10QSB 1 f10q_09-01.txt FORM 10-QSB - 9/30/01 ================================================================================ 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 September 30, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number: 000-23291 DigiTEC 2000, Inc. (Exact name of registrant as specified in its charter) Nevada 54-1287957 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 99 Madison Avenue, Third Floor New York, New York 10016 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (212) 944-8888 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| The number of outstanding shares of the Registrant's Common Stock, par value $.001 per share (the "Common Stock") as of September 30, 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 September 30, 2001 (Unaudited)........................................................ 3 Condensed Consolidated Statements of Loss for the Three Months Ended September 30, 2001 and September 30, 2000 (Unaudited)........................................................ 4 Condensed Consolidated Statement of Stockholders' Deficit for the Three MonthsEnded September 30, 2001 (Unaudited)........................ 5 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2001 and September 30, 2000 (Unaudited)...... 6 Notes to Condensed Consolidated Financial Statements (Unaudited)........ 7 - 10 ITEM 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 11 - 14 ITEM 3--Quantitative and Qualitative Disclosures About Market Risk...... 14 Signatures.............................................................. 15 2 DigiTEC 2000, Inc. and Subsidiary Condensed Consolidated Balance Sheet (Unaudited) ================================================================================ September 30, 2001 -------------------------------------------------------------------------------- Assets: Current: Cash and cash equivalents $ 284,488 Accounts receivable, net of allowance for bad debts of $1,917,682 2,171,760 Inventory, net of allowance for obsolescence of $46,513 1,229,284 Prepaid expenses and other 212,345 -------------------------------------------------------------------------------- Total Current Assets 3,897,877 Property and equipment, net of accumulated depreciation of $294,106 349,248 Other assets 181,861 -------------------------------------------------------------------------------- Total Assets $ 4,428,986 ================================================================================ Liabilities and Stockholders' Deficit Current: Notes and accounts payable to TecNet, Inc. $ 16,591,858 Accounts payable - trade 1,259,757 Accrued taxes and penalties 2,697,120 Accounts payable and accrued expenses 781,484 Accrued legal expenses 816,834 Allowance for sales returns 1,221,703 Short term loans payable 1,144,031 -------------------------------------------------------------------------------- Total Liabilities 24,512,787 -------------------------------------------------------------------------------- Deferred gain on disposition of subsidiary 911,427 -------------------------------------------------------------------------------- Commitments and Contingencies - -------------------------------------------------------------------------------- Stockholders' Deficit Series A Convertible Preferred Stock, $.001 par value, 1,000,000 shares authorized; 61,050 shares issued and outstanding; $100 per share liquidation preference 61 Common Stock, $.001 par value, 100,000,000 shares authorized; 7,058,998 shares issued and outstanding 7,059 Additional paid-in-capital 17,184,318 Accumulated deficit (38,186,666) -------------------------------------------------------------------------------- Total Stockholders' Deficit (20,995,228) -------------------------------------------------------------------------------- Total Liabilities and Stockholders' Deficit $ 4,428,986 ================================================================================ 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, 2001 2000 -------------------------------------------------------------------------------------- Net sales $ 4,328,679 $ 8,874,653 Cost of sales, primarily TecNet 3,932,659 7,798,496 -------------------------------------------------------------------------------------- Gross profit 396,020 1,076,157 Selling, general and administrative expenses 1,387,694 1,913,815 -------------------------------------------------------------------------------------- Loss before other income (expenses) (991,674) (837,658) -------------------------------------------------------------------------------------- Other income (expenses): Interest expense (258,156) (191,119) Other income 45,947 26,987 -------------------------------------------------------------------------------------- Other expenses (212,209) (164,132) -------------------------------------------------------------------------------------- Net loss $(1,203,883) $(1,001,790) ====================================================================================== Net loss per common share-basic and diluted $ ( 0.17) $ (0.14) ====================================================================================== Weighted average number of common and common equivalent shares outstanding used in basic and diluted computations 7,058,998 7,058,998 ======================================================================================
