U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
Commission File No.: 000-27375
USA DIGITAL, INC.
(Name of small business issuer 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) 221-8373
(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Check whether the issuer (1) has 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 |X|
No |_|
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. USA Digital, Inc. had
10,221,320 shares outstanding as of October 10, 2000.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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TABLE OF CONTENTS
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PAGE
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PART I. Financial Information
Item 1. Financial Statements ................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...........................................................10
PART II.
Item 1. Legal Proceedings ....................................................................15
Item 2. Changes in Securities and Use of Proceeds ............................................15
Item 3. Defaults Upon Senior Securities ......................................................15
Item 4. Submission of Matters to a Vote of Security Holders ..................................15
Item 5. Other Information ....................................................................15
Item 6. Exhibits and Reports on Form 8-K .....................................................16
</TABLE>
ii
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PART I
ITEM 1. FINANCIAL STATEMENTS
USA DIGITAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
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<CAPTION>
SEPTEMBER 30, 2000 MARCH 31, 2000
(UNAUDITED) (AUDITED)
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<S> <C> <C>
CURRENT ASSETS
Cash $ 369,084 $ 856,445
Accounts receivable, net of allowance of $125,000 459,739 214,917
Inventories, net 205,750 46,486
Employee receivables 58,927 35,967
Prepaids and other current assets 183,488 7,125
---------- ----------
Total Current Assets 1,276,988 1,160,940
---------- ----------
PROPERTY AND EQUIPMENT, NET 708,729 1,404,660
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OTHER ASSETS
Intangible assets, net 2,197,234 987,482
Deposits and other non-current assets 150,310 76,375
---------- ----------
Total Other Assets 2,347,544 1,063,857
---------- ----------
TOTAL ASSETS $4,333,261 $3,629,457
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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USA DIGITAL, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 MARCH 31, 2000
(UNAUDITED) (AUDITED)
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<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 649,904 $ 365,423
Capitalized lease obligation-current 20,409 165,313
Notes payable - current 363,017 8,500
Employee payables 49,107 50,173
----------- -----------
Total Current Liabilities 1,082,437 589,409
Capitalized lease obligations 109,591 831,440
Notes payable, loans and other non-current liabilities 81,654 113,778
Unearned revenue 86,815 167,781
----------- -----------
Total Non-Current Liabilities 278,060 1,112,999
Total Liabilities 1,360,497 1,702,408
----------- -----------
CONVERTIBLE REDEEMABLE PREFERRED STOCK
Preferred stock-Class B, series 1 and 2, redeemable at
$4.00 per share, $0.001 par value, 50,000 and 90,000 shares
authorized, issued and outstanding, respectively 175,793 303,750
----------- -----------
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, 4,910,000 shares
authorized, none issued and outstanding -- --
Common stock, $0.001 par value, 50,000,000 shares
authorized, 10,193,820 and 7,928,000 shares issued
and outstanding, respectively 10,194 7,928
Additional paid-in capital 5,813,768 3,786,567
Deferred consulting and compensation expense (128,892) (127,111)
Accumulated deficit (2,898,099) (2,044,085)
----------- -----------
Total Stockholders' Equity 2,796,971 1,623,299
----------- -----------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $ 4,333,261 $ 3,629,457
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
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USA DIGITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPT. 30, 2000 SEPT. 30, 1999 SEPT. 30, 2000 SEPT. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES $ 1,406,336 $ 496,134 $ 2,701,596 $ 496,134
COST AND EXPENSES:
Cost of equipment sales and direct wages 894,124 283,993 1,555,646 283,993
Network operating expenses 450,127 374,952 959,329 583,724
Salaries expense 423,724 84,506 836,596 84,506
Depreciation and amortization 106,345 5,166 197,888 5,102
Interest expense (income) 2,212 (40,247) (4,489) (40,226)
------------ ------------ ------------ ------------
TOTAL EXPENSES 1,876,532 708,370 3,544,970 917,099
------------ ------------ ------------ ------------
NET LOSS $ (470,196) $ (212,236) $ (843,374) $ (420,965)
============ ============ ============ ============
Reconciliation of net loss to net loss
applicable to common stockholders:
Net loss $ (470,196) $ (212,236) $ (843,374) $ (420,965)
Preferred stock accretions (4,389) -- (10,639) --
------------ ------------ ------------ ------------
Net loss applicable to common shareholders $ (474,585) $ (212,236) $ (854,013) $ (420,965)
============ ============ ============ ============
Net loss per common share - basic and diluted $ (0.05) $ (0.08) $ (0.09) $ (0.16)
