As filed with the Commission on April 19, 2000 File No. _________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
DIGS, INC.
(Name of small business issuer in its charter)
Delaware 7372 95-4603237
- ---------------------------- ---------------------------- -------------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code) Identification No.)
organization)
17327 Ventura Boulevard, Suite 200, Encino California 91316
--------------------------------------------------------------
(Address and telephone number of principal executive offices)
17327 Ventura Boulevard, Suite 200, Encino California 91316
- --------------------------------------------------------------------------------
(Address of principal place of business or intended principal place of business)
Peter B. Dunn, President and CEO
DIGS, Inc.
----------------------------------
17327 Ventura Boulevard
Suite 200
Encino, California 91316
---------------------------------------------------------
818/995-3650
(Name, address and telephone number of agent for service)
Copy to:
Roger D. Linn, Esq.
Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Telephone: 916-442-0400
Approximate date of proposed sale to the public: As soon as practicable after
the registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following blocks and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>ii
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
Proposed Proposed
maximum maximum Amount of
Title of each class of Amount to be offering price aggregate registration
securities to be registered registered per share offering price fee
- --------------------------------------- ------------- --------------- --------------- ------------
Common Stock to be offered for resale
by Selling Stockholders upon
conversion of Series A Preferred Stock 875,000 $4.156(1) $3,636,500 $ 961
Common Stock for resale by holders of
Warrants assuming the exercise of such
Warrants 300,000 $4.156(2) $1,246,800 $ $330
Total 1,175,000 $4,883,300 $ 1,291
============= ============== ============== ============
- -------------------------------
</TABLE>
(1) Fee calculated in accordance with Rule 457(c) of the Securities Act of
1933, as amended ("Securities Act"). Estimated for the sole purpose of
calculating the registration fee and based upon the average quotation of
the high and low price per share of the Company's Common Stock on April 11,
2000, as reported on the NASD OTC Bulletin Board.
(2) Assumes that the holder of the warrant has exercised such warrant. Maximum
offering price per share is based upon the average quotation of the high
and low price per share of the Company's Common Stock on April 11, 2000, as
reported on the NASD OTC Bulletin Board.
The registrant hereby amends this registration statement on the date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on the date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>1
PROSPECTUS Subject to Completion
April 19, 2000
DIGS, INC.
COMMON STOCK
----------------
Certain stockholders of DIGS, Inc. are hereby offering up to 1,175,000
shares of Common Stock in connection with (i) the resale of shares of Common
Stock held by the Selling Stockholders upon the conversion of outstanding shares
of Series A Convertible Preferred Stock of DIGS, Inc., and (ii) the resale of
shares of Common Stock held by the Selling Stockholders assuming the exercise of
certain outstanding Warrants.
We will not receive any proceeds from the resale of shares of Common Stock
by the Selling Stockholders. We will pay for expenses of this offering.
The Company's Common Stock is listed in the NASD "OTC Bulletin Board" under
the symbol "DIGS." On April 11, 2000, the bid quotation for one share of Common
Stock was $4.156. Our securities are also listed on the Frankfurt Stock
Exchange. The Selling Stockholders will attempt to sell the shares being offered
in this Prospectus at the best market price obtainable.
--------------------------------
Our business is subject to many risks and an investment in our Common Stock
will also involve significant risks. You should carefully consider the various
Risk Factors described beginning on page 5 before investing in the Common Stock.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------------------------
The date of this Prospectus is April __, 2000.
<PAGE>2
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................3
RISK FACTORS...................................................................4
THE OFFERING...................................................................8
USE OF PROCEEDS................................................................8
PRICE RANGE OF COMMON STOCK....................................................8
DILUTION.......................................................................9
DIVIDEND POLICY...............................................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATIONS........................................................10
BUSINESS......................................................................12
MANAGEMENT....................................................................18
EXECUTIVE COMPENSATION........................................................19
OPTIONS GRANTED IN THE YEAR ENDED DECEMBER 31, 1999...........................20
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT..........................................22
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................23
PLAN OF DISTRIBUTION..........................................................23
DESCRIPTION OF CAPITAL STOCK..................................................25
LEGAL PROCEEDINGS.............................................................26
LEGAL MATTERS.................................................................26
EXPERTS ......................................................................26
AVAILABLE INFORMATION.........................................................26
FINANCIAL STATEMENTS AND SCHEDULES............................................27
<PAGE>3
PROSPECTUS SUMMARY
This summary is intended to highlight information contained elsewhere in
this Prospectus. Consequently, this summary does not contain all of the
information that you should consider before investing in our Common Stock. You
should carefully read the entire Prospectus, including the documents and
information incorporated by reference into it. This Prospectus contains
forward-looking statements that are subject to risks and uncertainties,
including those risk factors discussed elsewhere in this Prospectus.
Our Business
DIGS, Inc. is a developer and producer of comprehensive multimedia Internet
and CD-ROM communication software and other forms of digital media for
businesses who want to provide information to their clients, investors,
employees, the media, and the public at large in a proactive package. In this
report, you will see our company referred to as "DIGS," the "Company" or simply
as "we." These terms are used interchangeably, and unless otherwise noted, they
include subsidiaries.
The Company conducts its business through its three wholly-owned
subsidiaries. Digital Corporate Profiles, Inc. (DCP) produces CD-ROMs for
corporate clients. These CD-ROMs are used for investor relations, marketing,
employee orientation or to highlight specific corporate activity.
DXF Design, Inc. (DXF) provides design services to corporate clients for
use on their websites and/or CD- ROMs being produced by DCP or for independently
produced media.
DIGS Web Video, Inc. (DWV) is in the research and development phase of a
new product known as iVideoNow!TM which is a real time Internet video screening
application.
DIGS is a Delaware corporation with its business offices located at 17327
Ventura Boulevard, Suite 200, Encino, California 91316. Its telephone number is
(818) 995-3650.
Summary Of Risk Factors
An investment in DIGS' Common Stock involves a number of risks which should
be carefully considered and evaluated. These risks would include:
o The fact that DIGS is a developing company and has generated only
modest operating revenues, and to date the revenues have not been
sufficient to cover expenses.
o The Company is involved in developing new Internet video applications
which may not be technically feasible or commercially successful.
o The Company may not be able to develop or expand the markets for its
products and services.
For a more complete discussion of risk factors relevant to an investment in
our Common Stock see the "Risk Factors" section.
The Offering
The Selling Stockholders are registering for resale up to 1,175,000 shares
of DIGS' Common Stock which they could acquire through the conversion of shares
of Series A Convertible Preferred Stock or through the exercise of outstanding
warrants.
<PAGE>4
Summary Consolidated Financial Data
The summarized consolidated financial data presented below should be read
in conjunction with the more detailed financial statements of DIGS and notes
thereto which are included elsewhere in this Prospectus along with the section
entitled "Management's Discussion and Analysis and Plan of Operations."
For the year ended For the year ended
December 31, 1999 December 31, 1998
------------------- ---------------------
Revenue $ 564,022 $ 171,694
Loss from operations (517,846) (460,517)
Net Loss Attributable to (473,102) (575,078)
Common Stockholders
Loss per Share (0.07) (0.14)
Working Capital (71,918) 480,367
(Deficit)
Total Assets 560,149 658,560
Stockholders' Equity 167,008 587,007
(Deficit)
RISK FACTORS
An investment in DIGS' Common Stock involves a number of very significant
risks. You should carefully consider the following risks and uncertainties in
evaluating DIGS and its current and proposed business before purchasing shares.
DIGS is a Developing Company with Limited Operating History Which
Makes Future Performance Very Difficult to Predict.
We are a developing company which is primarily involved in the
development of interactive CD- ROMs and Internet video applications. As a
relatively new company, we have just begun offering our CD- ROM services, and
as a result, we do not have an established track record in any of these service
areas.
Our ability to provide commercial CD-ROM service and Internet video
programs and to eventually generate operating revenue will depend on our ability
to, among other things:
o Successfully expand our interactive CD-ROM production and design
services;
o Develop, implement and successfully market an Internet video system;
and
o Obtain the necessary financing to implement the Company's business
plan.
Given our limited operating history and operating losses, there can be no
assurance that we will be able to achieve any of these goals and develop a
sufficiently large customer base to be profitable.
<PAGE>5
Lack of Established Revenue Stream will Result in Anticipated Operating Losses.
During 1999 DIGS generated $564,022 in revenues from its CD-ROM production
and graphic design businesses and had an operating loss of $517,846 for the
year. Although we anticipate revenues to increase, we also expect development
costs and operating expenses to increase as well. Consequently, we expect to
incur operating losses and negative net cash flow until our businesses are
developed, deployed and operating in a profitable manner.
DIGS May Need Additional Capital in the Future to Fund its Business Growth. Due
to Limited Revenues, this Capital Will Have to Be Obtained from Outside Sources
Which May Not Be Available and Could Have a Dilutive Effect on Stockholder's
Ownership.
With the recent equity financing, we believe sufficient funds are available
to pay for ongoing operating costs and capital expenditures through 2000.
However, there is no assurance that actual cash requirements will not exceed our
estimates. In particular, additional capital will be required in the event that:
o We incur unexpected costs in completing the iVideoNow!TM system design
or encounter any unexpected technical or regulatory difficulties;
o We incur delays and additional expenses as the result of technology
failure;
o We are unable to expand the market for our CD-ROMs or incur delays in
introducing our iVideoNow!TM system; or
o We incur any significant unanticipated expenses.
The occurrence of any of the aforementioned events could adversely affect
our ability to meet our business plans.
We will depend almost exclusively on outside capital to pay for the
iVideoNow!TM system development. There can be no assurance that current capital
will be sufficient to meet all of these development costs. The issuance of
additional equity securities by us would result in a significant dilution in the
equity interests of our current stockholders. Obtaining commercial loans,
assuming those loans would be available, will increase our liabilities and
future cash commitments.
If we are unable to obtain financing in the amounts and at the terms
necessary, our business and future success will be adversely affected.
A Large Portion of DIGS' Assets Are Intangible Assets Which May Have Little
Liquidation Value if DIGS Were Unsuccessful.
We are primarily a technology development and service based company. As a
result, we do not expect to own a significant amount of tangible assets. In case
of a liquidation, we would have few tangible assets with little or no realizable
value.
Rapid Technological Changes in the Internet Video Industry Could Render Some
Services Obsolete or NonCompetitive.
The design, construction and operation of our iVideoNow!TM system
applications are exposed to risks associated in developing a sophisticated
communications systems via the Internet. Although we believe that our proposed
streaming video systems are based on established technology, certain aspects of
our technology have not been used in commercial applications. Although we will
engage designers and programmers who are experienced in the Internet
<PAGE>6
communications industry, we have only limited experience in developing,
constructing, and operating Internet video systems. The failure of our systems
to function as designed, or the failure of system components to function with
other components or to specification could result in delays, unanticipated
costs, and loss of system performance, thereby rendering our systems unable to
perform at the quality and capacity levels anticipated.
In addition, future advances in the Internet and telecommunications
industry could lead to new technologies, products or services competitive with
the products or services to be provided by us. Those technological advances
could also lower the costs of other products or services that may compete with
our systems, resulting in pricing or performance pressures on our products and
services, which could adversely affect our results of operations.
Lack of Patent and Copyright Protections for DIGS' Technologies Could Result in
Duplication by Competitors.
Although we are preparing a patent application for our iVNDS(TM)
technology, neither our CD-ROM production system or our iVideoNow!TM system
technology are currently protected by any patents or copyrights. Our business is
primarily based on the utilization of existing available CD-ROM production and
Internet technologies. Consequently, other competitors could copy our systems
and services.
Unscheduled Delays in Developing New Internet Video System or Introducing New
Services Could Result in Lost or Delayed Revenues.
Delays and related increases in costs in the development of the
iVideoNow!TM system or the implementation and operation of the iVideoNow!TM
system could result from a variety of causes, including:
o delays encountered in the development, construction, and testing of
this system;
o delays in establishing the iVideoNow!TM system on the Internet or
other events beyond our control;
o further modification of the design of all or a portion of these
systems as a result of, among other things, technical difficulties or
changes in regulatory requirements;
o the failure to establish an effective operating system for use with
the iVideoNow!TM technology.
There can be no assurance that these systems will be available on a timely
basis, or at all, or that implementation of these systems will occur. A
significant delay in the completion of these systems could erode our competitive
position, could result in increased development costs, and could have a material
adverse effect on our financial condition and results of operations.
DIGS Needs to Manage its Business and Growth in Order to Realize Profitability;
DIGS Needs to Provide Reliable Performance of Systems in Order to Maintain
Customers.
We expect to experience significant and rapid growth in the scope and
complexity of the industries in which we are involved as we proceed with the
production and design of CD-ROMs and the development of the iVideoNow!TM system.
If we are unable to effectively manage this rapid growth, we may not achieve
profitable operations in the time frames anticipated, if at all.
We do not currently serve significant markets but must identify,
investigate and enter existing or establish new markets for our services. There
is no assurance that we can enter and effectively compete in these existing or
new markets.
<PAGE>7
The growth of existing Internet systems and services as well as
establishing new markets depends to a large extent on the reliability of our
operating systems. The video tape industry and the Internet Video Industry
require a very high quality to promote customer use. The failure to establish
and operate a video delivery system that offers clear pictures and reliable
service would inhibit our future growth.
We are significantly smaller than virtually all of our national competitors and
consequently, we may lack the financial resources needed to enter markets and
increase market share.
We will encounter competition from other CD-ROM producers and from an
increasingly competitive Internet industry in general. The growing market for
Internet services has attracted new market participants as well as expansion by
established participants resulting in substantial and increasing competition.
Many of our present and future competitors using Internet video systems have
substantially greater:
o financial, marketing, technical and manufacturing resources;
o name recognition, and
o experience than we do.
Our competitors may be able to respond more quickly to new or emerging
advancements in the Internet video industry and to devote greater resources to
the development, promotion and sale of their products and services.
While we believe that our iVideoNow!TM technology will be competitive in
quality, ease of use and reliability as compared to systems operated by our
competitors, no assurances can be given that those competitors, in the future,
will not succeed in developing better or more cost effective video
communications systems.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties that could increase their ability to reach commercial customers or
subscribers of CD-ROM or Internet video services. This type of existing and
future competition could affect our ability to establish and maintain our
customer base. No assurances can be given that we will be able to compete
successfully against current and future competitors, and any failure to do so
would have a material adverse effect on our business.
Internet Video Services Must Compete with Other Forms of Entertainment.
The entertainment industry is extremely competitive and diverse. Internet
video entertainment will have to compete with movie theaters, video rental
stores, television and cable TV and other pay-for-view Internet websites.
Although we believe our iVideoNow!TM system will provide enhanced convenience
and selection for video viewing, there can be no assurance that we can compete
effectively with these other forms of entertainment.
Digs Can Issue Preferred Stock in the Future Which Could Have Superior Rights to
the Common Stock.
Our Articles of Incorporation authorize our Board of Directors to issue up
to 20,000,000 shares of preferred stock. These provisions allow our directors to
issue preferred stock with multiple votes per share and dividend and liquidation
rights which could have priority over any dividends paid or liquidation value
with respect to the shares of Common Stock. The issuance of preferred stock with
these rights may make the removal of management more difficult even if that
removal could be considered beneficial to Stockholders generally, and could have
the effect of limiting shareholder participation in certain transactions such as
mergers or tender offers if those transactions are not favored by incumbent
management.
<PAGE>8
No Dividends are Expected to be Declared in the Foreseeable Future.
We have not declared or paid any dividends on our Common Stock since our
inception, and we do not anticipate paying any such dividends for the
foreseeable future.
THE OFFERING
The Selling Stockholders are offering for resale up to 875,000 shares of
Common Stock upon conversion of 2,500 shares of Series A Preferred Stock and up
to 300,000 shares of Common Stock assuming the exercise of outstanding warrants.
The 2,500 shares of Series A Preferred Stock and the Warrants were issued
in connection with a private placement of 2,500 Units to investors at $1,000 per
Unit. Each Unit consists of one share of Series A Preferred Stock and a Warrant
to purchase one share of Common Stock at $9.90 per share.
The shares of Common Stock offered for resale and the shares of Common
Stock to be issued upon the exercise of the Warrants may be sold in a secondary
offering by the Selling Stockholders by means of this Prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the resale of the Common Stock by the
Selling Stockholders. However, we will receive proceeds from the exercise of the
Warrants referred to in this Prospectus. The proceeds from the exercise of
Warrants, if any, will be used for corporate working capital.
PRICE RANGE OF COMMON STOCK
DIGS' Common Stock is trading on the NASD's OTC Bulleting Board under the
symbol "DIGS". The following quotations reflect the high and low bids for DIGS'
Common Stock based on inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. The high and low prices of
DIGS' Common Stock on a quarterly basis for the last two years are as follows:
2000 High Bid Low Bid
- --------------------- ------------ ---------
First Quarter $9.38 $4.78
1999 High Bid Low Bid
- --------------------- ------------ ---------
First Quarter $7.00 $3.00
Second Quarter $8.50 $8.50
Third Quarter $7.75 $7.75
Fourth Quarter $8.25 $8.00
1998 High Bid Low Bid
- --------------------- ------------ ---------
First Quarter $0.09 $0.03
Second Quarter $1.50 $0.04 *
Third Quarter $2.62 $0.25
Fourth Quarter $6.87 $4.87**
- -------------------
* Reflects a 1 for 50 reverse stock split.
** Reflects a 1 for 20 reverse stock split.
<PAGE>9
The actual daily trading volume of our Common Stock on the OTC-BB over the
past three months has averaged less than 16,000 shares which indicates that the
ability of our Stockholders to realize the current trading price of the shares
they hold may fluctuate if any substantial number of shares were to be offered
for sale. In addition, due to the extremely limited nature of the market for our
Common Stock, any significant trading may have a dramatic effect on the price of
our Common Stock.
The Company's shares are also listed on the Frankfurt Stock Exchange.
As of March 31, 2000, we had 6,658,631 shares of Common Stock and 2,500
shares of Series A Convertible Preferred Stock outstanding and approximately 319
stockholders of record. This amount does not include stockholders who hold our
securities in street name.
5,201,530 of the currently outstanding shares of DIGS' Common Stock are
subject to the resale limitations of Rule 144 of the Securities Act. Of the
shares subject to the resale limitations of Rule 144 outstanding as of March 31,
2000, 2,721,593 shares of common stock have been held for at least one year and,
as a result, could be sold pursuant to the terms and limitations of Rule 144(e).
DILUTION
The following table illustrates the per share dilution to an investor
purchasing the common stock offered herein assuming conversion of the Series A
Preferred Stock at $3.117 per share of Common Stock and the sale of the common
shares at a price of $4.156 per share calculated as of April 11, 2000.
Purchase price per Share $ 4.156
Net tangible book value per Share
based on DIGS' December 31, 1999
financial statements(1)(2) $ .006
Increase to Selling Stockholders
attributable to the sale of shares of
Common Stock in this Offering $ 1.039
Dilution per Share to Investors(3) $ 4.150
Dilution to Investors as a percent of
offering price 99%
- -------------------------
(1) Net tangible book value per Share is determined by dividing the number of
shares outstanding into the tangible net worth of DIGS (tangible assets
less liabilities as of December 31, 1999). (See DIGS Consolidated Balance
Sheet as of December 31, 1999 at page F-3 of this Prospectus.)
