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 December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____ to ____
Commission file number 000-27481
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 DECEMBER 31, 1999
----- -----------------
Common Stock, par value $.01 2,945,500
Transitional Small Business Disclosure Format (check one):
Yes No X
---- ----
<PAGE>
USA DIGITAL, INC.
FORM 10-QSB FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 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...........................................31
Part II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................35
Item 2. Changes in Securities and Use of Proceeds...........................36
Item 3. Defaults Upon Senior Securities.....................................36
Item 4. Submission of Matters to a Vote of Security Holders.................36
Item 5. Other Information...................................................36
Item 6. Exhibits and Reports on Form 8-K....................................36
Signatures....................................................................37
ii
<PAGE>
USA DIGITAL, INC. AND SUBSIDIARIES
CONTENTS
PAGE 1 ACCOUNTANTS' REVIEW REPORT
PAGE 2 - 3 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND
MARCH 31, 1999
PAGE 4 - 7 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
DEFICIENCY FOR THE PERIOD FROM MARCH 31, 1999 TO
DECEMBER 31, 1999
PAGE 8 CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE AND
THREE MONTHS ENDED DECEMBER 31, 1999
PAGE 9 - 10 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE AND
THREE MONTHS ENDED DECEMBER 31, 1999
PAGE 11 - 30 NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999
iii
<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 as of December 31, 1999 and the related consolidated
statements of operations, changes in stockholders' deficiency and cash flows for
the nine and three months then ended, in accordance with Statements on Standards
for Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these 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
February 8, 2000
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, 1999 MARCH 31, 1999
(UNAUDITED) (AUDITED)
----------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 67,273 $ 65,003
Accounts Receivable 118,146 --
Inventory 126,300 --
Loans receivable 58,903 --
Note receivable - current portion 32,000 --
Due from employees 27,588 --
Prepaid expenses -- 57,065
---------- ----------
Total Current Assets 430,210 122,068
---------- ----------
PROPERTY AND EQUIPMENT - NET 1,045,208 752,256
---------- ----------
OTHER ASSETS
Intangible assets, net 52,980
Note and loans receivable - non-current 71,600 --
Deposits 60,382 --
---------- ----------
Total Other Assets 184,962 --
---------- ----------
TOTAL ASSETS $1,660,380 $ 874,324
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
DECEMBER 31, 1999 MARCH 31, 1999
(UNAUDITED) (AUDITED)
----------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 306,698 $ 96,718
Capitalized lease obligation-current 156,012 28,191
Convertible debentures 50,000 --
Notes payable - current 5,431 --
Loan payable 14,000 --
Due to related parties 177,957
Due to unrelated parties 82,576
----------- -----------
Total Current Liabilities 792,674 124,909
----------- -----------
NON-CURRENT LIABILITIES
Capitalized lease obligation 840,741 721,809
Notes payable 13,764 --
----------- -----------
Total Non-Current Liabilities 854,505 721,809
----------- -----------
TOTAL LIABILITIES $ 1,647,179 $ 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 150,747 --
----------- -----------
Total Convertible Redeemable Preferred Stock 150,837 --
----------- -----------
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, 2,945,000 shares issued and outstanding 2,945 2,650
Additional paid-in capital 1,842,469 877,614
Accumulated deficit during development stage (1,395,086) (556,017)
----------- -----------
450,328 324,247
Less subscriptions receivable (106,400) --
Less deferred consulting expense (151,564) (296,641)
Less common stock advanced (330,000) --
----------- -----------
Total Stockholders' Equity (Deficiency) (137,636) 27,606
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $ 1,660,380 $ 874,324
=========== ===========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM MARCH 31, 1999 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK ADDITIONAL
ISSUED TO BE ISSUED PAID-IN ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE
------ ------ ------ ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
March 31,
1999 2,649,500 $ 2,650 -- -- $ 877,614 $ (556,017) --
Stock
refunded for
cash (2,500) (3) -- -- (2,497) -- --
Stock issued
as loan 55,000 55 -- -- 329,945 -- --
