U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
Commission File No.: 000-27481
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) 230-9100
(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, $.01 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
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Revenues for the issuer's fiscal year ended March 31, 2000 were
$2,523,386.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, as of a specified date within the last 60 days. On June
14, 2000: $28,100,000.
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
9,754,070 shares outstanding as of June 14, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement pursuant to Regulation 14A to be
delivered to the Commission for filing which has not previously been mailed to
the Commission is incorporated by reference into Parts II and III of this
report.
Transitional Small Business Disclosure Format (check one): Yes No X
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TABLE OF CONTENTS
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PART I
ITEM 1. DESCRIPTION OF THE BUSINESS .............................................................................. 1
ITEM 2. DESCRIPTION OF PROPERTY .................................................................................. 7
ITEM 3. LEGAL PROCEEDINGS ........................................................................................ 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................................................... 9
PART II
ITEM 5. MARKET FOR USA DIGITAL'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ................................... 9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................... 9
ITEM 7. FINANCIAL STATEMENTS ..................................................................................... 10
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ........................ 10
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF USA DIGITAL; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ....... 10
ITEM 10. EXECUTIVE COMPENSATION ................................................................................... 11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........................................... 11
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................................................... 11
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ......................................................................... 11
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PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
GENERAL
On March 5, 1999, USA Digital, Inc. (the "Company") was incorporated
in the State of Nevada. The Company is a holding company whose mission is to
build a highly integrated convergent communications company. The Company seeks
to acquire Internet service providers, telephone interconnect companies,
computer/network integrators, and switchless resellers.
On March 4, 1999, Blazoon Systems Incorporated ("Blazoon"), a Colorado
corporation, an inactive publicly held company with no recent operating history,
acquired 100% of the outstanding common stock of Diverse Capital Corp.
("Diverse"), a Florida corporation incorporated on July 9, 1998, in exchange for
1,235,000 shares of Blazoon common stock. 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. Subsequent to the
acquisition, the prior shareholders of Diverse owned approximately 55% of the
voting common stock of Blazoon.
On March 9, 1999, the Company consummated a merger agreement with
Blazoon with the Company as the surviving entity. The Company entered into the
March 9, 1999 transaction with Blazoon in order to: (1) redomicile Blazoon as a
Nevada Corporation in order to take advantage of the more favorable corporate
law and franchise tax of Nevada; (2) effect the name change from Blazoon to USA
Digital, Inc.; and (3) to create a public market for USA Digital, Inc. common
stock so that the Company could more easily raise the capital necessary to carry
out its business plan.
BUSINESS DESCRIPTION
The Company is building a highly integrated, facility-based convergent
communications company that will address the rapidly expanding communication
demands of small to medium size businesses. The Company believes that a
convergence is occurring in the communication industry as more traditional
Internet providers become communications companies and communication companies
become Internet companies. These factors are creating an environment in which
individuals and businesses and other organizations perceive a need to establish
Internet access and an Internet presence. Furthermore, many businesses have
Internet requirements that go beyond the simple access that most Internet
service providers offer. These Internet requirements include security, network
consulting, high-bandwidth managed access and data services.
These services are most efficiently provided by a vendor that has a
local presence so as to ensure these businesses that their Internet requirements
will receive priority treatment. The Company believes that through the
implementation of its strategy to acquire, or roll-up, computer hardware
integrators, telephone interconnect (phone equipment vendors) companies, and
Internet service providers and other synergistic partners combined with its
status as a full-service communications company will enable it to capitalize on
this convergence.
In addition, the Telecommunications Act of 1996 (the "Telecom Act"),
the first comprehensive rewrite of the Communications Act of 1934, has
dramatically changed the ground rules for competition and regulation in
virtually all sectors of the communications industry, from local and
long-distance telephone services, to cable television, broadcasting and
equipment manufacturing.
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Under the Telecom Act, a distinction is made between those carriers
that own and operate their own switch (facility-based) and those entities that
do not own their own switch (non-facility based) and utilize someone else's
switch. Under this legislation, all facility-based carriers are entitled to
equal access to the incumbent local exchange carrier (e.g., BellSouth) network.
This means that the local operating company must allow all facility-based
carriers access to their infrastructure (co-location) at wholesale rates so that
these new entrants into the telecommunications arena can compete effectively
against the incumbents. Therefore, under the Telecom Act, only facility-based
carriers benefit from the legislative deregulation of the industry that provides
equal access to the incumbent local exchange carriers network.
Non-facility-based carriers must gain access or co-location to a switch in order
to benefit from the industry deregulations.
The Company believes that the impact of this legislation will be
three-fold.
o Deregulation will allow new-comers, such as USA
Digital, to successfully penetrate the communication
markets if they can offer the consumer alternative
services at competitive prices with the emphasis on
quality service.
o The valuations of non-facility based carriers will be
drastically reduced thus make the acquisition of
these entities both cost effective and attractive to
the Company at this time. Previously, some of these
companies had occupied a very profitable niche in the
market place following the AT&T divestiture in the
mid-' 80's, but due to the Telecom Act's preferential
treatment of facility-based carriers, many switchless
resellers have watched their valuation drop from a
high of 10 times monthly revenues to their current
valuation of 1-3 times monthly revenues.
o A company that has the ability to satisfy all of the
consumers' communications needs by providing all of
these products and services (ie. phone equipment,
computer hardware/software integration, local & long
distance services, and Internet solutions) through
one service provider will possess a competitive
advantage and have a greater probability of long term
retention of that customer.
The Company intends to capitalize on the convergence in the
communications industry and legislative changes through the acquisition of
strategic partners that have a recognized presence and customer base in its
particular market and region, and by offering these newly acquired customers a
complete package of products and services.
PRODUCTS CURRENTLY OFFERED
The Company currently offers the following products and
services to its customers.
o COMMUNICATIONS EQUIPMENT SALES AND SERVICE.
The Company currently provides telecommunications and computer
equipment sales and service through its wholly owned subsidiaries TEAM, Inc.,
Comsys Inc., and IBTS, which have been marketing their products and services for
14, 19, and 18 years, respectively. More specifically, these companies offer PBX
systems, electronic key systems, call technology servers, voice mail systems,
automatic call distributors and network and computer wiring to their customers.
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COMPUTER AND NETWORK INTEGRATION PRODUCTS AND SERVICES.
The Company offers computer hardware and software, network integration
technology and engineering products and services for small and medium size
businesses. More specifically, the Company offers network and computer wiring,
systems integration services and consulting, fire wall installation, local area
network ("LAN") and wide area network ("WAN"), implementation and maintenance
and management of those products and services through its wholly-owned
subsidiary, DSA Computers, Inc. DSA has been marketing these products and
services since 1991.
o INTERNET PRODUCTS AND SERVICES.
The Company currently provides a full line of Internet services through
its wholly owned subsidiary Syncom, Inc. doing business as "GatorNet". More
specifically, through Gator.net, the Company offers Dial up Internet access
service to the business and residential customers, focused on easy user
interface and access to information on the World Wide Web. Through Gator.net,
USA Digital also provides Web services, including Web page production and
hosting, Web page design, and Interactive Web-based business services, database
management, broadcast audio and video applications and Internet marketing.
Gator.Net has been marketing these products for two years.