============ ============ ============ ============
Weighted average common shares outstanding -
basic and diluted 10,000,546 2,725,859 9,724,240 2,695,770
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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USA DIGITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
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SIX MONTHS ENDED SIX MONTHS ENDED
SEPT. 30, 2000 SEPT. 30, 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (843,374) $ (420,965)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 197,888 5,102
Stock based consulting and compensation expense 57,069 272,529
Changes in assets and liabilities
(Increase) decrease in:
Accounts and employees receivables (319,268) (2,648)
Inventories (230,815) 15,000
Other current and non-current assets (258,885) 57,065
Increase (decrease) in:
Accounts payable and accrued expenses 385,042 29,280
Deferred revenue (80,966) (22,080)
Due to related parties 57,734 --
----------- -----------
Net cash used in operating activities (1,035,575) (66,717)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (164,516) (553)
Acquisition of note receivable -- (20,000)
Cash acquired 15,337 116,276
Decrease in deposits -- (56,320)
Decrease in loans receivable -- (19,964)
----------- -----------
Net cash provided by (used in) investing activities (149,179) 19,439
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan 351,560 75,000
Repayment of loans (29,167) (672)
Proceeds from issuance of common stock 375,000 42,000
Increase in cash overdraft -- 2,308
Payment of dividends -- (5)
----------- -----------
Net cash provided by financing activities 697,393 118,631
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (487,361) 71,353
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 856,445 65,003
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 369,084 $ 136,356
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During April 2000, the Company acquired Communication Systems, Inc. ("ComSys")
and International Business Telephone Systems ("IBTS") in exchange for USA
Digital, Inc. common stock. The purchase price, based on the fair value of the
common stock issued in these transactions, was $1,015,940 for ComSys, and
$398,660 for IBTS.
During the six months ended September 30, 2000 an officer of a subsidiary
refunded 50,000 shares to the Company while renegotiating his employment
arrangement. The Company charged the $50 par value to common stock and increased
the additional paid-in capital by $50.
Accretion of $10,639 in preferred stock was charged to the accumulated deficit
for the six months ended September 30, 2000.
Property and equipment reflects an adjustment of approximately $867,000 and the
related capital lease obligation was adjusted accordingly. (See Note 2)
Certain stock options were exercised in a net transaction where no proceeds were
received by the Company for the six month period ended September 30, 2000. (See
Note 4)
5
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USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission for interim financial
information. Accordingly, they do not include all the information necessary for
a comprehensive presentation of financial position and results of operations.
It is management's opinion, however that all material adjustments (consisting of
normal recurring adjustments) have been made which are necessary for a fair
financial statements presentation. The results for the interim period are not
necessarily indicative of the results to be expected for the year.
For further information, refer to the financial statements and footnotes for the
year ended March 31, 2000 included in the Company's Annual Report on Form
10-KSB.
NOTE 2. CAPITAL ASSETS AND RELATED CAPITAL LEASE OBLIGATION
In August 1999 equipment of approximately $997,000 and a related capital lease
obligation were recorded on the Company's balance sheet. To date equipment in
the amount of approximately $130,000 has been delivered and placed in service.
The remainder of the equipment covered under this lease will not be delivered.
The balance sheet assets and liabilities have been adjusted by approximately
$867,000 to reflect the asset reduction and related reduction in the capital
lease obligation.
NOTE 3. CONVERTIBLE DEBENTURE NOTE
In September 2000, the Company entered into a convertible debenture note in the
amount of $300,000. Additional consideration for the note is the issuance of
10,000 shares of the Company's common stock. The value of the common stock will
be amortized as a financing cost over the term of the note. The note principal
and interest is payable 120 days from the date of the agreement unless extended
in writing. The interest rate on the note is 10% per annum. In the event of
default the Company will pay to the note holder interest on the principal at the
rate of 18% per annum until the default is cured or waived.
NOTE 4. STOCK ISSUANCES
During April 2000, the Company issued 158,000 and 62,000 shares of its common
stock for the acquisition of Communication Systems, Inc. and International
Business Telephone Systems, respectively.
During June 2000, two consultants and one officer (the "recipients") of the
Company exercised a total of 1,875,000 stock options, which were granted
pursuant to certain consulting agreements, in a net stock transaction whereby
the recipients did not pay cash but gave the Company stock having a fair market
value equal to the exercise price.
