SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB SEC FILE NO:
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO.
DIGITAL D.J. HOLDINGS, INC.
formerly known as
BREAKTHROUGH ELECTRONICS, INC.
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(Exact name of registrant as specified in its charter)
Nevada 33-14982-LA 77-0530472
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
1658 E. Capitol Expressway, San Jose, California 95121
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (408) 246-9855
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Breakthrough Electronics, Inc.,
2612 East Kentucky Avenue, Salt Lake City, Utah 84117
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(Former name or former address, if changed since last report)
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the
preceding 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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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ ] No [ ]
As of September 30, 2000 the Company had approximately 14,017,526
shares outstanding.
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of September 30, 2000 was approximately
1,947,031.
FORM 10-KSB - Index
PART I
Page
Item 1. Description of Business.....................................2
Item 2. Description of Property.....................................9
Item 3. Legal Proceedings ....................................9
Item 4. Submission of Matters to a Vote of Security Holders.........9
PART II
Item 5. Market of the Registrant's Securities and
Related Stockholder Matters...............................10
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............11
Item 7. Financial Statements and Supplementary Data.................13
Item 8. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure....................13
PART III
Item 9. Directors and Executive Officers of the Registrant..........13
Item 10. Executive Compensation......................................14
Item 11. Security Ownership of Certain Beneficial
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Owners and Management.....................................15
Item 12. Certain Relationships and Related Transactions..............16
Item 13. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K.........................16
Signatures..................................................18
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PART I
This Annual Report on Form 10-KSB and the documents incorporated herein
by reference contain forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about the Company's industry, management's beliefs, and assumptions
made by management. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict therefore,
actual results and outcomes may differ materially from what is expressed or
forecasted in any such forward-looking statements.
ITEM 1. GENERAL
The Company was incorporated as "Golden Queens Mining Company" on
August 1, 1986, under the laws of the State of Nevada, primarily for the purpose
of exploration, development and production of certain mining properties located
in Esmeralda County, Nevada. In July, 1987, the Company changed its name to
"Breakthrough Electronics, Inc.," terminated its activities in the mining
business, and began efforts to develop and market electronic products, including
a telephone device designed to screen telephone calls, acquired from its then
President. This business was terminated several years ago. On November 22, 1999,
the Company acquired Digital D.J., Inc. ("DDJ"), pursuant to a reverse
triangular merger in a transaction in which approximately 781,687 shares of the
Company's common stock were issued to the shareholders of DDJ (the
"Reorganization"). The Reorganization resulted in control of the Company
transferring from the shareholders of the Company to the shareholders of DDJ.
The terms and conditions of the Reorganization are set forth in the Company's
Form 8-K filed with the Commission as of November 22, 1999. The Company owns
four subsidiaries, Digital D.J. Inc. ("DDJ"), Domestic Transmission Technologies
("DTT"), European Licensing Group ("ELG"), and Latin American Subcarrier
Services ("LASS"). DDJ is the Company's primary operating subsidiary. DDJ has
two operating subsidiaries of its own, Digital DJ Internet Solutions, Inc., a
Japan corporation, which is a wholly owned subsidiary responsible for all of the
Company's research and development to date. DDJ's other subsidiary, FMITS, is a
majority owned subsidiary in which one of the Company's shareholders is an
approximately 23% shareholder. Each of the other subsidiaries was recently
formed and have little or no operations and no revenue.
DDJ was incorporated in December 1991. Its primary business activity
was the development and marketing of a digital data system that provides a
variety of information services to radio listeners using FM subcarrier
technology. On April 1, 1999, DDJ established a wholly owned subsidiary, FM
Intelligent Transportation Systems, Inc. (FMITS), which provided a traffic
information service in the mobile market, with an initial investment of $5,000
for 5,000,000 shares of common stock. On June 1, 1999, DDJ transferred 1,142,376
shares of the common stock of FMITS (an approximately 23% interest) to Nichimen
America, Inc. (Nichimen) in consideration of the cancellation of accounts
payable to Nichimen in the amount of $951,980.
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Digital D.J.-Japan was formed in March 2000 as a subsidiary of DDJ to
carry on the activities of DDJ in Japan. DDJ Japan is in the process of
independently raising capital to support its operations, but has not yet
completed an offering or received funding independent of that provided by the
Company. Each of DTT, ELG and LASS were formed to operate licensing activities
related to DDJ's proprietary rights in the United States, and regions of Europe
and Latin America, respectively. Each of these subsidiaries is recently formed
and has no tangible assets. Each corporation will need to raise capital to
survive.
The Company has had an ongoing relationship with the consulting firm of
Mackenzie Shea, Inc. ("MSI"), which has assisted the Company, its subsidiaries
and affiliates in negotiations and strategic planning since prior to the DDJ
merger, and which is anticipated to continue through the completion of the
activities contemplated herein.
BUSINESS OF THE COMPANY
The Company's operations are all currently conducted by its operating
subsidiary, DDJ, to design and develop information technologies for application
in the "mobile environment." DDJ is the developer of a technology which is
designed to provide up to the minute information from FM radio stations.
The Internet has become the major player over the last three years in
the new era of "The Information Super Highway." At the same time, personal agent
software employing "on-demand" push technology has become a dominant player in
the wired world for those who want to get personal and customized information
from the Internet. Now the need for the information exists and is expanding in
the mobile environment. DDJ will be seeking to satisfy the need for rapidly
growing personalized information services, specializing in Mobile Information
Services, Internet Music Downloading, and ITS (Intelligent Transportation
System), by providing the necessary software and hardware platforms which can
receive up-to-the-minute information from FM radio.
Wireless is a solution for today's rapidly changing environment.
However, when listening to the radio in a mobile environment, listeners often
have a problem getting the exact information on the radio. For example, a
listener is unable to obtain address and telephone numbers of the sponsors of
radio ads, or up-to-the-minute stock, traffic or sports information. Most of the
song titles and artists' names are impossible to know since the radio disc
jockey does not give the desired information to the listener in a timely
fashion.
Especially in the automobile, people are in constant need of
up-to-the-minute traffic information wherever they go. Certain transitions from
"on-line" to "off-line" are happening with the growth of alphanumeric pages,
cellular services and personal digital assistants (PDAs). DDJ proposes to
address the needs of the drivers via its FM DataCasting System. DDJ believes
that its receiver and information services can provide the solutions for the FM
radio industry and its customers. As designed, when using a DDJ receiver unit,
people can see the information from the radio on the screen which will always
show them a variety of information such as the song and artist, event and movie
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schedules, stock market news, and real-time traffic information. Once the
automatic information filtering system is fully developed, this information will
be broadcast 24 hours a day and 7 days a week without any human involvement.
DDJ hopes that it (or its licensees) will be able to integrate all
updated information from major information providers and store it in its
Information Center Database to be delivered upon each radio station's request.
Information such as news, weather, traffic, sports, events, etc., will be
available through the DDJ (or its licensees) Information Center.
In this environment, DDJ has developed an operating system that is
believed to be both user friendly and very low cost to start the FM subcarrier
information services. Each radio station will be able to choose categories of
information from the DDJ (or its licensees) Information Center, based on their
program format, and simply set the program time for datacasting each category of
information. Updated information will then be delivered from DDJ according to
the program log. The selected categories of information are then sent from the
DDJ (or its Licensees) Information Center to the DDJ Information Work Bench
(DIWB) at the station and broadcast to the listeners automatically. These
high-speed data receivers are AM/FM stereo radios that receive FM subcarrier
data information broadcast from FM radio stations.
Unfortunately, DDJ has not been able to penetrate the U.S. market for
such services and has experienced a number of competing technologies becoming
more widely adopted by users. The Company plans to rethink its current market
strategy which is outlined below.
The Market
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Target Market. The Company originally planned to target gigantic
industry and consumer markets, such as (a) Radio Broadcasting Industry, (b)
ITS-Car Navigation System, (c) Audio Visual (Radio) Equipment, and (d) Personal
Computer and PDA.
Radio Broadcasting Industry. In European countries, major broadcasters
successfully implement RDS (Radio Data System), which is the old FM subcarrier
technology with 1.2 Kbps. the Company's system is an upper compatible system of
RDS, which makes it is easy for FM stations to set up the Company system. The
Company believes that approximately 95% of the car audio systems sold in Europe
have the RDS decoder. Approximately 20 million car audio systems with RDS were
sold in Europe in 1997. To start from this market is the first step to set up
the Company FM DataCasting Infrastructure.