(2) Net tangible book value per share is based upon the shares outstanding as
of December 31, 1999.
(3) Dilution is determined by subtracting net tangible book value per share
from the amount paid per share by new Investors.
As of the date of this Prospectus, the exercise of the Warrants referred to
in the "Selling Shareholders" section would be anti-dilutive and, therefore, are
not included in the calculation of dilution presented above.
<PAGE>10
DIVIDEND POLICY
We have not declared or paid any cash dividends since inception. We intend
to retain future earnings, if any, for use in the operation and expansion of our
business and do not intend to pay any cash dividends in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATIONS
This discussion, other than the historical financial information, may
consist of forward-looking statements that involve risks and uncertainties,
including quarterly and yearly fluctuations in results, the timely availability
of DIGS iVideoNow!TM services, the impact of competitive products and services,
and the other risks described in this Prospectus. These forward-looking
statements speak only as of the date hereof and should not be given undue
reliance. Actual results may vary significantly from those projected.
Operating Results for the Years Ended December 31, 1999 and 1998.
Revenue increased over 200% to $564,022 for 1999 from $171,694 in 1998. The
increase was comprised primarily of DCP's CD-ROM products and revenue generated
from graphic design services provided by DXF which commenced in the latter part
of 1999.
Gross profit also increased by over 200% to $283,953 in 1999 from $74,714
in 1998. As a percentage of revenue, gross profit percentages were approximately
50.4% in 1999, up from 43.5% in 1998. The increase in gross profit margin was
primarily due to labor efficiencies associated with production of CD-ROM
products.
Operating expenses increased to $801,799 in 1999 from $535,231 in 1998. An
increase in marketing costs accounts for approximately 36% of the increase. The
Company's marketing costs increased to $109,005 in 1999 from $14,400 in 1998.
Increases in professional services, rent, officer salaries and shareholder
expenses also contributed to the overall increase in operating costs in 1999 as
compared to 1998.
Other income and (expenses) were $52,733 in 1999 as compared to ($113,761)
in 1998. The income resulted from the sale of the Company's Stocknet-USA domain
name and website for a gain of $38,722 and a decrease in financing expenses.
Other income and (expenses) included rental income, interest income, interest
expense and realized losses on the sale of investments.
Federal income tax liabilities for the years ended December 31, 1999 and
1998 have not been recorded due to operating losses during those periods.
However, the minimum state income tax expense for DIGS and its subsidiaries in
the amounts of $6,364 and $800 were incurred in 1999 and 1998 respectively. As
of December 31, 1999, DIGS has net operating loss carryforwards of $1,253,761
that may be used to offset future federal taxable income. These net operating
loss carryforwards will begin to expire in 2011 if not used.
Liquidity and Capital Resources.
DIGS has funded its operations and met its capital requirements through
private sales of equity securities, short-term loans and cash generated from
sales. Negative cash flows from operating activities are a result of our net
operating losses. Net cash used for operations was $523,047 in 1999 and $383,158
in 1998. Net cash flow used for investing activities was $156,220 in 1999 and
$88,042 in 1998. Cash used in 1999 for investing activities is primarily related
to the development of the iVideoNow!TM player technology.
DIGS anticipates making capital expenditures of approximately $200,000
during the current year. The majority of the capital expenditures will be to
remodel the corporate offices and purchase additional hardware and software.
Remodeling of the corporate offices began in February 2000 to accommodate an
expanded staff of
<PAGE>11
programmers, designers and marketers. In addition, DIGS anticipates it will
require approximately $450,000, $80,000 and $100,000 from its investment capital
for salaries, outside services and marketing expenses respectively.
On March 8, 2000, DIGS secured financing of $2,500,000 through a private
sale of equity securities consisting of Series A Convertible Preferred Stock and
Warrants to purchase up to 100,000 shares of Common Stock. The funding will be
used for the continuing development of iVideoNow!TM, working capital, marketing
purposes, to pay short term loans and, principally, to pay for new sales and
technical support personnel. It is anticipated that this interim financing will
provide all the capital needed for our operations in 2000. DIGS anticipates it
will continue to report operating losses for at least 1 or 2 more years as the
Company continues to develop and refine its products and build its marketing,
production and management teams. Additional capital may have to be raised
through public financing, private financing or some other arrangement. If
additional capital were raised through the issuance of equity securities, the
percentage of ownership held by current shareholders would be reduced.
Furthermore, such equity may have rights, preferences or privileges senior to
the current common stock.
Year 2000 Issue.
We did not experience any disruptions to operations or any other problems
relating to the Y2K issue. The Y2K issue generally refers to the problems some
computer systems may have in determining the correct year for the century. We do
not foresee any future problems resulting from the Y2K issue.
New Accounting Pronouncements.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131) was adopted in
1999 with the formation of DXF Design, Inc. SFAS No. 131 establishes standards
for the reporting of operating results regarding different segments of a
company. Segment operating results reported by DIGS for its subsidiaries Digital
Corporate Profiles (DCP) and DXF Design (DXF) in 1999 are summarized as follows:
<TABLE>
<S> <C> <C> <C>
DCP DXF Consolidated
---------------- ---------------- -------------------
Net operating revenues $413,743 $150,279 $564,022
Operating income (589,211) 23,365 (565,846)
Operating assets 449,591 100,090 549,681
Capital expenditures 0 0 0
Depreciation/amortization 47,080 1,306 48,386
</TABLE>
Adoption of SFAS No. 131 did not have a material effect on financial
statement presentations and disclosures for prior years.
DIGS 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. In electing to follow APBO No. 25,
we are obligated to provide the expanded disclosures required under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." APBO No. 25 requires no recognition of compensation expense for
stock-based compensation agreements provided the exercise price is equal to the
market value on the date of grant. APBO No. 25 does require the recognition of
compensation expense for variable award plans based on the current market value
over the vesting periods. In contrast, SFAS No. 123 requires the recognition of
compensation expense for grants of stock options and other equity instruments
over the vesting period of such grants, based on the estimated fair market
values of such grants on the grant-date. In 1999, DIGS granted 230,000 shares of
qualified stock options and 65,000 shares of nonqualified stock options
<PAGE>12
at an average exercise price of $5.17 per share. DIGS has not recognized any
compensation expense related to these grants in 1999 because the options were
not granted at a price below the fair market value on the date of grant. For
additional information, please see Note 13 of the 1999 audited financial
statements.
In 1999, DIGS adopted Accountants' Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities." This statement requires costs
related to start-up activities and organizational costs be expensed when
incurred. The cumulative effect of this change was $2,625 (net of $0 tax effect)
or $0.00 per common share for the years prior to 1999. The adoption of SOP 98-5
had no material effect on 1999 income.
---------------------------
BUSINESS
This discussion, other than the historical financial information, may
consist of forward-looking statements that involve risks and uncertainties,
including fluctuations in results, the timely availability of new communication
products, the impact of competitive products and services, and other risks
described herein. Any forward-looking statements speak only as of the date
hereof and should not be given undue reliance. Actual results may vary
significantly from those projected.
General
DIGS, Inc. is a developer and producer of comprehensive multimedia Internet
and CD-ROM communication software and other forms of digital media to businesses
who want to provide proactive information to their clients, investors,
employees, the media, and the public at large.
We have achieved market recognition with several of our products that are
considered to be innovative and technologically advanced. Our CD-ROM products
are developed for corporate clients and include investor relations CD-ROMs,
marketing CD-ROMs, employee orientation CD-ROMs, environment, health and safety
CD- ROMs, employee recruitment CD-ROMs and training CD-ROMs. We also provide Web
Site design, CD-ROM data base programming and graphic design services. We intend
to introduce to the Internet market a high speed, user friendly multiple video
Internet player system in late 2000.
DIGS currently operates its businesses through three wholly-owned
subsidiaries: Digital Corporate Profiles, Inc. (DCP) provides complete
multimedia and internet communication solutions to its corporate clients
allowing them to proactively tell their story to the world. DCP produces several
CD-ROM products including an Investor Relation CD (IRCD), an Environmental
Health and Safety CD (EHSCD) and an Employee Orientation CD (EOCD). Each CD
provides the client with a dynamic medium that allows them to communicate
effectively with their investors, employees, the media and the public.
During 1999, DIGS formed a wholly owned subsidiary, DXF Design, Inc. (DXF),
which operates a digital and graphic design studio. DXF offers a complete range
of Internet, CD-ROM and promotional print design services. DXF specializes in
designing brochures, corporate identity graphics, corporate and entertainment
promotional kits, as well as key art for theatrical and home video
advertisements. DXF will not only provide artistic support to DCP but is an
additional revenue center. DXF is actively marketing its digital and graphic
design capabilities to the music, film and television industries.
Digs Web Video, Inc. (DWV), another wholly owned subsidiary, was formed in
1999 to develop and market a real time Internet video screening application
called iVideoNow!TM. The iVideoNow!TM player is intended to allow a user to
instantly view up to 36 separate videos. DWV plans to expand the viewing
capacity of the player to 200 videos. The interface of the iVideoNow!TM player
can be designed to a client's specification to maximize the video player's
<PAGE>13
use as a marketing and promotional tool. DWV also plans to develop an e-commerce
function that will allow the iVideoNow!TM player to act as both a marketing tool
and sales point for the client.
Corporate History
On November 9, 1998, as a result of a reorganization agreement, DIGS issued
5,194,968 shares of its common stock in exchange for all the outstanding common
stock of Digital Corporate Profiles, Inc. (DCP). The stock exchange resulted in
DCP becoming a wholly owned subsidiary of the Company based on a conversion
ratio of three shares of DIGS, Inc. common stock for each share of DCP's common
stock. The reorganization was accounted for as a recapitalization of each entity
at their book values.
Prior to the reorganization, DIGS was an inactive shell called Advanced
Laser Products. The shell corporation did not generate any revenue but did incur
minor administrative expenses. Administration expenses were $300 and $4,730 for
the years ended December 31, 1998 and 1997 respectively. On the reorganization
date there were 53,663 outstanding shares owned by former shareholders. All
share and per share amounts have been adjusted to reflect an April 20, 1998 one
for ten reverse stock split and an October 16, 1998 one for twenty reverse stock
split.
Products and Services
Corporate Information CD-ROMS
The primary product of DCP is an Investor Relations CD-ROM (IRCD). Each
IRCD program tells a corporate story by integrating the traditional printed
annual report information with the latest CD-ROM and Internet interactive video,
audio, and animation technologies. Complete financial information including
financial statements, schedules and notes, combined with annual comparison
graphs of revenues, sales, profits, earnings per share, etc., are all set forth
in a colorful and creative manner. Each presentation includes video and audio
that not only contains music and sound effects, but includes conversations with
company executives, such as its President, Chief Financial Officer or Chief
Scientist. These video and audio clips explain the client's business, financial
success, new products and/or inventions. This approach makes the "corporate
story" more compelling and, instead of reading a traditional printed annual
report, allows shareholders and other interested parties view an interesting,
colorful and entertaining CD that brings them up to date on the company's
progress.
To create our IRCD product, we first accumulate and/or create a collection
of our client's videos, pictures, text, financial information or other data.
Then using our proprietary application software, we produce an interactive
digital Master CD-ROM of the client's story. In the case of the IRCD products,
the basic package includes filming three corporate executive interviews, a
10-page corporate profile section, a financial bottom line section (which
includes charts and graphs illustrating the financial aspects of the company), a
products and services section and a research library. Also included is a link
function that takes the viewer to a specific Internet website for
up-to-the-minute information. This feature is available as long as the user has
Internet capabilities and the Internet connection is established at the same
time the IRCD is being viewed. This link function prevents the CD-ROM from
becoming out-dated. Once the "Master" CD-ROM is produced, we contract with
outside replication houses and printers to mass produce the final product for
distribution to shareholders, the investing community or other interested
parties.
In addition to providing corporate information in a highly attractive,
entertaining and interactive form, DCP offers a variety of custom designed
packaging to further project a company's image. The CD- ROM/packaging
combination can offer substantial savings to companies over traditional written
annual reports and investor relation materials in both production and mailing
costs. While traditional annual reports are still required by law, condensed
IRCD versions can be inserted into the jacket, thereby reducing printing and
postage costs. This approach to disseminating corporate information provides a
substantial economic incentive to our clients. Large companies often spend
anywhere from $6 to $12 to print each annual report and investor relations
<PAGE>14
package. In addition, they incur postage costs of up to $3 per package. Our IRCD
approach reduces the report costs to approximately $4 each, and postage costs
can be reduced to an average of less than a $1 each. With volume orders and
economies of scale, further reductions in Unit prices can be realized. Moreover,
the IRCD is user-friendly, can be linked to a company's website and unlike
traditional paper reports, does not require new paper, packaging and postage for
every update. Once a shareholder has received an IRCD, additional CD's may not
be required because new information or updated statistics can be obtained
through the website link feature. The result is an easily updated, entertaining
and interactive report that reduces a company's printing, handling and mailing
costs.
Another DCP product is the Environmental Health and Safety CD-ROM (EHSCD).
The EHSCD provides an interactive format for corporate clients to report their
environmental, health and safety accomplishments to shareholders, governments
and interested environmental groups. The EHSCD uses text, graphics, video and
audio in a dynamic manner to describe and explain a client's environmental,
health, safety and natural resource preservation efforts to their employees,
investors, environmental groups, media, the public and governmental agencies.
DCP has produced an EHSCD for Atlantic Richfield Corporation ("ARCO") who is
using it primarily to provide environmental health and safety information to its
employees.
Using a format similar to its IRCD and EHSCD products, DCP has also
developed an Employee Orientation CD-ROM (EOCD) for internal uses by
corporations. This product serves as an orientation and recruiting piece that is
designed to familiarize new employees with their company by providing a
comprehensive look at the company's people, products, services and policies.
Unlike a video presentation, the CD-ROM format allows the viewer to skip or
select particular sections to view. Design and Graphic Services
In August 1999, DIGS formed DXF to provide Web Site design, Web Site and
CD-ROM graphic art design, traditional print design services and artistic
support for our CD-ROM projects and our future iVideoNow!(TM) system.
During the fall of 1999, DXF not only redesigned all of our web sites, but
provided design services for outside companies as well. One of the first
projects completed by DXF was the design of www.ehsreports.com. The Website
helps Internet users search an international corporate database by company
and/or industry, for environmental, health and safety reports available in
print, online and interactive CD-ROM formats. DXF also developed an interactive
Internet investor relations data base program to be used by a prominent Los
Angeles Public Relations firm on their web site. DXF also offers its graphic
services for traditional advertising, annual reports, corporate identity
graphics, entertainment, and marketing design.
iVideoNow!TM Internet Video Delivery System
In 1999 DIGS also began the initial research and development of a new and
innovative Internet Video technology. This effort led to the formation in
October 1999 of DIGS Web Video, Inc. (DWV) and the trade marking of a new
business to business (B2B) product, iVideoNow!TM. In November 1999, we began
beta testing the product on the Web Site www.ivideonow.com with existing
clients. In December we added two new testing partners.
iVideoNow!TM is a real time Internet video screening application. Scheduled
for full launch in late 2000, iVideoNow!TM is currently in beta testing.
iVideoNow!TM is designed to provide an Internet video presentation platform that
allows companies in the film, TV, music, travel, and retail industries to use
their existing video and TV presentations to promote their image and products.
The iVideoNow!TM key features are its instant video library screening format
(currently 36 videos), an interactive and user friendly interface, a
multi-screen quality viewing function and our Internet video delivery system
(iVNDS(TM)). Currently, iVideoNow!TM supports both Apple's QuickTime(TM) and
Microsoft's MediaPlayer(TM) on the Internet Explorer(TM) and Netscape(TM) web
browsers. Support for Real Networks' Real Video is expected to be added by the
end of the year 2000, thus making iVideoNow!TM functional with all major web
browsers and streaming video technologies. Coupled with iVNDS(TM), the
iVideoNow!TM system is designed to automatically detect the video technology
<PAGE>15
installed on a user's computer at the time of log on and uses that system
seamlessly, thus eliminating the need to download any additional software.
The iVNDSTM is based on our proprietary Internet server infrastructure,
which has the ability to provide the best video quality available at the fastest
possible speeds. Presently, video presentations over the Internet are in their
infancy and require high speed Internet connections to deliver good quality
video images. However, DWV can provide 4-star, near broadcast quality at the
56K-modem level, the connection speed used by most households. The 4-Star System
allows the viewer to select the quality level they wish for full screen viewing.
DWV also provides video digitization, compression and server storage. We intend
to lease the iVideoNow!TM player as a package with the iVNDSTM or offer it as a
stand-alone product to be used on a client's own server. DWV plans to offer two
upgrades to the system. First, an e-commerce function is planned for integration
in late 2000. Second, by year-end the video library function of the player is
planned to be expanded from the present 36 video capacity up to 200 videos.
We believe our principal business strengths include our demonstrated
ability to supply unique CD-ROM and Internet communication products to
companies, our reputation for experience, competence, integrity and our
knowledge of how to successfully serve these markets. Amplifying our strengths
is our belief that any potential new competitor would face the formidable task
of having to substantially duplicate our technology or develop similar
technology to successfully compete in this market. Overview of the Industry.
DIGS currently operates in three industries, CD-ROM production, Website
Design and Streaming Video, all three in one way or another key off the Internet
Industry. The number of Internet users around the world is constantly growing.
The Computer Industry Almanac has projected that by year-end 2002, 490 million
people around the world will have Internet access. The United States has an over
whelming lead in Internet users with more than 110 million users at the end of
1999. According to the December 1999 Harris Interactive Survey, a total of 69%
of all adults use a computer at home, work, or some other location. This is up
from 50% in late 1995. The same study reported that 81% of all computer users
use the Internet compared to 27% three years ago.
The Internet Video industry is in its infancy. PC Data Online reported that
as of the end of October 1999, 41% of households with Internet access used media
players. It is estimated that less than 10 percent of households with Internet
access use media players for video playback. Internet video, whether it be
streaming or download-and-watch video, requires large bandwidth connections
(high speed Internet access) to perform acceptably. Most businesses and schools
have T-1 lines or higher bandwidth connections in use but as of November 1999,
only 5.9% (Nielson/ NetRatings) of home users were accessing the Internet via
high-speed connections. High-speed connections are defined as ISDN, T-1
telephone lines satellite, cable modem service and various types of digital
subscriber lines.
As of November 1999, only 4,266,023 unique audience used high-speed
bandwidth, but the number of high-speed users is projected by Computer Economics
to grow to 27 million by 2002.
The Market.
The market for our products and services is widespread and based in the
growing business to business (B2B) market. Any mid-size or larger business can
use our products. Key products such as the IRCD and graphic design services
compete directly with the print media. Competition in the financial and
corporate printing industry is intense and well established, as most
corporations currently use printed material as the means to communicate with
their investors and market makers. We believe that the significant cost
advantages and the more interesting, entertaining content of CD-ROM as compared
to printed materials gives our products a substantial competitive advantage.