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, 2001 -------------------------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Total --------------- ----------------- Additional Accumulated stockholders' Shares Amount Shares Amount paid-in capital deficit deficit -------------------------------------------------------------------------------------------------------------------------------- Balance, July 1, 2001 61,050 $ 61 7,058,998 $ 7,059 $ 17,152,818 $(36,982,783) $(19,822,845) Contributed Capital 31,500 31,500 Net loss -- -- -- (1,203,883) (1,203,883) -------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2001 61,050 $ 61 7,058,998 $ 7,059 $ 17,184,318 $(38,186,666) $(20,995,228) ================================================================================================================================ See accompanying notes to Condensed Consolidated Financial Statements.
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DigiTEC 2000, Inc. and Subsidiary Condensed Consolidated Statements of Cash Flows (Unaudited) ============================================================================================== Three Months Ended September 30, 2001 2000 ---------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $(1,203,883) $(1,001,790) Adjustments to reconcile net loss to net cash used in operating activities: Provision for bad debts - net 15,010 85,580 Sales returns (185,397) - Provision for inventory obsolescence 24,932 - Depreciation 37,725 17,828 Amortization of intangible assets 895 23,735 Deferred rent - (1,785) Loss on disposal of assets 19,600 - Services provided by shareholder 31,500 30,000 (Increase) decrease in: Accounts receivable 1,029,595 (500,380) Inventory (170,624) 91,779 Prepaid expenses and other (169,686) (146,685) Increase (decrease) in: Accrued taxes and penalties (140,847) - Accounts payable and accrued expenses, including TecNet (1,041,267) 908,125 ---------------------------------------------------------------------------------------------- Net cash used in operating activities (1,752,447) (493,593) ---------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (113,711) (22,206) ---------------------------------------------------------------------------------------------- Net cash used in investing activities (113,711) (22,206) ---------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of short term loans 1,144,031 - Proceeds from issuance of TecNet notes - 1,732,000 Repayment of notes payable - (317,000) ---------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,144,031 1,415,000 ---------------------------------------------------------------------------------------------- Net (decrease)increase in cash and cash equivalents (722,127) 899,201 Cash and cash equivalents beginning of period 1,006,615 1,165,854 ---------------------------------------------------------------------------------------------- Cash and cash equivalents end of period $ 284,488 $ 2,065,055 ==============================================================================================
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) ORGANIZATION OF BUSINESS The Company was organized as a Nevada corporation in May 1987 under the name Yacht Havens International Corp, which was subsequently changed in July of 1995 to Promo Tel, Inc. ("Promo Tel-Nevada"). In August of 1995, Promo Tel-Nevada merged with Promo Tel, Inc. ("Promo Tel-Delaware"), a Delaware corporation, exchanging 1,333,334 shares of the Company's previously unissued and unregistered common stock for all of the outstanding shares of common stock of Promo Tel-Delaware. In October of 1996, the Company formally amended its Articles of Incorporation to change the legal name of the Company to DigiTEC 2000, Inc. ("DigiTEC"). (b) NATURE OF OPERATIONS DigiTEC and its wholly owned subsidiary POS TEC (collectively the "Company") are primarily engaged in the creation, distribution and marketing of consumer prepaid telephone calling cards. The Company's prepaid cards provide consumers with a competitive alternative to the traditional pre-subscribed long-distance telecommunications services, credit/calling cards and conventional coin and other operator assisted long-distance services. It currently markets its prepaid products throughout the New York/New Jersey metropolitan area. The Company sells its prepaid telephone cards in approximately 100 cities in twenty-nine U.S. states. In November of 1998 the Company initiated a strategy of focusing on the sales, marketing and distribution of prepaid telephone calling cards. In connection with the initiation of such strategy, TecNet began to provide significant telecommunications services to the Company and to finance its current operations. In February of 1999, the Company began to receive semi-monthly operating cash inflows from TecNet through the issuance of 10% demand promissory notes. Although TecNet has not made any formal demands for the repayment of the advances, no formal written agreement exists between the Company and TecNet to support TecNet's continuing deferral of repayment on such notes. As of September 30, 2001 (and through the issuance date of this filing), the Company is totally dependent on TecNet to provide consulting services, financing and telecommunications support until it has achieved profitable operations. However, there can be no assurance that TecNet can or will continue to provide such services, to finance the current operations or to provide the Company with bundled prepaid calling cards at comparable rates in future periods. (c) BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of DigiTEC and those of its wholly owned subsidiary, POS TEC. Such financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Although the Company believes that the disclosures included on the face of the interim 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 ended September 30, 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 three month period ended September 30, 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-KSB for the fiscal year ended June 30, 2001. 