U.S. Securities and Exchange Commission
Washington, D.C. 20549
Amendment No. 3
To
Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
DIGS, INC.
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(Name of Small Business Issuer in its charter)
Delaware 95-4603237
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
17327 Ventura Boulevard, Suite 200 Encino, California 91316
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(Address of principal executive offices)
Issuer's telephone number: (818) 995 - 3650
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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Securities to be registered under Section 12(g) of the Act:
Common
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(Title of class)
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(Title of class)
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PART I
Forward Looking Statements
The sections of this Report on Form 10-SB containing such forward-looking
statements include "Description of Business," "Historical Background," "Growth,"
"Acquisitions," "Products and Services," "Marketing and Sales," Patent
Development," "Markets" and "Competition" under Item 1 below, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
Item 2 below. Statements in this Form 10-SB which address activities, events or
developments that the registrant expects or anticipates will or may occur in the
future, including such topics as future issuances of shares, future capital
expenditures (including the amount and nature thereof), expansion and other
development and technological trends of industry segments in which the
registrant is active, business strategy, expansion and growth of the
registrant's and its competitors' business and operations and other such matters
are forward-looking statements. Although the registrant believes the
expectations expressed in such forward-looking statements are based on
reasonable assumptions within the bounds of its knowledge of its business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made by or
on behalf of the registrant.
The registrant's operations are subject to factors outside its control. Any
one, or a combination, of these factors could materially affect the results of
the registrant's operations. These factors include: (a) changes in levels of
competition from current competitors and potential new competition; (b) loss of
a significant customer; and (c) changes in availability or terms of working
capital financing from vendors and lending institutions. The foregoing should
not be construed as an exhaustive list of all factors that could cause actual
results to differ materially from those expressed in forward-looking statements
made by the registrant. Forward-looking statements made by or on behalf of the
registrant are based on a knowledge of its business and the environment in which
it operates, but because of the factors listed above, actual results may differ
from those anticipated results described in these forward-looking statements.
Consequently, all of the forward-looking statements made are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the registrant will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the registrant or its business or operations.
ITEM 1. DESCRIPTION OF BUSINESS.
General
Digs, Inc. (the "Company" or "DIGS") provides comprehensive multimedia and
Internet communication solutions for public companies to proactively tell their
story to the investment community, its stockholders and employees. The Company's
CD-ROM program is a state of the art story telling tool creating a virtual road
show of a company's story. The program tells a client's "story" on a specially
designed Internet linked CD-ROM and delivers it, in an attention getting
package, to the computer screens of the client's shareholders, interested
investors, the business community and the media.
The Company's primary product is the Investor Relations CD-ROM ("IRCD").
The IRCD program tells a corporate story by integrating the traditional printed
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report approach with the latest CD-ROM and Internet interactive video, audio,
and animation technology. IRCD presents a company's story on an Internet-linked
multimedia CD-ROM. IRCD describes the business of a company utilizing video,
audio, animated graphics and text. The company's message is communicated via
CD-ROM linked to the Internet. The approach makes the often-dry corporate
profile come alive, by using video, audio, text and graphics to present a
company's corporate story, including financial highlights, product data and
other information. The IRCD is user-friendly and Internet-linked. A number of
specialized IRCD packages and programs, including a compacted Annual Report
package as well as an Environmental, Health and Safety CD-ROM which offers a new
multimedia approach to tell a company's Environmental, Health and Safety
policies, current results and achievements are available. The Company believes
that its IRCD packages offer savings to companies over traditional written
reports in both production and mailing costs. In addition, once an IRCD has been
received by a shareholder, additional CD's are never sent as updates, rather,
any new and updated information and statistics can be added to the existing CD
through a simple Internet uplink, thus, further reducing costs of handling and
mailing. The Company believes that this means of delivery of information is
particularly important in an era when millions of investors worldwide are using
their computers and Internet as investment tools.
Traditional Reports (Annual Reports, Product Catalogs, Company
Communications and Video Presentations) may require design, printing, new paper
and packaging to create a presentation for each update, which adds expense to
both production and postage. Costs associated with the design and printing of
these presentations can vary depending on the size and complexity of the
presentation. The cost to design and produce our IRCD package may have
similarities to that of the Traditional Written Report, however, replication
costs on the CD-ROM are substantially lower than printing the written report or
duplicating a video. While traditional reports are still required by law, a
condensed version can be inserted into the IRCD jacket, thereby decreasing the
cost of expensive postage. The postage costs for the traditional written report
can be up to six times the cost of the postage required for the Company's
product. Current postage charges for a standard written report are approximately
$3.00 in comparison to the cost of mailing our IRCD, which is approximately
$0.55.
The Company is not dependent on long term clientele; rather it is in
constant recruitment of new accounts. In 1997, the three companies that
generated 86% of the total revenues were Mikohn Gaming Corporation which
provided approximately 16%, Terrace Towers USA which provided approximately 27%
and White Wings Lab which provided approximately 43%. In 1998, the following
companies contributed approximately 96% of the Company's revenues as follows:
Terrace Towers USA - 63%; Hartcourt, Incorporated - 17%; and Mikohn Gaming
Corporation - 16%. During the fiscal year 1997 and 1998 the companies' primary
activity was the development of its IRCD product. DIGS, Inc. does not rely on
long-term relationships with its clients because the service or products
provided do not require upgrades unless specifically requested by the client.
Currently, there are no service or product contracts in force with any of the
above-mentioned clients and accordingly we do not know whether our past
relationship with these clients will result in future revenue. We are certain no
future services or products will be provided to Terrace Towers USA because the
client is no longer in existence. DIGS, Inc. attempts to maintain a relationship
with current and past clients, however, does not believe revenues are dependent
on any one client.
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The material term of our product supply agreement with our customers
requires each client to supply our company with their "assets", which consist of
copy, photographs, video, graphs, financial data and other corporate materials.
The company then converts the supplied information into a digital presentation
on Internet sites and on CD-ROM. The material is delivered to the client in the
form of an operating Internet website and/or CD-ROM.
Products
IRCD. The Company's principal product is the Investor Relations CD-ROM
("IRCD"). Companies can use this easy CD-ROM format to communicate with its
stockholders, market makers and investment analysts. One CD-ROM is capable of
providing information that would require more than 1,000 pages if the
traditional written report was prepared. Complete financial information,
including financial statements, schedules and notes, together with yearly
comparison graphs of revenues, sales, profits, earnings per share, etc., are all
set forth in a colorful and creative manner. Audio not only includes music and
sound effects but conversation by company executives, such as its President,
Chief Financial Officer or Chief Scientist, explaining the company's business,
financial success and/or new products and inventions. The IRCD makes an
excellent alternative to a written annual report or other written information
companies periodically send to its stockholders. Through a direct link to the
Internet, financial statements and other corporate happenings can be kept
current by accessing that company's Website.
Each IRCD is equipped with a link that will access the particular company's
website. This feature is available as long as the computer in use has Internet
capabilities, and provided the computer user is already utilizing their Internet
connection when our IRCD product is inserted into their CD-ROM drive. Each IRCD
has a "button icon". When an IRCD is viewed on a computer terminal that has
Internet access an individual can locate the "button icon" created within the
CD-ROM that is technically capable of providing a direct link to the company's
website. This enables the user to receive updated financial information, product
information and new video. Our product does not provide a direct link to the
Internet; however, the users Internet connection used in conjunction with our
product will provide a direct link to the company's website.
EHSCD. The Company developed its Environmental Health and Safety CD-ROM
("EHSCD") for those companies that are primarily in the natural resources
business. The EHSCD utilizes text, graphics, video and audio in a dynamic manner
to describe and explain a company's environmental, health and safety and natural
resource preservation to investors, environmental groups, media, the public and
to governmental agencies. The Company has produced an EHSCD for Atlantic
Richfield Corporation ("ARCO") who is using it primarily for information
regarding their efforts in the environmental, health and safety areas. In May
1999, the Company launched its new Website, EHSREPORTS.COM. This Website helps
Internet users search by company, or industry, for environmental health and
safety reports available in print, online and interactive CD-ROM formats from
hundreds of leading international corporations.
EOCD. The Company, using a similar format as its IRCD, has developed an
Employee Orientation CD-ROM ("EOCD"). The EOCD was developed for internal use by
companies. It is designed to familiarize new employees with their company by
providing a comprehensive look at the company's people, products, services and
policies. The production uses video, audio, graphics and text in a lively,
informative and fun presentation.
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Marketing and Customers
The Company markets its products to large public companies who are seeking
unique, efficient and inexpensive distribution of corporate business and
financial information. The Company markets these services through personal
contacts with customers and investment relations firms.
The Company employs two full time employees to market its products. The
Company's sales persons solicit business from existing and prospective
customers. The sales person also acts as service representative to ensure that
the Company's production staff promptly respond to customer instructions and
meets customer needs.
Since beginning full time operations in December, 1998, the Company has
provided its IRCD products for customers ranging from The Cheesecake Factory to
Mikohn Corp., a manufacturer and developer of systems and games for the gaming
industry. The first two customers utilizing the Company's EOCD product are The
Limited, Inc. and Intimate Brands, Inc., the parent company of Victoria's
Secrets, Inc. The Company's EHSCD product was chosen by Atlantic Richfield
Corporation to communicate their commitment to a clean environment to its
shareholders, government agencies and the media.
Production
The Company creates or accepts a client's videos, pictures, copy ("assets")
and, using the Company's proprietary application software, produces a Master
CD-ROM of the client's story.
The basic package includes filming three corporate executive interviews,
programming a 10-page corporate profile section, a financial Bottom Line section
featuring charts illustrating all financial aspect of the company, a products
and services section, a research library section, and a proprietary Uplink
function with an update feature. Once the "master" is produced, the Company
contracts with outside replication houses and printers to produce the final
product.
Competition
The Company competes with many traditional printers and producers of paper
annual reports and investor information, almost all of which are larger than the
Company, better financed and longer established. The Company is not aware of any
national entity directly competing with the Company's CD-ROM format for
communicating with stockholders and investment analysts.
Because of the interface between the Company's IRCD program and the
internet, the Company must continue to keep abreast of technology. The internet
is a rapidly evolving technology. In order to effectively compete in this arena,
the Company must continually improve the performance, features and reliability
of its internet access capabilities. Any significant failure on our part to
adapt and compete effectively in the online commerce area would likely have a
material, adverse effect on our business results of operations and financial
position.
Reorganization
Prior to the reorganization with Digital Corporate Profiles, Inc. ("DCP"),
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DIGS, Inc. (the "Company"), formerly known as Advanced Laser Products, Inc. (a
Delaware corporation), has one inactive subsidiary, Advanced Laser Products,
Inc. ("ALP") (a Nevada corporation). Effective November 9, 1998, in connection
with the agreement of reorganization (the "Reorganization"), the Company issued
5,194,968 shares of its common stock at $.001 par value per share in exchange
for all of the outstanding common stock of DCP. DCP then became a wholly owned
subsidiary of the Company based on a conversion ratio of 3 shares of the
Company's common stock for each share of DCP's stock. For further discussion
relating to the accounting for reorganization, See Note 9 of DIGS, Inc. and
Subsidiaries' Notes to Consolidated Financial Statements. The shareholders of
DCP became the owners of approximately 99% of the outstanding shares of the
Company after the reorganization.