6
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USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000
The recipients were issued a net total of 1,599,070 shares of the Company's
common stock, which was recorded by the Company as common stock at par with an
offsetting charge to additional paid-in capital.
In July 2000, the Company commenced a private placement, pursuant to Rule 506 of
Regulation D of the Securities Act of 1933, as amended, to offer 1,000,000
shares of the Company's common stock at a purchase price of $4.00 per share. At
the Company's discretion, the Company may issue up to an additional 250,000
shares of the Company's common stock at a purchase price of $4.00 per share. As
of the date of this report, the Company has received $375,000 in gross proceeds
from the private placement.
In August 2000, 40,000 shares of Class B Convertible Redeemable Preferred Stock,
Series 2 was converted into 400,000 shares of common stock. The common stock
issued takes into consideration the February 2000 stock split.
NOTE 5. ACQUISITION OF SUBSIDIARIES
During April 2000, the Company acquired 100% of the issued and outstanding stock
of Communication Systems, Inc. ("ComSys"), an interconnection company, in
exchange for 158,000 shares of the Company's common stock and a quantity of
contingent shares valued at $50,000 and $100,000. The contingent shares are
based upon the average closing price of such shares during the ten (10) trading
days preceding March 31, 2001 and March 31, 2002, respectively. The issuance of
the contingent shares is based on the subsidiary meeting certain future revenue
and net income performance criteria as stipulated in the stock purchase
agreement.
The acquisition was accounted for under the purchase method of accounting, and
accordingly the results of operations of ComSys are included in the accompanying
consolidated financial statements from April 1, 2000, the effective date.
The purchase price of $1,015,940 was determined based on the average quoted
trading price of the Company's common stock during the acquisition period
resulting in an allocation of the excess of the fair market value over book
value of the assets acquired to fixed assets in the amount of $61,026, customer
list in the amount of $492,507 and goodwill in the amount of $492,507.
The allocation is preliminary; the Company is still reviewing and evaluating
assets and liabilities. The customer list and goodwill are amortized over 5 and
15 years, respectively, resulting in $48,926 and $16,318 of amortization,
respectively, for the six months ended September 30, 2000.
The following unaudited information reflects the preliminarily estimated fair
market values of the assets acquired and the liabilities assumed:
7
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USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000
Cash $ 2,844
Accounts receivable 57,953
Inventory 67,972
Other current assets 5,187
Property and equipment 67,000
Customer list 492,507
Goodwill 492,507
Other assets 2,000
Accounts payable, accrued and
Other liabilities (68,451)
Current debt (103,579)
-----------
$ 1,015,940
During April 2000, the Company acquired International Business Telephone Systems
("IBTS") in exchange for 62,000 common shares and contingent shares of 15,000
based on the subsidiary meeting certain future revenue and net income
performance criteria and the Company meeting certain minimum closing stock
prices. The acquisition was accounted for under the purchase method of
accounting and accordingly the results of operations of IBTS are included in the
accompanying consolidated financial statements from April 1, 2000, the effective
date. The purchase price of $398,660 was determined based upon the average
trading price of the Company's common stock during the acquisition period
resulting in an allocation of the excess of the fair market value over the book
value of the assets acquired to the customer list in the amount of $187,492 and
goodwill in the amount of $187,493. The customer list and goodwill are amortized
over 5 and 15 years, respectively resulting in $18,750 and $6,250 of
amortization, respectively, for the six months ended September 30, 2000. The
allocation is preliminary; the Company is still reviewing and evaluating assets
and liabilities.
