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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 172574, TAMPA, FL 33672
(Address of principal executive office-zip code)
Telephone (813) 230-9100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of class)
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 twelve 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__ .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB [ X ]
As of August 20, 1999, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Registrant was
approximately $3,270,375.
As of August 20, 1999, 2,802,000 shares of Registrant's common stock
were outstanding.
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<PAGE>
USA DIGITAL, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED
MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
ITEM 1. Business........................................................................................3
ITEM 2. Properties......................................................................................7
ITEM 3. Legal Proceedings...............................................................................8
ITEM 4. Submission of Matters to a Vote of Security Holders.............................................8
PART II
ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters...........................8
ITEM 6. Management's Discussion And Analysis of Financial Condition And
Results of Operations...........................................................................9
ITEM 7. Financial Statements And Supplementary Data....................................................12
ITEM 8. Changes in And Disagreements With Accountants on Accounting
And Financial Disclosure.......................................................................12
PART III
ITEM 9. Directors And Executive Officers of The Registrant.............................................13
ITEM 10. Executive Compensation.........................................................................15
ITEM 11. Security Ownership of Certain Beneficial Owners And Management.................................18
ITEM 12. Certain Relationships And Related Transactions.................................................19
PART IV
ITEM 13. Exhibits, Financial Statement Schedules And Reports on Form 8-K................................20
</TABLE>
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PART I
ITEM 1. 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 4, 1999, Blazoon Systems Incorporated ("Blazoon"), a Colorado
corporation, consummated an Agreement and Plan of Reorganization (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
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 plans to achieve this
goal primarily 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
o Electronic Commerce
o Voice over Internet
o Internet Telephony
o Co-Location
o Local and Long Distance Telephone Services
o Communications Equipment Sales and Service
o Computer and Network Integration and Wireless Solutions
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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 sectors that has been adversely
affected by passage of The Telecom Act is the switchless resellers. 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, and thus creating an
excellent opportunity to enter the communications arena at an undervalued price
point.
The Company intends to grow through the continuation of its acquisition
program. In most instances, acquisitions will be consummated solely in exchange
for the Company's stock. Simultaneously, 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, such as ATM, ADSL, ISDN, T1's,
Fractional T1's and DS3's.
o Dial up access service to the residential community, focused
on easy user interface and access to information on the World
Wide Web.
o IP Telephony with the ability to offer price competitive
service to both the commercial and residential users.
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o Comprehensive long distance services including 800/888, One
Plus, WATS, international, calling cards, debit cards and
operator services. This unit would also
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provide digital private line services, including ATM, Frame
Relay, VPN, as well as traditional private line services.
o Web Services, including production, hosting, marketing and E
Commerce solutions.
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.
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 quarter 1999.
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 ("ISP"), 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
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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.
ITEM 2. PROPERTIES
The following table sets forth certain information at March 31, 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
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<S> <C> <C> <C>
6702 Benjamin Road, Suite 300 $66,000 December 31, 1999 2,400
Tampa, FL 33634
10001 N.W. 50th Street, Suite 105 $30,000 November 30, 1999 3,400
Sunrise, Florida 33351
</TABLE>
At March 31, 1999, the net book value of the Company's computer
equipment and other furniture, fixtures and equipment at its existing offices
totaled $752,256. For more information, see Note 2 of the Notes to Consolidated
Financial Statements.
ITEM 3. 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, 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.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. 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.
<TABLE>
<CAPTION>
PRICE RANGE
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QUARTER ENDED HIGH LOW
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Fiscal year ended March 31, 1999:
<S> <C>
Fourth Quarter ended March 31, 1999(1)............................... $ 3.50 $ 3.00
</TABLE>
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(1) Fourth quarter data is for the period of March 26, 1999 to March 31, 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.
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ITEM 6. 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-KSB. 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.
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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. 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 period ended March
31, 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 $168,917 in expenses that were
mainly associated with the development of the aforementioned infrastructure. The
Company sustained a net loss of $0.12 per share for the period.
CASH FLOW ACTIVITY
During the period ended March 31, 1999, the Company received proceeds
of $144,500 from the sale of common stock pursuant to Regulation D, Rule 504 of
the Securities Act of 1933, as amended. The net result to the Company for the
period was an increase in its cash position of $62,970. Additionally, $90,176 in
expenses that were incurred as a result of various consulting fees were
exchanged for common stock in the Company.
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.
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
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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 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.
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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 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of USA Digital, Inc. as of March 31, 1999 are
included in pages F-1 through F-19 of this report.
ITEM 8. 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.
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PART III
ITEM 9. 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. Cobb's 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.
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,
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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 1/2 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.
