U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
----------------- ---------------------
Commission file number 000-27375
USA DIGITAL, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
NEVADA 59-3560920
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100 WEST LUCERNE CIRCLE, SUITE 600, ORLANDO, FL 32801
(Address of Principal Executive Offices)
(813) 230-9100
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
----- -----
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
OUTSTANDING AT
CLASS OCTOBER 6, 1999
----- ---------------
Common Stock, par value $.01 3,200,500
Transitional Small Business Disclosure Format (check one):
Yes No X
------ ------
<PAGE>
USA DIGITAL, INC.
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PAGE
----
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 27
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures
- --------------------------------------------------------------------------------
Forward Looking Statements
This Form 10-QSB contains forward-looking statements, which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, product demand and
market acceptance risks, the impact of competitive products and pricing, product
development, commercialization and technological difficulties, capacity and
supply constraints or difficulties, general business and economic conditions,
the effect of the Company's accounting policies and other risks detailed in the
Company's Annual Report on Form 10-KSB and other filings with the Securities and
Exchange Commission.
- --------------------------------------------------------------------------------
<PAGE>
Part I Financial Information
Item 1 Financial Statements
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
PAGE 1 - ACCOUNTANTS' REVIEW REPORT
PAGE 2 - 3 - CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30,
1999 AND MARCH 31, 1999
PAGE 4 - 5 - CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
DEFICIENCY FOR THE PERIOD FROM JULY 9, 1998
(INCEPTION) TO SEPTEMBER 30, 1999
PAGE 6 - CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
SIX AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND
FOR THE PERIOD FROM JULY 9, 1998(INCEPTION) TO
SEPTEMBER 30, 1999
PAGE 7 - 8 - CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND
FOR THE PERIOD FROM JULY 9, 1998(INCEPTION) TO
SEPTEMBER 30, 1999
PAGES 9 - 26 - NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
<PAGE>
ACCOUNTANTS' REVIEW REPORT
To the Board of Directors of:
USA Digital, Inc.
We have reviewed the accompanying consolidated balance sheet of USA Digital,
Inc. and Subsidiaries (a Development Stage Company) as of September 30, 1999 and
the related consolidated statements of operations, changes in stockholders'
deficiency and cash flows for the six and three months then ended and for the
period from July 9, 1998 (inception) to September 30, 1999, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these consolidated 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 consolidated financial statements in order for them
to be in conformity with generally accepted accounting principles.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
November 12, 1999
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, MARCH 31,
1999 (UNAUDITED) 1999 (AUDITED)
---------------- --------------
ASSETS
CURRENT ASSETS
Cash $ 136,356 $ 65,003
Accounts Receivable 88,036 -
Inventory 44,600 -
Loans receivable - current 23,863 -
Note receivable - current portion 32,000 -
Due from employees 12,673 -
Prepaid expenses - 57,065
----------- -----------
Total Current Assets 337,528 122,068
----------- -----------
PROPERTY AND EQUIPMENT - NET 1,044,163 752,256
----------- -----------
OTHER ASSETS
Note and loans receivable - noncurrent 71,600 -
Deposits 60,382 -
----------- -----------
Total Other Assets 131,982 -
----------- -----------
TOTAL ASSETS $ 1,513,673 $ 874,324
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Cash overdraft $ 2,308 $ -
Accounts payable and accrued expenses 303,635 96,718
Capitalized lease obligation-current 156,012 28,191
Customer advances 67,504 -
Notes payable - current 5,318 -
---------- -----------
Total Current Liabilities 534,777 124,909
---------- -----------
NONCURRENT LIABILITIES
Capitalized lease obligation-non current 840,741 721,809
Notes payable - noncurrent 15,114 -
----------- -----------
Total Noncurrent Liabilities 855,855 721,809
----------- -----------
TOTAL LIABILITIES 1,390,632 846,718
----------- -----------
CONVERTIBLE REDEEMABLE PREFERRED STOCK
Preferred stock-class B, series 1 and 2,
redeemable at $4.00 per share, $0.001
par value, 90,000 shares authorized,
issued and outstanding 90 -
Additional paid in capital - convertible
redeemable preferred stock 138,208 -
----------- -----------
Total Convertible Redeemable
Preferred Stock 138,298 -
----------- -----------
See accompanying notes to consolidated financial statements.
2
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, MARCH 31,
1999 (UNAUDITED) 1999 (AUDITED)
---------------- --------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock-Class A, $.001 par value
5,000,000 shares authorized, none
issued and outstanding -
Preferred stock-Class B, $.001 par value
4,910,000 shares authorized, none issued
and outstanding -
common stock, $0.001 par value, 50,000,000
shares authorized, 2,863,000 shares issued
and outstanding 2,863 2,650
Common stock to be issued, 44,500 shares 45 -
Additional paid-in capital 1,488,745 877,614
Accumulated deficit during development
stage (976,987) (556,017)
----------- -----------
514,666 324,247
Less deferred consulting expense (199,923) (296,641)
Less common stock advanced (330,000) -
----------- ------------
Total Stockholders' Equity
(Deficiency) (15,257) 27,606
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $ 1,513,673 $ 874,324
=========== ===========
See accompanying notes to consolidated financial statements.