The following unaudited information reflects the preliminary estimated fair
market values of the assets acquired and the liabilities assumed:
Cash $ 12,494
Accounts receivable 16,493
Inventory 3,579
Customer list 187,492
Goodwill 187,493
Other assets 1,401
Accounts payable and other (10,292)
---------
$ 398,660
=========
The table below reflects unaudited pro forma combined results of the Company as
if the acquisitions had taken place on April 1, 1999:
8
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USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000
SIX MONTHS ENDED SEPTEMBER 30
2000 1999
-----------------------------
Revenues $ 2,701,596 $ 791,134
Costs and expenses 3,544,970 1,264,792
----------- -----------
Net loss $ (843,374) $ (473,658)
Net loss per share - basic and diluted $ (0.09) $ (0.16)
NOTE 6. SEGMENT INFORMATION
The table below summarizes the Company's segment data related to the
communications services and integration services segment for the three months
ended September 30, 2000. During 1999, the Company was in the development stage
without identifiable segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
---------------------------------------------------------------
Communications Integrated Consolidated
Services Services Total
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<S> <C> <C> <C>
Revenues from external
customers $ 793,510 $ 612,826 $ 1,406,336
Net income (loss) (514,630) 44,434 (470,196)
Total assets $ 3,993,700 $ 339,561 $ 4,333,261
</TABLE>
The table below summarizes the Company's segment data related to the
communications services and integration services segment for the six months
ended September 30, 2000.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30, 2000
---------------------------------------------------------------
Communications Integrated Consolidated
Services Services Total
-------------- -------------- ------------
<S> <C> <C> <C>
Revenues from external
customers $ 1,678,617 $ 1,022,979 $ 2,701,596
Net income (loss) (889,239) 45,865 (843,374)
Total assets $ 3,993,700 $ 339,561 $ 4,333,261
</TABLE>
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with the
financial statements and related notes included elsewhere in this Quarterly
Report Form 10-QSB. The Company may from time to time make written or oral
"forward-looking statements." These forward-looking statements may be contained
in this Quarterly Report Form 10-QSB filing with the Securities and Exchange
Commission the ("SEC") in other filings with the SEC, and in other
communications by the Company, which are made in good faith pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The words "may", "could", "should", "would", "believe", "anticipate",
"estimate", "expect", "intend", "plan", and similar expressions are intended to
identify forward-looking statements.
Forward-looking statements include statements with respect to the Company's
beliefs, plans, objectives, goals, expectation, anticipations, estimates and
intentions, that are subject to significant risks and uncertainties. The
following factors, many of which are subject to change based on various other
factors beyond the Company's control, and other factors discussed in this Form
10-QSB, as well as other factors identified in the Company's filings with the
SEC and those presented elsewhere by management from time to time, could cause
its financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements:
o the strength of the United States economy in general and the
strength of the local economies in which the Company conducts
operations;
o the timely development of and acceptance of new products and
services and the perceived overall value of these products and
services by users, including the features, pricing and quality
compared to competitors' products and services;
o the willingness of users to substitute competitors' products
and services for the Company's products and services;
o the Company's success in gaining regulatory approval of their
products and services, when required;
o the impact of technological changes;
o acquisitions; and
o the Company's success at managing the risks involved in their
business.
The list of important factors is not exclusive. The Company does not undertake
to update any forward-looking statement, whether written or oral, that may be
made from time to time by or on behalf of the Company.
10
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GENERAL
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 currently provides
telecommunications and computer equipment sales and service through its wholly
owned subsidiaries, Telephone Engineering and Maintenance, Inc. ("TEAM"),
Communications Systems, Inc. ("Comsys"), and International Business Telephone
Systems, Inc. ("IBTS"), which have been marketing their products and services
for 14, 19, and 18 years, respectively. The Company also offers computer
hardware and software, network integration technology and engineering products
and services for small and medium size businesses through its wholly owned
subsidiary, DSA Computers, Inc. ("DSA"), which has been selling these products
and services since 1991. In addition, the Company currently provides a full line
of Internet services, including Dial up Internet access service to business and
residential customers, Web page production and hosting, Web page design, and
Interactive Web-based business services, database management, broadcast audio
and video applications and Internet marketing, through its wholly owned
subsidiary Syncom, Inc. (doing business as "GatorNet"), an Internet service
provider with over 1,500 subscribers.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND MARCH 31, 2000
Total assets increased $703,804 to $4.3 million at September 30, 2000 from March
31, 2000. The increase is primarily attributable to the acquisition of Comsys
and IBTS during the three months ended June 30, 2000. The Company acquired 100%
of the issued and outstanding stock of ComSys, an interconnection company, in
exchange for 158,000 shares of the Company's common stock and a quantity of
contingent shares valued at $50,000 and $100,000. The contingent shares are
based upon the average closing price of such shares during the ten (10) trading
days proceeding March 31, 2001 and March 31, 2002, respectively. The issuance of
the contingent shares is based on the subsidiary meeting certain future revenue
and net income performance criteria as stipulated in the stock purchase
agreement. In addition, during April 2000, the Company acquired IBTS in exchange
for 62,000 common shares and contingent shares of 15,000 based on the subsidiary
meeting certain future revenue and net income performance criteria and the
Company meeting certain minimum closing stock prices. Comsys has served the
Gainesville, Florida market for 19 years, while IBTS has served the Ft.