Consulting
expense
recognition
for common
stock options -- -- -- -- -- -- --
Stock issued in
exchange
for a loan 75,000 75 -- -- 74,925 -- --
Stock issued for
cash 25,000 25 -- -- 24,975 -- --
Stock to be
issued for
cash -- -- 19,500 20 19,480 -- --
Stock issued
for consult-
ing services 61,000 61 -- -- 124,189 -- --
Stock to be
issued for
consulting
services -- -- 25,000 25 51,536 -- --
<CAPTION>
DEFERRED COMMON
CONSULTING STOCK
EXPENSE ADVANCED TOTAL
------- -------- -----
<S> <C> <C> <C>
Balance,
March 31,
1999 (296,641) -- $ 27,606
Stock
refunded for
cash -- -- (2,500)
Stock issued
as loan -- (330,000) --
Consulting
expense
recognition
for common
stock options 48,359 -- 48,359
Stock issued in
exchange
for a loan -- -- 75,000
Stock issued for
cash -- -- 25,000
Stock to be
issued for
cash -- -- 19,500
Stock issued
for consult-
ing services -- -- 124,250
Stock to be
issued for
consulting
services -- -- 51,561
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM MARCH 31, 1999 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK ADDITIONAL
ISSUED TO BE ISSUED PAID-IN ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE
------ ------ ------ ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consulting
expense
recognition
for common
stock options -- -- -- -- -- -- --
Dividend
payments -- -- -- -- -- (5)
Accretion to
convertible
Redeemable
preferred
stock -- -- -- -- (11,422) --
Stock issued
for cash and
subscriptions
receivable 160,000 160 -- -- 159,840 -- (106,400)
Stock issued 44,500 45 (44,500) (45) -- -- --
Stock issued
for consulting
and
advertising
services 125,000 125 -- -- 124,875 -- --
Consulting
expense
recognition for
common
stock options -- -- -- -- 4,125 -- --
<CAPTION>
DEFERRED COMMOM
CONSULTING STOCK
EXPENSE ADVANCED TOTAL
------- -------- -----
<S> <C> <C> <C>
Consulting
expense
recognition
for common
stock options 48,359 -- 48,359
Dividend
payments -- -- (5)
Accretion to
convertible
Redeemable
preferred
stock -- -- (11,422)
Stock issued
for cash and
subscriptions
receivable -- -- 53,600
Stock issued -- -- --
Stock issued
for consulting
and
advertising
services -- -- 125,000
Consulting
expense
recognition for
common
stock options 48,359 -- 52,484
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM MARCH 31, 1999 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK ADDITIONAL
ISSUED TO BE ISSUED PAID-IN ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE
------ ------ ------ ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock issued as
employee
bonus 15,000 15 -- -- 14,985 -- --
Stock issued
for acquisition
of assets 25,000 25 -- -- 24,975 -- --
Stock issued as
loan fees 37,500 37 -- -- 37,463 -- --
Cancellation of
shares issued
to Orlando
Digital (325,000) (325) -- -- -- -- --
Accretion to
Convertible
Redeemable
preferred stock -- -- -- -- (12,539) -- --
Net loss for the
period ended
December 31,
1999 -- -- -- -- -- (839,064) --
--------- -------- --- ------- ----------- ----------- -----------
BALANCE,
December
31, 1999 2,945,000 $ 2,945 -- $ -- $ 1,842,469 $(1,395,086) $ (106,400)
========= ======== === ======= =========== =========== ===========
<CAPTION>
DEFERRED COMMON
CONSULTING STOCK
EXPENSE ADVANCED TOTAL
------- -------- -----
<S> <C> <C> <C>
Stock issued as
employee
bonus -- -- 15,000
Stock issued
for acquisition
of assets -- -- 25,000
Stock issued as
loan fees -- -- 37,500
Cancellation of
shares issued
to Orlando
Digital -- -- (325)
Accretion to
Convertible
Redeemable
preferred stock -- -- (12,539)
Net loss for the
period ended
December 31,
1999 -- -- (839,064)
--------- --------- ---------
BALANCE,
December
31, 1999 $(151,564) $(330,000) $(137,636)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Nine months
December December Ended
31, 1999 31, 1998 December 31, 1999
----------- ----------- -----------------
<S> <C> <C> <C>
REVENUES
Computer hardware integration $ 427,088 $ -- $ 756,115
Telephone interconnect 395,702 -- 562,809
Internet services -- -- --
Local and long distance services -- -- --
----------- ----------- -----------
Total Revenues 822,790 -- 1,318,924
----------- ----------- -----------
COST OF SALES 471,978 -- 755,971
----------- ----------- -----------
GROSS PROFIT 350,812 -- 562,953
----------- ----------- -----------
OPERATING EXPENSES
Consulting fees 218,906 23,852 617,301
Selling, general and
administrative 549,555 21,200 824,492
----------- ----------- -----------
Total Expenses 768,461 45,052 1,441,793
----------- ----------- -----------
LOSS FROM OPERATIONS (417,649) (45,052) (878,840)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain on cancelled lease -- -- 40,700
Interest Expense (450) -- (924)
----------- ----------- -----------
Total Other Income $ (450) $ -- $ 39,776