<PAGE>16
The iVideoNow!TM player has an obvious appeal to movie studios and TV
distribution companies as well as applications for video retailers that may wish
to provide previews of popular new videos. There are also multiple applications
in the travel industry and retail trade. In the travel industry, for example,
hotels can video preview their rooms and facilities to potential clients. Cruise
lines can display ship amenities, on board entertainment and destinations.
Travel agents can provide visual and audio information on resorts, golf
packages, European tours, etc. Travel industry websites are the second most
popular sites on the Internet. In the retail industry, retailers can put on
video fashion shows for home computer users. Likewise, the music industry can
display music videos to help promote record sales. There are undoubtedly many
other companies with products and/or services where videos can be designed to
pique the public interest. While viewing these video presentations on the
Internet, a quick click can open a company's e-commerce site. The e-commerce
link will allow users to reserve a hotel room, book a cruise, rent or purchase a
video, buy a music CD, or order the latest in fashion apparel.
Yet another application for iVideoNow!TM has emerged as a result of recent
discussions with a company that intends to place employee-training videos on
their Intranet website. The use of the iVideoNow!TM player in this capacity
could replace a company's use of videocassettes and VCR's. The benefit is with
videocassettes an employee has to look at the entire videotape to see what they
need to learn, while only certain sections may be relevant to them. With
iVideoNow!TM, the employee easily can skip to the exact chapter or chapters of
the presentation to find and review the pertinent information they require.
The market we operate in is characterized by rapidly changing technologies,
frequent new product and service introductions, and evolving industry standards.
Our future success will depend, in large part, on how we adapt to rapidly
changing technologies. We plan to adapt to new technology by continually
improving the performance features and the reliability of our services. In
addition, we have an active commitment to research and development and believe
we will benefit from new bandwidth technology developments.
We believe we are now in a position to aggressively market our products and
services to a wider expansion of industries. We operate in the
business-to-business (B2B) marketplace, and focus our sales efforts on mid to
large companies that are seeking a unique, efficient and inexpensive means of
disseminating corporate business and financial information. We will market our
products and services through personal contacts with existing and potential
customers, investment relations firms, through a specially trained in-house
sales force and through direct marketing techniques. The Company will support
its marketing efforts with various techniques including news releases, mailers,
industry networking, public relation firms and simply word of mouth and
referrals. In addition to soliciting business from existing and prospective
customers, each sales person also acts as the account service representative,
ensuring that the Company's production staff promptly responds to customer
instructions and meets customer needs.
DIGS is not dependent on long-term clientele and does not enter into long
term service or product contracts with its clients. We do have the opportunity
to provide multiple products and services to each client and actively solicit
such business. The growth and expansion of our business is built on constant
recruitment of new accounts and offering new products and services to current
clients.
Competition.
Currently, there is limited direct competition in the production of
CD-ROM's for the investment and corporate communications community. Although
competitors can enter the field of CD-ROM production at any time, we believe our
early entrance into this market and our proprietary instant-start software
technology will allow us to continue to be a dominant provider of this business
service. We face substantial competition in the area of financial Website design
and maintenance. However, few competitors combine the corporate customer's
Website with a physical CD-ROM in the hands of its audience.
Key design services offered by DXF compete with the print media which is
well established, as most corporations currently use printed matter as the means
to communicate with their shareholders and market makers.
<PAGE>17
At the present time video on the Internet is in its infancy, and
competitive systems are limited to single unit players. Real Player's Real
Video, Apple's QuickTime and Microsoft's Media Player make up the majority share
of this market. These players could be considered competition to the
iVideoNow!TM system but since iVideoNow!TM supports all these players, a more
accurate description might be a system friendly application program. Further,
iVideoNow!TM will be the only player currently offering a multiple of videos, a
"library" of up to 36 videos. It is also the only product on the market
providing the end user control of what they view and its quality. The Company's
state-of-the-art technology puts it in a position to establish itself in this
emerging market in which even a small market share could represent substantial
revenues in the future.
DIGS believes that the significant cost advantages and more interesting,
entertaining content as compared to printed materials and other traditional
communication mediums gives our products a substantial competitive advantage to
be successful in this marketplace.
Intellectual Property, Government Approvals and Regulations.
We are in the process of preparing a patent application covering our
iVideoNow!TM and iVNDS(TM) technology. This application is expected to be filed
within the next two months.
Our other Internet video and CD-ROM technology is not protected by any
patents or copyrights nor do we intend to seek any such protection, although we
do treat our Internet video technology as proprietary information. We require
all research employees to sign confidentiality agreements regarding their work
for the Company and all rights to such technology are retained by the Company.
However, without patent or copyright protection, we may not be able to prevent
duplication of our Internet video technology by competitors.
Suppliers
All supplies and components used in our business are readily available from
a number of sources.
Customers
We believe that a majority of our future growth will be generated from new
customers. This expectation is the reason for DIGS establishing its own in-house
marketing team. In addition, we will continually evaluate new or expanded
services to be offered to past or existing customers.
Employees
As of March 31, 2000, DIGS had nine full-time and no part-time employees.
DIGS also utilizes outside services to perform programming, duplication and
printing services.
PROPERTY
DIGS is leasing from a third party 6,153 square feet of office space at
17327 Ventura Boulevard, Suite 200, Encino, California, 91316. The lease calls
for monthly rent of $8,307 and terminates July 31, 2003. The lease can be
renewed for an additional three or five years at our discretion. DIGS has no
plans to change its corporate office location or purchase any real property at
this time.
<PAGE>18
MANAGEMENT
Directors and Executive Officers of DIGS
The present directors, executive officers, key employees and consultants of
DIGS, their ages, positions held in DIGS, and duration as such, are as follows:
<TABLE>
<S> <C> <C>
Name Title Age Period of Service
- ------------------- --------------------------------- ----- -------------------------
Peter B. Dunn President and Director 60 November 1998 - Present
Allen Dunn Vice President, COO and Director 32 November 1998 - Present
David L. Fleming Secretary and Director 49 November 1998 - Present
Karl Ehlert CFO and Controller 31 February 20000 - Present
</TABLE>
Business Experience
Peter B. Dunn founded Digital Corporate Profiles, Inc. ("DCP"), a
wholly-owned subsidiary of DIGS, Inc., in July 1996. Since that time Mr. Dunn
has served the Company in various capacities including Chairman of the Board,
Chief Executive Officer, Chief Financial Officer and Treasurer. His duties with
the Company have changed over time as the Company has grown and additional key
personnel have joined the Company. Currently Mr. Dunn is CEO and President of
DIGS, Inc., a position he has held since November 1998. From 1987 to 1996, Mr.
Dunn was President of Lucky Dog Productions where he produced, directed and
wrote golf television shows/videos, commercials, cable television pilots and
made for television movies. Clients included Paramount Home Video, Classic Golf
International and British Broadcasting Corp. From 1980 to 1987, Mr. Dunn was
President of International Special Promotions (ISP), a special event marketing
company with a client base that included Coca-Cola, R.J. Reynolds and Proctor
and Gamble. From 1972 to 1980, Mr. Dunn was CEO of Western Corporate Services,
Inc., which he founded in 1972. Western Corporate Services is the owner of U.S.
Stock Transfer, the third largest independent stock transfer agency in the
United States.
Allen Dunn joined Digital Corporate Profiles, a wholly-owned subsidiary of
DIGS, inc., as a computer programmer at DCP's inception in July 1996. Mr. Dunn
has been serving as Chief Operating Officer of the Company since November 1998.
Prior to becoming Chief Operating Officer, Mr. Dunn also served the Company as
Chief Programmer as well as Director of Sales and Marketing. From June 1994 to
June 1996, Mr. Dunn was a freelance computer programmer. Mr. Dunn received a
Bachelor of Arts in Economics from California State University of Northridge in
1993. In addition, Mr. Dunn is an alumnus of the University of Colorado School
of Astrophysics and Atmospherics. Mr. Dunn is currently pursuing an advanced
degree in computer science.
David Fleming joined the Board of Directors of Digital Corporate Profiles,
a wholly-owned subsidiary of DIGS, Inc., in July 1996. In November 1998, Mr.
Fleming became Secretary of DIGS, Inc. and Chief Officer of its graphic design
subsidiary, DXF. Prior to joining DXF, Mr. Fleming was managing partner of DGF
Design, a privately owned graphic arts company. Mr. Fleming was managing partner
of DGF Design from 1992 until the time he joined DXF.
Karl Ehlert joined DIGS, Inc. as Controller and Chief Financial Officer in
February 2000. Mr. Ehlert is a licensed Certified Public Accountant in the state
of California. From March 1999 through January 2000, Mr. Ehlert was a senior
accountant at the public accounting firm of Cohen, Miskei and Mowrey located in
Encino, California. During the period of January 1994 through February 1999, Mr.
Ehlert was a senior accountant at the Los Angeles office of Matson, Driscoll and
Damico, CPA's. Mr. Ehlert's experience includes performing financial audits with
the former big six firm of Coopers and Lybrand's Los Angeles office during the
1997 and 1998 audit seasons. Mr. Ehlert graduated from California State
University at Northridge in 1993 with a Bachelor of Science Degree in Business
<PAGE>19
Administration/Accounting and became a licensed CPA in 1997. Mr. Ehlert is a
member of the AICPA and the California Society of CPA's.
Committees of the Board
The Board currently has no committees.
Family Relationships
Peter Dunn is the father of Allen Dunn.
Employment/Consulting Agreements
In February, 2000 the Company renewed its employment agreement with its
President, Peter Dunn. The employment agreement was extended for three years and
provides for a base annual salary of $120,000 as well as annual vacation, sick
pay, bonus and reimbursement of out-of-pocket business expenses.
EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Company's Chief
Executive Officer during the last three complete fiscal years. No other officers
received annual compensation in excess of $100,000 during the last completed
fiscal year.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
----------------------------------------------------- -----------------------------------------------------------
Awards Payout
------------------------------- ------------
Restricted
Other Annual Stock Securities LTIP All Other
Bonus Compensation Award(s) Underlying Payout Compensation
Year Salary ($) ($) ($) Options (#) ($) ($)
---------- ------------ ------- ---------------- ------------- ---------------- ------------- ------------
Peter B. Dunn 1999 $116,000 -0- $10,434(1) -0- 100,000 -0- -0-
1998 80,000 -0- $10,463(1) -0- -0- -0- -0-
1997 5,000 -0- $538 (1) -0- -0- -0- -0-
</TABLE>
- ----------------------
(1) Represents monthly car allowance ($7,920 in 1999 and $6,174 in 1998) and
membership in the Woodland Hills Country Club ($2,514 in 1999; $3,558 in
1998; and $538 in 1997).
On January 2, 1999, pursuant to the 1999 Stock Incentive Plan, stock
options were granted to Peter Dunn, Allen Dunn and David Fleming to purchase
100,000, 62,000 and 50,000 respectively. The exercise price of Peter Dunn's
options are $5.50 per share and expire five years from the grant date. The
exercise price of Allen Dunn's and David Fleming's options are $5.00 per share
and expire ten years from the grant date. As of March 31, 2000, no options have
been exercised.
Stock Option Plans
On January 2, 1999, the Board of Directors of the Company approved a Stock
Incentive Plan referred to as the "1999 Plan." The Plan was approved by the
Company's shareholders on July 9, 1999. The purpose of the 1999 Plan is to
enable the Company to recruit and retain selected officers and key personnel by
<PAGE>20
providing equity participation in the Company. Under the 1999 Plan, full-time
salaried employees, including directors, may be granted options at an exercise
price of 100% of the fair market value of the shares on the date of grant. The
exercise price of options granted to an individual whose holdings exceeding 10%
of voting power must be at 110% of the fair market value on the date of grant.
Any such options expire within five years. Options generally become exercisable
at a rate of 33% a year over three years. The options, unless subject to the 10%
voting power rule, generally are exercisable up to ten years. Options under the
1999 Plan can not be assigned except in the case of death and may be exercised
only while an optionee is employed by the Company, or in certain cases, within a
specified period after employment ends. The purchase price and number of shares
of each option may be adjusted in certain cases, including stock splits,
recapitalizations and reorganizations. The number of options and the optionee's
are determined by the Board of Directors.
The 1999 Plan provides the Board of Directors authorization to grant up to
750,0000 shares. As of March 31, 2000, the Company had granted 290,000 shares of
qualified stock options and 110,000 shares of nonqualified stock options at the
average exercise price of $5.17 per shares.
<TABLE>
<S> <C> <C> <C> <C>
OPTIONS GRANTED IN THE YEAR ENDED DECEMBER 31, 1999
Number of
Securities % of Total Option
Underlying Granted to Exercise of
Options Granted Employees in Base Price
Name in 1999 Fiscal Year 1999 ($/share) Expiration Date
- --------------- ---------------- ----------------- ------------ -----------------
Peter Dunn 100,000 35% $5.50 January 2, 2004
Allen Dunn 62,000 22% $5.00 January 2, 2009
David Fleming 50,000 18% $5.00 January 2, 2009
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
OPTIONS GRANTED IN THE CURRENT YEAR (through 3/31/00)
% of Total
Number of Securities Option Granted
Underlying Options to Employees in Exercise of Base
Name Granted in 2000 Fiscal Year 2000 Price ($/share) Expiration Date
- --------------- ------------------- ----------------- ---------------- -----------------
Karl Ehlert 60,000 100% $5.00 February 1, 2010
</TABLE>
<TABLE>
<S> <C> <C>
FISCAL YEAR END OPTION VALUE (DECEMBER 31, 1999)
Number of Securities Underlying Value of Unexercised in the
Unexercised Options/SARs at Money Options/SARs at Fiscal
Fiscal Year End (#) Year End
Exercisable/Unexercisable Options Exercisable/Unexercisable Options
Name at December 31, 1999 at December 31, 1999
- ------------------- ---------------------------------- ----------------------------------
Peter Dunn 0/100,000 0/0
Allen Dunn 0/ 62,000 0/0
David Fleming 0/ 50,000 0/0
</TABLE>
* The value of unexercised in-the-money options is based on a per share price
of $3.69 as quoted on the OTC Bulletin Board on December 31, 1999.
<PAGE>21
<TABLE>
<S> <C> <C>
OPTION VALUE OF OPTIONS GRANTED IN THE CURRENT YEAR (through 3/31/00)
Number of Securities Underlying Value of Unexercised in the
Unexercised Options/SARs at Money Options/SARs at Fiscal
Fiscal Year End (#) Year End
Exercisable/Unexercisable Options Exercisable/Unexercisable Options
Name at March 31, 2000 at March 31, 2000
- --------------- --------------------------------- ---------------------------------
Peter Dunn 33,333/66,667 20,833/41,667
Allen Dunn 20,666/41,334 23,249/46,500
David Fleming 16,666/33,334 18,749/37,500
Karl Ehlert 0/60,000 0/67,500
</TABLE>
*The value of unexercised in-the-money options is based on a per share price of
$6.125 as quoted on the OTC Bulletin Board on March 31, 2000.
Directors Compensation
DIGS reimburses its directors for expenses incurred in connection with
attending Board meetings but did not pay director's fees or other cash
compensation for services rendered as a director in 1999.
Limitation of Liability and Indemnification Matters
Section 145 of the General Corporate Law ("GCL") of Delaware empowers a
company incorporated in Delaware, such as DIGS, Inc., 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 of Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company under Delaware law or otherwise, the Company has been advised the
opinion of the Securities and Exchange Commission is that such indemnification
is against public policy as expressed in the Act of 1933 and is, therefore,
unenforceable. In the event a claim for indemnification against such liabilities
(other than payment by the Company for expenses incurred or paid by a director,
officer or controlling person of the Company in 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 seven 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.
<PAGE>22
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth, as of March 31, 2000, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each stockholder known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock and (ii) each executive officer and director of
the Company, and directors and executive officers of the Company as a group.
Except as indicated, it is our understanding that each individual listed below
has sole power to vote and dispose of the number of shares owned.
<TABLE>
<S> <C> <C>
(a) Ownership of Certain Beneficial owners:
Percentage
Number of Beneficially
Name and Address Shares (1) Owned
- ----------------------------------------- ------------ --------------
Peter B. Dunn 1,330,500 20.0%
17327 Ventura Blvd., Suite 200
Encino, CA 91316
Allen Kelsey Grammar Trust 450,000 6.8%
c/o Donald J. Miod
Miod & Company
15456 Ventura Blvd., Suite 500
Sherman Oaks, CA 91403
First Capital Network (1) & (2) 439,992 6.6%
Worldwide Insurance Consultants (1) & (2) 439,992 6.6%
Jamie Mazur (2) & (3) 219,996 3.3%
Jennifer Mazur (2) & (3) 219,996 3.3%
Emily Mazur (2) & (3) 219,996 3.3%
Trent Mazur (2) & (3) 219,996 3.3%
- ------------------------
</TABLE>
(1) First Capital Network and Worldwide Insurance Consultants are subsidiaries
of Corporate Financial Enterprises. Mr. Regis Possimo is an officer and
principal shareholder of Corporate Financial Enterprises and is deemed to
be the beneficial owner of these shares.
(2) The address of each beneficial owner is identified as:
c/o Corporate Financial Enterprises
2224 Main Street
Santa Monica, CA 90405
(3) Emily and Trent Mazur are minors. Their shares are held by Michelle Mazur,
their mother, as custodian.
<PAGE>23
(b) Security Ownership of Management:
Name, Title and Address Number of Shares Percent of Class
- ---------------------------------- ---------------- -----------------
Peter B. Dunn 1,330,500 20.0%
President and Director
17327 Ventura Blvd., Suite 200
Encino, CA 91316
Allen Dunn 165,000 2.5%
Vice President, COO and
Director
17327 Ventura Blvd., Suite 200-
Encino, CA 91316
David Fleming 120,000 1.8%
Director
17327 Ventura Blvd., Suite 200-
Encino, CA 91316
Officers and Directors as a 1,615,500 24.3%
Group (3 individuals)
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise indicated below, we have not been a party to any
transaction, proposed transaction, or series of transactions in which the amount
involved exceeds $60,000, and in which, to our knowledge, any of our directors,
officers, five percent beneficial security holder, or any member of the
immediate family of the foregoing persons has had or will have a direct or
indirect material interest.
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.
During the year ended December 31, 1999, the Company received a short term
loan of $25,000 from its President, Peter Dunn. The loan was repaid on November
30, 1999. Also during 1999, DXF loaned $30,000 to its President, David Fleming.
In March of 2000, DXF loaned an additional $15,000 to Mr. Fleming. The loans
bear interest at 5% per annum and are due on July 30, 2000 and March 22, 2001,
respectively.
During 1999 and 1998, DIGS paid its Secretary, David Fleming, $10,316 and
$9,000 respectively, for graphic art services provided by him prior to the
formation of DXF Design, Inc.
PLAN OF DISTRIBUTION
The Selling Stockholders may, from time to time, sell all or a portion of
the shares of Common Stock on any market upon which the Common Stock may be
quoted (currently the OTC-Bulletin Board and Frankfurt Stock Exchange), in
privately negotiated transactions or otherwise. Such sales may be at fixed
prices that may be changed, at market prices prevailing at the time of sale, at
prices related to the market prices or at negotiated prices. The shares of
Common Stock may be sold by the Selling Stockholders by one or more of the
following methods, without limitation:
<PAGE>24
(a) block trades in which the broker or dealer so engaged will attempt to
sell the shares of Common Stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal and resale by the broker
or dealer for its account pursuant to this Prospectus;
(c) an exchange distribution in accordance with the rules of the exchange;
(d) ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
(e) privately negotiated transactions;
(f) market sales (both long and short to the extent permitted under the
federal securities laws); and
(g) a combination of any aforementioned methods of sale.