PRODUCTS TO BE OFFERED IN THE FUTURE
The Company will continue to provide Internet services, communications
equipment products and services, computer hardware and software, and network
integration products and services. In addition to these products and services,
the Company plans to begin offering a full line of local, long distance
telephone services, expanded Internet services (e.g, "VOIP" "DSL" & "ATM"), and
wireless solutions within the next 90 days.
o LOCAL, LONG DISTANCE AND WIRELESS TELEPHONE SERVICE
The Company plans to become a provider of comprehensive local and long
distance telephone services including:
o Toll free 800/888 calling services;
o Traditional One Plus long distance calling services;
o WATS;
o International telephone services;
o Calling cards;
o Debit cards and operator services;
o Digital private line services (including ATM, Frame
Relay, WAN and LAN); and
o Traditional local private line services.
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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 office.
Once 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. The initial switches are expected to be operational
prior to September 1, 2000.
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 Company has entered into sales/interconnection agreements with
BellSouth, Sprint and GTE. These agreements will allow the Company to purchase
network services from BellSouth, Sprint and GTE at cost, as well as to resell
local and long distance services to its customers under a wholesale purchase
agreement. These agreements are currently in full force, however, they will
require an initial deposit once the Company's switches are operational and
service is ordered.
In order to provide local and long distance telephone services, it was
necessary for the Company to be certified as a Competitive Local Exchange
Carrier (CLEC) and Inter-Exchange Carrier (IXC) by the Florida Public Service
Commission and the FCC. The Company's CLEC and IXC applications were approved by
the Florida Public Service Commission on March 3, 2000 and April 4, 2000,
respectively.
In order to complement its entry into the local and long distance
telephone market, the Company will offer wireless telephone solutions to its
customers. The Company intends to enter into a resale agreement with a cellular
company to enable the Company to provide wireless services to its customers
under the USA Digital, Inc. name. The Company will not be required to obtain any
additional licenses or other regulatory approvals to provide wireless services.
The Company does not currently generate revenues from co-location
services, local or long distance services, or wireless telephone products and
services. The Company currently offers local and long distance telephone
products and services to its customers. Local service is offered under the
re-sale agreements with Bell South, Sprint or GTE. Long distance is offered
under a re-sale agreement with Qwest. Until an agreement is reached with a
cellular company, the Company will not be able to provide wireless services to
its customers or generate revenues from the sale of such products and services.
Until its local and long distance telephone switches are operational, the
Company will not be able to offer co-location services.
o INTERNET SERVICES
On January 6, 2000, the Company acquired 100% of the stock in Syncom,
Inc. a Gainesville, Florida based Internet Service provider d/b/a Gator.net.
Through the combination of Gator.net's operation and the activation of the
Lucent equipment the Company will be positioned to offer the following broad
array of Internet services to its customers:
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o Dedicated high-speed broadband Internet access
services to the small and medium size business user,
including the following:
o ATM (Asynchronous Transfer Mode) is a network
protocol that allows the use of multiple transmission
protocols such as TCP/IP (Transmission Control
Protocol/Internet Protocol). Utilizing multiple
protocols allows for bandwidth on demand and
providing voice, data and video over the same
circuit. It is the latest technology in high-speed
broadband transmission, and being used as the basis
for next-generation networks and switching equipment.
o SDSL (Synchronous Digital Subscriber Line) is a
high-speed digital telephone connection used
primarily for Voice Over IP ("VOIP") and high-speed
transmission of voice and data over standard
telephone lines. Internet Service Providers provide
this service to their subscribers to allow them
high-speed Internet connectivity. Transmission is 2.3
million bits per second (mbps) in both directions.
o ADSL (Asymmetric Digital Subscriber Line) is a
high-speed digital telephone connection, used
primarily for the high-speed transmission of voice
and data over standard telephone lines. Internet
Service Providers provide this service to their
subscribers to allow them high-speed Internet
connectivity. Transmission is 1.544 million bits per
second (mbps) in one direction and 576 thousand bits
per second (kbps) in the other, although not as fast
as SDSL.
o ISDN (Integrated Services Digital Network) is a 126
kbps digital telephone connection used primarily for
the transmission of voice and data. The speed is
twice as fast as the traditional modem used today,
although not as fast as ADSL.
o T-1 and Fractional T-1 (Transmission System 1) and
DS-1 (Digital System 1), are high-capacity,
high-speed digital four wire circuits used to connect
an end user to the local telephone company, their
Internet service provider, or their long distance
company. It is also used to connect telephone
companies and Internet companies together. T-1 by
design transmits a digital signal over a four-wire
circuit at the rate of 1,544,000 bits per second
(1.544 mbps). By utilizing special equipment on each
end of the circuit called channel banks or
multiplexers, this one circuit can be split into 24
individual circuits at each end. Each of the 24
circuits can either be digital or analog (voice) and
utilizes 65 kbps of the 1.544 mbps. T-1 is much more
cost-effective than utilizing individual lines. A T-1
can also be used to extend the distance limitation of
a DSL circuit, provided the appropriate equipment is
at both ends.
o DS3 (Digital System 3) is a high-capacity, high-speed
digital 4-wire circuit with 28 times the capacity of
a T-1 or DS-1. It is the equivalent of 672 individual
voice grade circuits. Telephone companies, Internet
service providers, and long-distance companies use it
to connect to one another.
o Dial up access service to the residential community,
focused on easy user interface and access to
information on the World Wide Web. The Company has
taken delivery of Lucent Technologies, Inc. equipment
that allows them to provide this service.
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o Web services, including Web page production and
hosting, Web page design, Interactive Web-based
business services, (e.g. credit card processing),
database management, broadcast audio and video
applications and Internet marketing.
o Electronic commerce.
o Voice over Internet.
o IP telephony.
Simultaneously with its acquisition program, the Company has
developed its Internet infrastructure and Super Pop at its Gainesville, Florida
facility. This facility is designed to provide access for the co-location of
independent Internet service providers and inter-exchange carriers to allow for
the integration of high-speed Internet access and Internet telephony utilizing
fiber and broadband connectivity.
In addition to the businesses discussed above, the Company has
targeted other businesses that it feels will be synergistic with the Company's
business plan. These include Internet service providers, telephone interconnect
companies, computer hardware and software companies, system/ network
integrators, and switchless resellers. To date, the Company's management through
its network of contacts, has identified many of these acquisition candidates and
has closed the acquisitions of DSA Computers, Inc., C.A.T. Computers, TEAM,
Inc., Comsys, Inc., IBTS and Syncom, Inc. in return for the Company's stock.
Additionally, the Company is currently negotiating several further acquisitions
where the consideration would solely be the Company's stock.
MARKET AREA
The Company's target market is small to medium size businesses that
need assistance moving into the information age so that they can take advantage
of new markets as well as rapidly changing technologies. These businesses are
generally accustomed to working with a local communication vendor to ensure that
its communication needs receive the highest priority. Through the acquisition of
computer hardware/network integrators, telephones interconnect companies,
Internet service providers, and switchless resellers, the Company will build a
customer base that will purchase its convergent communications products. The
Company intends to confine its business to the metropolitan areas of Florida
(e.g. Orlando, Tampa, Gainesville, Miami, etc.) for the next 9-12 months, and
thereafter, it intends to expand into the remaining eight states in the
BellSouth region, which includes Florida, Georgia, North Carolina, South
Carolina, Alabama, Tennessee, Mississippi, Louisiana and Kentucky.
