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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM 10-SB
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GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS Under section 12(b) or
12(g) of the Securities Exchange Act of 1934
USA DIGITAL, INC.
(Exact name of registrant as specified in its charter)
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NEVADA 59-3560920
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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USA DIGITAL, INC.
P.O. BOX 172574
TAMPA, FL 33672
(Address of principal executive offices)
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Registrant's telephone number, including area code (813) 230-9100
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class to be so registered Name of exchange on which
each class is to be registered
NONE NOT APPLICABLE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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PART I
ITEM 1.DESCRIPTION OF BUSINESS
GENERAL
On March 5, 1999, USA Digital, Inc. (the "Company") was incorporated
in the State of Nevada. The Company is a holding company whose mission is to
build a highly integrated convergent communications company. The Company seeks
to acquire Internet service providers, telephone interconnect companies,
computer/network integrators, and switchless resellers.
On February 26, 1999, Blazoon Systems Incorporated ("Blazoon"), a
Colorado corporation, that was an inactive publicly held company with no recent
operating history entered into an Agreement and Plan of Reorganization (the
"Acquisition") with Diverse Capital Corp. ("Diverse"), a Florida corporation
incorporated on July 9, 1998 to merge Diverse into Blazoon. From its inception,
through March 4, 1999, Diverse was engaged in the development of its business
plan and infrastructure to become a convergent communications company. The
Acquisition was consummated on March 4, 1999. Under the terms of the
Acquisition, Blazoon issued 1,235,000 shares of its common stock to the
stockholders of Diverse in exchange for 100% of the issued and outstanding
common stock of Diverse. The Company also agreed to issue 625,000 shares of its
Class A Preferred Stock to be issued to the stockholders of Orlando Digital
Telephone Corporation (a pending acquiree of Diverse at that time) in exchange
for 100% of the issued and outstanding preferred stock of Diverse. The 625,000
shares of Class A Preferred Stock was never issued and the Company is currently
in litigation with Orlando Digital Telephone Corporation to recind its
acquisition of Orlando Digital Telephone. The preferred stock is convertible to
common stock at a one-for-one ratio beginning February 2, 2000 to a maximum of
9.0% of the then outstanding common stock, has dividend preference, is
non-voting, and is subject to redemption at a $4.00 liquidation value at the
Company's option beginning February 2, 2004. Subsequent to the Acquisition, the
prior shareholders of Diverse owned approximately 55% of the voting common stock
of Blazoon.
On March 9, 1999 the Company consummated a merger agreement with
Blazoon with the Company as the surviving entity. The Company entered into the
March 9, 1999 transaction with Blazoon in order to: (1) redomicile Blazoon as a
Nevada Corporation in order to take advantage of the more favorable corporate
law and franchise tax of Nevada; (2) effect the name change from Blazoon to USA
Digital, Inc.; and (3) to create a public market for USA Digital, Inc. common
stock so that the Company could more easily raise the capital necessary to carry
out its business plan.
BUSINESS DESCRIPTION
**(1) The Company is building a highly integrated, facility-based
convergent communications company that will address the rapidly expanding
communication demands of small to medium size businesses. The Company believes
that a convergence is occurring in the communication industry as more
traditional Internet providers become communications companies and communication
companies become Internet companies. These factors are creating an environment
in which individuals and businesses and other organizations perceive a need to
establish Internet access and an Internet presence. Furthermore, many businesses
have Internet requirements that go beyond the simple access that most Internet
service providers offer. These Internet requirements include security, network
consulting, high-bandwidth managed access and data services. These services are
most efficiently provided by a vendor that has a local presence so as to ensure
these businesses that their Internet requirements will receive priority
treatment. The Company believes that its status as a full-service communications
company will enable it to capitalize on this convergence.
In addition, the Telecommunications Act of 1996 (the "Telecom Act"),
the first comprehensive rewrite of the Communications Act of 1934, has
dramatically changed the ground rules for competition and regulation in
virtually all sectors of the communications industry, from local and
long-distance telephone services, to cable television, broadcasting and
equipment manufacturing. One of the market
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sectors that has been adversely affected by passage of the Telecom Act is the
switchless resellers. A switchless reseller is an entity that purchases large
blocks of long distance telephone time from a traditional telephone carrier
(i.e. AT&T, Sprint, MCI Worldcom) at a discounted rate. The reseller then
resells that telephone service to its clients at a higher rate.
Under the Telecom Act, a distinction is made between those carriers
that own and operate their own switch (facility-based) and those entities that
do not own their own switch (non-facility based) and utilize someone else's
switch. Under this legislation, all facility-based carriers are entitled to
equal access to the (incumbent local exchange carrier (e.g. BellSouth) network.
This means that the local operating company must allow all facility-based
carriers access to their infrastructure (co-location) at wholesale rates so that
these new entrants into the telecommunications arena can compete effectively
against the incumbents. Therefore, under the Telcom Act, only facility-based
carriers benefit from the legislative deregulation of the industry that provides
equal access to the incumbent local exchange carriers network.
Non-facility-based carriers must gain access or co-location to a switch in order
to benefit from the industry deregulations.
The impact of this legislation has been to drastically reduce the
valuation of these switchless resellers, and thus make the acquisition of these
entities both cost effective and attractive to the Company at this time.
Previously, these companies had occupied a very profitable niche in the market
place following the AT&T Divestiture in the mid-`80's, but due to the Telecom
Act's preferential treatment of facility-based carriers, these switchless
resellers have watched their valuation drop from a high of 10 times monthly
revenues to their current valuation of 1-3 times monthly revenues. Further, this
deregulation has already negatively impacted the price of long distance service,
and thus further reduced the price that the reseller can charge its clients if
it wants to compete effectively against the major carriers. Thus, the
legislation has created an opportunity for the Company, as a facility-based
carrier, to enter the communications arena through its acquisition program at an
undervalued price point and to sell its other products and services to the
existing customer base of these companies.
The Company intends to capitalize on the convergence in the
communications industry and legislative changes through the acquisition of
strategic partners that have a recognized presence and customer base in its
particular market and region, and by offering these newly acquired customers its
complete package of products and services. These include, but are not limited
to:
o High-speed Internet access;
o Internet solutions, including Web page hosting, Web page
design, Interactive Web-based business services, (e.g. credit
card processing), database management, broadcast audio and
video applications and Internet marketing;
o Electronic Commerce;
o Voice over Internet;
o Internet Telephony;
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o Co-Location with companies who are providing Internet service,
web hosting, and local and long distance service, but which
require access to local telephone company connections. The
Company has the ability to provide colocation at its Orlando
switch center. It will also be able to provide colocation in
Gainesville and Tampa switch centers once those systems are in
place. There are no regulatory and economic requirements that
must be met by the Company to provide these services.
o Local and long distance telephone services. The Company has
placed an order with Siemens for the delivery of one Digital
Central Office switches long distance switch and three class
five local dial tone switches. Financing for these switches
have been approved by Siemens Telecommunications Finance
Group. The Orlando and Gainesville networks are expected to be
operational within ninety days, and the Company intends to add
Tampa to its network within sixty days thereafter. The Company
has successfully negotiated BellSouth re-sale/interconnection
agreements for the nine state BellSouth region, that will
allow the Company to purchase facilities from BellSouth as
well as to resell local and long distance services to its
customers. These agreements are currently in full force,
however they will require an initial deposit of $100,000 once
the companies' switches are installed and service is ordered.
Additionally, it will be necessary for the Company to be
certified as a Central Local Exchange Carrier and
Interexchange Carrier by the Florida Public Service
Commission. The Company has begun the certification process
and expects approval within sixy to ninety days.
o Communications equipment sales and service. The Company
currently provides computer and network integration, as well
as Telecommunications and computer equipment sales and service
through its wholly owned subsidiaries DSA Computers and/or
TEAM, Inc. who have been in business marketing these services
for 8 and 12 years, respectively. Last year DSA Computers and
TEAM collectively billed approximately $2.1 million providing
these services.
o Computer and network integration and wireless solutions. The
Company intends to enter into a resale agreement with a
cellular company to enable the Company to provide wireless
services to its customers, once its network is operational.
The Company will not be required to obtain any additional
licenses to provide these services.
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The Company is currently in the process of applying for its license to
operate as a competitive local exchange carrier, to do business in the nine Bell
South states. That combined with its Siemens Digital Central Office Switch will
qualify the Company as a facility based carrier under the Telecom Act and, will
further help provide the foundation on which the Company will grow. This fully
equipped switch will provide a full compliment of local, centrex, ISDN, and long
distance services, and is expected to be operational by the end of the fourth
quarter 1999.
In addition, the Company has targeted other specific types of
businesses that it feels will be synergistic with the Company's business plan.
These businesses include: Internet Service providers, telephone interconnect
companies, computer hardware & network integrators, and switchless resellers. To
date, the Company's management through its network of contacts has identified
several of these acquisition candidates and has closed two such acquisitions in
return for the Company's preferred stock. Additionally, the Company is currently
negotiating two further acquisitions where the consideration would solely be the
Company's stock. The Company intends to confine its business to the major
metropolis areas of Florida (e.g. Orlando, Tampa, Miami, etc.) for the next 9-12
months, and it intends to expand into the remaining eight BellSouth states.
Simultaneously with its acquisition program, the Company intends to
develop its Internet infrastructure and Super Pop, a facility designed to
provide access for the co-location of independent ISPs and inter-exchange
carriers to allow for the integration of high-speed Internet access and Internet
telephony utilizing fiber and broad-band connectivity. The ultimate goal is for
the Company to provide the following communications solutions and convergent
technologies to its newly acquired customer base:
o Dedicated high-speed broad band services to the small and
medium size business user, including the following:
o ATM (Asynchronous Transfer Mode) is a network protocol
that allows the use of multiple transmission protocols
such as TCP/IP (Transmission Control Protocol/Internet
Protocol). Utilizing multiple protocols allows for
bandwidth on demand and providing voice, data and
video over the same circuit. It is the latest
technology in high-speed broadband transmission, and
being used as the basis for next-generation networks
and switching equipment. The Company has ordered an
Accelerated Networks ATM broadband switch from
Siemens, delivery is expected by December 31, 1999.
Financing for this switch has been approved by Siemens
Telecommunications Finance Group. Implementation of
the switch in conjunction with a strategic appliance
with an Internet Service Provider will enable the
Company to provide its Internet and Web Services.
o ADSL (Asymmetric Digital Subscriber Line) is a
high-speed digital telephone connection used primarily
for the high-speed transmission of voice and data over
standard telephone lines. Internet Service Providers
(ISPs) provide this service to their subscribers to
allow them high-speed Internet connectivity.
Transmission is 6 million bits per second (mbps) in
one direction and 576 thousand bits per second (kbps)
in the other.
o ISDN (Integrated Services Digital Network) is a 126
kbps digital telephone connection used primarily for
the transmission of voice and data. The speed is twice
as fast as the traditional modem used today.
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o T-1 and Fractional T-1 (Transmission System 1) and
DS-1 (Digital System 1) are high-capacity, high-speed
digital four wire circuit used to connect an end user
to the local telephone company, their Internet service
provider, or their long distance company. It is also
used to connect telephone companies and Internet
companies together. T-1 by design transmits a digital
signal over a four wire circuit at the rate of
1,544,000 bits per second (1.544 mbps). By utilizing
special equipment on each end of the circuit called
channel banks or multiplexers, this one circuit can be
split into 24 individual circuits at each end. Each of
the 24 circuits can either be digital or analog
(voice) and utilizes 65 kbps of the 1.544 mbps. T-1 is
much more cost-effective than utilizing individual
lines.
o DS3 (Digital System 3) is a high-capacity, high-speed
digital 4 wire circuit with 28 times the capacity of a
T-1 or DS-1. It is the equivalent of 672 individual
voice grade circuits. It is used by telephone
companies, Internet service providers, and
long-distance companies to connect to one another.
o Dial up access service to the residential community, focused
on easy user interface and access to information on the world
wide web. The Company has placed an order for equipment for
dial up access service from accelerated networks, a leading
provider of integrated voice and data products. Delivery is
expected within 90 days.
o IP telephony with the ability to offer price competitive
service to both the commercial and residential users. This
service will be offered through the interface of the
Accelerated Networks equipment, the Siemens equipment, and the
Company's relationship with Gator. net.
o Comprehensive long distance services including 800/888, One
Plus, WATS, international, calling cards, debit cards and
operator services. This unit would also provide digital
private line services, including ATM, Frame Relay, VPN, as
well as traditional private line services. The Company has
ordered a Siemens Digital Central Office Switch which is
expected to be operational within ninety days. Additionally,
the Company has ordered three Siemens remote switches to
connect its network located in Orlando with its hubs located
in Gainesville and Tampa.
o Web Services, including production, hosting, marketing and E
Commerce solutions. The Company has purchased a secured
interest in Syncom, Inc. (d/b/a Gator.net) which is currently
operating under the protection of Chapter 11 of the U.S.
Bankruptcy Code. Syncom has filed a plan for reorganization
with the Court. Under an agreement with the owner of 100% of
Syncom's stock, the Company at its option has the ability to
acquire those shares in exchange for amounts advanced for
their purchase. Gator.net is currently hosting the Company's
web site, and the Company intends to utilize Gator.net's
infrastructure to provide web services.
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**(2) o Computer/Network Integration, Technology and Engineering
Services for small and medium size businesses including fire
wall installations, local area networks ("LAN") and wide area
network ("WAN") installation along with maintenance and
management of those facilities.
Currently the Company is receiving revenues from its DSA Computers,
Inc. subsidiary which provides Computer/Network Integration, and TEAM which
sells telephone equipment or provides telephone interconnection services. See
"Item 5 - Management Discussion and Analysis of Results of Operations."
MARKET AREA
The Company's target market is small to medium size businesses that
need assistance moving into the information age so that they can take advantage
of new markets as well as rapidly changing technologies. These businesses are
generally accustomed to working with a local communication vendor to ensure that
its communication needs receive the highest priority. Through the acquisition of
computer hardware/network integrators, telephone interconnect companies,
Internet service providers, and switchless resellers, the Company will build a
customer base that will purchase its convergent communications products.
Initially, the Company will concentrate its activities in the nine state
BellSouth region which includes Florida, Georgia, North Carolina, South
Carolina, Alabama, Tennessee, Mississippi, Louisiana and Kentucky.
COMPETITION
The market for telecommunications products and services is highly
competitive and characterized by the frequent introduction of new products based
upon rapidly changing technologies. The Company competes with numerous
well-established manufacturers and suppliers of telecommunications products,
some of which dominate certain market segments. Most of the Company's
competitors possess substantially greater financial, marketing, personnel and
other resources than the Company, have established reputations relating to
product design, development, manufacture, marketing and service of
telecommunications products and have significant budgets to permit them to
implement extensive advertising and promotional campaigns to market new products
in response to competitors.
