================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-SB
-------------------
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)
<TABLE>
<CAPTION>
<S> <C>
NEVADA 59-3560920
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
USA DIGITAL, INC.
P.O. BOX 172574
TAMPA, FL 33672
(Address of principal executive offices)
-------------------
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)
================================================================================
<PAGE>
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 March 9, 1999, Blazoon Systems Incorporated ("Blazoon"), a Colorado
corporation, consummated a Merger Agreement (the "Acquisition") with Diverse
Capital Corp. ("Diverse"), a private corporation, 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 in exchange for 100% of the issued and
outstanding preferred stock of Diverse. 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 to effect a redomicile and name change of Blazoon, with the Company as
the surviving entity.
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
-1-
<PAGE>
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 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
-2-
<PAGE>
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
o Local and long distance telephone services
o Communications equipment sales and service
o Computer and network integration and wireless solutions
-3-
<PAGE>
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 beginning of the
third 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, 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 that following that period 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, 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.
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.
-4-
<PAGE>
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 it is
expected to take delivery of within 10 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 once the plan for
reorganization is approved by the Court.
-5-
<PAGE>
**(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
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
various strategic vendors, and Internet service providers, as well as switchless
resellers, the Company will build a customer base that will purchase its
business solutions and applications. 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.
-6-
<PAGE>
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 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 3rd fiscal quarter 1999. Further, the
Company is currently in negotiations with Siemen's for the lease of three
additional remote switches 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. 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 beginning of the third fiscal quarter 1999.
The Company has entered into nine Interconnection/reseller agreements
with BellSouth covering each of the nine BellSouth states. 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 agreement provides for provides 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,
-7-
<PAGE>
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. 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 12, 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 20%. The purchase price of the acquisition is 50,000 shares
of the Company's Class B Convertible Preferred Stock, Series 1.
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 $168,917 and $160,349 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.
-8-
<PAGE>
CASH FLOW ACTIVITY
During the periods ended March 31, 1999 and June 30, 1999, the Company
received proceeds of $144,500 and $72,000, respectively, from the sale of common
stock pursuant to Regulation D, Rule 504 of the Securities Act of 1933, as
amended. Additionally, $90,176 and $160,349 in expenses, respectively, that were
incurred as a result of various consulting fees were exchanged for common stock
in the Company. The net result to the Company for the periods was an increase in
its cash position of $62,970 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 has currently initiated a
private placement 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.
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 June 30, 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.
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 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.
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, the Company issued 2,235,000 shares of its common
stock and 625,000 shares of Series A Convertible Preferred Stock to the
shareholders of Blazoon Systems, Inc., a Colorado corporation, 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. The shares of Series A Convertible
Preferred Stock were subsequently canceled by the Company. See "Legal
Proceedings."
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
Jeff Krisan March 24, 1999 7,500 $ 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
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
======== ========
-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 $ 1.00
Susan Gaither June 1, 1999 5,000 $ 1.00
Rich Clark June 1, 1999 25,000 $ 1.00
Wayne Clark June 1, 1999 5,000 $ 1.00
Louis V. Buccino August 2, 1999 25,000 $ 1.00
--------
TOTAL 80,000 $355,000
====== ========
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 5, 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 - 19 - 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
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AS OF MARCH 31, 1999
ASSETS
CURRENT ASSETS
Cash $ 65,003
Loan receivables 24,311
Prepaid expenses 57,065
----------
Total Current Assets 146,379
PROPERTY AND EQUIPMENT - NET 752,256
----------
TOTAL ASSETS $ 898,635
==========
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 263,236
Accumulated deficit during development stage (213,969)
----------
Total Stockholders' Equity 51,917
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 898,635
==========
See accompanying notes to financial statements.
2
<PAGE>
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
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
ADDITIONAL DURING
COMMON STOCK PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
--------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Common Stock Issuance 885,000 $ 885 $ -- $ $ 885
Stock Issued For:
Cash 144,500 145 144,355 -- 144,500
Consulting fees and expenses 295,000 295 119,881 -- 120,176
Acquisition of Orlando
Digital Telephone 325,000 325 -- -- 325
Issuance of Common Stock
to stockholders of Blazoon 1,000,000 1,000 (1,000) -- --
Net loss for the period
ended March 31, 1999 -- -- -- (213,969) (213,969)
--------- ------- ---------- ----------
BALANCE, March 31, 1999 2,649,500 $ 2,650 $ 263,236 $ (213,969) $ 51,917
========= ======= ========== ========== =========
</TABLE>
See accompanying notes to financial statements.
3
<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 115,886
Professional fees 27,589
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 213,969
----------
NET LOSS DURING DEVELOPMENT STAGE $ (213,969)
==========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.16)
==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 1,336,887
==========
See accompanying notes to financial statements
4
<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 $(213,969)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization 250
Consulting fees and expenses
incurred in exchange for common stock 120,176
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.
5
<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), a public
shell, 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.
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.
6
<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)
(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". The assumed exercise of common stock
equivalents was not utilized since the effect was antidilutive.
(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 has
been offset by a deferred tax valuation allowance on the entire amount.
7
<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)
(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", 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.
(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.
8
<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)
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.
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)
9
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
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
=========
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.
10
<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)
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 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).
11
<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
(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.
(ii) Stock Options Granted Under Employment and Consulting
Agreements
During 1999 the Company issued 1,937,500 incentive stock options
pursuant to certain employment and consulting agreements.
In accordance SFAS 123, the Company applies APB Opinion No. 25 and
related interpretations in accounting for the options issued under the
employment and consulting agreements. The Company considers consultants
to be employees similar to its definition of employees pursuant to the
plan discussed in Note 4(B)(i) above. Accordingly, no compensation cost
has been recognized for options issued under the employment and
consulting agreements as of March 31, 1999 since the exercise price of
the options as stipulated in the option agreements.
12
<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)
exceeded the fair market value of the stock on the grant dates. Had
compensation cost for the Company's Plan been determined based on the
fair value at the grant dates 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 $ (213,969)
Pro forma $ (831,678)
Net loss per share As reported $ (0.16)
Pro forma $ (0.62)
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 financial statement disclosure purposes, 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
13
<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)
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:
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 (the " 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 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.
14
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
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 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
15
<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)
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 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.
16
<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)
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, 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
17
<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)
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 Note 1(B).
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 is assumed to approximate fair market value of the
acquiree's net assets, subject to revision based upon an audit of the
financial statements of the acquiree and 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 ISP's
customer base, and some equipment, to the Company. Additionally, as of
the closing date, 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.
18
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 6 - 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 is assumed to
approximate fair market value of the acquiree's net assets, subject to
revision based upon an audit of the financial statements of the
acquiree and development 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.
19
<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'
EQUITY 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' equity 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
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AS OF JUNE 30, 1999
ASSETS
CURRENT ASSETS
Cash $ 3,676
Loans receivable - current 368,943
Note receivable - current portion 32,000
Prepaid expenses 27,065
----------
Total Current Assets 431,684
----------
PROPERTY AND EQUIPMENT - NET 752,873
----------
OTHER ASSETS
Note and loans receivable - noncurrent 71,600
----------
Total Other Assets 71,600
----------
TOTAL ASSETS $1,256,157
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
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' 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, 2,702,000 shares issued
and outstanding 2,702
Additional paid-in capital 590,684
Accumulated deficit during development stage (374,339)
----------
Total Stockholders' EQUITY 219,047
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,256,157
==========
See accompanying notes to financial statements.
2
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO JUNE 30, 1999
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
ADDITIONAL DURING
COMMON STOCK PAID-IN DEVELOPEMNT
SHARES AMOUNT CAPITAL STAGE TOTAL
------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Common Stock Issuance 885,000 $ 885 $ -- $ $ 885
Stock Issued For:
Cash 144,500 145 144,355 -- 144,500
Consulting fees and expenses 295,000 295 119,881 -- 120,176
Acquisition of Orlando
Digital Telephone 325,000 325 -- -- 325
Issuance of Common Stock
to stockholders of Blazoon 1,000,000 1,000 (1,000) -- --
Net loss for the period
ended March 31, 1999 -- -- -- (213,969) (213,969)
---------- ------- ---------- ---------- ---------
BALANCE, March 31, 1999 2,649,500 $ 2,650 $ 263,236 $ (213,969) $ 51,917
========== ======= ========== ========== =========
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 $ 590,684 $ (374,339) $ 219,047
========== ======= ========== ========== =========
</TABLE>
See accompanying notes to financial statements.
3
<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, 1999
ended (Inception) to
June 30, 1999 June 30, 1999
------------- --------------
Income $ -- $ --
---------- -----------
Expenses
Executive Compensation 24,844 62,177
Consulting fees 88,800 204,686
Professional fees 32,163 59,752
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 160,349 374,318
---------- ----------
LOSS FROM OPERATIONS (160,349) (374,318)
INTEREST EXPENSE (21) (21)
NET LOSS DURING DEVELOPMENT STAGE $ (160,370) $ (374,339)
========== ==========
NET LOSS PER COMMON SHARE
- BASIC AND DILUTED $ (0.06) $ (0.22)
========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 2,675,022 1,685,216
========== ==========
See accompanying notes to financial statements.
4
<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) $(374,339)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Depreciation and amortization (64) 186
Consulting fees and expenses incurred
In exchange for common stock -- 120,176
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.
5
<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), a public
shell, 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.
6
<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". The assumed exercise of common stock
equivalents was not utilized since the effect was antidilutive.
(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 has
been offset by a deferred tax valuation allowance on the entire amount.
7
<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", 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.
(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.
8
<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)
(I) New Accounting Pronouncements - (CONT'D)
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.