Lauderdale, Florida market for 18 years. Both Comsys and IBTS provide PBX
systems, electronic key systems, call technology servers, voice mail systems,
automatic call distributors and network and computer wiring.
The decrease in the Company's cash and cash equivalents of $487,361 over the six
month period ended September 30, 2000 was primarily attributable to costs
associated with the acquisitions of Comsys and IBTS and a related increase in
inventories, and additional deposits required for the Company to expand its
network infrastructure. The Company's property and equipment decreased by
approximately $696,000, which is a result of certain equipment ordered under a
capital lease obligation for which we have not taken delivery. This equipment
was recorded on the company books prematurely.
11
<PAGE>
Equipment acquisitions for the six month period amounted to approximately
$165,000. Intangible assets, which are comprised mostly of customer lists and
goodwill, increased by approximately $1.2 million as a result of the
acquisitions. Total deposits increased by $73,935 primarily as a result of the
execution of a new capital lease for telephone switching equipment and deposits
for office and switch site leases.
Total liabilities decreased $341,911 to $1.4 million at September 30, 2000 from
March 31, 2000. This decrease is primarily attributable to the approximately
$867,000 decrease in the capital lease obligation. An increase in accounts
payable of $284,481 and the Convertible Debenture Note of $300,000, offset the
decrease.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999
The Company incurred a net loss of $470,196 or $0.05 per share, for the quarter
ended September 30, 2000, as compared to a loss of $212,236 or $0.08 per share
for the quarter ended September 30, 1999.
For the three months ended September 30, 2000, the Company generated
approximately $1.4 million in total revenues. The Company generated
approximately $496,000 in revenues in the corresponding period of 1999. Of the
September 30, 2000 revenues, $793,510 was generated by the communications
services segment of the Company's operations, which includes Internet products
and services offered by Gator.net and the communications equipment products and
services offered by TEAM, Comsys and IBTS. Net loss for the communications
services segment for the quarter was $514,630. For the corresponding period in
1999, revenues of approximately $496,000 was attributable to communications
services and the related net loss was $212,236.
During the three months ended September 30, 2000, the parent company (on
unconsolidated basis) did not generate revenues, as its network infrastructure
was not yet operational. Consequently, the parent company sustained net loss of
approximately $342,000 for this period. The net loss for the parent company was
comprised primarily of salaries and wages, professional fees, and computer
consulting fees, incurred to develop the telephone and Internet infrastructure
of the Company.
The Company will begin offering a full line of local, long distance telephone
services, expanded Internet services, and wireless solutions within the next 90
days. In this regard, the Company has entered into an agreement with Lucent
Technologies, Inc. for the purchase of $25 million of network equipment over a
three-year period. Financing for this equipment is being provided by Gallant
Capital and Finance, LLC, pursuant to an agreement which provides up to $30
million in financing. The Company took delivery of Lucent's initial equipment
order on July 1, 2000. Additionally, the Company has leased from Siemens one
Digital Central Office Long Distance Switch, which is installed at the Company's
Orlando, Florida office. The Company is currently testing the equipment. Once
the testing has been completed and these switches are operational, the company
will be able to provide all of the above products to its customers in the
Orlando, Tampa, Gainesville, and Miami markets of Florida.
12
<PAGE>
In addition, the Company has recently entered into interconnection/re-sale
agreements with GTE Corp. covering their 37 state region and Bell Atlantic Corp.
covering 7 of their 14 states. With the recent merger of Bell Atlantic and GTE
forming Verizon Communications, USA Digital now has agreements covering the vast
majority of Verizon's U.S. locations. The Company has also executed agreements
with Bell South covering their 9-state region, Southwestern Bell Telephone Co.
covering their 13-state region, Sprint covering their 18-state region and Quest,
covering their 14-state region. These agreements give USA Digital
interconnection agreements covering Arizona, Arkansas, Alabama, California,
Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana,
Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi,
Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, New York, North
Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina,
South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia,
Wisconsin, and Wyoming. Now that USA Digital has agreements covering the vast
majority of the United States, it sets the stage for the Company's future
expansion plans. It will also allow the Company to take advantage of acquisition
opportunities that are outside of its initial network footprint.