Employees
The Company currently employs seven full time employees of which two are in
management and administration, two in marketing, two in computer programming and
research, and one in finance. The employees are not unionized and management
believes the Company's relationship with its employees is good.
The Company is a Delaware corporation, its executive offices are located at
17327 Ventura Boulevard, Suite 200, Encino, California 91316, and its telephone
number is 818-995-3650.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Overview:
Effective November 9, 1998, in connection with an agreement of
reorganization, the Company issued 5,194,968 shares of its common stock at $.001
par value per share in exchange for all of the outstanding common stock of
Digital Corporate Profiles, Inc., a California corporation ("DCP"), in which DCP
became a wholly-owned subsidiary of the Company based on a conversion ratio of
three shares of the Company's common stock for each share of DCP's stock. The
reorganization had been accounted for as a recapitalization of DIGS and DCP at
their book values. Prior to the reorganization, the Company was considered as a
shell organization and was inactive with no revenues and a minimal
administrative expense of $300 and $4,730 for the year ended December 31, 1998
and 1997, respectively. As the result of the recapitalization accounting, the
Company's consolidated financial statements presented are those of DCP whose
owners maintained control after the reorganization. At the date of
reorganization, there were 53,663 shares that were owned by the former DIGS,
Inc. shareholders. All share and per share amounts have been adjusted to reflect
the 1 for 10 reverse stock split effective April 20, 1998 and the 1 for 20
reverse stock split effective October 16, 1998. For further discussion relating
to the accounting for reorganization, see Note 9 of DIGS, Inc. and Subsidiaries'
Notes to Consolidated Financial Statements. DCP provides complete multimedia and
internet communications solutions for public companies to proactively tell their
story to the worldwide investment community. DCP produces investor relations
CD-ROM (IRCD) packages for its corporate and investor relations clients. DCP
also offers the environmental health and safety CD-ROM (EHSCD) to dynamically
tell the environmental, health and safety story to investors, environmental
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groups, media and the public. The Company operates in only one business segment.
For the Years Ended December 31, 1998 and 1997, the Company generated revenues
of 96% and 87% from the following customers:
For the Years Ended December 31
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1998 1997
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Hartcourt Incorporated $ 29,045 16.9% $ 0 0%
Mikohn Gaming Corporation 27,541 16.0 18,325 16.6
Terrace Tower USA 107,500 62.6 30,000 27.2
White Wings Lab 0 0 47,427 43.0
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$ 164,086 95.5% $ 95,752 86.8%
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Because our products are the properties of the Company, and because they
can be used in several different capacities, it is possible to have repeat
customers that order additional products and request upgrading and/or
modification to their products. As shown above, two of our customers in 1997,
Mikohn Gaming and Terrace Tower, continued to utilize our products and services
in 1998. However, there is no guarantee that our current customers will remain
with us through 1999 and subsequently. Our clients are in no contractual
obligation to use our services in the future after the products have been
delivered. As of December 31, 1998, the Company has no long-term agreements with
any of its customers. We believe that we have superior products and services.
With a strong marketing effort, we believe that we will be able to maintain and
increase our client base.
Years Ended December 31, 1998 and 1997:
Revenues increased to $171,694 for the year ended December 31, 1998 from
$110,107 for the year ended December 31, 1997. The increase was primarily due to
the overall increase of sales volume and activity during the year ended December
31, 1998.
Gross profit increased by 1.4% to $74,713 for the year ended December 31,
1998 from $46,362 for the year ended December 31, 1997. The increase was
primarily due to the overall increase in sales volume. Gross profit percentages,
however, remain approximately the same for the year ended December 31, 1998 and
1997, which were 43.5% and 42.1%, respectively.
Cost of sales increased to $96,980 for the year ended December 31, 1998
from $63,745 for the year ended December 31, 1997. The increase was primarily
due to the Company's overall increase of sales volume and activity during the
year ended December 31, 1998.
Operating expense increased to $535,231 for the year ended December 31,
1998 from $233,620 for the year ended December 31, 1997. The increase was
primarily due to hiring additional staff to manage and support the growth during
1998. In 1998, the Company entered into an employment agreement with its
President, which accounts for an increase of officer salaries by $83,489. The
total increases in salaries and related personnel costs accounted for 85% of the
increase in operating expense. Increase in sales commission, professional fees,
outside services, and rent expense also contributed to the increase of operating
expense.
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Other income and (expense) decreased to $(113,761) for the year ended
December 31, 1998 from ($1,991) for the year ended December 31, 1997. The
decrease was primarily due to the Company booking a non-cash finance expense of
$134,930 in conjuction with a short-term loan agreement. The loan agreement
called for the Company to sell 586,656 shares of common stock for $0.02 per
share. The non-cash finance expense is based on the difference of the estimated
value of the stock and the actual amount received. Factors used to determine the
fair market value of the stock included the price of previous stock sales and
the financial condition of the Company at March 20, 1998, the date of the
agreement. Interest expense decreased to ($1,831) for the year ended December
31, 1998 from ($2,814) for the year ended December 31, 1997. Interest expense
consists primarily of interest expense on the note payable to stockholder.
As a result of operating losses and the Company's inability to recognize a
benefit from its deferred tax assets, the Company has not recorded a provision
for federal income taxes for the years ended December 31, 1998 and 1997;
however, the Company incurred a minimum state income tax expense of $800 in 1998
and 1997. As of December 31, 1998, the Company had $711,466 of net operating
loss carry forwards for federal income tax purposes, which expire beginning in
2011. The Company has provided a full valuation allowance on its deferred tax
assets, consisting primarily of net operating loss carry forwards, due to the
likelihood that the Company may not generate sufficient taxable income during
the carry-forward period to utilize the net operating loss carry forwards.
Unrealized loss on investment in equity securities increased to $7,850 for
the year ended December 31, 1998 from $0 for the year ended December 31, 1997.
The unrealized loss was contributed by the decrease in market value, comparing
to historical cost of investment securities as of December 31, 1998.
Three Months Ended March 31, 1999 and 1998:
Revenues increased to $291,964 for the three months ended March 31, 1999
from $37,543 for the three months ended March 31, 1998. The increase was
primarily due to the overall increased sales volume and activity during the
first quarter of 1999. The increase in revenues is primarily attributable to the
increase in the marketing effort.
Gross profit increased to 91% for the three months ended March 31, 1999
from 44% for the year ended December 31, 1998. The increase was due to the
increase in sales volume and the decrease in cost of goods sold. Sales for the
first quarter of 1999 exceed sales for the year ended December 31, 1998 by 70%.
While sales increased, IRCD production expense decreased. The decrease in IRCD
production expense mainly due to the reduction in IRCD programming cost.
Throughout 1998, the Company constantly improved its products. All costs
associated with technology enhancement were expensed in 1998. By the end of
1998, the Company developed two new products, EOCD and EHSCD. In addition, the
Company has made arrangements with outside sources to maintain and improve its
products at a fixed monthly rate. Such arrangements benefited the Company in the
first quarter of 1999 when sales increased substantially and costs remained low.
If sales do not sustain the same level throughout the year, the Company expects
the gross profit to decrease because of certain fixed costs, that will remain
the same throughout the year.
Cost of sales increased to $26,009 for the three months ended March 31,
1999 from $17,477 for the three months ended March 31 1998. The increase was
primarily due to the overall increase of sales volume and activity during the
first quarter of 1999.
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Operating expense increased to $239,836 for the three months ended March
31, 1999 from $56,190 for the three months ended March 31, 1998. The increase
was primarily due to the significant increase in marketing expense, personnel
related costs, and outside service costs.
Other income (and expense) increased to $1,950 for the three months ended
March 31, 1999 from ($1,203) for the three months ended December 31, 1998. The
increase was primarily due to net changes in sublease rental income, interest
expense, and realized loss on sale of securities. Sublease rental income
increased to $9,800 for the three months ended December 31, 1998 from $0 for the
year ended December 31, 1997. Interest expense decreased to $0 from ($1,203) for
the three months ended March 31, 1999 and 1998, respectively. The Company
recognized a realized loss on sale of investment securities, which was offset
against unrealized loss, recorded as of December 31, 1998.
Six Months Ended June 30, 1999 and 1998:
Revenues increased to $314,154 for the six months ended June 30, 1999 from
$159,080 for the same period ended June 30, 1998. This overall increase is due
to increased sales volumes during the first quarter of 1999. Revenue for the
second quarter or three months ended June 30, 1999 decreased to $22,190 as
compared to $121,150 for the same period in 1998. The revenue decrease in this
quarter as compared to the same quarter in 1998 was due to a temporary decrease
in the sales volume of the Company's CD-ROM products.
Gross profit increased to $228,120 for the six months ended June 30, 1999
from $121,972 for the same period ended June 30, 1998. Gross profit as a percent
of revenue remained relatively constant at 28% and 24% during the six months
ended June 30, 1999 and 1998 respectively. Gross profits for the quarter ended
June 30, 1999 decreased to ($37,835) from $101,907 during the same quarter ended
June 30, 1998. The quarterly decrease in gross profit is related to the
quarterly decrease in revenues as well as an increase in production costs.
Production costs for the quarter ended June 30, 1999 increased due to the
complexity of the CD-ROM's being produced during the quarter. The complexity of
the CD-ROM's being produced in this quarter did not allow for normal production
efficiencies. The decreased production efficiencies resulted in increased
production costs.
Operating expenses increased to $443,768 for the six months ended June 30,
1999 from $202,762 for the six months ended June 30, 1998. For the quarter ended
June 30, 1999, operating expenses increased to $203,931 from $146,573 for the
comparable quarter ended June 30, 1998. The increase in operating expenses is
primarily due to increases in outside service costs, payroll expense and
marketing costs.
As a result of operating losses and the Company's inability to recognize a
benefit from its deferred tax assets, the Company has not recorded a provision
for federal income taxes for the three months ended March 31, 1999 and 1998;
however, the Company paid a minimum state income tax expense of $800 for the
first quarter of 1998. As of December 31, 1998, the Company had $711,466 of net
operating loss carry forwards for federal income tax purposes, which expire
beginning in 2011. The Company has provided a full valuation allowance on its
deferred tax assets, consisting primarily of net operating loss carry forwards,
due to the likelihood that the Company may not generate sufficient taxable
income during the carry-forward period to utilize the net operating loss
carry forwards.
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The Company currently anticipates that its revenue for 1999 will increase
by approximately 250%. This is because revenue for the first quarter of 1999
exceeded 1998 revenue by 70%. In addition, revenue for anticipated new contracts
for the remainder of the year would help to increase the Company's revenue by
approximately 250% in 1999. However, the Company anticipated that it would
generate a net loss of approximately $500,000 in 1999 due to the increase in
marketing expenses, personnel related costs, and outside service costs of 780%,
71%, and 167%, respectively. The Company also expects to incur significant
marketing and outside service expenses to promote all CD-ROM products. If
revenues fall below the Company's expectations, the Company will not be able to
reduce its expense rapidly in response to a shortfall without raising additional
capital through public or private financing, or other arrangements. In the
long-term, the Company will continue to maintain and increase its marketing
expense. In addition, the Company will continue to spend money to improve and
develop its technology for existing and new products.