(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 - CURRENT
The following schedule reflects loans receivable to non-related parties
as of June 30, 1999:
Loan receivable from
non-related party,
currently due $24,311
Loan receivable from
non-related party,
secured 338,132
Loan receivable from
non-related party,
current portion 6,500
--------
TOTAL LOANS RECEIVABLE - CURRENT $368,943
========
The loan receivable of $24,311 represents an advance to Orlando Digital
Telephone Corporation (ODT) given in the course of the planned
acquisition of ODT. The Company filed a complaint against ODT seeking
rescission of the ODT acquisition. The amount advanced has been
reclassified as a loan receivable (See Note 6(D)).
The loan receivable of $338,132 represents a $8,132.00 cash loan and
$330,000 Common stock 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).
9
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 2 - LOANS RECEIVABLE - CURRENT - (CONT'D)
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).
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.
10
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 4 - LOAN PAYABLE AND CAPITAL LEASE OBLIGATION - (CONT'D)
(A) 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' 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 (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 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.
11
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 5 - STOCKHOLDERS' EQUITY (CONT'D)
(A) Common and Preferred Stock - (CONT'D)
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 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.
12
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 5 - STOCKHOLDERS' EQUITY (CONT'D)
(B) Stock Compensation - (CONT'D)
(i) Stock Option Plan - (CONT'D)
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 1,937,500
incentive stock options 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:
Weighted
Number of 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:
13
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 5 - 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 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 (the " 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.
14
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
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.
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.
15
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONT'D)
(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 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.
16
<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)
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 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.
17
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
(D) Litigation - (CONT'D)
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
the transaction. Under the terms of the agreement, Premium has assigned
its security interest in the name "Gator.net", the ISP'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. This
loan, aggregating $338,132 is secured by the common stock acquired (See
Note 2).
18
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
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 is assumed to approximate fair market value of the
acquiree's net assets, subject to revision based upon an audit of the
financial statements of the acquiree and development of additional fair
market value data. The transaction is scheduled to close on or before
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.
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 is assumed to
approximate fair market value of the acquiree's net assets, subject to
revision based upon an audit of the financial statements of the
acquiree and 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.
19
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
USA DIGITAL, INC.
--------------------------------------------
FIRST: The name of this corporation is:
USA DIGITAL, INC.
SECOND: Its principal office in the State of Nevada is located at 502
East John Street, Corona City, Nevada, 89706. The name and address of its
resident agent is CSC Services of Nevada, Inc., at the above address.
THIRD: The nature of the business or objects or purposes proposed may
be organized under the General Corporation Law of the State of Nevada;
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Nevada.
FOURTH: The total authorized capital stock of the corporation is Fifty
Million (50,000,000) shares of common stock having a par value of $0.001,
amounting to $50,000.00, and Five Million (5,000,000) shares of Class A
Preferred stock having a par value of $0.001, amounting to $5,000.00, and Five
Million (5,000,000) shares of Class B Preferred stock having a par value of
$0.001, amounting to $5,000.00.
FIFTH: The governing board of this corporation shall be known as
directors, and the number of directors may from time to time be increased or
decreased in such manner as shall be provided in the by-laws of this
corporation, provided that the number of directors shall not be reduced less
than one unless there is less than one stockholder.
The name and post office address of the first board of directors, which shall be
three in number, is as follows;
NAME POST OFFICE ADDRESS
Mark D. Cobb 137 Strawberry Junction Lane
Valrico, FL 33594
Donald E. Darden 1134 Ox Bottom Road
Tallahassee, FL 32312
John J. White Jr. 7769 Apple Tree Circle
Orlando, FL 32819-4682
<PAGE>
SIXTH: The capital stock, after the amount of the subscription price,
or par value, has been paid in, shall not be subject to assessment to pay the
debts of the corporation.
SEVENTH: The name and post office address of the incorporator signing
the articles of incorporation is as follows:
NAME POST OFFICE ADDRESS
Marie Petrie 1013 Centre Road
Wilmington, DE 19805
EIGHTH: The corporation is to have perpetual existence.
NINTH: In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized, subject to the by-laws,
if any, adopted by the shareholders, to make, alter or amend the by-laws of the
corporation.
TENTH: Meetings of stockholders may be held outside of the State of
Nevada at such place or places as may be designated from time to time by the
board of directors or in the by-laws of the corporation.
ELEVENTH: This corporation reserves the right to amend, alter, change
or repeal any provision contained in the articles of incorporation, in the
manner now or hereafter prescribed, and all rights conferred upon stockholders
herein are granted subject to this reservation.
I, THE UNDERSIGNED, being the sole incorporator herein before named for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Nevada, do make and file those articles of incorporation, hereby
declaring and certifying that the facts herein stated are true, and accordingly
have hereunto set my hand this fourth day of March, A.D. 1999.
/s/ Marie Petrie
--------------------------
Marie Petrie, Incorporator
2
EXHIBIT 3.2
BYLAWS
OF
USA DIGITAL, INC.
(A NEVADA CORPORATION)
ARTICLE I
GENERAL
1.01 APPLICABILITY. These Bylaws provide rules for conducting the
business of this corporation (the "Company"). Every shareholder and person who
subsequently becomes a shareholder, the Board of Directors, Committees and
Officers of the Company shall comply with these Bylaws, as amended from time to
time. All bylaws and resolutions heretofore adopted by the Board of Directors
are hereby repealed, to the extent in conflict with the provisions of these
Bylaws.
1.02 OFFICES. The principal office of the Company shall be selected by
the Board of Directors from time to time and may be within or without the State
of Nevada. The Company may have such other offices, within or without the State
of Nevada, as the Board of Directors may, from time to time, determine. The
registered office of the Company required by the General Corporation Law of
Nevada to be maintained in Nevada may be, but need not be, identical with the
principal office if in Nevada, and the address of the registered office may be
changed from time to time by the Board of Directors.
1.03 DEFINITION OF TERMS. Terms defined in the Company's Certificate of
Incorporation, as amended and restated from time to time (the "Charter"), shall
have the same meanings when used in these Bylaws.
ARTICLE II
STOCK CERTIFICATES
2.01 STOCK CERTIFICATES. The shares of the Company's capital stock
shall be represented by consecutively numbered certificates signed by the
President or a Vice President and the Secretary or Assistant Secretary of the
Company, and sealed with the seal of the Company, or a facsimile thereof. If
certificates are signed by a transfer agent and registrar other than the Company
or an employee thereof, the signatures of the officers of the Company may be
facsimile. In case any officer who has signed (by real or facsimile signature) a
certificate shall have ceased to hold such office before the certificate is
issued, it may be issued by the Company with the same effect as if he continued
to hold such office on the date of issue. Each certificate representing shares
shall state upon the face thereof: (i) that the Company is organized under the
laws of the State of Nevada; (ii) the name of the person to whom issued; (iii)
the number, class and series (if any) of shares which such certificate
represents; and (iv) the par value, if any, of the shares represented by such
certificate, or a statement that the shares have no par value.
If any class or series of shares is subject to special powers,
designations, preferences or relative, participating or other special rights,
then such (together with all qualifications, limitations or restrictions of such
preferences or rights) shall be set forth in full or summarized on the
certificate representing such class or series. Moreover, each certificate shall
state that the Company will furnish, without charge, to the registered holder of
the shares represented by such certificate who so requests a statement setting
forth such information in full.
Each certificate also shall set forth restrictions upon transfer, if
any, or a reference thereto, as shall be adopted by the Board of Directors or by
the shareholders, or as may be contained in this Article II. Any shares issued
without registration under the Securities Act of 1933, as amended ("Act"), shall
bear a legend restricting transfer unless such shares are registered under such
act or an exemption from registration is available for a proposed transfer.
2.02 CONSIDERATION FOR SHARES. Shares of the Company shall be issued,
and treasury shares may be disposed of, for such consideration or considerations
as shall be fixed from time to time by the Board of Directors. No shares shall
be issued for less than the par value thereof. The consideration for the
issuance of shares may be paid, in whole or in part, in money, in other
property, tangible or intangible, or in labor or services actually performed for
the Company, or as permitted in the Charter.
1
<PAGE>
2.03 LOST , STOLEN, OR DESTROYED CERTIFICATES. The Board of Directors
may direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Company alleged to have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate of stock to be lost, stolen or destroyed and
the Board of Directors when authorizing such issue of a new certificate or
certificates may in its discretion, and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates or his legal representative to advertise the same in such manner as
it shall require, and/or furnish to the Company a bond in such sum as it may
direct, as indemnity against any claim that may be made against the Company.
Except as hereinabove in this section provided, no new certificate or
certificates evidencing shares of stock shall be issued unless and until the old
certificate or certificates, in lieu of which the new certificate or
certificates are issued, shall be surrendered for cancellation. Anything herein
to the contrary notwithstanding, the Corporation in its absolute discretion may
refuse to issue any new certificate, except pursuant to judicial proceedings
under the laws of the State of Nevada.
2.04 REGISTERED HOLDER AS OWNER. The Company shall be entitled to treat
the registered holder of any shares of the Company as the owner of such shares,
and shall not be bound to recognize any equitable or other claim to, or interest
in, such shares or rights deriving from such shares, unless and until such
purchaser, assignee, transferee or other person becomes the registered holder of
such shares, whether or not the Company shall have either actual or constructive
notice of the interests of such purchaser, assignee, or transferee or other
person. The purchaser, assignee, or transferee of any of the shares of the
Company shall not be entitled: to receive notice of the meetings of the
shareholders; to vote at such meetings; to examine a list of the shareholders;
to be paid dividends or other sums payable to shareholders; or to own, enjoy and
exercise any other property or rights deriving from such shares against the
Company, until such purchaser, assignee, or transferee has become the registered
holder of such shares.
