UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ To ___________
Commission file number 0-27375
USA DIGITAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA 59-3560920
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
P.O. BOX 172574
TAMPA, FLORIDA 33672
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (813) 230-9100
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
---- ----
As of August 20, 1999, 2,802,000 shares of the registrant's common stock were
outstanding.
<PAGE>
USA DIGITAL, INC. and SUBSIDIARIES
<TABLE>
<S> <C> <C>
INDEX
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements:
Accountant's Review Report 1
Balance Sheet - June 30, 1999 2
Statement of Operations - Three Months
Ended June 30, 1999 3
Statement of Changes in Stockholders'
Deficiency-Three Ended June 30, 1999 4
Statements of Cash Flows - Three Months
Ended June 30, 1997 5
Notes to Financial Statements -
June 30, 1999 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 23
SIGNATURES 25
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
ACCOUNTANTS' REVIEW REPORT
To the Board of Directors of:
USA Digital, Inc.
We have reviewed the accompanying balance sheet of USA Digital, Inc. as of June
30, 1999 and the related statements of operations, changes in stockholders'
deficiency and cash flows for the three months then ended, 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.
BALANCE SHEET
AS OF JUNE 30, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,676
Loans receivable - current 38,943
Note receivable - current portion 32,000
Prepaid expenses 68,840
----------
Total Current Assets 143,459
----------
PROPERTY AND EQUIPMENT - NET 752,873
----------
OTHER ASSETS
Deferred interest - capitalized leases 197,910
Note and loans receivable - noncurrent 71,600
----------
Total Other Assets 269,510
----------
TOTAL ASSETS $1,165,842
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 212,110
Capitalized lease obligation-current 98,970
----------
Total Current Liabilities 311,080
OTHER LIABILITIES
Capitalized lease obligation-non current 890,715
----------
Total Liabilities 1,201,795
----------
STOCKHOLDERS' DEFICIENCY
Preferred stock-Class A, $.001 par value
5,000,000 shares authorized, none
issued and outstanding --
Preferred stock-Class B, $.001 par value
5,000,000 shares authorized, none issued
and outstanding --
Common stock, $0.001 par value, 50,000,000
shares authorized, 2,722,000 shares issued
and outstanding 2,722
Additional paid-in capital 335,664
Accumulated deficit (374,339)
----------
Total Stockholders' Deficiency (35,953)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $1,165,842
==========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
USA DIGITAL, INC.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<S> <C>
Income $ --
-----------
Expenses
Executive compensation 24,844
Consulting fees 88,800
Professional fees 32,163
Office and other operational expenses 9,162
Auto expenses 3,000
Telephone 1,114
Insurance 884
Travel and entertainment 285
Depreciation (64)
Bank charges 161
-----------
Total Expenses 160,349
-----------
LOSS FROM OPERATIONS (160,349)
INTEREST EXPENSE (21)
-----------
NET LOSS $ (160,370)
===========
NET LOSS PER COMMON SHARE $ (0.06)
===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 2,675,022
===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
USA DIGITAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1999 2,649,500 $ 2,650 $ 263,236 $ (213,969) $ 51,917
Stock Issued For:
Cash 72,500 72 72,428 72,500
Net loss for the
three months ended
June 30, 1999 -- -- -- (160,370) (160,370)
---------- ------- ---------- ---------- ---------
BALANCE, June 30, 1999 2,722,000 $ 2,722 $ 335,664 $ (374,339) $ (35,953)
========== ======= ========== ========== =========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
USA DIGITAL, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(160,370)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization (64)
Changes in assets and liabilities
(Increase) decrease in:
Prepaid expenses 30,000
Increase (decrease) in:
Accounts payable and accrued expenses 27,892
---------
Net cash used in operating activities (102,542)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (553)
Acquisition of note receivable (20,000)
Increase in loans receivable (10,732)
---------
Net cash used in investing
activities (31,285)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 72
Proceeds from additional paid in capital 72,428
---------
Net cash provided by financing
activities 72,500
---------
DECREASE IN CASH AND CASH EQUIVALENTS (61,327)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 65,003
---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,676
=========
Cash paid during the year for:
Interest $ 21
=========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The Company acquired notes and loans receivable for cash and short-term debt of
$87,500.