Background of European Radio Industry with RDS (Radio Data System). The
Company management hopes that many FM broadcasting companies and FM stations
will want to introduce the Company system as an additional compatible system of
RDS, which already covers many major European countries; however, numerous
on-line and advertising companies are also seeking to provide enhancements and
additional services to stations.
Issue of FM Broadcasting Companies. Each country has FM broadcasting
companies that have great access to radio stations and have nation-wide networks
of FM stations. Currently, some FM broadcasting companies face de-regulation for
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their country policy. Many FM broadcasting companies would like to start new
services to FM stations since they want to retain their control over FM
stations. They face losing their power to FM stations.
Strategy for the FM Radio Industry. DDJ hopes to license the entire
DRIS (DDJ Radio Information System) for FM Stations to implement High Speed Data
Broadcasting Services. DDJ believes that FM stations will then be able to
provide attractive content to listeners and will generate additional advertising
revenue in today's lucrative, but competitive, market, as measured by higher
ratings and audience shares.
Positioning of DDJ: Solution Provider for Stations During Multi-Media
Era. Although radio-advertising revenue has been growing the last few years, the
emergence of new media sources such as on-line services, pagers, PDAs and TV
shopping networks have made radio vulnerable to decreases in audience and
advertising revenues.
DDJ will attempt to position itself as the "Solution Provider" for FM
radio stations to solve this problem. To be the "Solution Provider," DDJ plans
to be the "Advanced System Integrator" and a "Value Added Information Provider."
As a system integrator, DDJ plans to set up the total system, including hardware
and software, for each station to implement DDJ FM Data Cast Services. At the
same time, DDJ and/or its Licensees plans to function as an information provider
by offering the DDJ database, which will include a variety of updated
information such as music and event information, sports news, traffic
information, advertising information and more. In this way, the radio stations
will not need to spend time or money to generate or acquire all the information.
A radio station simply has to access the DDJ database to subscribe to format
specific information through the DDJ system network.
Initial research conducted by DDJ shows that radio stations perceive
that DDJ's "FM DataCast System" could add significant value for advertisers when
receiver penetration exceeds 15-20% in that market. Some radio stations estimate
that they could increase their current advertising rates substantially with the
added value and increased audience. Although FM subcarrier services exist, DDJ
believes that it is the only company offering the radio industry an opportunity
to generate additional income through value-added advertising and increased
audience listening. In addition, DDJ believes it will be in the unique position
of helping the radio industry compete against new media trends and technologies.
DDJ understands that the radio industry is very cost conscious. No
radio station wants to pay for the expensive equipment and incremental
operational costs to start new services. DDJ believes it has addressed this
issue in a way that no other mobile information service using the FM frequencies
has. As designed, the DDJ system is easy to operate and offers significantly low
start- up costs for this type of attractive information services. DDJ would be
the "Value Added Solution Provider" to the radio stations that want to generate
new revenue streams with the subcarriers while enhancing their relationship with
their core listeners.
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Competition
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In the broadcasting area, Digital Audio Broadcasting (DAB) could be a
prospective competitor. DDJ believes that the technology employed by the full
digital broadcasting system of DAB, is excellent. However, broadcasting
companies are required to make a huge investment to shift their equipment from
analog to full digital. Moreover, receivers for DAB in Europe cost approximately
$1,000 per unit. DDJ believes that, in Europe, customers would not pay to listen
to CD quality radio since they are satisfied with the conventional, and free, FM
stereo sound. On the other hand, in European communities, broadcasters are
planning to continue the conventional FM broadcasting services for the next 15
to 20 years. Therefore, DDJ believes it will be able to enjoy long-term business
opportunities. When DAB enters the market, DDJ, together with major
manufacturing companies, will introduce the DDJ and DAB compatible (dual mode)
receiver unit so that customers can enjoy both DDJ and DAB at the same time. In
this way, DDJ believes it will be able to take full advantage of then existing
marketing power in order to enjoy a smooth transition of its DDJ business base
toward DAB. DDJ is also subject to competition from all other areas of data
broadcasting, including digital, cellular and analogue in all frequency ranges.
Subsequent Events and Changes
Subsequent to the June 30, 2000 fiscal year end, on August 30, 2000,
the Company's shareholders and Board of Directors voted to distribute the
majority of the outstanding shares of each of the Company's subsidiaries,
Digital D.J., Inc., a California corporation, Latin American Subcarrier
Services, a California corporation, European Licensing Group, a California
corporation and Domestic Transmission Technologies, a California corporation, to
the Company's shareholders. Ninety-five percent (95%) of the outstanding shares
of each of the subsidiaries were distributed to the shareholders, ratably, based
upon their ownership interest. The shareholders and the Board of Directors also
voted to amend the Company's Articles of Incorporation to change the Company's
name to Digital Holdings, Inc., and to conduct a twenty-five for one reverse
stock split of the Company's common stock. After distributing out ninety-five
percent (95%) of the core businesses of the Company to its shareholders, the
Company elected to seek other acquisition candidates and to sell up to 1,000,000
shares of its common stock for up to $.10 per share, to be paid in goods,
services or cash. The Company is now seeking possible acquisition candidates
that the Company would purchase for stock. The Company continues to own five
percent (5%) of each of the subsidiaries.
RISK FACTORS
The Company's business and the actions proposed in this report are
subject to numerous risk factors, including the following:
THE COMPANY HAS LIMITED OPERATING HISTORY AND REVENUE AND MINIMAL
ASSETS AND OPERATES AT A LOSS. The Company has had limited operating history and
revenues from operations. The Company has no significant assets or financial
resources. The Company has operated at a loss to date and will, in all
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likelihood, continue to sustain operating expenses without corresponding
revenues, at least until the consummation of a business combination.
CONFLICTS OF INTEREST. Each of Mr. Wildes and Mr. Van Wagoner, two of
the Company's proposed directors, participate in other business ventures which
could limit the amount of time they devote to the Company. Mr. Wildes is
affiliated with MSI, which has been the Company's business consultant for over
one year. Mr. Van Wagoner maintains his own private legal practice. Additional
conflicts of interest and non-arms length transactions may also arise in the
future. The terms of a business combination may provide for a payment by cash or
otherwise to MSI for the purchase or retirement of all or part of its common
stock of the Company by a target company or for services rendered incident to or
following a business combination. MSI would directly benefit from such
employment or payment. Such benefits may influence the Company's choice of a
target company.
THE PROPOSED OPERATIONS OF THE COMPANY ARE SPECULATIVE. The success of
the Company's proposed plan of operation will depend to a great extent on the
operations, financial condition and management of the identified target company.
While business combinations with entities having established operating histories
are preferred, there can be no assurance that the Company will be successful in
locating candidates meeting such criteria. The decision to enter into a business
combination will likely be made without detailed feasibility studies,
independent analysis, market surveys or similar information which, if the
Company had more funds available to it, would be desirable. In the event the
Company completes a business combination the success of the Company's operations
will be dependent upon management of the target company and numerous other
factors beyond the Company's control. There is no assurance that the Company can
identify a target company and consummate a business combination.
PURCHASE OF PENNY STOCKS CAN BE RISKY. In the event that a public
market develops for the Company's securities following a business combination,
such securities may be classified as a penny stock depending upon their market
price and the manner in which they are traded. The Securities and Exchange
Commission has adopted Rule15g-9 which establishes the definition of a "penny
stock," for purposes relevant to the Company, as any equity security that has a
market price of less than $5.00 per share or with an exercise price of less than
$5.00 per share whose securities are admitted to quotation but do not trade on
the Nasdaq Small Cap Market or on a national securities exchange. For any
transaction involving a penny stock, unless exempt, the rules require delivery
by the broker of a document to investors stating the risks of investment in
penny stocks, the possible lack of liquidity, commissions to be paid, current
quotation and investors' rights and remedies, a special suitability inquiry,
regular reporting to the investor and other requirements. Prices for penny
stocks are often not available and investors are often unable to sell such
stock. Thus an investor may lose his investment in a penny stock and
consequently should be cautious of any purchase of penny stocks.