2.05 REVERSIONS. Cash, property or share dividends, shares issuable to
shareholders in connection with a reclassification of stock, and the redemption
price of redeemed shares, which are not claimed by the shareholders entitled
thereto within TWO years after the dividend or redemption price became payable
or the shares became issuable, despite reasonable efforts by the Company to pay
the dividend or redemption price or deliver the certificate(s) for the shares to
such shareholders within such time shall, at the expiration of such time, revert
in full ownership to the Company, and the Company's obligation to pay any such
dividend or redemption price or issue such shares, as the case may be, shall
thereupon cease; provided, that the Board of Directors may at any time and for
any reason satisfactory to it, but need not, authorize (i) payment of the amount
of cash or property dividend or (ii) issuance of any shares, ownership of which
has reverted to the Company pursuant to this Section of Article II, to the
person or entity who or which would be entitled thereto had such reversion not
occurred.
2.06 RETURNED CERTIFICATES. All certificates for shares changed or
returned to the Company for transfer shall be marked by the Secretary
"CANCELLED," with the date of cancellation, and the transaction shall be
immediately recorded in the certificate book opposite the memorandum of their
issue. The returned certificate may be inserted in the certificate book.
2.07 TRANSFER OF SHARES. Upon surrender to the Company or to a transfer
agent of the Company of a certificate of stock endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, and such
documentary stamps as may be required by law, it shall be the duty of the
Company to issue a new certificate, upon payment by the transferee of such
nominal charge therefor as the Company or its transfer agent may impose. Each
such transfer of stock shall be entered on the stock book of the Company.
Respecting any securities issued in reliance upon Regulation S under the Act at
any time when the Company is not a "reporting issuer" as defined in Regulation
S, no transfer of such securities shall be registered by the Company unless made
in accordance with the provisions of Regulation S.
2.08 REGULATIONS/TRANSFER AGENT. The Board of Directors shall have
power and authority to make such rules and regulations not inconsistent with
these By-Laws as it may deem expedient concerning the issue, transfer and
registration of certificates for shares of stock of the Corporation. The Board
of Directors shall have power to appoint one or more transfer agents and
registrars for the transfer and registration of certificates of stock of any
class, and may require that stock certificates shall be countersigned and
registered by one or more of such transfer agents and registrars. Any powers or
duties with respect to the transfer and registration of certificates may be
delegated to the transfer agent and registrar.
2
<PAGE>
ARTICLE III
MEETINGS OF THE SHAREHOLDERS
3.01 ANNUAL MEETING. The annual meeting of the shareholders shall be
held between the 90th and 180th day after the tax year end, at such date and
time and at such place, within or without the State of Nevada, as is designated
from time to time by the Board of Directors and stated in the notice of the
meeting. At each annual meeting the shareholders shall elect a Board of
Directors in accordance with the Charter and shall transact such other business
as may properly be brought before the meeting.
3.02 SPECIAL MEETINGS. Unless otherwise proscribed by law, the Charter
or these Bylaws, special meetings of the shareholders may be called by the
Chairman of the Board, the President, or a majority of the Board of Directors,
or by persons who as of the date of calling the meeting are the holders of not
less than ten percent (10%) of the total voting power. Requests for special
meetings shall state the purpose or purposes of the proposed meeting.
3.03 NOTICE OF MEETINGS. Except as otherwise provided by law, the
Charter or these Bylaws, written notice of any annual or special meeting of the
shareholders shall state the place, date, and time thereof and, in the case of a
special meeting, the purpose or purposes for which the meeting is called, shall
be given to each shareholder of record entitled to vote at such meeting not
fewer than 10 nor more than 60 days prior to the meeting by any means permitted
in Article IX hereof. No business other than that specified in the notice of a
special meeting shall be transacted at any such special meeting.
3.04 RECORD DATE. In order that the Company may determine shareholders
of record who are entitled (i) to notice of or to vote at any shareholders
meeting or adjournment thereof, (ii) to express written consent to corporate
action in lieu of a meeting, (iii) to receive payment of any dividend or other
distribution, or (iv) to allotment of any rights or to exercise any rights in
respect of any change, conversion or exchange of stock, or in order that the
Company may make a determination of shareholders of record for any other lawful
purpose, the Board of Directors may fix in advance a date as the record date for
any such determination. Such date shall not be more than 60 days, and in case of
a meeting of shareholders, not less than 10 days prior to the date on which the
particular action, requiring such determination of shareholders, is to be taken,
and in no event may the record date precede the date upon which the Directors
adopt a resolution fixing the record date.
If no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is given (as defined in Article IX hereof) or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of the
shareholders. When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided in this Section such
determination shall apply to any adjournment thereof, unless the Board of
Directors fixes a new record date for the adjournment.
3.05 VOTING LIST. At least 10 days but nor more than 60 days before any
meeting of shareholders, the officer or transfer agent in charge of the
Company's stock transfer books shall prepare a complete alphabetical list of the
shareholders entitled to vote at such meeting, which list shows the address of
each shareholder and the number of shares registered in his or her name. The
list so prepared shall be maintained at the corporate offices of the Company and
shall be open to inspection by any shareholder, for any purpose germane to the
meeting, at any time during usual business hours during a period of no fewer
than 10 days prior to the meeting. The list shall also be produced and kept open
at any shareholders meeting and, except as otherwise provided by law, may be
inspected by any shareholder or proxy of a shareholder who is present in person
at the meeting. The original stock transfer books shall be prima facie evidence
as to who are the shareholders entitled to examine the list of shareholders and
to vote at any meeting of shareholders.
3.06 INSPECTORS. The Board of Directors, in advance of any meeting of
stockholders, shall appoint one or more inspectors to act at such meeting or any
adjournment thereof and to make a written report thereon. The Board of Directors
may designate one or more persons as alternate inspectors to replace any
inspector who fails to act. If no inspector or alternate is able to act at the
meeting of stockholders, the chairman of the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector at such meeting with strict impartiality and according to
the best of his ability. The inspectors shall ascertain the number of shares of
each kind, class or series of stock outstanding and the voting power of each,
determine the number of shares of stock represented at the meeting, the
existence of a quorum, the validity and effect of proxies, and shall
3
<PAGE>
receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On request of
the chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, question or matter
determined by them and shall execute a certificate of any fact found by them. No
Director or nominee for the office of Director shall act as an inspector of an
election of Directors. Inspectors need not be stockholders.
3.07 BUSINESS BROUGHT BEFORE AN ANNUAL MEETING. At an annual meeting of
stockholders, only such business shall be conducted, and only such proposals
shall be acted upon, as shall have been properly brought before the meeting of
stockholders. To be properly brought before an annual meeting of stockholders,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) brought
before the meeting by or at the direction of the Board of Directors, or(c)
otherwise properly brought before the meeting by a stockholder who was a
stockholder of record at the time of giving of the notice provided for in this
section, who is entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section 10. For business to be properly brought
before an annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation and such
business must otherwise be a proper matter for stockholder action. To be timely,
a stockholder's notice must be delivered to or mailed and received by the
Corporation's Secretary at the principal executive offices of the Corporation,
not less than one hundred twenty (120) days prior to the first anniversary of
the preceding year's annual meeting of stockholders; provided, however, that in
the event that the date of the annual meeting of stockholders is changed by more
than thirty (30) days from such anniversary date, notice by the stockholder to
be timely must be so received no later than the close of business on the
tenth(10) day following the day on which notice of the date of the meeting was
mailed. A stockholder's notice to the Corporation's Secretary shall set forth
(a) as to each person whom the stockholder proposes to nominate for election or
re-election as a Director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of Directors
in an election contest, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
Director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business sought to be
brought before the meeting; (c) the name and address, as such appear on the
Corporation's books, of the stockholder proposing such nominee or business and
any other stockholders known by such stockholder to be supporting such nominee
or proposal; (d) the class and number of shares of the Corporation which, on the
date of such stockholder's notice, are beneficially owned by such stockholder
and by any other stockholders known by such stockholder to be supporting such
nominee or proposal; and (e) any material interest of the stockholder in such
business. Notwithstanding anything in these By-laws to the contrary, no business
shall be conducted at an annual meeting of stockholders except in accordance
with the procedures set forth in this Section 10. The chairman of the annual
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Section 10 and if the chairman should so determine, the
chairman shall so declare at the meeting and any such business not properly
brought before such meeting shall not be transacted.
3.08 QUORUM; ADJOURNMENTS. (a) The holders of a majority of the total
voting power at any shareholders meeting present in person or by proxy shall be
necessary to and shall constitute a quorum for the transaction of business at
all shareholders meetings, except as otherwise provided by law or by the
Articles.
(b) If a quorum is not present in person or by proxy at any
shareholders meeting, a majority of the voting shares present or represented
shall have the power to adjourn the meeting from time to time to the same or
another place within 30 days thereof and no further notice of such adjourned
meeting need be given if the time and place thereof are announced at the meeting
at which the adjournment is taken.
(c) Even if a quorum is present in person or by proxy at any
shareholders meeting, a majority of the voting shares present or represented
shall have the power to adjourn the meeting from time to time, for good cause,
without notice of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjourment is taken, until a new date
which is not more than 30 days after the date of the original meeting.
(d) Any business which might have been transacted at a shareholders
meeting as originally called may be
4
<PAGE>
transacted at any meeting held after adjournment as provided in this Section
3.06 at which reconvened meeting a quorum is present in person or by proxy.
Anything in paragraph (b) of this Section to the contrary notwithstanding, if an
adjournment is for more than 30 days, or if after an adjournment a new record
date is fixed for the adjourned meeting, notice of the adjourned meeting shall
be given to each shareholder of record entitled to vote thereat.
(e) The shareholders present at a duly called meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
3.09 PROXIES. At all meetings of shareholders, a shareholder may vote
by proxy, executed in writing by the shareholder or by his duly authorized
attorney in fact. Any proxyholder shall be authorized to sign, on the
shareholder's behalf, any written consent for shareholder action taken in lieu
of a meeting. Such proxy shall be filed with the Secretary of the Company before
or at the time of the meeting. No proxy shall be valid after the expiration of
six (6) months from the date of its execution, unless coupled with an interest,
or unless the person executing it specifies therein the length of time for which
it is to continue in force, which in no case shall exceed three (3) years from
the date of its execution.