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ITEM 10. 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>
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(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, and it 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 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.
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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 $3.00.
1998 Compensatory Stock Option Plan. The Stock Option Plan ("Stock
Option Plan") has been adopted by the Board of Directors of the Company and
approved by the Company's stockholders. The purpose of the Stock Option Plan is
to promote the growth of the Company and its affiliates by linking the incentive
compensation of officers, key executives and directors with the profitability of
the Company. The Stock Option Plan is not subject to ERISA and is not a
tax-qualified plan. The Company has reserved an aggregate of 1,500,000 shares of
Common Stock for issuance upon the exercise of stock options granted under the
Plan.
The Stock Option Plan is administered by the members of the Board's
Compensation Committee who are disinterested directors ("Option Committee"). The
Stock Option Plan does not provide for the grant of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and provides only for the grant of non-qualified stock
options to purchase Common Stock of the Company ("Options") to eligible
employees. The Option Committee has discretion under the Stock Option Plan to
establish certain material terms of the Options granted to officers and
employees provided such grants are made in accordance with the Plan's
requirements.
All costs of the Stock Option Plan are borne by the Company. The
Company has reserved the right to amend or terminate the Plan, in whole or in
part, subject to the requirements of all applicable laws.
16
<PAGE>
The following table summarizes the grants that were made to the Named
Executive Officer during fiscal 1999.
OPTION/SAR GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED IN EXERCISE OR
GRANTED FISCAL YEAR BASE PRICE EXPIRATION
NAME (#)(1) (%) ($ 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.
17
<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
- ---- ------------------------- -------------------------
Mark D. Cobb
<S> <C> <C>
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.
18
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares of the Company's Common
Stock beneficially owned by each person known to be the beneficial owner of 5%
of the company's 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. Consultant 270,500(3) 9.4%
John D. Brasher, Jr. Shareholder 220,000 7.9%
Dunn Capital Corp. Consultant 843,000(4) 27.6%
J.R. Nelson Shareholder 247,500 8.8%
Mark D. Cobb Director, President and 850,000(5) 27.9%
Chief Executive Officer
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 945,000 31.0%
as a group ( persons)
</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 Company's Common
Stock at $1.00 per share. Does not include options to purchase 187,500
shares of the Company's Common Stock at prices ranging from $1.00 per
share to $3.00 per share.
(4) Includes options to purchase 250,000 shares of the Company's Common
Stock at $1.00 per share. Does not include options to purchase 500,000
shares of the Company's Common Stock at prices ranging from $1.50 per
share to $3.00 per share.
(5) Includes options to purchase 250,000 shares of the Company's Common
Stock at $1.00 per share . Does not include options to purchase 500,000
shares of the Company's 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 Company's
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
Company's 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.
19
<PAGE>
ITEM 12. 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 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.
On March 22, 1999, June 25, 1999 and August 18, 1999, respectively, the
Company issued 25,000, 25,000 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.
20
<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 sheets of USA Digital, Inc. as of March 31, 1999
and the related consolidated statement of operations, changes
in stockholders' equity and cash flows for the three months
ended March 31, 1999, together with the related notes and the
independent auditors' report of Weinberg & Company, P.A.
independent certified public accountants.
(2) The balance sheet of USA Digital, Inc. as of June 30, 1999 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.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <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 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*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Weinberg & Company, P.A.
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference to the Registration Statement on Form 10-SB as
filed with the Securities and Exchange Commission on September 17, 1999.
(b) The Company filed no reports on Form 8-K during the fourth quarter of the
fiscal year ended March 31, 1999.
21
<PAGE>
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
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Mark D. Cobb Director, President and Chief Executive September 16, 1999
- ------------------------------------- Officer (principal executive officer and
Mark D. Cobb principal accounting officer)
Director
- -------------------------------------
Donald E. Darden
/s/ Peter J. Lyons Director September 16, 1999
- -------------------------------------
Peter J. Lyons
</TABLE>
22
<PAGE>
USA DIGITAL, INC.
FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
<PAGE>
USA DIGITAL, INC.
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. 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
F-1
<PAGE>
USA DIGITAL, INC.