3
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
COMMON STOCK COMMON STOCK ADDITIONAL DURING DEFERRED COMMON
ISSUED TO BE ISSUED PAID-IN DEVELOPMENT CONSULTING STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE EXPENSE ADVANCED TOTAL
------ ------ ------ ------ ------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock Issuance 885,000 $ 885 - $ - $ - $ - $ - $ - $ 885
Stock issued for consulting
services 25,000 25 - - 24,975 - - - 25,000
Common stock options issued
to consultants - - - - 614,378 - (296,641) - 317,737
Acquisition of Orlando
Digital Telephone 325,000 325 - - - - - - 325
Issuance of Common Stock to
stockholders of Blazoon 1,000,000 1,000 - - (1,000) - - - -
Stock issued for cash 144,500 145 - - 144,355 - - - 144,500
Stock issued for consulting
services 270,000 270 - - 94,906 - - - 95,176
Net loss for the period
ended March 31, 1999 - - - - - (556,017) - - (556,017)
--------- ------- ------ ------ ---------- ----------- --------- -------- ---------
Balance, March 31, 1999 2,649,500 $ 2,650 - - $ 877,614 $ (556,017) $(296,641) - $ 27,606
Stock refunded for cash (2,500) (3) - - (2,497) - - - (2,500)
Stock issued as loan 55,000 55 - - 329,945 - - (330,000) -
Consulting expense recognition
for common stock options - - - - - - 48,359 - 48,359
Stock issued in exchange for
a loan 75,000 75 - - 74,925 - - - 75,000
Stock issued for cash 25,000 25 - - 24,975 - - - 25,000
Stock to be issued for cash - - 19,500 20 19,480 - - - 19,500
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
COMMON STOCK COMMON STOCK ADDITIONAL DURING DEFERRED COMMON
ISSUED TO BE ISSUED PAID-IN DEVELOPMENT CONSULTING STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE EXPENSE ADVANCED TOTAL
------ ------ ------ ------ ------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock issued for consulting
services 61,000 61 - - 124,189 - - - 124,250
Stock to be issued for consulting
services - - 25,000 25 51,536 - - - 51,561
Consulting expense recognition
for common stock options - - - - - - 48,359 - 48,359
Divided payments - - - - - (5) - - (5)
Accretion to convertible redeemable
preferred stock - - - - (11,422) - - - (11,422)
Net loss for the period
ended September 30, 1999 - - - - - (420,965) - - (420,965)
--------- ------- ------- ------ ---------- -------- -------- --------- -------
BALANCE, September 30, 1999 2,863,000 2,863 44,500 45 1,488,745 (976,987) (199,923) (330,000) (15,257)
========= ======== ======= ====== ========== ======== ======== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND FOR THE
PERIOD FROM JULY 9, 1998 (INCEPTION) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Six months Three months July 9, 1998
ended ended (Inception) to
September 30, 1999 September 30, 1999 September 30, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
REVENUES $ 496,134 $ 496,134 $ 496,134
COST OF SALES 283,993 283,993 283,993
----------- ----------- -----------
GROSS PROFIT 212,141 212,141 212,141
----------- ----------- -----------
EXPENSES
Executive Compensation 64,441 39,597 101,774
Salaries and Wages 84,506 84,506 84,506
Consulting fees 398,395 261,236 832,018
Professional fees 50,722 18,559 78,312
Provision for doubtful loans - - 24,311
Office and other operational expenses 40,225 31,063 58,648
Auto expenses 12,732 9,732 17,732
Telephone 10,124 9,010 14,699
Insurance 4,442 3,558 6,096
Travel and entertainment 1,350 1,065 4,262
Depreciation 5,102 5,166 5,352
Bank charges 480 319 603
Repairs and maintenance 813 813 1,036
---------- ----------- -----------
Total Expenses 673,332 464,624 1,229,349
---------- ----------- -----------
LOSS FROM OPERATIONS (461,191) (252,483) (1,017,208)
---------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain on cancelled lease 40,700 40,700 40,700
Interest Expense (474) (453) (474)
---------- ----------- -----------
Total Other Income $ 40,226 $ 40,247 $ 40,226
---------- ---------- -----------
NET LOSS DURING DEVELOPMENT STAGE $ (420,965) $ (212,236) $ (976,982)
========== ========== ===========
NET LOSS PER COMMON SHARE
- BASIC AND DILUTED $ (0.16) $ (0.08) $ (0.49)
========== ========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 2,695,770 2,725,859 2,011,537
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND FOR
THE PERIOD FROM JULY 9, 1998 (INCEPTION) to SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Six months Three months July 9, 1998
ended ended (Inception) to
September 30, 1999 September 30, 1999 September 30, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (420,965) $ (212,236) $ (976,982)
Adjustments to reconcile net loss to
Net cash provided by (used in)
operating activities:
Depreciation and amortization 5,102 5,166 5,352
Provision for doubtful loans - - 24,311
Consulting fees and expenses incurred
In exchange for common stock 175,811 175,811 295,987
Consulting expense recognized
for common stock options 96,718 48,359 414,455
Changes in assets and liabilities
(Increase) decrease in:
Accounts Receivable 452 452 452
Inventory 15,000 15,000 15,000
Prepaid expenses 57,065 27,065 -
Due from employees (3,100) (3,100) (3,100)
Increase (decrease) in:
Accounts payable and accrued expenses 29,280 1,388 125,998
Customer advances (22,080) (22,080) (22,080)
---------- -------- -----------
Net cash provided by (used in)
operating activities (66,717) 35,825 (120,607)
---------- -------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition of
T.E.A.M. and DSA 116,276 116,276 116,276
Purchase of equipment (553) - (3,059)
Acquisition of note receivable (20,000) - (20,000)
Increase (Decrease) in deposits (56,320) (56,320) (56,320)
Increase (Decrease) in loans receivable (19,964) (9,232) (44,275)
---------- --------- ----------
Net cash provided by (used in)
investing activities 19,439 50,724 (7,378)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 44,500 44,500 190,210
Increase in cash overdraft 2,308 2,308 2,308
Proceeds from loan 75,000 - 75,000
Payment of dividends (5) (5) (5)
Refund of common stock (2,500) - (2,500)
Decrease in Notes payable (672) (672) (672)
---------- --------- ----------
Net cash provided by financing
activities 118,631 46,131 264,341
---------- --------- -----------
INCREASE IN CASH AND CASH
EQUIVALENTS 71,353 132,680 136,356
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND FOR
THE PERIOD FROM JULT 9, 1998 (INCEPTION) to SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Six months Three months July 9, 1998
ended ended (Inception) to
September 30, 1999 September 30, 1999 September 30, 1999
------------------ ------------------ ------------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIOD 65,003 3,676 -
----------- --------- ----------
CASH AND CASH EQUIVALENTS - END OF
PERIOD $ 136,356 $ 136,356 $ 136,356
=========== ========= ==========
Cash paid during the year for:
Interest $ 474 $ 453 $ 474
=========== ========= ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The Company acquired notes and loans receivable for short-term debt of $87,500.