----------- ----------- -----------
NET LOSS $ (418,099) $ (45,052) $ (839,064)
=========== =========== ===========
NET LOSS PER COMMON SHARE - BASIC AND
DILUTED
$ (0.13) $ (0.05) $ (0.29)
=========== =========== ===========
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING - BASIC AND
DILUTED 3,103,676 885,000 2,846,631
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months Three months
ended ended
December 31, 1999 December 31,1999
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(839,064) $(418,099)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,043 3,941
Consulting, advertising and compensation expenses
incurred in exchange for common stock 315,811 140,000
Loan fees incurred in exchange for common stock 37,500 37,500
Consulting expense recognized for common stock
options 149,202 52,484
Changes in assets and liabilities
(Increase) decrease in:
Accounts Receivable (29,658) (30,110)
Inventory (66,700) (81,700)
Prepaid expenses 57,065 --
Due from employees (18,015) (14,915)
Increase (decrease) in:
Accounts payable and accrued expenses 32,558 3,278
Customer advances (89,584) (67,504)
--------- ---------
Net cash (used in) operating activities (441,842) (375,125)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition of T.E.A.M. and DSA 116,276 --
Purchase of intangible and tangible assets (20,053) (19,500)
Acquisition of note receivable (20,000) --
(Increase) decrease in deposits (56,320) --
(Increase) decrease in loans receivable (55,004) (35,040)
--------- ---------
Net cash (used in) investing activities (35,101) (54,540)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 98,100 53,600
(Decrease) in cash overdraft -- (2,308)
Proceeds from loan 75,000 --
Payment of dividends (5) --
Refund of common stock (2,500) --
Increase in convertible debentures 50,000 50,000
Increase in due to related and unrelated parties 260,527 260,527
Decrease in notes payable (1,909) (1,237)
--------- ---------
Net cash provided by financing activities 479,213 360,582
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statement.
8
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months Three months
ended ended
December 31, 1999 December 31,1999
----------------- ----------------
<S> <C> <C>
INCREASE (DECREASE)IN CASH AND CASH
EQUIVALENTS 2,270 (69,083)
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIOD 65,003 136,356
--------- ---------
CASH AND CASH EQUIVALENTS - END OF
PERIOD $ 67,273 $ 67,273
========= =========
Cash paid during the year for:
Interest $ 924 $ 450
========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
The Company acquired notes and loans receivable for debt of $87,500 (see Note
12).
The Company issued and advanced 55,000 shares of common stock (see Note 12).
The Company issued 75,000 shares of common stock in exchange for a loan payable
(see Note 7(B)).
The Company acquired certain intangible assets in exchange for a loan payable
and common stock (see Notes 6(A) and 7(B)).
See accompanying notes to financial statements
9
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND DESCRIPTION OF BUSINESS
USA Digital, Inc. ("the Company"), incorporated under the laws of Nevada on
March 5, 1999, is a Holding Company whose mission is to build a highly
integrated convergent communications company. The Company seeks to acquire
Internet service providers, telephone interconnect companies,
computer/network integrators, and switch-less resellers. In prior periods,
the Company was considered a Development Stage Company. Through the
acquisition of TEAM and DSA (see Note 1 (B)) the Company is no longer
considered a Development Stage Company.
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 at that time (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 pursuant to a dispute
and subsequent settlement (See Note 10(D). 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 re-capitalization 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 re-domicile 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
10
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
Convertible Redeemable Preferred B, Series 2 Stock, making it a 100%
subsidiary of USA Digital, Inc. (See Note 11).
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
Basic earnings per share are computed using the weighted average number of
common shares outstanding as defined by Financial Accounting Standards No.
128, "Earnings per Shares". Diluted earnings per share are computed using
the weighted average number of common stock outstanding including common
stock equivalents. At
11
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
December 31, 1999 there were 2,220,000 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 anti-dilutive effect.