Liquidity and Capital Resources:
Since 1996, the Company has funded its operations and met its capital
expenditure requirements through private sale of equity securities, through
short-term loans from stockholders and unrelated parties, and through cash
generated from sale of its CD-ROM products and annual service contracts of its
Internet Website. Proceeds from sale of common stock through March 31 1999
totaled approximately $1,306,000.
The Company had negative cash flows from operating activities since 1997.
Net cash used in operating activities was $135,084 in 1997, $383,189 in 1998,
and $181,177 in the first three months of 1999. Net cash used in operating
activities in each of these periods was primarily the result of net operating
losses. These operating cash outflows were partially offset by the increases in
deferred rent credit and accounts receivable, and the decreases in accounts
payable and accrued expenses.
Net cash used by investing activities was $51,750 in 1997, $88,042 in 1998,
and $0 in the first three months of 1999. To date, the Company investing
activities have consisted of purchases of property and equipment and investment
in program development. Capital expenditures for property and equipment totaled
$12,615 in 1997, $79,042 in 1998, and $7,475 for the first three months of 1999.
Capital expenditures for program development totaled $39,135 in 1997, $0 in
1998, and $13,500 for the first three months of 1999.
As of December 31, 1998, the Company's principal commitments consisted of a
two-year operating lease of the corporate office, which is due to expire on July
31, 2000. The Company is obligated to pay $92,295 and $53,837 of rent expense
for 1999 and 2000, respectively. Rent expense for 1999 and 2000 will be offset
against deferred rent credit of $20,000 and $11,667 and sublease rental income
of $21,000 and $0, respectively. The Company anticipates that it will renew the
lease agreement for an additional 3 years with an annual lease obligation of
approximately $100,000.
The Company also has an employment agreement with the Company's President,
which is due to expire on February 28, 2000. The Company is obligated to pay its
President a salary of $96,000 and $16,000 for 1999 and 2000. The Company
anticipates that it will renew the employment agreement with the President in
February of the year 2000 for an additional 3 years with an approximate annual
compensation of $120,000.
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The Company's working capital remained approximately the same for the 1st
quarter of 1999, despite an increase in revenue which had already exceeded 1998
revenue by $120,270. This is because cash used for operations exceeded cash
generated from the operation by $181,177. In addition, accounts receivable
during the first quarter of 1999 increased to $203,011 from $3,183 because of
the increase in sales.
The Company plans to make capital expenditures of approximately $150,000 in
1999. In addition, the Company anticipates that it will spend approximately
$300,000, $80,000, and $100,000 for personnel, outside service costs, and
marketing expense.
As of March 31, 1999, the Company had $314,918 in cash. The Company
anticipates that the existing cash and any cash generated from operations will
be sufficient to fund its operating activities, capital expenditures and other
obligations through at least December 31, 1999. However, the Company may need to
raise additional funds in order to fund more rapid expansion, to expand its
marketing activities, to develop and enhance existing products, or to acquire
businesses or technologies. If the company is not successful in generating
sufficient cash flow from operations, it may need to raise additional capital
through public or private financing or other arrangements. If additional funds
were raised through the issuance of equity securities, the percentage of the
stock owned by the then current stockholders would be reduced. Furthermore, such
equity might have rights, preferences or privileges senior to current common
stock.
Year 2000 Issue:
The Year 2000 Issue refers generally to the problems that some computer
systems may have in determining the correct year for the century. For example,
software with date-sensitive functions that is not Year 2000 compliant may not
be able to distinguish whether "00" means 1900 or 2000, which may result in
failures or the creation of erroneous results.
The Company's primary management information and business systems are
running on third party software packages purchased and implemented in 1997.
These software packages are maintained and upgraded annually. Management
anticipates that these packages are Year 2000 compliant; however, the Company
will obtain Year 2000 compliance statements from the software makers. The
Company believes that the total cost of Year 2000 compliance efforts will not be
material; however, if the Company experiences unforeseen problems with respect
to the Year 2000, such as unused computer hardware and software, the Company
could incur additional expense to correct these problems, which is estimated to
be no more than $3,000.
In addition, the Company intends to obtain Year 2000 compliance statements
from other third parties, including the landlord, banks, Internet service
providers, customers, and major suppliers. Failure to achieve Year 2000
readiness by any of the Company's vendors and third parties could delay the
payments of the Company's month-to-month obligations and the collection of the
Company's accounts receivable for an estimated period of two weeks. However, the
Company does not expect the results to have a material impact on the Company's
financial position.
New Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
11
<PAGE>
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances in a full set of
general purpose financial statements. SFAS No. 130 defines comprehensive income
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is presented with the same prominence as other
financial statements. The Company adopted SFAS No. 130 for its fiscal year
beginning January 1, 1998, and does not anticipate that adoption of SFAS No. 130
will have a material effect on its financial statement presentation and
disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information "
("SFAS No. 131"), which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," and which is effective for financial
statements issued for fiscal years beginning after December 15, 1997. SFAS No.
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. SFAS No. 131 also establishes standards for disclosures by
public companies regarding information about their major customers, operating
segments, products and services, and the geographic areas in which they operate.
SFAS No. 131 defines operating segments as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. SFAS No. 131 requires comparative information for earlier
years to be restated. The Company adopted SFAS No. 131 for its fiscal year
beginning January 1, 1998. Adoption of SFAS No. 131 did not have a material
effect on the Company's financial statement presentation and disclosures.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pensions and Other Post retirement
Benefits" ("SFAS No. 132"), which is effective for financial statements issued
for fiscal years beginning after December 15, 1997. SFAS No. 132 revises
employers' disclosures about pension and other post retirement benefit plans.
SFAS No. 132 requires comparative information for earlier years to be restated.
The Company adopted SFAS No. 132 for its fiscal year beginning January 1, 1998.
Adoption of SFAS No. 132 did not have any effect on the Company's financial
statement presentation and disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), which is effective for financial statements for all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. SFAS No. 133 also addresses the accounting for hedging
activities. The Company will adopt SFAS No. 133 for its fiscal year beginning
January 1, 2000, and does not anticipate that adoption of SFAS No. 133 will have
any effect on its financial statement presentation and disclosures.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company presently leases, from a third party, 6,153 square feet of
office space at 17327 Ventura Boulevard, Suite 200, Encino, California 91316,
12
<PAGE>
pursuant to a lease with a term ending July 31, 2000, providing for monthly rent
of $7,691. The lease provides options to renew for an additional three and five
years. The Company does not anticipate changing its present leasing situation or
purchasing any real property in the near future.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS:
The following table sets forth certain information regarding the ownership
of the Company's Common Stock known by the Company to be the beneficial owner of
more than 5% of the Common Stock of the Company as of May 31, 1999. Except as
otherwise indicated, the Company has been advised that all individuals listed
below have the sole power to vote and dispose of the number of shares set forth
opposite their names.
Beneficial
Ownership of
Name and Address Common Stock Percent of Class
- -------------------------------------------------------------------------------
Peter B. Dunn 1,330,500 20.0
17327 Ventura Boulevard, Suite 200
Encino, CA 91316
Allen Kelsey Grammer Trust 450,000 6.8
c/o Donald J. Miod
Miod & Company
15456 Ventura Boulevard, Suite 500
Sherman Oaks, CA 91403
First Capital Network, 1 439,992 6.6
Worldwide Insurance Consultants, 1 439,992 6.6
Jamie Mazur 1, 2 219,996 3.3
Jennifer Mazur 1, 2 219,996 3.3
Emily Mazur 1, 2 219,996 3.3
Trent Mazur 1, 2 219,996 3.3
1 The address of each of the beneficial owners identified is c/o
Corporate Financial Enterprises, 2224 Main Street, Santa Monica, CA
90405. Mr. Regis Possino is an officer and principal shareholder of
these beneficial owners.
2 Jamie, Jennifer, Emily and Trent Mazur are siblings and their parents
disclaim beneficial ownership of these shares. Emily and Trent Mazur
are minors, and their shares are held by Michelle Mazur, their mother,
as custodian.
(b) SECURITY OWNERSHIP OF MANAGEMENT:
The following table sets forth certain information regarding the ownership
of the Company's Common Stock which are deemed under the current rules of the
13
<PAGE>
Securities and Exchange Commission to be beneficially owned by the Company's
executive officers and directors, individually, and all executive officers and
directors as a group, as of May 31, 1999. Except as otherwise indicated, the
Company has been advised that all individuals listed below have the sole power
to vote and dispose of the number of shares set forth opposite their names.
Name, Title and Address Number of Shares Percent of Class
- ----------------------- ------------------------------------
Peter B. Dunn 1,330,500 20.0
President and Director
17327 Ventura Boulevard, Suite 200
Encino, CA 91316
Allen Dunn 165,000 2.5
Vice President, COO and Director
17327 Ventura Boulevard, Suite 200
Encino, CA 91316
David L. Fleming 120,000 1.8
Secretary and Director
17327 Ventura Boulevard, Suite 200
Encino, CA 91316
Officers and Directors as a Group
(3 Persons) 1,615,500 24.3
(c) CHANGES IN CONTROL:
There are no arrangements known to the Company which may result in a change
in control of the Company.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
(a) OFFICERS AND DIRECTORS: The following table provides information
concerning each executive officer and director of the Company. All directors
hold office until the next annual meeting of shareholders or until their
successors have been elected and qualified.
Age Title
--- -----
Peter B. Dunn 59 President, Chief Financial Officer and
Director
Allen Dunn 32 Chief Operating Officer and Director
David L. Fleming 48 Secretary and Director
PETER B. DUNN founded Digital Corporate Profiles, Inc. ("DCP"), a
wholly-owned subsidiary of the Company, in July 1996 and has served as Chairman
of the Board, President, Chief Executive officer, Chief Financial Officer and
Treasurer of DCP since that time, and as President and Chief Financial Officer
for the Company since November 1998. From 1987 to 1996, Mr. Dunn was President
of Lucky Dog Productions where he produced, directed and/or wrote 12 Golf TV
shows/videos, one commercial, two cable TV pilots and a made-for-video movie for
such clients as Paramount Home Video, Classic Golf International, British
14
<PAGE>
Broadcasting Corp., Lifetime Vision, Ltd, and Best of British Film and TV, Ltd.
From 1980 to 1987, he was President of International Special Promotions (ISP), a
special events marketing company serving companies such as Coca-Cola, R.J.
Reynolds, and Proctor and Gamble. From 1972 to 1980, Mr. Dunn was Chief
Executive Officer of Western Corporate Services, Inc., which he founded in 1972.
Western Corporate Services is the owner of U.S. Stock Transfer Corporation,
which is the third largest independent stock transfer agency in the United
States. Mr. Dunn remains a major shareholder and member of the Board of
Directors of Western Corporate Services. Mr. Dunn received his Bachelor of Arts
in Industrial Management from Clarkson University, and attended graduate school
at the University of California, Los Angeles, where he studied Math and
Business.
ALLEN DUNN joined Digital Corporate Profiles, Inc. ("DCP"), a wholly-owned
subsidiary of the Company at its inception, in July 1996, in its computer
department and, since November 1998, has been serving as Chief Operating Officer
and director of both the Company and DCP. Mr. Dunn has been responsible for the
Company's web page design and Html coding, as well as website maintenance of the
Company's UNIX operating system. From August 1997 to March 1998, Mr. Dunn was
director of sales and marketing. From June 1994 to January 1996, Mr. Dunn
freelanced as a computer programmer and a children's self-defense instructor.