The Company issued 55,000 shares of common stock as a loan (see Note 7).
The Company issued 75,000 shares of common stock in exchange for a loan payable.
See accompanying notes to consolidated financial statements.
8
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Business Organization And Activity
USA Digital, Inc. ("the Company"), incorporated under the laws of
Nevada on March 5, 1999, is a Development Stage Holding Company whose
mission is to build a highly integrated convergent communications
company. The Company seeks to acquire Internet service providers,
telephone interconnect companies, computer/network integrators, and
switchless resellers.
USA Digital, Inc. and its wholly owned subsidiaries are hereinafter
referred to as the "Company".
(B) Business Combinations
On March 4, 1999, Blazoon Systems Incorporated (Blazoon), an inactive
publicly held company with no recent operating history, consummated an
Agreement and Plan of Reorganization (the Acquisition) with Diverse
Capital Corp. (Diverse), a private corporation incorporated on July 9,
1998, whereby Blazoon issued 1,235,000 shares of its common stock to
the stockholders of Diverse in exchange for 100% of the issued and
outstanding common stock of Diverse, and 625,000 shares of its Class A
Preferred Stock to be issued to the stockholders of Orlando Digital
Telephone Corporation, a pending acquiree of Diverse (See Note 10(D)),
in exchange for 100% of the issued and outstanding preferred stock of
Diverse. The Class A Convertible Preferred Stock was never issued (See
Note 10(D)). The preferred stock is convertible to common stock at a
one-for-one ratio for a one year period beginning February 2, 2000, has
dividend preference, is non-voting, and is subject to redemption at a
$4.00 liquidation value at the Company's option beginning February 2,
2004. Subsequent to the Acquisition, the prior shareholders of Diverse
owned approximately 55% of the voting common stock of Blazoon. Under
Generally Accepted Accounting Principles, a Company whose stockholders
receive over 50% of the stock of the legal acquirer in a business
combination is considered the acquirer for accounting purposes.
Accordingly, the transaction is accounted for as an acquisition of
Blazoon by Diverse, and a recapitalization of Diverse. The balance
sheet subsequent to the acquisition includes the net assets of Blazoon
and Diverse at historical costs and the operations of diverse since its
inception and the operations of Blazoon since the date of acquisition.
On March 9, 1999 the Company consummated a merger agreement with
Blazoon, a State of Colorado corporation, to effect a redomicile and
name change of Blazoon, with the Company as the surviving entity.
On July 9, 1999 the Company acquired 100% of the issued and outstanding
stock of DSA Computers, Inc. ("DSA") in exchange for 40,000 shares of
the Company's Convertible Redeemable Preferred B, Series 2 Stock,
making it a 100% subsidiary of USA Digital, Inc. (See Note 11).
9
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
(B) Business Combinations - (Cont'd)
On August 5, 1999 the Company acquired 100% of the issued and
outstanding stock of Telephone Engineering and Maintenance, Inc.
("T.E.A.M.") in exchange for 50,000 shares of the Company's Convertible
Redeemable Preferred B, Series 1 Stock, making it a 100% subsidiary of
USA Digital, Inc. (See Note 11).
(C) Principles of Consolidation
The consolidated financial statements include the accounts of USA
Digital, Inc. and its two wholly-owned subsidiaries (See Note 11). All
significant intercompany balances and transactions have been eliminated
in consolidation.
(D) 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.
(E) 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.
(F) 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.
(G) Earnings Per Share
Earnings per share are computed using the weighted average of common
shares outstanding as defined by Financial Accounting Standards No.
128, "Earnings per Shares". At September 30, 1999 there were 2,137,500
stock options that could potentially dilute basic EPS in the future
which were not included in the computation of diluted earnings per
share due to their antidilutive effect.
10
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
(H) Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
SFAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events
other than enactment of changes in the tax law or rates. Any available
deferred tax assets arising from net operating loss carryforwards and
consulting expense relating to common stock options issued to
consultants has been offset by a deferred tax valuation allowance on
the entire amount.
(I) 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.
(J) Stock Options
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting For Stock Based Compensation" ("SFAS 123"), the Company has
elected to account for Stock Options issued to employees under
Accounting Principles Board Opinion No. 25 "(APB Opinion No. 25)" and
related interpretations, and for stock options issued to consultants in
accordance with SFAS 123.
(K) 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
11
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
(L) New Accounting Pronouncements - (Cont'd)
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", as
amended by Statement No. 137, 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, 2000. 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.
(M) Financial Instruments
The Company follows Statement of Financial Accounting Standard No. 107
"Disclosures About Fair Value of Financial Instruments" Financial
instruments which potentially expose the Company to concentrations of
credit risk consist principally of cash, loans and note receivable and
a capital lease obligation. At September 30, 1999, the cash, loans and
note receivable and capital lease obligation approximated fair market
value.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable were as follows at September 30, 1999:
Accounts receivable $ 88,036
=========
At September 30, 1999 approximately 29%, 16% and 12% of accounts
receivable were due from three customers, respectively.
NOTE 3 - INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined
by the first-in, first-out ("FIFO") method.