(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 accounts 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
12
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers, and is effective for financial statements for periods beginning
after December 15, 1997. Statement No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits" revises employers' disclosure
requirements about pension and other postretirement benefit plans and is
effective for fiscal years beginning after December 15, 1997. Statement No
133, "Accounting for Derivative Instruments and Hedging Activities", 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.
(L) 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 December 31, 1999, the cash, loans and note
receivable and capital lease obligation approximated fair market value.
NOTE 2 - ACCOUNTS RECEIVABLE
At December 31, 1999 approximately 21%, 12% and 7% 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 December 31, 1999:
Computer and computer parts $ 126,300
============
NOTE 4 - NOTES AND LOANS RECEIVABLE
(A) LOANS RECEIVABLE
The following schedule reflects loans receivable from non-related
parties as of December 31, 1999:
13
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
Loan receivable from non-related party, secured $13,363
Loan receivable from non-related party 39,040
Loan receivable from non-related party, current portion 6,500
-------
TOTAL LOANS RECEIVABLE $58,903
=======
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. In accordance with the settlement
agreement agreed upon by the two parties on November 16, 1999, the loan
receivable was written off as of December 31, 1999.
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 and 13(B)).
The loan receivable of $39,040 represents a cash loan given to Syncom, Inc.
(See Note 13(B)).
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 and
13(B)).
(B) NOTES AND LOANS RECEIVABLE
The notes and loans receivable totaling $71,600 represent the $48,000
non-current portion of the proposed secured claims settlement of $80,000
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 December 31, 1999 consisted of the following:
Furniture and Fixtures $ 6,814
Computer equipment 16,292
Automobiles 77,001
Equipment held under capital lease 996,753
-----------
1,096,860
14
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
Less: Accumulated depreciation (51,652)
-----------
TOTAL PROPERTY AND EQUIPMENT $ 1,045,208
===========
Depreciation expense for the nine months ended December 31, 1999
was $8,023.
NOTE 6 - INTANGIBLE ASSETS AND DEPOSITS
(A) INTANGIBLE ASSETS
Intangible assets at December 31, 1999 consisted of the following:
Trade-name $ 40,000
Customer base 14,000
--------
54,000
Less: Accumulated amortization (1,020)
--------
TOTAL INTANGIBLE ASSETS $ 52,980
========
Intangible assets are amortized using the straight-line method over the
estimated economic life of 5 years. Amortization expense for the nine
months ended December 31, 1999 was $1,020.
(B) DEPOSITS
The following schedule reflects deposits as of December 31, 1999
Deposit under capital lease (See Note 7(A)) $49,838
Deposit 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
15
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
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
telephone switching equipment with the same lessor as the previous lease
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 December 31, 1999.
The value of the property that was held under capital lease as of December
31, 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. According to the company's management,
payments for the new lease have been deferred by the lessor until the
equipment is placed in service.
Minimum future lease payments under the capital lease as of December
31, 1999 are as follows:
For the year ended December 31, 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.
16
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
(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.
In November 1999, the Company assumed a loan payable of $14,000 in exchange
for a customer base (see Note 6 (A)). The loan bears interest at 12% per
annum, and matures on November 18, 2001.
The following schedule reflects notes payable to non-related parties
at December 31, 1999:
Note payable, interest at 9.35% per annum, secured $12,218
Note payable, interest at 8.25% per annum, secured 6,977
--------
19,195
Less current portion 5,431
--------
$ 13,764
========
Required payments of principal on notes payable at December 31, 1999,
including maturities, are summarized as follows:
2000 $ 5,431
2001 5,934
2002 4,599
2003 3,231
-------
$19,195
=======
Interest expense for the nine months ended December 31, 1999 was $924.
(C) CONVERTIBLE DEBENTURES
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. Both notes were converted into shares of the Company's common
stock in January 2000 (See Note 13(D)).
17
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
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 non-assessable 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 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 non-assessable shares of the Company's common
stock. Additionally, each holder of these shares shall be entitled to vote
at all
18
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
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 December 31, 1999, $13,527 and $10,434 have been accreted to the
Convertible Preferred B, Series 1 and 2 Stock, respectively. In absence of
Retained Earnings, the total accretion of $23,961 for the period ended
December 31, 1999, is presented as a deduction from Additional Paid in
Capital in the Statement of Stockholders' Deficiency.
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 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, including the restricted nature of the shares issued and the
limited trading volume of the Company's shares.