During this time, the primary focus of Mr. Dunn's athletic career was competing
in national Tae Kwon Do tournaments highlighted in an attempt to qualify for the
U.S. National Tae Kwon Do Team at the Olympic Training Center located in
Colorado Springs, Colorado. Mr. Dunn received his Bachelor of Arts in Economics
from California State University at Northridge in 1993, and is an alumnus of the
University of Colorado School of Astrophysics and Atmospherics. He is currently
pursuing an advanced degree in Computer Science at California State University
at Northridge, as well as completing a Microsoft certified program at New
Horizons Computer School in Los Angeles, California. Mr. Dunn is the son of
Peter Dunn.
DAVID L. FLEMING joined the Board of Directors of Digital Corporate
Profiles, Inc., a wholly-owned subsidiary of the Company, in July 1996 and has
been a director and Secretary of the Company since November 1998. Since 1991,
Mr. Fleming has been a managing partner in DG&F Design, a privately owned
graphic arts company.
ITEM 6. EXECUTIVE COMPENSATION.
(a) SUMMARY COMPENSATION TABLE: The following information is provided for
the Company's Chief Executive officer during the Company's last completed fiscal
year. The Company had no executive officers whose total annual salary and bonus
exceeded $100,000 for such year.
Annual Compensation Long Term Compensation
------------------- -------------------------
Awards Payouts
-----------------------------
Secur-
ities
All Rest- Under- All
Other ricted lying Other
Name and Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Awards SARs Payouts sation
- --------------------------------------------------------------------------------
15
<PAGE>
Peter B.
Dunn, CEO 1998 $80,000 -0- -0- -0- -0- -0- -0-
1997 $ 5,000 -0- -0- -0- -0- -0- -0-
1996 -0- -0- -0- -0- -0- -0- -0-
- --------------------------------------------------------------------------------
OPTIONS/SAR GRANTS in Last Fiscal Year: None. On January 2, 1999, pursuant
to a 1999 Stock Incentive Plan, the Company granted options to Peter Dunn and
Allen Dunn to purchase 100,000 shares and 80,000 shares, respectively. The
exercise price for Peter Dunn was $5.50 per share, and for Allen Dunn $5.00 per
share. For Peter Dunn, the options expire five years from date of grant and, for
Allen Dunn, the options expire ten years from date of grant. As of May 31, 1999,
no options have been exercised.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In 1997 and 1998, the Company borrowed monies from Peter Dunn, its
President, evidenced by a demand loan agreement with interest at 10% per annum.
In December 1998, the Company repaid $47,321 to Mr. Dunn, representing all
amounts owed to Mr. Dunn, including interest.
ITEM 8. DESCRIPTION OF SECURITIES.
(a) GENERAL:
The Company has authorized 100,000,000 shares consisting of 80,000,000
shares of Common Stock, $.001 par value, and 20,000,000 shares of Preferred
Stock, $.01 par value. There are issued and outstanding, as of May 31, 1999,
6,648,631 shares of Common Stock (258 holders of record). No Preferred Stock has
been issued.
(b) COMMON STOCK:
Each share of Common Stock entitles the holder thereof to one vote, either
in person or by proxy, at a meeting of shareholders. The holders are not
permitted to vote their shares cumulatively. Accordingly, the holders of more
than 50% of the issued and outstanding shares of Common Stock can elect all of
the directors of the Company.
All shares of Common Stock are entitled to participate ratably in dividends
when and as declared by the Company's Board of Directors out of the funds
legally available therefore. Any such dividends may be paid in cash, property or
additional shares of Common Stock. The Company has not paid any dividends since
its inception and presently anticipates that no dividends will be declared in
the foreseeable future. Any future dividends will be subject to the discretion
of the Company's Board of Directors and will depend upon, among other things,
future earnings, the operating and financial condition of the Company, its
capital requirements, general business conditions and other pertinent facts.
Therefore, there can be no assurance that any dividends on the Common Stock will
be paid in the future.
Holders of Common Stock have no preemptive or other subscription rights,
conversion rights, redemption or sinking fund provisions. In the event of the
dissolution, whether voluntary or involuntary, of the Company, each share of
Common Stock is entitled to share ratably in any assets available for
distribution to holders of the equity securities of the Company after
satisfaction of all liabilities.
16
<PAGE>
(c) PREFERRED STOCK:
The Company is authorized to issue up to 20,000,000 shares of Preferred
Stock, $.01 par value, of which no shares are issued and outstanding.
The Board of Directors has authority to issue the authorized Preferred
Stock in one or more series, each series to have such designation and number of
shares as the Board of Directors may fix prior to the issuance of any shares of
such series. Each series may have such preferences and relative, participating,
optional or other special rights, with such qualifications, limitations or
restrictions, as are stated in the resolution or resolutions providing for the
issue of such series as may be adopted from time to time by the Board of
Directors prior to the issuance of any shares of such series.
(d) 1999 STOCK INCENTIVE PLAN:
On January 2, 1999, the Company's Board of Directors approved a 1999 Stock
Incentive Plan (the "1999 Plan"), subject to approval, within twelve months, by
the stockholders. The purpose of the 1999 Plan is to enable the Company to
recruit and retain selected officers and other employees by providing equity
participation in the Company to such individuals. Under the 1999 Plan, regular
salaried employees, including directors, who are full time employees, may be
granted options exercisable at not less than 100 percent of the fair value of
the shares at the date of grant. The exercise price of any option granted to an
optionee who owns stock possessing more than ten percent of the voting power of
all classes of stock of the Company must be 110 percent of the fair market value
of the common stock on the date of grant, and the duration may not exceed five
years. Options generally become exercisable at a rate of 33 percent of the
shares subject to option one year after grant. The remaining shares generally
become exercisable ratably over an additional 24 months. The duration of options
may not exceed ten years. Options under the Plan are nonassignable, except in
the case of death and may be exercised only while the optionee is employed by
the Company, or in certain cases, within a specified period after termination of
employment (within three months) or death (within twelve months). The purchase
price and number of shares that may be purchased upon exercise of options are
subject to adjustment in certain cases, including stock splits,
recapitalizations and reorganizations.
The number of options granted and to whom, are determined by the Board of
Directors, at their discretion.
Under the 1999 Plan, there were 750,000 shares available for grant. As of
May 31, 1999, 289,000 options have been granted and are outstanding under the
1999 Plan, leaving a balance of 461,000 shares available for grant.
(e) TRANSFER AGENT:
The Transfer Agent for the Company's common stock is Signature Stock
Transfer, Inc., 14675 Midway Road, Suite 229, Dallas, Texas 75244.
17
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS.
Market Information
The Common Stock of the Company is traded under the symbol DIGS in the
over-the-counter market through the NASD's electronic OTC Bulletin Board
service. The following table sets forth the range of high and low bid prices per
share of the Common Stock for each of the periods indicated. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions,
and may not necessarily represent actual transactions. In November 1998 the
Company acquired Digital Corporate Profiles, Inc. ("DCP"). For a period of at
least two years prior thereto, the Company was inactive and trading in its
common stock was very sporadic. There was very little liquidity due to the low
volume. Therefore, any quotations prior to the DCP transaction would be
meaningless and misleading.
Bid Prices
-------------------------
High Low
---- ---
Quarter ended:
- ---------------
March 31, 1998 $ .09 $ .03
June 30, 1998 $1.50 $ .04
September 30, 1998 $2.62 $ .25
December 31, 1998 $6.87 $4.87*
March 31, 1999 $7.00 $3.00
June 30, 1999 $8.50 $8.50
September 30, 1999 $7.75 $7.75
December 31, 1999 $9.62 $4.87
Through February 10, 2000 $6.25 $5.12
* Reflects a 1 for 20 reverse stock split.
Holders of Common Stock
As of May 31, 1999, the number of holders of record of common stock was 258.
Dividends
To date, the company has not paid any cash dividends on its common stock
and does not anticipate paying cash dividends in the foreseeable future. The
Company anticipates that all earnings, if any, for the foreseeable future will
be retained for development of the Company's business.
ITEM 2. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings.
ITEM 3.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
18
<PAGE>
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
(1) On April 8, 1997, the Company sold 300,000 shares of Common Stock to
two investors for an aggregate amount of $100,000. The two individuals
were sophisticated investors and were given full opportunity to review
the business and financial operations of the Comjpany and to question
officers and directors. Each of the investors purchased the shares
without a view to further distribute the shares. Accordingly, the
Company believes that this transaction was exempt from the registration
provisions of the Securities Act of 1933, as amended, pursuant to the
exemption under Section 4(2) of the Act.
(2) Pursuant to an agreement entered into on March 20, 1998, the Company
issued 1,759,968 shares on September 15, 1998 of its Common Stock to
three purchasers for $11,734. All of the purchasers were sophisticated
investors and were in fact business consultants for the Company. Each
of the investors acquired the stock for investment purposes without a
view to further distribution. Accordingly, the Company believes that
this transaction was exempt from the registration provisions of the
Securities Act of 1933, as amended, pursuant to the exemption under
Section 4(2) of the Act.
(3) On November 9, 1998, in connection with a Plan and Agreement of
Reorganization (the "Plan"), the Company issued 5,194,968 shares of its
Common Stock in exchange for all of the outstanding common stock of
Digital Corporate Profiles, Inc. ("DCP"). Upon the close of the Plan,
DCP's shareholders owned approximately 99% of the outstanding Common
Stock of the Company. as a Result, DCP became a wholly-owned subsidiary
of the Company.
(4) On November 10, 1998, the Company sold 1,400,000 shares of Common Stock
to four individuals pursuant to a Rule 504 offering. The shares were
sold at $0.71 per share for gross proceeds of $994,000. The Company had
reasonable grounds to believe that each purchaser was capable of
evaluating the merits and risks of his investment and bearing the
economic risks of his investment. The Company had not raised, over the
prior twelve months, more than one million dollars inclusive of the
proceeds from this offering. Accordingly, the Company believes that
this transaction was exempt from the registration provisions of the
Securities Act of 1933, as amended, pursuant to the exemption under
Regulation D of that Act, and the Rules and Regulations promulgated
thereunder.
(5) On January 2, 1999, the Board of Directors duly adopted a stock option
plan, subject to shareholder approval, pursuant to which options to
purchase up to 750,000 shares of the Company's Common Stock may be
granted by a committee of directors to key employees and others. Each
option will have a term not to exceed ten years, or such shorter period
as is determined by the Board of Directors, and will be exercisable at
the per share fair market value of the Company's Common Stock as at the
date of grant. As of May 31, 1999, option to purchase 287,000 shares of
Common Stock have been granted.
19
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporate Law ("GCL") of the State of Delaware
empowers a Delaware corporation, such as the Company, to indemnify its directors
and officers under certain circumstances. The Company's Certificate of
Incorporation provides that the Company shall indemnify such persons to the
fullest extent permitted by Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors and officers and controlling persons of
the Company pursuant to the provisions of Delaware law or otherwise, the Company
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in said Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit, or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy in said Act and will be governed by the final adjudication of such
issue.
Article Seventh of the Company's Certificate of Incorporation provides that
the Company shall, to the full extent permitted by Section 145 of the Delaware
General Corporation Law, as amended from time to time, indemnify all persons
whom it may indemnify pursuant thereto.