7 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) 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 and other payables, such realization of assets and satisfaction of liabilities are subject to significant uncertainty. The unaudited Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's ability to continue as a going concern is highly dependent in the near term on both the willingness and ability of TecNet to finance the Company's telecommunications products and services and working capital shortfalls, and the ability of the Company and TecNet to provide reliable and competitive prepaid telephone cards. However, there can be no assurance that TecNet can or will continue to provide such services, to finance the current operations, or to provide the Company with bundled prepaid calling cards at comparable rates in future periods. TecNet is a wholly owned subsidiary of Telephone Electronics Corporation ("TEC") and is a holder of approximately 21% of DigiTEC's outstanding common stock. Additionally, the Company's overall stability is highly dependent upon its ability to raise working capital, to increase market share while developing existing markets and improving overall customer retention, to achieve profitable operations and to generate sufficient cash flows from operating and financing activities to meet its obligations as they become due. (d) REVENUE RECOGNITION Sales of bundled prepaid calling cards from third-party providers for which the Company acts solely as a distributor are recorded at the sales price of the card and are recognized as revenue upon delivery to the Company's customers. The related costs are simultaneously charged to the cost of sales accounts upon such delivery. These costs primarily include the charge for related telecommunications services from TecNet which amounted to approximately 85% of the sales price of the cards, net of discounts and the printing costs of the underlying calling cards. 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. The Company provides appropriate provisions for prepaid phone card sales returns in the same period as the related revenues. (e) 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. (f) RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. SFAS No. 141 will require companies to recognize acquired identifiable intangible assets separately from goodwill if control over the future economic benefits of the asset results from contractual or other legal rights or the intangible asset is capable of being separated or divided and sold, transferred, licensed, rented or exchanged. The Standards will require the value of a separately identifiable intangible asset 8 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) meeting any of the above criteria to be measured at fair value. SFAS No. 142 requires companies to cease amortizing goodwill acquired through business combinations. However, SFAS No. 142 requires that companies assess acquired goodwill for impairment upon adoption of the statement, and at least annually, at the lowest individual reporting unit level that can be distinguished, physically and operationally, for internal reporting purposes, from the other activities, operations, and assets of the entity, utilizing a two-step approach. The Company expects to implement SFAS No. 142 effective July 1, 2002, and believes that such adoption will not have a material effect on the Company's results of operations or financial position. In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations and costs associated with the retirement of tangible long-lived assets. The Company is required to implement SFAS No. 143 on July 1, 2002, and has not yet determined the impact that this statement will have on its results of operations or financial position. In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and establishes accounting and reporting standards for long-lived assets to be disposed of by sale. This standard applies to all long-lived assets, including discontinued operations. SFAS No. 144 requires that those assets be measured at the lower of carrying amount or fair value less cost to sell. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company is required to implement SFAS No. 144 on July 1, 2002, and has not yet determined the impact that this statement will have on its results of operations or financial position. In September 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a final consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs". EITF 00-10 is effective for fiscal year 2001 and addresses the income statement classification of amounts charged to customers for shipping and handling, as well as costs incurred related to shipping and handling. The Company classifies shipping and handling costs billed to customers as revenues and costs incurred relating to shipping and handling as costs of sales, which is in accordance with the consensus in EITF 00-10. (g) 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. (h) RELATED PARTY TRANSACTIONS TecNet continues to provide consulting services, financing and telecommunications support to the Company on an on-going basis. As the primary provider of bundled prepaid calling card services to the Company and the sole carrier for carrying the traffic and processing the minutes related to the prepaid calling cards, TecNet provided approximately $2.2 million in telecommunications services for the three month period ended September 30, 2001. In addition, TecNet provided approximately $32,000 of consulting services to the Company during the quarter ended September 30, 2001, which have been accounted for as a capital contribution. 