See accompanying notes to financial statements.
5
<PAGE>
USA DIGITAL, INC.
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 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 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
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.
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".
(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 enactments 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.
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 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.
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.
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 June 30, 1999 consisted of the following:
<TABLE>
<S> <C>
Computer equipment $ 3,059
Equipment held under
capital lease 750,000
---------
753,059
Less: Accumulated depreciation (186)
---------
Total property and equipment $ 752,873
=========
</TABLE>
Depreciation expense for the three months ended June 30, 1999 was
$(64). (See Note 3)
NOTE 3 - CAPITAL LEASE OBLIGATION
The Company is the lessee of telephone switching equipment under a
capital lease expiring during 2004. The assets and liabilities under
the capital lease are recorded at the lower of the present value of the
minimum lease payments or the fair value of the asset. The asset will
be depreciated using the declining balance method over the estimated
economic useful life, and is expected to be placed in service in late
1999. Hence no depreciation has been provided for as of June 30, 1999.
The value of the property held under capital lease as of June 30, 1999
was $750,000.
9
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 3 - CAPITAL LEASE OBLIGATION - (CONT'D)
Minimum future lease payments under the capital lease as of June 30,
1999 are as follows:
<TABLE>
<S> <C>
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
=========
</TABLE>
The interest rate on the capital lease is approximately 11.5% and is
imputed at the inception of the lease and included in prepaid expenses
and other assets. The lease payments do not begin until 90 days after
the installation and subsequent operation of the equipment, expected to
be in late 1999.
NOTE 4 - STOCKHOLDERS' EQUITY
(A) Common and Preferred Stock
The Company has authorized 50,000,000 shares of common stock, $.001 par
value; 5,000,000 of Class A Preferred Stock, $.001 par value; and
5,000,000 shares of Class B Preferred Stock, $.001 par value. The
preferred stock will have such rights and preferences as determined by
the Board of Directors.
In connection with an acquisition transaction (Note 5D), the Company
may be required to issue 625,000 shares of Class A Preferred Stock.
A series of Class B Preferred Stock was designated as "Class B
Convertible Redeemable Preferred Stock, Series 1" and consists of
50,000 shares, $.001 par value per share. These shares are redeemable
any time after April 20, 2002 upon 30 days written notice to the
Company, and such shares are
10
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)
(A) Common and Preferred Stock - (CONT'D)
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 7).
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).
(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
11
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)
(B) Stock Compensation - (CONT'D)
(i) Stock Option Plan - (CONT'D)
options" within the meaning of Section 422 of the Internal Revenue
Code. As of June 30, 1999, the Company has reserved 1,500,000 shares of
common stock for issuance upon the exercise of options granted under
the Plan.
The exercise price of options granted under the Plan shall not be less
than 85% of the Fair Market Value of a share of common stock on the
date the option is granted. The exercise period, expiration date and
vesting period shall be determined by the Compensation Committee of the
Board of Directors, however, the vesting period may not exceed ten
years. If the vesting period is not stated in the granting resolution,
then the option shall vest immediately.
As of June 30, 1999, no options have been granted under the Plan.
(ii) Stock Options Granted Under Employment and Consulting
Agreements
During the year ended March 31, 1999 the Company issued 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:
12
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)
(B) Stock Compensation - (CONT'D)
(ii) Stock Options Granted Under Employment and Consulting
Agreements - (CONT'D)
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
------- --------------
<S> <C> <C>
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
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
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
--------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
$1.00-$3.00 1,937,500 6.00 Years $ 2.13 637,500 $ 1.23
</TABLE>
(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
13
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)
(B) Stock Compensation - (CONT'D)
(iii) Employee Stock Compensation Plan - (CONT'D)
Company has reserved 1,000,000 shares of common stock for issuance
under the Employee Compensation Plan and no shares may be issued under
the Employee Compensation Plan after April 30, 2003. No shares have
been issued under the Employee Compensation Plan as of June 30, 1999.
NOTE 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
14
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONT'D)
(A) Year 2000 Issue - (CONT'D)
the Company's products and programs as they are primarily computer
related. The Company's products have been developed and tested with
regard to year 2000 compliance. All products were deemed to be Year
2000 compliant. The costs of such development and testing and
validating were minimal and absorbed as part of the Company's normal
quality control procedures.