20
<PAGE>
PART F/S
The following financial statements are included as a separate section
following the signature page to this Form 10-SB and are incorporated herein by
reference.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Audited Financial Statements:
Independent Auditors' Report F-2
Prior Independent Auditors' Report F-3
Consolidated Balance Sheet as of December 31, 1998 F-4
Consolidated Statements of Operations - Years Ended
December 31, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1998 and 1997 F-6
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8 - F-15
21
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS.
Item Description
2. Plan and Agreement of Reorganization between the Registrant and
Digital Corporate Profiles, Inc. dated October 3, 1998.*
3.(i) Articles of Incorporation and Amendments thereto.*
(ii) By-Laws of Registrant.*
10.(i) Registrant's 1999 Stock Incentive Plan.*
(ii) Employment Agreement between Registrant's wholly-owned subsidiary
and Peter Dunn.*
23. Subsidiaries of Registrant.
- -------------------
* Previously filed.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGS, INC.
Date: April 6, 2000
By: /s/ Peter B. Dunn
----------------------------------------------------
Peter B. Dunn, President and Chief Financial Officer
22
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
23
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
INDEX TO FINANCIAL STATEMENTS
Pages
------------------
Independent Auditors' Report F - 2
Prior Independent Auditors' Reports F - 3
Consolidated Balance Sheet as of December 31, 1998 F - 4
Consolidated Statements of Operations
For the Years Ended December 31, 1998 and 1997 F - 5
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1998 and 1997 F - 6
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997 F - 7
Notes to Consolidated Financial Statements F - 8 - F - 15
Unaudited Financial Statements
Consolidated Balance Sheet - Three Months
Ended March 31, 1999 F-16
Consolidated Statements of Operations - Three
Months Ended March 31, 1999 and 1998 F-17
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1999 and 1998 F-18
Notes to Consolidated Financial Statements F-19
Consolidated Balance Sheet (Unaudited) as of June 30, 1999 F-20
Consolidated Statements of Operations (Unaudited)
For the Quarters and Year-To-Date Periods
Ended June 30, 1999 and 1998 F-21
Consolidated statements of Cash flow (Unaudited)
For the Year-To-Date Periods Ended June 30, 1999
And 1998 F-22
Selected Information - Substantially All Disclosures
Required by Generally Accepted Accounting
Principles are Not Included F-23 - F-25
ITEM 2 - Management's Discussion And Analysis Of Financial
Condition And Results Of Operations F-26
F-1
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
April 5, 1999
To the Board of Directors
DIGS, Inc. and Subsidiaries
Encino, California
We have audited the accompanying consolidated balance sheet of DIGS, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1998 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
financial statements of Digital Corporate Profiles, Inc. (Subsidiary) as of
December 31, 1997 were audited by other auditors whose report dated April 10,
1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of DIGS,
Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
CALDWELL, BECKER, DERVIN, PETRICK & CO., L. L. P.
Woodland Hills, California 91364
F-2
25
<PAGE>
KELLOGG & ANDELSON
ACCOUNTANCY CORPORATION
Board of Directors
Digital Corporate Profiles, Inc.
(Formerly known as StockNet, Inc.)
Encino, California
Independent Auditor's Report
----------------------------
We have audited the accompanying balance sheet of Digital Corporate
Profiles, Inc. (formerly known as StockNet, Inc.) as of December 31, 1997 and
the related statements of operations and accumulated deficit and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on the test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digital Corporate Profiles,
Inc. (formerly known as StockNet, Inc.), as of December 31, 1997 and the results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
(X) Kellogg & Andelson
- ----------------------
signature
April 10, 1998
MEMBERS AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
CALIFORNIA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
C.P.A. ASOCIATES OFFICES IN PRINCIPLE CITIES
14724 VENTURA BOULEVARD. SECOND FLOOR, SHERMAN OAKS, CALIFORNIA 91403
PHONE (818) 971-5100 FAX (818) 971- 5155
F-3
26
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
CURRENT ASSETS
Cash (Note 2) $ 515,920
Marketable equity securities (Notes 2 and 3) 1,150
Accounts receivable - trade 3,183
-----------------
Total Current Assets 520,253
PROPERTY AND EQUIPTMENT,
net of accumulated depreciation (Notes 2 and 5) 90,552
PROGRAM DEVELOPMENT COSTS,
net of accumulated amortization (Notes 2 and 6) 47,755
LONG-TERM ASSETS
Deferred tax assets (Note 4) --
------------------
Total Assets $ 658,560
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 20,912
Payroll tax liabilities 11,339
Accrued vacation pay 4,635
Sub-lease deposits 3,000
------------------
Total Current Liabilities 39,886
OTHER LIABILITIES
Deferred rent credit (Note 7) 31,667
------------------
Total Liabilities 71,553
------------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share;
20,000,000 shares authorized, 0 shares
issued and outstanding --
Common stock, par value $.001 per share;
80,000,000 shares authorized, 6,648,631
shares issued and outstanding 6,649
Additional paid-in capital 1,434,604
Accumulated other comprehensive income (loss) (7,850)
Retained (deficit) (846,396)
------------------
Total Stockholders' Equity 587,007
------------------
Total Liabilities and Stockholders' Equity $ 658,560
==================
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
F - 4
27
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
--------------- --------------
REVENUE (Notes 2 and 8)
Investor relations CD-ROM (IRCD) $ 166,564 $ 82,770
Stocknet-USA directories 5,130 27,337
------------- ------------
Total Revenue 171,694 110,107
------------- ------------
COST OF SALES
IRCD production costs 72,972 59,815
Others 24,008 3,930
------------- ------------
Total Cost of Sales 96,980 63,745
------------- ------------
Gross Profit 74,714 46,362
------------- ------------
OPERATING EXPENSES
Auto expense 18,282 7,624
Depreciation and amortization (Note 12) 14,717 17,767
Commissions 17,974 3,124
Marketing 14,400 34,358
Outside services 43,817 27,025
Printing 19,824 5,122
Professional services 33,126 13,916
Rent (Note 7) 44,445 18,000
Salaries - officers 121,989 38,500
Salaries - other 113,257 16,000
Taxes - payroll 20,565 14,740
Others 72,835 37,444
------------- ------------
Total Operating Expenses 535,231 233,620
------------- ------------
(Loss) from Operations (460,517) (187,258)
OTHER INCOME (EXPENSE)
Rental income (Note 7) 23,000 --
Financing expense (Note 10) (134,930) --
Other income -- 823
Interest expense (1,831) (2,814)
------------- ------------
(Loss) Before Income Taxes (574,278) (189,249)
PROVISION FOR INCOME TAX (Note 4) (800) (800)
------------- ------------
Net (Loss) (575,078) (190,049)
OTHER COMPREHENSIVE INCOME, net of tax:
Unrealized holding (loss) arising during period (7,850) --
(Notes 2 and 3) ------------- ------------
Comprehensive Income (Loss) $ (582,928) $ (190,049)
============= ============
(Loss) per common share and common share $ (.14) $ (.06)
equivalent (Note 2) ============= ============
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
F - 5
28
<PAGE>
DIGS, INC. AND SUBSIDIARIES (FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Additional Other Retained
Preferred Stock Common Stock Paid-In Comprehensive Earnings
------------------ ----------------------
Shares Amount Shares Amount Capital Income (Deficit) Total
-------- --------- ------------ --------- -------------- -------------- -------------- -------------
Balance as
previously reported
Dec. 31, 1996 -- -- 3,135,000 $ 3,135 $ 197,453 -- $ (81,269) $ 119,319
(Note 9)
Stock sales
April 8, 1997
(Note 10) -- -- 300,000 300 99,700 -- -- 100,000
Net (loss)for
the year ended
Dec. 31, 1997 -- -- -- -- -- -- (167,504) (167,504)
Prior period
adjustment
Dec. 31, 1997
(Note 12) -- -- -- -- -- -- (22,545) (22,545)
------- ---------- ------------ ---------- ------------- --------------- -------------- -----------
Balance at
Dec. 31, 1997 -- -- 3,435,000 3,435 297,153 -- (271,318) 29,270
Stock sales
Mar. 20, 1998 -- -- 1,759,968 1,760 144,905 -- -- 146,665
(Note 10)
Reorganization
with DIGS, Inc. -- -- 53,663 54 (54) -- -- 0
Nov. 9, 1998
(Note 9)
Stock sales
Nov. 10, 1998
(Note 11) -- -- 1,400,000 1,400 992,600 -- -- 994,000
Net (loss)for
the year ended
Dec. 31, 1998 -- -- -- -- -- -- (575,078) (575,078)
Unrealized
holding (loss)
Dec. 31, 1998 -- -- -- -- -- (7,850) -- (7,850)
(Notes 2 and 3)
-------- ---------- ----------- --------- ---------- ------------- -------------- ----------
Balance at -- $ -- 6,648,631 $ 6,649 $1,434,604 $ (7,850) $ (846,396) $ 587,007
Dec.31,1998 ======== ========== =========== ========= ========== ============= ============== ============
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
F - 6
29
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<S> <C> <C>
1998 1997
--------------------- -------------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net loss $ (575,078) $ (190,049)
Adjustments to reconcile net (loss) to net cash provided (used)
by operating activities:
Operating expenses paid by issuance of stock 134,930 --
Amortization and depreciation 31,607 17,766
(Increase) in accounts receivable (3,183) --
(Decrease) Increase in current liabilities and accrued expenses (6,101) 37,199
Increase in deposits 3,000 --
Increase in deferred rent credit 31,667 --
------------------- -------------------
Net Cash Flows (Used) by Operating Activities (383,158) (135,084)
------------------- -------------------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Acquisition of property and equipment (79,042) (12,615)
(Increase) in program development cost -- (39,135)
Acquisition of marketable equity securities (9,000) --
------------------- -------------------
Net Cash Flows (Used) by Investing Activities (88,042) (51,750)
------------------- -------------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 100,200
Proceeds from short-term loan 600,000 --
Principal payment on short-term loan (600,000) --
Issuance of common stock (Notes 10 and 11) 1,005,735 100,000
(Decrease) in note payable to stockholders (47,321) --
Payment of long-term debt -- (52,879)
------------------- -------------------
Net Cash Flows Provided by Financing Activities 958,414 147,321
------------------- -------------------
NET INCREASE (DECREASE) IN CASH 487,213 (39,513)
CASH AT THE BEGINNING OF THE YEAR 28,707 68,220
------------------- -------------------
CASH AT THE END OF THE YEAR $ 515,920 $ 28,707
=================== ===================
ADDITIONAL DISCLOSURES:
Cash paid during the year for:
Interest $ 1,831 $ 2,814
=================== ===================
Income Taxes $ 800 $ 800
=================== ===================
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Common stock issued in exchange for subsidiary's common stock
$ 312,322 $ --
=================== ===================
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
F - 7
30
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - DESCRIPTION OF BUSINESS
DIGS, Inc. (the Company), formerly known as Advanced Laser Products, Inc.,
a Delaware corporation, was incorporated on June 27, 1986 as Skin Research
Laboratories, Ltd. On September 25, 1990, the Company changed its name to
Medipak Corporation. On February l, 1995, the Company changed its name to
Advanced Laser Products, Inc. In the late 1980's, the Company was attempting to
enter the medical receivables financing business. On November 9, 1998, the
Company acquired Digital Corporate Profiles, Inc. (DCP) (see Note 9). DCP
provides complete multimedia and Internet communications solutions for public
companies to proactively tell their story to the worldwide investment community.