THERE IS A SCARCITY OF AND COMPETITION FOR BUSINESS OPPORTUNITIES AND
COMBINATIONS. The Company is and will continue to be an insignificant
participant in the business of seeking mergers with and acquisitions of business
entities. A large number of established and well-financed entities, including
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venture capital firms, are active in mergers and acquisitions of companies which
may be merger or acquisition target candidates for the Company. Nearly all such
entities have significantly greater financial resources, technical expertise and
managerial capabilities than the Company and, consequently, the Company will be
at a competitive disadvantage in identifying possible business opportunities and
successfully completing a business combination. Moreover, the Company will also
compete with numerous other small public companies in seeking merger or
acquisition candidates.
THERE IS NO AGREEMENT FOR A BUSINESS COMBINATION AND NO MINIMUM
REQUIREMENTS FOR BUSINESS COMBINATION. The Company has no current arrangement,
agreement or understanding with respect to engaging in a business combination
witha specific entity. There can be no assurance that the Company will be
successful in identifying and evaluating suitable business opportunities or in
concluding a business combination. No particular industry or specific business
within an industry has been selected for a target company. The Company has not
established a specific length of operating history or a specified level of
earnings, assets, net worth or other criteria which it will require a target
company to have achieved, or without which the Company would not consider a
business combination with such business entity. Accordingly, the Company may
enter into a business combination with a business entity having no significant
operating history, losses, limited or no potential for immediate earnings,
limited assets, negative net worth or other negative characteristics. There is
no assurance that the Company will be able to negotiate a business combination
on terms favorable to the Company.
REPORTING REQUIREMENTS MAY DELAY OR PRECLUDE ACQUISITION. Pursuant to
the requirements of Section 13 of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company is required to provide certain information about
significant acquisitions including audited financial statements of the acquired
company. These audited financial statements must be furnished within 75 days
following the effective date of a business combination. Obtaining audited
financial statements are the economic responsibility of the target company. The
additional time and costs that may be incurred by some potential target
companies to prepare such financial statements may significantly delay or
essentially preclude consummation of an otherwise desirable acquisition by the
Company. Acquisition prospects that do not have or are unable to obtain the
required audited statements may not be appropriate for acquisition so long as
the reporting requirements of the Exchange Act are applicable. Notwithstanding a
target company's agreement to obtain audited financial statements within the
required time frame, such audited financials may not be available to the Company
at the time of effecting a business combination. In cases where audited
financials are unavailable, the Company will have to rely upon unaudited
information that has not been verified by outside auditors in making its
decision to engage in a transaction with the business entity. This risk
increases the prospect that a business combination with such a business entity
might prove to be an unfavorable one for the Company.
LACK OF MARKET RESEARCH OR MARKETING ORGANIZATION. The Company has
neither conducted, nor have others made available to it, market research
indicating that demand exists for the transactions contemplated by the Company.
Even in the event demand exists for a transaction of the type contemplated by
the Company, there is no assurance the Company will be successful in completing
any such business combination.
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REGULATION UNDER INVESTMENT COMPANY ACT. In the event the Company
engages in business combinations which result in the Company holding passive
investment interests in a number of entities, the Company could be subject to
regulation under the Investment Company Act of 1940. Passive investment
interests, as used in the Investment Company Act, essentially means investments
held by entities which do not provide management or consulting services or are
not involved in the business whose securities are held. In such event, the
Company would be required to register as an investment company and could be
expected to incur significant registration and compliance costs. The Company has
obtained no formal determination from the Securities and Exchange Commission as
to the status of the Company under the Investment Company Act of 1940. Any
violation of such Act could subject the Company to material adverse
consequences.
PROBABLE CHANGE IN CONTROL AND MANAGEMENT. A business combination
involving the issuance of the Company's common stock will, in all likelihood,
result in shareholders of a target company obtaining a controlling interest in
the Company. As a condition of the business combination agreement, certain
majority shareholders may agree to sell or transfer all or a portion of their
common stock in the Company so to provide the target company or its affiliates
with all or majority control. The resulting change in control of the Company
will likely result in removal of the present officers and directors of the
Company and a corresponding reduction in or elimination of their participation
in the future affairs of the Company.
POSSIBLE DILUTION OF VALUE OF SHARES UPON BUSINESS COMBINATION. A
business combination normally will involve the issuance of a significant number
of additional shares. Depending upon the value of the assets acquired in such
business combination, the per share value of the Company's common stock may
increase or decrease, perhaps significantly.
TAXATION. Federal and state tax consequences will, in all likelihood,
be major considerations in any business combination the Company may undertake.
Currently, such transactions may be structured so as to result in tax-free
treatment to both companies, pursuant to various federal and state tax
provisions. The Company intends to structure any business combination so as to
minimize the federal and state tax consequences to both the Company and the
target company; however, there can be no assurance that such business
combination will meet the statutory requirements of a tax-free reorganization or
that the parties will obtain the intended tax-free treatment upon a transfer of
stock or assets. A non-qualifying reorganization could result in the imposition
of both federal and state taxes which may have an adverse effect on both parties
to the transaction.
ITEM 2. PROPERTIES
The Company maintained an office for its Japan operations for which it
paid $39,200 in rent during the fiscal year ended June 30, 2000. Effective
August 30, 2000, the Company relocated its Japan offices to a smaller facility
currently being provided on a rent free basis. The address in Japan is Digital
DJ Internet Solutions, Inc., Dai 2-Umemura Building, 7F, 3-24-3 Yoyogi, Shibuya-
ku, Tokyo 151-0053, Japan. The Company does not maintain any physical office in
the State of California or in the United States.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to the vote of its security
holders during the fourth quarter of the fiscal year covered by this report. The
Company did submit to its shareholders a matter for vote in the quarter ended
December 31, 1999, as more particularly described in the Company's 8-K/A filed
as of November 22, 1999, which is incorporated herein.
The Company also submitted a matter to the vote of its shareholders on
August 30, 2000, which is more particularly described in the Subsequent Events
section of this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ OTC Bulletin Board
under the symbol DJAY. The transfer agent and registrar for the common stock is
Interwest Transfer Company, Inc. The following table sets forth for the periods
indicated the high and low sale prices for shares of the Company's common stock
as reported on the OTC Bulletin Board These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
Sales Price
Fiscal Year Ended 1999
Fourth Quarter 3.00
Third Quarter 0.25
Second Quarter 1/8
First Quarter 2.00
Fiscal Year Ended 2000
Fourth Quarter 7/32
Third Quarter 5/16
Second Quarter 5.00
First Quarter 1 1/8
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The source of this information was IXL Services, Inc. As of September
30, 2000, there were approximately 450 holders of record for the Company's
common stock.
The Company's common stock is traded on the NASDAQ OTC Bulletin Board
rather than an exchange. Accordingly, an investor may find it more difficult to
dispose of, or obtain accurate quotations as to the market value of the common
stock. Further, in the absence of a security being quoted on NASDAQ, a market
price of at least $5.00 per share or a company having in excess of $4,000,000 in
net tangible assets, trading in the Company's securities may be covered by a
Securities and Exchange Commission ("SEC") rule that imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally
institutions with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse). For transactions covered by the
rule, the broker-dealer must make a special suitability determination for the
purchaser and receive the purchasers' written agreement to the transaction prior
to the sale. Consequently, the rule affects the ability of broker-dealers to
sell our securities and also may affect the ability of purchasers in this
offering to sell their securities in the secondary market.
Previously, the SEC adopted seven rules ("Rules") under the Securities
Exchange Act of 1934 requiring broker-dealers engaging in certain recommended
transactions with their customers in specified equity securities falling within
the definition of "penny stock" (generally non- NASDAQ securities priced below
$5.00 per share) to provide to those customers certain specified information.
Unless the transaction is exempt under the Rules, broker/dealers
effecting customer transactions in such defined penny stocks are required to
provide their customers with: (1) a risk disclosure document; (2) disclosure of
current bid and as quotations, if any; (3) disclosure of the compensation of the
broker/dealers and its sales person in the transaction; and (4) monthly account
statements showing the market value of each penny stock held in the customer's
account.
Recent changes to Rule 15c2-11 require that companies, such as Digital
DJ Holdings, Inc., must be reporting issuers under Section 12(g) of the
Securities Exchange Act of 1934, as amended in order to maintain trading
privileges on the "Electronic Bulletin Board." As such our inability to file
form 10-K's, and other reports required under Section 12(g) on a timely basis
would adversely effect the marketability of our securities.