During the three months ended December 31, 1999, the company issued 160,000
shares of common stock for cash and subscription receivable. For the same
period, 325,000 shares, originally issued for the acquisition of Orlando
Digital Telephone, were cancelled in accordance with the recession and
settlement agreement (See Note 10(D)).
Common Stock issued for consulting and advertising services as well as loan
fees and for the acquisition of intangible assets during the periods
presented was recorded at the fair market value of the stock at the grant
dates, which was estimated to be $1.00 per share based on recent cash sales
of the Company's common stock to unrelated parties.
19
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
(B) STOCK COMPENSATION
(i) Stock Option Plan
The 1998 Compensatory Stock Option Plan (the "Plan") has been adopted by
the Board of Directors of the Company and approved by the Company's
stockholders. The plan was developed to provide a means whereby directors,
officers, consultants, advisors or agents, employees or professional
service providers of the Company may be granted non-qualified stock options
to purchase common stock of the Company. The Plan does not provide for the
issuance of "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code. As of December 31, 1999, the Company has
reserved 1,500,000 shares of common stock for issuance upon the exercise of
options granted under the Plan.
The exercise price of options granted under the Plan shall not be less than
85% of the Fair Market Value of a share of common stock on the date the
option is granted. The exercise period, expiration date and vesting period
shall be determined by the Compensation Committee of the Board of
Directors, however, the vesting period may not exceed ten years. If the
vesting period is not stated in the granting resolution, then the option
shall vest immediately.
As of December 31, 1999, no options have been granted under the Plan.
(ii) Stock Options Granted Under Employment and Consulting Agreements
During the year ended March 31, 1999 the Company issued 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 nine months ended December 31, 1999, the Company issued an
additional 282,500 stock options to directors of the Company, resulting in
a total of 2,220,000 stock options granted as of December 31, 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
December 31, 1999. Had compensation cost for the Company's options been
determined based on the fair market value of the warrants at the grant
date, consistent with SFAS 123, the Company's net loss for the three months
and the nine months ended December 31, 1999 would have been increased to
the pro-forma amounts indicated below.
20
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
Three months ended Nine months ended
03/31/99 12/31/99
-------- --------
<S> <C> <C>
Net loss As reported $ (418,099) $ (839,064)
Pro forma $ (546,155) $ (1,208,683)
Net loss per share As reported $ (0.13) $ (0.29)
Pro forma $ (0.18) $ (0.42)
</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 nine months and
three months ended December 31, 1999 consulting expense of $145,077 and
$48,359 has been recognized, resulting in deferred consulting expense of
$151,564 at December 31, 1999. The deferred tax asset of $49,326 resulting
from the consulting expense of $145,077 was fully offset by a valuation
allowance at December 31, 1999 (See Note 1(H)). In addition, $4,125 was
charged to operations for additional stock options granted and vested
during the three months ended December 31, 1999.
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
interest rate of 5.59%, volatility 101% and expected term of three years.
A summary of the options issued under the employment and consulting
agreements as of December 31, 1999 and changes during the nine month period
ended December 31, 1999 is presented below:
21
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
Number of Weighted Average
Options Exercise Price
--------- ----------------
<S> <C> <C>
Stock Options
Balance at beginning of period 1,937,500 $ 2.13
Granted 282,500 $ 4.04
Exercised -- --
Forfeited -- $ --
--------- ---------
Balance at end of period 2,220,000 $ 2.37
========= =========
Options exercisable at end of period 700,000 $ 1.40
Weighted average fair value of options
granted during the period 282,500 $ 2.15
The following table summarizes
information about stock options
outstanding at December 31, 1999:
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- ----------------------------------
Weighted
Number Average Weighted Number Weighted
Range Of Outstanding At Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise At December, Exercise
Price 1999 Life Price 31, 1999 Price
----- ---- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.00 - 3.00 1,937,500 5.75 Years $ 2.13 562,500 $ 1.23
$ 3.00 - 7.00 150,000 7.08 Years $ 5.83 25,000 $ 3.00
$ 1.00 12,500 3.00 Years $ 1.00 12,500 $ 1.00
$ 2.50 - 3.00 20,000 3.00 Years $ 2.75 -- $ --
$ 1.00 - 3.00 100,000 3.00 Years $ 2.00 100,000 $ 2.00
--------- --------
--------------- -----------
2,220,000 5.67 Years $ 2.37 700,000 $ 1.40
=============== ===========
</TABLE>
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
December 31, 1999, the Company has
22
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
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 December 31, 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. As of the date of this
report the Company has not been effected by the Year 2000 issues.