3.10 VOTING OF SHARES. At any shareholders meeting every shareholder
having the right to vote shall be entitled to vote in person or by proxy. Except
as otherwise provided by law, by the Articles or in the Board resolution
authorizing the issuance of shares, each shareholder of record shall be entitled
to one vote (on each matter submitted to a vote) for each share of capital stock
registered in his, her or its name on the Company's books. Except as otherwise
provided by law or by the Articles, all matters submitted to the shareholders
for approval shall be determined by a majority of the votes cast (not counting
abstentions) at a legal meeting commenced with a quorum.
3.11 VOTING OF SHARES BY CERTAIN HOLDERS. Neither treasury shares, nor
shares of its own stock held by the Company in a fiduciary capacity, nor shares
held by another corporation if the majority of the shares entitled to vote for
the election of directors of such other corporation is held by the Company,
shall be voted at any meeting or counted in determining the total number of
outstanding shares at any given time.
Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent, or proxy as the bylaws of such
corporation may prescribe, or, in the absence of such provision, as the board of
directors of such corporation may determine.
Shares held by an administrator, executor, personal representative,
guardian, or conservator may be voted by him, either in person or by proxy,
without a transfer of such shares into his name. Shares standing in the name of
a trustee may be voted by him, either in person or by proxy, but no trustee
shall be entitled to vote shares held by him without a transfer of such shares
into his name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority to do so
be contained in an appropriate order of the court by which such receiver was
appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
3.12 CHAIRMAN. The Chairman of the Board of Directors of the Company,
if there is one, or in his absence, the President, shall act as chairman at all
meetings of shareholders.
3.11 MANNER OF SHAREHOLDER VOTING. Voting at any shareholders' meeting
shall be oral or by show of hands; provided, however, that voting shall be by
written ballot if such demand is made by any shareholder present in person or by
proxy and entitled to vote.
3.13 INFORMAL ACTION BY SHAREHOLDERS; RECORD DATE. Any action required
or permitted to be taken at a meeting of the shareholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by shareholders holding at
least a majority of the voting power, except that if a different
5
<PAGE>
proportion of voting power is required for such an action at a meeting, then
that proportion of written consents is required. Such a consent must be filed
with the minutes of the proceedings of shareholders and shall have the same
force and effect as a vote of the shareholders, and may be stated as such in any
document filed with the Secretary of State of Nevada under the General
Corporation Law of Nevada. Written notice of such action shall be given to all
shareholders who have not consented in writing to the action taken. The record
date for determining shareholders entitled to consent to corporate actions in
writing without a meeting (the "consent record date") shall not precede, and
shall not be more than ten (10) days after, the date upon which the resolution
fixing the record date was adopted. However, if no consent record date is fixed,
the consent record date shall be, respectively, (i) if prior action by the Board
of Directors is required under the General Corporation Law of Nevada for the
consent to be validly taken, the close of business on the day on which the Board
of Directors adopts the resolution taking such prior action; and (ii) if prior
action by the Board of Directors is not required, the first date on which a
properly signed and dated consent setting forth the action taken or proposed to
be taken is delivered as required above.
3.14 PRESIDING OFFICERS; ORDER OF BUSINESS. (a) Shareholders meetings
shall be presided over by the Chairman of the Board; or if the Chairman (and
Vice Chairman) is not present, by the President; or if the President is not
present, by a Vice President; or if a Vice President is not present, by such
person chosen by the Board of Directors; or if none, by a chairperson to be
chosen at the meeting by shareholders present in person or by proxy who own a
majority of the voting power present. The Secretary of a shareholders meeting
shall be the Secretary of the Company; or if the Secretary is not present, an
Assistant Secretary; or if an Assistant Secretary is not present, such person as
may be chosen by the Board of Directors; or if none, by such person who is
chosen by the chairperson at the meeting.
(b) The following order of business, unless otherwise ordered at the
shareholders meeting by the chairperson thereof, shall be observed as far as
practicable and consistent with the purposes of the meeting:
1. Calling of the shareholders' meeting to order.
2. Presentation of proof of mailing of the notice of the meeting and,
if a special meeting, the call thereof.
3. Presentation of proxies.
4. Determination and announcement that a quorum is present.
5. Reading and approval (or waiver thereof) of the minutes of the
previous meeting of shareholders.
6. Reports, if any, of officers.
7. Election of directors, if the meeting is an annual meeting or a
meeting called for such purpose.
8. Consideration of the specific purpose or purposes for which the
meeting has been called, other than election of directors.
9. Transaction of such other business as may properly come before the
meeting.
10. Adjournment.
3.15 ANNUAL REPORT. The President of the Company shall prepare an
annual report which will set forth a statement of affairs of the Company as of
the end of its last fiscal year, including a balance sheet, an income statement
and a statement of changes in financial position, which need not be audited, and
present them at the annual meeting of shareholders. Failure to prepare or
present an annual report shall not affect the validity of any shareholder
meeting. No such report need be prepared or presented for any fiscal year in
which the Company was inactive. This Section shall not apply as to any fiscal
year if the Company (i) was at the year end subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, and
subsequently furnishes to the shareholders an annual report or report on Form
10-K under such Act covering such fiscal year, or (ii) furnishes to shareholders
an Information Statement which conforms to the requirements of Rule 15c2-11 of
the Securities and Exchange Commission.
6
<PAGE>
ARTICLE IV
DIRECTORS, POWERS AND MEETINGS
4.01 GENERAL POWERS. All corporate powers shall be exercised, and the
Company's business and affairs shall be managed, by or under the authority of
its Board of Directors, except as otherwise provided in the General Corporation
Law of Nevada or the Charter.
4.02 NUMBER, TENURE AND QUALIFICATIONS. The Company's Board of
Directors shall consist of not less than one (1) and not more than seven (7)
Directors, as resolved from time to time by the Board of Directors. If such
number is not so fixed, the Company shall have one Director. Directors shall be
elected at each annual meeting of shareholders, except as otherwise provided
below. Each Director shall hold office until the next annual meeting of
shareholders and thereafter until his successor shall have been elected and duly
qualified. Directors need not be residents of Nevada or shareholders of the
Company. Directors shall be elected by plurality vote. At least one-fourth in
number of the Directors must be elected annually. No decrease in the number of
Directors shall shorten the term of any incumbent Director.
4.03 VACANCIES; RESIGNATION. (a) Any vacancy occurring in the Board of
Directors, except resulting from an increase in the number of directors, may be
filled by the affirmative vote of a majority of the remaining Directors, though
less than a quorum, or by a sole remaining Director. A Director elected to fill
a vacancy shall be elected for the unexpired term of his predecessor in office.
Any directorship to be filled by reason of an increase in the number of
Directors shall be filled by the affirmative vote of a majority of the entire
board or by a majority of the total voting power at any annual meeting or at a
special meeting of shareholders called for that purpose, or by means of written
shareholder consents taken in lieu of a meeting. Every director chosen to fill a
vacancy as provided in this Section shall hold office until the next annual
meeting of shareholders or until his successor has been elected and qualified.
(b) Any Director may resign at any time by giving written notice to the
Board, the Chairman of the Board, the President or the Secretary of the Company.
Unless otherwise specified in such written notice, a resignation shall take
effect upon delivery to the Board or the designated officer. A resignation need
not be accepted in order for it to be effective.
4.04 REMOVAL OF DIRECTORS. Any Director may be removed, with or without
cause, by the affirmative vote of the holders of at least a majority of the
issued and outstanding shares of the Corporation's capital stock entitled to
vote with respect to the election of Directors, at any special meeting, the
notice of which shall state that it is called for that purpose. Vacancies caused
by any removal, or any vacancy caused by the death or resignation of any
Director or for any other reason, and any newly created directorship resulting
from any increase in the authorized number of Directors, shall be filled by the
affirmative vote of a majority of the Directors then in office, although less
than a quorum, and if there shall be no Directors then in office, such vacancy
or newly created directorship shall be filled by holders of at least a majority
of the shares of the Corporation's capital stock entitled to vote with respect
to the election of Directors, and any Director so elected to fill such vacancy
or any newly created directorship shall hold office for a term that shall expire
at the first annual meeting of stockholders following such appointment or until
the earlier resignation or removal of the Director. When one (1) or more
Directors shall resign from the Board of Directors effective at a future date, a
majority of the Directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office until the first annual meeting of
stockholders following such appointment or until the earlier resignation or
removal of the Director.
4.05 NOMINATIONS. (a) Nominations of persons for election to the Board
of Directors of the Corporation may be made at a meeting of stockholders (i) by
or at the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of the notice
provided for in these By-laws, who is entitled to vote for the election of
Directors at the meeting and who shall have complied with each of the notice
procedures set forth in Article I, Section 10 and all applicable requirements of
the Exchange Act and the Rules and Regulations promulgated thereunder. At the
request of the Board of Directors, any person nominated by the Board of
Directors for election as a Director shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. (b) No person shall be eligible to
serve as a Director of the Corporation unless nominated in accordance with the
procedures set forth in these By-laws. The chairman of the meeting shall, if the
facts
7
<PAGE>
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by these By-laws, and if the chairman
should so declare, the defective nomination shall be disregarded.
4.06 PLACE OF MEETINGS. The Board of Directors may hold both regular
and special meetings either within or without the State of Nevada, at such place
as the Board of Directors from time to time deems advisable.
4.07 REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than these Bylaws immediately after and at
the same place as the annual meeting of shareholders. The Board of Directors may
provide by resolution the time and place for the holding of additional regular
meetings without other notice than such resolution; provided, that any Director
not present when any such resolution is passed is given notice of the
resolution.