As a result of the aforesaid rules regulating penny stocks, the market
liquidity for the Company's securities could be severely adversely affected by
limiting the ability of broker-dealers to sell the Company's securities and the
ability of shareholders sell their securities in the secondary market.
DILUTION AND ABSENCE OF DIVIDENDS
The Company has not paid any cash dividends on its common stock and
does not anticipate paying any such cash dividends in the foreseeable future.
Earnings, if any, will be retained to finance future growth. The Company plans
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to issue shares in private or public offerings to obtain financing, capital or
to acquire other businesses that can improve our performance and growth. Future
issuance and or sale of substantial amounts of common stock could adversely
affect prevailing market prices in the Company's common stock.
TRANSFER AGENT
The transfer agent and registrar for the Company is Interwest Stock
Transfer Company, Inc., located at 1981 East Murray - Holladay Boulevard,
Holladay, Utah 84117.
RECENT SALES OF UNREGISTERED SECURITIES
The Company has not issued any shares of unregistered securities which
have not been reflected in its previous filings.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview of the Company
-----------------------
Digital D.J. Holdings, Inc. (the "Company") was incorporated as "Golden
Queens Mining Company" on August 1, 1986 under the laws of the State of Nevada,
primarily for the purpose of exploration, development and production of certain
mining properties located in Esmeralda County, Nevada. In July, 1987, the
Company changed its name to "Breakthrough Electronics, Inc.," terminated its
activities in the mining business, and began efforts to develop and market
electronic products, including a telephone device designed to screen telephone
calls, acquired from its then President. This business was terminated several
years ago. On November 22, 1999, the Company acquired Digital D.J., Inc.,
pursuant to a reverse triangular merger in a transaction in which approximately
781,687 shares of the Company's common stock were issued to the shareholders of
Digital D.J., Inc. The Reorganization resulted in control of the Company
transferring from the former shareholders to the former shareholders of Digital
D.J., Inc. The terms and conditions of the Reorganization are set forth in the
Company's Form 8-K filed with the Commission for the period beginning on
November 22, 1999.
DDJ was incorporated in December 1991. Its primary business activity
was the development and marketing of a digital data system that provides a
variety of information services to radio listeners using FM subcarrier
technology. On April 1, 1999, DDJ established a wholly owned subsidiary, FM
Intelligent Transportation Systems, Inc. (FMITS), which provided a traffic
information service in the mobile market, with an initial investment of $5,000
for 5,000,000 shares of common stock. On June 1, 1999, DDJ transferred 1,142,376
shares of the common stock of FMITS (approximately 23% interest) to Nichimen
America, Inc. (Nichimen) in consideration of the cancellation of accounts
payable to Nichimen in the amount of $951,980.
14
<PAGE>
Subsequent Events and Changes
Subsequent to the June 30, 2000 fiscal year end, on August 30, 2000,
the Company shareholders and Board of Directors voted to distribute the majority
of the outstanding shares of each of the Company's subsidiaries, Digital D.J.,
Inc., a California corporation, Latin American Subcarrier Services, a California
corporation, European Licensing Group, a California corporation and Domestic
Transmission Technologies, a California corporation, to the Company
shareholders. Ninety-five percent (95%) of the outstanding shares of each of the
subsidiaries were distributed to the shareholders, ratably, based upon their
ownership interest. The shareholders and the Board of Directors also voted to
amend the Company's Articles of Incorporation to change the Company's name to
Digital Holdings, Inc., and to conduct a twenty-five for one reverse stock split
of the Company's common stock. After distributing out ninety-five percent (95%)
of the core businesses of the Company to its shareholders, the Company elected
to seek other acquisition candidates and to sell up to 1,000,000 shares of its
common stock for up to $.10 per share, to be paid in goods, services or cash.
The Company is now seeking possible acquisition candidates that the Company
would purchase for stock. The Company continues to own five percent (5%) of each
of the subsidiaries.
Results of Operations
As of the date of this Annual Report, the Company is in the development
stage and is primarily engaged in research and development activities.
Accordingly, the accompanying consolidated statements of operations should not
be regarded as typical for normal periods of operation. The Company's
development stage status, recurring net losses and capital deficit raise
substantial doubt about its ability to continue as a going concern. Additional
financing or restructuring of its liabilities will be required in order for the
Company to complete its development stage activities. Management believes that
it will be able to obtain such financing from new investors, and restructure its
liabilities.
The Company had no operations or revenues, or significant assets or
liabilities over the past several years until completion of the Reorganization
on November 22, 1999. All representations of the Company prior to November 22,
1999, set forth in this Management's Discussion and Analysis are therefore
provided on a pro forma basis as if the Reorganization had occurred in such
period. In June 1998, the Company entered into a License Agreement with
TeleDiffusion De France S.A. to use the Company's Radio Information System -
Europe Version for a term of five years for a total license fee of $400,000,
paid $280,000 in 1998, $60,000 in 1999, $20,000 in 2000 and $40,000 in 2001. In
August, 1998, the Company entered into a License Agreement with Deutsche Telekom
AG for the same technology for a term of five years for a total license fee of
$1,625,000, paid $1,250,000 in 1998, and $125,000, in March of the years 1999,
2000 and 2001 (the "DT Contract"). In January 1999, the Company entered into a
license agreement with the Netherlands Broadcasting Transmission Company, for
the same technology for a five year contract, which constituted the Company's
sole new source of revenue in 1999. The Netherlands Broadcasting contract was
for a five year term for total license fees of $300,000, paid $200,000 in 1999
and $25,000 per year in 2000, 2001, 2002 and 2003. Because the Company licensed
its technology over a five year term, GAAP required the Company to recognize the
revenue from the licenses over a five year period, rather than on a cash basis.
15
<PAGE>
Fiscal Year Ended June 30, 2000
Revenues. Revenues decreased by $78,543 or approximately 14% from
$543,543 for the fiscal year ended June 30, 1999, to 465,000 in the fiscal year
ended June 30, 2000. The decrease is primarily due to the Company not having any
rental income from the sublease of its offices in the United States.
Cost of Sales. The cost of sales for the fiscal year ended June 30,
2000, decreased to $245 from $104,659 for the fiscal year ended June 30, 1999.
The decrease is primarily due to the fact that the costs associated with the DT
Contract sale were not incurred during this period and the Company made no other
sales during the period as well as the Company not having any rental income from
the sublease of its offices in the United States.
Gross Profit. Gross profit as a percentage of revenues increased to
approximately 100% for the fiscal year ended June 30, 2000, from 81% of revenues
for the corresponding period in 1999, increasing by $25,871 for a gross profit
of $464,755 in the fiscal year ended June 30, 2000, compared to gross profit of
$438,884 for the same period ended June 30, 1999. The gross profit percentage
increase is attributed primarily to the fact that no cost of sales were incurred
during the current period.
Operating Expenses. Operating expenses increased by $317,155 or 27%
from $1,187,914 in the fiscal year ended June 30, 1999 to $1,505,069, in the
fiscal year ended June 30, 2000. The increase was attributable to an increase in
selling, general and administrative expenses and research and development
expenses. Research and development increased by $39,949 or 11% from $371,859 in
the fiscal year ended June 30, 1999, to $411,808 in the fiscal year ended June
30, 2000. Selling, general and administrative expenses increased by $289,394 or
36% from $803,867 in the fiscal year ended June 30, 1999, to $1,093,261 in the
fiscal year ended June 30, 2000. The increase was primarily attributable to
costs associated with the Reorganization.
Other Income (Expense). Other expense decreased by $40,892 from
($93,183) in the fiscal year ended June 30, 1999, to ($52,291) in the fiscal
year ended June 30, 2000, due to the following. Interest expense increased by
$10,609 or 12% from $86,379 in the fiscal year ended June 30, 1999, to $96,988
in the fiscal year ended June 30, 2000, primarily due to interest accruing on
the Company's debt financing. Gain on sale of assets increased by $19,137 from
$0 in the fiscal year ending June 30, 1999 to $19,137 in the fiscal year ended
June 30, 2000, primarily due to sale of certain assets.
Liquidity and Capital Resources
Cash and cash equivalents and net working capital (deficit) totaled
$21,108 and ($1,689,040), respectively, as of June 30, 2000. The primary source
of cash has been net proceeds generated from debt financings. The Company has
relied upon loan proceeds from convertible promissory notes and annual payments
under its three license agreements to fund its operations during the periods
discussed. The Company received $605,000 and $243,755 in debt financing for the
years ended June 30, 1999 and 2000, respectively.