COMPETITION
Virtually every aspect of the telecommunications industry is
extremely competitive, and USA DIGITAL expects that competition will intensify
in the future. The Company faces significant competition from carriers and other
companies with greater market share and financial resources. USA DIGITAL will
compete domestically with incumbent providers (Incumbent Local Exchange Carriers
"ILEC"), which have historically dominated local telecommunications, and with
long distance carriers, for the provision of long distance services. Sometimes
the incumbent provider offers both local and long distance services. The ILECs
presently have numerous advantages as a result of their historic monopoly
control over local exchanges. A continuing trend toward business combinations
and alliances in the telecommunications industry may create significant new
competitors to the Company. Many of the Company's existing and potential
competitors have financial, personnel and other resources significantly greater
than those of USA Digital.
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The Company also faces competition from competitors in every area of their
businesses, including competitive access providers operating fiber optic
networks, in some cases in conjunction with the local cable television operator.
Several competitors have announced the deployment of nationwide fiber networks
using advanced state-of-the-art technologies. AT&T Corp. ("AT&T") and Sprint
Corporation ("Sprint") have indicated their intention to offer local
telecommunications services in major United States markets using their own
facilities, including, in AT&T's case, the announced acquisition of the
facilities and business of Teleport Communications Group, Inc., or by resale of
the local exchange carriers' or other providers' services.
The Company may also be subject to additional competition due
to the development of new technologies and increased availability of domestic
and international transmission capacity. For example, even though fiber optic
networks are now widely used for long distance transmission, it is possible that
the desirability of such networks could be adversely affected by changing
technology.
The telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite and fiber optic transmission capacity for
services similar to those provided by USA DIGITAL. The Company cannot predict
which of many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services. For most of the Company's
communications services, the factor's critical to customer's choice of a service
provider are cost, ease of use, speed of installation, quality, reputation and
in some cases, geography and network size.
PERSONNEL
As of June 30, 2000, the Company had 47 full-time employees. The
employees are not represented by a collective bargaining unit and the Company
considers its relationship with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
OFFICES/PROPERTY
The following table sets forth certain information at March
31, 2000 regarding the Company's office facilities, which are owned or leased by
the Company and certain other information relating to its property at that date.
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ANNUAL LEASE SQUARE
RENT EXPIRES FOOTAGE
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100 West Lucerne Circle, Suite 600
Orlando, FL 32801 $ 38,892 December 31, 2004 1,852
6702 Benjamin Road, Suite 300
Tampa, FL 33634 $ 66,000 December 31, 2002 2,400
10001 N.W. 50th Street, Suite 105 Sunrise,
Florida 33351 $ 30,000 November 30, 2002 3,400
503 S.W. 2nd Avenue
Gainesville, Florida Owned -- 4,000
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ITEM 3. LEGAL PROCEEDINGS
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The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition and results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR USA DIGITALS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the OTC Electronic Bulletin
Board under the symbol "UDIG." The table below shows the high and low sales
price during the periods indicated. The Company's common stock began trading on
March 26, 1999. At March 31, 2000, the last trading date in the Company's fiscal
year, the Company's common stock closed at $6.25. At June 14, 2000, there were
9,754,070 shares of the Company's common stock outstanding, which were held of
record by approximately 67 stockholders, not including persons or entities who
hold the stock in nominee or "street" name through various brokerage firms.
The following table shows the market range for the Company's common
stock based on reported sales prices on the OTC Electronic Bulletin Board.
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PERIOD HIGH (1) LOW (1)
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Fiscal year ended March 31, 1999
March 26, 1999 to March 31, 1999 .......... $ 1.7500 $ 1.5000
Fiscal year ended March 31, 2000
Quarter Ended June 30, 1999 ............... 3.2500 1.5000
Quarter Ended September 30, 1999 .......... 2.3750 0.4375
Quarter Ended December 31, 1999 ........... 1.9375 0.8125
Quarter Ended March 31, 2000 .............. 10.8750 0.6875
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(1) All figures adjusted to reflect a 2 for 1 stock split effected on March
3, 2000.
The Company did not pay cash dividends in fiscal year 2000 and does not
intend to do so for the foreseeable future. The Board of Directors considers
paying dividends, dependent on the results of operations and financial condition
of the Company, tax considerations, industry standards, economic conditions,
regulatory restrictions and other factors.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction
with the financial statements and related notes included elsewhere in this Form
10-KSB. The Company may from time to time make written or oral "forward-looking
statements." These forward-looking statements may be contained in this Form
10-KSB 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-KSB, 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.
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.
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On March 4, 1999, Blazoon Systems Incorporated ("Blazoon"), a Colorado
corporation, an inactive publicly held company with no recent operating history,
acquired 100% of the outstanding common stock of Diverse Capital Corp.
("Diverse"), a Florida corporation incorporated on July 9, 1998, in exchange for
1,235,000 shares of Blazoon common stock. 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. Subsequent to the
acquisition, the prior shareholders of Diverse owned approximately 55% of the
voting common stock of Blazoon.
On March 9, 1999, the Company consummated a merger agreement with
Blazoon with the Company as the surviving entity. The Company entered into the
March 9, 1999 transaction with Blazoon in order to: (1) redomicile Blazoon as a
Nevada Corporation in order to take advantage of the more favorable corporate
law and franchise tax of Nevada; (2) effect the name change from Blazoon to USA
Digital, Inc.; and (3) to create a public market for USA Digital, Inc. common
stock so that the Company could more easily raise the capital necessary to carry
out its business plan.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND MARCH 31, 1999
Total assets increased $2.8 million to $3.6 million at March 31, 2000
from March 31, 1999. The increase is primarily attributable to the sale of the
Company's common stock in a private placement completed in February of 2000
which raised gross proceeds of $1.4 million, the conversion of debt to equity in
the Company and acquisitions completed by the Company during the year. More
specifically, the Company acquired DSA Computers, Inc. ("DSA"), TEAM, Inc.
("TEAM") and Syncom, Inc. (doing business as Gator.net, "Gator.net") as
subsidiaries and the acquisition of the assets of Computer Advanced Technology
Corp. ("CAT") during the year. These acquisitions in assets of $0.2 million,
$0.1 million, $0.5 million and $0.09 million, respectively, being acquired by
the Company at the acquisition date. The increase in the Company's cash and cash
equivalents of $0.8 million over the year ended March 31, 2000 was primarily due
to the aforementioned sale of common stock, conversion of debt to equity and
acquisitions. In addition, the Company's property and equipment increased by
approximately $0.7 million.
Total liabilities increased $0.9 million to approximately $1.7 million
at March 31, 2000 from March 31, 1999. This increase is attributed to a $0.3
million increase in accounts payable and accrued expenses, a $0.1 million
increase in current capitalized lease obligations and a $0.1 million increase in
non-current capitalized lease obligations associated with its order of telephone
switching equipment. In addition, the redemption value of the preferred stock
issued in connection with the acquisitions of DSA and TEAM was accounted for as
temporary equity in the amount of $0.3 million. The Company also incurred a $0.2
million liability for unearned revenue during the year.
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<PAGE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2000 AND MARCH 31, 1999
The Company incurred a net loss of $1.5 million, or $0.26 per share,
for the year ended March 31, 2000 compared to $0.6 million, or $0.26 per share,
for the period from July 9, 1998 (inception) to March 31, 1999.