9 DigiTEC 2000, Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) However, as there is no formalized agreement between the parties, there can be no assurance that TecNet will continue to provide such services, to finance the current operations or to provide the Company with bundled prepaid calling cards at comparable rates in future periods. Short term loans of approximately $1.1 million were issued by various related parties to Everything Prepaid, Inc. during the quarter ended September 30, 2001, until such time as the reorganization of POSTEC/Everything Prepaid, Inc. could be finalized. The $1.1 million in short term loans were subsequently converted into common stock of Everything Prepaid, Inc. after September 30, 2001, as further discussed in footnote 1(i) below. (i) REORGANIZATION OF POS TEC On July 3, 2001, the Board of Directors of DigiTEC decided to reorganize POS TEC from an LLC to a Chapter C corporation to enable POS TEC to raise additional capital from other investors. DigiTEC formed a new Nevada corporation, Everything Prepaid, Inc. ("EP"). EP was organized with authorized capital of 10,000,000 of common stock and 1,000,000 of preferred stock with all shares having a $.01 par value. The preferred stock may be issued with such relative rights, privileges and qualifications as determined by EP's Board of Directors. Upon its organization EP issued 1,000 shares of its common stock to DigiTEC for $1,000. POS TEC was then merged into EP with DigiTEC receiving 99,000 shares of EP's common stock. At the time of the merger, DigiTEC and TecNet, Inc., an indirect 21% owner of DigiTEC, each agreed to convert certain intercompany debt and trade payables of POS TEC assumed by EP in the Merger into shares of EP's common stock at $1.00 per share resulting in the issuance of 911,427 shares to TecNet, Inc. and 988,573 shares to DigiTEC. As a result of the merger, the Company deferred a net gain of $911,427 representing the conversion of certain temporary loans due to TecNet, Inc. The gain will remain deferred until certain factors are present, including EP's ability to generate cash flows from operating activities. On September 27, 2001 and after unsuccessful attempts to raise additional capital for EP, the Company concluded that it was unable to assist or participate in the further necessary financing of EP and approved a transaction in which an aggregate of 8,000,000 shares of EP's common stock were sold on October 2, 2001 at $.25 per share for total proceeds of $2,000,000. The purchasers of this stock include: (i) Telephone Electronics Corporation (TEC), a principal shareholder of DigiTEC; (ii) persons who are principals or associates of TEC or TecNet, Inc.; (iii) affiliates of EP; and (iv) the President of DigiTEC. As a result of the additional $2 million capitalization, the Company's ownership percentage in EP was reduced to approximately 11%, and therefore EP will be accounted for as an investee and no longer included within the consolidated financial statements of the Company effective October 2, 2001. (j) SUBSEQUENT EVENTS TecNet continues to provide consulting services, financing and telecommunications support. The Company has continued to be financed through advances from its joint customer deposit account with TecNet, Inc. with the acquiescence of TecNet, Inc. As there is no formalized agreement between the parties, there can be no assurance that TecNet will continue to provide such services, to finance the current operations or to provide the Company with bundled prepaid calling cards at comparable rates in future periods. On January 11, 2002, the Company's Board of Directors accepted an informal verbal offer from TecNet and/or a group of its associates to loan up to $1,200,000 to the Company. The terms of the proposed loan call for the payment of interest only for 12 months with amortization of the loan over the following 36 months to be secured by the Company's accounts receivable and such other terms as are negotiated between the parties. Pending completion of the loan, the Company will have to rely upon additional advances from the joint customer deposit account. 10 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 target markets include ethnic communities with substantial international long distance calling requirements. The Company's prepaid phone cards provide consumers with a competitive alternative to traditional calling cards and presubscribed long distance telecommunications services. Retail rates in the international long distance market have declined in recent years and, as competition in this segment of the telecommunications industry continues to intensify, the Company believes that this downward trend in rates is likely to continue. Although there can be no assurance, the Company believes that any reduction in rates will be offset in whole or in part by efficiencies attributable to the planned expansion of the Company's services as well as by lower transmission costs per minute resulting from the Company's increased volume of minutes. In addition, the Company expects to produce favorable operating results in the future by increasing 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. The Company's total revenues were approximately $50,309,000, $13,733,000, and $10,395,000, and its net losses were approximately $3,241,000, $4,500,000, and $13,567,000 for the fiscal years ended June 30, 2001, 2000 and 1999, respectively. The Company believes that future growth is dependent on the continued receipt of operational and financial support from TecNet, providing customers with a high quality prepaid product at a competitive price, and the ability to obtain competitive bundled prepaid cards from TecNet on favorable terms. However, there can be no assurance that the Company will continue to receive the support of TecNet or be able to achieve favorable operating results in future periods. OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 NET SALES: Sales, net of discount and