In effecting sales, brokers and dealers engaged by the Selling Stockholders
may arrange for other brokers or dealers to participate.
Brokers or dealers may receive commissions or discounts from the Selling
Stockholders or, if any of the broker-dealers act as an agent for the purchaser
of said shares, from the purchaser in amounts to be negotiated which are not
expected to exceed those customary in the types of transactions involved.
Broker-dealers may agree with the Selling Stockholders to sell a specified
number of the shares of Common Stock at a stipulated price per share. Such an
agreement may also require the broker-dealer to purchase as principal any unsold
shares of Common Stock at the price required to fulfill the broker-dealer
commitment to the Selling Stockholders if said broker-dealer is unable to sell
the shares on behalf of the Selling Stockholders. Broker-dealers who acquire
shares of Common Stock as principal may thereafter resell the shares of Common
Stock from time to time in transactions which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above. Such sales by a broker-dealer could be at prices and on terms
then prevailing at the time of sale, at prices related to the then-current
market price or in negotiated transactions. In connection with such resales, the
broker-dealer may pay to or receive from the purchasers of the shares,
commissions as described above. The Selling Stockholders may also sell the
shares of Common Stock in accordance with Rule 144 under the Securities Act,
rather than pursuant to this Prospectus.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in the sale of the shares of Common Stock may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with these sales. In that event, any commissions received by the
broker-dealers or agents and any profit on the resale of the shares of Common
Stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
From time to time, the Selling Stockholders may pledge their shares of
Common Stock pursuant to the margin provisions of their customer agreements with
their brokers. Upon a default by a Selling Stockholder, the broker may offer and
sell the pledged shares of Common Stock from time to time. Upon a sale of the
shares of Common Stock, the Selling Stockholders intend to comply with the
Prospectus delivery requirements, under the Securities Act, by delivering a
Prospectus to each purchaser in the transaction. We intend to file any
amendments or other necessary documents in compliance with the Securities Act
which may be required in the event any Selling Stockholder defaults under any
customer agreement with brokers.
Subscription Procedures
All expenses of the registration statement including, but not limited to,
legal, accounting, printing and mailing fees are and will be borne by DIGS.
<PAGE>25
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Signature Stock
Transfer, Inc., 14675 Midway Road, Suite 229, Dallas, Texas 75244.
<TABLE>
<S> <C> <C> <C> <C> <C>
SELLING STOCKHOLDERS
Number of Common
Number of Common Number of Shares Beneficially
Shares Beneficially Common Shares Owned Following
Name of Shareholder Owned Prior to the Offering Offered Hereby the Offering
- ------------------- --------------------------- -------------- ---------------------
# Of % Of # Of # Of % Of
Shares Class Shares Shares Class
------------- ------------ -------------- ------- --------
Calp II, L.P. 875,000 (1) 11.6% 875,000 -0- 0%
Calp II, L.P. 100,000 (2) 1.5% 100,000 -0- 0%
May Davis Group, Inc. 200,000 (2) 2.9% 200,000 -0- 0%
- --------------------
</TABLE>
(1) Assumes conversion of the 2,500 shares of Series A Preferred Stock.
(2) Assumes the exercise of outstanding warrants.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 80,000,000 shares of Common Stock,
$.001 par value and 20,000,000 shares of Preferred Stock, $.01 par value. As of
March 31, 2000, there were 6,658,631 shares of Common Stock outstanding and
2,500 shares of Series A Convertible Preferred Stock outstanding.
Common Stock
Each stockholder is entitled to one vote for each share of Common Stock
held on all matters submitted to a vote of stockholders, including the election
of directors.
Holders of Common Stock are entitled to receive the dividends as may be
declared by our Board of Directors out of funds legally available for dividends
and, in the event of liquidation, to share pro rata in any distribution of our
assets after payment of liabilities. Our Board of Directors is not obligated to
declare a dividend. 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 factors.
It is not anticipated that dividends will be paid in the foreseeable future.
Holders of Common Stock do not have preemptive rights to subscribe to
additional shares if issued by us. There are no conversion, redemption, sinking
fund or similar provisions regarding the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable and all of the shares of
Common Stock issued upon the exercise of the outstanding warrants will be, upon
issuance, fully paid and non-assessable.
Preferred Stock
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 voting, participating,
optional or other special rights, with such rights, 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.
<PAGE>26
In March, 2000, the Company authorized and issued 2,500 shares of preferred
stock to be designated as Series A Convertible Preferred Stock. The Preferred
Stock has no voting rights except as may be required by Delaware's General
Corporation Law. The Series A Preferred Stock has a dividend rate of 6% per
annum. The Preferred Stock is convertible at 75% of the lowest closing bid price
of our Common Stock during any three trading days during the 20 consecutive
trading days ending on the date of the holder's determination to convert or
$11.25, whichever is lower. The Shares can also be redeemed by the Company under
certain circumstances.
Warrants
In connection with various acquisition, compensation and financing
transactions, DIGS has issued the following warrants, all of which are
exercisable into shares of Common Stock:
<TABLE>
<S> <C> <C> <C> <C>
Issue Date # of Shares Covered Exercisable Exercise Price/Share Expiration Date
-------------- ---------------------- ------------- ----------------------- ------------------
3/14/00 100,000 (1) 3/14/00 $9.90 3/14/03
3/14/00 200,000 (1) 3/14/00 $9.90 3/14/03
</TABLE>
- -------------------------
(1) Of this amount no warrants have been exercised.
Options
The Company has issued qualified options to purchase 230,000 shares of
Common Stock and non-qualified options to purchase 65,000 shares of Common Stock
to 10 individuals. The options are exercisable at an average price of $5.17 per
share. All options are exercisable for up to 10 years unless the optionholder's
association with the Company is terminated, in which case, the options must be
exercised within 30 days of such termination and are cancelled thereafter.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Selling
Stockholders will be passed upon by the law firm of Bartel Eng Linn & Schroder,
Sacramento, California.
EXPERTS
The consolidated balance sheets as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1999 and December 31, 1998 included in this
Prospectus have been audited by Caldwell, Becker, Dervin, Petrick & Co., L.L.P.,
independent chartered accountants, as set forth in their report thereon included
elsewhere herein and are included in reliance upon the report, given on the
authority of the firm, as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2, together with all
amendments and exhibits, with the SEC. This Prospectus, which forms a part of
that registration statement, does not contain all information included in the
registration statement. Certain information is omitted and you should refer to
the registration statement and its exhibits. With respect to references made in
this Prospectus to any contract or other document of DIGS, the references are
not necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document. You may
review a copy of the registration statement at the SEC's public reference room,
and at the SEC's regional offices located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New
<PAGE>27
York, New York 10048. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our filings and the
registration statement can also be reviewed by accessing the SEC's website at
http://www.sec.gov.
FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
The following Financial Statements pertaining to DIGS, Inc. and Subsidiaries are
filed as part of this Prospectus:
<TABLE>
<S> <C>
INDEX TO FINANCIAL STATEMENTS
Pages
------------------
Independent Auditors' Report F-1
Consolidated Balance Sheet as of December 31, 1999 F-2
Consolidated Statements of Operations
For the Years Ended December 31, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-18
Additional Information:
Independent Auditors' Report on Additional Information F-19
Schedule of Cost of Goods Sold and Operating Expenses F-20
For the Years Ended December 31, 1999 and 1998
</TABLE>
<PAGE>F-1
INDEPENDENT AUDITORS' REPORT
February 24, 2000
To the Board of Directors and Shareholders of
DIGS, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of DIGS, Inc. (a
Delaware corporation) and Subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1999. 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.
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 provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DIGS, Inc.
and subsidiaries as of December 31, 1999, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1999, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1999 the Company changed
its method of accounting for organizational and start-up costs.
CALDWELL, BECKER, DERVIN, PETRICK & CO., L. L. P.
Woodland Hills, California 91364
<PAGE>F-2
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash (Note 2) $ 106,095
Marketable equity securities (Notes 2 and 3) 116,875
Accounts receivable - trade (Note 2 and 8) 67,695
Loan receivable - officer (Note 15) 30,558
-----------------
Total Current Assets 321,223
-----------------
PROPERTY AND EQUIPTMENT,
net of accumulated depreciation (Notes 2 and 5) 110,811
PROGRAM DEVELOPMENT COSTS,
net of accumulated amortization (Notes 2 and 6) 127,955
LONG-TERM ASSETS
Deposit 160
Deferred tax assets (Note 4) --
-----------------
Total Assets $ 560,149
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 72,164
Income taxes payable 4,564
Interest payable (Note 16) 2,346
Short-term note payable (Note 16) 300,000
Sublease deposits 2,400
Deferred rent credit (Note 7) 11,667
-----------------
Total Current Liabilities 393,141
-----------------
CONCENTRATION AND COMMITMENT (Note 7 and 8)
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, 6,658,631 shares issued and outstanding 6,659
Additional paid-in capital 1,482,594
Accumulated other comprehensive income (loss) (2,747)
Retained (deficit) (1,319,498)
-----------------
Total Stockholders' Equity 167,008
-----------------
Total Liabilities and Stockholders' Equity $ 560,149
=================
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
<PAGE>F-3
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
1999 1998
----------------- ----------------
REVENUE
CD-ROM design and development revenue $ 414,145 $ 166,564
Graphic design revenue 149,877 --
Stocknet-USA directories -- 5,130
----------------- ----------------
Total Revenue 564,022 171,694
----------------- ----------------
COST OF SALES (Page 21) 280,069 96,980
----------------- ----------------
Gross Profit 283,953 74,714
OPERATING EXPENSES (Page 21) 801,799 535,231
----------------- ----------------
(Loss) from Operations (517,846) (460,517)
OTHER INCOME (EXPENSE)
Rental income (Note 7) 22,300 23,000
Financing expense (Note 10) -- (134,930)
Interest income 863 --
Miscellaneous income 1,351 --
Gain on sale of asset (Note 18) 38,722 --
Realized loss on sale of securities (7,850) --
Interest expense (2,653) (1,831)
----------------- ----------------
Total Other Income 52,733 (113,761)
----------------- ----------------
(Loss) Before Income Taxes and Cumulative Effect of Accounting
Change (465,113) (574,278)
PROVISION FOR INCOME TAX (Note 4) (5,364) (800)
----------------- ----------------
Net (Loss) Before Cumulative Effect of Accounting Change (470,477) (575,078)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Organizational costs, net of income tax benefit of $0 (2,625) --
----------------- ----------------
Net (Loss) (473,102) (575,078)
OTHER COMPREHENSIVE INCOME, net of tax:
Unrealized holding (loss) arising during period, net of tax benefit
of $0 and $0 (Notes 2 and 3) (2,747) (7,850)
Add reclassification adjustment for (loss) included in net income 7,850 --
----------------- ----------------
Comprehensive Income (Loss) $ (467,999) $ (582,928)
================= ================
(Loss) per common share (Note 2 and 12) $ (.07) $ (.14)
================= ================
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
<PAGE>F-4
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other
Preferred Stock Common Stock Additional Comprehensive Retained
-------------------------------------------- Paid-In Income/ Earnings
Shares Amount Shares Amount Capital (Loss) (Deficit) Total
------- -------- ----------- ----------- ------------ ------------- ------------- -----------
Balance at
Dec. 31, 1997 -- -- 3,435,000 $ 3,435 $ 297,153 $ -- $ (271,318) $ 29,270
Stock sales
Mar. 20, 1998
(Note 10) -- -- 1,759,968 1,760 144,905 -- -- 146,665
Reorganization
with DIGS, Inc.
Nov. 9, 1998
(Note 9) -- -- 53,663 54 (54) -- -- --
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
(Notes 2 and 3) -- -- -- -- -- (7,850) -- (7,850)
------- -------- ----------- ----------- ------------ ------------- ------------- -----------
Balance at
Dec. 31, 1998 -- -- 6,648,631 6,649 1,434,604 (7,850) (846,396) 587,007
Shares issued for
services
Nov. 17, 1999
(Note 17) -- -- 10,000 10 47,990 -- -- 48,000
Net (loss) for the
year ended
Dec. 31, 1999 -- -- -- -- -- -- (473,102) (473,102)
Net unrealized
holding (loss) and
reclassification
Dec. 31, 1999
(Notes 2 and 3) -- -- -- -- -- 5,103 -- 5,103
------- -------- ----------- ----------- ------------ ------------- ------------- -----------
Balance at
Dec. 31, 1999 -- $ -- 6,658,631 $ 6,659 $1,482,594 $ (2,747) $(1,319,498) $ 167,008
------- -------- ----------- ----------- ------------ ------------- ------------- -----------
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
<PAGE>F-5
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
1999 1998
--------------------- -------------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net (loss) $ (473,102) $ (575,078)
Adjustments to reconcile net (loss) to net cash provided (used)
by operating activities:
Cumulative effect of accounting change-organizational costs 2,625 --
Operating expenses paid by issuance of stock 48,000 134,930
Equity securities received for payment of services (75,000) --
Amortization and depreciation 48,386 31,607
(Increase) in accounts receivable (64,512) (3,183)
(Increase) in deposit (160) --
(Decrease) increase in current liabilities and accrued expenses 35,278 (6,101)
Increase in income taxes payable 4,564 --
Increase in interest payable 2,346 --
(Decrease) increase in deposits (600) 3,000
Increase (decrease) in deferred rent credit (20,000) 31,667
Gain on sale of asset (38,722) --
Realized loss on sale of marketable equity securities 7,850 --
------------------- -------------------
Net Cash Flows (Used) by Operating Activities (523,047) (383,158)
------------------- -------------------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Acquisition of property and equipment (48,550) (79,042)
(Increase) in program development cost (108,820) --
Proceeds from sale of marketable equity securities 1,150 --
Acquisition of marketable equity securities -- (9,000)
------------------- -------------------
Net Cash Flows (Used) by Investing Activities (156,220) (88,042)
------------------- -------------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Issuance of common stock (Notes 10 and 11) -- 1,005,735
Proceeds from short-term loan 325,000 600,000
Principal payment on short-term loan (25,000) (600,000)
(Increase) in loan receivable - officer (30,558) --
(Decrease) in note payable to stockholders -- (47,321)
------------------- -------------------
Net Cash Flows Provided by Financing Activities 269,442 958,414
------------------- -------------------
NET INCREASE (DECREASE) IN CASH (409,825) 487,213
CASH AT THE BEGINNING OF THE YEAR 515,920 28,707
------------------- -------------------
CASH AT THE END OF THE YEAR $ 106,095 $ 515,920
=================== ===================
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
<PAGE>F-6
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
--------------------- -------------------
ADDITIONAL DISCLOSURES:
Cash paid during the year for:
Interest $ 307 $ 1,831
=================== ===================
Income Taxes $ 800 $ 800
=================== ===================
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Common stock issued in exchange for subsidiary's common stock
$ -- $ 312,322
=================== ===================
Disposal of asset in exchange for equity securities (Note 18) $ 44,622 $ --
=================== ===================
Equity securities received for payment of services (Note 18) $ 75,000 $ --
=================== ===================
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
<PAGE>F-7
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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). In connection with the
agreement of reorganization, the "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 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. Prior to the
reorganization, the Company was considered a shell organization and was
inactive. 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. As a 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. Please see Note 9 for additional information. In 1999, the
Company formed two wholly owned subsidiaries, DXF Design, Inc. (DXF) and DIGS
Web Video, Inc. (DWV).
DCP provides complete multimedia and Internet communications solutions for
public companies to proactively tell their story to the worldwide investment
community. DCP produces CD-ROM (IRCD) packages for its corporate and investor
relations clients. DCP also offers an environmental health and safety CD-ROM
(EHSCD) to dynamically tell the environmental, health and safety story to
investors, environmental groups, media and the public. In addition, the Company
also produces an employee orientation CD-ROM (EOCD) for the customers' internal
use. It is designed to familiarize new employees with their new environment by
providing a comprehensive look at all aspects of the customers' companies,
including: staff, products, services, policies, and financial outlook. In 1999,
DCP ceased to provide Stocknet-USA directory services and sold Stocknet-USA
Website and domain name to non-related parties (see Note 18 for additional
information).
DXF is a fully functional digital and graphic design studio providing a complete
range of Internet, CD-ROM and promotional print design services. DXF specializes
in designing brochures, corporate identity graphics, corporate and entertainment
promotional kits, as well as providing key art for theatrical and home video
advertisement.
DWV is developing and marketing a real time Internet Video screening application
known as iVideoNow!. The iVideoNow! player has the capability of allowing the
user to instantly view up to 36 separate videos. This multi-screening technology
is currently being marketed to companies in the film, television, music, travel,
and retail industries. This multi-screening technology of iVideoNow! can be
designed to a client's specification and will provide companies new ways to use
Internet video as a promotional tool. DWV is also developing an e-commerce
technology that will work with the iVideoNow! player, allowing the viewer to
order products directly from the promotional videos.
<PAGE>F-8
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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, Advanced Laser Products, Inc., a Nevada corporation (inactive), DXF
Design, Inc., a California corporation, and DIGS Web Video, Inc., a California
corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Segment information
The company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No
131) in 1999. Prior to 1999, the Company only operated in one business segment.
This statement establishes for the reporting of information about a company's
operating segments. Operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker(s) in deciding how to
allocate resources and in assessing performance. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position of prior reports. (See Note 14 for additional information)
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.
Accounts Receivable
Uncollectible accounts receivable are written off as bad debt expense at the end
of the year. For the year ended December 31, 1999 and 1998, there was no bad
debt expense. The current accounts receivable is considered collectible by
management.
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." For purpose of determining
realized gains and losses, the cost of securities sold was based on first-in,
first-out method.
<PAGE>F-9
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, establishes a standard for reporting and displaying
comprehensive income and its components within the financial statements.
Comprehensive income includes charges and credits to equity that are not the
result of transactions with shareholders. Comprehensive income is composed of
two subsets - net income and other comprehensive income. Included in other
comprehensive income for the Company are unrealized losses and adjustment for
realized losses of available-for-sale securities as of December 31, 1999 and
1998.
Revenue Recognition
Design and development of CD-ROM revenues are billed in equal one-third
installments as the contract progresses. All payments are nonrefundable and
revenue is recognized when earned. Revenue is deemed to be earned when there is
no future performance obligation. Future performance obligation ceases when the
product is approved by the client and shipped. The average length of a contract
is approximately two months. As of December 31, 1999 and 1998, the Company did
not have any open contracts.
Graphic design revenue is billed when the project is completed. As of December
31, 1999, the Company did not have any open contracts.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement (SFAS) No.
128, "Earning Per Share." SFAS No. 128 established standards for computing and
presenting earnings per share ("EPS") and requires the presentation of both
basic and diluted EPS. Unlike primary EPS, basic EPS excludes any dilutive
effects of options, warrants, and convertible securities and is computed on the
basis of the weighted average number of common shares outstanding during the
year. The diluted EPS calculation is very similar to the previous fully diluted
EPS calculation method. The Company has adopted SFAS 128 since 1998. The Company
has a simple capital structure and there were no changes under the SFAS 128
methodology to the previously reported EPS amounts for any of the fiscal years.