4.08 SPECIAL MEETINGS. A special meeting of the Board of Directors
shall be held without other notice than these Bylaws immediately after and at
the same place as every special meeting of shareholders. Special meetings of the
Board of Directors also may be called by or at the request of the Chairman of
the Board, the President, or any two Directors upon two days' notice to each
director if such notice is delivered personally or sent by telegram, or upon
five days' notice if sent by mail.
4.09 TELEPHONIC MEETINGS. One or more members of the Board of Directors
or any committee designated by the Board may participate in a meeting of the
Board of Directors or committee by means of conference telephone or similar
communications equipment by which all persons participating in the meeting can
hear one another at the same time. Such participation shall constitute presence
in person at the meeting. All participants in any meeting of Directors, by
virtue of their participation and without further action on their part, shall be
deemed to have consented to the recording of such meeting by electronic device
or otherwise, and to the making of a written transcript thereof, in order that
minutes thereof shall be available for the Company's records.
4.10 NOTICE. Except as otherwise provided above, notice of the time,
date and place, of every special meeting of Directors or any committee thereof
shall be given. Any Director may waive notice of any meeting. The attendance of
a Director at a meeting shall constitute a waiver of notice of such meeting,
except where a Director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
4.11 QUORUM; ADJOURNMENTS. A majority of the number of directors then
in office, present in person or by means of conference telephone or similar
equipment, shall constitute a quorum for the transaction of business at every
Board meeting, and the act of the majority of the Directors present at a meeting
at which a quorum is present shall be the act of the Board of Directors, except
as may otherwise specifically be provided by law, the Charter or these Bylaws.
If a quorum is not present at any Board meeting, the directors present may
adjourn the meeting, from time to time, without notice other than announcement
of the meeting, until a quorum is present.
4.12 COMPENSATION. Directors shall be entitled to such compensation for
their services as directors as from time to time may be fixed by the Board and
shall be entitled to reimbursement of all reasonable expenses incurred by them
in attending Board meetings. A director may waive compensation for any Board
meeting. No director who receives compensation as a director shall be barred
from serving the Company in any other capacity or from receiving compensation
and reimbursement of reasonable expenses for any or all such other services.
4.13 PRESUMPTION OF ASSENT. A Director of the Company who is present at
a meeting of the Board of Directors at which action on any corporate matter is
taken shall be presumed to have assented to the action taken unless his dissent
shall be entered in the minutes of the meeting or unless he shall file his
written dissent to such action with the person acting as the Secretary of the
meeting before the adjournment thereof, or shall forward such dissent by
registered or certified mail, first class, postage prepaid, to the Secretary of
the Company, provided such mailing is postmarked within ten calendar days after
the adjournment of the meeting. Such right to dissent shall not apply to a
Director who voted in favor of such action.
4.14 ACTION BY DIRECTORS WITHOUT MEETING. Any action required to be
taken at a meeting of the Directors of the Company or of a committee of
Directors or any action which may be taken at such a meeting, may be taken
without a meeting if a
8
<PAGE>
consent in writing, setting forth the action so taken, shall be signed by all of
the Directors entitled to vote with respect to the subject matter therof. A
consent shall be sufficient for this Section if it is executed in counterparts,
in which event all of such counterparts, when taken together, shall constitute
one and the same consent.
4.15 BANK ACCOUNTS, ETC. Anything herein to the contrary
notwithstanding, the Board of Directors may, except as may otherwise be required
by law, authorize any officer or officers, agent or agents, in the name of and
on behalf of the Company, to sign checks, drafts, or other orders for the
payment of money or notes or other evidences of indebtedness, to endorse for
deposit, deposit to the credit of the Company at any bank or trust company or
banking institution in which the Company may maintain an account or to cash
checks, notes, drafts, or other bankable securities or instruments, and such
authority may be general or confined to specific instances, as the Board of
Directors may elect.
4.16 INSPECTION OF RECORDS. Every Director shall have the absolute
right at any reasonable time to inspect all books, records, documents of every
kind, and the physical properties, of the Company and of its subsidiaries. Such
inspection may be made personally or by an agent and includes the right to make
copies and extracts.
4.17 EXECUTIVE COMMITTEE. (a) The Board of Directors may, by resolution
adopted by a majority of the whole Board, appoint two or more of its members to
constitute an Executive Committee. One of such directors shall be designated as
Chairman of the Executive Committee. Each member of the Executive Committee
shall continue as a member thereof until the expiration of his term as a
director, or until his earlier resignation from the Executive Committee, in
either case unless sooner removed as a director or member of the Executive
Committee by any means authorized by the Charter or herein.
(b) The Executive Committee shall have and may exercise, to the extent
provided in such resolution and except as prohibited by law, all of the rights,
power and authority of the Board of Directors.
(c) The Executive Committee shall fix its own rules of procedure and
shall meet at such times and at such place or places as may be provided by its
rules. The Chairman of the Executive Committee, or in the absence of the
Chairman, a member of the Executive Committee chosen by a majority of the
members present, shall preside at all meetings of the Executive Committee, and
another member thereof chosen by the Executive Committee shall act as Secretary.
A majority of the Executive Committee shall constitute a quorum for the
transaction of business, and the affirmative vote of a majority of the members
thereof shall be required for any action of the Executive Committee. The
Executive Committee shall keep minutes of its meetings and deliver such minutes
to the Board of Directors.
4.18 OTHER COMMITTEES. The Board of Directors may, by resolution duly
adopted by a majority of directors at a meeting at which a quorum is present,
appoint an audit committee, compensation committee, and such other committee or
committees as it shall deem advisable and with such limited authority as the
Board of Directors shall from time to time determine.
4.19 OTHER PROVISIONS REGARDING COMMITTEES. (a) The Board of Directors
shall have the power at any time to fill vacancies in, change the membership of,
or discharge any committee. The members of any committee present at any meeting
of a committee, whether or not they constitute a quorum, may appoint a director
to act in the place of an absent member.
(b) Members of any committee shall be entitled to such compensation for
their services as such as from time to time may be fixed by the Board of
Directors and in any event shall be entitled to reimbursement of all reasonable
expenses incurred in attending committee meetings. Any member of a committee may
waive compensation for any meeting. No member of a committee who receives
compensation as a member of one or more committees shall be barred from serving
the Company in any other capacity or from receiving compensation and
reimbursement of reasonable expenses for any or all such other services.
(c) Unless otherwise prohibited by law, the provisions above concerning
action by written consent of directors and meetings of directors by telephonic
or similar means shall apply to all committees from time to time created by the
Board of Directors.
9
<PAGE>
ARTICLE V
OFFICERS AND AGENTS
5.01 POSITIONS. The Company's officers generally shall be chosen by the
Board of Directors and shall consist of a Chairman of the Board, a President,
one or more Vice Presidents if desired, a Secretary and a Treasurer. The Board
of Directors may appoint one or more other officers, assistant officers and
agents as it from time to time deems necessary or appropriate, who shall be
chosen in such manner and hold their offices for such terms and have such
authority and duties as from time to time may be determined by the Board of
Directors. The Board may delegate to the Chairman of the Board the authority to
appoint any officer or agent of the Company and to fill a vacancy other than the
Chairman of the Board or President. Any two or more offices may be held by the
same person, except that no person may simultaneously hold the offices of
President and Secretary and of President and Vice President. In all cases where
the duties of any officer, agent or employee are not prescribed by these bylaws
or by the Board of Directors, such officer, agent or employee shall follow the
orders and instructions of the President.
5.02 TERM OF OFFICE; REMOVAL. Each officer of the Company shall hold
office at the pleasure of the Board and any officer may be removed, with or
without cause, at any time by the affirmative vote of a majority of the
directors then in office; provided, that any officer appointed by the Chairman
of the Board pursuant to authority delegated by the Board may be removed, with
or without cause, at any time by the Chairman whenever the Chairman in his or
her absolute discretion shall consider that the Company's best interests shall
be served by such removal. Removal of an officer by the Board (or the Chairman,
as the case may be) shall not prejudice the contract rights, if any, of the
person so removed. Election or appointment of an officer or agent shall not in
itself create contract rights.
5.03 VACANCIES. A vacancy in any office, however occurring, may be
filled by the Board or the Executive Committee, for the unexpired portion of the
term by majority vote of its members, or by the Chairman of the Board in the
case of a vacancy occurring in an office to which the Chairman has been
delegated authority to make appointments.
5.04 COMPENSATION. The salaries of all officers of the Company shall be
fixed from time to time by the Board, and no officer shall be prevented from
receiving a salary by reason of the fact that he also receives compensation from
the Company in any other capacity.
5.05 CHAIRMAN OF THE BOARD. The Chairman of the Board ("Chairman"), if
such officer shall be chosen by the Board of Directors, shall preside at all
meetings of the Board of Directors and meetings of shareholders at which he is
present and shall exercise general supervision and direction over the
implementation of Board policy affecting the affairs of the Company. Any act
which may be performed by the Chief Executive Officer or President may be
performed by the Chairman.
5.06 CHIEF EXECUTIVE OFFICER; CHIEF OPERATING OFFICER. The Chairman of
the Board shall, unless the Board determines otherwise, serve as the Chief
Executive Officer ("CEO") of the Company. If the Chairman is not designated the
CEO, then the President shall serve as CEO. The Board may, from time to time,
designate from among the executive officers of the Company an officer to serve
as Chief Operating Officer ("COO") of the Company. If the Chairman serves as the
CEO, then the President shall serve as COO. If the President is designated CEO,
then the Executive Vice President (or if there is none, then the next most
senior Vice President) shall serve as COO. A person designated to serve in the
capacity of CEO or COO shall serve at the pleasure of the Board.