Inventory consists of the following at September 30, 1999:
Computer and computer parts $ 44,600
=========
NOTE 4 - LOANS RECEIVABLE
(A) Loans Receivable - Current
The following schedule reflects loans receivable from non-related
parties as of September 30, 1999:
12
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 4 - LOANS RECEIVABLE - (CONT'D)
(A) Loans Receivable - Current - (Cont'd)
Loan receivable from
non-related party, secured $ 13,363
Loan receivable from
non-related party 4,000
Loan receivable from
non-related party, current portion 6,500
TOTAL LOANS RECEIVABLE - CURRENT $ 23,863
=========
A loan receivable of $24,311 representing an advance to Orlando Digital
Telephone Corporation (ODT) was given in the course of the planned
acquisition of ODT. The Company filed a complaint against ODT seeking
rescission of the ODT acquisition. An allowance for doubtful loans was
established for the total amount during the period ended March 31, 1999
(See Note 10(D)).
The loan receivable of $13,363 represents a cash loan given to the
purchaser of all of the outstanding common stock of Syncom, Inc. This
loan is secured by the common stock acquired (See Note 12).
The loan receivable of $4,000 represents a cash loan given to Syncom,
Inc.
The loan receivable of $6,500 represents the current portion of the
proposed unsecured claims settlement against Syncom, Inc. acquired from
Premium Internet, Corp. (Premium) as of June 2, 1999 (See Note 12).
(B) Loans Receivable - Non-current
The notes and loans receivable - non-current totaling $71,600 represent
the non-current portion of the proposed secured claims settlement of
$48,000 and the proposed unsecured claims settlement of $23,600 against
Syncom, Inc., acquired from Premium as of June 2, 1999 (See Note 12).
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1999 consisted of the
following:
13
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 5 - PROPERTY AND EQUIPMENT (CONT'D)
Furniture and Fixtures $ 7,985
Computer equipment 11,155
Automobiles 77,001
Equipment held under
capital lease 996,753
-----------
1,092,894
Less: Accumulated depreciation (48,731)
-----------
Total property and equipment $ 1,044,163
===========
Depreciation expense for the six months ended September 30, 1999 was
$5,102 (See Note 7).
NOTE 6 - DEPOSITS
The following schedule reflects deposits as of September 30, 1999:
Deposit under capital
lease (See Note (7(A)) $ 49,838
Deposits under office
leases 10,544
-----------
TOTAL DEPOSITS $ 60,382
===========
NOTE 7 - LOANS AND NOTES PAYABLE AND CAPITAL LEASE OBLIGATION
(A) Capital Lease Obligation
The Company was the lessee of telephone switching equipment under a
capital lease expiring during 2004. The assets and liabilities under
the capital lease were recorded during the period ended March 31, 1999
at the lower of the present value of the minimum lease payments or the
fair value of the asset. The lease was assumed on March 1, 1999 through
an assignment agreement entered into between the Company, a related
party (" Original Lessee")and the lessor. There was no change in the
terms of the lease and the original commencement date as defined under
the lease and Generally Accepted Accounting Principles was October 2,
1998. The Original Lessee was in default on lease payments at the date
of assignment. On March 1, 1999 the Company received from the lessor a
waiver of default and an extension of 150 days. In August 1999 this
lease was cancelled by the Company. As a result of the cancellation,
the deposit, originally paid by the original lessee, was refunded to
the Company and recorded as "gain on cancelled lease" during the period
ended September 30, 1999.
In August 1999 the Company entered into a new lease ("New Lease") of
14
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 7 - LOANS AND NOTES PAYABLE AND CAPITAL LEASE OBLIGATION - (CONT'D)
(A) Capital Lease Obligation - (CONT'D)
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.
Although the equipment has been delivered and accepted by the Company,
it has not been placed in service at the review date. Hence no
depreciation has been provided for as of September 30, 1999. The value
of the property that was held under capital lease as of September 30,
1999 was $996,753. The deposit of $49,838, paid by the Company for the
New Lease during the period ended September 30, 1999 is included in
"deposits" on the Balance Sheet.
Minimum future lease payments under the capital lease as of September
30, 1999 are as follows:
For the year ended September 30, 2000 $ 263,916
2001 263,916
2002 263,916
2003 263,916
2004 263,916
-----------
Total minimum lease payments 1,319,580
Less: Amount representing interest (322,827)
-----------
Present value of net minimum
lease payment $ 996,753
===========
The interest rate on the capital lease is approximately 11.5% and is
imputed at the inception of the lease. At lease inception, the present
value of the net minimum lease payments did not exceed the fair market
value of the leased asset.
(B) Loans and Notes Payable
On May 28, 1999, the Company received a loan of $75,000 from an
investor. The loan was converted to 75,000 shares of the Company's
common stock in August 1999.
The following schedule reflects notes payable to non-related parties at
September 30, 1999:
Note payable, interest at 9.35% per
annum, secured $ 12,856
15
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 7 - LOANS AND NOTES PAYABLE AND CAPITAL LEASE OBLIGATION - (CONT'D)
(B) Loans and Notes Payable - Cont'd)
Note payable, interest at 8.25% per
annum, secured 7,576
-----------
20,432
Less current portion 5,318
-----------
$ 15,114
===========
Required payments of principal on notes payable at September 30, 1999,
including maturities, are summarized as follow:
2000 5,318
2001 5,809
2002 4,732
2003 3,516
2004 1,057
------
20,432
======
Interest expense for the six months ended September 30, 1999 was $453.