(B) Employment Agreement
On January 5, 1999 the Company entered into an employment agreement
with its President. The effective date of this agreement is November
10, 1998, and is for a period of five years at which time it can be
renewed by mutual agreement of both parties. The agreement may be
terminated at any time by mutual written agreement by the parties. The
consideration is $80,000 annually to paid at regular payroll periods.
As additional compensation, the Company is issuing 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 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
15
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONT'D)
(C) Consulting Agreements - (CONT'D)
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 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 5D) and Blazoon Systems, Incorporated (See Note
1A). In addition, the Company shall provide the organization with a
monthly unaccounted for expense allowance of $2,500.
On January 5, 1999, effective November 10, 1998, the Company entered
into a two year consulting agreement with another consulting
organization whereby the Company will be provided with advice with
regard to corporate finance, evaluations of business partners, mergers
and acquisitions and such other 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 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 consideration for the services provided,
the Company issued 60,000 shares of the Company's common stock.
16
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 5 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
(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. Diverse reserved the right at the time of
the closing to obtain an appraisal substantiating that the approximate
value of ODT was $2.8 million. Subsequently, USA Digital, Inc., the
successor to Diverse (See Note 1B), obtained an appraisal which did not
substantiate such value, and, on May 14, 1999, in the Circuit Court in
and for Hillsborough County, Florida, filed a complaint against ODT and
its former shareholders seeking rescission of the ODT acquisition. The
Defendants filed a Motion to Dismiss, which was served on the Company
on June 19, 1999. A hearing on defendants' motion is set for September
27, 1999. Defendants have not yet filed an Answer 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.
NOTE 6 - 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.
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USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
NOTE 6 - ACQUISITION OF SECURED AND UNSECURED CLAIMS - (CONT'D)
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.
NOTE 7 - 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. The transaction is scheduled to close on or before
August 5, 1999 (See Note 4(A)).
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 (See Note 4(A)).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and related notes included elsewhere in this Form
10-SB. This discussion contains forward-looking statements based on current
expectations, which involve risks and uncertainties. Actual results and the
timing of certain events could differ materially from the forward-looking as a
result of a number of factors.
OVERVIEW
The Company was incorporated 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 4th quarter 1999. The operation of this
switch will qualify the Company as facility-based under the Telecommunications
Act of 1996. 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.
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 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. Through the operation of its Siemen's DCO switch and/or
with its BellSouth reseller agreement, 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. (T.E.A.M.), a Tampa, Florida based telephone
interconnect company that has been in business since 1986. T.E.A.M. will operate
as a wholly-owned subsidiary of the Company. During its 1998 fiscal year,
T.E.A.M.
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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 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 period the Company incurred $160,349 in expenses
that were mainly associated with the development of the aforementioned
infrastructure. The Company sustained a net loss of $0.06 per share for the
period.
CASH FLOW ACTIVITY
During the period ended June 30, 1999, the Company received proceeds of
$72,000 from the sale of common stock pursuant to Regulation D, Rule 504 of the
Securities Act of 1933, as amended. Additionally, $160,349 in expenses 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 period was a decrease in
its cash position of $61,327.
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
20
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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 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.
21
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements and exhibits filed as part of this
report:
(1) The balance sheet of USA Digital, Inc. as of June 30, 199 and
the related statement of operational changes in stockholders'
equity and cash flow for the three months then ended, together
with the related notes and review report of Weinberg & Company,
P.A.
independent certified public accountants.
(2) 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*
10.8 Amendment to Acquisition Agreement by and among
USA Digital, Inc., DSA Computer, Inc. and David Seal*
22
<PAGE>
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*
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule (Submitted only with filing in
electronic format)
(b) The Company filed no reports on Form 8-K during the three months ended June
30, 1999.
- ---------------
*To be filed by amendment.
23
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Tampa, State of Florida, on September 16, 1999.
USA Digital, Inc.
By: /s/ Mark D. Cobb
--------------------
Mark D. Cobb, President and Chief Executive Officer
(Principal Executive Officer and Principal Accounting Officer)
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