16
<PAGE>
The Company anticipates that its primary use of working capital in
future periods will be for increases in product research and development,
expansion of its marketing plan and general and administrative expenses.
The Company believes that existing cash and cash equivalents, cash flow
from operations and cash raised through private placements will not be
sufficient to meet the Company's presently anticipated working capital needs for
the next 90 days. To the extent the Company uses its cash resources for its
operations, the Company will be required to obtain additional funds, if
available, through borrowings or equity financings. There can be no assurance
that such capital will be available on acceptable terms. If the Company is
unable to obtain sufficient financing, it may be unable to fully implement its
growth strategy.
In addition to the uncertainties of sources of capital for the
Company's operations, the Company continues to experience uncertainties and
difficulties within the marketplace for its technology. The Company originally
sought to offer high speed data broadcasting systems using conventional FM
subcarrying, which would provide stock market and other data to subscribers on a
real time basis for a monthly fee. Shortly after the introduction of the
Company's product and services, several online brokerages and pager service
began offering free real time stock market quotations. The Company then modified
its business plan to license its technology to users in Europe and attempt to
joint venture with major broadcasters in the United States to provide subcarrier
textual information in addition to the audio broadcasts. The Company competes
with numerous other types of carriers in this marketplace, including Digital FM
broadcasters, satellite FM broadcasters and competitors in conventional FM
subcarrier systems which claim to offer the ability to transmit at higher speeds
than that of the Company. The Company has no active sales force within the U.S.
and sales and marketing depends upon the Company's CEO, Thomas Takahisa. There
are no assurances that the Company will be able to compete successfully within
this marketplace.
Material Changes in Operations
As discussed above, in the fiscal year ended June 30, 2000, the Company
changed the focus of its marketing plan to shift from a retail and wholesale
provider of FM subcarrier content and hardware and software, to a licensor of
the Company's technology to individual users and resellers in Europe and Asia.
The Company also completed the Reorganization on November 22, 1999, which
resulted in the Company's combination with Digital D.J. The Company also formed
its Japan subsidiary for the marketing of licenses of its technology in Japan.
Inflation
Inflation has not proved to be a factor in the Company's business since
its inception and is not expected to have a material impact on the Company's
business in the foreseeable future.
Year 2000
To the best of the Company's knowledge and belief, the Company has not
experienced any disruption in data processing on our financial reporting and
operational systems or malfunction in equipment containing microprocessors as a
result of the year 2000 issue. The Company cannot be sure that some condition
relating to the year 2000 exists, but has not been identified.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is presented at pages F-1 to
F-28.
17
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
June 30, 2000
--------------------------------------------------------------------------------
Page
----
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 - F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-3 - F-4
Consolidated Statements of Operations F-5 - F-6
Consolidated Statements of Shareholders' Equity (Deficit) F-7 - F-10
Consolidated Statements of Cash Flows F-11 - F-12
Notes to Consolidated Financial Statements F-13 - F-28
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Digital Holdings, Inc.
We have audited the accompanying consolidated statements of operations and cash
flows of Digital Holdings, Inc. and subsidiaries (the Company), a development
stage company, for the year ended June 30, 1999 and the related statements of
shareholders' equity (deficit) for the period from December 6, 1991 (inception)
to June 30, 1999. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The consolidated
statements of shareholders' equity (deficit) for the period from December 6,
1991 (inception) to June 30, 1999, include amounts for the period from December
6, 1991 (inception) to June 30, 1995, which were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for the period from December 6, 1991 (inception) to June 30,
1995, is based solely on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the results of operations of Digital Holdings, Inc. and
subsidiaries and their cash flows for the year ended June 30, 1999 and their
changes in shareholders' equity (deficit) for the period from December 6, 1991
(inception) to June 30, 1999, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the
Company is in the development stage, has experienced recurring losses since
inception, and requires additional financing to complete its development
activities and transition to the attainment of profitable operations. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KPMG LLP
------------
KPMG LLP
Mountain View, CA
December 9, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Digital Holdings, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of Digital
Holdings, Inc. and subsidiaries as of June 30, 2000, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the year then ended, and for the period from December 6, 1991
(inception) to June 30, 2000. 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.
Those 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital Holdings,
Inc. and subsidiaries as of June 30, 2000, and the results of their operations
and their cash flows for the year then ended, and for the period from December
6, 1991 (inception) to June 30, 2000 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company incurred a net loss of $1,037,291 and it had
negative cash flows from operations of $1,240,312 during the year ended June 30,
2000. In addition, it had an accumulated deficit of $14,967,233 at June 30,
2000. These factors, among others, as discussed in Note 2 to the financial
statements, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
By: /s/ Singer Lewak Greenbaum & Goldstein LLP
----------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
September 20, 2000
F-2
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
June 30, 2000
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 21,108
Accounts receivable 45,000
Prepaid income taxes 20,000
Other current assets 5,966
----------------
Total current assets 92,074
Property and equipment, net 29,870
Other assets 28,420
----------------
Total assets $ 150,364
================
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
June 30, 2000
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 182,307
Short-term loans 35,665
Notes payable 100,000
Accrued expenses and other current liabilities 181,399
Deferred revenue 1,262,500
Current portion of capital lease obligations 19,243
----------------
Total current liabilities 1,781,114
Capital lease obligations, net of current portion 10,938
----------------
Total liabilities 1,792,052
----------------
Commitments and contingencies
Minority interest 1,142
----------------
Shareholders' deficit
Preferred stock, no par value
6,000,000 shares authorized
no shares issued and outstanding -
Common stock, $0.001 par value
50,000,000 shares authorized
528,701 shares issued and outstanding 529
Additional paid-in capital 13,323,874
Deficit accumulated during the development stage (14,967,233)
----------------
Total shareholders' deficit (1,642,830)
----------------
Total liabilities and shareholders' deficit $ 150,364
================
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 2000 and 1999 and
for the Period from December 6,1991 (Inception) to June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Period from
December 6,
1991
For the Years Ended (Inception) to
June 30, June 30,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Revenues $ 465,000 $ 444,449 $ 1,587,921
Rental income -- 99,094 218,050
------------ ------------ ------------
Total revenues 465,000 543,543 1,805,971
------------ ------------ ------------
Costs and expenses
Cost of revenues 245 24,261 1,208,096
Cost of rental income -- 80,398 199,542
Loss on inventory write down -- -- 2,271,203
Loss on sales or write down of property and
equipment -- 12,188 600,296
Research and development 411,808 371,859 4,173,132
Selling, general, and administrative 1,093,261 803,867 9,576,645
------------ ------------ ------------
Total costs and expenses 1,505,314 1,292,573 18,028,914
------------ ------------ ------------
Loss from operations (1,040,314) (749,030) (16,222,943)
------------ ------------ ------------
Other income (expense)
Gain on sale of property and equipment 19,137 -- 19,137
Interest expense, net (96,988) (86,379) (201,069)
Other 25,560 (6,804) 21,898
------------ ------------ ------------
Total other income (expense) (52,291) (93,183) (160,034)
------------ ------------ ------------
Loss before provision for income taxes and
extraordinary item (1,092,605) (842,213) (16,382,977)
Provision for income taxes -- 3,000 10,290
------------ ------------ ------------
Loss before extraordinary item (1,092,605) (845,213) (16,393,267)
Extraordinary item
Gain on restructuring of accounts payable, net of
income tax expense of $0, $10,000, and $10,000 55,314 1,370,720 1,426,034
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 2000 and 1999 and
for the Period from December 6,1991 (Inception) to June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Period from
December 6,
1991
For the Years Ended (Inception) to
June 30, June 30,
2000 1999 2000
============ =========== ==============
<S> <C> <C> <C>
Net income (loss) $ (1,037,291) $ 525,507 $ (14,967,233)