A person designated Chief Executive Officer (CEO) shall have primary
responsibility for and active charge of the management and supervision of the
Company's business and affairs. The CEO may execute in the name of the Company
authorized corporate obligations and other instruments, shall perform such other
duties as may be prescribed by the Board (or Chairman, as the case may be) from
time to time and, in the absence or disability of the President, shall exercise
all of the duties and powers of the President. In the event that the President
is not the CEO, then the CEO shall supervise the performance of the President
and shall be responsible for the execution of the policies and directives of the
Board. The CEO shall report directly to the Board. The CEO shall perform such
other duties as may be assigned by the Board (or Chairman, as the case may be).
The CEO may perform any act which might be performed by the President.
A person designated Chief Operating Officer (COO) shall be responsible
for the day-to-day management of the Company's operations, subject to the
authority of the CEO. The COO shall report directly to the CEO of the Company
and shall
10
<PAGE>
consult with the CEO on all matters of corporate policy and material business
activities of the Company. The COO shall perform such other duties as may be
assigned by the Board or the CEO.
5.07 PRESIDENT. The President shall have general active management of
the business of the Company, subject to the authority of the Chief Executive
Officer if the President is not designated as such, and general supervision of
its officers, agents and employees. In the absence of the Chairman and Chief
Executive Officer, he shall preside at all meetings of the shareholders and of
the Board. In the absence of a designated Chief Executive Officer he shall see
that all policies and directives of the Board are carried into effect.
He shall, unless otherwise directed by the Board of Directors, attend
in person or by substitute appointed by him, or shall execute in behalf of the
Company written instruments appointing a proxy or proxies to represent the
Company, at all meetings of the stockholders of any other company in which the
Company shall hold any stock. He may, on behalf of the Company, in person or by
substitute or by proxy, execute written waivers of notice and consents with
respect to any such meetings. At all such meetings and otherwise, the President,
in person or by substitute or proxy as aforesaid, may vote the stock so held by
the Company and may execute written consent and other instruments and power
incident to the ownership of said stock, subject however to the instructions, if
any, of the Chairman or the Board of Directors. The President shall have custody
of the Treasurer's bond, if any.
5.08 EXECUTIVE VICE PRESIDENT. The Executive Vice President shall
assist the President in the discharge of surpervisory, managerial and executive
duties and functions. In the absence of the President or in the event of his
death, or inability or refusal to act, the Executive Vice President shall
perform the duties of the President and when so acting shall have the duties and
powers of the President. He shall perform such other duties as from time to time
may be assigned to him by the President, Chairman or Board of directors.
5.09 VICE PRESIDENTS. The Vice Presidents, if any, shall assist the
President and Executive Vice President and shall perform such duties as may be
prescribed by the Board, the Chairman or the President. Vice Presidents in the
order of their seniority shall, in the absence or disability of the Chairman and
President, exercise all of the duties and powers of such officers. The Executive
Vice President, if any, shall be the most senior of Vice Presidents, and the
Senior Vice President, if any, shall be the next most senior of Vice Presidents.
In regard to other Vice Presidents, they shall have the respective ranks
designated by the Board of Directors, or if none has been so designated, as
designated by the Chairman, or if none has been so designated by the Chairman,
they shall rank in the order of their respective elections to such office. The
execution of any instrument on the Company's behalf by a Vice President shall be
conclusive evidence, as to third parties, of his authority to act in the stead
of the President and Executive Vice President.
5.10 SECRETARY. The Secretary shall: (i) keep the minutes of the
proceedings of the shareholders and the Board of Directors and record all votes
and proceedings thereof in a book kept for that purpose; (ii) see that all
notices are duly given in accordance with the provisions of these Bylaws or as
required by law; (iii) be custodian of the corporate records and of the seal of
the Company and affix the seal to all documents when authorized by the Board of
Directors; (iv) keep at its registered office or principal place of business
within or outside Delaware a record containing the names and addresses of all
shareholders and the number and class of shares held by each, unless such a
record shall be kept at the office of the Company's transfer agent or registrar;
(v) sign with the President, or a Vice President, certificates for shares of the
Company, the issuance of which shall have been authorized by resolution of the
Board of Directors; (vi) have general charge of the stock transfer books of the
Company, unless the Company has a transfer agent; and (vii) in general, perform
all duties incident to the office of Secretary and such other duties as from
time to time may be assigned to him by the President or the Board of Directors.
The Board of Directors may give general authority to officers other than the
Secretary or any Assistant Secretary to affix the Company's seal and to attest
the fixing thereof by his or her signature.
5.11 ASSISTANT SECRETARY. The Assistant Secretary, if any (or if there
is more than one, the Assistant Secretaries in the order designated, or in the
absence of any designation, in the order of their appointment), in the absence
or disability of the Secretary, shall perform the duties and exercise the powers
of the Secretary. The Assistant Secretary(ies) shall perform such other duties
and have such other powers as from time to time may be prescribed by the Board,
the Chairman or the Chief Executive Officer. The Chairman may appoint one or
more Assistant Secretary(ies) to office.
11
<PAGE>
5.12 TREASURER. The Treasurer shall, unless the Board otherwise
resolves, be the principal financial officer and principal accounting officer of
the Company and shall have the care and custody of all funds, securities,
evidence of indebtedness and other valuable effects of the Company, shall keep
full and accurate accounts of receipts and disburesments in books belonging to
the Company and shall deposit all money and other valuable effects of the
Company in the name and to the credit of the Company in such depositories as
from time to time may be designated by the Board. The Treasurer shall disburse
the funds of the Company in such manner as may be ordered by the Board from time
to time and shall render to the Chairman of the Board, the President and the
Board, at regular Board meetings or whenever any of them may so require, an
account of all transactions and of the Company's financial condition.
5.13 ASSISTANT TREASURER. The Assistant Treasurer, if any (or if there
is more than one, the Assistant Treasurers in the order designated, or in the
absence of any designation, in the order of their appointment), in the absence
or disability of the Treasurer, shall perform the duties and exercise the powers
of the Treasurer. The Assistant Treasurer(s) shall perform such other duties and
have such other powers as from time to time may be prescribed by the Board, the
Chairman or the Chief Executive Officer. The Chairman may appoint one or more
Assistant Treasurer(s) to office.
5.14 RESIGNATIONS. Any officer may resign at any time by giving written
notice to the Board or to the Chairman. Such resignation shall take effect at
the time specified therein and, unless specified therein, no acceptance of the
resignation shall be required for the resignation to be effective.
5.15 DELEGATION OF DUTIES. In the event of the absence or disability of
any officer of the Company, or for any other reason the Board shall deem
sufficient, the Board may temporarily designate the powers and duties, or
particular powers and duties, of such officer to any other officer, or to any
director.
5.16 FIDELITY BONDS. The Board of Directors shall have the power, to
the extent permitted by law, to require any officer, agent or employee of the
Company to give bond for the faithful discharge of his duties in such form and
with such surety or sureties as the Board deems advisable.
ARTICLE VI
INDEMNIFICATION
The Corporation shall, to the fullest extent permitted by applicable
law from time to time in effect, indemnify any and all persons who may serve or
who have served at any time as Directors or officers of the Corporation, or who
at the request of the Corporation may serve or at any time have served as
directors or officers of another corporation (including subsidiaries of the
Corporation) or of any partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, from and against any
and all of the expenses, liabilities or other matters referred to in or covered
by said law. Such indemnification shall continue as to a person who has ceased
to be a Director or officer and shall inure to the benefit of the heirs,
executors and administrators of such a person. The Corporation may also
indemnify any and all other persons whom it shall have power to indemnify under
any applicable law from time to time in effect to the extent authorized by the
Board of Directors and permitted by law. The indemnification provided by this
Section 5 shall not be deemed exclusive of any other rights to which any person
may be entitled under any provision of the Restated Certificate, these By-Laws,
agreement, vote of stockholders or disinterested Directors, or otherwise, both
as to action inhis official capacity and as to action in another capacity while
holding such office.
ARTICLE VII
EXECUTION OF INSTRUMENTS AND DEPOSIT OF CORPORATE FUNDS
7.01 EXECUTION OF INSTRUMENTS GENERALLY. The Chairman of the Board, the
President, any Vice President, the Secretary or the Treasurer, subject to the
approval of the Board of Directors, may enter into any contract or execute and
deliver any instrument in the name and on behalf of the Company. The Board of
Directors may authorize any officer or officers, or agent or agents, to enter
into any contract or execute and deliver any instrument in the name and on
behalf of the Company, and such authorization may be general or confined to
specific instances.
12
<PAGE>
7.01 BORROWING. Unless and except as authorized by the Board of
Directors, no loans or advances shall be obtained or contracted for, by or on
behalf of the Company, and no negotiable paper shall be issued in its name. Such
authorization may be general or confined to specific instances. Any officer or
agent of the Company thereunto so authorized may attain loans and advances for
the Company and for such loans and advances may make, execute and deliver any
promissory notes, bonds, or other evidences of indebtedness of the Company. Any
officer or agent of the Company so authorized may pledge, hypothecate or
transfer as security for the payment of any and all loans, advances,
indebtedness and liabilities of the Company, any and all stocks, bonds other
securites and other personal property at any time held by the Company, and to
that end may endorse, assign and deliver the same and do every act and thing
necessary or proper in connection therewith.
7.03 DEPOSITS. All funds of the Company not otherwise employed shall be
deposited from time to time to its credit in such banks or trust companies or
with such bankers or other depositaries as the Board of Directors may select, or
as may be selected by any officer or officers or agent or agents authorized to
do so by the Board of Directors. Endorsements for deposit to the credit of the
Company in any of its duly authorized depositaries shall be made in such manner
as the Board of Directors from time to time may determine.
7.04 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the
payment of money, and all notes or other evidence of indebtedness issued in the
name of the Company, shall be signed by such officer or officers or agent or
agents of the Company and in such manner as the Board of Directors from time to
time may determine.