Fully diluted per share data is not presented, as the effects would be
antidilutive. (See Note 12)
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
Computer software 5
Leasehold improvements 10
In 1999, the Company changed its accounting policy for organization and start-up
costs. Please see accounting change.
<PAGE>F-10
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 when events or changes in circumstances indicate 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 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.
Stock-Based Compensation
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
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 (see Note 13 for additional information).
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 basis 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.
<PAGE>F-11
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. As of the
date of this report, the Company has not experienced any year 2000 problems.
Accounting Change
In 1999, the Company adopted Accountants' Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities." This statement requires that
costs of start-up activities and organizational costs be expensed as incurred.
The cumulative effect of this accounting change on years prior to 1999 was in
the amount of $2,625 (net of $0 tax effect) or $0.00 per common share that was
reflected in the first quarter of 1999. This new accounting requirement did not
have a significant effect on 1999 income before the cumulative effect of the
accounting change.
NOTE 3 - MARKETABLE EQUITY SECURITIES
Cost and fair value of marketable equity securities at December 31, 1999 are as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
--------------- --------------- --------------- ---------------
December 31, 1999
Available for sale
Equity securities $ 119,622 $ -- $ (2,747) $ 116,875
=============== =============== =============== ===============
</TABLE>
Net unrealized losses from available for sale securities during the year ended
December 31, 1999 and 1998 amounted to $2,747 and $7,850, respectively,
resulting in net changes of $2,747 and $7,850, respectively, to Other
Comprehensive Income. For the year ended December 31, 1999, the Company received
proceeds of $1,510 as the result of sales of securities available for sale. The
Company also recorded gross realized losses included in earnings of $7,850, and
recorded losses reclassified out of accumulated other comprehensive income as
the result of sales of securities available for sale. The tax benefit for each
component of comprehensive income, including reclassification adjustments is $0
for the year ended December 31, 1999 and 1998. For purpose of determining
realized gains and losses, the cost of securities sold was based on first-in,
first-out method.
<PAGE>F-12
NOTE 4 - INCOME TAXES
The Company has available at December 31, 1999, net operating loss carryforwards
totaling $1,253,761 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 470,148
Year 2019 512,295
------------------
$ 1,253,761
==================
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, 1999:
Deferred Tax Asset - Current $ --
Deferred Tax Asset - Non-Current 427,916
------------------
427,916
Valuation allowance (427,916)
------------------
$ --
==================
For the year ended December 31, 1999 and 1998, valuation allowance increased by
$203,679 and $156,530, respectively. 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 $427,916.
The components of the provision for income taxes for continuing operations are
as follows:
1999 1998
------------------- ------------------
Current
State $ 5,364 $ 800
=================== ==================
NOTE 5 - PROPERTY AND EQUIPMENT
Computer $ 89,510
Furniture and fixtures 9,923
Computer software 21,180
Leasehold improvements 44,365
------------------
164,978
Less accumulated amortization and depreciation (54,167)
------------------
$ 110,811
==================
Amortization and depreciation expenses for the years ended December 31, 1999 and
1998 were $25,666 and $18,356, respectively. In 1999 and 1998, the Company
allocated amortization expense to cost of sales in the amount of $4,057 and
$3,639, respectively.
<PAGE>F-13
NOTE 5 - PROPERTY AND EQUIPMENT (CONTINUED)
In 1999, the Company adopted Accountants' Statement of Position (SOP) 98-5,
"Reporting on the costs of Start up Activities." This statement requires that
costs of start-up activities and organizational costs be expensed as incurred.
See Accounting Change in Note 2 for additional information.
NOTE 6 - PROGRAM DEVELOPMENT COSTS
Program development costs $ 160,931
Less accumulated amortization (32,976)
------------------
$ 127,955
==================
Amortization expense for the years ended December 31, 1999 and 1998 was $22,720
and $13,251, respectively. In 1999 and 1998, the Company allocated amortization
expense to cost of sales in an amount of $22,720 and $13,251, respectively. For
the year ended December 31, 1999, the Company capitalized additional $108,820 of
program development costs.
NOTE 7 - COMMITMENTS
In August 1998, the Company entered in a two-year operating lease on its current
premises, expiring July 31, 2000, with a monthly lease payment of $7,691. The
lease agreement contains certain terms and conditions, which include, but are
not limited to, payment of property taxes, insurance, rent increases, repairs
and maintenance. There is currently an option to renew the lease for an
additional three and five years. On February 23, 2000, the Company renewed its
lease agreement for an additional three years, with a monthly lease payment of
$8,307. The new lease will expire on July 31, 2003.
The following is a schedule of future minimum rental payments required under the
above operating lease as of December 31, 1999:
Year Ending
December 31, Amount
------------------------ ------------------
2000 $ 95,370
2001 99,679
2002 99,679
2003 58,146
------------------
$ 352,874
==================
The above rental expenses will be offset by $7,000 in sublease rental income
through July 31, 2000.
For the years ended December 31, 1999 and 1998, rental expenses, net of deferred
rent credit, were $70,277 and $44,445, respectively. Rental income under the
subleases amounted to $22,300 and $23,000 for the years ended December 31, 1999
and 1998, respectively.
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 1999 and 1998, the amortized credit of $20,000 and $8,333 was
offset against rental expense, respectively.
<PAGE>F-14
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 7 - COMMITMENTS (CONTINUED)
In 1999 the Company entered in a 36-month operating lease agreement with a
monthly payment of $822. For the year ended December 31, 1999, total lease
payment amounted to $5,015. Future obligation under the operating lease totals
$9,864, $9,864, and $4,932 for 2000, 2001, and 2002, respectively.
On March 1, 1998, DCP entered into a two-year employment contract with an
officer 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. On February 28, 2000, the Company renewed the above employment contract
an additional three years that provides an annual salary of $120,000 as well as
annual vacation, sick pay, bonus, and miscellaneous reimbursement of
out-of-pocket costs. The contract expires on February 28, 2003. For the years
ended December 31, 2000, 2001, 2002, and 2003, minimum obligation under this
contract is $116,000, $120,000, $120,000, and $20,000, respectively. Total
compensation to all officers for the year ended December 31, 1999 was
approximately $242,000 including auto and miscellaneous expense reimbursements.
During 1999, the total of approximately $20,000 was recorded as auto expense and
other operating expenses. In addition, the Company allocated $65,250 of
officers' salary to cost of goods sold during 1999.
NOTE 8 - CONCENTRATON
For the years ended December 31, 1999 and 1998, sales to five and three
customers accounted for approximately 60% and 96% of total revenue,
respectively. The total revenue received from these customers in 1999 and 1998
was as follows:
<TABLE>
<S> <C> <C> <C> <C>
For the Years Ended December 31,
-------------------------------------------------
1999 1998
---------------------- -----------------------
Customer A $ -- --% $ 29,045 16.9%
Customer B 1,500 0.3 27,541 16.0
Customer C -- -- 107,500 62.6
Customer D 60,118 10.6 -- --
Customer E 84,500 15.0 -- --
Customer F 130,680 23.2 -- --
Customer G 59,183 10.5 -- --
------------- -------- -------------- --------
$ 335,981 59.6% $ 164,086 95.5%
============= ======== ============== ========
</TABLE>
As of December 31, 1999, receivables from three customers account for 91% of
total accounts receivable.
The Company relies solely on the performance of DXF's officer, Mr. Fleming, to
generate revenue for its graphic design subsidiary, DXF Design, Inc. (DXF).
NOTE 9 - 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. and the acquisition of DIGS at their book values.
<PAGE>F-15
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 9 - AGREEMENT OF REORGANIZATION (CONTINUED)
Prior to the reorganization, the Company was considered 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 a 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
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 - EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic (loss) per share:
<TABLE>
<S> <C> <C>
1999 1998
------------------- ------------------
Basic EPS:
(Loss) from continue operation $ (.07) $ (.14)
Cumulative effect of accounting change (.00) (.00)
------------------- ------------------
Net (Loss) Per Common Share $ (.07) $ (.14)
=================== ==================
Weight average shares outstanding 6,649,864 4,220,188
=================== ==================
</TABLE>
Fully diluted per share data is not presented, as the effects would be
antidilutive.
<PAGE>F-16
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 13 - STOCK OPTION PLANS
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 December 31,
1999, the maximum of 750,000 shares was approved to be issued under the plan, of
which 455,000 shares were available for future grants.
For the year ended December 31, 1999, the Company granted 230,000 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 December 31,
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 plan activity for the year shown:
<TABLE>
<S> <C> <C>
Weight-
Average
Stock Options Exercise Price
------------------- ------------------
Outstanding at December 31, 1998 -- --
Granted 295,000 5.17
Exercised -- --
Forfeited -- --
Expired -- --
------------------- ------------------
Outstanding at December 31, 1999 295,000 5.17
=================== ==================
Shares exercisable at December 31, 1999 -- --
=================== ==================
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 range from $5.00
to $5.50. The following table summarizes information for options outstanding and
exercisable at December 31, 1999:
<TABLE>
<S> <C> <C> <C> <C> <C>
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
-------------------- ------------- ------------- ------------- ------------- -------------
$5.00 195,000 $5.00 2.0 -- --
$5.50 100,000 $5.50 2.0 -- --
------------- -------------
295,000 --
</TABLE>
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, such as pro forma net income and
earnings per share, had compensation expense that relating to the year ended
December 31, 1999 grants measured under the fair value recognition provisions of
SFAS No. 123.
<PAGE>F-17
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 13 - STOCK OPTION PLANS (CONTINUED)
The weight-average fair values at date of grant for options granted during the
year ended December 31, 1999 were $5.00, respectively and were estimated using
the Black-Scholes option valuation model with the following weight-average
assumptions:
1999
-------------
Expected life in years 5
Interest Rate 5.0%
Volatility 33.0%
Dividend Yield 0%
NOTE 14 - SEGMENT INFORMATION
Information concerning operations in different lines of business at December 31,
1999 and for the year then ended is presented below. Prior to 1999, the Company
only operated in one business segment, public relation CD-ROM. In 1999, the
company operated in the public relation CD-ROM products and graphic design
within the United States. Intercompany transactions between segments are not
material.
<TABLE>
<S> <C> <C> <C>
CD-ROM
Design and Graphic
1999 Development Design Consolidated
- ------------------------------------------------------ --------------- -------------- ---------------
Net Operating Revenues $ 413,743 $ 150,279 $ 564,022
Operating Income (589,211) 23,365 (565,846)
Identifiable Operating Assets 449,591 100,090 549,681
Capital Expenditures -- -- --
Depreciation and Amortization $ 47,080 $ 1,306 $ 48,386
</TABLE>
Identifiable operating assets include cash, available-for-sale securities, trade
accounts receivable, and fixed assets.
NOTE 15 - RELATED PARTY TRANSACTIONS
For the year ended December 31, 1999 and 1998, the Company paid its Secretary,
David Fleming, approximately $10,500 and $9,000 as an independent contractor in
connection with the production of its products. All payments were made prior to
Mr. Fleming taking the position of a full-time officer of DXF Design, Inc.
In 1999, the President provided the Company an unsecured non-interest bearing
short-term loan of $25,000. The Company repaid this loan within one month.
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.
For the year ended December 31, 1999, loan receivable from DXF's officer, Mr.
Fleming, totaled $30,558, including $558 of accrued interest. The loan bears
interest at 5% per annum and is due on July 30, 2000.
<PAGE>F-18
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<TABLE>
<S> <C>
NOTE 16 - SHORT-TERM NOTE
As of December 31, 1999, the Company has the following short-term notes:
A short-term note bears interest at 5% per annum,
with an effective interest rate of 5.116%. The
note is due on January 1, 2000. $ 100,000
Revolving short-term note bears interest at 5% per annum, with an
effective interest rate of 5.116%.
The note is due on January 1, 2000. 200,000
--------------------
300,000
Interest accrued for the above notes 2,346
--------------------
$ 302,346
====================
</TABLE>
For the year ended December 31, 1999, interest expense accrued for the above
notes totaled $2,346. The maximum funds available under the second note
agreement are $350,000. The Company, under the note agreements, is required to
provide 100,000 and 350,000 shares of its common stock as collateral for the
above notes, respectively. If the note is not repaid in full within 30 days from
the due date, the note is deemed to be in default, which shall give the note
holder the right to foreclose on the collateral with no further action or
notice. The notes have been extended and is due April 1, 2000. As of February
24, 2000, the Company borrowed an additional $150,000.
NOTE 17 - SHARES ISSUED FOR SERVICES
On November 17, 1999, the Company issued 10,000 restricted shares of common
stock for services rendered relating to the listing of the Company's stock on
Frankfurt Stock Exchange. The Company recorded a shareholder expense in an
amount of $48,000, which represents 50% of the fair market value of the
Company's share at $9.60 per share. The 50% value is deemed reasonable
considering the inability of the shareholder to dispose of the restricted stock.
NOTE 18 - SALE OF ASSETS
On September 1999, the Company received from Monia Investment, Inc. (MII) 10,000
shares of Global Electronics Manufacturing, Inc. (ECSW) common stock with a
market value of $122,500. In exchange, the Company gave MII, Stocknet-USA's
domain name and Website, as well as redesigning the Website to MII
specifications and providing MII with a lifetime of non-exclusive and
non-transfereable use of the Company proprietary system. The net book value of
Stocknet-USA's domain name and Website was $5,900. The Company recorded an after
tax gain of $38,722 for the exchange of Stocknet-USA's domain name and Website,
net of agent fee of $2,878. The Company also recorded the redesigning fees and
the non-exclusive use of the Company proprietary system as revenue in an amount
of $75,000 for the year ended December 31, 1999.
NOTE 19 - SUBSEQUENT EVENTS
In February 2000, the Company entered into securities purchase agreements to
issue and sell up to 2,500 shares of the Company's Series "A" convertible
preferred stock, par value $.01 per share and warrants to purchase 40 shares of
common stock for each share of preferred stock at a price of $1,000 per share
for an aggregate offering price of $2,500,000. In connection with the
agreements, the Company will issue and sell 200,000 warrants to purchase 200,000
shares of the Company's common stock, $.001 par value.
<PAGE>F-19
Independent Auditors' Report on Additional Information
To the Board of Directors and Stockholders of
DIGS, Inc. and Subsidiaries
Our report on our audit of the basic financial statements of DIGS, Inc. and
Subsidiaries for December 31, 1999 and 1998 appears on Page F-2. That audit was
conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules of cost of goods sold and operating
expenses on Page F-21 are presented for the purposes of additional analysis and
are not a required part of the basic financial statements. Such information,
except for that portion marked "unaudited', on which we express no opinion, has
been subjected to the auditing procedures applied in the audit of the basic
financial statements, and, in our opinion, the information is fairly stated in
all material respects in relation to the basic financial statements taken as a
whole.
CALDWELL, BECKER, DERVIN, PETRICK & CO., L.L.P.
Woodland Hills, California 91364
<PAGE>F-20
DIGS, INC. AND SUBSIDIARIES
SCHEDULE OF COST OF GOODS SOLD AND OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
UNAUDITED
1999 1998
------------------ ----------------
COST OF GOODS SOLD
IRCD production costs $ 87,381 $ 72,972
Labor costs 124,380 --
Others 68,308 24,008
------------------ ----------------
Total Cost of Sales $ 280,069 $ 96,980
================== ================
OPERATING EXPENSES
Auto expense $ 28,001 $ 18,282
Commissions 5,931 17,974
Marketing 109,005 14,400
Outside services 22,867 43,817
Printing 1,611 19,824
Professional services 66,022 33,126
Rent (Note 7) 70,277 44,445
Salaries - officers 156,725 121,989
Salaries - other 107,247 113,257
Shareholder expenses (Note 17) 69,972 2,860
Taxes - payroll 24,941 20,565
Others 139,200 84,692
------------------ ----------------
Total Operating Expenses $ 801,799 $ 535,231
================== ================
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
<PAGE>II-1
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporate Law ("GCL") of Delaware empowers a
company incorporated in Delaware, such as DIGS, Inc., 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 of Delaware law.
In the event a claim for indemnification against such liabilities (other
than payment by the Company for expenses incurred or paid by a director, officer
of controlling person of the Company in 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 seven 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, or persons controlling DIGS
pursuant to the foregoing provisions, we have been informed that, in the opinion
of the SEC, that type of indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by us in
connection with the issuance and distribution of the securities being registered
hereunder. No expenses shall be borne by the Selling Stockholders. All of the
amounts shown are estimates, except for the SEC Registration Fees.
SEC registration fee $ 1,291
Printing and engraving expenses $ 3,000
Accounting fees and expenses $ 3,000
Legal fees and expenses $40,000
Transfer agent and registrar fees $ 1,500
Fees and expenses for qualification under state
securities laws $ 5,000
Miscellaneous $ 2,000
Total $55,791
Item 26. Recent Sales of Unregistered Securities
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 Company 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 (the
"1933 Act"), pursuant to the exemption under Section 4(2) of that Act.
<PAGE>II-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 four individuals
and two entities. These shares were valued at $11,735. The shares were issued in
exchange for loan brokerage and consulting services provided by PAC Rim Capital,
Inc. The transaction was private in nature and the Company had reasonable
grounds to believe that the Purchasers were capable of evaluating the merits and
risks of their investment. 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 1933 Act, pursuant to the exemption under Section 4(2) of that
Act.
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.
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 1933
Act, pursuant to the exemption under Regulation D of that Act, and the Rules and
Regulations promulgated thereunder.
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 the Board of
Directors or a committee of the Board 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
March 31, 2000, options to purchase 400,000 shares of Common Stock had been
granted.
On November 17, 1999, the Company issued 10,000 shares of restricted Common
Stock to a foreign entity for services rendered relating to the listing of the
Company's stock on the Frankfurt Stock Exchange. The shares were valued at $4.80
per share. The Company believes this transaction was exempt from the
registration provisions of the 1933 Act, pursuant to the exemption under
Regulation S of that Act.
Pursuant to an agreement entered into on December 1, 1999, the Company
issued, as of January 2, 2000, options to purchase 5,000 shares of Common Stock
at $5.00 per share to one principal and issued 1,250 shares of Common Stock to
the other principal of an entity which provides investor and corporate relations
services to the Company. Each of the Purchasers were deemed sophisticated
investors and were business consultants for the Company and the options/shares
were issued in a private transaction. Accordingly, the Company believes that
this transaction was exempt from the registration provisions of the 1933 Act,
pursuant to the exemption under Section 4(2) of that Act.
<PAGE>II-3
On March 14, 2000, the Company sold 2,500 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") and Warrants to purchase 100,000 shares
of its Common Stock at $1,000 per share for $2,500,000 to Calp II, L.P., an
offshore venture capital limited partnership in Hamilton, Bermuda. The Preferred
Stock is convertible at 75% of the lowest closing bid price of the Company's
Common Stock during any three trading days during the twenty consecutive trading
days ending on the date of the purchaser's determination to convert, or $11.25,
whichever is lower. The Company also agreed to register the underlying Common
Stock issuable upon conversion of the Preferred Stock and exercise of the
Warrants. In connection with this private placement, the Company paid May Davis
$200,000 and issued a Warrant to purchase 200,000 shares of its Common Stock at
$9.90 per share as a placement agent fee. The Company also paid $50,000 to
Thomson Kernaghan & Company, Ltd. as a finder's fee.