For the year ended March 31, 2000, the Company generated $2.5 million
in total revenues. The Company did not generate any revenues in the
corresponding period of 1999, in which the Company was still in its
developmental stage. Of these revenues, $1.3 million were generated by the
integrated 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. The acquisition
of Gator.net in January of 2000 and TEAM in July of 1999 accounts for the
increase in revenues for this segment during the year. Net incom for TEAM and
Gator.net was $0.08 million during the year.
During the year ended March 31, 2000, the parent company, which will
offer local & long distance telephone service and high speed Internet access to
its customers, did not generate revenues as its network infrastructure was not
yet operational. Consequently, the parent company sustained a $1.4 million net
loss for the year. The net loss for the parent company was comprised primarily
of fees paid to consultants and expenses incurred to develop the telephone and
Internet infrastructure of the Company. The Company projects that it will be
able to provide all of its services by September 1, 2000.
$1.2 million of the Company's revenues for the year were generated by
the information integration services of the Company's operations which 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. The acquisition of DSA accounts for the increase in
revenues for this segment during the year. This segment incurred a $0.1 million
net loss during the year.
The Company's total operating expenses increased $3.4 million to $4.0
million for the year ended March 31, 2000 from the period from July 9, 1998
(inception) to March 31, 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. The increase is also attributed to a $0.3 million
increase in fees paid to consultants to assist with the formation of the
infrastructure of the Company. Operating expenses for the period from July 9,
1998 (inception) to March 31, 1999 were comprised primarily of consulting and
start up costs. $0.9 million of expenses were paid in the form of stock or
options which were measured at fair value when issued.
Net loss applicable to common stockholders reflects $18,750 of
accretions of preferred stock. Accretions are recorded on a straight-line basis
over three years.
12
<PAGE>
SUBSEQUENT EVENTS
The Company acquired Comsys, Inc. and International Business Telephone
in April of 2000. Because these companies were acquired subsequent to March 31,
2000, no revenues from either of these companies are reflected in the Company's
financial statements included in this report. These entities are currently
generating revenues and incurring expenses for the integrated communications
services segment of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's strategy is to acquire established Internet service
providers, computer/network integrators, telephone interconnect companies, and
switchless resellers mostly in exchange for stock in USA Digital. As such, the
Company does not anticipate requiring large sums of money to consummate its
anticipated acquisitions. However, the Company does anticipate incurring
expenses relating to the completion of future acquisitions, required deposits,
and 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 planning to raise additional capital in a private
placement of its common stock. The Company believes that its line of credit and
the funds raised in the proposed private placement together with operating
revenues will be sufficient to fund its working capital needs for the next 24
months.
13
<PAGE>
ITEM 7.FINANCIAL STATEMENTS
The consolidated audited financial statements for the period March 31,
1999 to March 31, 2000 are included in pages F-1 through F-22 of this Annual
Report on Form 10-KSB. This includes the following financial statements:
Report of Independent Auditors
Consolidated Balance Sheet -- At March 31, 2000;
Consolidated Statements of Operations -- Year Ended March 31, 2000 and
period from July 9, 1998 (inception) to March 31, 1999;
Consolidated Statements of Changes in Shareholders' Equity -- Year
Ended March 31, 2000 and period from July 9, 1998 (inception) to
March 31, 1999;
Consolidated Statements of Cash Flows -- Year Ended March 31, 2000 and
period from July 9, 1998 (inception) to March 31, 1999; and
Notes to Consolidated Financial Statements -- Year Ended March 31, 2000
and period from July 9, 1998 (inception) to March 31, 1999.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On May 3, 2000, USA Digital declined to reappoint its independent
public accountant, Weinberg & Company, P.A. ("Weinberg") for the fiscal year
ended March 31, 2000. The decision to decline to reappoint Weinberg as the
Company's independent public accountant was recommended and approved by the
Board of Directors.
During the two most recent fiscal years ending on March 31, 2000 and
March 31, 1999, the financial statements of the Company did not contain any
adverse opinion or a disclaimer of opinion, and the financial statements did not
contain any qualified or modified opinion as to uncertainty, audit scope or
accounting principles. In addition, there were no disagreements between the
Company and Weinberg on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to Weinberg's satisfaction, would have caused
Weinberg to make reference in connection with its report to the subject matter
of the disagreement.
Effective May 3, 2000, the Company appointed Ernst & Young LLP as the
Company's independent public accountant for the fiscal year ending March 31,
2000.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF USA DIGITAL; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
The information included in USA Digital, Inc.'s Proxy Statement for the
2000 Annual Meeting of Shareholders ("Proxy Statement") is incorporated herein
by reference: "Proposal 1, Election of Directors" and the following subsection
entitled "Information About Board of Directors and Management": "Board of
Directors," "Committees of the Board," "Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance."
14
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information included in USA Digital, Inc.'s Proxy Statement is
incorporated herein by reference: "Directors' Compensation," "Executive
Compensation" (including the Summary Compensation Table), and "Benefit Plans".
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information included in USA Digital, Inc.'s Proxy
Statement is incorporated herein by reference: "Stock Ownership of Management"
and "Security Ownership of Certain Beneficial Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information included in the Proxy Statement is
incorporated herein by reference: "Transactions with Certain Related Persons."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are either filed as part of
this report or are incorporated herein by reference:
Exhibit No. Description
----------- -------------
3.1 Certificate of Incorporation of USA Digital, Inc. (1)
3.2 Bylaws of USA Digital, Inc. (1)
4.3 Specimen of Stock Certificate of USA Digital, Inc. (1)
10.1 Employment Agreement between USA Digital, Inc. and Mark D.
Cobb (1)
10.2 Consulting Agreement between USA Digital, Inc. and Dunn
Capital Corporation (1)
10.3 Consulting Agreement between USA Digital, Inc. and Bell
Entertainment, Inc. (1)
10.4 1998 Compensatory Stock Option Plan (1)
10.5 1998 Employee Stock Compensation Plan (1)
10.6 Agreement and Plan of Reorganization by and among Blazoon
Systems, Inc. and Diverse Capital Corporation dated February
26, 1999 (1)
10.7 Acquisition Agreement made and entered into as of July 2, 1999
by and among USA Digital, Inc., DSA Computer, Inc., and David
Seal (1)
10.8 Amendment to Acquisition Agreement by and among USA Digital,
Inc., DSA Computer, Inc. and David Seal (1)
10.9 Employment Agreement by and between DSA Computers, Inc. and
David Seal (1)
10.10 Acquisition Agreement made and entered into as of June 7,
1999, by and among, USA Digital, Inc., Telephone Engineering
and Maintenance, Inc., and H. Ralph Cole (1)
15
<PAGE>
10.11 Employment Agreement by and between Telephone Equipment
Maintenance, Inc., and H. Ralph Cole (1)
10.12 Merger Agreement dated March 4, 1999 between USA Digital, Inc.
and Blazoon Systems, Inc. (1)
10.13 Employment Agreement by and between USA Digital, Inc. and
Peter J. Lyons
10.14 Employment Agreement by and between USA Digital, Inc. and
Kenneth D. Allen
21.1 Subsidiaries of the Registrant (1)
27.1 Financial Data Schedule (Submitted only with filing in
electronic format)
--------------------
(1) Incorporated by reference to the Registration Statement on Form 10-SB
(File #000-27375) as filed with the Securities and Exchange Commission
on September 17, 1999, as amended.
(b) Reports on Form 8-K.
NONE.
