaid cards purchased from TecNet and to the increased volume of sales of prepaid cards noted above. In addition, the Company was able to obtain more favorable credit terms from TecNet in connection with the purchase of the bundled prepaid cards, which helped to facilitate the increase in overall net sales. Selling, General and Administrative Expenses: The Company's selling, general and administrative expenses increased approximately $829,000 (62%) to approximately $2.2 million for the three month period ended March 31, 2001 as compared to approximately $1.3 million for the three month period ended March 31, 2000. The overall increase is related to the combined effect of several factors. The Company experienced an increase in federal excise taxes of approximately $550,000, increased shipping charges of approximately $129,000, and an increase of approximately $35,000 in advertising and promotional expenses related to the significant increase in overall sales of the Company's prepaid cards during the quarter ended March 31, 2001. In addition, the Company's professional services expenses increased approximately $115,000 from the prior presented period. Loss before other Income (Expenses): The Company's loss before other income (expenses) of approximately $232,000 for the three month period ended March 31, 2001 decreased approximately $956,000 (80%) as compared to the loss before other income (expenses) of approximately $1.2 million for the three month period ended March 31, 2000. The overall decrease is directly related to the combination of factors noted above for net sales, cost of sales and selling, general and administrative expenses. -10- Other Income (Expenses): The Company's other income (expenses) changed approximately $246,000 (143%) to approximately $74,000 (income, net), for the three month period ended March 31, 2001 as compared to approximately $172,000 (expense, net), for the three month period ended March 31, 2000. The overall change is primarily related to a one-time non-recurring credit to income of approximately $583,000 during the quarter ended March 31, 2001. The non-recurring item related primarily to the settlement of outstanding trade payables with a vendor who previously was a holder of the Company's outstanding preferred stock. Other offsetting factors include an increase in current period interest expense of approximately $162,000 related to the 10% demand promissory notes payable to TecNet, an increase in penalties and interest attributed to accrued federal excise tax obligations of approximately $71,000, and an increase in other miscellaneous expenses of approximately $104,000. Net Loss: The Company's net loss of approximately $158,000 for the three month period ended March 31, 2001 decreased by approximately $1.2 million (88%) as compared to the net loss of approximately $1.4 million for the three month period ended March 31, 2000. The overall increase is directly related to the factors noted above for gross profit and other income (expenses). Nine Months Ended March 31, 2001 Compared to Nine Months Ended March 31, 2000 Net Sales: Sales, net of discount and returns, increased approximately $28.8 million (302%) to approximately $38.4 million for the nine month period ended March 31, 2001 as compared to approximately $9.5 million for the nine month period ended March 31, 2000. The overall increase is attributed to the Company's strategy of focusing on the sales, marketing and distribution of prepaid telephone calling cards within its target market and the termination of its unprofitable proprietary branded facilities-based cards. By abandoning its prior strategy and through the infusion of operating capital by TecNet, the Company has been able to increase overall sales by focusing on the specific needs of its target market and utilizing its cash flows for the development of existing and prospective markets instead of purchasing costly network infrastructure. The Company's revenues are now based on both the dollar value and the total number of cards sold, less discounts, and the Company was able to significantly increase the total number of prepaid cards sold during the nine month period ended March 31, 2001 through its master distributor network and other distribution channels. The Company has been able to realize market growth by offering cost competitive prepaid calling cards utilizing the favorable pricing obtained from TecNet on bundled products. Cost of Sales: The Company's cost of sales increased approximately $25.1 million (305%) to approximately $33.3 million for the nine month period ended March 31, 2001 as compared to approximately $8.2 million for the nine month period ended March 31, 2000. The overall cost of sales increase is directly related to the increased volume of prepaid cards sales discussed above. Gross Profit: The Company realized a gross profit of approximately $5.0 million for the nine month period ended March 31, 2001 as compared to a gross profit of approximately $1.3 million for the nine month period ended March 31, 2000. The gross profit realized is directly related to the Company's use of bundled prepaid cards purchased from TecNet and to the increased volume of sales of prepaid cards noted above. In addition, the Company was able to obtain more favorable credit terms from TecNet in connection with the purchase of the bundled prepaid cards, which helped to facilitate the increase in overall net sales. Selling, General and Administrative Expenses: The Company's selling, general and administrative expenses increased approximately $2.1 million (49%) to approximately $6.5 million for the nine month period ended March 31, 2001 as compared to approximately $4.4 million for the nine month period ended March 31, 2000. The overall increase is related to the combined effect of several factors. The Company experienced an increase in payroll and employee benefit costs of approximately $460,000 due primarily to an increase in the total number of employees of the Company attributable to increased sales volume during the current fiscal year. Other factors include an overall increase in federal excise taxes of approximately $1.2 million, increased shipping charges of approximately $206,000 and an increase of approximately $133,000 in advertising and promotional expenses related to the significant increase in overall sales of the Company's prepaid cards during the nine months ended March 31, 2001. In addition, the Company's professional services expenses increased approximately $147,000 from the prior presented period. -11- Loss before other Income (Expenses): The Company's loss before other income (expenses) of approximately $1.5 million for the nine month period ended March 31, 2001 decreased approximately $1.6 million (51%) as compared to