DCP produces investor relations CD-ROM (IRCD) packages for its corporate and
investor relations clients. DCP also offers the environmental health and safety
CD-ROM (EHSCD) to dynamically tell the environmental, health and safety story to
investors, environmental groups, media and the public.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
- ----------------------
The consolidated financial statements include the accounts of DIGS, Inc.
and its wholly owned subsidiaries, Digital Corporate Profiles, Inc. (DCP), a
California corporation, and Advanced Laser Products, Inc., a Nevada corporation
(inactive). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Reclassifications
- -----------------
Certain prior year balances have been reclassified to conform with the
current year presentation.
Cash and Cash Equivalents
- -------------------------
The Company and its subsidiaries consider cash on hand and cash in banks as
cash and cash equivalents.
As of December 31, 1998, the Company funds held in its operating checking
account exceeded FDIC limit by $415,920.
Marketable Securities
- ---------------------
Marketable securities consist of common stock. Marketable securities are
stated at market value as determined by the most recently traded price of each
security at the balance sheet date, with the unrealized gains and losses, net of
tax, reported as a separate component of stockholders' equity. All marketable
securities are defined as available-for-sale securities under provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
Revenue Recognition
- -------------------
Design and development contract revenues are billed in equal one-third
installments as the contracts progress. All payments are nonrefundable and
revenue is recognized when earned. Revenue is deemed to be earned when there is
F-8
31
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (continued)
- -------------------------------
no future performance obligation. Future performance obligation ceases when the
product is approved by client and shipped. The average length of a contract is
approximately two months.
Annual service contract revenues are recognized when earned. Annual service
contracts are billed at the beginning of each quarter and recognized on the
straight-line basis over the contract life, which is twelve months. The advance
charges are recorded and presented as deferred revenue until earned.
As of December 31, 1998 and 1997, the Company did not have any open contracts.
Earnings Per Share
- ------------------
Earnings per share are computed on the basis of the weighted average number
of common shares outstanding during the year. The weighted average shares
outstanding for the years ended December 31, 1998 and 1997 were 4,024,105 and
3,355,274, respectively (see Note 9). Fully diluted per share data is not
presented, as the effects would be antidilutive.
Property and Equipment
- ----------------------
Depreciation of equipment and amortization of leasehold improvements is
calculated by the straight-line and accelerated methods based on the following
estimated useful lives:
Years
-----------------
Computer 5
Furniture and fixtures 7
Organizational costs 5
Computer software 5
Leasehold improvements 10
Long-Lived Assets
- -----------------
In 1998, the Company adopted SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." In accordance
with SFAS 121, long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicated that the
carrying amount of an asset might not be fully recoverable. For purposes of
evaluating the recoverability of long-lived assets, the estimated future cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required. The adoption of SFAS 121 had no impact on the Company's financial
position or on its results of operations.
Program Development Costs
- -------------------------
In March 1998, the Company adopted Statement of Position 98-1, "Accounting
for Costs of Computer Software Developed or Obtained for Internal Use."
Capitalized program development costs consist of consulting and programming
F - 9
32
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
costs. The Company capitalizes internally developed software costs based on a
project-by-project analysis of each project's significance to the Company and
its estimated useful life. All capitalized software costs are amortized on a
straight-line method over a period of five years.
Income Taxes
- ------------
This Company has adopted SFAS No. 109, "Accounting for Income Taxes", which
requires a liability approach to financial accounting and reporting for income
taxes. The difference between the financial statement and tax bases of assets
and liabilities is determined annually. Deferred income tax assets and
liabilities are computed for those differences that have future tax consequences
using the currently enacted tax laws and rates that apply to the periods in
which they are expected to affect taxable income. Valuation allowances are
established, if necessary, to reduce deferred tax asset accounts to the amounts
that will more likely than not be realized. Income tax expense is the current
tax payable or refundable for the period, plus or minus the net change in the
deferred tax asset and liability accounts.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Year 2000 Compliance
- --------------------
In general, management believes its computerized systems used to report
financial information are year 2000 compliant. Management does not foresee any
material year 2000 problems with the Company's vendors, service providers, or
other third parties which affect the Company's financial information.
Name Change
- -----------
On March 17, 1998, Digital changed its name from Stocknet-USA, Inc. to
Digital Corporate Profiles, Inc.
On October 8, 1998, the Company changed its name from Advanced Laser
Products, Inc. (a Delaware corporation) to DIGS, Inc.
NOTE 3 - MARKETABLE EQUITY SECURITIES
Cost and fair value of marketable equity securities at December 31, 1998
are as follows:
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ------------- -------------- -----------
Available for Sale
Equity securities $ 9,000 $ -- $ (7,850) $ 1,150
=========== ========= ========== ========
F - 10
33
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Gross unrealized losses during the year ended December 31, 1998 amounted to
$7,850.
NOTE 4 - INCOME TAXES
The Company has available at December 31, 1998, net operating loss
carryforwards totaling $711,466 that may be offset against future taxable. If
not used, the net operating loss carryforwards will expire as follows:
Operating Losses
Year 2011 $ 81,269
Year 2012 190,049
Year 2018 440,148
-----------------
$ 711,466
=================
The net deferred tax assets, resulting from the net operating loss,
included in the accompanying balance sheet include the following amounts of
deferred tax assets and liabilities at December 31, 1998:
Deferred Tax Asset - Current $ --
Deferred Tax Asset - Non-Current 224,237
-----------------
224,237
Valuation allowance (224,237)
-----------------
$ --
=================
For the year ended December 31, 1998, valuation allowance increased by
$156,530. Due to the uncertainty of the realization of the net operating loss
carryforwards, the Company has established a valuation allowance against the
carryforward benefits in the amount of $224,237.
The components of the provision for income taxes are as follows:
1998 1997
----------------- ----------------
Current
State $ 800 $ 800
================= ================
F - 11
34
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 5 - PROPERTY AND EQUIPMENT
Computer $ 47,032
Furniture and fixtures 4,691
Organizational costs 4,996
Computer software 21,180
Leasehold improvements 43,524
-----------------
121,423
Less accumulated amortization and depreciation ( 30,871)
-----------------
$ 90,552
=================
Amortization and depreciation expenses for the years ended December 31,
1998 and 1997 were $18,356 and $12,515, respectively. Depreciation and
amortization expense for the year ended December 31, 1997 included an $835 prior
year adjustment (see Note 12). In 1998, the Company allocated amortization
expense to cost of sales in an amount of $3,639.
NOTE 6 - PROGRAM DEVELOPMENT COSTS
Program development costs $ 66,257
Less accumulated amortization (18,502)
------------------
$ 47,755
==================
Amortization expense for the years ended December 31, 1998 and 1997 was
$13,251 and $5,252, respectively. Amortization expense for the year ended
December 31, 1997 included a $4,670 prior year adjustment (see Note 12). In
1998, the Company allocated amortization expense to cost of sales in an amount
of $13,251.
NOTE 7 - COMMITMENTS
As of September 1, 1997, the Company entered into an operating lease for
its offices expiring on August 31, 2007. The lease agreement contains certain
terms and conditions, which include, but are not limited to, property taxes,
insurance, rent increases, and repairs and maintenance. As of August 1, 1998,
the above lease commitment was terminated at the request of the lessor. The
Company was discharged of any future lease payment obligation.
In August 1998, the Company entered in a new two-year operating lease on
its current premises, expiring July 31, 2000, for the monthly lease payment of
$7,691. The lease agreement contains certain terms and conditions, which
include, but are not limited to, property taxes, insurance, rent increases,
repairs and maintenance. There is an option to renew the lease for additional
three and five years.
The following is a schedule of future minimum rental payments required
under the above operating leases as of December 31, 1998:
F - 12
35
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Year Ending
December 31, Amount
------------------------ ------------------
1999 $ 92,295
2000 53,837
-----------------
$ 146,132
=================
The above rental expenses will be offset by $21,000 in sublease rental
income through July 31, 1999.
For the years ended December 31, 1998 and 1997, rental expenses were
$44,445 and $18,000, respectively. Rentals under the subleases expiring July 31,
2000 amounted to $23,000 in 1998. (See Note 14).
In 1998, the lessor compensated DCP in an amount of $40,000 for moving to
its current facility. As of December 31, 1998, the above amount has been
classified as deferred rental credit and amortized on a straight-line method
over the term of the lease. In 1998, the amortized credit of $8,333 was offset
against rental expense.
On March 1, 1998, DCP entered into an employment contract with its
president that provides for an annual salary of $96,000 as well as annual
vacation, sick pay, bonus, and miscellaneous reimbursement of out-of-pocket
costs. The contract expires on February 28, 2000.
NOTE 8 - MAJOR CUSTOMERS
For the years ended December 31, 1998 and 1997, sales to three customers
accounted for approximately 96% and 87% of total revenue, respectively. The
total revenue received from these customers in 1998 and 1997 was as follows:
For the Years Ended December 31,
-------------------------------------------------------
1998 1997
------------------------ -----------------------
Customer A $ 29,045 16.9% $ 0 .0%
Customer B 27,541 16.0 18,325 16.6
Customer C 107,500 62.6 30,000 27.2
Customer D 0 0 47,427 43.0
------------ -------- -------------- --------
$ 164,086 95.5% $ 95,752 86.8%
============ ======== ============== ========
NOTE 9 - AGREEMENT OF REORGANIZATION
Effective November 9, 1998, in connection with the agreement of
F - 13
36
<PAGE>
DIGS, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
reorganization, the Company issued 5,l94,968 shares of its common stock at $.001
par value per share, in exchange for all of the outstanding common stock of
Digital Corporate Profiles, Inc. (DCP), in which DCP became a wholly owned
subsidiary of the Company based on a conversion ratio of 3 shares of the
Company's common stock for each share of DCP's stock. The merger qualified for a
tax-free reorganization and has been accounted for as a recapitalization of
Digital Corporate Profiles, Inc. and the acquisition of DIGS at their book
value.
Prior to the reorganization, the Company was considered as a shell
organization and was inactive with no revenues and a minimal administrative
expense of $300 and $4,730 for the year ended December 31, 1998 and 1997,
respectively. As the result of the recapitalization, the Company's consolidated
financial statements presented are those of Digital Corporate Profiles, Inc.
(DCP) whose owners maintained control after the reorganization. At the date of
reorganization, there were 53,663 shares that were owned by the former DIGS,
Inc. shareholders. All share and per share amounts have been adjusted to reflect
the 1 for 10 reverse stock split effective April 20, 1998 and the 1 for 20
reverse stock split effective October 16, 1998.
NOTE 10 - SALE OF DCP'S STOCK
In 1997, DCP issued 100,000 shares of its common stock, an equivalent of
300,000 shares of the Company, no par, to two unrelated individuals at the price
of $1 per share. The net proceeds were $100,000. These shares were outstanding
at the time of the reorganization with the Company (see Note 9).