This Form 10-KSB contains certain forward looking statements consisting
of estimates with respect to the financial condition, results of operations and
business of USA Digital, Inc. that are subject to various factors which could
cause actual results to differ materially from these estimates. These factors
include: changes in general, economic and market conditions, or the development
of an adverse interest rate environment that adversely affects the interest rate
spread or other income anticipated from USA Digital's operations and
investments.
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Peter J. Lyons Chief Executive Officer and a July 14, 2000
---------------------------------------- Director (principal executive
Peter J. Lyons officer)
/s/ Mark D. Cobb President and a Director July 14, 2000
---------------------------------------- (principal accounting officer)
Mark D. Cobb
/s/Donald E. Darden
---------------------------------------- Director July 14, 2000
Donald E. Darden
/s/ Daniel J. Montague
---------------------------------------- Director July 14, 2000
Daniel J. Montague
</TABLE>
17
<PAGE>
USA Digital, Inc.
Consolidated Financial Statements
Year ended March 31, 2000 and Period
from July 9, 1998 (inception) to March 31, 1999
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors..................................................................................F-2
Report of Independent Auditors..................................................................................F-3
Consolidated Financial Statements
Consolidated Balance Sheet......................................................................................F-4
Consolidated Statements of Operations...........................................................................F-5
Consolidated Statements of Changes in Stockholders' Equity......................................................F-6
Consolidated Statements of Cash Flows...........................................................................F-7
Notes to Consolidated Financial Statements......................................................................F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
USA Digital, Inc.
We have audited the accompanying consolidated balance sheet of USA Digital, Inc.
as of March 31, 2000 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of USA Digital, Inc. for the period from
July 9, 1998 (inception) to March 31, 1999, were audited by other auditors whose
report dated July 15, 1999 except for Notes 6 and 5(D) as included in the 1999
financial statements, as to which the dates are August 5, 1999 and October 18,
1999, respectively expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 2000 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of USA Digital,
Inc. as of March 31, 2000 and the consolidated results of its operations and its
cash flows for the year then ended in conformity with accounting standards
generally accepted in the United States.
/s/ Ernst & Young LLP
Tampa, Florida
July 12, 2000
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
USA Digital, Inc.
We have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows of USA Digital, Inc. (a Development Stage
Company) for the period from July 9, 1998 (inception) to March 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of USA Digital,
Inc. for the period from July 9, 1998 (inception) to March 31, 1999 in
conformity with generally accepted accounting principles.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
July 15, 1999 except for Notes 6 and 5(D)
as to which the dates are August 5, 1999
and October 18, 1999, respectively
F-3
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED BALANCE SHEET
March 31, 2000
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 856,445
Accounts receivable, net of $125,000 allowances 214,917
Inventories, net 46,486
Employee receivables 35,967
Other current assets 7,125
----------------
Total current assets 1,160,940
Property and equipment, net 1,404,660
Intangible assets, net 987,482
Deposits and other non-current assets 76,375
----------------
Total assets $ 3,629,457
================
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 373,923
Employee payables 50,173
Current portion of capital lease obligations 165,313
----------------
Total current liabilities 589,409
Capital lease obligations 831,440
Unearned revenue 167,781
Non-current liabilities 82,956
Equipment loans 30,822
Redeemable preferred stock, $0.001 par value, 90,000 shares authorized,
issued and outstanding 303,750
Stockholders' equity:
Common stock, $0.001 par value, 50,000,000 shares authorized,
7,928,000 shares issued and outstanding 7,928
Additional paid-in capital 3,786,567
Deferred consulting expense (127,111)
Accumulated deficit (2,044,085)
----------------
Total stockholders' equity 1,623,299
----------------
Total liabilities, redeemable preferred stock and stockholders' equity $ 3,629,457
================
</TABLE>
See accompanying notes.
F-4
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31, 2000 and Period from July 9, 1998 (inception)
to March 31, 1999
<TABLE>
<CAPTION>
Periods ended March 31,
2000 1999
------------------------------------
<S> <C> <C>
Revenues $ 2,523,386 $ --
Costs and expenses:
Cost of equipment sales and direct wages 1,529,698 --
Network operating expenses 1,016,760 18,424
Consulting services 748,210 433,623
Bad debts expense 125,000 24,311
Telephone service 106,026 4,575
Travel and entertainment 102,791 2,912
Professional services 80,958 27,589
Rent expense 74,543 --
Automobiles and equipment 67,669 5,000
Depreciation and amortization 62,481 250
Interest expense 40,850 --
Other expenses 37,718 2,000
Executive compensation -- 37,333
------------------------------------
3,992,704 556,017
------------------------------------
Net loss $ (1,469,318) $ (556,017)
====================================
Reconciliation of net loss to net loss applicable to common
stockholders:
Net loss $ (1,469,318) $ (556,017)
Preferred stock accretions (18,750) --
------------------------------------
Net loss applicable to common stockholders $ (1,488,068) $ (556,017)
====================================
Net loss per common share--basic and diluted $ (0.26) $ (0.26)
====================================
Weighted average common shares outstanding--basic and diluted
5,733,216 2,182,354
====================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year ended March 31, 2000 and Period from July 9, 1998 (inception)
to March 31, 1999
<TABLE>
<CAPTION>
Additional Deferred
Common Stock Paid-in Consulting Accumulated
Shares Amount Capital Expense Deficit Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 9, 1998 -- $ -- $ -- $ -- $ -- $ --
Common stock issuance - founders 1,770,000 885 -- -- -- 885
Stock issued to consultants 50,000 25 24,975 -- -- 25,000
Options issued to consultants -- -- 614,378 (296,641) -- 317,737
Stock issued for business-ODT 650,000 325 -- -- -- 325
Stock issued for business-
Blazoon 2,000,000 1,000 (1,000) -- -- --
Issuance of common stock for
cash 289,000 145 144,355 -- -- 144,500
Stock issued to consultants 540,000 270 94,906 -- -- 95,176
Net loss -- -- -- (556,017) (556,017)
-------------------------------------------------------------------------------------------------
Balance, March 31, 1999 5,299,000 2,650 877,614 (296,641) (556,017) 27,606
Issuance of common stock for
cash 2,005,000 1,003 1,680,997 -- -- 1,682,000
Stock issued to consultants and
other service providers 820,000 410 473,840 -- -- 474,250
Stock issued for business-SYNCOM 110,000 55 329,945 -- -- 330,000
Stock issued for business-CAT 50,000 25 24,975 -- -- 25,000
Stock issued for property and
equipment 66,000 33 88,092 -- -- 88,125
Stock issued to employees 50,000 25 24,975 -- -- 25,000
Conversions of debt to equity 100,000 50 49,950 -- -- 50,000
Stock issued for debt service 78,000 38 38,962 -- -- 39,000
Rescission of business
combination-ODT (650,000) (325) -- -- -- (325)
Options issued to employees -- -- 180,500 -- -- 180,500
Options issued to consultants -- -- 4,125 -- -- 4,125
Accretions of redeemable
preferred stock -- -- -- -- (18,750) (18,750)
Amortization of deferred
compensation -- -- -- 169,530 -- 169,530
Two-for-one stock split -- 3,964 (3,964) -- -- --
Other activity -- -- 16,556 -- -- 16,556
Net loss -- -- -- -- (1,469,318) (1,469,318)
-------------------------------------------------------------------------------------------------
Balance, March 31, 2000 7,928,000 $ 7,928 $ 3,786,567 $ (127,111) $(2,044,085) $ 1,623,299
=================================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31, 2000 and Period from July 9, 1998 (inception)
to March 31, 1999
<TABLE>
<CAPTION>
Periods ended March 31
2000 1999
------------------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITES
Net loss $ (1,469,318) $ (556,017)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based employment, consulting service and debt service 892,405 437,913
Provisions for bad debts 125,000 24,311
Depreciation and amortization 62,481 250
Changes in operating assets and liabilities:
Accounts receivable (246,536) --
Inventories 33,160 --
Employee receivable/payable 23,779 --
Other current and non-current assets (9,632) (57,065)