============ =========== ==============
Basic and diluted earnings (loss) per share
Loss before extraordinary item $ (2.50) $ (3.50) $ (67.75)
Extraordinary item -- 5.68 5.75
------------ ----------- --------------
Total basic and diluted earnings (loss)
per share $ (2.50) $ 2.18 $ (62.00)
============ =========== ==============
Shares used to compute basic and diluted
earnings (loss) per share 426,079 241,228 251,620
============ =========== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For
the Period from December 6, 1991(Inception) to June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Preferred Stock Common Stock Paid-In Development
Shares Amount Shares Amount Capital Stage Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 6, 1991
(Inception) - $ -- -- $ -- $ -- $ -- $ --
Initial capitalization - -- 10,978 11 (11) -- --
Common stock issued for cash - -- 168,000 168 299,832 -- 300,000
Net loss - -- -- -- -- (76,889) (76,889)
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1992 - -- 178,978 179 299,821 (76,889) 223,111
Common stock issued for
Acquisition of technology - -- 1,580 2 (2) -- --
Exchange of debt - -- 2,000 2 (2) -- --
Net loss - -- -- -- -- (227,520) (227,520)
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1993 - -- 182,558 183 299,817 (304,409) (4,409)
Common stock and warrants
issued for cash - -- 6,667 6 99,994 -- 100,000
Common stock and warrants
issued for cash - -- 20,000 20 349,982 -- 350,002
Common stock issued for
acquisition of technology - -- 1,200 1 (1) -- --
Net loss - -- -- -- -- (452,734) (452,734)
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For
the Period from December 6, 1991 (Inception) to June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Preferred Stock Common Stock Paid-In Development
Shares Amount Shares Amount Capital Stage Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 -- $ -- 210,425 $ 210 $ 749,792 $ (757,143) $ (7,141)
Series A preferred stock
issued for cash 431,564 604,190 -- -- -- -- 604,190
Series A preferred stock
exchanged forgiveness of note
payable and accrued interest 50,534 70,747 -- -- -- -- 70,747
Common stock exchanged for
forgiveness of notes payable
and accrued interest -- -- 5,952 6 148,804 -- 148,810
Common stock issued as
payment for services rendered -- -- 2,120 2 (2) -- --
Net loss -- -- -- -- -- (682,748) (682,748)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1995 482,098 674,937 218,497 218 898,594 (1,439,891) 133,858
Series B preferred stock
issued for cash 827,255 2,068,137 -- -- -- -- 2,068,137
Series B preferred stock exchanged
for forgiveness of note payable
and accrued interest 40,756 101,890 -- -- -- -- 101,890
Series C preferred stock
issued for cash 759,710 2,279,130 -- -- -- -- 2,279,130
Net loss -- -- -- -- -- (1,871,340) (1,871,340)
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-8
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For
the Period from December 6, 1991 (Inception) to June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 2,109,819 $ 5,124,094 218,497 $ 218 $ 898,594
Series C preferred stock
issued for cash 240,290 720,870 -- -- --
Series D preferred stock-
issued for cash 554,473 1,940,656 -- -- --
Common stock issued upon
exercise of stock options -- -- 20,600 21 50,696
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, June 30, 1997 2,904,582 7,785,620 239,097 239 949,290
Series D preferred stock
issued for cash 503,894 1,763,631 -- -- --
Common stock issued upon
exercise of stock options -- -- 20,000 20 5,693
Cancellation of common stock -- -- (4,725) (5) 5
Common stock issued as
payment for services rendered -- -- 6,848 7 (7)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, June 30, 1998 3,408,476 9,549,251 261,220 261 984,981
Common stock issued upon
exercise of stock options -- -- 8 -- 160
</TABLE>
Deficit
Accumulated
During the
Development
Stage Total
------------ ------------
Balance, June 30, 1996 $ (3,311,231) $ 2,711,675
Series C preferred stock
issued for cash -- 720,870
Series D preferred stock-
issued for cash -- 1,940,656
Common stock issued upon
exercise of stock options -- 50,717
Net loss (3,380,835) (3,380,835)
------------ ------------
Balance, June 30, 1997 (6,692,066) 2,043,083
Series D preferred stock
issued for cash -- 1,763,631
Common stock issued upon
exercise of stock options -- 35,713
Cancellation of common stock -- --
Common stock issued as
payment for services rendered -- --
Net loss (7,763,383) (7,763,383)
------------ ------------
Balance, June 30, 1998 (14,455,449) (3,920,956)
Common stock issued upon
exercise of stock options -- 160
The accompanying notes are an integral part of these financial statements
F-9
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For
the Period from December 6, 1991 (Inception) to June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Common stock issued for
Cash -- $ -- 8,000 $ 8 $ (8)
Services rendered -- -- 421 1 (1)
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, June 30, 1999 3,408,476 9,549,251 269,649 270 985,132
Common stock issued for
Conversion of preferred stock (3,408,476) (9,549,251) 136,339 137 9,549,114
Conversion of notes payable -- -- 97,371 97 2,520,698
Conversion of interest payable -- -- 8,006 8 215,465
Anti-dilution provision for preferred
stock -- -- 17,296 17 (17)
Exercise of stock options -- -- 40 -- 1,400
Capital contribution -- -- -- -- 6,424
Stock options issued as
compensation -- -- -- -- 45,658
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 -- $ -- 528,701 $ 529 $ 13,323,874
============ ============ ============ ============ ============
</TABLE>
Deficit
Accumulated
During the
Development
Stage Total
------------ ------------
Common stock issued for
Cash $ -- $ --
Services rendered -- --
Net income 525,507 525,507
------------ ------------
Balance, June 30, 1999 (13,929,942) (3,395,289)
Common stock issued for
Conversion of preferred stock -- --
Conversion of notes payable -- 2,520,795
Conversion of interest payable -- 215,473
Anti-dilution provision for preferred
stock -- --
Exercise of stock options -- 1,400
Capital contribution -- 6,424
Stock options issued as
compensation -- 45,658
Net loss (1,037,291) (1,037,291)
------------ ------------
Balance, June 30, 2000 $(14,967,233) $ (1,642,830)
============ ============
The accompanying notes are an integral part of these financial statements
F-10
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2000 and 1999 and
for the Period from December 6, 1991 (Inception) to June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Period from
December 6,
1991
For the Years Ended (Inception) to
June 30, June 30,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (1,037,291) $ 525,507 $(14,967,233)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Gain on restructuring of accounts payable (55,314) (1,380,720) (1,436,034)
Depreciation 38,823 47,405 700,199
Stock options issued as compensation 45,658 -- 45,658
Loss on inventory write down -- -- 2,271,203
Loss on sales or write down of property and
equipment -- 12,188 600,296
Accrued interest on loans converted to
preferred and common stock -- -- 19,447
(Increase) decrease in
Restricted cash -- 250,000 --
Accounts receivable (44,096) 349,845 (50,799)
Inventory -- -- (1,966,327)
Other current assets (22,359) 25,973 (20,167)
Increase (decrease) in
Accounts payable 63,285 (222,977) 2,619,483
Accrued expenses and other current liabilities 65,982 (104,306) 409,711
Deferred revenue (295,000) 922,500 1,262,500
Other liabilities -- 19,894 19,894
------------ ------------ ------------
Net cash provided by (used in) operating activities (1,240,312) 445,309 (10,492,169)
------------ ------------ ------------
Cash flows from investing activities
Other assets 500 501 (28,420)
Acquisition of property and equipment (17,486) (11,410) (1,888,542)
Proceeds from sale of property and equipment -- 14,960 253,301
------------ ------------ ------------
Net cash provided by (used in) investing activities (16,986) 4,051 (1,663,661)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-11
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2000 and 1999 and
for the Period from December 6,1991 (Inception) to June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Period from
December 6,
1991
For the Years Ended (Inception) to
June 30, June 30,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from issuance of preferred stock $ -- $ -- $ 9,376,614
Proceeds from issuance of common stock -- 160 836,592
Proceeds from investor loans 243,755 605,000 2,021,460
Repayment of investor loans -- (30,000) (63,000)
Payments on capital lease obligations (2,552) -- (2,552)
Proceeds from exercise of stock options 1,400 -- 1,400
Capital contribution 6,424 -- 6,424
------------ ------------ ------------
Net cash provided by financing activities 249,027 575,160 12,176,938
------------ ------------ ------------
Net increase (decrease) in cash (1,008,271) 1,024,520 21,108
Cash, beginning of period 1,029,379 4,859 --
------------ ------------ ------------
Cash, end of period $ 21,108 $ 1,029,379 $ 21,108
============ ============ ============
Supplemental disclosures of non-cash investing
and financing activities
Conversion of loans payable and accrued interest to
preferred and common stock
Loans payable $ -- $ -- $ 302,000
Accrued interest $ -- $ -- $ 19,447
Conversion of accounts payable to notes
payable $ -- $ 1,000,000 $ 1,000,000
Property and equipment transferred to
inventory $ -- $ -- $ 304,876
Investment exchanged for forgiveness of
accounts payable $ -- $ 1,142 $ 1,142
</TABLE>
The accompanying notes are an integral part of these financial statements
F-12
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 1 - BUSINESS AND ORGANIZATION
Digital Holdings, Inc. ("DHI"), formerly known as Breakthrough
Electronics, Inc., a Nevada publicly-traded corporation, and
subsidiaries (collectively, the "Company") are in the design and
development stage of developing a digital data system that provides a
variety of information services to radio listeners using FM sub-carrier
technology. DHI changed its name from Digital DJ Holdings, Inc. on
August 30, 2000.