Further, once the switches are operational, the Company will have an additional
revenue source by providing Internet services to companies who are providing
Internet service, web hosting and local and long distance service, but which
require access to local telephone company connections. The Company has developed
a plan designed to enable it to expand and to provide all of these services to
the remaining eight states in the BellSouth region within the next 30 months.
The integration services segment of the Company's operations generated revenues
of $612,826 for the three months ended September 30, 2000. This segment includes
the network and computer hardware and software, wiring, systems integration
services, consulting, fire wall installation, local area network ("LAN") and
wide area network ("WAN") implementation and maintenance and management of those
products offered by DSA. Net income for the quarter that ended September 30,
2000 for the integration services segment was $44,434.
The Company's total operating expenses increased approximately $1.2 million to
$1.9 million for the three months ended September 30, 2000 compared to the three
months ended September 30, 1999. This increase in expenses is attributed to
increases in the cost of equipment sales and direct wages and network operating
expenses, reflecting operational costs and professional fees incurred to support
the newly acquired companies.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER
30, 1999
The Company incurred a net loss of $843,374 or $0.09 per share, for the six
months ended September 30, 2000, as compared to a loss of $420,965 or $0.16 per
share for the six months ended September 30, 1999.
For the six months ended September 30, 2000, the Company generated approximately
$2.7 million in total revenues. The Company generated approximately $ 500,000 in
revenues in
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the corresponding period of 1999. The increase is primarily responsible to the
acquisitions Syncom, ComSys and IBTS for the six month period ended September
30, 2000. Of the September 30, 2000 revenues, $1.7 million was generated by the
communications services segment of the Company's operations, which includes
Internet products and services offered by Syncom, Inc. (doing business as
"Gator.net") and the communications equipment products and services offered by
TEAM, ComSys and IBTS. Net loss for the communications services segment for the
six months was $889,239. For the corresponding period in 1999, revenues of
approximately $ 500,000 was attributable to communications services and the
related net loss was $420,965.
During the six months ended September 30, 2000, the parent company (on
unconsolidated basis) did not generate revenues, as its network infrastructure
was not yet operational. Consequently, the parent company sustained a net loss
of approximately $739,000 for the six months. The net loss for the parent
company was comprised primarily of salaries and wages, professional fees, and
computer consulting fees, incurred to develop the telephone and Internet
infrastructure of the Company.
The integration services segment of the Company's operations generated revenues
of $1,022,979 for the six months ended September 30, 2000. This segment includes
the network and computer hardware and software, wiring, systems integration
services, consulting, fire wall installation, local area network ("LAN") and
wide area network ("WAN") implementation and maintenance and management of those
products offered by DSA. Net income for the six months ended September 30, 2000
for the integration services segment was $45,865.
The Company's total operating expenses increased approximately $2.6 million to
$3.5 million for the six months ended September 30, 2000 compared to the six
months ended September 30, 1999. This increase in expenses is attributed to
increases in the cost of equipment sales and direct wages and network operating
expenses, reflecting operational costs and professional fees incurred to support
the newly acquired companies.
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 completing its
network infrastructure. To that end, the Company has received a firm commitment
on a $30.0 million line of credit of which $24.0 million is committed to the
purchase of Lucent Technologies equipment and the remaining $6.0 million may be
used for general corporate and working capital purposes. Additionally, the
Company is currently in the process of raising additional capital in a private
placement of its common stock. The Company believes that its line of credit and
the funds raised in the private placement, together with operating revenues,
will be sufficient to fund its working capital needs for the next 24 months.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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
The annual meeting of shareholders was held on September 21, 2000. At
the annual meeting, the following issues were voted on:
A. Votes for the election of each nominee for Director of the
corporation were as follows:
VOTES FOR VOTES AGAINST
Peter J. Lyons 7,300,478 4,700
Mark D. Cobb 7,300,478 4,700
Donald E. Darden 7,300,478 4,700
Daniel J. Montague 7,300,478 4,700
B. Votes for the ratification of the appointment of Ernst &
Young, LLP to act as independent auditors for USA Digital for
the fiscal year ending March 31, 2001 were as follows:
For 7,296,387
Against 7,800
Abstained 991
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27.1 Financial Data Schedule
B. Reports on Form 8-K
None
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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/ Peter J. Lyons
-------------------------------------------
Peter J. Lyons, Chief Executive Officer and
a Director (principal executive officer)
/s/ Mark D. Cobb
-------------------------------------------
Mark D. Cobb, President, Chief Operating
Officer and a Director
(principal accounting officer)
Date: November 20, 2000
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