Accounts payable and accrued expenses 127,355 96,718
Unearned revenue 45,118 --
------------------------------------
Net cash used in operating activities (416,188) (53,890)
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of businesses (218,665) --
Purchases of equipment (275,159) (2,506)
Increase in loans receivable -- (24,311)
------------------------------------
Net cash used in investing activities (493,824) (26,817)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,682,000 145,710
Proceeds from the issuance of subordinated notes 50,000 --
Payments on capital leases and notes payable (30,546) --
------------------------------------
Net cash provided by financing activities 1,701,454 145,710
Increase in cash and cash equivalents 791,442 65,003
Cash and cash equivalents--beginning of year 65,003 --
------------------------------------
Cash and cash equivalents--end of year $ 856,445 $ 65,003
====================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
USA DIGITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
Year ended March 31, 2000 and Period from July 9, 1998 (inception)
to March 31, 1999
<TABLE>
<CAPTION>
Periods ended March 31
2000 1999
--------------------------------------
<S> <C> <C>
NONCASH INVESTING ACTIVITIES
Purchase of telecommunications equipment under capital leases $ 246,753 $ 750,000
======================================
Purchase of equipment and building with 66,000 shares of common stock 88,125 --
======================================
Purchases of businesses by issuance of 160,000 shares of common stock 355,000 --
======================================
Purchases of businesses by issuance of 90,000 shares of preferred stock 285,000 --
======================================
NONCASH FINANCING ACTIVITIES
Conversion of subordinated debentures into 100,000 shares of common stock 50,000 --
======================================
Rescission of ODT purchase transaction and cancellation of 650,000 shares of
common stock 325 --
======================================
1999 recapitalization in connection with purchase of business for 2,000,000
shares of common stock. -- --
======================================
Accretion of redeemable preferred stock 18,750 --
======================================
OTHER CASH FLOW INFORMATION
Cash paid for interest $3,350 --
======================================
</TABLE>
See accompanying notes.
F-8
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
1. BUSINESS AND ORGANIZATION
Business
USA Digital, Inc. (the Company) operates in two segments: the integrated
communications services segment and the information integration services
segment. Products and services in the integrated communications segment include
local, long-distance and enhanced telecommunications services. Products and
services in the information integration services segment include consulting,
network architecture design and computer equipment sales. The Company's services
and products are delivered principally to business customers in the State of
Florida.
The Company operated as a development stage enterprise prior to the acquisitions
of businesses described in Note 3, at which time development stage reporting was
discontinued.
Organization
On March 4, 1999, Blazoon Systems Incorporated (Blazoon), an inactive publicly
held company with no operating history, consumated the acquisition of Diverse
Capital Corp. In connection with the acquisition, Blazoon (i) tendered 1,235,000
shares of common stock to the stockholders of Diverse in exchange for 100% of
the issued and outstanding common stock of Diverse, and (ii) tendered 625,000
shares of its Class A Preferred Stock in exchange for 100% of the issued and
outstanding preferred stock of Diverse. The preferred stock is convertible to
common stock on a one-for-one ratio for a one year period beginning February 2,
2000. The preferred stock has a dividend preference, is nonvoting, and is
subject to redemption at a $4.00 liquidation value at the Company's option
beginning February 2, 2004. Subsequent to the acquisition agreement, the former
shareholders of Diverse owned approximately 55% of the voting common stock of
Blazoon. Under Generally Accepted Accounting Principles, a Company whose
stockholders receive over 50% of the stock of the legal acquirer in a business
combination is considered the acquirer for accounting purposes. Accordingly, the
transaction is accounted for as an acquisition of Blazoon by Diverse, and a
recapitalization of Diverse.
On March 5, 1999, the Company incorporated under the laws of Nevada. On March 9,
1999, the Company consummated a merger agreement with Blazoon, a State of
Colorado corporation, to effect a redomicile and name change of Blazoon, with
USA Digital, Inc. as the surviving entity.
F-9
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND ORGANIZATION (CONTINUED)
The consolidated balance sheet subsequent to the acquisition includes the net
assets of Blazoon and the Company at historical costs and the operations of the
Company since its inception and the operations of Blazoon since the date of
acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of financial statements in accordance with accounting principles generally
accepted in the United States 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.
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions have
been eliminated.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments acquired with an original maturity of three months or
less to be cash equivalents.
Revenue Recognition
The Company recognizes revenue on integrated communications services in the
period that the service is provided and earned. Revenue on information
integration services is generally recognized when the services and equipment are
provided. Revenue on arrangements involving services and equipment generally is
recognized upon completion of the implementation. Finally, in the case of
equipment sales, revenue is recorded upon delivery. In all instances where
customer acceptance criteria are present, the Company defers revenue until
formal acceptance has been received. Unearned revenue represents amounts
collected from customers for integrated communication services, which have not
yet been rendered. Costs of revenues include wages of direct employees and the
cost of information systems and telecommunications equipment.
Inventories
Inventories, consisting principally of telecommunications and computer equipment
held for sale, are carried at the lower of cost (using the first-in, first-out
method) or market. As of March 31, 2000 inventories are net of $25,000 in
reserves for obsolescence.
F-10
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Equipment held under capital leases
is stated at the lower of fair value of the asset or the net present value of
the future minimum lease payments at the inception of the lease. Depreciation
and amortization are calculated using the straight-line method over lives
ranging from 4 to 7 years for equipment and building improvements and 30 years
for buildings.
Intangible Assets
Intangible assets, consisting principally of trademarks, customer lists and
goodwill, arose in connection with business combinations. Intangible assets are
stated at cost and amortized using the straight-line method over their
respective estimated useful lives.
Long-lived Assets
In accordance with Statement of Financial Accounting Standards No. 121 (SFAS
121), Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of, the Company reviews its long-lived assets, consisting
principally of property and equipment and intangible assets, for impairment when
events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. This review consists of a comparison of the
carrying value of the asset with the asset's expected future undiscounted cash
flows, without interest. Estimates of expected future cash flows represent
management's best estimate based upon reasonable and supportable assumptions and
projections. If the expected future cash flows exceed the carrying value of the
asset, no impairment is recognized. If the carrying value of the asset exceeds
the expected future cash flows, an impairment exists and is measured by the
excess of the carrying value over the fair value of the asset. There were no
impairments in any period presented.
Financial Instruments
The carrying value of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, loans and capital lease
obligations approximate their fair market values.
F-11
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Advertising
The Company expenses advertising as incurred. During the year ended March 31,
2000, advertising expenses amounted to approximately $43,000.
Loss per Share
The Company has applied the provisions of Statements on Financial Accounting
Standards No. 128, Earnings Per Share, which establishes standards for computing
and presenting earnings or loss per share. Basic earnings or loss per share is
computed by dividing income or loss available to common shareholders by the
weighted average number of common shares outstanding for the period. The
calculation of diluted earnings per share includes the effects of dilutive
common stock equivalents, of which there were none during the periods presented.