Digital DJ, Inc. ("DDJ") was formed under the laws of the State of
California in December 1991. On April 1, 1999, DDJ established a wholly
owned subsidiary, FM Intelligent Transportation Systems, Inc.
("FMITS"), which provides a traffic information service in the mobile
market, with an initial investment of $5,000 for 200,000 shares of
common stock. On June 1, 1999, DDJ transferred 45,695 shares of the
common stock of FMITS (an approximate 23% interest) to Nichimen
America, Inc. ("Nichimen") in consideration for the cancellation of
accounts payable to Nichimen in the amount of $951,980.
On November 22, 1999, DHI entered into an Agreement and Plan of Merger,
whereby it acquired all of the outstanding common stock of DDJ in
exchange for 500,280 shares of newly issued common stock. The common
stock of DDJ included 153,635 shares issued upon conversion of DDJ's
preferred stock (after anti-dilution), 241,268 issued shares of common
stock, and 97,371 shares and 8,006 shares issued upon conversion of
convertible promissory notes and related accrued interest for
$2,520,795 and $215,473, respectively. In addition, 32,000 unissued
shares of DDJ common stock held in escrow for a consultant agreement
with MacKenzie Shea, Inc. were exchanged for an equal number of
unissued shares of DHI common stock, and 51,197 stock options and
24,600 warrants for the purchase of DDJ common stock were converted on
a one-for-one basis into stock options and warrants for the purchase of
DHI common stock. The aforementioned preferred stock, common stock,
convertible promissory notes and related accrued interest, common stock
held in escrow, stock options, and warrants were converted as a result
of and concurrently with the Agreement and Plan of Merger with DHI. For
accounting purposes, the transaction has been treated as a
recapitalization of DDJ, with DDJ as the accounting acquirer (reverse
acquisition), and has been accounted for in a manner similar to a
pooling of interests. The operations of DHI have been included with
those of DDJ from the acquisition date.
DHI was incorporated in Nevada on July 31, 1986. DHI had minimal assets
and liabilities at the date of the acquisition and did not have
significant operations prior to the acquisition. Therefore, no pro
forma information is presented.
F-13
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN MATTERS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles which contemplate
continuation of the Company as a going concern. However, the Company
incurred a net loss of $1,037,291 and it had negative cash flows from
operations of $1,240,312 during the year ended June 30, 2000. In
addition, it had an accumulated deficit of $14,967,233 at June 30,
2000. Further, the Company is in the development stage at June 30,
2000. These factors raise substantial doubt about the Company's ability
to continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the
Company's development program and its transition to the attainment of
profitable operations is dependent upon the Company obtaining adequate
debt and equity financing to fulfill its development activities and
achieving a level of sales adequate to support the Company's cost
structure. In addition, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon the Company's ability
to meet its financing requirements and the success of its plans to
develop and sell its products. The financial statements do not include
any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence.
Management plans to raise additional equity capital, continue to
develop its products, and look for merger or acquisition candidates.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Digital
Holdings, Inc. and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Development Stage Enterprise
----------------------------
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company is devoting
substantially all of its present efforts to establish a new business,
and its planned principal operations have not yet commenced. All losses
accumulated since inception have been considered as part of the
Company's development stage activities.
F-14
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Such estimates affect the reported
amounts of revenues and expenses during the reported period. Actual
results could materially differ from these estimates.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three
months or less to be cash equivalents.
Revenue Recognition
-------------------
Effective July 1, 1998, the Company began recognizing revenue in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition."
SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements (i.e., software products,
upgrades/enhancements, post-contract customer support, installation,
and training) to be allocated to each element based on the relative
fair values of the elements. The fair value of an element must be based
on evidence, which is specific to the vendor. The revenue allocated to
software products (including specified upgrades/enhancements) generally
is recognized upon shipment of the products. The revenue allocated to
post-contract customer support generally is recognized ratably over the
term of the support, and revenue allocated to services is recognized as
such services are performed.
If a vendor does not have evidence of the fair value for all elements
in a multiple-element arrangement, all revenue from the arrangement is
deferred until such evidence exists or until all elements are
delivered. The adoption of SOP 97-2 did not have a material impact on
the Company's results of operations.
Capitalized Software
--------------------
Development costs incurred in the research and development of new
software products are expensed as incurred until technological
feasibility in the form of a working model has been established. To
date, the Company has not completed its software development to the
point of technological feasibility, and accordingly, no costs have been
capitalized.
F-15
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated
useful lives of the respective assets of three to seven years.
Inventory and Property and Equipment Write Down
-----------------------------------------------
Management of the Company decided to close substantially all of its
operations in the United States and focus its marketing efforts in
Europe. As a result, the Company commenced a series of actions to
liquidate its inventory and property and equipment in the United
States. In May 1998, the Company sold property and equipment with a net
carrying value of approximately $576,000 for cash proceeds of $238,000.
The Company also wrote down property and equipment with a carrying
value of approximately $250,000 that was no longer in use as a result
of closing its United States operations and which had no reasonably
determinable disposal value. The Company also wrote down approximately
$2,271,000 of inventory, consisting primarily of receivers produced for
the United States market because the cost to refit the receiver
inventory for sale in the European market was uneconomical.
Earnings (Loss) per Share
-------------------------
The Company calculates earnings (loss) per share in accordance with
SFAS No. 128, "Earnings per Share." Basic earnings (loss) per share is
computed by dividing income (loss) available to common shareholders by
the weighted-average number of common shares outstanding. Diluted
earnings (loss) per share is computed similar to basic earnings (loss)
per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if
the potential common shares had been issued and if the additional
common shares were dilutive. Basic and diluted earnings (loss) per
share are the same since the Company has incurred a net loss for the
year ended June 30, 2000 and the potential common shares were
anti-dilutive for the year ended June 30, 1999.
Employee Stock Option Plans
---------------------------
The Company accounts for its stock-based compensation plans in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock
exceeds the exercise price. On July 1, 1996, the Company adopted the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under SFAS No. 123, the Company must disclose certain
pro forma information related to employee stock option grants as if the
fair value-based method defined in SFAS No. 123 had been applied.
F-16
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Split
-----------
On June 3, 1993 and August 30, 2000, the Company effected a 70-for-one
split and a one-for-25 reverse split of its common stock. All share and
per share data have been retroactively restated to reflect these stock
splits.
Income Taxes
------------
The Company accounts for income taxes under the asset and liability
method of accounting. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
A valuation allowance is required when it is less likely than not that
the Company will be able to realize all or a portion of its deferred
tax assets.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
-----------------------------------------------------------------------
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value, less the cost to sell. To
date, no such impairment has occurred.
Concentration of Credit Risk
----------------------------
During the year ended June 30, 2000, the Company's three largest
customers accounted for 70%, 17%, and 13% of total net sales. At June
30, 2000, accounts receivable from these customers represented 0%, 44%,
and 56% of total accounts receivable. During the year ended June 30,
1999, the Company's largest customer accounted for 61% of total net
sales. At June 30, 1999, accounts receivable from this customer
represented 0% of total accounts receivable.
F-17
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of cash, accounts receivable, accounts payable,
and accrued expenses and other current liabilities approximate fair
value due to the short maturity of these instruments. The recorded
amount of notes payable approximates fair value as the actual interest
rates approximate current competitive rates.
Comprehensive Income
--------------------
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financial statements since the Company did
not have any of the items of comprehensive income in any period
presented.