(B) EMPLOYMENT AGREEMENTS
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
23
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
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)).
On November 18, 1999 the Company entered into an employment agreement with
an employee (the "Employee") who was engaged to serve as the Director of
Technical Support for Northern Florida. The effective date of this
agreement is October 1999, and is for a period of three years. The
agreement may be terminated at any time by mutual written agreement by the
parties, upon sixty days prior written notice. As consideration for the
Employee's services the Company agreed to pay an annual base salary of
$31,200 and a monthly bonus based on the gross revenues of the Company. As
additional compensation, the Company has issued a total of 15,000 shares of
the Company's common stock and 20,000 stock options to purchase the
Company's common stock excisable at annual intervals ranging from January
3, 2000 to January 3, 2001 at an exercise price of $2.50 per share for the
first 10,000 stock options and $3.00 for the second 10,000 stock options
(See Note 9(B)). Furthermore, the Company agreed to acquire a customer list
from the Employee in exchange for outstanding debt of $14,000 bearing 12%
interest per annum and 15% commission on all gross profits earned by the
Company from any customer on the customer list.
On November 18, 1999 the Company entered into an employment agreement with
an employee (the "Employee") who was engaged to serve as the Director of
Sales for Northern Florida. The effective date of this agreement is
November 18, 1999 and is for a period of three years. The agreement may be
terminated at any time by mutual written agreement by the parties, upon
sixty days prior written notice. As consideration for the Employee's
services the Company agreed to pay an annual base salary of $24,000 and a
monthly bonus based on the gross profits of the Company. For the first year
of employment, the Employee was granted a guaranteed draw against
commissions so that the sum of the Employee's base salary and commissions
would equal $52,000.
(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 of October 1999, the agreement was extended
through June 30, 2000. As consideration for the services provided the
Company issued 10,000 shares of the Company's common stock in March 1999
and 25,000 shares of the Company's common stock in October 1999.
24
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 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
excess of 50 hours in any calendar month. As additional compensation, the
Company issued a total of 437,500 stock options, exercisable at annual
intervals ranging from January 5, 1999 to February 15, 2002 at varying
exercise prices between $1.00 to $3.00. In October 1999, the exercise date
of 125,000 originally issued with an exercise date of January 5, 1999, was
retroactively changed to March 15, 2000 (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.
On October 6, 1999, the Company entered into a six month consulting
agreement with an individual (the "Consultant"). Under the terms of the
agreement, the Consultant is engaged to serve as a general consultant to
primarily assist the Company with regard to public relations and the
development and implementation of strategic plans. As
25
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
consideration for the services provided, the Company agreed to pay the
Consultant a monthly fee of $8,333.33. As additional compensation, the
Company issued 50,000 shares of the Company's common stock in October 1999.
(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 were
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. On November 16, 1999, the two parties entered into a settlement
agreement whereby they agreed to settle all current disputes. In accordance
with the terms of the settlement agreement, the 325,000 shares of the
Company's common stock originally issued in exchange for the acquisition of
ODT have been returned to the Company and cancelled by the Company, and the
Class A Convertible Preferred Stock to be issued as part of the February 2,
1999 contract were not issued and were cancelled by the Company. There are
no further obligations whatsoever from or to the Company as of December 31,
1999.
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,
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,
26
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
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:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 105,517
Due from employees 9,573
Property and equipment 25,938
Deposits 1,000
Note Payable (89,584)
----------
$ 52,444
==========
</TABLE>
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, 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:
27
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C>
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
=========
</TABLE>
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. was 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
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). On
December 27, 1999 the United States Bankruptcy Court approved the plan of
reorganization.
As of December 31, 1999, the Company has paid $20,000 to Premium and a
total of $7,600 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, aggregating $343,363, is secured by the common stock acquired and
evidenced by a promissory note accruing interest at 8% per annum. The
Company had the right to obtain the stock of Syncom in satisfaction of
amounts due under the promissory note. (See Note 12(B) relating to the
acquisition of Syncom, Inc.