PERSONNEL
As of August 20, 1999, the Company had 24 full-time employees. The
employees are not represented by a collective bargaining unit and the Company
considers its relationship with its employees to be good.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and related notes included elsewhere in this Form
10-SB. This discussion contains forward-looking statements based on current
expectations, which involve risks and uncertainties. Actual results and the
timing of certain events could differ materially from the forward-looking as a
result of a number of factors.
OVERVIEW
The Company was incorporated on July 9, 1998 and reincorporated to
effect a name change and redomicile under the laws of Nevada on March 5, 1999
and is a holding company that intends to build a highly integrated, facility
based, convergent communications company. The Company intends to grow primarily
through the acquisition of Internet service providers, telephone interconnect
companies, computer/network integrators, and switchless resellers, and then
selling its products and services to its newly acquired customer base. These
products and service will include: high-speed Internet access, Internet
solutions, electronic commerce, voice over Internet, Internet telephony,
co-location, local and long distance telephone services, communications
equipment sales and servicing, computer and network integration and wireless
solutions.
The Company has entered into a lease agreement with Siemens for the
lease of DCO telephone switch. This switch will be located in Orlando, Florida
and is expected to be operational by the end of the fourth quarter 1999.
Further, the Company has ordered three additional remote switches and an
Accelerated Networks broadband ATM switch that will be used to link its network
in the State of Florida. The Company is currently in the process of applying for
its license to operate as a Competitive Local Exchange Carrier (CLEC), to do
business in the nine Bell South states. That combined with its Siemens DCO-CS
(Digital Central Office Switch) will qualify the Company as a facility based
carrier under the Telecom Act and, will further help provide the foundation on
which the Company will grow. These equipped switches will enable the Company to
provide a full compliment of local, centrex, ISDN, and long distance services,
and is expected to be operational by the end of the fourth fiscal quarter 1999.
The Company has entered into nine Interconnection/reseller agreements
with BellSouth covering each of the nine BellSouth states. The agreements expire
on June 2, 2000 and may be terminated sooner only upon a breach of the
agreements by one of the parties. The agreements provide for the negotiations of
a "follow-on" agreement for an additional three year term with such negotiations
to commence no later than 180 days prior to the expiration. These agreements
will substantially reduce the Company's network costs by allowing the Company to
co-locate its equipment at the BellSouth switching center location which
dramatically reduces access costs. The agreements provide for revenue sharing by
providing the Company with a portion of the revenue from any calls that
terminate or originate with BellSouth and pass through the Company's network.
The agreement allows the Company to immediately begin selling customers local
dial tone throughout the BellSouth region in the Company's name.
On June 2, 1999, the Company purchased a secured interest in Syncom,
Inc., a Florida corporation that owns and operates Gator.net. Gator.net is a
Gainesville, Florida-based Internet service provider that currently has a
customer base of 2,500 subscribers. Syncom, Inc. is currently operating under
the protection of Chapter 11 of the United States Bankruptcy Code in the
Northern District of Florida. More specifically, the Company has purchased: a
$160,000 note, secured by Gator.net's customer list, various equipment,
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and the Gator.net name from Premium Internet Corp.; a $120,000 unsecured note
from Clifford Gaither; and a $10,000 unsecured note from Wayne Clark.
In addition, on May 30, 1999, USA Digital entered into an agreement
with Renegade Corporation of America, Inc. ("Renegade") wherein USA Digital
agreed to loan Renegade cash and up to 80,000 shares of USA Digital stock so
that Renegade could purchase all the issued and outstanding stock of Syncom. As
of June 30, 1999, the total amount of cash distributed under this agreement was
$8,131.56 and the total stock distributed was 55,000 shares. Under the terms of
the agreement USA Digital hold the Syncom stock as collateral for the loan.
Additionally, USA Digital has been approved by the U.S. Bankruptcy
Court to advance up to $40,000 to Syncom which will receive priority treatment.
To date, USA Digital has advanced approximately $7,000 under this order. Through
the operation of its Siemen's DCO switch and/or with its BellSouth reseller
agreements, the Company possesses the ability to reduce Gator.net's monthly
telephone circuit expenses by nearly 70%, and thus make Gator.net profitable at
its current operating levels. Syncom has recently submitted a plan of
reorganization to the Bankruptcy Court that if accepted will enable the Company
to purchase 100% of Syncom.
On July 9, 1999, the Company completed the acquisition of DSA
Computers, Inc., a Sunrise, Florida based computer and network integrator. DSA
will operate as a wholly-owned subsidiary of the Company. In 1998 DSA generated
more than $1.3 million in revenues with gross profit margins of approximately
25%. The purchase price of the acquisition was 40,000 shares of the Company's
Class B Convertible Preferred Stock, Series 2.
On August 5, 1999 the Company completed its acquisition of Telephone
Engineering and Maintenance, Inc. (TEAM), a Tampa, Florida based telephone
interconnect company that has been in business since 1986. TEAM will operate as
a wholly-owned subsidiary of the Company. During its 1998 fiscal year, TEAM
generated nearly $800,000 in operating revenues with gross profit margins in
excess of 56%. The purchase price of the acquisition is 50,000 shares of the
Company's Class B Convertible Preferred Stock, Series 1.
Both DSA Computers, Inc. and TEAM, Inc. are operating at profitable
levels and only require the addition of a minimal amount of operating capital
for expansion of existing operations. Additionally, it is the Company's
intention to continue with its acquisition program, but it only intends to
acquire companies that are operating profitably or at a break even level so that
substantial cash infusions are not needed to assimilate the acquiree into the
Company's business plan. It is the Company's intent to continue to make
acquisitions during the next 12 months in exchange solely for its stock and/or
debt, and it is not anticipated that these acquisitions will require a
significant cash investment on the part of the Company. However, the Company
will require working capital over the next 12 months to continue to build and
operating its network infrastructure and for organizational expenses. To that
end, the Company is currently undertaking to raise $1 million in equity
financing, and is negotiating various loans to satisfy its short term needs.
Although the Company has signed a capital lease for its switching equipment, no
payments are due under the contract until 90 days after the equipment has become
operational. The Company does not envision making the equipment operational
until the working capital needs of the Company have been satisfied.
STATEMENT OF OPERATIONS
The Company did not generate any revenues for the fiscal year ended
March 31, 1999 or the three months ended June 30, 1999, as it was in the process
of establishing the necessary infrastructure that will enable it to meet its
acquisition goals over the next 24 months. During the above periods the Company
incurred $625,156 and $0.57 in expenses, respectively, that were mainly
associated with the development of the aforementioned infrastructure. The
Company sustained a net loss of $0.12 and $0.06 per share, respectively, for the
period.
As of the date of this Registration Statement, the Company is receiving
revenues from DSA and TEAM.
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CASH FLOW ACTIVITY
During the periods ended March 31, 1999, the Company received proceeds
of $144,500 from the sale of common stock pursuant to Regulation D, Rule 504 of
the Securities Act of 1933, as amended. During the three months ended June 30,
1999, the Company received proceeds of $75,000 from a loan and refunded $2,500
of common stock. Additionally, $120,176 in expenses, incurred as a result of
various consulting fees, were exchanged for common stock in the Company during
the period ended March 31, 1999. The net result to the Company for the periods
including activities relating to operations and investing activities was an
increase in its cash position of $65,003 for the period ended March 31, 1999 and
a decrease in its cash position of $61,327 for the period ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's strategy is to acquire established Internet service
providers, computer/network integrators, telephone interconnect companies, and
switchless resellers mostly in exchange for stock in USA Digital. As such, the
Company does not anticipate requiring large sums of money to consummate its
anticipated acquisitions. However, the Company does anticipate incurring
expenses relating to the completion of future acquisitions, required deposits,
and switching activities. To that end, the Company is currently undertaking to
raise an additional $1 million in capital. As of the date of this Registration
Statement, $382,000 has been raised in the private placement.
DSA COMPUTERS
In fiscal 1998 Gross Sales increased to $1,288,023 from $1,104,766 in
fiscal 1997, an increase of nearly 17%. Gross Sales Net of Returns and
Allowances increased to $1,173,605 in 1998 as compared to $996,360 in the
previous year, an increase of 17%. The Cost of Goods Sold was $855,440 in 1998
as compared to $725,949 in 1997. The Cost of Goods Sold in both years is
approximately 73% of Gross Income. Gross Profit in 1998 was $316,782 as compared
to $270,411 in 1997, and the Gross Profit Margin equaled 27% in both years. In
1998 Operating Expenses were $275,602 as compared to $234,893 in 1997. This
increase in Operating Expenses can be attributed mostly to an increase in wages
paid which had a direct impact on the 17% increase in Gross Sales. In both
years, Operating Expenses comprised approximately 23.5% of gross income. Net
Income before tax effects in 1998 was $42,563, which was almost 20% higher than
the Net Income of $35,518 of 1997.
For the nine-month period ended September 30, 1999 Gross Sales were
$1,061,075. There are no figures available for the corresponding period of 1998.
However, assuming that the corresponding nine-month period of 1998 was comprised
of 75% of the year end totals, Gross Sales increased from $966,017in 1998. Gross
Sales Net of Returns were $1,027,201 as compared to $880,204, an increase of
17%. The Cost of Goods Sold was $723,360 as compared to $641,580. The Gross
Profit Margin increased to nearly 30% from 27% in the previous period. Operating
Expenses were $222,905 in the period as compared to $206,702 in 1998 an 8%
increase. The increase in Operating Expenses can be attributed to an increase in
Salaries & Wages which resulted from the hiring of additional personnel. Net
Income before tax effects for the period was $80,603 as compared to $31,922 in
the corresponding period which is an increase of 152%.
TEAM, INC.
In fiscal 1998 Total Revenues increased to $786,837 from $707,880 in
fiscal 1997, an increase of 11%. Cost of Goods Sold increased to $339,823 in
1998 as compared to $287,562 in 1997, an increase of 18%. Gross Profit increased
in 1998 to $447,014 or 6% from $420,318 in the previous year. However, Gross
Profit Margins decreased slightly from 59% in 1997 to 57% in 1998. This
negligible decrease can be attributed to the slight increase in Cost of Goods
Sold that was not passed on to the consumer. Total Expenses in 1998 increased 4%
to $418,124 from $400,283 in 1997. The majority of this increase can be
attributed to an increase in Officer's Salaries. Net Income before tax effects
in 1998 was $28,890 or 44% as compared to $20,035 in fiscal 1997 as a result of
the low increase in Operating Expenses as compared to the more substantial
increase in Total Revenues.
For the nine months ended September 30, 1999 Total Revenues increased
73% to $891,325 from $515,718 in the corresponding nine-month period of 1998.
This increase in revenues can be attributed to the hiring of additional staff.
Cost of Goods Sold increased to $377,667 in 1999 as compared to $196,694 in
1998, an increase of 92%. Gross Profit increased to $513,658 for the nine-month
period ended September 30, 1999 from $319,024 in the corresponding nine-month
period of 1998. Gross Profit Margins decreased during the 1999 period to 58% as
compared to 62 % in the corresponding period of 1998 due to an increase in the
wholesale price in telephone systems. For the nine-month period of 1999, Total
Operating Expenses increased by 72% to $491,298 from $286,189 in 1998. This
increase can mostly be attributed to increases in Salaries and Wages expenses,
associated with the hiring of additional staff necessary to build future
business. The remainder of the increase was a result of an increase in
professional fees. Net Income before tax effects in the nine-month period of
1999 decreased by 32% and were $22,360 as compared to $32,835 in 1998 due to the
higher Operating Expenses incurred in that period.
IMPACT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements. Statement No. 130, "Reporting Comprehensive
Income" establishes standards for reporting and display of comprehensive income
and its components, and is effective for fiscal years beginning after December
15, 1997. Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers, and its effective for financial
statements for periods beginning after December 15, 1997. Statement No. 132,
"Employers' Disclosure About Pensions and Other Postretirement Benefits" revises
employers' disclosure requirements about pension and other postretirement
benefit plans and in effective for fiscal years beginning after December 15,
1997. Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" establishes accounting and reporting standards for derivative
instruments and related contracts and hedging activities. This statement is
effective for all fiscal quarters and fiscal years beginning after June 15,
1999. The Company believes that its adoption of these pronouncements will not
have a material effect on the Company's financial position or results of
operations.
YEAR 2000 ISSUE
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two-digit year value to 00.
The issue is whether computer systems will properly recognize date-sensitive
information when the
-9-
<PAGE>
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
The Company uses standard off the shelf accounting software package for
all of its accounting requirements. Management has contacted the software vendor
and determined that the accounting software is Microsoft based and management
continually monitors the Year 2000 status of such software. Management has
verified Year 2000 status with is primary vendors, including Siemens, as it
relates to its telephone switches, and has not identified any Year 2000 issues
with those vendors. Costs of investigating internal and external Year 2000
compliance issues have not been material to date. As a result, management
believes that the effect of investigating and resolving Year 2000 compliance
issues on the Company will not have a material effect on the Company's future
financial position or results of operations.
In addition to the effect of Year 2000 issues on the Company's
accounting and management systems, year 2000 issues may effect the Company's
products and programs as they are primarily computer related. The Company's
products have been developed and tested with regard to year 2000 compliance. All
products were deemed to be Year 2000 compliant. The costs of such development
and testing and validating were minimal and absorbed as part of the Company's
normal quality control procedures.
The Company has funded its Y2K plan from available cash and has not
separately accounted for these costs in the past. To date, these costs have not
been material. Any additional costs that may be incurred are not anticipated to
be material. The Company may experience material problems and costs with Y2K
compliance that could adversely affect its business, results of operations and
financial condition.
The Company has not yet fully developed a contingency plan to address
situations that may result if it is unable to achieve Y2K readiness of its
critical operations. Finally, the Company is also subject to external forces
that might generally affect industry and commerce, such as utility or
transportation company Y2K compliance failures and related service
interruptions.
ITEM 3. DESCRIPTION OF PROPERTY
The following table sets forth certain information at August 20, 1999
regarding the Company's office facilities, which are leased by the Company and
certain other information relating to its property at that date.
<TABLE>
<CAPTION>
ANNUAL RENT LEASE EXPIRES SQUARE FOOTAGE
----------- ------------- --------------
<S> <C> <C> <C>
6702 Benjamin Road, Suite 300
Tampa, FL 33634 $66,000 December 31, 1999 2,400
10001 N.W. 50th Street, Suite 105
Sunrise, Florida 33351 $30,000 November 30, 1999 3,400
</TABLE>
At June 30, 1999, the net book value of the Company's computer
equipment and other furniture, fixtures and equipment at its existing offices
totaled $752,873. For more information, see Note 2 of the Notes to Consolidated
Financial Statements.