the loss before other income (expense) of approximately $3.1 million for the nine month period ended March 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, net, increased approximately $416,000 (107%) to approximately $28,000 (income, net), for the nine month period ended March 31, 2001 as compared to approximately $388,000 (expense, net) for the nine month period ended March 31, 2000. The overall increase is primarily related to the recognition of two separate non-recurring credits to income of approximately $583,000 and $408,000 related to the settlement of outstanding trade payables with vendors during the nine months ended March 31, 2001. Other offsetting factors include an increase in current period interest expense of approximately $389,000 related to the 10% demand promissory notes payable to TecNet, an increase in penalties and interest attributed to accrued federal excise tax obligations of approximately $167,000, and an increase in interest and other miscellaneous expenses of approximately $19,000. Net Loss: The Company's net loss of approximately $1.5 million for the nine month period ended March 31, 2001 decreased by approximately $1.9 million (57%) as compared to the net loss of approximately $3.4 million for the nine month period ended March 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 $21 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: NINE MONTHS ENDED MARCH 31, ----------------------------- 2001 2000 ------------ ------------ Net cash used in operating activities......... $(3,047,819) $(1,516,078) Net cash used in investing activities......... (122,106) (39,544) Net cash provided by financing activities..... 2,947,487 2,548,021 ----------- ---------- Net change in cash and cash equivalents....... $ (222,438) $ 992,399 =========== ========== The Company's net cash used in operating activities increased approximately $1.5 million (101%) to $(3,047,819) for the nine months ended March 31, 2001 as compared to $(1,516,078) for the nine months ended March 31, 2000. The overall increase in net cash used in operating activities for the nine months ended March 31, 2001 is related to the combined effect of a decrease in the cash flow -12- effect of accounts receivable of approximately $3.1 million, a decrease in the net loss of approximately $1.9 million, an increase in the cash flow effect of accounts payable and other accrued expenses of approximately $971,000, an increase in the cash flow effect of prepaid expenses and other assets of approximately $584,000, and a decrease in the cash flow effect of inventory of approximately $397,000. Cash used in investing activities for both the nine months ended March 31, 2001 and 2000 related solely to capital expenditures of approximately $122,000 for the nine months ended March 31, 2001 and approximately $40,000 for the nine months ended March 31, 2000. During the nine months ended March 31, 2001, cash provided from financing activities related primarily to the issuance of approximately $3.9 million in promissory notes to TecNet, the repayment of $900,000 in principal to the holders of the $1.2 million promissory notes, and the repayment of $17,000 in principal on an outstanding loan with a family member of an officer/director of the Company. During the nine months ended March 31, 2000, cash provided from financing activities related primarily to the issuance of $2.7 million of 10% demand promissory note to TecNet, the repayment of approximately $52,000 in principal on an outstanding loan with a family member of an officer/director of the Company, and the payment of approximately $121,000 related to the settlement of disputed trade payables with a vendor. 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. In addition, the Company has imposed a fifty-percent deferral of its two executives' salaries. As the Company increases the sales of its bundled prepaid products, its capital requirements are expected to progressively decline. Although the Company has achieved significant improvements in cash flows from operations, it does not expect to achieve positive cash flows from operations until any earlier than the end of fiscal year 2001. The Company expects capital requirement needs of approximately $250,000 during the remaining three months of fiscal 2001, before it begins to generate positive cash flow by the end of fiscal year 2001. The foregoing amount includes further expansion of the Company's prepaid products into additional cities and expanding the Company's existing master distribution network. If cash needs prove to be greater than contemplated, the Company will need to slow the expansion of its prepaid product offerings to additional cities during fiscal year 2001. Also, the Company expects to consider other financing opportunities during the 2001 fiscal year. The Company believes that with the continued support of TecNet, internally generated cash from operations in fiscal 2001 will be sufficient to fund its operations throughout the 2001 fiscal year. There can be no assurance that the foregoing external sources of financing will be available to the Company, or that the Company's projections for positive cash generation commencing at the end of fiscal year 2001 will be realized. The Company's ability to implement its new strategy to become a sales, marketing and distribution company and to generate sufficient cash flow to begin to address its obligations to TecNet and other suppliers will be dependent upon continued financing by TecNet of cash flow needs and continued financing of telecommunications services by TecNet. In addition, the Company will need to raise long-term capital. There can be no assurance that such financing will continue to be available to the Company from TecNet or that long-term financing will be obtained, or if available, will be available in either a timely manner or upon terms and conditions acceptable to the Company. For the nine months ended March 31, 2001, the Company experienced an operating loss of approximately $1.5 million and used approximately $3.0 million of cash in operating activities. The Company's cash position at March 31, 2001 approximated $943,000 and its working capital deficit approximated $18.1 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 March 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. -13- 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: May 14, 2001 DigiTEC 2000, Inc. (Registrant) By: /s/ Frank C. Magliato ---------------------------------------- Frank C. Magliato Chief Executive Officer, President, Chairman of the Board of Directors and Chief Financial Officer May 14, 2001 By: /s/ Diego E. Roca ---------------------------------------- Diego E. Roca Senior Vice President, Chief Accounting Officer, Treasurer and Secretary -14-