Item 27. Exhibits
The following Exhibits are filed with or incorporated by reference into
this Prospectus:
Item Description
----- ---------------------------------------------------------------------
2.* Plan and Agreement of Reorganization between the Registrant and
Digital Corporate Profiles, Inc. dated October 3, 1998 -
incorporated by reference from Exhibit 2 to Registrant's Form
10-SB12G filed June 14, 1999.
3.1* Articles of Incorporation and Amendments thereto - incorporated
by reference from Exhibit 3.(i) to Registrant's Form 10-SB12G
filed June 14, 1999.
3.2* Bylaws of Registrant - incorporated by reference from Exhibit
3.(ii) to Registrant's Form 10-SB12G filed June 14, 1999.
4.** Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of DIGS, Inc., dated March 14, 2000.
5.1 Opinion of Bartel Eng Linn & Schroder (to be filed by amendment).
10.1* Registrant's 1999 Stock Incentive Plan - incorporated by
reference from Exhibit 10.(i) to Registrant's Form 10-SB12G filed
June 14, 1999.
10.2* Employment Agreement between Registrant's wholly-owned subsidiary
and Peter Dunn incorporated by reference from Exhibit 10.(ii) to
Registrant's Form 10-SB12G filed June 14, 1999.
10.3** Placement Agent Agreement by and between DIGS, Inc. and May Davis
Group, Inc., dated March 14, 2000.
10.4** Securities Purchase Agreement by and between DIGS, Inc. and Calp
II, L.P., dated March 14, 2000.
10.5** Warrant to Purchase Common Stock by and between DIGS, Inc. and May
Davis Group, Inc., dated March 14, 2000.
10.6** Warrant to Purchase Common Shares by and between DIGS, Inc. and
Calp II, L.P., dated March 14, 2000.
10.7 Registration Rights Agreement.
10.8 Registration Rights Agreement with May Davis Group, Inc.
21.1 List of Subsidiaries of DIGS, Inc.
23.1 Consent of Caldwell, Becker, Dervin, Petrick & Co. LLP.
<PAGE>II-4
23.2 Consent of Bartel Eng Linn & Schroder is contained in Exhibit 5.1 (to
be filed by amendment).
- ----------------------
* Previously filed with DIGS' initial registration statement on Form 10-SB
filed with the SEC on June 14, 1999.
** Previously filed with DIGS' annual report on Form 10-KSB filed with the SEC
on April 4, 2000.
Item 28. Undertakings
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include: (a) any
prospectus required by Section 10(a)(3) of the Securities Act; (b) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the registration statement; and (c) any
additional or changed material information with respect to the plan of
distribution not previously disclosed in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each of the post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of DIGS pursuant to the foregoing provisions, or otherwise, DIGS has
been advised that in the opinion of the Commission that type of indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against said
liabilities (other than the payment by DIGS of expenses incurred or paid by a
director, officer or controlling person of DIGS in the successful defense of any
action, suit or proceeding) is asserted by the director, officer or controlling
person in connection with the securities being registered, DIGS will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of the issue.
(5) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
<PAGE>II-5
SIGNATURE
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Encino,
California, on April 17, 2000.
DIGS, INC.
a Delaware Corporation
/S/ PETER B. DUNN
------------------------------
Peter B. Dunn, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Date
/S/PETER B. DUNN April 17, 2000
----------------------------------------
PETER B. DUNN
President and Director
/S/ALLEN DUNN April 17, 2000
----------------------------------------
ALLEN DUNN
Vice President, COO and Director
/S/ DAVID L. FLEMING April 17, 2000
----------------------------------------
DAVID L. FLEMING, Secretary and Director
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of March 14,
2000, by and among DIGS, INC., a Delaware corporation, with headquarters located
at 17327 Ventura Blvd. Suite 200, CA 91316 (the "Company"), and the undersigned
buyers (each, a "Buyer" and collectively, the "Buyers").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties hereto of even date herewith (the "Securities Purchase Agreement"), the
Company has agreed, upon the terms and subject to the conditions of the
Securities Purchase Agreement, to issue and sell to the Buyers (i) up to 2,500
shares of the Company's Series A Convertible Preferred Stock, par value $0.01
per share (the "Preferred Shares"), which will be convertible into shares (as
converted, the "Conversion Shares") of the Company's common stock, par value
$0.01 per share (the "Common Stock"), in accordance with the terms of the
Company's Certificate of Designations, Preferences and Rights of the Series A
Convertible Preferred Stock (the "Certificate of Designations"), and (ii)
warrants to purchase 40 shares of Common Stock for each share of Preferred Stock
( "Warrant Shares")
B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"), and
applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
a. "Investor" means a Buyer and any transferee or assignee thereof to
whom a Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9.
b. "Person" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
c. "Register," "registered," and "registration" refer to a
registration effected by preparing and filing one or more Registration
Statements (as defined below) in compliance with the 1933 Act and pursuant to
Rule 415 under the 1933 Act or any successor rule providing for offering
securities on a continuous or delayed basis ("Rule 415"), and the declaration or
ordering of effectiveness of such Registration Statement(s) by the United States
Securities and Exchange Commission (the "SEC").
<PAGE>
d. "Registrable Securities" means (i) the Conversion Shares issued or
issuable upon conversion of the Preferred Shares, (ii) the Dividend Shares (as
defined in the Certificate of Designations) relating to the Preferred Shares,
(iii) the Warrant Shares issued or issuable upon the exercise of the Warrants,
(iv) any shares of capital stock issued or issuable with respect to the
Conversion Shares, the Preferred Shares, the Dividend Shares, the Warrant Shares
or the Warrant as a result of any stock split, stock dividend, recapitalization,
exchange or similar event or otherwise, without regard to any limitations on
conversions of Preferred Shares or exercises of Warrants.
e. "Registration Statement" means registration statement under the
1933 Act covers the Registrable Securities.
2. REGISTRATION.
a. Mandatory Registration.
(i) The Company shall prepare, and, as soon as practicable but in
no event later than 60 days from the date hereof (the "Filing Deadline"), file
with the SEC an Initial Registration Statement or Initial Registration
Statements (as necessary) on Form S-3 covering the resale of all of the
Registrable Securities. In the event that Form S-3 is unavailable for such a
registration, the Company shall use such other form as is available for such a
registration, subject to the provisions of Section 2(d). Any initial
Registration Statement prepared pursuant hereto shall register for resale at
least that number of shares of Common Stock equal to the product of (x) 2.0 and
(y) the sum of number of Conversion Shares issuable upon conversion of the
Preferred Shares (without regard to any limitations on conversions) as of the
date immediately preceding the date the Registration Statement is initially
filed with the SEC and (B) the number of Warrant Shares issuable upon exercise
of the Warrants (without regard to any limitations on exercise) as of a date
immediately preceding the date the Registration Statement is filed with the SEC,
subject to adjustment as provided in Section 2(f). The Company shall use its
best efforts to cause such Initial Registration Statement to be declared
effective by the SEC as soon as practicable, but in no event later than 90 days
after the date hereof (the "Effectiveness Deadline").
b. Allocation of Registrable Securities. The initial number of
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held by
each Investor at the time the Registration Statement covering such initial
number of Registrable Securities or increase thereof is declared effective by
the SEC. In the event that an Investor sells or otherwise transfers any of such
Person's Registrable Securities, each transferee shall be allocated a pro rata
portion of the then remaining number of Registrable Securities included in such
Registration Statement for such transferor. Any shares of Common Stock included
in a Registration Statement and which remain allocated to any Person which
ceases to hold any Registrable Securities covered by such Registration Statement
shall be allocated to the remaining Investors, pro rata based on the number of
Registrable Securities then held by such Investors which are covered by such
Registration Statement.
<PAGE>
c. Legal Counsel. Subject to Section 5 hereof, the Buyers holding a
majority of the Registrable Securities shall have the right to select one legal
counsel to review and oversee any offering pursuant to this Section 2 ("Legal
Counsel"), at the expense of the Company which expense shall not exceed $3,000.
The Company shall reasonably cooperate with Legal Counsel in performing the
Company's obligations under this Agreement.
d. Ineligibility for Form S-3. In the event that Form S-3 is not
available for any registration of Registrable Securities hereunder, the Company
shall (i) register the sale of the Registrable Securities on another appropriate
form reasonably acceptable to the holders of a majority of the Registrable
Securities and (ii) undertake to register the Registrable Securities on Form S-3
as soon as such form is available, provided that the Company shall maintain the
effectiveness of the Registration Statement then in effect until such time as a
Registration Statement on Form S-3 covering the Registrable Securities has been
declared effective by the SEC.
e. Effect of Failure to File and Obtain and Maintain
Effectiveness of Registration Statement. If (i) a Registration Statement
covering all the Registrable Securities and required to be filed by the Company
pursuant to this Agreement is not (A) filed with the SEC on or before the Filing
Deadline or (B) declared effective by the SEC on or before the applicable
Effectiveness Deadline or (ii) on any day after the Registration Statement has
been declared effective by the SEC, sales of all the Registrable Securities
required to be included on such Registration Statement cannot be made pursuant
to the Registration Statement (including, without limitation, because of a
failure to keep the Registration Statement effective, to disclose such
information as is necessary for sales to be made pursuant to the Registration
Statement, to register sufficient shares of Common Stock), then, as partial
relief for the damages to any holder by reason of any such delay in or reduction
of its ability to sell the underlying shares of Common Stock (which remedy shall
not be exclusive of any other remedies available at law or in equity), the
Company shall pay to each holder of Preferred Shares an amount in cash per
Preferred Share held equal to the product of $1,000 multiplied by (I) .00067
multiplied by the sum of (x) the number of days after the Filing Deadline that
such Registration Statement is not filed with the SEC, plus (y) the number of
days after the Effectiveness Deadline that the Registration Statement is not
declared effective by the SEC, plus (z) the number of days after the
Registration Statement has been declared effective by the SEC that such
Registration Statement is not available for the sale of at least all the
Registrable Securities required to be included on such Registration Statement.
The payments to which a holder shall be entitled pursuant to this Section 2(e)
are referred to herein as "Registration Delay Payments." Registration Delay
Payments shall be paid on the third business day after the last day of the
calendar month during which such Registration Delay Payments are incurred. In
the event the Company fails to make Registration Delay Payments in a timely
manner, such Registration Delay Payments shall bear interest at the rate of 2.0%
per month (prorated for partial months) until paid in full.
f. Sufficient Number of Shares Registered. In the event the number of
shares available under a Registration Statement filed pursuant to Section 2(a)
is insufficient to cover all of the Registrable Securities which such
Registration Statement is required to cover or an Investor's allocated
<PAGE>
portion of the Registrable Securities pursuant to Section 2(b), the Company
shall amend the Registration Statement, or file a new Registration Statement (on
the short form available therefor, if applicable), or both, so as to cover at
least 200% of such Registrable Securities (based on the market price of the
Common Stock on the trading day immediately preceding the date of filing of such
amendment or new Registration Statement), in each case, as soon as practicable,
but in any event not later than fifteen (15) days after the necessity therefor
arises. The Company shall use it best efforts to cause such amendment and/or new
Registration Statement to become effective as soon as practicable following the
filing thereof. For purposes of the foregoing provision, the number of shares
available under a Registration Statement shall be deemed "insufficient to cover
all of the Registrable Securities" if at any time the number of Registrable
Securities issued or issuable upon conversion of the Preferred Shares and the
exercise of the Warrants covered by such Registration Statement is greater than
the quotient determined by dividing (i) the number of shares of Common Stock
available for resale under such Registration Statement by (ii) 1.5. For purposes
of the calculation set forth in the foregoing sentence, any restrictions on the
convertibility of the Preferred Shares or exercise of the Warrants shall be
disregarded and such calculation shall assume that the Preferred Shares are then
convertible into and the Warrants are then exercisable for, shares of Common
Stock at the then prevailing Conversion Rate (as defined in the Company's
Certificate of Designations) or Exercise Price, as the case may be.
3. RELATED OBLIGATIONS.
At such time as the Company is obligated to file a Registration Statement
with the SEC pursuant to Sections 2(a) or 2(f), the Company will use its best
efforts to effect the registration of the Registrable Securities in accordance
with the intended method of disposition thereof and, pursuant thereto, the
Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the applicable Registrable Securities (as
soon as practicable but in no event later than the applicable Filing Deadline)
and use its best efforts to cause such Registration Statement relating to the
Registrable Securities to become effective as soon as practicable after such
filing (but in no event later than the applicable Effectiveness Deadline). The
Company shall keep each Registration Statement effective pursuant to Rule 415 at
all times until the earlier of (i) the date as of which the Investors may sell
all of the Registrable Securities covered by such Registration Statement without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto) or (ii) the date on which the Investors shall have sold all the
Registrable Securities covered by such Registration Statement (the "Registration
Period"), which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading. The term "best efforts"
shall mean, among other things, that the Company shall submit to the SEC, within
three business days after the Company learns that no review of a particular
Registration Statement will be made by the staff of the SEC or that the staff
has no further comments on the Registration Statement, as the case may be, a
request for acceleration of effectiveness of such Registration Statement to a
time and date not later than 48 hours after the submission of such request.
<PAGE>
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this Agreement (including pursuant to this Section 3(b)) by
reason of the Company filing a report on Form 10-K, Form 10-Q or Form 8-K or any
analogous report under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the Company shall have incorporated such report by reference into
the Registration Statement, if applicable, or shall file such amendments or
supplements with the SEC on the same day on which the 1934 Act report is filed
which created the requirement for the Company to amend or supplement the
Registration Statement.
c. The Company shall (a) permit Legal Counsel to review and comment
upon (i) the Initial Registration Statement and the Additional Registration
Statement at least seven (7) days prior to its filing with the SEC and (ii) all
other Registration Statements and all amendments and supplements to all such
Registration Statements (except for Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K and any similar or
successor reports) within a reasonable number of days prior to the their filing
with the SEC and (b) not file any document in a form to which Legal Counsel
reasonably objects. The Company shall not submit a request for acceleration of
the effectiveness of a Registration Statement or any amendment or supplement
thereto without the prior approval of Legal Counsel, which consent shall not be
unreasonably withheld. The Company shall furnish to Legal Counsel, without
charge, (i) any correspondence from the SEC or the staff of the SEC to the
Company or its representatives relating to any Registration Statement, (ii)
promptly after the same is prepared and filed with the SEC, one copy of any
Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference and
all exhibits and (iii) upon the effectiveness of any Registration Statement, one
copy of the prospectus included in such Registration Statement and all
amendments and supplements thereto. The Company shall reasonably cooperate with
Legal Counsel in performing the Company's obligations pursuant to this Section
3.
d. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement, without charge, (i)
promptly after the same is prepared and filed with the SEC, at least one copy of
such Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference, all
exhibits and each preliminary prospectus, (ii) upon the effectiveness of any
such Registration Statement, ten (10) copies of the prospectus included in such
Registration Statement and all amendments and supplements thereto (or such other
number of copies as such Investor may reasonably request) and (iii) such other
documents, including copies of any preliminary or final prospectus, as such
<PAGE>
Investor may reasonably request from time to time in order to facilitate the
disposition of the Registrable Securities owned by such Investor.
e. The Company shall use its best efforts to (i) register and qualify
the Registrable Securities covered by a Registration Statement under such other
securities or "blue sky" laws of such jurisdictions in the United States as any
Investor reasonably requests, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (w) make any
change to its certificate of incorporation or by-laws, (x) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(e), (y) subject itself to general taxation in any such
jurisdiction, or (z) file a general consent to service of process in any such
jurisdiction. The Company shall promptly notify Legal Counsel and each Investor
who holds Registrable Securities of the receipt by the Company of any
notification with respect to the suspension of the registration or qualification
of any of the Registrable Securities for sale under the securities or "blue sky"
laws of any jurisdiction in the United States or its receipt of actual notice of
the initiation or threat of any proceeding for such purpose.
f. As promptly as practicable after becoming aware of such event
or development, the Company shall notify Legal Counsel and each Investor in
writing of the happening of any event as a result of which the prospectus
included in a Registration Statement, as then in effect, includes an untrue
statement of a material fact or omission to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (provided that in no
event shall such notice contain any material, nonpublic information), and
promptly prepare a supplement or amendment to such Registration Statement to
correct such untrue statement or omission, and deliver ten (10) copies of such
supplement or amendment to Legal Counsel and each Investor (or such other number
of copies as Legal Counsel or such Investor may reasonably request). The Company
shall also promptly notify Legal Counsel and each Investor in writing (i) when a
prospectus or any prospectus supplement or post-effective amendment has been
filed, and when a Registration Statement or any post-effective amendment has
become effective (notification of such effectiveness shall be delivered to Legal
Counsel and each Investor by facsimile on the same day of such effectiveness),
(ii) of any request by the SEC for amendments or supplements to a Registration
Statement or related prospectus or related information, and (iii) of the
Company's reasonable determination that a post-effective amendment to a
Registration Statement would be appropriate.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction within the United States of America and, if such an
order or suspension is issued, to obtain the withdrawal of such order or
suspension at the earliest possible moment and to notify Legal Counsel and each
Investor who holds Registrable Securities being sold of the issuance of
<PAGE>
such order and the resolution thereof or its receipt of actual notice of the
initiation or threat of any proceeding for such purpose.
h. At the reasonable request of any Investor, the Company shall
furnish to such Investor, on the date of the effectiveness of the Registration
Statement and thereafter from time to time on such dates as an Investor may
reasonably request (i) a letter, dated such date, from the Company's independent
certified public accountants in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, and (ii) an opinion, dated as of such date, of counsel
representing the Company for purposes of such Registration Statement, in form,
scope and substance as is customarily given in an underwritten public offering,
addressed to the Investors.
i. The Company shall make available for inspection by (i) any
Investor, (ii) Legal Counsel and (iii) one firm of accountants or other agents
retained by the Investors (collectively, the "Inspectors") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request;
provided, however, that each Inspector shall agree, and each Investor hereby
agrees, to hold in strict confidence and shall not make any disclosure (except
to an Investor) or use of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or is otherwise required under the 1933 Act, (b) the release of such
Records is ordered pursuant to a final, non-appealable subpoena or order from a
court or government body of competent jurisdiction, or (c) the information in
such Records has been made generally available to the public other than by
disclosure in violation of this or any other agreement of which the Inspector
and the Investor has knowledge. Each Investor agrees that it shall, upon
learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential.
j. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
<PAGE>
k. The Company shall use its best efforts either to cause all the
Registrable Securities covered by a Registration Statement to be listed on each
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange or (ii) secure
designation and quotation of all the Registrable Securities covered by the
Registration Statement on the Nasdaq National Market or, if, despite the
Company's best efforts to satisfy the preceding clause (i) or (ii), the Company
is unsuccessful in satisfying the preceding clause (i) or (ii), to secure the
inclusion for quotation on The Nasdaq SmallCap Market for such Registrable
Securities and, without limiting the generality of the foregoing, to arrange for
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities. The Company shall pay all fees and expenses in connection with
satisfying its obligation under this Section 3(k).
l. The Company shall cooperate with the Investors who hold Registrable
Securities being offered and, to the extent applicable, to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legend)
representing the Registrable Securities to be offered pursuant to a Registration
Statement and enable such certificates to be in such denominations or amounts,
as the case may be, as the Investors may reasonably request and registered in
such names as the Investors may request.
m. Intentionally Left Blank
n. If requested by an Investor, the Company shall (i) as soon as
practicable incorporate in a prospectus supplement or post-effective amendment
such information as an Investor requests to be included therein relating to the
sale and distribution of Registrable Securities, including, without limitation,
information with respect to the number of Registrable Securities offered or
sold, the purchase price being paid therefor and any other terms of the offering
of the Registrable Securities to be sold in such offering; (ii) as soon as
practicable make all required filings of such prospectus supplement or
post-effective amendment after being notified of the matters to be incorporated
in such prospectus supplement or post-effective amendment; and (iii) supplement
or make amendments to any Registration Statement if reasonably requested by an
Investor of such Registrable Securities.
o. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.
p. The Company shall make generally available to its security holders
as soon as practical, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the 1933 Act) covering a twelve-month period beginning not later
than the first day of the Company's fiscal quarter next following the effective
date of the Registration Statement.