returns, decreased approximately $4.5 million (51%) to approximately $4.3 million for the three month period ended September 30, 2001 as compared to approximately $8.9 million for the three month period ended September 30, 2000. The Company attributes the decrease of approximately $5.2 million in net sales on its prepaid calling card products to increases in per-minute rates on its prepaid calling cards which impacted volume, which is offset against an increase in net prepaid wireless sales of approximately $634,000. The Company expects to increase overall sales in future periods by working directly with TecNet to introduce new products which are cost competitive and will focus on the specific needs of its target markets. In addition, the Company expects to utilize its future cash flows from operations for the expansion of its existing master distributor network and other distribution channels and the development of prospective markets for its prepaid products. COST OF SALES: The Company's cost of sales decreased approximately $3.9 million (50%) to approximately $3.9 million for the three month period ended September 30, 2001 as compared to approximately $7.8 million for the three month period ended September 30, 2000. The overall cost of sales decrease is directly related to the decreased volume of prepaid cards sales discussed above. 11 GROSS PROFIT: The Company realized a gross profit of approximately $396,000 for the three month period ended September 30, 2001 as compared to a gross profit of approximately $1.1 million for the three month period ended September 30, 2000. The gross profit decline is due to the overall decrease in the volume of prepaid card sales noted above. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: The Company's selling, general and administrative expenses decreased approximately $526,000 (27%) to approximately $1.4 million for the three month period ended September 30, 2001 as compared to approximately $1.9 million for the three month period ended September 30, 2000. The overall decrease is related to the combined effect of several factors. Factors directly related to the significant decrease in overall sales of the Company's prepaid cards during the quarter ended September 30, 2001 include an overall decrease in federal excise taxes of approximately $263,000, decreased shipping and fulfillment charges of approximately $34,000, and a decrease of approximately $40,000 in advertising and promotional expenses. In addition, the Company experienced a decrease in payroll and employee benefit costs of approximately $99,000 and a decrease in contract labor cost of approximately $21,000 due primarily to a decrease in the total number of employees of the Company attributable to the reduced sales volumes noted above. Other contributing factors include decreased rent expenses of approximately $50,000, an overall decrease in office and office related expenses of approximately $16,000, a decrease in bank charges of approximately $4,000, professional services expenses decreased approximately $54,000, and decreased depreciation and amortization charges of approximately $3,000. Offsetting factors include an increase in telephone expense of approximately $39,000, an increase in travel and business related expenditures of approximately $11,000 and an overall increase in repair and maintenance expenses of approximately $8,000. LOSS BEFORE OTHER INCOME (EXPENSES): The Company's loss before other income (expenses) of approximately $992,000 for the three month period ended September 30, 2001 increased approximately $154,000 (18%) as compared to the loss before other income (expenses) of approximately $838,000 for the three month period ended September 30, 2000. The overall increase is directly related to the combination of factors noted above for net sales, cost of sales and selling, general and administrative expenses. OTHER INCOME (EXPENSES): The Company's other income (expenses) changed approximately $48,000 (30%) to approximately $212,000 (expense, net), for the three month period ended September 30, 2001 as compared to approximately $164,000 (expense, net), for the three month period ended September 30, 2000. The overall change is primarily due to an increase in current period interest expense of approximately $67,000 related to the 10% demand promissory notes payable to TecNet and an increase in penalties and interest attributed to accrued federal excise tax obligations of approximately $104,000. NET LOSS: The Company's net loss of approximately $1,204,000 for the three month period ended September 30, 2001 increased by approximately $202,000 (20%) as compared to the net loss of approximately $1,002,000 for the three month period ended September 30, 2000. The overall increase is directly related to the factors noted above for gross profit and other income (expenses). LIQUIDITY AND CAPITAL RESOURCES FINANCING REQUIREMENTS To date, the Company has funded its operations through: (i) two offerings, which aggregated $1,000,000 of proceeds to the Company; (ii) the exercise of approximately 2,280,000 warrants to purchase shares of the Common Stock of the Company at $1.50 per share (the "$1.50 Warrants"), which aggregated approximately $3,400,000 of proceeds to the Company; (iii) sale of 61,050 shares of the Company's Series A Preferred Stock, which resulted in the elimination of an accounts payable balance to Premiere totaling approximately $6,105,000; (iv) sale of $1,200,000 principal amount of the Company's Notes with the $2.375 Warrants (as subsequently exchanged, the "10% Notes"); (v) issuance of a $100,000 10% promissory note to an officer/director family member; and (vi) the infusion of approximately $18.6 million of operating capital through the issuance of 10% demand promissory notes and the extension of trade credit by TecNet. All of the above offerings were exempt from registration under the applicable Securities Act and have been utilized to fund the Company's current operations. 