Comprehensive Income
Statements on Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS 130) was issued in June 1997. SFAS 130 requires that total
comprehensive income be disclosed with equal prominence as net income.
Comprehensive income is defined as changes in stockholders' equity, exclusive of
transactions with owners such as capital contributions and dividends. During the
periods presented, the Company's comprehensive income (loss) equaled its net
loss.
F-12
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Split
All share and per share information presented in the accompanying financial
statements has been retroactively restated to reflect a two-for-one stock split
of the Company's common stock which occurred on March 3, 2000.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations, because the alternative fair value accounting provided
under Statements on Financial Accounting Standards No. 123 Accounting for
Stock-based Compensation (SFAS 123) is not required. Accordingly, in cases where
exercise prices equal or exceed fair market value, the Company recognizes no
compensation expense for the stock option grant. In cases where the exercise
prices are less than the fair market value, compensation expense is recognized
over the period of performance or the vesting period.
The Company accounts for issuances of common stock and common stock options to
non-employee consultants and equipment vendors in accordance with SFAS 123 and
related interpretations. Pursuant to SFAS 123, the value of common stock issued
for non-employee services and equipment is based upon quoted market prices for
the Company's common stock. The value of options issued to non-employees is
based upon a fair-value model for stock options (principally the Black-Scholes
model).
New Accounting Pronouncement
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
establishes accounting and reporting standards for derivative instruments and
related contracts and hedging activities. This statement is effective for all
fiscal quarters and fiscal years beginning after June 15, 1999. The Company
believes that its future adoption of this pronouncement will not have a material
effect on the Company' financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified in order to conform with the
2000 presentation.
F-13
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS COMBINATIONS
During July 1999, the Company completed the purchase of the outstanding common
stock of Telephone Engineering and Maintenance, Inc. (TEAM) for 50,000 shares of
Series B Redeemable Convertible Common Stock valued at $ 158,500 ($200,000
liquidation preference). The Company also incurred $100,000 in legal and other
transaction expenses. TEAM is engaged in selling and servicing
telecommunications equipment. The transaction was accounted for as a purchase
where the purchase price was allocated to the fair values of net tangible and
intangible assets acquired. The excess of the purchase price over the fair
values of assets acquired amounted to $228,000 and is being amortized using the
straight-line method over 15 years.
During July 1999, the Company completed the purchase of the outstanding common
stock of DSA Computers, Inc. (DSA) for 40,000 shares of Series B Redeemable
Convertible Common Stock valued at $126,500 ($160,000 liquidation preference).
The Company also incurred $59,000 in legal and other transaction expenses. DSA
is engaged in the sale of network integration equipment and services. The
transaction was accounted for as a purchase where the purchase price was
allocated to the fair values of net tangible and intangible assets acquired. The
excess of the purchase price over the fair values of assets acquired amounted to
$119,000 and is being amortized using the straight-line method over 15 years.
During October 1999, the Company, through a wholly owned subsidiary, completed
the purchase of certain assets of Computer Advanced Technology Corp. (CAT) for
cash of approximately $61,000 and 50,000 shares of common stock valued at
approximately $25,000. The transaction was accounted for as a purchase where the
purchase price was allocated to the fair values of net tangible and intangible
assets acquired. No significant goodwill arose from this purchase.
F-14
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS COMBINATIONS (CONTINUED)
During January 2000, the Company completed the purchase of Syncom, Inc. (SYNCOM)
for common stock valued at approximately $330,000 and cash advances of $123,000.
SYNCOM is an Internet Service Provider (ISP) serving principally business
customers. The transaction was accounted for as a purchase where the purchase
price was allocated to the fair values of net tangible and intangible assets
acquired. The excess of the purchase price, plus approximately $130,000 of
assumed liabilities, over the fair values of net tangible assets acquired was
preliminarily recorded as customer lists in the amount of $465,000 and goodwill
of $146,388. These amounts are being amortized using the straight-line method
over 5 years and 15 years, respectively. The assumed liabilities which are
preliminary, arose in connection with a bankruptcy proceeding involving SYNCOM
prior to its acquisition by the Company. The amounts pertaining to the
bankruptcy proceeding have extended payment terms and are included in the
accompanying balance sheet as non-current liabilities.
The operating results of the above acquisitions have been included in the
Company's consolidated financial statements from the date of each acquisition,
respectively.
On an unaudited pro forma basis, assuming that the above acquisitions had
occurred on April 1, 1999, consolidated revenues, net loss and net loss per
common share (basic and diluted) would have been $4,021,000, $(1,595,400) and
$(0.28), respectively. However, pro forma operating information is not intended
to be indicative of the results of operations that would have occurred had the
aforementioned purchase transactions occurred on April 1, 1999. In the opinion
of management, the unaudited pro forma effects of the aforementioned purchase
transactions on the prior year financial statements are not meaningful.
F-15
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31, 2000:
<TABLE>
<S> <C>
Telecommunications equipment $ 1,202,495
Buildings and improvements 220,000
------------------
1,422,495
Less accumulated depreciation 17,835
------------------
Property and equipment, net 1,404,660
==================
</TABLE>
Depreciation expense for the year ended March 31, 2000 and the period from July
9, 1998 (inception) to March 31, 1999 was $17,585 and $250, respectively.
The Company leases telephone-switching equipment under a capital lease expiring
during 2004. The cost basis of the property that was held under capital lease as
of March 31, 2000 was $996,753 ($750,000 at March 31, 1999).
Minimum future lease payments under the capital lease (using an 11.5% rate) as
of March 31, 2000 are as follows:
<TABLE>
<S> <C>
For the year ended March 31
2001 $ 263,916
2002 263,916
2003 263,916
2004 296,916
2005 263,916
Later --
-------------------
Total minimum lease payments 1,319,580
Less amount representing interest (322,827)
-------------------
Present value of net minimum lease payment $ 996,753
===================
</TABLE>
F-16
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets consisted of the following at March 31, 2000:
<TABLE>
<CAPTION>
Lives
-------------------
<S> <C> <C>
Goodwill $ 493,178 15
Customer lists 499,200 5
Trademark and other 40,000 10
------------------
1,032,378
Less accumulated amortization 44,896
------------------
Intangible assets, net $ 987,482
==================
</TABLE>
Amortization expense for the year ended March 31, 2000 was $44,896 (none in
1999).
6. STOCKHOLDERS' EQUITY
Preferred Stock
The Company has authorized 5,000,000 undesignated shares of Class A Preferred
Stock, $.001 par value and 5,000,000 undesignated shares of Class B Preferred
Stock, $.001 par value. During July 1999, the Board of Directors designated
90,000 shares of Class B Preferred Stock as Class B Convertible Redeemable
Preferred Stock. The designated shares are entitled to one vote per share, are
convertible into common stock on a five-to-one (ten-to-one post split) basis
after July 2000, and are redeemable by the holder or Company after April 2002 at
the $4 per share liquidation preference.
The Class B Convertible Redeemable Preferred Stock were utilized in the
purchases of TEAM and DSA during July 1999 and recorded outside of equity at the
present value of future liquidation obligation, or $285,000. The Company records
periodic accretions to increase the carrying amount of the preferred stock to
its liquidation obligation ($360,000) over three years.