<PAGE>
q. The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any registration
hereunder.
r. Within two (2) business days after a Registration Statement which
covers applicable Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that such Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.
s. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
t. Notwithstanding anything to the contrary in Section 3(f), at any
time after the applicable Registration Statement has been declared effective by
the SEC, the Company may delay the disclosure of material non-public information
concerning the Company, the disclosure of which at the time is not, in the good
faith opinion of the Board of Directors of the Company and its counsel, in the
best interest of the Company and, in the opinion of counsel to the Company,
otherwise required (a "Grace Period"); provided, that the Company shall promptly
(i) notify the Investors in writing of the existence of material non-public
information giving rise to a Grace Period (provided that in each notice the
Company will not disclose the content of such material non-public information to
the Investors) and the date on which the Grace Period will begin, and (ii)
notify the Investors in writing of the date on which the Grace Period ends; and,
provided further, that no Grace Period shall exceed 15 consecutive days and
during any 365 day period such Grace Periods shall not exceed an aggregate of 30
days (an "Allowable Grace Period"). For purposes of determining the length of a
Grace Period above, the Grace Period shall begin on and include the date the
holders receive the notice referred to in clause (i) above and shall end on and
include the later of the date the holders receive the notice referred to in
clause (ii) and the date referred to in such notice. The provisions of Section
3(g) hereof shall not be applicable during the period of any Allowable Grace
Period. Upon expiration of the Grace Period, the Company shall again be bound by
the first sentence of Section 3(g) with respect to the information giving rise
thereto unless such material non-public information is no longer applicable.
4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) days prior to the first anticipated filing date
of the Registration Statement, the Company shall notify each Investor in writing
of the information the Company reasonably requires from each such Investor if
such Investor elects to have any of such Investor's Registrable Securities
included in such Registration Statement. It shall be a condition precedent to
the obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Investor
that such Investor shall furnish to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities
<PAGE>
and shall execute such documents in connection with such registration as the
Company may reasonably request.
b. Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement. The Effectiveness Deadline shall be
extended to the extent of any delay caused solely by the Investor's failure to
corporate with the Compay.
c. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(g),
3(t) or the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(g) or the
first sentence of 3(f) or receipt of notice that no supplement or amendment is
required or that a Grace Period has ended. Notwithstanding anything to the
contrary, the Company shall cause its transfer agent to deliver unlegended
shares of Common Stock to a transferee of an Investor in accordance with the
terms of the Securities Purchase Agreement in connection with any sale of
Registrable Securities with respect to which an Investor has entered into a
contract for sale prior to the Investor's receipt of a notice from the Company
of the happening of any event of the kind described in Section 3(g), 3(t) or the
first sentence of 3(f) and for which the Investor has not yet settled.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees shall be paid by the Company.
In addition, the Company shall reimburse the Investors for the reasonable fees
and disbursements of Legal Counsel in connection with registrations, filings or
qualifications pursuant to Section 2 and 3 of this Agreement.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor, the directors,
officers, partners, employees, agents, representatives of, and each Person, if
any, who controls any Investor within the meaning of the 1933 Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act") (each, an
"Indemnified Person"), against any losses, claims, damages, liabilities,
judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts
paid in settlement or expenses, joint or several, (collectively, "Claims")
incurred in investigating, preparing or defending any action, claim, suit,
<PAGE>
inquiry, proceeding, investigation or appeal taken from the foregoing by or
before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("Indemnified Damages"), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other "blue sky" laws of any jurisdiction in which Registrable Securities are
offered ("Blue Sky Filing"), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading or (iii) any violation or alleged violation by the Company
of the 1933 Act, the 1934 Act, any other law, including, without limitation, any
state securities law, or any rule or regulation thereunder relating to the offer
or sale of the Registrable Securities pursuant to a Registration Statement (the
matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). The Company shall reimburse the Investors and each such
underwriter or controlling person, promptly as such expenses are incurred and
are due and payable, for any legal fees or disbursements or other reasonable
expenses incurred by them in connection with investigating or defending any such
Claim. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(a): (i) shall not apply to
a Claim by an Indemnified Person arising out of or based upon a Violation which
occurs in reliance upon and in conformity with information furnished in writing
to the Company by such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not be available to the extent such Claim is
based on a failure of the Investor to deliver or to cause to be delivered the
prospectus made available by the Company, if such prospectus was timely made
available by the Company pursuant to Section 3(d); and (iii) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of the Company, which consent shall not be
unreasonably withheld. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Person
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9.
b. In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to severally and not jointly
indemnify, hold harmless and defend, to the same extent and in the same manner
as is set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement and each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act (each an
"Indemnified Party"), against any Claim or Indemnified Damages to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim or Indemnified Damages arise out of or are based upon any
Violation, in each case to the extent, and only to the extent, that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection
<PAGE>
with such Registration Statement; and, subject to Section 6(d), such Investor
will reimburse any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 6(b) and the agreement
with respect to contribution contained in Section 7 shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor, which consent shall not be unreasonably
withheld; provided, further, however, that the Investor shall be liable under
this Section 6(b) for only that amount of a Claim or Indemnified Damages as does
not exceed the net proceeds to such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(b) with respect to any prospectus shall not inure to
the benefit of any Indemnified Party if the untrue statement or omission of
material fact contained in the prospectus was corrected and such new prospectus
was delivered to each Investor prior to such Investor's use of the prospectus to
which the Claim relates.
c. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim,
such Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this Section 6,
deliver to the indemnifying party a written notice of the commencement thereof,
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for such
Indemnified Person or Indemnified Party to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. In the case of an
Indemnified Person, legal counsel referred to in the immediately preceding
sentence shall be selected by the Investors holding a majority in interest of
the Registrable Securities included in the Registration Statement to which the
Claim relates. The Indemnified Party or Indemnified Person shall cooperate fully
with the indemnifying party in connection with any negotiation or defense of any
such action or claim by the indemnifying party and shall furnish to the
indemnifying party all information reasonably available to the Indemnified Party
or Indemnified Person which relates to such action or claim. The indemnifying
party shall keep the Indemnified Party or Indemnified Person fully apprised at
all times as to the status of the defense or any settlement negotiations with
respect thereto. No indemnifying party shall be liable for any settlement of any
action, claim or proceeding effected without its prior written consent,
provided, however, that the indemnifying party shall not unreasonably withhold,
delay or condition its consent. No indemnifying party shall, without the prior
written consent of the Indemnified Party or Indemnified Person, consent to entry
<PAGE>
of any judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party or Indemnified Person of a release from all liability
in respect to such claim or litigation. Following indemnification as provided
for hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
d. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
e. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that: (i) no seller
of Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any seller of Registrable Securities who was not guilty of fraudulent
misrepresentation; and (ii) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Investors to sell securities of the Company
to the public without registration (ARule 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
<PAGE>
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the Investors to
sell such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of Registrable Securities if:
(i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with the written consent of the Company and Investors
who then hold at least two-thirds (b) of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Registrable
Securities. No consideration shall be offered or paid to any Person to amend or
consent to a waiver or modification of any provision of any of this Agreement
unless the same consideration also is offered to all of the parties to this
Agreement.
11. MISCELLANEOUS.
a. A Person is deemed to be a holder of Registrable Securities
whenever such Person owns or is deemed to own of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more Persons with respect to the same Registrable
Securities, the Company shall act upon the basis of instructions, notice or
election received from the registered owner of such Registrable Securities.
<PAGE>
b. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
DIGS, Inc.
17327 Ventura Blvd. Suite 200
Encino, CA 91316
Telephone: ( )
Facsimile: ( )
Attention:
If to Legal Counsel:
Silverman, Collura & Chernis, P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
Telephone: (212) 779-8600
Facsimile: (212) 779-8858
Attention: Martin C. Licht, Esq.
If to a Buyer, to its address and facsimile number on the Schedule of Buyers
attached hereto, with copies to such Buyer's representatives as set forth on the
Schedule of Buyers or to such other address and/or facsimile number and/or to
the attention of such other person as the recipient party has specified by
written notice given to each other party five days prior to the effectiveness of
such change. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a courier or overnight courier service shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from a
nationally recognized overnight delivery service in accordance with clause (i),
(ii) or (iii) above, respectively.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. The corporate laws of the State of Delaware shall govern all issues
concerning the relative rights of the Company and the Buyers as its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by the
<PAGE>
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of New York. Each party hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting in the City of New York, borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. If any provision of this Agreement shall
be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.
e. This Agreement, the Securities Purchase Agreement, the Warrants and
the Certificate of Designations constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and thereof. There are
no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein and therein. This Agreement, the Securities Purchase
Agreement, the Warrants and the Certificate of Designations supersede all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in identical counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
<PAGE>
of this Agreement and the consummation of the transactions contemplated hereby.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors holding a majority of the Registrable Securities,
determined as if all of the Preferred Shares and the Warrants then outstanding
have been converted into or exercised for Registrable Securities without regard
to any limitation on conversions of the Preferred Shares or exercises of the
Warrants.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
l. This Agreement is intended for the benefit of the parties hereto
and their respective permitted successors and assigns, and is not for the
benefit of, nor may any provision hereof be enforced by, any other Person.
* * * * * *
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
DIGS, INC. CALP II L.P.
By:/s/ PETER B. DUNN By: /s/ MICHELLE MCKINNON
--------------- -------------------
Name: Peter B. Dunn Name: Michelle McKinnon
Title: president Title: Agent
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<S> <C> <C>
Investor Address Investor's Representatives' Address
Investor Name and Facsimile Number and Facsimile Number
- --------------- ------------------------------ ------------------------------------
Calp II L.P. c/o Forum Fund Services, Inc.
Washington Mall - 3rd Floor
Church Street
Hamilton HM-11, Bermuda
Telephone: 441-296-1300
Facsimile: 441-296-1301
</TABLE>
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
Attn:
Re: Digs, Inc.
Ladies and Gentlemen:
We are counsel to Digs, Inc., a Delaware corporation (the "Company"),
and have represented the Company in connection with that certain Securities
Purchase Agreement (the "Purchase Agreement") entered into by and among the
Company and the buyers named therein (collectively, the "Holders") pursuant to
which the Company issued to the Holders shares of its Series ___A Convertible
Preferred Stock, par value $_____$0.01 per share (the "Preferred Shares")
convertible into shares of the Company's common stock, par value $_____$0.01 per
share (the "Common Stock") and Warrants (the "Warrants") to acquire shares of
Common Stock. Pursuant to the Purchase Agreement, the Company also has entered
into a Registration Rights Agreement with the Holders (the "Registration Rights
Agreement") pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the shares of Common Stock issuable upon conversion of the
Preferred Shares and the exercise of the Warrants under the Securities Act of
1933, as amended (the "1933 Act"). In connection with the Company's obligations
under the Registration Rights Agreement, on ____________ ____, the Company filed
a Registration Statement on Form ________ (File No. 333-_____________) (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") relating to the Registrable Securities which names each of the Holders as
a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[ISSUER'S COUNSEL]
By:
cc: [LIST NAMES OF HOLDERS]
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of March 14,
2000, by and among DIGS, INC., a Delaware corporation, with headquarters located
at 17327 Ventura Blvd. Suite 200, CA 91316 (the "Company"), and May Davis Group,
Inc. (the "Buyer").
WHEREAS:
A. In connection with the Placement Agent Agreement of even date herewith
(the "Placement Agent Agreement"), the Company has agreed, upon the terms and
subject to the conditions of the Placement Agent Agreement, to issue and sell to
the Buyers warrants (the "Warrants") to purchase 200,000 shares of the Company's
common stock, $.001 par value (the "Common Stock") ( "Warrant Shares").
B. To induce the Buyers to execute and deliver the Placement Agent
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"), and
applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
a. "Investor" means a Buyer and any transferee or assignee thereof to
whom a Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9.
b. "Person" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
c. "Register," "registered," and "registration" refer to a
registration effected by preparing and filing one or more Registration
Statements (as defined below) in compliance with the 1933 Act and pursuant to
Rule 415 under the 1933 Act or any successor rule providing for offering
securities on a continuous or delayed basis (ARule 415"), and the declaration or
ordering of effectiveness of such Registration Statement(s) by the United States
Securities and Exchange Commission (the "SEC").
<PAGE>
d. "Registrable Securities" means the Warrant Shares issued or
issuable upon the exercise of the Warrants and any shares of capital stock
issued or issuable with respect to the Warrant Shares or the Warrant as a result
of any stock split, stock dividend, recapitalization, exchange or similar event
or otherwise, without regard to any limitations on exercises of the Warrant.
e. "Registration Statement" means registration statement under the
1933 Act covers the Registrable Securities.
2. REGISTRATION.
a. Mandatory Registration.
(i) The Company shall prepare, and, as soon as practicable but in
no event later than 60 days from the date hereof (the "Filing Deadline"), file
with the SEC an Initial Registration Statement or Initial Registration
Statements (as necessary) on Form S-3 covering the resale of all of the
Registrable Securities. In the event that Form S-3 is unavailable for such a
registration, the Company shall use such other form as is available for such a
registration, subject to the provisions of Section 2(d). Any initial
Registration Statement prepared pursuant hereto shall register for resale at
least that number of shares of Common Stock equal to the number of Warrant
Shares issuable upon exercise of the Warrants (without regard to any limitations
on exercise) as of a date immediately preceding the date the Registration
Statement is filed with the SEC, subject to adjustment as provided in Section
2(f). The Company shall use its best efforts to cause such Initial Registration
Statement to be declared effective by the SEC as soon as practicable, but in no
event later than 90 days after the date hereof (the "Effectiveness Deadline").
b. Allocation of Registrable Securities. The initial number of
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held by
each Investor at the time the Registration Statement covering such initial
number of Registrable Securities or increase thereof is declared effective by
the SEC. In the event that an Investor sells or otherwise transfers any of such
Person's Registrable Securities, each transferee shall be allocated a pro rata
portion of the then remaining number of Registrable Securities included in such
Registration Statement for such transferor. Any shares of Common Stock included
in a Registration Statement and which remain allocated to any Person which
ceases to hold any Registrable Securities covered by such Registration Statement
shall be allocated to the remaining Investors, pro rata based on the number of
Registrable Securities then held by such Investors which are covered by such
Registration Statement.
c. Legal Counsel. Subject to Section 5 hereof, the Buyer shall have
the right to select one legal counsel to review and oversee any offering
pursuant to this Section 2 ("Legal Counsel") at the expense of the Company,
which expense shall not exceed $3,000. The Company shall reasonably cooperate
with Legal Counsel in performing the Company's obligations under this Agreement.
<PAGE>
d. Ineligibility for Form S-3. In the event that Form S-3 is not
available for any registration of Registrable Securities hereunder, the Company
shall (i) register the sale of the Registrable Securities on another appropriate
form reasonably acceptable to the holders of a majority of the Registrable
Securities and (ii) undertake to register the Registrable Securities on Form S-3
as soon as such form is available, provided that the Company shall maintain the
effectiveness of the Registration Statement then in effect until such time as a
Registration Statement on Form S-3 covering the Registrable Securities has been
declared effective by the SEC.
e. Effect of Failure to File and Obtain and Maintain Effectiveness of
Registration Statement. If (i) a Registration Statement covering all the
Registrable Securities and required to be filed by the Company pursuant to this
Agreement is not (A) filed with the SEC on or before the Filing Deadline or (B)
declared effective by the SEC on or before the applicable Effectiveness Deadline
or (ii) on any day after the Registration Statement has been declared effective
by the SEC, sales of all the Registrable Securities required to be included on
such Registration Statement cannot be made pursuant to the Registration
Statement (including, without limitation, because of a failure to keep the
Registration Statement effective, to disclose such information as is necessary
for sales to be made pursuant to the Registration Statement, to register
sufficient shares of Common Stock), then, as partial relief for the damages to
any holder by reason of any such delay in or reduction of its ability to sell
the underlying shares of Common Stock (which remedy shall not be exclusive of
any other remedies available at law or in equity), the Company shall pay to each
holder of Warrants or Warrant Shares an amount in cash per Warrant or Warrant
Shares held equal to the product of the closing bid price of the Common Stock on
the date of the Effectiveness Deadline multiplied by (I) .00067 multiplied by
the sum of (x) the number of days after the Filing Deadline that such
Registration Statement is not filed with the SEC, plus (y) the number of days
after the Effectiveness Deadline that the Registration Statement is not declared
effective by the SEC, plus (z) the number of days after the Registration
Statement has been declared effective by the SEC that such Registration
Statement is not available for the sale of at least all the Registrable
Securities required to be included on such Registration Statement. The payments
to which a holder shall be entitled pursuant to this Section 2(e) are referred
to herein as "Registration Delay Payments." Registration Delay Payments shall be
paid on the third business day after the last day of the calendar month during
which such Registration Delay Payments are incurred. In the event the Company
fails to make Registration Delay Payments in a timely manner, such Registration
Delay Payments shall bear interest at the rate of 2.0% per month (prorated for
partial months) until paid in full.
f. Sufficient Number of Shares Registered. In the event the number of
shares available under a Registration Statement filed pursuant to Section 2(a)
is insufficient to cover all of the Registrable Securities which such
<PAGE>
Registration Statement is required to cover or an Investor's allocated portion
of the Registrable Securities pursuant to Section 2(b), the Company shall amend
the Registration Statement, or file a new Registration Statement (on the short
form available therefor, if applicable), or both, so as to cover all of such
Registrable Securities (based on the market price of the Common Stock on the
trading day immediately preceding the date of filing of such amendment or new
Registration Statement), in each case, as soon as practicable, but in any event
not later than fifteen (15) days after the necessity therefor arises. The
Company shall use it best efforts to cause such amendment and/or new
Registration Statement to become effective as soon as practicable following the
filing thereof.