-10-
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares of the Companys Common
Stock beneficially owned by each person known to be the beneficial owner of 5%
of the companys common stock, each director and executive officer, and all
directors and executive officers of the Company as a group, as of August 20,
1999. Except as otherwise indicated, each person and each group shown in the
table has sole voting and investment power with respect to the shares of Common
Stock listed next to their name.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL COMMON STOCK
NAME POSITION OWNERSHIP(1) OUTSTANDING(2)
- ------------------------------- --------------- ----------------- --------------------
<S> <C> <C> <C>
Bell Entertainment, Inc. 6100 Consultant 270,500(3) 9.4%
Glades Road, Suite 314
Boca Raton, FL 33434
John D. Brasher, Jr.
90 Madison Street, Suite 70
Denver, CO 80206 Shareholder 220,000 7.9%
Dunn Capital Corp.
400 Hampton View Court
Alpharetta, GA 30004 Consultant 843,000(4) 27.6%
J.R. Nelson
6521 W. Calhoun Place
Littleton, CO 80123 Shareholder 247,500 8.8%
Mark D. Cobb Director, President and
Chief Executive Officer 850,000(5) 27.9%
Donald E. Darden Director 45,000 1.6%
Peter J. Lyons Director 50,000 1.8%
Kenneth D. Allen Vice President 50,000 1.4%
H. Ralph Cole President (T.E.A.M.) -(6) *
David Seal President (DSA
Computers) -(7) *
All directors and executive officers
as a group (6 persons) 9,450 31.0%
</TABLE>
_____________________
* Less than one percent of outstanding Common Stock.
(1) All persons shown in the above table have sole voting and investment
power, except as otherwise indicated.
(2) Percentages with respect to each person or group of persons have been
calculated on the basis of 2,802,000 shares of Common Stock, the total
number of shares of the Company's common stock outstanding as of August
20, 1999, plus the number of shares of Common Stock which such person or
group has the right to acquire within 60 days after August 20, 1999.
(3) Includes options to purchase 62,500 shares of the Companys Common Stock
at $1.00 per share. Does not include options to purchase 187,500 shares
of the Companys Common Stock at prices ranging from $1.00 per share to
$3.00 per share. Bell Entertainment, Inc. is owned by Elliot L. Bellen.
(4) Includes options to purchase 250,000 shares of the Companys Common Stock
at $1.00 per share. Does not include options to purchase 500,000 shares
of the Companys Common Stock at prices ranging from $1.50 per share to
$3.00 per share. Dunn Capital Corporation is owned and controlled by Rose
Strohmeyer Bosso and William J. Bosso.
-11-
<PAGE>
(5) Includes options to purchase 250,000 shares of the Companys Common Stock
at $1.00 per share. Does not include options to purchase 500,000 shares
of the Companys Common Stock at prices ranging from $1.50 per share to
$3.00 per share.
(6) Does not include: 50,000 shares of voting Class B Convertible Preferred
Stock, Series 1 with each convertible into five shares of the Companys
Common Stock beginning on August 5, 2000.
(7) Does not include 40,000 shares of voting Class B Convertible Preferred
Stock, Series 2 with each share convertible into five shares of the
Companys Common Stock beginning on July 12, 2000. All shares of Class B
Convertible Preferred Stock have a liquidation value of $4.00 per share
and are subject to cash redemption at the liquidation value at the
election of either the Company or the holder beginning three years from
the date of issuance upon thirty days written demand for redemption by
either party.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Mark D. Cobb, age 50, has been the President and Chief Executive
Officer of the Company since its inception. Mr. Cobb, has more than 20 years of
telecommunications experience. From 1996-1998 he was employed as Chief Operating
Officer by TSC, a full service facility based carrier, located in Tampa,
Florida. Under Mr. Cobbs leadership TSC grew from billing $100,000 monthly to
$2.5 million a month in just a 12-month period. Prior to that he was Vice
President Sales & Marketing for Phone One, Inc. which was acquired by Intermedia
Communications, Inc. in December of 1994, where he pioneered a wholesale
division and generated more than $23 million in contracts in less than six
month. Mr. Cobb has also held management positions with AT&T, ITT, ATC/Microtel,
Southern Bell and Metromedia. In addition to his successful career in the
telecommunications industry, Mr. Cobb enjoyed a distinguished career as a U.S.
Army officer and helicopter pilot, flying 2,000 hours of combat time in Vietnam.
Mr. Cobb left active duty as a Captain at the age of 23 having earned the
following military awards: Distinguished Flying Cross, Bronze Star, 38 Air
Medals, Air Medal with Combat V for Valor, Navy Commendation Medal with Combat
V, Vietnamese Cross of Gallantry/Bronze Star, Army Commendation Medal, Good
Conduct Ribbon and National Defense Ribbon.
Donald E. Darden, age 53, has been a director of the Company since its
inception. From 1973 to present, Mr. Darden has run an architectural firm.
Peter J. Lyons, age 54, has been a director of the Company since July
1, 1999. Mr. Lyons has more than 35 years of telecommunications experience, and
is currently an independent telecommunications consultant. From 1998-June 1,
1999 Mr. Lyons was the President & General Manager of the Broad Band Carrier
Division of Siemens ICN. From 1996-1998 he was Vice-President of DCO & AIN
Business Units for Siemens Telecom Networks, where he was credited with bringing
in $31 million net profit from previously abandoned Narrowband Switching
Product. From 1988-1996 Mr. Lyons was Director of OCC/CAP Sales at Siemens
Stromberg-Carlson.
-12-
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Kenneth D. Allen, age 43, has served as Vice President of Switch
Operations of the Company since its inception. Mr. Allen has more than 21 years
of managerial experience in the telecommunications industry with an emphasis on
operations, MIS and technical support. From 1996-1998 he was Vice President of
Operations/Business Development at Melbourne International Communications Ltd.,
Melbourne, Florida where his duties included responsibility for all operations
including MIS, Switching, Network Management, Technical and Customer Service.
Prior to that Mr. Allen was employed at Ameritech Communications, Inc.,
Rosemont, Illinois as a Director of Product Marketing Manager where he designed
and managed a network that handled a $75 million customer base. Additionally,
Mr. Allen has held managerial positions with Phonetel Technologies, Inc., LCI
International and MCI Communications. Mr. Allen has the following
certifications: DSC 400/600 switch, SS7 signaling, DMS-250 switch, DCO Siemens
switch, SAT 565 1.8 and 2.4, FiberOptic Transmission Systems.
H. Ralph Cole, age 54, has served as the President of T.E.A.M., Inc.
since 1986. Mr. Cole formed T.E.A.M. in 1986 a premier interconnect company
servicing Tampa, florida and its outlying areas. From 1984-1986 Mr. Cole was an
executive for Telplus, a large nationwide interconnect company located in Tampa.
From 1974-1984 Mr. Cole functioned as a top consultant to United Technologies.
Prior to joining United Technologies, Mr. Cole was employed by GTE for more than
4 years designing land and microwave transmission systems.
David Seal, age 43, has served as President DSA Computers, Inc. since
1991. In 1991 Mr. Seal formed DSA Computers, Inc., a full service hardware and
network sales and service company. Eight years later DSA services all of
Florida, as well as some parts of the Caribbean.
-13-
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the
Company for services rendered in all capacities during the three months ended
March 31, 1999 to the President and Chief Executive Officer of Company. No other
executive officer of the Company had annual salary and bonus during the three
months ended March 31, 1999 aggregating in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
---------------------------------------- ------ -------
(A) (B) (C) (D) (E) (G) (H) (I)
OTHER
ANNUAL LTIP
SALARY COMPENSATION OPTIONS PAYOUTS ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR ($) BONUS($) ($)(1) (#)(2) ($) COMPENSATION($)(3)
- ---------------------------------------- ---- ------ -------- ------------ ------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark D. Cobb
President and Chief Executive Officer... 1999 $108,000 $ -- -- 750,000 -- --
</TABLE>
- -----------------
(1) For fiscal year 1999, there were no: (a) perquisites with an aggregate
value for any named individual in excess of the lesser of $50,000 or
10% of the total of the individual's salary and bonus for the year;
(b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term
incentive plans prior to settlement or maturation; (d) tax payment
reimbursements; or (e) preferential discounts on stock.
(2) Includes 750,000 shares of Common Stock subject to options granted to
Mr. Cobb pursuant to the employment agreement between the Company and
Mr. Cobb dated January 5, 1999. The options granted under the
employment agreement are intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code, as amended
(the "Code") to the maximum extent possible, and any options that do
not qualify will constitute non-qualified stock options. Of these
options, 125,000 became exercisable on January 5, 1999 with the
remaining options becoming exercisable at annual increments beginning
on January 15, 1999 to January 15, 2002 at varying exercise prices
ranging from $1.50 per share to $3.00 per share. Such options
generally remain exercisable until the tenth anniversary of the grant
date. In the case of a change in control, as defined in the Stock
Option Plan, all options granted become immediately exercisable.
(3) Includes (i) the dollar value of premiums, if any, paid by the Company
with respect to term life insurance (other than group term insurance
coverage under a plan available to substantially all salaried
employees) for the benefit of the executive officer.
CERTAIN EMPLOYEE BENEFIT PLANS AND EMPLOYMENT AGREEMENTS
Employment Agreement. On January 5, 1999 the Company entered
into an employment agreement with its President. The effective date of
this agreement is November 10, 1998. The agreement is for a period of
five years at which time it can be renewed by mutual agreement of both
parties. The agreement may be terminated at any time by the mutual
written agreement of the parties. The consideration is $96,000
annually paid at regular payroll periods. As additional compensation,
the Company is issuing a total of 750,000 options vesting and becoming
exercisable at annual intervals ranging from January 5, 1999 to
January 15, 2002 at varying exercise prices ranging from $1.00 per
share to $3.00 per share. All options expire five years following
their initial vesting date.
-14-
<PAGE>
Consulting Agreements. On January 5, 1999, effective November 10,
1998, the Company entered into a five year consulting agreement with Dunn
Capital Corporation whereby the Company will be provided with advice with regard
to corporate finance, evaluations of business partners, mergers and acquisitions
and such other matters as requested. This agreement may be extended by mutual
written agreement of the parties. As consideration for the services provided,
the Company issued 150,000 shares of the Company's common stock as a signing
bonus. The Company pays a monthly fee of $8,000 in semi-monthly installments. As
additional compensation, the Company issued a total of 750,000 options,
exercisable at annual intervals ranging from January 5, 1999 to February 15,
2002 at varying exercise prices from $1.00 to $3.00. The Company also agreed to
pay the organization a 2% finders fee, payable in cash or stock at the Company's
election, on the total value of any acquisition, merger, reverse-merger and/or
equity or debt financing introduced to the Company, excluding Orlando Digital
Telephone and Blazoon Systems, Incorporate. In addition, the Company shall
provide the organization with a monthly unaccounted for expense allowance of
$2,500.
On January 5, 1999, effective November 10, 1998, the Company entered
into a two year consulting agreement with Bell Entertainment, Inc. whereby the
Company will be provided with advice with regard to corporate finance,
evaluations of business partners, mergers and acquisitions and such other
matters as requested. This agreement may be extended by mutual written agreement
of the parties. As consideration for the services provided the Company shall pay
a monthly fee of $5,000, plus $200/hour for any time in excess of 50 hours in
any calendar month. As additional compensation, the Company issued a total of
437,500 options, exercisable at annual intervals ranging from January 5, 1999 to
February 15, 2002 at varying exercise prices between $1.00 to $3.00.
1998 Compensatory Stock Option Plan. The Stock Option Plan ("Stock
Option Plan") has been adopted by the Board of Directors of the Company and
approved by the Company's stockholders. The purpose of the Stock Option Plan is
to promote the growth of the Company and its affiliates by linking the incentive
compensation of officers, key executives and directors with the profitability of
the Company. The Stock Option Plan is not subject to ERISA and is not a
tax-qualified plan. The Company has reserved an aggregate of 1,500,000 shares of
Common Stock for issuance upon the exercise of stock options granted under the
Plan.
The Stock Option Plan is administered by the members of the Board's
Compensation Committee who are disinterested directors ("Option Committee"). The
Stock Option Plan does not provide for the grant of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and provides only for the grant of non-qualified stock
options to purchase Common Stock of the Company ("Options") to eligible
employees. The Option Committee has discretion under the Stock Option Plan to
establish certain material terms of the Options granted to officers and
employees provided such grants are made in accordance with the Plan's
requirements.
All costs of the Stock Option Plan are borne by the Company. The
Company has reserved the right to amend or terminate the Plan, in whole or in
part, subject to the requirements of all applicable laws.
-15-
<PAGE>
The following table summarizes the grants that were made to the Named
Executive Officer during fiscal 1999.
OPTION/SAR GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED IN EXERCISE OR
GRANTED FISCAL YEAR BASE PRICE EXPIRATION
NAME (#)(1) (%) ($ PER SHARE)(2) DATE
- ---- ------------- ------------------- --------------------- ------------
<S> <C> <C> <C> <C>
Mark D. Cobb
President and Chief Executive Officer 750,000 40.0 2.17 1/15/2007
</TABLE>
- --------------
(1) The options granted under the employment agreement are intended to
qualify as "incentive stock options" under Section 422 of the Internal
Revenue Code, as amended (the "Code") to the maximum extent possible,
and any options that do not qualify will constitute non-qualified
stock options. Of these options, 125,000 became exercisable on January
5, 1999 with the remaining options becoming exercisable at annual
increments beginning on January 15, 1999 to January 15, 2002 at
varying exercise prices ranging from $1.50 per share to $3.00 per
share. Such options generally remain exercisable until the fifth
anniversary of the vesting date. In the case of a change in control,
as defined in the Stock Option Plan, all options granted become
immediately exercisable.
(2) Represents the weighted-average exercise price of options granted.
Actual exercise prices range from $1.00 per share to $3.00 per share.
The options granted by the Company to date have not been granted
pursuant to the compensatory stock option plan. Because no market for the
Company's common stock existed or the date of the grant, the exercise price of
the options was determined by negotiations between the Company and the grantee.
The Company believes that the exercise price of the options is greater than the
market value of the stock on the date of the grant.
1998 Employee Stock Compensation Plan. The 1998 Employee Stock
Compensation Plan (the "Compensation Plan") is intended to further the growth of
the Company and its affiliates by supporting and increasing the Company's
ability to attract, retain and compensate officers and key employees of the
Company. The Compensation Plan is not subject to ERISA and is not a
tax-qualified plan. The Company has reserved 1,000,000 shares of Common Stock
for issuance under the Compensation Plan.