28
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
NOTE 13 - SUBSEQUENT EVENTS
(A) Private Placements
In January 2000, the Company issued a Private Placement Memorandum,
pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as
amended, to offer 500,000 shares of the Company's common stock at a
purchase price of $2.00 per share. At the Company's discretion, the Company
may issue up to an additional 200,000 shares of the Company's common stock
at a purchase price of $2.00 per share. As of the date of this report, the
Company had received paid subscriptions for shares aggregating $1,359,000,
at which point the offering was closed.
(B) Acquisition of Subsidiary
On January 3, 2000 (the "Acquisition date") the Company purchased all of
the issued and outstanding stock of Syncom, Inc. ("Syncom"), a Florida
based Internet Service Provider that has been in business since June 1998
in exchange for the cancellation of a promissory note of $343,363. The
acquisition was accounted for under the purchase method of accounting, and
accordingly the results of operations of Syncom are included in the
Company's consolidated financial statements from the Acquisition date.
The following unaudited information reflects the fair market values of the
assets acquired and the liabilities assumed:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 14,221
Accounts receivable 34,895
Property and equipment 43,545
Customer list 515,200
Goodwill 137,353
Accounts payable (69,530)
Payables under Plan of
Reorganization due to USA Digital (231,540)
Payables under Plan of
Reorganization (100,781)
----------
$ 343,363
==========
</TABLE>
29
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
(C) Employment Agreement
On February 1, 2000 (the "Effective Date"), the Company entered into an
employment agreement (the "Agreement") with a director of the Company (the
"Employee") who was engaged to serve as the Chief Executive Officer of the
Company. The term of the Agreement is for a period of five years. As
consideration for the Employee's services the Company agreed to pay an
annual base salary of $160,000, a monthly car allowance of $1,000 and
medical insurance. As a signing bonus, the Company has issued to the
Employee 100,000 stock options to purchase the Company's common stock
exercisable at the execution of the Agreement at an exercise price of $3.50
per share. As additional compensation, the Company has issued a total of
500,000 stock options to purchase the Company's common stock exercisable at
annual intervals ranging from January 3, 2001 to January 3, 2004 at
exercise prices ranging from $3.50 to $6.00.
(D) Conversion of Debt
In January 2000, the two convertible debentures plus accrued interest (see
Note 7 (C)) were converted into 51,500 shares of the Company's common
stock. Furthermore, balances owed to two consultants and the President of
the Company of a total of approximately $164,000 were converted into a
total of 164,000 shares of the Company's common stock.
30
<PAGE>
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 has rescinded its acquisition of Orlando
Digital Telephone.
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.
The Company may from time to time make written or oral "forward-looking
statements." These forward-looking statements may be contained in this quarterly
filing with the Securities and Exchange Commission the ("SEC"), the Annual
Report to Shareholders, 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
31
<PAGE>
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.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND MARCH 31, 1999
Total assets increased $786,056 to $1,660,380 million at December 31, 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 December 31, 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 $292,952. The increase in the
Company's cash and cash equivalents of $2,270 over the nine month period ended
December 31, 1999 was primarily due to the aforementioned acquisitions. The
increase in receivable and note receivable, current portion, and note and loan
receivables non-current of $58,903, $32,000, $71,600, respectively can be
attributed to the Company's purchase of certain unsecured and secured 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. As a result
of the subsequent purchase of Syncom, Inc. the Company's property and equipment
will increase by $43,545. Intangible assets comprised of goodwill and a customer
base will increase by $652,553, and net payables excluding inter-company debt
will increase by $121,195.
Total liabilities increased $800,461 to approximately $1.6 million at
December 31, 1999 from March 31, 1999. This increase is primarily attributable
to a $209,980 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, as well as an increase in the amount due to related parties
of $177,957 and $82,576, respectively that were primarily incurred as a result
of loans received for financing activities and salary deferments.
RESULTS OF OPERATIONS FOR THE PERIODS ENDED DECEMBER 31, 1999
32
<PAGE>
The Company incurred a net loss of $418,099, or $0.13 per share, for the
three months ended December 31, 1999 and $839,064, or $0.29 per share, for the
nine months ended December 31, 1999. The net losses reflect losses from
operations for the three months ended December 31, 1999 of $417,649 and $878,840
for the nine months ended December 31, 1999, partially offset by a $40,700
onetime gain associated with cancellation and the subsequent renegotiation of a
telephone switching equipment lease.