On March 20, 1998, pursuant to a short-term loan agreement of $600,000,
DCP's Board of Directors authorized the issuance of 586,656 shares of its common
stock, an equivalent of 1,759,968 shares of the Company, no par, to various
unrelated individuals at the price of $.02 per share. All shares were issued on
September 15, 1998. The net proceeds were $11,735. These shares were outstanding
at the time of the reorganization with the Company (see Note 9). In addition,
the Company recorded a non-cash financing expense of $134,930 in conjunction
with the short-term loan agreement and the issuance of the above shares. The
financing expense is the difference between the estimated fair market value of
DCP's stock on March 20, 1998, which is $0.25 per share, and the net proceeds
received. Factors used in determining the fair market value of DCP's stock
included the price of previously sold stock and the financial condition of the
Company on March 20, 1998.
NOTE 11 - SALE OF DIGS' STOCK
On November 10, 1998, the Company issued 1,400,000 shares of common stock
through a 504 offering, which is available to non-reporting and non-investment
companies for offerings of not more than $1,000,000 of securities in the
12-month period under section 3(b) of the (1933) Securities Act. The net
proceeds of the offering were $994,000. The Company used $600,000 of the net
proceeds to repay outstanding short-term debts.
NOTE 12 - PRIOR PERIOD ADJUSTMENT
Due to the discovery of unrecorded liabilities and the miscalculation of
depreciation as of December 31, 1997, the following adjustments were made to
F - 14
37
<PAGE>
DIGS, INC. AND SUBSIDIARIES (FORMERLY KNOWN AS ADVANCED LASER PRODUCTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
DCP's beginning retained earnings as of January l, 1998:
Amortization and depreciation $ 5,505
Commission 3,124
Accounting fees 13,916
-----------------
$ 22,545
=================
The above changes increased DCP's net loss for the year ended December 31,
1997 from $167,504 to $190,049.
NOTE 13 - LITIGATION
The Company is a defendant in a suit in which the plaintiff is seeking
recovery of approximately $85,000. The dispute arose as to the investment made
by the plaintiff and the non-delivery of the shares by the Company. The
Company's investment banking firm agreed to hold the Company and DCP harmless
for any and all damages including, but not limited, to the cost of litigation
resulting from this suit. Consequently, no provision has been made in the
accounts for any liability from this suit. During the calendar year 1999, the
Company settled all claims with the Plaintiff. There was no impact on the
Company's financial position.
NOTE 14 - RELATED PARTY TRANSACTIONS
For the first eight months of 1997, the Company leased its facilities from
the majority stockholder. The amount of rent paid to the stockholder during 1997
was $18,000.
For the year ended December 31, 1998, the Company paid its Secretary
approximately $9,000 for services in connection with the production of its
products.
For the year ended December 31, 1998, DCP repaid the president of the
Company the short-term note in an amount of $47,321. This amount was on DCP's
books since December 31, 1997.
NOTE 15 - SUBSEQUENT EVENTS
On March 2, 1999, DCP paid a commission in an amount of $3,124 to U. S.
Stock Transfer for referring customers during the year ended December 31, 1997.
The president of DCP is also a member of the Board of Directors and a
shareholder of U.S. Stock Transfer.
On January 2, 1999, pursuant to a 1999 Stock Incentive Plan, the Company
granted 287,000 options to the following individuals:
Exercise Expire From
Options Price Date of Grant
------------- --------------- ---------------
Peter Dunn, President 100,000 $ 5.50 5 yrs.
Allen Dunn, Vice President 62,000 5.00 10 yrs.
Various other individuals 127,000 5.00 10 yrs.
-----------
289,000
===========
F - 15
38
<PAGE>
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 314,918
Accounts receivable - trade 203,011
------------------
Total Current Assets 517,929
PROPERTY AND EQUIPTMENT,
net of accumulated depreciation 93,437
PROGRAM DEVELOPMENT COSTS,
net of accumulated amortization 57,943
LONG-TERM ASSETS
Deferred tax assets --
-----------------
Total Assets $ 669,309
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expense $ 17,517
Sub-lease deposits 3,000
-----------------
Total Current Liabilities 20,517
-----------------
OTHER LIABILITIES
Deferred rent credit 26,666
-----------------
STOCKHOLDERS' EQUITY 47,183
-----------------
Preferred stock, par value $.01 per share; 20,000,000
shares authorized, 0 shares issued and outstanding --
Common stock, par value $.001 per share; 50,000,000
shares authorized, 6,648,631 shares issued and
outstanding 6,649
Additional paid-in capital 1,434,604
Retained (deficit) (846,396)
Income 27,269
-----------------
Total Stockholders' Equity 622,126
-----------------
Total Liabilities and Stockholders' Equity $ 669,309
=================
See Accompanying Notes to Unaudited Consolidated Financial Statements
F-16
39
<PAGE>
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS PERIOD ENDED MARCH 31, 1999
(UNAUDITED)
For the Quarter Ended
March 31,
-------------------------------
1999 1998
-------------------------------
REVENUE
CD-ROM $ 291,964 $ 33,981
Stocknet-USA directories 0 3,612
-------------- ------------
Total Revenue 291,964 37,543
-------------- ------------
COST OF SALES
IRCD production costs 18,790 12,800
Others 7,219 4,677
-------------- ------------
Total Cost of Sales 26,009 17,477
-------------- ------------
Gross Profit (Loss) 265,955 20,066
-------------- ------------
OPERATING EXPENSES
Marketing 64,118 315
Outside services 30,500 0
Payroll expenses 66,150 20,664
Rent Expense 19,123 6,300
Tax - payroll 6,456 3,277
Others 136,730 32,249
-------------- ------------
Total Operating Expenses 239,836 56,190
-------------- ------------
Income (Loss) From Operations 26,119 (36,184)
OTHER INCOME (EXPENSE)
Rental income 9,800 0
Interest expense 0 (1,203)
Realized (loss) on sale of securities (7,850) 0
-------------- ------------
Income (Loss) Before Taxes 28,069 (37,387)
(PROVISION) FOR INCOME TAX (800) 0
-------------- ------------
Net Income (Loss) 27,269 (1,203)
OTHER COMPREHENSIVE INCOME, net of tax:
Add reclassification adjustment for (loss)
included in net income 7,850 0
-------------- ------------
Comprehensive Income (Loss) $ 35,119 (37,387)
============== ============
(Loss) per common share and common share equivalent
$ 0.01 $ (0.01)
============== ============
Weighted average common shares outstanding 5,272,280 3,435,000
============== ============
See Accompanying Notes to Unaudited Consolidated Financial Statements
F-17
40
<PAGE>
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
1999 1998
--------------------- -------------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income loss $ 27,269 $ (37,327)
Adjustments to reconcile net (loss) to net cash provided (used)
by operating activities:
Amortization and depreciation 7,902 7,902
(Increase) in accounts receivable (199,828) (26,785)
(Decrease) Increase in current liabilities and accrued expenses (19,369) (3,790)
Realized loss on sale of marketable equity securities 7,850 --
(Decrease) in deferred rent credit (5,001)
------------------- -------------------
Net Cash Flows (Used) by Operating Activities (181,177) (60,000)
------------------- -------------------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Acquisition of property and equipment (7,475) (1,248)
(Increase) in program development cost (13,500) --
Sale of marketable equity securities 1,150 --
------------------- -------------------
Net Cash Flows (Used ) by Investing Activities (19,825) (1,248)
------------------- -------------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from issuance of short-term debts -- 71,085
------------------- -------------------
Net Cash Flows Provided by Financing Activities -- 71,085
------------------- -------------------
NET INCREASE (DECREASE) IN CASH (201,002) 9,837
CASH AT THE BEGINNING OF THE YEAR 515,920 28,707
------------------- -------------------
CASH AT THE END OF THE PERIODS $ 314,918 $ 38,544
=================== ===================
ADDITIONAL DISCLOSURES:
Interest paid $ -- $ 1,203
=================== ===================
Income taxes paid $ 800 $ --
=================== ===================
NON-CASH INVESTING AND FINANCING TRANSACTIONS
Realized (loss) on sale of marketable equity securities $ (7,850 ) $ --
------------------- ------------------
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
F-18
41
<PAGE>
DIGS, INC. AND SUBSIDIARIES
SELECTED INFORMATION
Substantially All Disclosures Required By Generally Accepted Accounting
Principles are Not Included MARCH 31, 1999 (UNAUDITED)
NOTE 1 - MANAGEMENT'S STATEMENT
In the opinion of the management the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position of DIGS, Inc. and
subsidiaries (the Company) at March 31, 1999, and the results of operations and
the cash flows for the quarter periods ended March 31, 1999 and 1998. The notes
to the Consolidated Financial Statements which are incorporated by reference
into the 1998 Form 10-SK should be read in conjunction with these Consolidated
Financial Statements.
NOTE 2 - AGREEMENT OF REORGANIZATION
Effective November 9, 1998, in connection with the agreement of
reorganization, the Company issued 5,l94,968 shares of its common stock at $.001
par value per share, in exchange for all of the outstanding common stock of
Digital Corporate Profiles, Inc. (DCP), in which DCP became a wholly owned
subsidiary of the Company based on a conversion ratio of 3 shares of the
Company's common stock for each share of DCP's stock. The merger qualified for a
tax-free reorganization and has been accounted for as a recapitalization of
Digital Corporate Profiles, Inc. at book value.
For periods preceding the merger, there were no intercompany transactions
that required elimination from the combined consolidated results of operations
and there were no adjustments necessary to conform the accounting practices of
the two companies.