The Compensation Committee of the Board of Directors ("Committee") will
be responsible for the administration of the Compensation Plan and will have
sole power to award Common Stock under the Compensation Plan. Subject to the
express provisions of the Compensation Plan, the Committee shall have full
authority and sole and absolute discretion to interpret the Compensation Plan,
to prescribe, amend and rescind rules and regulations relating to it, and to
make all other determinations which it believes to be necessary or advisable in
administering this Plan. The determination of those eligible to receive an award
shall rest in the sole discretion of the Committee, subject to the provisions of
the Compensation Plan. Awards may be made as compensation for services rendered,
directly or in lieu of other compensation payable, as a bonus in recognition of
past service or performance or may be sold to an employee as herein provided.
-16-
<PAGE>
The following table provides the value for "in-the-money" options,
which represent the positive spread between the exercise price of any such
existing stock options and the fiscal year-end price of the Common Stock, which
was $3.25 per share. The first installment of options became exercisable on
January 5, 1999. The Named Executive Officer did not exercise any vested options
during the fiscal year ended March 31, 1999.
AGGREGATED OPTIONS IN 1999 FISCAL YEAR AND 1999 FISCAL YEAR END OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
YEAR-END YEAR-END(1)
(#) ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
Mark D. Cobb
President and Chief Executive Officer...... 250,000 / 500,000 500,000 / 312,500
</TABLE>
- ---------------------
(1) The closing price per share of Common Stock on March 31, 1999 was
$3.25, and options have exercise prices ranging from $1.00 to $3.00
per share, which equals spreads of $2.25 per share to $0.25 per share.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 5, 1999, effective November 10, 1998, the Company entered
into a five year consulting agreement with Dunn Capital Corporation, beneficial
owner of approximately 27.6% of the Company's common stock, whereby the Company
will be provided with advice with regard to corporate finance, evaluations of
business partners, mergers and acquisitions and such other matters as requested.
This agreement may be extended by mutual written agreement of the parties. As
consideration for the services provided, the Company issued 150,000 shares of
the Company's common stock as a signing bonus. The Company pays a monthly fee of
$8,000 in semi-monthly installments. As additional compensation, the Company
issued a total of 750,000 options, exercisable at annual intervals ranging from
January 5, 1999 to February 15, 2002 at varying exercise prices from $1.00 to
$3.00. The Company also agreed to pay the organization a 2% finders fee, payable
in cash or stock at the Company's election, on the total value of any
acquisition, merger, reverse-merger and/or equity or debt financing introduced
to the Company, excluding Orlando Digital Telephone and Blazoon Systems,
Incorporate. In addition, the Company shall provide the organization with a
monthly unaccounted for expense allowance of $2,500.
On January 5, 1999, effective November 10, 1998, the Company entered
into a two year consulting agreement with Bell Entertainment, Inc., beneficial
owner of approximately 9.4% of the Company's common stock, whereby the Company
will be provided with advice with regard to corporate finance, evaluations of
business partners, mergers and acquisitions and such other matters as requested.
This agreement may be extended by mutual written agreement of the parties. As
consideration for the services provided the Company shall pay a monthly fee of
$5,000, plus $200/hour for any time in excess of 50 hours in any calendar month.
As additional compensation, the Company issued a total of 437,500 options,
exercisable at annual intervals ranging from January 5, 1999 to February 15,
2002 at varying exercise prices between $1.00 to $3.00.
-17-
<PAGE>
On March 22, 1999 and August 18, 1999, respectively, the Company issued
25,000 shares of common stock and 25,000 shares of common stock, respectively,
to Bell Entertainment, Inc. at $1.00 per share in connection with private
placements of the Company's common stock pursuant to Rule 504 of Regulation D of
the Securities Act of 1933, as amended. Bell Entertainment paid for the shares
by converting accrued, but unpaid consulting fees to equity in the Company.
PART II
ITEM 1. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the OTC Electronic Bulletin
Board under the symbol "UDIG." The table below shows the high and low sales
price during the periods indicated. The Company's common stock began trading on
March 26, 1999. At March 31, 1999, the last trading date in the Company's fiscal
year, the Company's common stock closed at $3.25. At August 20, 1999, there were
2,802,000 shares of the Company's common stock outstanding, which were held of
record by approximately 49 stockholders, not including persons or entities who
hold the stock in nominee or "street" name through various brokerage firms.
PRICE RANGE
------------------
QUARTER ENDED HIGH LOW
- -------------------------------------------------- ------ --------
Fiscal year ended March 31, 1999:
Fourth Quarter ended March 31, 1999(1).......... $ 3.50 $ 3.000
Fiscal year ended March 31, 2000:
First Quarter ended June 30, 1999(1)............ $ 6.50 $ 3.000
Second Quarter ended September 30, 1999(2)...... $ 4.75 $ 0.875
- -----------------
(1) Fourth quarter data is for the period of March 26, 1999 to March 31, 1999.
(2) Second quarter data is for the period of July 1, 1999 to September 14, 1999.
The Company did not pay dividends in fiscal year 1999 and does not
intend to do so for the foreseeable future. The Board of Directors considers
paying dividends, dependent on the results of operations and financial condition
of the Company, tax considerations, industry standards, economic conditions,
regulatory restrictions and other factors.
ITEM 2. LEGAL PROCEEDINGS
On February 2, 1999 Diverse Capital Corporation ("Diverse") acquired
Orlando Digital Telephone Corporation ("ODT") in exchange for 325,000 shares of
Diverse common stock and 625,000 shares of Diverse Convertible Preferred A
Stock. The 625,000 shares of Preferred A Stock were never issued. The 325,000
shares of common stock were issued to ODT shareholders. Diverse reserved the
right at the time of the closing to obtain an appraisal substantiating that the
approximate value of ODT was $2.8 million. Subsequently, USA Digital, Inc., the
successor to Diverse, obtained an appraisal which did not substantiate such
value,
-18-
<PAGE>
and, on May 14, 1999, in the Circuit Court in and for Hillsborough county,
Florida, filed a complaint against ODT and its former shareholders seeking
rescission of the ODT acquisition. The Defendants filed a Motion to Dismiss,
which was served on the Company on June 19, 1999. The motion to dismiss the
Orlando Digital action has not been heard. Defendants have not yet filed an
Answer or asserted any counterclaims or defenses. In addition to such other
relief that the Court may grant in the event that the Company does not prevail,
including enforcement of the acquisition agreement, the Company may be required
to issue 625,000 shares of Class A Convertible Preferred Stock to the ODT
shareholders.
On September 23, 1999 Orlando Digital through its attorney has
submitted a proposal to settle the matter. The terms of the settlement offer are
confidential. USA Digital has not decided whether it will accept this offer. A
hearing regarding Defendant's Motion to Dismiss has been postponed pending the
outcome of settlement discussions.
Other than described above, the Company is not involved in any pending
legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings in the aggregate are believed
by management to be immaterial to the Company's financial condition and results
of operations.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements concerning any matter of accounting
principle or financial statement disclosure between the Company and its
independent auditors.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
The following securities were issued by the Company since its
inception on March 5, 1999 without registering the securities under the
Securities Act. There were no underwriting discounts or commissions paid in
connection with the issuance of any of said securities, except as noted.
On March 9, 1999, to effect a redomicile and name change of Blazoon,
the Company issued 2,235,000 shares of its common stock to the shareholders of
Blazoon in a one for one share exchange pursuant to a Merger Agreement by and
among Blazoon Systems, Inc. and the Company dated March 9, 1999. Shares of
Series A Convertible Preferred Stock to be issued to the former shareholders of
Orlando Digital Telephone pursuant to the Merger Agreement were never issued.
See "Legal Proceedings."
On February 26, 1999, the Company issued 150,000 shares of restricted
common stock to Dunn Capital Corporation as a signing bonus for its Consulting
Agreement with the Company, pursuant to Section 4(2) of the Securities Act.
The sales of the securities described in the following table were made
in reliance upon Regulation D, Rule 504 of the Securities Act, which provides
exemptions for transactions not involving a public offering. With regard to the
Company's reliance upon the exemption from registration provided by Regulation
D, Rule 504 of the Securities Act of the sale of securities described below,
certain inquiries were made by the Company to establish that such sales
qualified for such exemption. In particular, for issuances occurring after April
7, 1999, the Company confirmed that with respect to the exemption claimed under
Regulation D, Rule 504 of the Securities Act (i) each investor made
representations that he or she was an "accredited investor" within the meaning
of Regulation D of the Securities Act in relation to such investments.
-19-
<PAGE>
NUMBER OF
SHARES OF
COMMON
PURCHASER DATE STOCK PER SHARE
- --------- ---- --------- ---------
Bell Entertainment, Inc. March 22, 1999 25,000 $ 1.00
Jim Brant March 24, 1999 5,000 $ 1.00
Jonathan Chapman March 25, 1999 5,000 $ 1.00
Newton R. Cobb March 24, 1999 5,000 $ 1.00
Dominic T. Dinicola March 25, 1999 15,000 $ 1.00
Donald E. Darden March 25, 1999 10,000 $ 1.00
Mark F. Darden March 25, 1999 10,000 $ 1.00
Equitable Research & Development, Inc. March 26, 1999 60,000 $ 1.00
Victor Front March 24, 1999 2,500 $ 1.00
K&M Associates March 25, 1999 12,000 $ 1.00
Blake Krisan March 25, 1999 1,250 $ 1.00
Jeff Krisan March 24, 1999 5,000 $ 1.00
William E. Miracle March 26, 1999 2,500 $ 1.00
Ashley Lowe March 24, 1999 1,250 $ 1.00
David Miller March 24, 1999 2,500 $ 1.00
Denise Miller March 24, 1999 2,500 $ 1.00
Timothy Riegert March 26, 1999 2,500* $ 1.00
David Seal March 25, 1999 5,000 $ 1.00
Jeffrey Walker March 24, 1999 2,500 $ 1.00
Mark Sand March 26, 1999 10,000 $ 1.00
Carol R. Buccino March 26, 1999 25,000 $ 1.00
Louis V. Buccino March 26, 1999 50,000 $ 1.00
Francesco Marchesini March 25, 1999 5,000 $ 1.00
Equitable Research & Development, Inc. August 18, 1999 75,000 $ 1.00
Bell Entertainment, Inc. August 18, 1999 25,000 $ 1.00
Funding USA Corp. September 9, 1999 36,000 $ 1.00
------- --------
TOTAL 398,000 $398,000
======= ========
* These shares of common stock were subsequently cancelled and are therefore not
included in total number of shares issued.
-20-
<PAGE>
The sales of securities described in the following table were made in
reliance upon Section 4(2) of the Securities Act, which provides exemptions for
transactions not involving a public offering and are restricted securities as
that term is defined by Rule 144, as promulgated under the Securities Act.
NUMBER OF
SHARES OF
COMMON CONSIDERATION
PURCHASER DATE STOCK PER SHARE
- --------- ---- --------- -------------
Cliff Gaither June 1, 1999 20,000 $ 6.00*
Susan Gaither June 1, 1999 5,000 $ 6.00*
Rich Clark June 1, 1999 25,000 $ 6.00*
Wayne Clark June 1, 1999 5,000 $ 6.00*
Louis V. Buccino August 2, 1999 25,000 $ 1.00*
--------
TOTAL 80,000 $355,000
====== ========
* This stock was issued as a loan to Renegade Corporation of America and the
consideration does not represent cash received by the Company but rather
represents valuation of shares for financial accounting purposes based on
the trading price of the Company's common shares near the service date.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Nevada General Corporation Law ("NGCL"), empowers a Nevada
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of
another corporation or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Similar indemnity is authorized for such persons against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the defense
or settlement of any such threatened, pending or completed action or suit if
such person acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation, and provided further
that (unless a court of competent jurisdiction otherwise provides) such person
shall not have been adjudged liable to the corporation. Any such indemnification
may be made only as authorized in each specific case upon a determination by the
stockholders or disinterested directors or by independent legal counsel in a
written opinion that indemnification is proper because the indemnitee has met
the applicable standard of conduct.
The NGCL further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
of a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him, and incurred
-21-
<PAGE>
by him in any such capacity, or arising out of his status as such, whether or
not the corporation would otherwise have the power to indemnify him under the
NGCL.
The Company's bylaws provide that the Company shall indemnify its
officers and trustees to the fullest extent permitted by law.
ITEM 8. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The Company is authorized to issue 50,000,000 shares of common stock,
$.001 par value per share; 5,000,000 shares of Class A preferred stock, $.001
par value per share; and 5,000,000 of Class B preferred stock, $.001 par value
per share. As of the date of this Registration Statement, there were 2,802,000
shares of common stock outstanding held by 49 holders of record. In addition,
there were 40,000 shares of Class B Convertible Preferred Stock, Series 2
outstanding and 50,000 shares of Class B Convertible Preferred Stock, Series 1
outstanding as of the date of this registration statement and no shares of Class
A Preferred Stock outstanding. See "Part II Item 2 - Legal Proceedings."
COMMON STOCK
The holders of common stock are entitled to one vote for each share held
of record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors.
The holders of shares of common stock are entitled to receive dividends
when, as and if declared by the Board of Directors in its discretion, out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the holders of common stock are entitled to share
ratably in the assets of the Company, if any, legally available for distribution
to them after payment of debts and liabilities of the Company after provision
has been made for each class of stock, if any, having liquidation preference
over the common stock.
The holders of common stock have no conversion, preemptive or other
subscription rights, and there are no redemption or sinking fund provisions
applicable to the common stock. All of the outstanding shares of common stock
are fully paid and non-assessable.
PREFERRED STOCK
In connection with an acquisition transaction (see "Legal Proceedings"),
the Company may be required to issue 625,000 shares of Class A Preferred Stock.
A series of Class B Preferred Stock was designated as "Class B
Convertible Redeemable Preferred Stock, Series 1" and consists of 50,000 shares,
$.001 par value per share. These shares are redeemable any time after April 20,
2002 upon 30 days written notice to the Company, and such shares are designated
at $4.00 per share. The Company also has the right of redemption under rights
-22-
<PAGE>
similar to the preferred shareholders. The shares have the right, at the option
of the holder at any time after July 9, 2000, to convert each outstanding share
of Class B Preferred Stock, Series 1 into five fully paid and nonassessable
shares of the Company's common stock. Additionally, each holder of these shares
shall be entitled to vote at all meetings of the shareholders and shall have one
vote for each share held (see Note 7 to "Financial Statements").
A series of Class B Preferred Stock was designated as "Class B
Convertible Redeemable Preferred Stock, Series 2" and consists of 40,000 shares,
$.001 par value per share. At any time after July 2, 2002, upon 30 days written
notice to the Company, holders of shares of Class B Preferred Stock, Series 2
may, at the option of the holder thereof, require that the Company redeem in
whole or in part, such shares as designated at $4.00 per share. The Company also
has the right of redemption under rights similar to the preferred shareholders.