12 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: THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2001 2000 ------------ ------------ Net cash used in operating activities......... $(1,752,447) $ (493,593) Net cash used in investing activities......... (113,711) (22,206) Net cash provided by financing activities..... 1,144,031 1,415,000 ----------- ---------- Net change in cash and cash equivalents....... $ (722,127) $ 899,201 =========== ========== The Company's net cash used in operating activities increased approximately $1.3 million (255%) to $(1,752,447) for the three months ended September 30, 2001 as compared to $(493,593) for the three months ended September 30, 2000. The overall increase in net cash used in operating activities for the three months ended September 30, 2001 is related to the combined effect of several key factors. These include an decrease in the allowance for sales returns of approximately $185,000, an increase in the collection velocity of accounts receivable of approximately $1.5 million, a decrease in the net loss of approximately $36,000, a decrease in the cash flow effect of accounts payable and other accrued expenses of approximately $1.9 million, a decrease in the cash flow effect of accrued taxes and penalties of approximately $141,000, an increase in the cash flow effect of prepaid expenses and other assets of approximately $23,000, and an increase in the cash flow effect of inventory of approximately $262,000. Cash used in investing activities for the three months ended September 30, 2001 and 2000 is related solely to capital expenditures of approximately $114,000 for the three months ended September 30, 2001 and approximately $22,000 for the three months ended September 30, 2000. During the three months ended September 30, 2001, cash provided from financing activities related solely to the issuance of approximately $1.1 million in short-term debt to a related party of the Company. During the three months ended September 30, 2000, cash provided from financing activities related primarily to the issuance of approximately $1.7 million of 10% demand promissory note to TecNet, the repayment of approximately $17,000 in principal on an outstanding loan with a family member of an officer/director of the Company, and the repayment of approximately $300,000 in principal to the holders of the $1.2 million promissory notes. The Company expects capital requirements of approximately $1.0 million during fiscal 2002. The foregoing amount includes the necessary capital to further the expansion of the Company's prepaid products into additional cities and expanding the Company's existing master distribution network. As the Company increases the sales of its bundled prepaid products, its capital requirements are expected to progressively decline. If cash needs prove to be greater than contemplated, the Company will need to slow the expansion of its prepaid product offerings to additional cities during fiscal year 2002. Since June 30, 1999, the Company has raised cash primarily through the issuance of 10% demand promissory notes payable to TecNet. Since February of 1999, the Company has been dependent on TecNet financing its shortfalls in cash flows and current operations and the provisioning of telecommunication services by TecNet. The Company expects to consider other financing opportunities during the 2002 fiscal year. The Company believes that with the continued support of TecNet, internally generated cash from operations in fiscal 2002 will be sufficient to fund its operations throughout the 2002 fiscal year. Although the Company has achieved significant improvements in cash flows from operations, it does not expect to achieve positive cash flows from operations in the foreseeable future. Additionally, there can be no assurance that the foregoing external sources of financing will be available to the Company, or that the Company's projections for internal cash generation from current operations will be realized. The Company's ability to expand its operations as a sales, marketing and distribution company and to generate sufficient cash flow to begin to address its obligations to TecNet and other suppliers will be dependent upon continued financing by TecNet of cash flow needs and continued financing of telecommunications services by TecNet. In addition, the Company will need to raise long-term capital. There can be no assurance that such financing will continue to be available to the Company from TecNet or that long-term financing will be obtained, or if available, will be available in either a timely manner or upon terms and conditions acceptable to the Company. 13 For the three months ended September 30, 2001, the Company experienced an operating loss of approximately $1.0 million and used approximately $1.7 million of cash in operating activities. The Company's cash position at September 30, 2001 approximated $284,000 and its working capital deficit approximated $20.6 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 September 30, 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. 14 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: January 25, 2002 DigiTEC 2000, Inc. (Registrant) By: /s/ Frank C. Magliato ---------------------------------------- Frank C. Magliato Chief Executive Officer, President, Chairman of the Board of Directors and Chief Financial Officer January 25, 2002 By: /s/ Diego E. Roca ---------------------------------------- Diego E. Roca Senior Vice President, Chief Accounting Officer, Treasurer, Secretary and Director 15