NOTE 8 - CONVERTIBLE REDEEMABLE 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 have been issued
in exchange for the acquisition of T.E.A.M. and recorded at the
carrying value of T.E.A.M.'s net assets, aggregating $52,444 at August
5, 1999 (the "Acquisition Date"), which the Company determined
approximated the fair market value of those assets at the acquisition
date. Management believes that the fair market value of the net assets
acquired was more readily determinable than the fair market value of
the Preferred Stock issued. Accordingly, the Convertible Preferred B,
Series 1 Stock was assigned a value of $52,444 with no resulting
goodwill. The shares are redeemable any time after June 7, 2002 upon 30
days written notice to the Company at a redemption price of $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. In accordance with the Securities and Exchange Commission Staff
Accounting Bulletin 55, the carrying value of the Convertible Preferred
B, Series 1 Stock will be accreted, using the interest method, over the
period from the Acquisition Date to the redemption date of June 7, 2002
to increase the carrying value to its fixed redemption
16
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 8 - CONVERTIBLE REDEEMABLE PREFERRED STOCK - (CONT'D)
price of $4.00 per share. (See Note 11).
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. These shares have been issued
in exchange for the acquisition of DSA and recorded at the carrying
value of DSA's net assets, aggregating $74,432 at the Acquisition Date,
which the Company determined approximated the fair market value of
those assets at the acquisition date. Management believes that the fair
market value of the net assets acquired was more readily determinable
than the fair market value of the Preferred Stock issued. Accordingly,
the Convertible Preferred B, Series 2 Stock was assigned a value of
$74,432 with no resulting goodwill. 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 at a
redemption price of $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. In accordance with the
Securities and Exchange Commission Staff Accounting Bulletin 55, the
carrying value of the Convertible Preferred B, Series 2 Stock will be
accreted, using the interest method, over the period from the
Acquisition Date to the redemption date of July 2, 2002 to increase the
carrying value to its fixed redemption price of $4.00 per share (See
Note 11).
As of September 30, 1999, $6,376 and $5,046 has been accreted to the
Convertible Preferred B, Series 1 and 2 Stock, respectively. In absence
of Retained Earnings, the total accretion of $11,422 for the period
ended September 30, 1999, is presented as a deduction from Additional
Paid in Capital in the Statement of Stockholders' Deficiency as of
September 30, 1999.
NOTE 9 - STOCKHOLDERS' DEFICIENCY
(A) Common and Preferred Stock
The Company has authorized 50,000,000 shares of common stock, $.001 par
value; 5,000,000 of Class A Preferred Stock, $.001 par value; and
5,000,000 shares of Class B Preferred Stock, $.001 par value. The
preferred stock will have such rights and preferences as determined by
the Board of Directors. As a result of the designation of 90,000 of
"Class B Preferred stock as Class B Convertible Redeemable Preferred
Stock Series 1 and 2" the authorized
17
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 9 - STOCKHOLDERS' DEFICIENCY - (CONT'D)
(A) Common and Preferred Stock - (Cont'd)
number of Class B Preferred Stock aggregates 4,910,000 shares as of
September 30, 1999.
During the three months ended September 30, 1999, the Company issued
25,000 shares of Common Stock for cash and 75,000 shares of Common
Stock in exchange for debt. Such stock was issued at a discount due to
certain factors, such as the restricted nature of the shares issued and
the limited trading volume of the Company's shares.
Common Stock issued for consulting services during the periods
presented was recorded at the Fair Market Value of the stock based upon
the trading price of the stock at the issuance dates.
In connection with an acquisition transaction (See Note 10(D)), the
Company may be required to issue 625,000 shares of Class A Preferred
Stock.
(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
September 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 September 30, 1999, no options have been granted under the Plan.
18
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 9 - STOCKHOLDERS' DEFICIENCY - (CONT'D)
(B) Stock Compensation
(ii) Stock Options Granted Under Employment and Consulting
Agreements
During the year ended March 31, 1999 the Company issued 750,000
incentive stock options to an officer and 1,187,500 incentive stock
options to consultants pursuant to certain employment and consulting
agreements. During the six months ended September 30, 1999, the Company
issued an additional 200,000 stock options to directors of the Company,
resulting in a total of 2,137,500 stock options granted as of September
30, 1999.
In accordance with SFAS 123, for options issued to employees, the
Company applies APB Option No. 25 and related interpretations in
accounting for the options issued. Accordingly, no compensation cost
has been recognized for options issued under the employment agreement
as of March 31, 1999 and September 30, 1999 since the exercise price of
the options as stipulated in the option agreement exceeded the fair
market value of the stock on the grant date. Had compensation cost for
the Company's Plan been determined based on the fair market value at
the grant date for awards under that plan, consistent with SFAS 123,
the Company's net loss for the year ended March 31, 1999 and the six
months ended September 30, 1999 would have been increased to the
pro-forma amounts indicated below.
<TABLE>
<CAPTION>
03/31/99 09/30/99
-------- --------
<S> <C> <C> <C>
Net loss As reported $(556,017) $(420,965)
Pro forma $(740,757) $(630,288)
Net loss per share As reported $ (0.51) $ (0.16)
Pro forma $ (0.68) $ (0.23)
</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 options issued to consultants, the Company applies SFAS 123.
Accordingly, consulting expense of $317,737 was charged to operations
during the period ended March 31, 1999 with deferred consulting expense
of $296,641 presented as a deduction from stockholders' equity at March
31, 1999. The deferred consulting expense is recognized ratably over
the vesting period of the stock options through 2002. For the six
months ended September 30, 1999 consulting expense of $96,718 has been
recognized, resulting in deferred consulting expense of $199,923 at
September 30, 1999. The deferred tax asset of $32,884 resulting from
the consulting expense of $96,718 was fully offset by a valuation
allowance at September 30, 1999 (See Note 1(H)).