The holders of these shares have the right, at their option at any time after
July 9, 2000, to convert each outstanding share of Class B Preferred Stock,
Series 2 into five fully paid and nonassessable shares of the Company's common
stock. Additionally, each holder of these shares shall be entitled to vote at
all meetings of the shareholders and shall have one vote for each share held
(see Note 7 to "Financial Statements").
PART F/S
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements of USA Digital, Inc. as of March 31, 1999 and
June 30, 1999 are included in this report.
-23-
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS.
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of USA Digital, Inc*........................................
3.2 Bylaws of USA Digital, Inc*..............................................................
4.3 Specimen of Stock Certificate of USA Digital, Inc.*......................................
10.1 Employment Agreement between USA Digital, Inc. and Mark D. Cobb*.........................
10.2 Consulting Agreement between USA Digital, Inc. and Dunn Capital Corporation*.............
10.3 Consulting Agreement between USA Digital, Inc. and Bell Entertainment, Inc*..............
10.4 1998 Compensatory Stock Option Plan*.....................................................
10.5 1998 Employee Stock Compensation Plan*...................................................
10.6 Agreement and Plan of Reorganization by and among Blazoon Systems, Inc. and Diverse
Capital Corporation dated February 26, 1999* ............................................
10.7 Acquisition Agreement made and entered into as of July 2, 1999 by and among USA Digital,
Inc., DSA Computer, Inc., and David Seal*................................................
10.8 Amendment to Acquisition Agreement by and among USA Digital, Inc., DSA Computers, Inc.
and David Seal* .........................................................................
10.9 Employment Agreement by and between DSA Computers, Inc. and David Seal*..................
10.10 Acquisition Agreement made and entered into as of June 7, 1999, by and among, USA
Digital, Inc., Telephone Engineering and Maintenance, Inc., and H. Ralph Cole*...........
10.11 Employment Agreement by and between Telephone Equipment Maintenance, Inc., and H.
Ralph Cole*..............................................................................
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.12 Merger Agreement dated March 9, 1999 between USA Digital, Inc. and Blazoon Systems, Inc.*.
21.1 Subsidiaries of the Registrant*...........................................................
23.1 Consent of Weinberg & Company, P.A........................................................
27.1 Financial Data Schedule (Submitted only with filing in electronic format).................
</TABLE>
ITEM 2. DESCRIPTION OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of USA Digital, Inc.*
3.2 Bylaws of USA Digital, Inc.*
4.3 Specimen of Stock Certificate of USA Digital, Inc.*
10.1 Employment Agreement between USA Digital, Inc. and Mark D. Cobb*
10.2 Consulting Agreement between USA Digital, Inc. and Dunn Capital
Corporation*
10.3 Consulting Agreement between USA Digital, Inc. and Bell
Entertainment, Inc.*
10.4 1998 Compensatory Stock Option Plan*
10.5 1998 Employee Stock Compensation Plan*
10.6 Agreement and Plan of Reorganization by and among
Blazoon Systems, Inc. and Diverse Capital Corporation
dated February 26, 1999*
10.7 Acquisition Agreement made and entered into as of July 2, 1999
by and among USA Digital, Inc., DSA Computer, Inc., and David
Seal*
-25-
<PAGE>
10.8 Amendment to Acquisition Agreement by and among
USA Digital, Inc., DSA Computer, Inc. and David Seal*
10.9 Employment Agreement by and between DSA Computers, Inc. and
David Seal*
10.10 Acquisition Agreement made and entered into as of June 7, 1999,
by and among, USA Digital, Inc., Telephone Engineering and
Maintenance, Inc., and H. Ralph Cole*
10.11 Employment Agreement by and between Telephone Equipment
Maintenance, Inc., and H. Ralph Cole*
10.12 Merger Agreement dated March 9, 1999 between USA Digital, Inc.
and Blazoon Systems, Inc.*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Weinberg & Company, P.A.
27.1 Financial Data Schedule (Submitted only with filing in
electronic format)
- ---------------
*Previously filed.
-26-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
USA DIGITAL, INC.
By: /s/ Mark D. Cobb
-------------------------------------
Mark D. Cobb
President and Chief Executive Officer
Dated: October 20, 1999
-27-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
PAGE 1 - INDEPENDENT AUDITORS' REPORT
PAGE 2 - BALANCE SHEET AS OF MARCH 31, 1999
PAGE 3 - STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE PERIOD FROM JULY 9, 1998
(INCEPTION) TO MARCH 31, 1999
PAGE 4 - STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION)
TO MARCH 31, 1999
PAGE 5 - STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION)
TO MARCH 31, 1999
PAGES 6 - 20 - NOTES TO FINANCIAL STATEMENT
AS OF MARCH 31, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
USA Digital, Inc.
We have audited the accompanying balance sheet of USA Digital, Inc. (a
Development Stage Company) as of March 31, 1999 and the related statements of
operations, changes in stockholders' equity and cash flows for the period from
July 9, 1998 (inception) to March 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
These 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USA Digital, Inc. as of March
31, 1999 and the results of its operations and its cash flows for the period
from July 9, 1998 (inception) to March 31, 1999 in conformity with generally
accepted accounting principles.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
July 15, 1999 except for Note 5(D)
as to which the date is October 18, 1999
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AS OF MARCH 31, 1999
ASSETS
CURRENT ASSETS
Cash $ 65,003
Prepaid expenses 57,065
----------
Total Current Assets 122,068
PROPERTY AND EQUIPMENT - NET 752,256
----------
TOTAL ASSETS $ 874,324
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 96,718
Capitalized lease obligation-current 28,191
----------
Total Current Liabilities 124,909
OTHER LIABILITIES
Capitalized lease obligation-non current 721,809
----------
Total Liabilities 846,718
----------
STOCKHOLDERS' EQUITY
Preferred stock-Class A, $.001 par value
5,000,000 shares authorized, none
issued and outstanding -
Preferred stock-Class B, $.001 par value
5,000,000 shares authorized, none issued
and outstanding -
Common stock, $0.001 par value, 50,000,000
shares authorized, 2,649,500 shares issued
and outstanding 2,650
Additional paid-in capital 877,614
Accumulated deficit during development stage (625,156)
----------
255,108
Less deferred consulting expense (227,502)
----------
Total Stockholders' Equity 27,606
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 874,324
==========
See accompanying notes to financial statements.
-28-
<PAGE>
<TABLE>
<CAPTION>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO MARCH 31, 1999
ACCUMULATED
DEFICIT
ADDITIONAL DURING DEFERRED
COMMON STOCK PAID-IN DEVELOPEMNT CONSULTING
SHARES AMOUNT CAPITAL STAGE EXPENSE TOTAL
------ ------ ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Common Stock Issuance 885,000 $ 885 $ - $ - $ - $ 885
Stock issued for consulting
expenses 25,000 25 24,975 - - 25,000
Common stock options issued
to consultants - - 614,378 - (227,502) 386,876
Acquisition of Orlando
Digital Telephone 325,000 325 - - - 325
Issuance of Common Stock
to stockholders of Blazoon 1,000,000 1,000 (1,000) - - -
Stock issued for cash 144,500 145 144,355 - - 144,500
Stock issued for consulting
fees and expense 270,000 270 94,906 - - 95,176
Net loss for the period
ended March 31, 1999 - - - (625,156) - (625,156)
---------- ------- ---------- ---------- --------- ---------
BALANCE, March 31, 1999 2,649,500 $ 2,650 $ 877,614 $ (625,156) $(227,502) $ 27,606
========== ======= ========== ========== ========= =========
</TABLE>
See accompanying notes to financial statements.
-29-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO MARCH 31, 1999
Income $ --
-----------
Expenses
Executive compensation 37,333
Consulting fees and expenses 502,762
Professional fees 27,589
Provision for doubtful loans 24,311
Office and other operational expenses 18,424
Auto expenses 5,000
Telephone 4,575
Insurance 1,654
Travel and entertainment 2,912
Depreciation 250
Repairs and maintenance 223
Bank charges 123
-----------
Total Expenses 625,156
-----------
NET LOSS DURING DEVELOPMENT STAGE $ (625,156)
===========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ $ (0.57)
===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 1,091,177
===========
See accompanying notes to financial statements
-30-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO MARCH 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(625,156)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization 250
Provision for doubtful loans 24,311
Consulting fees and expenses
incurred in exchange for common stock 120,176
Consulting expense recorded for issuance
of common stock options 386,876
Changes in assets and liabilities
(Increase) decrease in:
Prepaid expenses (57,065)
Increase (decrease) in:
Accounts payable and accrued expenses 96,718
Net cash used in operating activities (53,890)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (2,506)
Increase in loans receivable (24,311)
Net cash used in investing activities (26,817)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,355
Proceeds from additional paid in capital 144,355
---------
Net cash provided by financing activities 145,710
---------
INCREASE IN CASH AND CASH EQUIVALENTS 65,003
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD --
---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 65,003
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The Company acquired telephone switching equipment for debt under a capitalized
lease in the amount of $750,000.
See accompanying notes to financial statements.
-31-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Business Organization And Activity
USA Digital, Inc. ("the Company"), incorporated under the laws of
Nevada on March 5, 1999, is operating as a Development Stage Holding
Company whose mission is to build a highly integrated convergent
communications company. The Company seeks to acquire Internet service
providers, telephone interconnect companies, computer/network
integrators, and switchless resellers.
(B) Business Combinations
On March 4, 1999, Blazoon Systems Incorporated (Blazoon), an inactive
publicly held company with no recent operating history, consummated an
Agreement and Plan of Reorganization (the Acquisition) with Diverse
Capital Corp. (Diverse), a private corporation incorporated on July 9,
1998, whereby Blazoon issued 1,235,000 shares of its common stock to
the stockholders of Diverse in exchange for 100% of the issued and
outstanding common stock of Diverse, and 625,000 shares of its Class A
Preferred Stock to be issued to the stockholders of Orlando Digital
Telephone Corporation, a pending acquiree of Diverse (See Note 5(d)),
in exchange for 100% of the issued and outstanding preferred stock of
Diverse. The Class A Convertible Preferred stock was never issued (See
Note 5(d)).The preferred stock is convertible to common stock at a
one-for-one ratio for a one year period beginning February 2, 2000, has
dividend preference, is non-voting, and is subject to redemption at a
$4.00 liquidation value at the Company's option beginning February 2,
2004. Subsequent to the Acquisition, the prior shareholders of Diverse
owned approximately 55% of the voting common stock of Blazoon. Under
Generally Accepted Accounting Principles, a Company whose stockholders
receive over 50% of the voting stock of the legal acquirer in a
business combination is considered the acquirer for accounting
purposes. Accordingly, the transaction is accounted for as an
acquisition of Blazoon by Diverse, and a recapitalization of Diverse.
The balance sheet subsequent to the acquisition includes the net assets
of Blazoon and Diverse at historical costs and the operations of
Diverse since its inception and the operations of Blazoon since the
date of acquisition.
-32-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
(B) Business Combinations - (CONT'D)
On March 9, 1999 the Company consummated a merger agreement with
Blazoon, a State of Colorado corporation, to effect a redomicile and
name change of Blazoon, with the Company as the surviving entity.
(C) Use of Estimates
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(D) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchases with an original maturity of
three months or less to be cash equivalents.
(E) Earnings Per Share
Earnings per share are computed using the weighted average of common
shares outstanding as defined by Financial Accounting Standards No.
128, "Earnings per Share". At March 31, 1999 there were 1,937,500
incentive stock options that could potentially dilute basic EPS in the
future which were not included in the computation of diluted earnings
per share due to their antidilutive effect.
(F) Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
SFAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets
-33-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
(F) Income Taxes - (CONT'D)
and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, SFAS 109 generally
considers all expected future events other than enactment of changes in
the tax law or rates. Any available deferred tax assets arising from
net operating loss carryforwards and consulting expense relating to
common stock options issued to consultants have been offset by a
deferred tax valuation allowance on the entire amount.
(G) Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk or cash and cash equivalents.
(H) Stock Options
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting For Stock Based Compensation" ("SFAS 123"), the Company has
elected to account for Stock Options issued to employees and
consultants under Accounting Principles Board Opinion No. 25 "(APB
Opinion No. 25)" and related interpretations, and for stock options
issued to consultants in accordance with SFAS 123.
(I) New Accounting Pronouncements
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements. Statement No. 130, "Reporting
Comprehensive Income" establishes standards for reporting and display
of comprehensive income and its components, and is effective for fiscal
years beginning after December 15, 1997. Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial
-34-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
(I) New Accounting Pronouncements - (CONT'D)
reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and
major customers, and is effective for financial statements for periods
beginning after December 15, 1997. Statement No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits" revises
employers' disclosure requirements about pension and other
postretirement benefit plans and is effective for fiscal years
beginning after December 15, 1997. Statement No 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting
and reporting standards for derivative instruments and related
contracts and hedging activities. This statement is effective for all
fiscal quarters and fiscal years beginning after June 15, 1999. The
Company believes that its future adoption of these pronouncements will
not have a material effect on the Company's financial position or
results of operations.
(J) Financial Instruments
The Company follows Statement of Financial Accounting Standard No. 107
"Disclosures About Fair Value of Financial Instruments". Financial
instruments which potentially expose the Company to concentrations of
credit risk consist principally of cash, loans receivable and a capital
lease obligation. At March 31, 1999, the cash, loans receivable and
capital lease obligation approximated fair market value.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
declining balance method over the estimated economic useful life of 5
to 7 years when placed in service. Maintenance and repairs are charged
to expense as incurred. Major improvements are capitalized.
-35-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 2 - PROPERTY AND EQUIPMENT - (CONT'D)
Property and equipment at March 31, 1999 consisted of the following:
Computer equipment $ 2,506
Equipment held under
capital lease 750,000
----------
752,506
Less: Accumulated depreciation (250)
Total property and equipment $ 752,256
==========
Depreciation expense for the three months ended March 31, 1999 was
$250. (See Note 3)
NOTE 3 - CAPITAL LEASE OBLIGATION
The Company is the lessee of telephone switching equipment under a
capital lease expiring during 2004. The assets and liabilities under
the capital lease are recorded at the lower of the present value of the
minimum lease payments or the fair value of the asset. The asset will
be depreciated using the declining balance method over the estimated
economic useful life, and is expected to be placed in service in late
1999. Hence no depreciation has been provided for as of March 31, 1999.
The value of the property that was held under capital lease as of March
31, 1999 was $750,000.
Minimum future lease payments under the capital lease as of March 31,
1999 are as follows:
For the year ended March 31, 2000 $ 49,485
2001 197,940
2002 197,940
2003 197,940
2004 197,940
Subsequent to 2005 148,440
---------
Total minimum lease payments 989,685
Less: Amount representing interest (239,685)
Present value of net minimum
lease payment $ 750,000
=========
-36-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 3 - CAPITAL LEASE OBLIGATION - (CONT'D)
The interest rate on the capital lease is approximately 11.5% and is
imputed at the inception of the lease. The lease payments do not begin
until 90 days after the installation and subsequent operation of the
equipment, expected to be in late 1999. At lease inception, the present
value of the net minimum lease payments did not exceed the fair market
value of the leased asset.