See Accompanying Notes to Unaudited Consolidated Financial Statements
F-19
42
<PAGE>
DIGS, INC. AND SUBSIDIARIES
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 217,889
Accounts receivable - trade 63,378
------------------
Total Current Assets 281,267
PROPERTY AND EQUIPTMENT,
net of accumulated depreciation 90,971
PROGRAM DEVELOPMENT COSTS,
net of accumulated amortization 56,130
LONG-TERM ASSETS
Deferred tax assets --
Note receivable 4,000
------------------
Total Assets $ 432,368
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 19,844
Sub-lease deposits 3,000
------------------
Total Current Liabilities 22,844
OTHER LIABILITIES
Deferred rent credit 21,665
------------------
Total Liabilities 44,509
------------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; 20,000,000
shares authorized, 0 shares issued and outstanding --
Common stock, par value $.001 per share; 50,000,000
shares authorized, 6,648,631 shares issued and
outstanding 6,649
Additional paid-in capital 1,434,604
Retained (deficit) (846,396)
Net (loss) (206,998)
------------------
Total Stockholders' Equity 387,859
------------------
Total Liabilities and Stockholders' Equity $ 432,368
==================
See Accompanying Notes to Unaudited Consolidated Financial Statements
F-20
43
<PAGE>
DIGS, INC. AND SUBSIDIARIES
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND YEAR-TO-DATE PERIODS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C>
For the Quarter Ended For The Year-To-Date Periods
June 30, Ended June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------------------------- -------------------------------
REVENUE
IRCD and EHSCD $ 22,190 $ 121,150 $ 314,154 $ 155,081
Stocknet-USA directories 0 387 0 3,999
------------- ------------- -------------- -------------
Total Revenue 22,190 121,537 314,154 159,080
------------- ------------- -------------- -------------
COST OF SALES
IRCD and EHSCD production costs 52,594 14,185 71,385 26,985
Others 7,431 5,445 14,649 10,123
------------- ------------- -------------- -------------
Total Cost of Sales 60,025 19,630 86,034 37,108
------------- ------------- -------------- -------------
Gross Profit (Loss) (37,835) 101,907 228,120 121,972
------------- ------------- -------------- -------------
OPERATING EXPENSES
Outside services 28,057 97 58,557 97
Payroll expenses 87,252 69,935 153,402 90,599
Rent expense 19,207 6,510 38,330 12,810
Taxes 17,941 5,497 24,397 8,773
Others 51,474 64,534 169,081 90,483
------------- ------------- -------------- -------------
Total Operating Expenses 203,931 146,573 443,768 202,762
------------- ------------- -------------- -------------
(Loss) Before Other Income (Expense) (241,766) (44,666) (215,648) (80,790)
OTHER INCOME (EXPENSE)
Rental income 7,500 7,000 17,300 7,000
Interest expense 0 (385) 0 (1,588)
Realized (loss) on sale of securities 0 0 (7,850) 0
------------- ------------ -------------- -------------
Income (Loss) Before Taxes (234,266) (38,051) (206,198) (75,378)
(PROVISION) FOR INCOME TAX 0 (800) (800) (800)
------------- ------------ -------------- -------------
Net Income (Loss) (234,266) (38,851) (206,998) (76,178)
OTHER COMPREHENSIVE INCOME, net of tax:
Add reclassification adjustment for (loss)
included in net income 0 0 7,850 0
------------- ------------ -------------- -------------
Comprehensive Income (Loss) $ (234,266) (38,851) $ (199,148) $ (76,178)
============= ============ ============== =============
(Loss) per common share and common share equivalent $ (.04) $ (.01) $ (.04) $ (.02)
============= ============= ============== =============
Weighted average common shares outstanding 5,272,280 3,435,000 5,272,280 3,435,000
============= ============= ============== =============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
F-21
44
<PAGE>
DIGS, INC. AND SUBSIDIARIES
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR-TO-DATE PERIODS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<S> <C> <C>
1999 1998
--------------------- -------------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net loss $ (199,148) $ (76,178)
Adjustments to reconcile net (loss) to net cash provided (used)
by operating activities:
Amortization and depreciation 16,254 10,298
(Increase) in accounts receivable (60,195) (97,238)
(Decrease) Increase in current liabilities and accrued expenses (17,042) 5,404
(Increase) in miscellaneous receivable - employee (4,000) (300)
Increase in deferred rent credit (10,002) 40,000
Realized loss on sale of securities (7,850) 0
------------------- -------------------
Net Cash Flows (Used) by Operating Activities (281,983) (118,014)
------------------- -------------------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Acquisition of property and equipment (10,049) (45,371)
(Increase) in program development cost (15,000) 0
(Increase) Decrease of marketable equity securities 9,000 (9,000)
------------------- -------------------
Net Cash Flows (Used ) by Investing Activities (16,049) (54,371)
------------------- -------------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
(Decrease) in note payable to stockholders 0 (28,321)
Payment of long-term debt 0 0
Proceeds from short-term note payable 0 180,000
------------------- -------------------
Net Cash Flows Provided by Financing Activities 0 151,679
------------------- -------------------
NET INCREASE (DECREASE) IN CASH (298,032) (20,706)
CASH AT THE BEGINNING OF THE YEAR 515,920 28,707
------------------- -------------------
CASH AT THE END OF THE PERIODS $ 217,888 $ 8,001
=================== ===================
ADDITIONAL DISCLOSURES:
Interest paid $ 0 $ 1,588
=================== ===================
Income taxes paid $ 800 $ 800
=================== ===================
</TABLE>
See Accompanying Notes to Unaudited Consolidated financial Statements
F-22
45
<PAGE>
DIGS, INC. AND SUBSIDIARIES
SELECTED INFORMATION
Substantially All Disclosures Required By
Generally Accepted Accounting Principles are Not Included
JUNE 30, 1999
(UNAUDITED)
NOTE 1 - MANAGEMENT'S STATEMENT
In the opinion of the management the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position of DIGS, Inc. and
subsidiaries (the Company) at June 30, 1999, and the results of operations and
the cash flows for the quarters and year-to-date periods ended June 30, 1999 and
1998. The notes to the Consolidated Financial Statements which are incorporated
by reference into the 1998 Form 10-SK should be read in conjunction with these
Consolidated Financial Statements.
NOTE 2 - AGREEMENT OF REORGANIZATION
Effective November 9, 1998, in connection with the agreement of
reorganization, the Company issued 5,l94,968 shares of its common stock at $.001
par value per share, in exchange for all of the outstanding common stock of
Digital Corporate Profiles, Inc. (DCP), in which DCP became a wholly owned
subsidiary of the Company based on a conversion ratio of 3 shares of the
Company's common stock for each share of DCP's stock. The merger qualified for a
tax-free reorganization and has been accounted for as a recapitalization of
Digital Corporate Profiles, Inc. at book value.
For periods preceding the merger, there were no intercompany transactions
that required elimination from the combined consolidated results of operations
and there were no adjustments necessary to conform the accounting practices of
the two companies.
NOTE 3 - SUBSEQUENT EVENT
In August 1999, the company started a newly owned subsidiary, DXF Design,
Inc. DXF Design, Inc. is a fully functional graphic design service that creates
designs for packaging, print and the World Wide Web.
DXF Design, Inc. has a client base that includes Walt Disney Studios, Buena
Vista Home Entertainment, Universal Studios, Paramount Television, Turner
Broadcasting and Digital Corporate Profiles, Inc., as well as many others.
NOTE 4 - SUBSEQUENT EVENT
The Company has elected to follow Accounting Principles Board Opinion
(APBO) No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation and to provide
the disclosures required under Statement of Financial Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation."
APBO No. 25 requires no recognition of compensation expense for most of the
stock-based compensation agreements provided by the Company where the exercise
F-23
46
<PAGE>
price is equal to the market value at the date of grant. However, APBO No. 25
requires recognition of compensation expense for variable award plans over the
vesting periods of such plans, based upon the then-current market values of the
underlying stock. In contrast, SFAS No. 123 requires recognition of compensation
expense for grants of stock, stock options, and other equity instruments over
the vesting periods of such grants, based on the estimated grant-date fair
values of those grants.
The Company's 1999 stock option plans provide incentive stock options and
nonqualified stock options to purchase common stock. These may be granted to
directors, officers, key employees, consultants, and subsidiaries with an
exercise price of up to 110% of market price at the date of grant. Generally,
options are exercisable in equal installments over three years from the date of
grant, and expire five to ten years from the date of grant. As of June 30, 1999,
the maximum of 750,000 shares was approved to be issued under the plan, of which
467,000 shares were available for future grants.
For the year-to-date period ended June 30, 1999, the Company granted
224,000 shares of qualified stock options and 65,000 shares of nonqualified
stock options to various individuals at the average exercise price of $5.17 per
share.
In electing to follow Accounting Principles Board Opinion (APBO) No. 25,
"Accounting for Stock Issued to Employees," the Company recognizes no
compensation expense related to employee stock options for the year-to-date
period ended June 30, 1999, as no options are granted at a price below the
market price on the day of grant.
Presented below is a summary of stock option plans activity for the year shown:
Weight-
Average
Stock Options Exercise Price
------------------ ---------------
Outstanding at December 31, 1998 -- --
Granted 289,000 5.17
Exercised -- --
Forfeited -- --
Expired -- --
---------------- ---------------
Outstanding at March 31, 1999 289,000 5.17
Granted -- 0
Exercised -- --
Forfeited -- --
Expired -- --
Outstanding at June 30, 1999 289,000 5.17
================ ===============
Shares exercisable at March 31, 1999 -- --
================ ===============
Shares exercisable at June 30, 1999 -- --
================ ===============
Exercise prices for options outstanding as of June 30, 1999 range from
$5.00 to $5.50. The following table summarizes information for options
outstanding and exercisable at June 30, 1999:
F-24
47
<PAGE>
DIGS, INC. AND SUBSIDIARIES
SELECTED INFORMATION
Substantially All Disclosures Required By
Generally Accepted Accounting Principles are Not Included
JUNE 30, 1999
(UNAUDITED)
Options Outstanding Options Exercisable
------------------------------------ -------------------------
Weighted
Weight- Average Weight-
Stock Average Remaining Stock Average
Exercise Options Exercise Contractual Options Exercise
Prices Outstanding Price Life Exercisable Price
--------- ----------- -------- ----------- ------------ -------------
$5.00 189,000 $5.00 2.5 -- --
$5.50 100,000 $5.50 2.5 -- --
----------- ------------
289,000 --
In electing to continue to follow APBO No. 25 for expense recognition
purposes, the Company is obliged to provide the expanded disclosures required
under SFAS No. 123 for stock-based compensation granted in 1999. This includes
materially different information from reported results. Disclosure of pro forma
net income and earnings per share included no compensation expense relating to
the year-to-date ended June 30, 1999 grants measured under the fair value
recognition provisions of SFAS No. 123.
The weighted-average fair values at date of grant for options granted
during the year-to-date period ended June 30, 1999 were $5.00 and were estimated
using the Black-Scholes option valuation model with the following
weighted-average assumptions:
June 30,
1999
-------------
Expected life in years 5
Interest Rate 5.0
Volatility 33.0%
Dividend Yield 0%
The weighted-average fair values, at the date of the grant, for options
granted were the same as the market values during the year-to-date ended June
30, 1999, therefore, the Company's net income and earnings per share will be the
same as the pro forma net income and earnings per share. As a result, the
Company's pro forma information has not been presented.
F-25
48
<PAGE>
DIGS, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPUTATION OF NET INCOME PER COMMON SHARES
FINANCIAL CONDITION
-------------------
The company's financial condition remains solid at the end of the second
quarter of 1999, as of June 30, 1999. The debt to equity ratio was 11.5%. This
compares to a debt to equity ratio of (709.7%) at the end of the second quarter
of 1998.
As of June 30, 1999, cash used for operating activities and capital
expenditures amounted to $281,983 and $16,049, respectively compared to $118,014
and $54,371 as of June 30, 1998. Cash proceeds from financing activities were $0
and $151,679 as of June 30, 1999 and 1998, respectively.
RESULTS OF OPERATIONS
---------------------
The company recorded net loss of $234,266 for the second quarter ended June
30, 1999, while $38,851 was reported for the second quarter ended June 30, 1998.
Net loss for the year-to-date periods ended June 30, 1999 and 1998 was $199,148
for 1999 and $76,178, respectively.
REVENUES
- --------
Revenue from IRCD and EHSCD decreased $98,960 in the second quarter of 1999
compared with the second quarter of 1998. Year-to-date revenue increased $59,073
compared with the year-to-date revenue of 1998.
COST OF SALES AND OPERATING EXPENSES
- ------------------------------------
The company's operating profit margin decreased in the second quarter 1999
to (170.5%) versus 84.1% for 1998. The year-to-date 1999 operating margin was
72.6% versus 76.7% for 1998. The improvement reflected the extensive marketing
effort, which began at the end of 1998.
Operating expenses were increased as a percentage of the revenue for the
year-to-date of 1999.
OUTLOOK
-------
The company continues to employ its strong marketing effort to increase its
revenue. The company has opened a web site to promote its new line of
environmental, health and safety CD-ROM's, at www.ehsreports.com. The company's
emphasis continues to be on effectively marketing and enhancing its current
products, developing new software to target new markets, and new product
development to proactively increase the financial strength of the company.
F-26
29