In the three month period ended December 31, 1999, the Company generated
$822,790 in revenues. The Company did not generate any revenues in the
corresponding period of 1998, in which the Company was still in its
developmental stage. This increase in revenue is attributed to the Company's
acquisition of DSA Computers and T.E.A.M. which accounted for $427,088 and
$395,702, respectively, in revenues during this period. The Company did not
generate any revenues from its Internet & Telephone Services divisions during
this period. However, the Company expects to achieve revenues from both of these
divisions in the three month period ending March 31, 2000.
For the nine month period ended December 31, 1999, the Company generated
$1,318,924 in total revenues. Since the Company has only been in existence since
July 1998, there are no corresponding nine month revenues. For the three month
period ended December 31, 1999, cost of sales equaled $471,978 yielding a gross
profit of $350,812 or 43%. For the nine month period ending December 31, 1999,
the cost of sales was $755,971, yielding a gross profit of $562,953 or 43%.
For the nine month period ended December 31, 1999, the Company incurred
total operating expenses of $1,441,793. For the current period the Company's
loss from operations was $417,649 as compared to $45,052 during the same period
of 1998. Again the majority of this loss is attributed to the $218,906 and
$70,670 expended on consultants and on professional fees, respectively, to
create the necessary infrastructure to advance the Company.
Operating expense increased during the current period to $768,461 from
$45,052 during the corresponding period in 1998. This increase in expenses is
attributed to an increase of $302,039 in salaries and wages to support the
Companies acquisitions and operations and $218,906 paid to consultants primarily
in the form of stock to assist with the formation of the infrastructure of the
Company. The remainder of the increase in expenses is attributed to operational
costs and professional fees incurred to support the newly acquired companies. In
the nine month period ended December 31, 1999, total operating expenses were
$1,441,993 and the Company had a $878,840 loss from operations for the period.
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 the Company stock. 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,
33
<PAGE>
and switching activities. The Company believes that the funds raised in its
private placement completed in February 2000 will be sufficient to meet these
needs for the next 12 months.
YEAR 2000 ISSUE
Based on a review of the Company's business since January 1, 2000, the
Company has not experienced any material effects of the year 2000 problem.
Although the Company has not been informed of any material risks associated with
the year 2000 problem from third parties, there can be no assurance that the
Company will not be impacted in the future. The Company will continuously
monitor its business applications and maintain contact with its third party
vendors and key business partners to resolve any year 2000 problems that may
arise in the future.
34
<PAGE>
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
325,000 shares of common stock were issued to ODT shareholders, however, the
625,000 shares of Class A Convertible Preferred Stock were never issued. 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. On November
16, 1999, the two parties entered into a settlement agreement whereby they
agreed to settle all current disputes. In accordance with the terms of the
settlement agreement, the 325,000 shares of the Company's common stock
originally issued in exchange for the acquisition of ODT have been returned to
the Company and canceled by the Company, and the Class A Convertible Preferred
Stock to be issued as part of the February 2, 1999 contract were not issued and
were canceled by the Company. There are no further obligations whatsoever from
or to the Company as of December 31, 1999.
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.
ITEM 5. OTHER INFORMATION
In January 2000, the Company commenced an offering of 500,000 shares of the
Company's common stock at a purchase price of $2.00 per share. The Company had
the option, at its sole discretion, to issue up to an additional 200,000 shares
of the Company's common stock at a purchase price of $2.00 per share. As of
February 8, 2000, the Company had received subscriptions for shares aggregating
$1,359,000, at which point the offering was closed.
35
<PAGE>
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.
36
<PAGE>
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 (principal executive officer and principal
accounting officer)
Date: February 15, 2000
37
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001094563
<NAME> USA DIGITAL, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-2000
<EXCHANGE-RATE> 1
<CASH> 67,273
<SECURITIES> 0
<RECEIVABLES> 118,146
<ALLOWANCES> 0
<INVENTORY> 126,300
<CURRENT-ASSETS> 430,210
<PP&E> 1,045,208
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,660,380
<CURRENT-LIABILITIES> 792,674
<BONDS> 0
150,837
0
<COMMON> 2,945
<OTHER-SE> 1,506,548
<TOTAL-LIABILITY-AND-EQUITY> 1,660,380
<SALES> 1,318,924
<TOTAL-REVENUES> 1,318,924
<CGS> 755,971
<TOTAL-COSTS> 1,441,793
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (878,840)
<INCOME-TAX> 0
<INCOME-CONTINUING> 39,776
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (834,064)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