NOTE 4 - STOCKHOLDERS' EQUITY
(A) Common and Preferred Stock
The Company has authorized 50,000,000 shares of common stock, $.001 par
value; 5,000,000 of Class A Preferred Stock, $.001 par value; and
5,000,000 shares of Class B Preferred Stock, $.001 par value. The
preferred stock will have such rights and preferences as determined by
the Board of Directors.
In connection with an acquisition transaction (Note 5D), the Company
may be required to issue 625,000 shares of Class A Preferred Stock.
A series of Class B Preferred Stock was designated as "Class B
Convertible Redeemable Preferred Stock, Series 1" and consists of
50,000 shares, $.001 par value per share. These shares are redeemable
any time after April 20, 2002 upon 30 days written notice to the
Company, and such shares are designated at $4.00 per share. The Company
also has the right of redemption under rights similar to the preferred
shareholders. The shares have the right, at the option of the holder at
any time after July 9, 2000, to convert each outstanding share of Class
B Preferred Stock, Series 1 into five fully paid and nonassessable
shares of the Company's common stock. Additionally, each holder of
these shares shall be entitled to vote at all meetings of the
shareholders and shall have one vote for each share held (See Note 6).
A series of Class B Preferred Stock was designated as "Class B
Convertible Redeemable Preferred Stock, Series 2" and consists of
40,000 shares, $.001 par value per share. At any time after July 2,
2002, upon 30 days written notice to the Company, holders of shares of
Class B Preferred Stock, Series
-37-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)
(A) Common and Preferred Stock - (CONT'D)
2 may, at the option of the holder thereof, require that the Company
redeem in whole or in part, such shares as designated at $4.00 per
share. The Company also has the right of redemption under rights
similar to the preferred shareholders. The holders of these shares have
the right, at their option at any time after July 9, 2000, to convert
each outstanding share of Class B Preferred Stock, Series 2 into five
fully paid and nonassessable shares of the Company's common stock.
Additionally, each holder of these shares shall be entitled to vote at
all meetings of the shareholders and shall have one vote for each share
held (See Note 6 for issuance of Class B Preferred Stock Series 2 after
June 30, 1999).
(B) Stock Compensation
(i) Stock Option Plan
The 1998 Compensatory Stock Option Plan (the "Plan") has been adopted
by the Board of Directors of the Company and approved by the Company's
stockholders. The plan was developed to provide a means whereby
directors, officers, consultants, advisors or agents, employees or
professional service providers of the Company may be granted
non-qualified stock options to purchase common stock of the Company.
The Plan does not provide for the issuance of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code. As of
March 31, 1999, the Company has reserved 1,500,000 shares of common
stock for issuance upon the exercise of options granted under the Plan.
The exercise price of options granted under the Plan shall not be less
than 85% of the Fair Market Value of a share of common stock on the
date the option is granted. The exercise period, expiration date and
vesting period shall be determined by the Compensation Committee of the
Board of Directors, however, the vesting period may not exceed ten
years. If the vesting period is not stated in the granting resolution,
then the option shall vest immediately.
As of March 31, 1999, no options have been granted under the Plan.
-38-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)
(B) Stock Compensation - (CONT'D)
(ii) Stock Options Granted Under Employment and Consulting
Agreements
During 1999 the Company issued 750,000 incentive stock options to an
officer and 1,187,500 incentive stock options to consultants pursuant
to certain employment and consulting agreements.
In accordance with SFAS 123, for options issued to employees, the
Company applies APB Opinion No. 25 and related interpretations in
accounting for the options issued. Accordingly, no compensation cost
has been recognized for options issued under the employment agreement
as of March 31, 1999 since the exercise price of the options as
stipulated in the option agreement exceeded the fair market value of
the stock on the grant date. Had compensation cost for the Company's
Plan been determined based on the fair value at the grant date for
awards under that plan, consistent with SFAS 123, the Company's net
loss for the year ended March 31, 1999 would have been increased to the
pro-forma amounts indicated below.
Net loss As reported $ (625,156)
Pro forma $ (855,989)
Net loss per share As reported $ (0.57)
Pro forma $ (0.78)
The effect of applying Statement No. 123 is not likely to be
representative of the effects on reported net income for future years
due to, among other things, the effects of vesting.
For options issued to consultants, the Company applies SFAS 123.
Accordingly, consulting expense of $386,876 was charged to operations
in 1999 with deferred consulting expense of $227,502 presented as a
deduction from stockholders' equity at March 31, 1999. The deferred
consulting expense will be recognized in the years 2000 through 2002.
The deferred tax
-39-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)
(B) Stock Compensation - (CONT'D)
(ii) Stock Options Granted Under Employment and Consulting
Agreements - (CONT'D)
asset of $131,538 resulting from the recognition of consulting expense
of $386,876 was fully offset by a valuation allowance at March 31, 1999
(See Note 1(F)).
For financial statement disclosure purposes and for purposes of valuing
stock options issued to consultants, the fair market value of each
stock option granted during 1999 was estimated on the date of grant
using the Black-Scholes Option-Pricing Model in accordance with SFAS
123 using the following weighted-average assumptions: expected dividend
yield 0%, risk-free interest rate of 5.59%, volatility 101% and
expected term of three years.
A summary of the options issued under the employment and consulting
agreements as of March 31, 1999 and changes during the year is
presented below:
Weighted
Number of Average
Options Exercise Price
------- --------------
Stock Options
Balance at beginning of period - $ -
Granted 1,937,500 $ 2.13
Exercised - -
Forfeited - $ -
--------- --------
Balance at end of period 1,937,500 $ 2.13
========= =======
Options exercisable at end
of period 687,500 $ 1.23
Weighted average fair value
of options granted during the period $ 0.51
The following table summarizes information
about stock options outstanding at
March 31, 1999:
-40-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)
(B) Stock Compensation - (CONT'D)
(ii) Stock Options Granted Under Employment and Consulting
Agreements - (CONT'D)
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at March 31, Contractual Exercise At March 31 Exercise
Price 1999 Life Price 1999 Price
----- ---- ---- ----- ---- -----
$1.00-$3.00 1,937,500 6.25 Years $ 2.13 687,500 $ 1.23
(iii) Employee Stock Compensation Plan
The 1998 Employee Stock Compensation Plan (Employee Compensation Plan)
has been adopted by the Board of Directors of the Company and approved
by the Company's stockholders. The Employee Compensation Plan was
developed to provide a means whereby directors, officers, consultants,
advisors or agents, employees or professional service providers of the
Company may be granted common stock of the Company. Grants under the
Employee Compensation Plan shall be determined by the Compensation
Committee of the Board of Directors. As of March 31, 1999, the Company
has reserved 1,000,000 shares of common stock for issuance under the
Employee Compensation Plan and no shares may be issued under the
Employee Compensation Plan after April 30, 2003. No shares have been
issued under the Employee Compensation Plan as of March 31, 1999.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
(A) Year 2000 Issue
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches.
The "Year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the
two-digit year value to 00. The issue is whether computer systems will
properly recognize date-sensitive information when the year
-41-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 5 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
(A) Year 2000 Issue - (CONT'D)
changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
The Company uses standard off the shelf accounting software package for
all of its accounting requirements. Management has contacted the
software vendor and determined that the accounting software is Year
2000 compliant. All internal management software is Microsoft based and
management continually monitors the Year 2000 status of such software.
Management has verified Year 2000 status with its primary vendors and
has not identified any Year 2000 issues with those vendors. Costs of
investigating internal and external Year 2000 compliance issues have
not been material to date. As a result, management believes that the
effect of investigating and resolving Year 2000 compliance issues on
the Company will not have a material effect on the Company's future
financial position or results of operations.
In addition to the effect of Year 2000 issues on the Company's
accounting and management systems, year 2000 issues may effect the
Company's products and programs as they are primarily computer related.
The Company's products have been developed and tested with regard to
year 2000 compliance. All products were deemed to be Year 2000
compliant. The costs of such development and testing and validating
were minimal and absorbed as part of the Company's normal quality
control procedures.
(B) Employment Agreement
On January 5, 1999 the Company entered into an employment agreement
with its President. The effective date of this agreement is November
10, 1998, and is for a period of five years at which time it can be
renewed by mutual agreement of both parties. The agreement may be
terminated at any time by mutual written agreement by the parties. The
consideration is $96,000 annually to be paid at regular payroll
periods. As additional compensation, the Company has issued a total of
750,000 options, which become exercisable at annual intervals
-42-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 5 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
(B) Employment Agreement - (CONT'D)
ranging from January 5, 1999 to January 15, 2002 at varying exercise
prices between $1.00 to $3.00. (See Note 4(B))
(C) Consulting Agreements
On January 5, 1999 the Company entered into a six month consulting
agreement with an individual whereby the Company will be provided with
identification, and introduction to a public shell for the purposes of
effecting a reverse merger. As consideration for the services provided
the Company issued 10,000 shares of the Company's common stock in March
1999.
On January 5, 1999, effective November 10, 1998, the Company entered
into a five year consulting agreement with a consulting organization
whereby the Company will be provided with advice with regard to
corporate finance, evaluations of business partners, mergers and
acquisitions and such other matters as requested. This agreement may be
extended by mutual written agreement of the parties. As consideration
for the services provided, the Company issued 150,000 shares of the
Company's common stock as a signing bonus. The Company pays a monthly
fee of $8,000 in semi-monthly installments. As additional compensation,
the Company issued a total of 750,000 options, which become exercisable
at annual intervals ranging from January 5, 1999 to February 15, 2002
at varying exercise prices from $1.00 to $3.00. (See Note 4(B)) The
Company also agreed to pay the organization a 2% finders fee, payable
in cash or stock at the Company's election, on the total value of any
acquisition, merger, reverse-merger and/or equity or debt financing
introduced to the Company, excluding Orlando Digital Telephone (See
Note 5(D)) and Blazoon Systems, Incorporated (See Note 1A). In
addition, the Company shall provide the organization with a monthly
unaccounted for expense allowance of $2,500.
On January 5, 1999, effective November 10, 1998, the Company entered
into a two year consulting agreement with another consulting
organization whereby the Company will be provided with advice with
regard to corporate finance, evaluations of business partners, mergers
and acquisitions and such other
-43-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 5 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
(C) Consulting Agreements - (CONT'D)
matters as requested. This agreement may be extended by mutual written
agreement of the parties. As consideration for the services provided
the Company shall pay a monthly fee of $5,000, plus $200/hr for any
time in excess of 50 hours in any calendar month. As additional
compensation, the Company issued a total of 437,500 options, which
become exercisable at annual intervals ranging from January 5, 1999 to
February 15, 2002 at varying exercise prices between $1.00 to $3.00.
(See Note 4(B))
On March 22, 1999, the Company entered into a six month consulting
agreement with a public relations organization whereby the Company will
be provided with advice with regard to public relations, the
development and implementation of strategic plans, and such other
matters as requested. This agreement may be extended by mutual written
agreement of the parties. As considerations for the services provided,
the Company issued 60,000 shares of the Company's common stock.
(D) Litigation
On February 2, 1999 Diverse Capital Corporation (Diverse) acquired
Orlando Digital Telephone Corporation (ODT) in exchange for 325,000
shares of Diverse common stock and 625,000 shares of Diverse
Convertible Preferred A stock. The 325,000 shares of common stock were
issued to ODT shareholders, however, the 625,000 shares of Class A
Convertible Preferred Stock was never issued (See Note 1(B). Diverse
reserved the right at the time of the closing to obtain an appraisal
substantiating that the approximate value of ODT was $2.8 million.
Subsequently, USA Digital, Inc., the successor to Diverse (See Note
1B)), obtained an appraisal which did not substantiate such value, and,
on May 14, 1999, in the Circuit Court in and for Hillsborough County,
Florida, filed a complaint against ODT and its former shareholders
seeking rescission of the ODT acquisition. The Defendants filed a
Motion to Dismiss, which was served on the Company on June 19, 1999. A
hearing on defendants' motion is set for September 27, 1999. Defendants
have not yet filed an Answer
-44-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 5 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
(D) Litigation - (CONT'D)
or asserted any counterclaims or defenses. In addition to such other
relief that the Court may grant in the event that the Company does not
prevail, including enforcement of the acquisition agreement, the
Company may be required to issue 625,000 shares of Class A Convertible
Preferred Stock to the ODT shareholders (See Note 1(B)). In
anticipation of the acquisition, the Company had advanced $24,311 to
ODT. An allowance for doubtful loans has been established for the total
advance as of March 31, 1999.
NOTE 6 - SUBSEQUENT EVENTS
On April 20, 1999 the Company entered into an agreement to acquire 100%
of the issued and outstanding stock of Telephone Engineering and
Maintenance, Inc. (T.E.A.M.), a Florida corporation engaged since 1986
in the business of selling and servicing telephone equipment, in
exchange for 50,000 shares of the Company's Convertible Preferred B,
Series 1 Stock which has been recorded based upon the net equity of the
acquiree which approximates fair market value of the acquiree's net
assets subject to revision based upon development of additional fair
market value data. The transaction is scheduled to close on or before
August 5, 1999. The T.E.A.M. acquisition was recorded under the
purchase method of accounting and accordingly, the results of
operations of T.E.A.M. will be included in the Company's consolidated
financial statements from the date of acquisition.
On June 2, 1999 the Company entered into an agreement with Premium
Internet, Corp. (Premium) to purchase Premium's $160,000 security
interest in Syncom, Inc., a Florida corporation currently doing
business as Gator.net, an Internet Service Provider in Gainesville,
Florida. Syncom, Inc is currently under reorganization pursuant to
Chapter 11 of the United States Bankruptcy Code. The purchase price for
this security interest was $80,000, payable over 6 months from the date
of the transaction. Under the terms of the agreement, Premium has
assigned its security interest in the name "Gator.net", the Internet
Service Provider's customer base, and
-45-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 6 - SUBSEQUENT EVENTS - (CONT'D)
some equipment, to the Company. Additionally, as of June 2, 1999, the
Company entered into various agreements with other parties to purchase
$130,000 in unsecured debt of Syncom, Inc. for the sum of $30,100.
On July 9, 1999 the Company purchased all of the issued and outstanding
stock of DSA Computers, Inc. (DSA.), a Florida based computer
hardware/network integration company that has been in business since
1991. The purchase price for the acquisition was 40,000 shares of the
Company's Convertible Preferred B, Series 2 Stock which has been
recorded based upon the net equity of the acquiree which approximates
fair market value of the acquiree's net assets subject to revision
based upon the receipt of additional fair market value data (See Note
4(A)). The DSA acquisition was recorded under the purchase method of
accounting and accordingly, the results of operations of DSA will be
included in the Company's consolidated financial statements from the
date of acquisition.