19
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 9 - STOCKHOLDERS' DEFICIENCY (CONT'D)
(B) Stock Compensation - (CONT'D)
(ii) Stock Options Granted Under Employment and Consulting
Agreements - (CONT'D)
For financial statement disclosure purposes and for purposes of valuing
stock options issued to consultants, the fair market value of each
stock option granted 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 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 September 30, 1999 and changes during the six month
period ended September 30, 1999 is presented below:
Number of Weighted Average
Options Exercise Price
------- --------------
Stock Options
Balance at beginning of period 1,937,500 $ 2.13
Granted 200,000 $ 5.13
Exercised - -
Forfeited - $ -
--------- --------
Balance at end of period 2,137,500 $ 2.41
========= =======
Options exercisable at end of period 762,500 $ 1.40
Weighted average fair value of options
granted during the period 200,000 $ 2.55
The following table summarizes information about stock options
outstanding at September 30, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at Sept 30, Contractual Exercise At Sept 30 Exercise
Price 1999 Life Price 1999 Price
--------- -------- -------- ------- -------- --------
$1.00-$3.00 1,937,500 5.75 Years $ 2.13 687,500 $ 1.23
$3.00-$7.00 150,000 7.08 Years $ 5.83 25,000 $ 3.00
$3.00 50,000 3.00 Years $ 3.00 50,000 $ 3.00
--------- ---------- ------- ------- -------
2,137,500 5.78 Years $ 2.41 762,500 $ 1.40
========= =======
20
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANICAL STEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 9 - STOCKHOLDERS' DEFICIENCY (CONT'D)
(B) Stock Compensation - (CONT'D)
(iii) Employee Stock Compensation Plan
The 1998 Employee Stock Compensation Plan (Employee Compensation Plan)
has been adopted by the Board of Directors of the Company and approved
by the Company's stockholders. The plan was developed to provide a
means whereby directors, officers, consultants, advisors or agents,
employees or professional service providers of the Company may be
granted common stock of the Company. Grants under the Employee
Compensation Plan shall be determined by the Compensation Committee of
the Board of Directors. As of September 30, 1999, the Company has
reserved 1,000,000 shares of common stock for issuance under the
Employee Compensation Plan and no shares may be issued under the
Employee Compensation Plan after April 30, 2003. No shares have been
issued under the Employee Compensation Plan as of September 30, 1999.
NOTE 10 - 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.
21
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 10 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
(B) Employment Agreement
On January 5, 1999 the Company entered into an employment agreement
with its President. The effective date of this agreement is November
10, 1998, and is for a period of five years at which time it can be
renewed by mutual agreement of both parties. The agreement may be
terminated at any time by mutual written agreement by the parties. The
consideration is $96,000 annually to be paid at regular payroll
periods. As additional compensation, the Company has issued a total of
750,000 options excisable at annual intervals ranging from Jan. 5, 1999
to January 15, 2002 at varying exercise prices between $1.00 to $3.00.
(See Note 9(B))
(C) Consulting Agreements
On January 5, 1999 the Company entered into a six month consulting
agreement with an individual whereby the Company will be provided with
identification, and introduction to a public shell for the purposes of
effecting a reverse merger. As consideration for the services provided
the Company issued 10,000 shares of the Company's common stock in March
1999.
On January 5, 1999, effective November 10, 1998, the Company entered
into a five year consulting agreement with a consulting organization
whereby the Company will be provided with advice with regard to
corporate finance, evaluations of business partners, mergers and
acquisitions and such other matters as requested. This agreement may be
extended by mutual written agreement of the parties. As consideration
for the services provided, the Company issued 150,000 shares of the
Company's common stock as a signing bonus. The Company pays a monthly
fee of $8,000 in semi-monthly installments. As additional compensation,
the Company issued a total of 750,000 options, exercisable at annual
intervals ranging from January 5, 1999 to February 15, 2002 at varying
exercise prices from $1.00 to $3.00. (See Note 9(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 10(D)) and
Blazoon Systems, Incorporated (See Note 1(B)). 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
22
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 10 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
(C) Consulting Agreements
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 9(B)).
On March 22, 1999, the Company entered into a six month consulting
agreement with a public relations organization whereby the Company will
be provided with advice with regard to public relations, the
development and implementation of strategic plans, and such other
matters as requested. This agreement may be extended by mutual written
agreement of the parties. As consideration for the services provided,
the Company issued 60,000 shares of the Company's common stock.
(D) Litigation
On February 2, 1999 Diverse Capital Corporation (Diverse) acquired
Orlando Digital Telephone Corporation (ODT) in exchange for 325,000
shares of Diverse common stock and 625,000 shares of Diverse
Convertible Preferred A stock. The 325,000 shares of common stock were
issued to ODT shareholders, however, the 625,000 shares of Class A
Convertible Preferred Stock was never issued (See Note 1(B)). Diverse
reserved the right at the time of the closing to obtain an appraisal
substantiating that the approximate value of ODT was $2.8 million.
Subsequently, USA Digital, Inc., the successor to Diverse (See Note
1(B)), obtained an appraisal which did not substantiate such value,
and, on May 14, 1999, in the Circuit Court in and for Hillsborough
County, Florida, filed a complaint against ODT and its former
shareholders seeking rescission of the ODT acquisition. The Defendants
filed a Motion to Dismiss, which was served on the Company on June 19,
1999. Defendants have not yet filed an Answer or asserted any
counterclaims or defenses. In addition to such other relief that the
Court may grant in the event that the Company does not prevail,
including enforcement of the acquisition agreement, the Company may be
required to issue 625,000 shares of Class A Convertible Preferred Stock
to the ODT shareholders. (See Notes 1(B) and 2)
On September 23, 1999 ODT through its attorney has submitted a proposal
to settle the matter. The terms of the settlement offer are
confidential. USA Digital, Inc. has not decided whether it will accept
this offer. A hearing regarding the Defendant's Motion to Dismiss has
been postponed pending the outcome of the settlement discussions.