F-17
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Stock Compensation
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 nonqualified stock options to purchase common stock of the
Company. The Plan does not provide for the issuance of "Incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code. As of March 31,
2000 and 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 10 years. If the vesting period is not stated in
the granting resolution, then the option shall vest immediately.
As of March 31, 2000 and 1999, no options have been granted under the Plan.
During the year ended March 31, 2000, the Company issued 1,765,000 stock options
to certain directors, employees and one consultant of the Company, resulting in
a total of 5,640,000 stock options outstanding as of March 31, 2000.
In accordance with SFAS 123, for options issued to employees, the Company
applies APB Opinion No. 25 and related interpretations in accounting for the
options issued. Accordingly, compensation cost of $180,500 was recognized as of
March 31, 2000, computed in accordance with the intrinsic value method. Had
compensation cost for the Company's options been determined based on the fair
market value of the options at the grant date, consistent with SFAS 123, the
Company's net loss for the years ended March 31, 2000 and 1999 would have been
increased to the pro-forma amounts indicated below.
F-18
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Period ended March 31
2000 1999
------------------------------------
<S> <C> <C> <C>
Net loss As reported $ (1,469,318) $ (556,017)
Pro forma (2,152,392) (740,757)
Net loss per share As reported $ (0.26) $ (0.26)
Pro forma (0.38) (0.34)
</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 year ended March 31, 2000 consulting expense of $169,530
has been recognized, resulting in deferred consulting expense of $127,111 at
March 31, 2000. In addition, $4,125 was charged to operations for additional
stock options granted and vested during the year ended March 31, 2000.
For financial statement disclosure purposes, the fair market value of each stock
option granted during 2000 and 1999 was estimated on the date of grant using the
Black-Scholes Option-Pricing Model in accordance with SFAS 123 using the
following weighted-average assumptions: expected dividend yield 0%, risk-free
interest rate of 5.59%, volatility 101% and expected term of three years.
A summary of the options issued under the employment and consulting agreements
as of March 31, 2000 and 1999 and changes during the years is presented below:
F-19
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
------------------------------------ -------------------------------------
Weighted Average Weighted Average
Number of Options Exercise Price Number of Options Exercise Price
------------------------------------ -------------------------------------
<S> <C> <C> <C> <C>
Stock options:
Balance at beginning of period 3,875,000 $1.06 -- $ --
Granted 1,765,000 2.16 3,875,000 1.06
Exercised -- -- -- --
Forfeited -- -- -- --
------------------------------------ -------------------------------------
Balance at end of period 5,640,000 $1.40 3,875,000 $1.06
==================================== =====================================
Options exercisable at end of period
Weighted average fair value of options
granted during the period $1.08 $0.26
</TABLE>
The following table summarizes information about stock options outstanding at
March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding at Average Average Exercisable at Average
Exercise March 31, Remaining Exercise March 31, Exercise
Price 2000 Contractual Life Price 2000 Price
--------------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.50 - $1.50 3,875,000 5.32 Years $1.06 2,000,000 $0.73
0.50 - 3.00 1,425,000 6.49 Years 2.02 425,000 1.32
1.25 - 1.50 40,000 5.26 Years 1.38 20,000 1.25
1.50 - 3.50 300,000 6.61 Years 2.92 50,000 1.50
----------------------------------- --------------------------------------------------
5,640,000 5.68 Years $1.40 2,495,000 $0.85
=================================== ==================================================
</TABLE>
F-20
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding at Average Average Exercisable at Average
Exercise March 31, Remaining Exercise March 31, Exercise
Price 1999 Contractual Life Price 1999 Price
--------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.50 - $1.50 3,875,000 6.25 Years $1.06 1,375,000 $0.61
</TABLE>
Employee Stock Compensation Plan: The 1998 Employee Stock Compensation Plan (the
Employee Compensation Plan) has been adopted by the Board of Directors of the
Company and approved by the Company's stockholders. The plan was developed to
provide a means whereby directors, officers, consultants, advisors or agents,
employees or professional service providers of the Company may be granted common
stock of the Company. Grants under the Employee Compensation Plan shall be
determined by the Compensation Committee of the Board of Directors. As of March
31, 2000 and 1999, the Company has reserved 1,000,000 shares of common stock for
issuance under the Employee Compensation Plan and no shares may be issued under
the Employee Compensation Plan after April 30, 2003. No shares have been issued
under the Employee Compensation Plan as of March 31, 2000 and 1999.
7. INCOME TAXES
As of March 31, 2000, the Company had net deferred tax assets of approximately
$570,000, which resulted primarily from net operating loss carryforwards.
Generally accepted accounting principles require a valuation allowance to reduce
the deferred tax assets reported if, based on the weight of the evidence, it is
more likely than no that some portion or all of the deferred tax assets will not
be realized. After consideration of all evidence, both positive and negative,
management has determined that a valuation allowance of $570,000 is appropriate
as of March 31, 2000.
As of March 31, 2000, the Company has a net operating loss carryforward of
approximately $689,000 for tax purposes which will be available to offset future
taxable income. These carryforwards expire through the year 2020.
8. LITIGATION
On February 2, 1999, Diverse Capital Corporation, the Company's predecessor,
acquired Orlando Digital Telephone Corporation (ODT) in exchange for 650,000
shares of Diverse common stock and 625,000 shares of Diverse Convertible
Preferred A Stock. The 650,000 shares of common stock were issued to ODT
shareholders. Diverse reserved the right at the time of the closing to obtain an
appraisal substantiating that the approximate value of ODT was $2.8 million.
Subsequently, the Company 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. During October 1999,
the counterparties agreed to rescind the purchase transaction at which time the
Company cancelled the related common shares.
F-21
<PAGE>
USA DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SEGMENT INFORMATION
The table below summarizes the Company's segment data related to the integrated
communications services and information integration services segment for the
year ended March 31, 2000. During 1999, the Company was in the development stage
without identifiable segments.
<TABLE>
<CAPTION>
Year ended March 31, 2000
-------------------------------------------------------------------------------------------
<CAPTION> Communications Integration
Services Services Eliminations Consolidated
--------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 1,286,806 $1,236,580 -- $2,523,386
Intersegment revenue -- 22,797 $ (22,797) --
Depreciation and amortization 51,066 11,415 -- 62,481
Net loss 1,329,887 139,431 -- 1,469,318
Interest expense 39,021 1,829 -- 40,850
Stock-based employment,
consulting service and debt service 892,405 -- -- 892,405
Total assets as March 31, 2000 3,343,143 286,314 -- 3,629,457
</TABLE>
10. SUBSEQUENT EVENTS
During April 2000, the Company purchased the outstanding common stock of
Communications Systems, Inc. (ComSys), an interconnection company, for Company
common stock valued at approximately $988,000. The Company will follow the
purchase method of accounting for this purchase. However, the components of the
allocation of the purchase price are currently preliminary.
During April 2000, the Company purchased the outstanding common stock of
International Business Telephone Systems, Inc. (IBTS), an interconnection
company, for Company common stock valued at approximately $400,000. The Company
will follow the purchase method of accounting for this purchase. However, the
components of the allocation of the purchase price are currently preliminary.
During May 2000, the Company received a firm commitment on a $30.0 million line
of credit that expires in five years. Purchases under the credit line are
subject to approval by the lender. During June 2000, the Company committed $24
million of the line for the purchase of telecommunications equipment. The
balance of the line is available for general corporate and working capital
purposes.
F-22