BALANCE SHEET
AS OF MARCH 31, 1999
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $ 65,003
Loan receivables 24,311
Prepaid expenses 78,359
----------
Total Current Assets 167,673
PROPERTY AND EQUIPMENT - NET 752,256
OTHER ASSETS - DEFERRED INTEREST ON
CAPITAL LEASE OBLIGATION 218,391
----------
TOTAL ASSETS $1,138,320
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 96,718
Capitalized lease obligation-current 49,485
----------
Total Current Liabilities 146,203
OTHER LIABILITIES
Capitalized lease obligation-non current 940,200
----------
Total Liabilities 1,086,403
----------
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 (213,969)
----------
Total Stockholders' Equity 51,917
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,138,320
==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
USA DIGITAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO MARCH 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT 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
========== ======= ========== ========== =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
USA DIGITAL, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO MARCH 31, 1999
--------------------------------------------------------------
<TABLE>
<S> <C>
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 $ (213,969)
===========
NET LOSS PER COMMON SHARE-BASIC AND DILUTED $ (0.16)
===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-BASIC AND DILUTED 1,336,887
-----------
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
USA DIGITAL, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO MARCH 31, 1999
<TABLE>
<S> <C>
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
=========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The Company acquired telephone switching equipment for debt under a capitalized
lease in the amount of $989,685.
See accompanying notes to financial statements.
F-5
<PAGE>
USA DIGITAL, INC.
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 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.
F-6
<PAGE>
USA DIGITAL, INC.
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".
(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. Inc 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.
F-7
<PAGE>
USA DIGITAL, INC.
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 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
F-8
<PAGE>
USA DIGITAL, INC.
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.
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:
<TABLE>
<S> <C>
Computer equipment $ 2,506
Equipment held under
capital lease 750,000
---------
752,506
Less: Accumulated depreciation (250)
---------
Total property and equipment $ 752,256
=========
</TABLE>
Depreciation expense for the three months ended March 31, 1999 was
$250. (See Note 3)
NOTE 3 - CAPITAL LEASE OBLIGATION
The Company is the lessee of telephone switching equipment under a
capital lease expiring during 2004. The assets and liabilities under
the capital lease are recorded at the lower of the present value of the
minimum lease payments or the fair value of the asset. The asset will
be depreciated using the declining balance method over the estimated
economic useful life, and is expected to be placed in service in late
1999. Hence no depreciation has been provided for as of March 31, 1999.
The value of the property that was held under capital lease as of March
31, 1999 was $750,000.
F-9
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 3 - CAPITAL LEASE OBLIGATION - (CONT'D)
Minimum future lease payments under the capital lease as of March 31,
1999 are as follows:
<TABLE>
<S> <C>
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
=========
</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 designated at $4.00 per share. The Company
also has the right
F-10
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)
(A) Common and Preferred Stock - (CONT'D)
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).
(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
F-11
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)
(B) Stock Compensation - (CONT'D)
(i) Stock Option Plan - (CONT'D)
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. Accordingly, no compensation cost
has been recognized for options issued under the employment and
consulting agreements as of March 31, 1999. 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.
F-12
<PAGE>
USA DIGITAL, INC.
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)
<TABLE>
<S> <C>
Net loss As reported $ 168,917
Pro forma $ 1,165,792
Net loss per share As reported $ 0.12
Pro forma $ 0.83
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
------- --------------
<S> <C> <C>
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
</TABLE>
F-13
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)
(B) Stock Compensation - (CONT'D)
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:
<TABLE>
<CAPTION>
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
--------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
$1.00-$3.00 1,937,500 6.25 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 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.
F-14
<PAGE>
USA DIGITAL, INC.
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
F-15
<PAGE>
USA DIGITAL, INC.
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 $80,000
annually to paid at regular payroll periods. As additional
compensation, the Company is issuing 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 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.
F-16
<PAGE>
USA DIGITAL, INC.
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. 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
F-17
<PAGE>
USA DIGITAL, INC.
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.
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. The transaction is scheduled to close on or before July
22, 1999.
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.
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
F-18
<PAGE>
USA DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 6 - SUBSEQUENT EVENTS - (CONT'D)
acquisition was 40,000 shares of the Company's Convertible Preferred B,
Series 2 Stock.
F-19
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Form 10-KSB of USA Digital, Inc. our report
for the period from July 9, 1998(inception) to March 31, 1999 dated July 15,
1999 relating to the financial statements of USA Digital, Inc. which appear in
such Form 10-KSB.
WEINBERG & COMPANY, P.A.
Certified Public Accountants
Boca Raton, Florida
September 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001094563
<NAME> US DIGITAL INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> MAR-9-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 65,003
<SECURITIES> 0
<RECEIVABLES> 24,311
<ALLOWANCES> 78,359
<INVENTORY> 0
<CURRENT-ASSETS> 167,673
<PP&E> 752,256
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,138,320
<CURRENT-LIABILITIES> 146,203
<BONDS> 0
0
0
<COMMON> 2,650
<OTHER-SE> 263,236
<TOTAL-LIABILITY-AND-EQUITY> 1,138,320
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 213,969
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (213,969)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (213,969)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