NOTE 11 - ACQUISITION OF SUBSIDIARIES
On April 20, 1999 the Company entered into an agreement to acquire 100%
of the issued and outstanding stock of Telephone Engineering and
Maintenance,
23
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 11 - ACQUISITION of SUBSIDIARIES - (CONT'D)
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 acquisition closed on August 5, 1999, but became effective as of
July 1, 1999. The acquisition was accounted for under the purchase
method of accounting, and accordingly the results of operations of
T.E.A.M. are included in the Company's consolidated financial
statements from the effective date. The Company has determined that the
carrying value of T.E.A.M.'s net assets, aggregating $52,444 at August
5, 1999, (the "Acquisition Date") approximated the fair market value of
those assets at the acquisition date. Management believes that the fair
market value of the net assets acquired was more readily determinable
than the fair market value of the Preferred Stock issued. Accordingly,
the Convertible Preferred B, Series 1 Stock was assigned a value of
$52,444 with no resulting goodwill. In accordance with the Securities
and Exchange Commission Staff Accounting Bulletin 55, the carrying
value of the Convertible Preferred B, Series 1 Stock will be accreted,
using the interest method, over the period from the Acquisition Date to
the redemption date of June 7, 2002 to increase the carrying value to
its fixed redemption price of $4.00 per share (See Note 8).
The following unaudited information reflects the fair market values of
the assets acquired and the liabilities assumed:
Cash $ 105,517
Due from employees 9,573
Property and equipment 25,938
Deposits 1,000
Note payable (89,584)
----------
$ 52,444
==========
On July 9, 1999 (the "Acquisition Date") 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.
The acquisition closed on July 9, 1999,but become effective on July 1,
1999. The acquisition was accounted for under the purchase method of
accounting, and accordingly the results of operations of DSA are
included in the Company's consolidated financial statements from the
effective date. The Company has determined that the carrying value of
DSA's net assets, aggregating $74,432 at the Acquisition Date
approximated the fair market value of those assets at the acquisition
date. Management believes that the fair market value of the net assets
acquired was more readily determinable than the fair market value of
the Preferred Stock issued. Accordingly, the Convertible Preferred B,
Series 2 Stock was assigned a value of $74,432 with no resulting
goodwill. In accordance with the Securities and Exchange Commission
Staff Accounting Bulletin 55, the carrying value of the Convertible
Preferred B,
24
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 11 - ACQUISITION of SUBSIDIARIES - (CONT'D)
Series 2 Stock will be accreted, using the interest method, over the
period from the Acquisition Date to the redemption date of July 2, 2002
to increase the carrying value to its fixed redemption price of $4.00
per share (See Note 8).
The following unaudited information reflects the fair market values of
the assets acquired and the liabilities assumed:
Cash $ 10,759
Accounts receivable 88,486
Inventory 59,600
Property and equipment 23,765
Other assets 3,063
Accounts payable (44,016)
Notes payable - current portion (1,909)
Other current liabilities (46,121)
Notes payable (19,195)
---------
$ 74,432
=========
NOTE 12 - 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 Internet Service
Provider's customer base, and some equipment, to the Company.
Additionally, as of June 2, 1999, the Company entered into agreements
with other parties to purchase $130,000 in unsecured debt of Syncom,
Inc. for the sum of $30,100. According to the proposed plan of
reorganization, this unsecured debt will be repaid $0.25 on every $1.00
owed over a period of five years, resulting in a total amount due to
the Company of $32,500 and a current amount due of $6,500 (See Note 4).
As of September 30, 1999, the Company has paid $20,000 to Premium and a
total of $5,100 to the sellers of the unsecured debt in accordance with
the agreements.
Additionally, the Company advanced an amount of $13,363 cash and 55,000
shares of its common stock valued at $330,000 or $6.00 per share based
upon the trading price of the common stock on June 1, 1999 to the
purchaser of all of the outstanding common stock of Syncom, Inc. The
advances of common stock is presented as a deduction from stockholders'
equity. The total advances,
25
<PAGE>
USA DIGITAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
NOTE 12 - ACQUISITION OF SECURED AND UNSECURED CLAIMS - (CONT'D)
aggregating $343,363, is secured by the common stock acquired and
evidenced by a promissory note accruing interest at 8% per annum. The
Company has the right to obtain the stock of Syncom in satisfaction of
amounts due under the promissory note. There are no obligations to
Renegade if the plan of reorganization is not approved.
NOTE 13 - SUBSEQUENT EVENTS
In October 1999, the Company issued two convertible debenture notes for
an aggregate amount of $50,000. The notes accrue interest at 10% per
annum. Principal and interest are due and payable 120 days from the
effective date of the notes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
On March 5, 1999, USA Digital, Inc. (the "Company") was incorporated in
the State of Nevada. The Company is a holding company whose mission is to build
a highly integrated convergent communications company. The Company seeks to
acquire Internet service providers, telephone interconnect companies,
computer/network integrators, and switchless resellers.
On February 26, 1999, Blazoon Systems Incorporated ("Blazoon"), a
Colorado corporation, that was an inactive publicly held company with no recent
operating history entered into an agreement and Plan of Reorganization (the
"Acquisition") with Diverse Capital Corp. ("Diverse"), a Florida corporation
incorporated on July 9, 1998 to merge Diverse into Blazoon. From its inception,
through March 4, 1999, Diverse was engaged in the development of its business
plan and infrastructure to become a convergent communications company. The
Acquisition was consummated on March 4, 1999. Under the terms of the
Acquisition, Blazoon issued 1,235,000 shares of its common stock to the
stockholders of Diverse in exchange for 100% of the issued and outstanding
common stock of Diverse in exchange for 100% of the issued and outstanding
common stock of Diverse. The Company also agreed to issue 625,000 shares of its
Class A Preferred Stock to be issued to the stockholders of Orlando Digital
Telephone Corporation (a pending acquiree of Diverse at that time) in exchange
for 100% of the issued and outstanding preferred stock of Diverse. The 625,000
shares of Class A Preferred Stock was never issued and the Company is currently
in litigation with Orlando Digital Telephone Corporation to recind its
acquisition of Orlando Digital Telephone. The preferred stock is convertible to
common stock at a one-for-one ratio beginning February 2, 2000 to a maximum of
9.0% of the then outstanding common stock, has dividend preference, is
non-voting, and is subject to redemption at a $4.00 liquidation value at the
Company's option beginning February 2, 2004. Subsequent to the Acquisition, the
prior shareholders of Diverse owned approximately 55% of the voting common stock
of Blazoon.