7.05 PROXIES. Proxies to vote with respect to shares of stock of other
corporations owned by, or standing in the name of, the Company may be executed
and delivered from time to time on behalf of the Company by the Chairman of the
Board, the President or any Vice President or by any other person or persons
thereunto authorized by the Board of Directors.
ARTICLE VIII
MISCELLANEOUS
8.01 DECLARATION OF DIVIDENDS. The Board of Directors at any regular or
special meeting may declare dividends payable, whenever in the exercise of its
discretion it may deem such declaration advisable and such is permitted by law.
Such dividends may be paid in cash, property, or shares of the Company.
8.02 BENEFIT PLANS. Directors shall have the power to install and
authorize any pension, profit sharing, stock option, stock award or stock bonus,
insurance, welfare, educational, bonus, health and accident or other benefit
program which the Board deems to be in the interest of the Company, at the
expense of the Company, and to amend or revoke any plan so adopted. Any such
plan may adopted and have full force and effect by resolution of the Board of
Directors, except where applicable laws, rules or regulations require prior
approval of the Company's shareholders of such plan in order for the plan to be
valid.
8.03 SEAL. The corporate seal of the Company shall be circular in form
and shall contain the name of the Company, the year incorporated and the words
"Seal" and "Nevada".
8.04 FISCAL YEAR. The Board of Directors shall have the power to fix,
and from time to time change, the fiscal year of the Company. Any such adoption
of or change in a fiscal year shall not constitute or require an amendment to
these Bylaws.
8.05 AMENDMENT OF BYLAWS. These Bylaws may be amended or repealed in
the manner provided for in the Charter, or if none is there provided: by
majority vote of the Board of Directors, taken at any meeting or by written
consent, subject to the shareholders' right to change or repeal any Bylaws so
made or adopt new Bylaws by vote of at least a majority of the total voting
power. Bylaws amendments may be proposed by any Director or shareholder. Any
action duly taken by the Board or the shareholders which conflicts or is
inconsistent with these Bylaws (as they may be amended) shall constitute an
amendment of the Bylaws, if the action was taken by such number of directors or
shares voting as would be sufficient for amendment of the Bylaws.
8.06 GENDER. The masculine gender is used in these Bylaws as a matter
of convenience only and shall be interpreted to include the feminine and neuter
genders as the circumstances indicate.
8.07 CONFLICTS. In the event of any irreconcilable conflict between
these Bylaws and either the Company's Charter or
13
<PAGE>
applicable law, the latter shall control.
8.08 DEFINITIONS. Except as these Bylaws otherwise specifically
provide, all terms used in these Bylaws shall have the definitions given them in
the Company's Charter or the Nevada General Corporation Law.
ARTICLE IX
NOTICES
9.01 RECEIPT OF NOTICES BY THE COMPANY. Notices, shareholder writings
consenting to action, and other documents or writings shall be deemed to have
been received by the Company when they are actually received: (i) at the
registered office of the Company in Nevada; (ii) at the principal office of the
Company (as designated in the most recent document filed by the Company with the
Nevada Secretary of State designating a principal office) addressed to the
attention of the Secretary of the Company; (iii) by the Secretary of the Company
wherever the Secretary may be found; or (iv) by any other person authorized from
time to time by the Board of Directors or the President to receive such
writings, wherever such person is found.
9.02 GIVING OF NOTICE. Except as otherwise provided by the General
Corporation Law of Nevada, these Bylaws, the Charter or resolution of the Board
of Directors, every meeting notice or other notice, demand, bill, statement or
other communication (collectively, "Notice") from the Company to a Director,
Officer or shareholder shall be duly given if it is written or printed and is
(i) sent by first class or express mail, postage prepaid, (ii) sent by any
commercial overnight air courier service, such as DHL, Federal Express, Emery,
Airborne, UPS or similar service, (iii) sent by telegraph, cablegram, telex,
telecopier, facsimile or similar transmission, (iv) delivered by any commercial
messenger service which regularly retains its receipts, or (v) personally
delivered, provided a receipt is obtained reflecting the date of delivery.
Notice shall not be duly given unless all delivery or postage charges are
prepaid. Notice shall be given to an addressee's most recent address as it
appears on the Company's records or to such other address as has been provided
in writing to the Secretary. A Notice shall be deemed "given" when dispatched
for delivery, when personally delivered, when transmitted electronically, or if
mailed, on the date postmarked. This Section shall not have the effect of
shortening any notice period provided for in these Bylaws.
9.03 WAIVER OF NOTICE. Any Notice required or permitted by the General
Corporation Law of Nevada, the Charter or these Bylaws may be waived in writing
at any time by the person entitled to the Notice, and such waiver shall be
equivalent to the giving of notice. Notice of any shareholders' meeting shall be
waived by attendance, in person or by proxy, at the meeting, unless any question
of lack of or defect in a Notice is raised prior to conclusion of the meeting. A
waiver of Notice of a special meeting of shareholders shall state the purpose
for which the meeting was called or the business to be transacted thereat.
APPROVED AND ADOPTED by the Board of Directors as of May 28, 1999.
SECRETARY'S CERTIFICATION
I, the undersigned Secretary of this Corporation, hereby certify that
the foregoing Bylaws were duly adopted by its Board of Directors on the date
above indicated and that the foregoing text of the Bylaws are currently in full
force and effect and have not been revoked, suspended or amended since adoption
thereof.
Dated: May 28, 1999
USA DIGITAL, INC.
By
----------------------------
SECRETARY
(SEAL)
14
EXHIBIT 10.12
MERGER AGREEMENT
of
USA DIGITAL, INC.
(A Nevada Corporation)
and
BLAZOON SYSTEMS INCORPORATED
(A Colorado Corporation)
This Merger Agreement, dated as of March 9, 1999, is entered into pursuant
to the provisions of Section 92A.190 of the General Corporation Law of Nevada
and of Section 7-111-107 of the Colorado Business Corporation Act, by and
between USA DIGITAL, INC., a Nevada corporation (the "Survivor"), and BLAZOON
SYSTEMS INCORPORATED, a Colorado corporation (the "Assimilated"), both
corporations being sometimes referred to herein as the "Constituent
Corporations."
RECITALS:
A. Survivor is a corporation duly organized and existing under the laws of
the State of Nevada and has an authorized capital of 60,000,000 shares, of which
50,000,000 shares are designated as common stock, par value $.001, and of which
5,000,000 shares are designated as Class A Preferred stock, $.001 par value, and
of which 5,000,000 shares are designated Class B Preferred Stock, $.001 par
value, none of which have been issued or are outstanding.
B. Assimilated is a corporation duly organized and existing under the laws
of the State of Colorado and has an authorized capital of 60,000,000 shares
without par value, of which 50,000,000 shares are designated as Common Stock and
of which 10,000,000 shares are designated as Preferred Stock. A total of
2,235,000 shares of Common Stock are issued and outstanding. A total of 625,000
shares of Series A Convertible Preferred shares are issued and outstanding.
C. The Board of Directors and Shareholders of Assimilated approved this
merger/reincorporation on June 22nd 1998, and the Board of Directors of the
Survivor approved this Agreement on March 9, 1999. (The Survivor has no
shareholders prior to the closing of this transaction.)
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained, Survivor and
Assimilated hereby agree, subject to the terms and conditions hereinafter set
forth, as follows:
ARTICLE I. MERGER.
1.1 MERGER AND NAME CHANGE. In accordance with the provisions of this
Agreement, the General Corporation Law of Nevada, and the Colorado Business
Corporation Act, Assimilated shall be merged with and into Survivor (the
"Merger"), and the name of the surviving corporation shall be USA Digital, Inc.
1.2 FILING AND EFFECTIVENESS. The Merger shall become effective when the
following actions shall have been completed:
(a) This Agreement and the Merger shall have been adopted and
approved by the shareholders of each Constituent Corporation in accordance with
the respective requirements of the General Corporation Law of Nevada and the
Colorado Business Corporation Act.
(b) An executed counterpart of this Agreement shall have been
filed with the Secretary of State of the State of Nevada; and
Merger Agreement page 1 of 5
USA Digital/Blazoon Systems
<PAGE>
(c) Executed Articles of Merger or other documents meeting the
requirements of the Colorado Business Corporation Act shall have been filed with
the Secretary of State of the State of Colorado.
The date and time when the Merger shall become effective, as aforesaid,
is herein called the "Effective Date."
1.3 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
Survivor as in effect immediately prior to the Effective Date shall continue in
full force and effect as the Certificate of Incorporation of the Survivor until
duly amended in accordance with the provisions thereof and applicable law.
1.4 BYLAWS. The Bylaws of Survivor as in effect immediately prior to the
Effective Date shall continue in full force and effect as the Bylaws of the
Survivor without any change as a result of the Merger.
1.5 DIRECTORS AND OFFICERS. The directors and officers of Survivor in
office immediately prior to the Effective Date shall continue in office and
shall constitute the directors and officers of Survivor until their respective
successors shall have been elected and duly qualified or until otherwise
provided by law, the Certificate of Incorporation of Survivor and the Bylaws of
Survivor.
1.6 EFFECT OF MERGER. Upon the Effective Date, the separate existence of
Assimilated shall cease and the Survivor (i) shall continue to possess all of
the assets, rights, powers and property of Survivor as constituted immediately
prior to the Effective Date, shall be subject to all actions previously taken by
the Board of Directors of Assimilated and shall succeed, without other transfer,
to all of the assets, rights, powers and property of Assimilated, (ii) shall
continue to be subject to all of the debts, liabilities and obligations of
Assimilated as constituted immediately prior to the Effective Date and shall
succeed, without other transfer, to all of the debts, liabilities and
obligations of Assimilated in the same manner as if Survivor had itself incurred
them, all as more fully provided under the applicable provisions of the General
Corporation Law of Nevada and the Colorado Business Corporation Act.