-46-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
PAGE 1 - ACCOUNTANTS' REVIEW REPORT
PAGE 2 - BALANCE SHEET AS OF JUNE 30, 1999
PAGE 3 - STATEMENT OF CHANGES IN STOCKHOLDERS'
DEFICIENCY FOR THE PERIOD FROM JULY 9, 1998
(INCEPTION) TO JUNE 30, 1999
PAGE 4 - STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 1999 AND FOR THE PERIOD
FROM JULY 9, 1998(INCEPTION) TO JUNE 30, 1999
PAGE 5 - STATEMENT OF CASH FLOWS FOR THE THREE
MONTHS ENDED JUNE 30, 1999 AND FOR THE PERIOD
FROM JULY 9, 1998(INCEPTION) TO JUNE 30, 1999
PAGES 6 - 19 - NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
<PAGE>
ACCOUNTANTS' REVIEW REPORT
To the Board of Directors of:
USA Digital, Inc.
We have reviewed the accompanying balance sheet of USA Digital, Inc. (a
Development Stage Company) as of June 30, 1999 and the related statements of
operations, changes in stockholders' deficiency and cash flows for the three
months then ended and for the period from July 9, 1998 (inception) to June 30,
1999, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of USA Digital, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
August, 3, 1999 except for Note 2 (ODT loan receivable)
as to which the date is October 18, 1999
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AS OF JUNE 30, 1999
ASSETS
CURRENT ASSETS
Cash $ 3,676
Loans receivable - current 14,632
Note receivable - current portion 32,000
Prepaid expenses 27,065
----------
Total Current Assets 77,373
PROPERTY AND EQUIPMENT - NET 752,873
----------
OTHER ASSETS
Note and loans receivable - noncurrent 71,600
----------
Total Other Assets 71,600
TOTAL ASSETS $ 901,846
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 212,110
Capitalized lease obligation-current 57,195
Loan payable 75,000
----------
Total Current Liabilities 344,305
OTHER LIABILITIES
Capitalized lease obligation-non current 692,805
----------
Total Liabilities 1,037,110
----------
STOCKHOLDERS' DEFICIENCY
Preferred stock-Class A, $.001 par value
5,000,000 shares authorized, none
issued and outstanding -
Preferred stock-Class B, $.001 par value
5,000,000 shares authorized, none issued
and outstanding -
Common stock, $0.001 par value, 50,000,000
shares authorized, 2,702,000 shares issued
and outstanding 2,702
Additional paid-in capital 1,205,062
Accumulated deficit during development stage (785,526)
----------
422,238
Less deferred consulting expense (227,502)
Less common stock advanced (330,000)
----------
Total Stockholders' Deficiency (135,264)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 901,846
==========
See accompanying notes to financial statements.
-47-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO JUNE 30, 1999
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
ADDITIONAL DURING DEFERRED COMMON
COMMON STOCK PAID-IN DEVELOPEMNT CONSULTING STOCK
SHARES AMOUNT CAPITAL STAGE EXPENSE ADVANCED TOTAL
------- ------- ------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock Issuance 885,000 $ 885 $ - $ - $ - $ - $ 885
Stock issued for consulting
expenses 25,000 25 24,975 - - - 25,000
Common stock options issued to
consultants - - 614,378 - (227,502) - 386,876
Acquisition of Orlando Digital
Telephone 325,000 325 - - - - 325
Issuance of Common Stock to
stockholders of Blazoon 1,000,000 1,000 (1,000) - - - -
Stock issued for cash 144,500 145 144,355 - - - 144,500
Stock issued for consulting
fees and expense 270,000 270 94,906 - - - 95,176
Net loss for the period ended
March 31, 1999 - - - (625,156) - - (625,156)
---------- ------- ---------- ---------- --------- ---------- ---------
Balance, March 31, 1999 2,649,500 $ 2,650 $ 877,614 $ (625,156) $(227,502) - $ 27,606
Stock refunded for cash (2,500) (3) (2,497) - - - (2,500)
Stock issued as loan 55,000 55 329,945 - - (330,000) -
Net loss for the three months
ended June 30, 1999 - - - (160,370) - - (160,370)
--------- -------- ---------- ---------- ---------- ---------- ---------
BALANCE, June 30, 1999 2,702,000 $ 2,702 $1,205,062 $ (785,526) $ (227,502) $ (330,000) $(135,264)
========= ======== ========== ========== ========== ========== =========
</TABLE>
See accompanying notes to financial statements.
-48-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND FOR THE
PERIOD FROM JULY 9, 1998 (INCEPTION) TO JUNE 30, 1999
Three months July 9, 1998
ended (Inception) to
June 30, 1999 June 30, 1999
-------------- ---------------
Income $ - $ -
---------- -----------
Expenses
Executive Compensation 24,844 62,177
Consulting fees and expense 88,800 591,562
Professional fees 32,163 59,752
Provision for doubtful loans - 24,311
Office and other operational expenses 9,162 27,586
Auto expenses 3,000 8,000
Telephone 1,114 5,689
Insurance 884 2,538
Travel and entertainment 285 3,197
Depreciation (64) 186
Bank charges 161 284
Repairs and maintenance - 223
---------- ----------
Total Expenses 160,349 785,505
---------- ----------
LOSS FROM OPERATIONS (160,349) (785,505)
INTEREST EXPENSE (21) (21)
NET LOSS DURING DEVELOPMENT STAGE $ (160,370) $ (785,526)
- --------------------------------- ========== ==========
NET LOSS PER COMMON SHARE
- BASIC AND DILUTED $ (0.06) $ (0.53)
========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 2,665,556 1,493,565
See accompanying notes to financial statements.
-49-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND FOR
THE PERIOD FROM JULY 9, 1998 (INCEPTION) to JUNE 30, 1999
Three months July 9, 1998
ended (Inception) to
June 30, 1999 June 30, 1999
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(160,370) $(785,526)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Depreciation and amortization (64) 186
Provision for doubtful loans - 24,311
Consulting fees and expenses incurred
In exchange for common stock - 120,176
Consulting expense recorded for issuance
of common stock options - 386,876
Changes in assets and liabilities
(Increase) decrease in:
Prepaid expenses 30,000 (27,065)
Increase (decrease) in:
Accounts payable and accrued expenses 27,892 124,610
--------- ---------
Net cash used in operating activities (102,542) (156,432)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (553) (3,059)
Acquisition of note receivable (20,000) (20,000)
Increase in loans receivable (10,732) (35,043)
--------- ---------
Net cash used in investing activities (31,285) (58,102)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 1,355
Proceeds from additional paid in capital - 144,355
Proceeds from loan 75,000 75,000
Refund of common stock (2,500) (2,500)
--------- ---------
Net cash provided by financing activities 72,500 218,210
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (61,327) 3,676
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 65,003 -
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,676 $ 3,676
========= =========
Cash paid during the year for:
Interest $ 21 $ 21
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The Company acquired notes and loans receivable for short-term debt of $87,500.
The Company issued 55,000 shares of common stock as a loan (see Note 7).
See accompanying notes to financial statements.
-50-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Business Organization And Activity
USA Digital, Inc. ("the Company"), incorporated under the laws of
Nevada on March 5, 1999, is a Development Stage Holding Company whose
mission is to build a highly integrated convergent communications
company. The Company seeks to acquire Internet service providers,
telephone interconnect companies, computer/network integrators, and
switchless resellers.
(B) Business Combinations
On March 4, 1999, Blazoon Systems Incorporated (Blazoon), an inactive
publicly held company with no recent operating history, consummated an
Agreement and Plan of Reorganization (the Acquisition) with Diverse
Capital Corp. (Diverse), a private corporation incorporated on July 9,
1998, whereby Blazoon issued 1,235,000 shares of its common stock to
the stockholders of Diverse in exchange for 100% of the issued and
outstanding common stock of Diverse, and 625,000 shares of its Class A
Preferred Stock to be issued to the stockholders of Orlando Digital
Telephone Corporation, a pending acquiree of Diverse (See Note 6(D)),
in exchange for 100% of the issued and outstanding preferred stock of
Diverse. The Class A Convertible Preferred Stock was never issued (See
Note 6(D)). The preferred stock is convertible to common stock at a
one-for-one ratio for a one year period beginning February 2, 2000, has
dividend preference, is non-voting, and is subject to redemption at a
$4.00 liquidation value at the Company's option beginning February 2,
2004. Subsequent to the Acquisition, the prior shareholders of Diverse
owned approximately 55% of the voting common stock of Blazoon. Under
Generally Accepted Accounting Principles, a Company whose stockholders
receive over 50% of the stock of the legal acquirer in a business
combination is considered the acquirer for accounting purposes.
Accordingly, the transaction is accounted for as an acquisition of
Blazoon by Diverse, and a recapitalization of Diverse. The balance
sheet subsequent to the acquisition includes the net assets of Blazoon
and Diverse at historical costs and the operations of diverse since its
inception and the operations of Blazoon since the date of acquisition.
On March 9, 1999 the Company consummated a merger agreement with
Blazoon, a State of Colorado corporation, to effect a redomicile and
name change of Blazoon, with the Company as the surviving entity.
-51-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
(C) Use of Estimates
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(D) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchases with an original maturity of
three months or less to be cash equivalents.
(E) Earnings Per Share
Earnings per share are computed using the weighted average of common
shares outstanding as defined by Financial Accounting Standards No.
128, "Earnings per Shares". At June 30, 1999 there were 1,937,500
incentive stock options that could potentially dilute basic EPS in the
future which were not included in the computation of diluted earnings
per share due to their antidilutive effect.
(F) Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
SFAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events
other than enactment of changes in the tax law or rates. Any available
deferred tax assets arising from net operating loss carryforwards and
consulting expense relating to common stock options issued to
consultants has been offset by a deferred tax valuation allowance on
the entire amount.
-52-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
(G) Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts, which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk or cash and cash equivalents.
(H) Stock Options
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting For Stock Based Compensation" ("SFAS 123"), the Company has
elected to account for Stock Options issued to employees and
consultants under Accounting Principles Board Opinion No. 25 "(APB
Opinion No. 25)" and related interpretations, and for stock options
issued to consultants in accordance with SFAS 123.
(I) New Accounting Pronouncements
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements. Statement No. 130, "Reporting
Comprehensive Income" establishes standards for reporting and display
of comprehensive income and its components, and is effective for fiscal
years beginning after December 15, 1997. Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers, and is effective for financial statements for periods
beginning after December 15, 1997. Statement No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits" revises
employers' disclosure requirements about pension and other
postretirement benefit plans and is effective for fiscal years
beginning after December 15, 1997. Statement No 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting
and reporting standards for derivative instruments and related
contracts and hedging activities. This statement is effective for all
fiscal quarters and fiscal years beginning after June 15, 1999. The
Company believes that its adoption of these pronouncements will not
have a material effect on the Company's financial position or results
of operations.
-53-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
(J) Financial Instruments
The Company follows Statement of Financial Accounting Standard No. 107
"Disclosures About Fair Value of Financial Instruments" Financial
instruments which potentially expose the Company to concentrations of
credit risk consist principally of cash, loans and note receivable and
a capital lease obligation. At March 31, 1999, the cash, loans and note
receivable and capital lease obligation approximated fair market value.
NOTE 2 - LOANS RECEIVABLE
(A) Loans Receivable - Current
The following schedule reflects loans receivable to non-related
parties as of June 30, 1999:
Loan receivable from
non-related party, secured 8,132
Loan receivable from
non-related party, current portion 6,500
TOTAL LOANS RECEIVABLE - CURRENT $ 14,632
-------------------------------- ========
A loan receivable of $24,311 representing an advance to Orlando Digital
Telephone Corporation (ODT) was given in the course of the planned
acquisition of ODT. The Company filed a complaint against ODT seeking
rescission of the ODT acquisition. An allowance for doubtful loans has
been established for the total amount during the period ended March 31,
1999 (See Note 6(D)).
The loan receivable of $8,132 represents a cash loan given to the
purchaser of all of the outstanding common stock of Syncom, Inc. This
loan is secured by the common stock acquired (See Note 7).
The loan receivable of $6,500 represents the current portion of the
proposed unsecured claims settlement against Syncom, Inc. acquired from
Premium Internet, Corp. (Premium) as of June 2, 1999 (See Note 7)
-54-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 2 - LOANS RECEIVABLE - CURRENT - (CONT'D)
(B) Loans Receivable - Non-current
The notes and loans receivable - non-current totaling $71,600 represent
the non-current portion of the proposed secured claims settlement of
$48,000 and the proposed unsecured claims settlement of $23,600 against
Syncom, Inc., acquired from Premium as of June 2, 1999 (See Note 7).
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
declining balance method over the estimated economic useful life of 5
to 7 years when placed in service. Maintenance and repairs are charged
to expense as incurred. Major improvements are capitalized.
Property and equipment at June 30, 1999 consisted of the following:
Computer equipment $ 3,059
Equipment held under
capital lease 750,000
----------
753,059
Less: Accumulated depreciation (186)
Total property and equipment $ 752,873
==========
Depreciation expense for the three months ended June 30, 1999 was
$(64). (See Note 4)
NOTE 4 - LOAN PAYABLE AND CAPITAL LEASE OBLIGATION
(A) Capital Lease Obligation
The Company is the lessee of telephone switching equipment under a
capital lease expiring during 2004. The assets and liabilities under
the capital lease are recorded at the lower of the present value of the
minimum lease payments or the fair value of the asset. The asset will
be depreciated using the declining balance method over the estimated
economic useful life, and is expected to be placed in service in late
1999. Hence no depreciation has been provided for as of June 30, 1999.
The value of the property held under capital lease as of June 30, 1999
was $750,000.
-55-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 4 - CAPITAL LEASE OBLIGATION - (CONT'D)
Minimum future lease payments under the capital lease as of June 30,
1999 are as follows:
For the year ended June 30, 2000 $ 98,970
2001 197,940
2002 197,940
2003 197,940
2004 197,940
Subsequent to 2005 98,955
---------
Total minimum lease payments 989,685
Less: Amount representing interest (239,685)
Present value of net minimum
lease payment $ 750,000
=========
The interest rate on the capital lease is approximately 11.5% and is
imputed at the inception of the lease. The lease payments do not begin
until 90 days after the installation and subsequent operation of the
equipment, expected to be in late 1999. At lease inception, the present
value of the net minimum lease payments did not exceed the fair market
value of the leased asset.
(B) Loan Payable
On May 28, 1999, the Company received a loan of $75,000 from an
investor. The loan was converted to 75,000 shares of the Company's
common stock in August 1999.