On March 9, 1999, the Company consummated a merger agreement with
Blazoon with the Company as the surviving entity. The Company entered into the
March 9, 1999, transaction with Blazoon in order to: (1) redomicile Blazoon as a
Nevada Corporation in order to take advantage of the more favorable corporate
law and franchise tax of Nevada; (2) effect the name change from Blazoon to USA
Digital, Inc.; and (3) to create a public market for USA Digital, Inc. common
stock so that the Company could more easily raise the capital necessary to carry
out its business plan.
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COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND MARCH 31, 1999
Total assets increased $639,349 to $1.5 million at September 30, 1999
from March 31, 1999. The increase is primarily attributable to the acquisition
of DSA Computers, Inc., ("DSA") and TEAM, Inc. ("TEAM") during the three months
ended September 30, 1999 which resulted in assets of $185,673 and $142,028,
respectively, being acquired by the Company at the acquisition date, and an
increase in capitalized lease equipment of $246,753. The increase in the
Company's cash and cash equivalents of $71,353 over the six month period ended
September 30, 1999 was primarily due to the aforementioned acquisitions. The
increase in non-current notes and loans receivable of $71,600 can be attributed
to the Company's purchase of certain unsecured claims of Syncom, Inc. Total
deposits increased by $60,382 primarily as a result of the execution of a new
capital lease for telephone switching equipment.
Total liabilities increased $543,914 to $1.4 million at September 30,
1999 from March 31, 1999. This increase is primarily attributable to a $206,917
increase in accounts payable and accrued expenses, a $127,821 increase in
current capitalized lease obligations and a $118,932 increase in non-current
capitalized lease obligations associated with its order of telephone switching
equipment.
RESULTS OF OPERATIONS FOR THE PERIODS ENDED SEPTEMBER 30, 1999
The Company incurred a net loss of $212,236, or $0.08 per share, for
the three months ended September 30, 1999 and $420,965, or $0.16 per share, for
the six months ended September 30, 1999. The net losses reflect losses from
operations for the three months ended September 30, 1999 of $252,483 and
$461,191 for the six months ended September 30, 1999, partially offset by a
$40,700 onetime gain associated with cancellation and the subsequent
renegotiation of a telephone switching equipment lease.
The Company did not generate any revenues for the fiscal year ended
March 31, 1999 or the three months ended June 30, 1999, as it was in the process
of establishing the necessary infrastructure that will enable it to meet its
acquisition goals over the next 24 months. During the three period ended
September 30, 1999, the Company completed its acquisition of DSA and TEAM and
therefore generated revenues for the first time in its operating history during
the current period. For the three and six months ended September 30, 1999, the
Company generated $496,134 in revenues. The cost of sales for the three and six
month periods was $283,993. Gross profit for the periods was
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$212,141 and gross profit margins were 43.0%. Total expenses for the three and
six months ended September 30, 1999 were $464,624 and $673,332, respectively, of
which $224,170 and $272,529, respectively, were noncash expenses relating to the
issuance of common stock and common stock options issued to consultants.
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. As of September 30, 1999, the Company had a working
capital deficiency of $197,249. In order to fund its working capital needs, the
Company is currently undertaking to raise an additional $1 million in capital.
The Company believes that such funds raised together with operating revenues
will be sufficient to fund its working capital needs for the next twelve months.
YEAR 2000 ISSUE
The Company is aware of the issues associated wit 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 its primary vendors. Including Siemens, as it
relates to its telephone switches, and has not identified and 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.
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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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 2, 1999 Diverse Capital Corporation ("Diverse") acquired
Orlando Digital Telephone Corporation ("ODT") in exchange for 325,000 shares of
Diverse common stock and 625,000 shares of Diverse Convertible Preferred A
Stock. The 625,000 shares of Preferred A Stock were never issued. The 325,000
shares of common stock were issued to ODT shareholders. Diverse reserved the
right at the time of the closing to obtain an appraisal substantiating that the
approximate value of ODT was $2.8 million. Subsequently, USA Digital, Inc., the
successor to Diverse, obtained an appraisal which did not substantiate such
value, and, on May 14, 1999, in the Circuit Court in and for Hillsborough
County, Florida, filed a complaint against ODT and its former shareholders
seeking rescission of the ODT acquisition. The Defendants filed a Motion to
Dismiss, which was served on the Company on June 19, 1999. The motion to dismiss
the Orlando Digital action has not been heard. Defendants have not yet filed an
Answer or asserted any counterclaims or defenses. In addition to such other
relief that the Court may grant in the event that the Company does not prevail,
including enforcement of the acquisition agreement, the Company may be required
to issue 625,000 shares of Class A Convertible Preferred Stock to the ODT
shareholders.
On September 23, 1999 Orlando Digital through its attorney has
submitted a proposal to settle the matter. The terms of the settlement offer are
confidential. USA Digital has not decided whether it will accept this offer. A
hearing regarding Defendant's Motion to Dismiss has been postponed pending the
outcome of settlement discussions.
Other than described above, the Company is not involved in any pending
legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings in the aggregate are believed
by management to be immaterial to the Company's financial condition and results
of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule*
(b) Reports on Form 8-K
None
*Submitted only with filing in electronic format.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
USA DIGITAL, INC.
By: /s/ Mark D. Cobb
-------------------------------
Mark D. Cobb
President and Chief Executive Officer
(principal executive officer and
principal accounting officer)
Date: November 15, 1999