3. RELATED OBLIGATIONS.
At such time as the Company is obligated to file a Registration Statement
with the SEC pursuant to Sections 2(a) or 2(f), the Company will use its best
efforts to effect the registration of the Registrable Securities in accordance
with the intended method of disposition thereof and, pursuant thereto, the
Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the applicable Registrable Securities (as
soon as practicable but in no event later than the applicable Filing Deadline)
and use its best efforts to cause such Registration Statement relating to the
Registrable Securities to become effective as soon as practicable after such
filing (but in no event later than the applicable Effectiveness Deadline). The
Company shall keep each Registration Statement effective pursuant to Rule 415 at
all times until the earlier of (i) the date as of which the Investors may sell
all of the Registrable Securities covered by such Registration Statement without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto) or (ii) the date on which the Investors shall have sold all the
Registrable Securities covered by such Registration Statement (the "Registration
Period"), which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading. The term "best efforts"
shall mean, among other things, that the Company shall submit to the SEC, within
three business days after the Company learns that no review of a particular
Registration Statement will be made by the staff of the SEC or that the staff
has no further comments on the Registration Statement, as the case may be, a
request for acceleration of effectiveness of such Registration Statement to a
time and date not later than 48 hours after the submission of such request.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
<PAGE>
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this Agreement (including pursuant to this Section 3(b)) by
reason of the Company filing a report on Form 10-K, Form 10-Q or Form 8-K or any
analogous report under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the Company shall have incorporated such report by reference into
the Registration Statement, if applicable, or shall file such amendments or
supplements with the SEC on the same day on which the 1934 Act report is filed
which created the requirement for the Company to amend or supplement the
Registration Statement.
c. The Company shall (a) permit Legal Counsel to review and comment
upon (i) the Initial Registration Statement and the Additional Registration
Statement at least seven (7) days prior to its filing with the SEC and (ii) all
other Registration Statements and all amendments and supplements to all such
Registration Statements (except for Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K and any similar or
successor reports) within a reasonable number of days prior to the their filing
with the SEC and (b) not file any document in a form to which Legal Counsel
reasonably objects. The Company shall not submit a request for acceleration of
the effectiveness of a Registration Statement or any amendment or supplement
thereto without the prior approval of Legal Counsel, which consent shall not be
unreasonably withheld. The Company shall furnish to Legal Counsel, without
charge, (i) any correspondence from the SEC or the staff of the SEC to the
Company or its representatives relating to any Registration Statement, (ii)
promptly after the same is prepared and filed with the SEC, one copy of any
Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference and
all exhibits and (iii) upon the effectiveness of any Registration Statement, one
copy of the prospectus included in such Registration Statement and all
amendments and supplements thereto. The Company shall reasonably cooperate with
Legal Counsel in performing the Company's obligations pursuant to this Section
3.
d. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement, without charge, (i)
promptly after the same is prepared and filed with the SEC, at least one copy of
such Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference, all
exhibits and each preliminary prospectus, (ii) upon the effectiveness of any
such Registration Statement, ten (10) copies of the prospectus
<PAGE>
included in such Registration Statement and all amendments and supplements
thereto (or such other number of copies as such Investor may reasonably request)
and (iii) such other documents, including copies of any preliminary or final
prospectus, as such Investor may reasonably request from time to time in order
to facilitate the disposition of the Registrable Securities owned by such
Investor.
e. The Company shall use its best efforts to (i) register and qualify
the Registrable Securities covered by a Registration Statement under such other
securities or "blue sky" laws of such jurisdictions in the United States as any
Investor reasonably requests, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (w) make any
change to its certificate of incorporation or by-laws, (x) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(e), (y) subject itself to general taxation in any such
jurisdiction, or (z) file a general consent to service of process in any such
jurisdiction. The Company shall promptly notify Legal Counsel and each Investor
who holds Registrable Securities of the receipt by the Company of any
notification with respect to the suspension of the registration or qualification
of any of the Registrable Securities for sale under the securities or "blue sky"
laws of any jurisdiction in the United States or its receipt of actual notice of
the initiation or threat of any proceeding for such purpose.
f. As promptly as practicable after becoming aware of such event or
development, the Company shall notify Legal Counsel and each Investor in writing
of the happening of any event as a result of which the prospectus included in a
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (provided that in no event shall such
notice contain any material, nonpublic information), and promptly prepare a
supplement or amendment to such Registration Statement to correct such untrue
statement or omission, and deliver ten (10) copies of such supplement or
amendment to Legal Counsel and each Investor (or such other number of copies as
Legal Counsel or such Investor may reasonably request). The Company shall also
promptly notify Legal Counsel and each Investor in writing (i) when a prospectus
or any prospectus supplement or post-effective amendment has been filed, and
when a Registration Statement or any post-effective amendment has become
effective (notification of such effectiveness shall be delivered to Legal
Counsel and each Investor by facsimile on the same day of such effectiveness),
(ii) of any request by the SEC for amendments or supplements to a Registration
<PAGE>
Statement or related prospectus or related information, and (iii) of the
Company's reasonable determination that a post-effective amendment to a
Registration Statement would be appropriate.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction within the United States of America and, if such an
order or suspension is issued, to obtain the withdrawal of such order or
suspension at the earliest possible moment and to notify Legal Counsel and each
Investor who holds Registrable Securities being sold of the issuance of such
order and the resolution thereof or its receipt of actual notice of the
initiation or threat of any proceeding for such purpose.
h. At the reasonable request of any Investor, the Company shall
furnish to such Investor, on the date of the effectiveness of the Registration
Statement and thereafter from time to time on such dates as an Investor may
reasonably request (i) a letter, dated such date, from the Company's independent
certified public accountants in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, and (ii) an opinion, dated as of such date, of counsel
representing the Company for purposes of such Registration Statement, in form,
scope and substance as is customarily given in an underwritten public offering,
addressed to the Investors.
i. The Company shall make available for inspection by (i) any
Investor, (ii) Legal Counsel and (iii) one firm of accountants or other agents
retained by the Investors (collectively, the "Inspectors") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request;
provided, however, that each Inspector shall agree, and each Investor hereby
agrees, to hold in strict confidence and shall not make any disclosure (except
to an Investor) or use of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or is otherwise required under the 1933 Act, (b) the release of such
Records is ordered pursuant to a final, non-appealable subpoena or order from a
court or government body of competent jurisdiction, or (c) the information in
such Records has been made generally available to the public other than by
disclosure in violation of this or any other agreement of which the Inspector
and the Investor has knowledge. Each Investor agrees that it shall, upon
learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at its expense, to undertake
<PAGE>
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential.
j. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
k. The Company shall use its best efforts either to cause all the
Registrable Securities covered by a Registration Statement to be listed on each
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange or (ii) secure
designation and quotation of all the Registrable Securities covered by the
Registration Statement on the Nasdaq National Market or, if, despite the
Company's best efforts to satisfy the preceding clause (i) or (ii), the Company
is unsuccessful in satisfying the preceding clause (i) or (ii), to secure the
inclusion for quotation on The Nasdaq SmallCap Market for such Registrable
Securities and, without limiting the generality of the foregoing, to arrange for
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities. The Company shall pay all fees and expenses in connection with
satisfying its obligation under this Section 3(k).
l. The Company shall cooperate with the Investors who hold Registrable
Securities being offered and, to the extent applicable, to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legend)
representing the Registrable Securities to be offered pursuant to a Registration
Statement and enable such certificates to be in such denominations or amounts,
as the case may be, as the Investors may reasonably request and registered in
such names as the Investors may request.
m. Intentionally Left Blank
<PAGE>
n. If requested by an Investor, the Company shall (i) as soon as
practicable incorporate in a prospectus supplement or post-effective amendment
such information as an Investor requests to be included therein relating to the
sale and distribution of Registrable Securities, including, without limitation,
information with respect to the number of Registrable Securities offered or
sold, the purchase price being paid therefor and any other terms of the offering
of the Registrable Securities to be sold in such offering; (ii) as soon as
practicable make all required filings of such prospectus supplement or
post-effective amendment after being notified of the matters to be incorporated
in such prospectus supplement or post-effective amendment; and (iii) supplement
or make amendments to any Registration Statement if reasonably requested by an
Investor of such Registrable Securities.
o. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.
p. The Company shall make generally available to its security holders
as soon as practical, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the 1933 Act) covering a twelve-month period beginning not later
than the first day of the Company's fiscal quarter next following the effective
date of the Registration Statement.
q. The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any registration
hereunder.
r. Within two (2) business days after a Registration Statement which
covers applicable Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that such Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.
s. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
t. Notwithstanding anything to the contrary in Section 3(f), at any
time after the applicable Registration Statement has been declared effective by
the SEC, the Company may delay the disclosure of material non-public information
concerning the Company, the disclosure of which at the time is not, in the good
faith opinion of the Board of Directors of the Company and its counsel, in the
best interest of the Company and, in the opinion of counsel to the Company,
<PAGE>
otherwise required (a "Grace Period"); provided, that the Company shall promptly
(i) notify the Investors in writing of the existence of material non-public
information giving rise to a Grace Period (provided that in each notice the
Company will not disclose the content of such material non-public information to
the Investors) and the date on which the Grace Period will begin, and (ii)
notify the Investors in writing of the date on which the Grace Period ends; and,
provided further, that no Grace Period shall exceed 15 consecutive days and
during any 365 day period such Grace Periods shall not exceed an aggregate of 30
days (an "Allowable Grace Period"). For purposes of determining the length of a
Grace Period above, the Grace Period shall begin on and include the date the
holders receive the notice referred to in clause (i) above and shall end on and
include the later of the date the holders receive the notice referred to in
clause (ii) and the date referred to in such notice. The provisions of Section
3(g) hereof shall not be applicable during the period of any Allowable Grace
Period. Upon expiration of the Grace Period, the Company shall again be bound by
the first sentence of Section 3(g) with respect to the information giving rise
thereto unless such material non-public information is no longer applicable.
4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) days prior to the first anticipated filing date
of the Registration Statement, the Company shall notify each Investor in writing
of the information the Company reasonably requires from each such Investor if
such Investor elects to have any of such Investor's Registrable Securities
included in such Registration Statement. It shall be a condition precedent to
the obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Investor
that such Investor shall furnish to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
b. Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement, the Effectiveness Deadline shall be
extended to the extent of any delay caused solely by the Investor's failure to
corporate with the Company.
c. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(g),
3(t) or the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration
<PAGE>
Statement(s) covering such Registrable Securities until such Investor's receipt
of the copies of the supplemented or amended prospectus contemplated by Section
3(g) or the first sentence of 3(f) or receipt of notice that no supplement or
amendment is required or that a Grace Period has ended. Notwithstanding anything
to the contrary, the Company shall cause its transfer agent to deliver
unlegended shares of Common Stock to a transferee of an Investor in accordance
with the terms of the Placement Agent Agreement in connection with any sale of
Registrable Securities with respect to which an Investor has entered into a
contract for sale prior to the Investor's receipt of a notice from the Company
of the happening of any event of the kind described in Section 3(g), 3(t) or the
first sentence of 3(f) and for which the Investor has not yet settled.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees
shall be paid by the Company. In addition, the Company shall reimburse the
Investors for the reasonable fees and disbursements of Legal Counsel in
connection with registrations, filings or qualifications pursuant to Section 2
and 3 of this Agreement.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a
Registration Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor, the directors,
officers, partners, employees, agents, representatives of, and each Person, if
any, who controls any Investor within the meaning of the 1933 Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act") (each, an
"Indemnified Person"), against any losses, claims, damages, liabilities,
judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts
paid in settlement or expenses, joint or several, (collectively, "Claims")
incurred in investigating, preparing or defending any action, claim, suit,
inquiry, proceeding, investigation or appeal taken from the foregoing by or
before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("Indemnified Damages"), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
<PAGE>
or other "blue sky" laws of any jurisdiction in which Registrable Securities are
offered ("Blue Sky Filing"), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading or (iii) any violation or alleged violation by the Company
of the 1933 Act, the 1934 Act, any other law, including, without limitation, any
state securities law, or any rule or regulation thereunder relating to the offer
or sale of the Registrable Securities pursuant to a Registration Statement (the
matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). The Company shall reimburse the Investors and each such
underwriter or controlling person, promptly as such expenses are incurred and
are due and payable, for any legal fees or disbursements or other reasonable
expenses incurred by them in connection with investigating or defending any such
Claim. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(a): (i) shall not apply to
a Claim by an Indemnified Person arising out of or based upon a Violation which
occurs in reliance upon and in conformity with information furnished in writing
to the Company by such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not be available to the extent such Claim is
based on a failure of the Investor to deliver or to cause to be delivered the
prospectus made available by the Company, if such prospectus was timely made
available by the Company pursuant to Section 3(d); and (iii) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of the Company, which consent shall not be
unreasonably withheld. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Person
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9.
b. In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to severally and not jointly
indemnify, hold harmless and defend, to the same extent and in the same manner
as is set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement and each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act (each an
"Indemnified Party"), against any Claim or Indemnified Damages to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim or Indemnified Damages arise out of or are based upon any
Violation, in each case to the extent, and only to the extent, that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement; and, subject to Section 6(d), such Investor will
<PAGE>
reimburse any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such Claim; provided, however, that the
indemnity agreement contained in this Section 6(b) and the agreement with
respect to contribution contained in Section 7 shall not apply to amounts paid
in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor, which consent shall not be unreasonably
withheld; provided, further, however, that the Investor shall be liable under
this Section 6(b) for only that amount of a Claim or Indemnified Damages as does
not exceed the net proceeds to such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(b) with respect to any prospectus shall not inure to
the benefit of any Indemnified Party if the untrue statement or omission of
material fact contained in the prospectus was corrected and such new prospectus
was delivered to each Investor prior to such Investor's use of the prospectus to
which the Claim relates.
c. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim,
such Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this Section 6,
deliver to the indemnifying party a written notice of the commencement thereof,
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for such
Indemnified Person or Indemnified Party to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. In the case of an
Indemnified Person, legal counsel referred to in the immediately preceding
sentence shall be selected by the Investors holding a majority in interest of
the Registrable Securities included in the Registration Statement to which the
Claim relates. The Indemnified Party or Indemnified Person shall cooperate fully
with the indemnifying party in connection with any negotiation or defense of any
such action or claim by the indemnifying party and shall furnish to the
indemnifying party all information reasonably available to the Indemnified Party
or Indemnified Person which relates to such action or claim. The indemnifying
party shall keep the Indemnified Party or Indemnified Person fully apprised at
<PAGE>
all times as to the status of the defense or any settlement negotiations with
respect thereto. No indemnifying party shall be liable for any settlement of any
action, claim or proceeding effected without its prior written consent,
provided, however, that the indemnifying party shall not unreasonably withhold,
delay or condition its consent. No indemnifying party shall, without the prior
written consent of the Indemnified Party or Indemnified Person, consent to entry
of any judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party or Indemnified Person of a release from all liability
in respect to such claim or litigation. Following indemnification as provided
for hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
d. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
e. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that: (i) no seller
of Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any seller of Registrable Securities who was not guilty of fraudulent
misrepresentation; and (ii) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
<PAGE>
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Investors to sell securities of the Company
to the public without registration (ARule 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements and the filing of such reports
and other documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the Investors to
sell such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of Registrable Securities if:
(i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; and (v) such transfer shall have been made in
accordance with the applicable requirements of the Placement Agent Agreement.
<PAGE>
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with the written consent of the Company and Investors
who then hold at least two-thirds (b) of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Registrable
Securities. No consideration shall be offered or paid to any Person to amend or
consent to a waiver or modification of any provision of any of this Agreement
unless the same consideration also is offered to all of the parties to this
Agreement. 11. MISCELLANEOUS.
a. A Person is deemed to be a holder of Registrable Securities
whenever such Person owns or is deemed to own of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more Persons with respect to the same Registrable
Securities, the Company shall act upon the basis of instructions, notice or
election received from the registered owner of such Registrable Securities.
b. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Buyer:
May Davis Group, Inc.
1 World Trade Center, Suite 8735
New York, NY 10048
Telephone: (212) 775-7400
Facsimile: (212) 775-8166
If to the Company:
DIGS, Inc.
17327 Ventura Blvd. Suite 200
Encino, CA 91316
Telephone: ( 818) 995-3650
Facsimile: ( 818) 789-3985
Attention: President
<PAGE>
If to Legal Counsel:
Silverman, Collura & Chernis, P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
Telephone: (212) 779-8600
Facsimile: (212) 779-8858
Attention: Martin C. Licht, Esq.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by a courier or overnight courier service shall be rebuttable evidence
of personal service, receipt by facsimile or receipt from a nationally
recognized overnight delivery service in accordance with clause (i), (ii) or
(iii) above, respectively.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. The corporate laws of the State of Delaware shall govern all issues
concerning the relative rights of the Company and the Buyers as its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of New York. Each party hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting in the City of New York, borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such
<PAGE>
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. If any provision of this
Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity
or unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.
e. This Agreement, the Placement Agent Agreement and the Warrants
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and thereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
therein. This Agreement, the Placement Agent Agreement, the Warrants and the
Certificate of Designations supersede all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in identical counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors holding a majority of the Registrable Securities,
determined as if all of the Warrants then outstanding have been exercised for
<PAGE>
Registrable Securities without regard to any limitation on exercises of the
Warrants.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
l. This Agreement is intended for the benefit of the parties hereto
and their respective permitted successors and assigns, and is not for the
benefit of, nor may any provision hereof be enforced by, any other Person.
* * * * * *
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYER:
DIGS, INC. MAY DAVIS GROUP, INC.
By:/s/ PETER B. DUNN By:/s/ MICHAEL JACOBS
--------------- -------------------
Name: Peter B. Dunn Name: Michael Jacobs
Title: President Title: Managing Director
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
Attn:
Re: Digs, Inc.
Ladies and Gentlemen:
We are counsel to Digs, Inc., a Delaware corporation (the "Company"),
and have represented the Company in connection with that certain Placement Agent
Agreement (the "Placement Agent Agreement") entered into by and among the
Company (the "Holder") pursuant to which the Company issued to the Holder and
warrants to purchase 200,000 shares of the Company's common stock, $.01 par
value (the "Common Stock") (the "Warrants"). Pursuant to the Placement Agent
Agreement, the Company also has entered into a Registration Rights Agreement
with the Holders (the "Registration Rights Agreement") pursuant to which the
Company agreed, among other things, to register the Registrable Securities (as
defined in the Registration Rights Agreement), including the shares of Common
Stock issuable upon the exercise of the Warrants under the Securities Act of
1933, as amended (the "1933 Act"). In connection with the Company's obligations
under the Registration Rights Agreement, on ____________ ____, the Company filed
a Registration Statement on Form ________ (File No. 333-_____________) (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") relating to the Registrable Securities which names each of the Holders as
a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[ISSUER'S COUNSEL]
By:
cc: MAY DAVIS GROUP, INC.
SUBSIDIARIES OF DIGS, INC.
The following entities are wholly-owned subsidiaries of DIGS, Inc.:
Digital Corporate Profiles, Inc., a California corporation.
DXF Design, Inc., a California corporation.
Digs Web Video, Inc., a California corporation.
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of DIGS, Inc. and
Subsidiaries on Form SB-2 of our report dated February 24, 2000, appearing in
the Prospectus, which is part of this registration Statement, and of our report
dated February 24, 2000 relating to the financial statement schedules appearing
elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
CALDWELL, BECKER, DERVIN, PETRICK & CO., L. L. P.
April 18, 2000