NOTE 5 - STOCKHOLDERS' DEFICIENCY
(A) Common and Preferred Stock
The Company has authorized 50,000,000 shares of common stock, $.001 par
value; 5,000,000 of Class A Preferred Stock, $.001 par value; and
5,000,000 shares of Class B Preferred Stock, $.001 par value. The
preferred stock will have such rights and preferences as determined by
the Board of Directors.
In connection with an acquisition transaction (See Note 6D), the
Company may be required to issue 625,000 shares of Class A Preferred
Stock.
A series of Class B Preferred Stock was designated as "Class B
Convertible Redeemable Preferred Stock, Series 1" and consists of
50,000 shares, $.001 par value per share. These shares are
-56-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 5 - STOCKHOLDERS' DEFICIENCY (CONT'D)
(A) Common and Preferred Stock - (CONT'D)
redeemable any time after April 20, 2002 upon 30 days written notice
to the Company, and such shares are designated at $4.00 per share.
The Company also has the right of redemption under rights similar to
the preferred shareholders. The shares have the right, at the option of
the holder at any time after July 9, 2000, to convert each outstanding
share of Class B Preferred Stock, Series 1 into five fully paid and
nonassessable shares of the Company's common stock. Additionally, each
holder of these shares shall be entitled to vote at all meetings of the
shareholders and shall have one vote for each share held (See Note 8).
A series of Class B Preferred Stock was designated as "Class B
Convertible Redeemable Preferred Stock, Series 2" and consists of
40,000 shares, $.001 par value per share. At any time after July 2,
2002, upon 30 days written notice to the Company, holders of shares of
Class B Preferred Stock, Series 2 may, at the option of the holder
thereof, require that the Company redeem in whole or in part, such
shares as designated at $4.00 per share. The Company also has the right
of redemption under rights similar to the preferred shareholders. The
holders of these shares have the right, at their option at any time
after July 9, 2000, to convert each outstanding share of Class B
Preferred Stock, Series 2 into five fully paid and nonassessable shares
of the Company's common stock. Additionally, each holder of these
shares shall be entitled to vote at all meetings of the shareholders
and shall have one vote for each share held (See Note 8 for issuance of
Class B Preferred Stock Series 2 after June 30, 1999).
(B) Stock Compensation
(i) Stock Option Plan
The 1998 Compensatory Stock Option Plan (the "Plan") has been adopted
by the Board of Directors of the Company and approved by the Company's
stockholders. The plan was developed to provide a means whereby
directors, officers, consultants, advisors or agents, employees or
professional service providers of the Company may be granted
non-qualified stock options to purchase common stock of the
-57-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 5 - STOCKHOLDERS' DEFICIENCY (CONT'D)
(B) Stock Compensation - (CONT'D)
(i) Stock Option Plan - (CONT'D)
Company. The Plan does not provide for the issuance of "incentive stock
options" within the meaning of Section 422 of the Internal Revenue
Code. As of June 30, 1999, the Company has reserved 1,500,000 shares of
common stock for issuance upon the exercise of options granted under
the Plan.
The exercise price of options granted under the Plan shall not be less
than 85% of the Fair Market Value of a share of common stock on the
date the option is granted. The exercise period, expiration date and
vesting period shall be determined by the Compensation Committee of the
Board of Directors, however, the vesting period may not exceed ten
years. If the vesting period is not stated in the granting resolution,
then the option shall vest immediately.
As of June 30, 1999, no options have been granted under the Plan.
(ii) Stock Options Granted Under Employment and Consulting
Agreements
During the year ended March 31, 1999 the Company issued 750,000
incentive stock options to an officer and 1,187,500 incentive stock
options to consultants pursuant to certain employment and consulting
agreements. There were no stock options issued under employment or
consulting agreements for the three months ended June 30, 1999.
A summary of the options issued under the employment and consulting
agreements as of June 30, 1999 and changes during the three month
period ended June 30, 1999 is presented below:
Number of Weighted Average
Options Exercise Price
---------- ----------------
Stock Options
Balance at beginning of period 1,937,500 $ 2.13
Granted - $ -
Exercised - -
Forfeited - $ -
--------- --------
Balance at end of period 1,937,500 $ 2.13
========= ========
Options exercisable at end of period 687,500 $ 1.23
The following table summarizes information about stock options
outstanding at June 30, 1999:
-58-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 5 - STOCKHOLDERS' DEFICIENCY (CONT'D)
(B) Stock Compensation - (CONT'D)
(ii) Stock Options Granted Under Employment and Consulting
Agreements - (CONT'D)
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at June 30, Contractual Exercise At June 30 Exercise
Price 1999 Life Price 1999 Price
--------- -------- -------- ------- -------- --------
$1.00-$3.00 1,937,500 6.00 Years $ 2.13 687,500 $ 1.23
(iii) Employee Stock Compensation Plan
The 1998 Employee Stock Compensation Plan (Employee Compensation Plan)
has been adopted by the Board of Directors of the Company and approved
by the Company's stockholders. The plan was developed to provide a
means whereby directors, officers, consultants, advisors or agents,
employees or professional service providers of the Company may be
granted common stock of the Company. Grants under the Employee
Compensation Plan shall be determined by the Compensation Committee of
the Board of Directors. As of June 30, 1999, the Company has reserved
1,000,000 shares of common stock for issuance under the Employee
Compensation Plan and no shares may be issued under the Employee
Compensation Plan after April 30, 2003. No shares have been issued
under the Employee Compensation Plan as of June 30, 1999.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
(A) Year 2000 Issue
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches.
The "Year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the
two-digit year value to 00. The issue is whether computer systems will
properly recognize date-sensitive information when the year changes to
2000. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail.
-59-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
(A) Year 2000 Issue - (CONT'D)
The Company uses standard off the shelf accounting software package for
all of its accounting requirements. Management has contacted the
software vendor and determined that the accounting software is Year
2000 compliant. All internal management software is Microsoft based and
management continually monitors the Year 2000 status of such software.
Management has verified Year 2000 status with its primary vendors and
has not identified any Year 2000 issues with those vendors. Costs of
investigating internal and external Year 2000 compliance issues have
not been material to date. As a result, management believes that the
effect of investigating and resolving Year 2000 compliance issues on
the Company will not have a material effect on the Company's future
financial position or results of operations.
In addition to the effect of Year 2000 issues on the Company's
accounting and management systems, year 2000 issues may effect the
Company's products and programs as they are primarily computer related.
The Company's products have been developed and tested with regard to
year 2000 compliance. All products were deemed to be Year 2000
compliant. The costs of such development and testing and validating
were minimal and absorbed as part of the Company's normal quality
control procedures.
(B) Employment Agreement
On January 5, 1999 the Company entered into an employment agreement
with its President. The effective date of this agreement is November
10, 1998, and is for a period of five years at which time it can be
renewed by mutual agreement of both parties. The agreement may be
terminated at any time by mutual written agreement by the parties. The
consideration is $96,000 annually to be paid at regular payroll
periods. As additional compensation, the Company has issued a total of
750,000 options excisable at annual intervals ranging from Jan. 5, 1999
to January 15, 2002 at varying exercise prices between $1.00 to $3.00.
(See Note 5(B))
(C) Consulting Agreements
On January 5, 1999 the Company entered into a six month consulting
agreement with an individual whereby the Company will be provided
-60-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONT'D)
(C) Consulting Agreements - (CONT'D)
with identification, and introduction to a public shell for the
purposes of effecting a reverse merger. As consideration for the
services provided the Company issued 10,000 shares of the Company's
common stock in March 1999.
On January 5, 1999, effective November 10, 1998, the Company entered
into a five year consulting agreement with a consulting organization
whereby the Company will be provided with advice with regard to
corporate finance, evaluations of business partners, mergers and
acquisitions and such other matters as requested. This agreement may be
extended by mutual written agreement of the parties. As consideration
for the services provided, the Company issued 150,000 shares of the
Company's common stock as a signing bonus. The Company pays a monthly
fee of $8,000 in semi-monthly installments. As additional compensation,
the Company issued a total of 750,000 options, exercisable at annual
intervals ranging from January 5, 1999 to February 15, 2002 at varying
exercise prices from $1.00 to $3.00. (See Note 5(B)). The Company also
agreed to pay the organization a 2% finders fee, payable in cash or
stock at the Company's election, on the total value of any acquisition,
merger, reverse-merger and/or equity or debt financing introduced to
the Company, excluding Orlando Digital Telephone (See Note 6(D)) and
Blazoon Systems, Incorporated (See Note 1(A)). In addition, the Company
shall provide the organization with a monthly unaccounted for expense
allowance of $2,500.
On January 5, 1999, effective November 10, 1998, the Company entered
into a two year consulting agreement with another consulting
organization whereby the Company will be provided with advice with
regard to corporate finance, evaluations of business partners, mergers
and acquisitions and such other matters as requested. This agreement
may be extended by mutual written agreement of the parties. As
consideration for the services provided the Company shall pay a monthly
fee of $5,000, plus $200/hr for any time in excess of 50 hours in any
calendar month. As additional compensation, the Company issued a total
of 437,500 options, exercisable at annual intervals ranging from
January 5, 1999 to February 15, 2002 at varying exercise prices between
$1.00 to $3.00. (See Note 5(B)).
On March 22, 1999, the Company entered into a six month consulting
agreement with a public relations organization whereby the Company
-61-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONT'D)
(C) Consulting Agreements - (CONT'D)
will be provided with advice with regard to public relations, the
development and implementation of strategic plans, and such other
matters as requested. This agreement may be extended by mutual written
agreement of the parties. As consideration for the services provided,
the Company issued 60,000 shares of the Company's common stock.
(D) Litigation
On February 2, 1999 Diverse Capital Corporation (Diverse) acquired
Orlando Digital Telephone Corporation (ODT) in exchange for 325,000
shares of Diverse common stock and 625,000 shares of Diverse
Convertible Preferred A stock. The 325,000 shares of common stock were
issued to ODT shareholders, however, the 625,000 shares of Class A
Convertible Preferred Stock was never issued (See Note 1(B)). Diverse
reserved the right at the time of the closing to obtain an appraisal
substantiating that the approximate value of ODT was $2.8 million.
Subsequently, USA Digital, Inc., the successor to Diverse (See Note
1(B)), obtained an appraisal which did not substantiate such value,
and, on May 14, 1999, in the Circuit Court in and for Hillsborough
County, Florida, filed a complaint against ODT and its former
shareholders seeking rescission of the ODT acquisition. The Defendants
filed a Motion to Dismiss, which was served on the Company on June 19,
1999. A hearing on defendants' motion is set for September 27, 1999.
Defendants have not yet filed an Answer or asserted any counterclaims
or defenses.
In addition to such other relief that the Court may grant in the event
that the Company does not prevail, including enforcement of the
acquisition agreement, the Company may be required to issue 625,000
shares of Class A Convertible Preferred Stock to the ODT shareholders.
(See Notes 1(B) and 2)
NOTE 7 - ACQUISITION OF SECURED AND UNSECURED CLAIMS
On June 2, 1999 the Company entered into an agreement with Premium
Internet, Corp. (Premium) to purchase Premium's $160,000 secured claim
against Syncom, Inc., a Florida corporation currently doing business as
Gator.net, an Internet Service Provider in Gainesville, Florida.
Syncom, Inc. is currently under reorganization pursuant to Chapter 11
of the United States Bankruptcy Code. The purchase price for this
security interest was $80,000, payable over 6 months from the date of
-62-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 7 - ACQUISITION OF SECURED AND UNSECURED CLAIMS - (CONT'D)
the transaction. Under the terms of the agreement, Premium has assigned
its security interest in the name "Gator.net", the Internet Service
Provider's customer base, and some equipment, to the Company.
Additionally, as of June 2, 1999, the Company entered into agreements
with other parties to purchase $130,000 in unsecured debt of Syncom,
Inc. for the sum of $30,100. According to the proposed plan of
reorganization, this unsecured debt will be repaid $0.25 on every $1.00
owed over a period of five years, resulting in a total amount due to
the Company of $32,500 and a current amount due of $6,500 (See Note 2).
As of June 30, 1999, the Company has paid $20,000 to Premium and a
total of $2,600 to the sellers of the unsecured debt in accordance
with the agreements.
Additionally, the Company advanced an amount of $8,132 cash and 55,000
shares of its common stock valued at $330,000 or $6.00 per share based
upon the trading price of the common stock on June 1, 1999 to the
purchaser of all of the outstanding common stock of Syncom, Inc. The
advances of common stock is presented as a deduction from stockholders'
equity. The total advances, aggregating $338,132, is secured by the
common stock acquired and evidenced by a promissory note accruing
interest at 8% per annum. The Company has the right to obtain the stock
of Syncom in satisfaction of amounts due under the promissory note.
There are no obligations to Renegade if the plan of reorganization is
not approved.
NOTE 8 - SUBSEQUENT EVENTS
On April 20, 1999 the Company entered into an agreement to acquire 100%
of the issued and outstanding stock of Telephone Engineering and
Maintenance, Inc. (T.E.A.M.), a Florida corporation engaged since 1986
in the business of selling and servicing telephone equipment, in
exchange for 50,000 shares of the Company's Convertible Preferred B,
Series 1 Stock which has been recorded based upon the net equity of the
acquiree which approximates fair market value of the acquiree's net
assets subject to revision based upon development of additional fair
market value data. The transaction closed on August 5, 1999 (See Note
5(A)). The T.E.A.M. acquisition was recorded under the purchase method
of accounting and accordingly, the results of operations of T.E.A.M.
will be included in the Company's consolidated financial statements
from the date of acquisition.
-63-
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 8 - SUBSEQUENT EVENTS - (CONT'D)
On July 9, 1999 the Company purchased all of the issued and outstanding
stock of DSA Computers, Inc. (DSA.), a Florida based computer
hardware/network integration company that has been in business since
1991. The purchase price for the acquisition was 40,000 shares of the
Company's Convertible Preferred B, Series 2 Stock which has been
recorded based upon the net equity of the acquiree which approximates
fair market value of the acquiree's net assets subject to revision
based upon development of additional fair market value data (See Note
5(A)). The DSA acquisition was recorded under the purchase method of
accounting and accordingly, the results of operations of DSA will be
included in the Company's consolidated financial statements from the
date of acquisition.
-64-
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<CURRENCY> US DOLLAR
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,676
<SECURITIES> 0
<RECEIVABLES> 70,943
<ALLOWANCES> 0
<INVENTORY> 752,873
<CURRENT-ASSETS> 143,459
<PP&E> 269,510
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,165,842
<CURRENT-LIABILITIES> 311,180
<BONDS> 0
2,722
0
<COMMON> 335,604
<OTHER-SE> (374,339)
<TOTAL-LIABILITY-AND-EQUITY> 1,165,842
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 160,349
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (160,370)
<INCOME-TAX> 0
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