ARTICLE II. MANNER OF CONVERSION OF COMMON STOCK.
2.1 ASSIMILATED COMMON STOCK. Upon the Effective Date, each share of common
stock, of Assimilated issued and outstanding immediately prior thereto shall, by
virtue of the Merger and without any action by any holder of such shares or any
other person, be converted into and exchanged for one fully paid and
nonassessable share of Common Stock, $.001 par value, of Survivor (the "Merger
Shares"); that is, each share of Assimilated common stock shall be converted
into one (1) Merger Share.
2.2 OUTSTANDING COMMON STOCK OF SURVIVOR. Upon the Effective Date, there
will be no shares of Common Stock of Survivor issued and outstanding.
2.3 EXCHANGE OF CERTIFICATES. On or after the Effective Date of the Merger:
(a) All of the outstanding certificates which prior to that
time represented the outstanding Common Shares of Assimilated shall be deemed
for all purposes to evidence ownership of and to represent the Merger Shares
into which the shares of Assimilated represented by such certificates have been
converted as herein provided. The registered owner on the books and records of
Assimilated or its transfer agent of any such outstanding stock certificate
shall, until such certificate shall have been surrendered for transfer or
conversion or otherwise accounted for to Survivor or its transfer agent, have
and be entitled to exercise any voting and other rights with respect to and to
receive any dividend and other distributions upon the Merger Shares evidenced by
such outstanding certificate as above provided.
(b) Each certificate evidencing Merger Shares issued in the
Merger shall bear the same legends, if any, with respect to the restrictions on
transferability as the certificates of Assimilated so converted and given in
exchange therefor, unless otherwise determined by the Board of Directors of
Survivor in compliance with applicable laws.
Merger Agreement page 2 of 5
USA Digital/Blazoon Systems
<PAGE>
(c) If any certificate for Merger Shares is to be issued in a
name other than that in which the certificate surrendered in exchange therefor
is registered, it shall be a condition of issuance thereof that the certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer, that such transfer otherwise be proper and that the person requesting
such transfer pay any transfer or other taxes payable by reason of the issuance
of such new certificate in a name other than that of the registered holder of
the certificate surrendered or establish to the satisfaction of Survivor that
such tax has been paid or is not payable.
2.4 ASSUMPTION OF BENEFIT PLANS. Upon the Effective Date, Survivor shall
assume and continue both the 1998 Compensatory Stock Option Plan and the 1998
Employee Stock Compensation Plan of Assimilated, without change other than
conforming changes in the corporate name, par value of common stock, governing
law and similar non-substantive changes. Survivor and its Board of Directors
shall have the same rights and powers in regard to such plans as Assimilated and
its Board of Directors.
ARTICLE III. MANNER OF CONVERSION OF PREFERRED STOCK.
3.1 ASSIMILATED PREFERRED STOCK. Upon the Effective Date, each share of
Preferred stock, of Assimilated issued and outstanding immediately prior thereto
shall, by virtue of the Merger and without any action by any holder of such
shares or any other person, be converted into and exchanged for one fully paid
and nonassessable share Series A Convertible Preferred Stock, with a stated
value of $4.00, of Survivor (the "Merger Shares"); that is, each share of
Assimilated common stock shall be converted into one (1) Merger Share.
3.2 OUTSTANDING PREFERRED STOCK OF SURVIVOR. Upon the Effective Date,
there will be no shares of Preferred Stock of Survivor issued and outstanding
with the exception of the Merger Shares.
3.3 EXCHANGE OF CERTIFICATES. On or after the Effective Date of the
Merger:
(a) All of the outstanding certificates which prior to that
time represented the outstanding Series A Convertible Preferred Shares of
Assimilated shall be deemed for all purposes to evidence ownership of and to
represent the Merger Shares into which the shares of Assimilated represented by
such certificates have been converted as herein provided. The registered owner
on the books and records of Assimilated or its transfer agent of any such
outstanding stock certificate shall, until such certificate shall have been
surrendered for transfer or conversion or otherwise accounted for to Survivor or
its transfer agent, have and be entitled to exercise any voting and other rights
with respect to and to receive any dividend and other distributions upon the
Merger Shares evidenced by such outstanding certificate as above provided.
(b) Each certificate evidencing Merger Shares issued in the
Merger shall bear the same legends, if any, with respect to the restrictions on
transferability as the certificates of Assimilated so converted and given in
exchange therefor, unless otherwise determined by the Board of Directors of
Survivor in compliance with applicable laws.
(c) If any certificate for Merger Shares is to be issued in a
name other than that in which the certificate surrendered in exchange therefor
is registered, it shall be a condition of issuance thereof that the certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer, that such transfer otherwise be proper and that the person requesting
such transfer pay any transfer or other taxes payable by reason of the issuance
of such new certificate in a name other than that of the registered holder of
the certificate surrendered or establish to the satisfaction of Survivor that
such tax has been paid or is not payable.
ARTICLE IV. GENERAL MATTERS.
4.1 COVENANTS OF SURVIVOR. Survivor covenants and agrees that it will, on
or before the Effective Date:
(a) Qualify to do business as a foreign corporation in all
states wherein its operations require it to
Merger Agreement page 3 of 5
USA Digital/Blazoon Systems
<PAGE>
qualify under applicable state laws.
(b) File all documents with the franchise tax authorities of
the State of Colorado necessary to the assumption by Survivor of all of the
franchise tax liabilities of Assimilated.
(c) Take such other actions as may be required by the Colorado
Business Corporation Act or other applicable law.
4.2 ABANDONMENT. At any time before the Effective Date, this Agreement may
be terminated and the Merger abandoned for any reason whatever by the Board of
Directors of Survivor or Assimilated, or both, notwithstanding the approval of
this Agreement and Merger by the shareholders of Assimilated or Survivor or
both.
4.3 AMENDMENT. The Boards of Directors of the Constituent Corporations
may amend this Agreement at any time prior to the filing of this Agreement (or a
certificate in lieu thereof) with the Secretary of State of the State of Nevada,
provided that an amendment made subsequent to the adoption of this Agreement by
the shareholders of either Constituent Corporation shall not (i) alter or change
the amount or kind of Merger Shares to be received in exchange for or on
conversion of all or any of the shares of any class or series thereof of such
Constituent Corporation, (ii) alter or change any term of the Certificate of
Incorporation of the Survivor to be effected by the Merger, or (iii) alter or
change any of the terms and conditions of this Agreement if such alteration or
change would adversely affect the holders of any class or series thereof of such
Constituent Corporation.
4.4 EXPENSES. Survivor shall pay all costs related to the Merger and
necessary filings and actions in connection therewith.
4.5 MUTUAL COVENANTS OF CONSTITUENT CORPORATIONS. Survivor and Assimilated
each agree that, between the date hereof and the Effective Date, it will not (i)
enter into any employment contracts, (ii) grant any options, warrants or similar
rights (nor any instrument or security containing such an option, warrant or
similar right) exercisable for, exchangeable for or convertible into its common
shares or other securities, (iii) issue any stock or other securities, including
debt instruments, or (iv) declare or pay any dividends in stock or cash or make
any other distribution on or with respect to its outstanding common stock.
Either party may but need not abandon the Merger if the holders of more than 5%
of the outstanding shares of Assimilated should dissent from the Merger.
4.6 REGISTERED OFFICE. The Registered Office of the Survivor in the
State of Nevada is located at 502 East John Street, Carson City Nevada 89706,
and CSC Services of Nevada is the Resident Agent of the Survivor at such
address.
4.7 FURTHER ACTIONS. If at any time Survivor shall consider or be advised
that any further assignment or assurances in law are necessary or desirable to
vest or to perfect or confirm of record in Survivor the title to any property or
rights of Assimilated, or to otherwise carry out the provisions of this
Agreement, then the proper officers and directors of Assimilated as of the
Effective Date shall execute and deliver to Survivor any and all proper deeds,
assignments and assurances in law, and do all things necessary or proper to
vest, perfect or confirm title to such property or rights in Survivor.
4.8 GOVERNING LAW. This Agreement shall in all respects be interpreted and
enforced in accordance with and governed by the laws of the State of Colorado.
4.9 COUNTERPARTS. In order to facilitate the filing and recording of
this Agreement, it may be executed in any number of counterparts, each of which
shall be deemed to be an original.
4.10 AGREEMENT. Executed copies of this Agreement will be on file at the
principal place of business of Survivor located at 3601-4 Vineland Road,
Orlando, FL 32811-6474, and copies thereof will be furnished to any shareholder
of any Constituent Corporation upon request and without cost.
Merger Agreement page 4 of 5
USA Digital/Blazoon Systems
<PAGE>
IN WITNESS WHEREOF, this Agreement, having first been approved by
resolution of the Boards of Directors Assimilated and survivor, is hereby
executed on behalf of each of such corporations and attested by their respective
officers thereto duly authorized.
USA DIGITAL, INC.
A Nevada Corporation
ATTEST: By.................................
Mark D. Cobb, President
By.....................................
Mark D. Cobb, Secretary
BLAZOON SYSTEMS INCORPORATED
A Colorado Corporation
ATTEST: By................................
Mark D. Cobb, President
By................................
Mark D. Cobb, Secretary
Merger Agreement page 5 of 5
USA Digital/Blazoon Systems
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Forms 10-SB and 10-KSB of USA Digital, Inc.
our reports for the period from July 9,1998 (inception) to March 31, 1999 dated
July 15, 1999 and for the period from July 9, 1998 (inception) to June 30, 1999
dated August 3, 1999 relating to the financial statements of USA Digital, Inc.
which appear in such Forms 10-SB and 10-KSB.
/s/ WEINBERG & COMPANY, P.A.
WEINBERG & COMPANY, P.A.
Certified Public Accountants
Boca Raton, Florida
October 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001094563
<NAME> USA DIGITAL
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<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
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (160,370)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