Reclassifications
-----------------
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year presentation.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 138, "Accounting for Certain Instruments and Certain Hedging
Activities." This statement is not applicable to the Company.
In June 2000, the FASB issued SFAS No. 139, "Rescission of FASB
Statement No. 53 and Amendments to Statements No. 63, 89, and 121."
This statement is not applicable to the Company.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2000 consisted of the following:
Furniture and fixtures $ 1,571
Computer equipment and software 187,851
----------------
189,422
Less accumulated depreciation 159,552
----------------
Total $ 29,870
================
F-18
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 5 - SHORT-TERM LOANS
The principal is due on demand and is unsecured. Amounts do not accrue
interest.
NOTE 6 - NOTES PAYABLE
The Company entered into agreements to borrow $837,705 from 10
individuals and two companies (of which $133,104 is from related
parties) during the period from December 1997 through June 1998. These
loans generally bore interest at 10%. Of the total amount borrowed,
$807,705 was in the form of convertible notes, which were due to mature
on March 31, 1999. In April 1999, the maturity date was extended to
July 31, 2000. The entire principal amount of these notes, at the
option of the holders, could be converted into shares of common stock
of the Company at a price of $28 per share. Notes payable of $707,705
were converted into shares of common stock as part of the reverse
merger, and a note payable of $30,000 was fully paid in April 1999. At
June 30, 2000, the Company was in default on the remaining note payable
for $100,000. The Company is in the process of renegotiating the note
payable.
The Company obtained additional financing through the issuance of
convertible notes of $605,000 from 16 individuals in May and June 1999.
In addition, included in accounts payable as of June 30, 1998 were
amounts due to Nichimen of $1,951,980, of which $1,000,000 was
converted into a convertible note on June 1, 1999. These notes bore
interest at 10% and matured on July 31, 2000. The entire principal
amount of these notes, at the option of the holders, could be converted
into shares of common stock of the Company at a price of $28 per share.
The notes were converted into shares of common stock as part of the
reverse merger.
The Company issued convertible notes to borrow $208,090 from eight
individuals and one corporation in October and November 1999. These
notes generally bore interest at 10% and mature on October 31, 2000.
The entire principal amount of these notes, at the option of the
holders, could be converted into shares of common stock of the Company
at a price of $1 per share. The notes were converted into shares of
common stock as part of the reverse merger.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Operating Leases and Capital Lease Obligations
----------------------------------------------
The Company leases administrative facilities in Japan under a
month-to-month lease that is cancelable by the Company upon three
months notice. Rent expense was $39,720 for the year ended June 30,
2000.
F-19
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases and Capital Lease Obligations (Continued)
----------------------------------------------------------
The Company leased its administrative facilities in the United States
under a non-cancelable operating lease that expires November 2003. In
addition to the minimum annual rental commitments, the lease provided
for periodic cost of living increases in the base rent and payment by
the Company of common area costs. Rent expense related to the operating
lease was $80,000 for the year ended June 30, 1999. The Company was
released from the lease in October 1998.
The Company also leases certain telephone equipment under a capital
lease, The lease has an initial term of five years and requires fixed
monthly payments.
Future minimum lease payments under capital leases at June 30, 2000
were as follows:
Year Ending
June 30,
2001 $ 22,820
2002 11,410
----------------
34,230
Less amount representing interest 4,049
----------------
30,181
Less current portion 19,243
----------------
Long-term portion $ 10,938
================
Leased capital assets included in property and equipment of June 30,
2000 consisted of the following:
Computer equipment and software $ 47,024
Less acccumulated depreciation 47,024
----------------
Total $ --
================
Litigation
----------
The Company is involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe
that the outcome of these matters will have a material adverse effect
on the Company's consolidated financial position or results of
operations.
F-20
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Consulting Agreement with MacKenzie Shea, Inc.
----------------------------------------------
The Company entered into a business consulting agreement with MacKenzie
Shea, Inc. ("MSI") on June 9, 1999, whereby MSI assists the Company in
the recruitment of officers and directors for the Company and advises
the Company in its negotiation with individuals, firms, or entities who
may have an interest in providing investment capital in the form of
bridge financing, private placement financing, media financing, or in a
form of business combination with the Company. In consideration for the
services to be rendered by MSI, the Company issued 800,000 shares of
the Company's common stock to a mutually agreed escrow agent. The
common stock will be released to MSI on an installment basis as
specified services are rendered by MSI. None of the services specified
in the business consulting agreement were provided as of June 30, 2000,
and all common stock was maintained by the escrow agent at that date.
The 800,000 shares of common stock transferred to the escrow agent were
not included in shares issued or outstanding in the accompanying
consolidated balance sheet.
NOTE 8 - SHAREHOLDERS' DEFICIT
Preferred Stock
---------------
The rights, preferences, and privileges of the Series A, B, C, and D
convertible preferred stock are as follows:
o Each share of Series A, B, C, and D preferred stock may be
converted into common stock at the option of the holder. The
conversion rate is initially one-for-one, subject to adjustment
for certain anti-dilution provisions. Automatic conversion for
Series A, B, C, and D will occur upon the closing of an initial
public offering of common stock in which the per share price is at
least $8 and gross proceeds to the Company are at least
$10,000,000.
o Holders of the preferred stock are entitled to non-cumulative
annual dividends, when and if declared by the Company's Board of
Directors, of $0.14, $0.25, $0.30, and $0.35 per share for Series
A, B, C, and D preferred stock, respectively.
o Holders of the Series A, B, C, and D preferred stock have the
right to one vote for each share of common stock into which such
shares could be converted in every election of directors of the
Company and on other matters as provided in the Articles of
Incorporation and required by law.
o Holders of the Series A, B, C, and D preferred stock have a
liquidation preference of $1.40, $2.50, $3, and $3.50 per share,
respectively, plus all declared but unpaid dividends.
F-21
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 8 - SHAREHOLDERS' DEFICIT (Continued)
Preferred Stock (Continued)
---------------------------
The preferred stock was converted into common stock as part of a
reverse acquisition on November 22, 1999.
Stock Option and Equity Incentive Plans
---------------------------------------
Under nonqualified Stock Option Agreements, the directors of the
Company and certain shareholders are granted options to purchase shares
of the Company's common stock at fair market value as determined by the
Company's Board of Directors. Options vest over four years.
Under the terms of the equity incentive plan, employees, officers,
directors, consultants, and advisers may be granted options to purchase
shares of the Company's common stock. Such options are granted at fair
market value as determined by the Company's Board of Directors. Options
vest over varying periods, generally four years. Under the plan, 60,000
shares have been reserved for issuance.
A summary of the status of the Company's options is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise
of Options Price
--------------- ----------
<S> <C> <C>
Outstanding, June 30, 1998 51,864 $ 28.98
Granted 9,535 $ 35.00
Exercised (8) $ 20.00
Forfeited (10,194) $ 27.38
---------------
Outstanding, June 30, 1999 51,197 $ 30.43
Exercised (40) $ 35.00
Cancelled (20,583) $ 35.75
---------------
Outstanding, June 30, 2000 30,574 $ 27.00
===============
Exercisable, June 30, 2000 26,331 $ 32.00
===============
</TABLE>
The weighted-average fair value of all options granted during the years
ended June 30, 2000 and 1999 was $0 and $5.90, respectively.
F-22
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 8 - SHAREHOLDERS' DEFICIT (Continued)
Stock Option and Equity Incentive Plans (Continued)
---------------------------------------
The following tables summarize information about the stock option plan
and options outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Stock Stock Remaining Price of Price of
Exercise Options Options Contractual Options Options
Prices Outstanding Exercisable Life Outstanding Exercisable
------------------ --------------- --------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$ 20.00 12,000 12,000 4.00 years $ 20.00 $ 20.00
$ 25.00 - 32.50 9,662 9,662 5.86 years $ 30.00 $ 30.00
$ 35.00 - 38.50 8,912 4,669 8.01 years $ 35.00 $ 35.00
--------------- ---------------
30,574 26,331
=============== ===============
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Had compensation cost for the
Company's stock option plan been consistent with SFAS No. 123, the
Company's net income (loss) and basic and diluted earnings (loss) per
share for the years ended June 30, 2000 and 1999 would be as follows:
<TABLE>
<CAPTION>
2000 1999
--------------- -----------
<S> <C> <C>
Net income (loss)
As reported $ (1,037,291) $ 525,507
Pro forma $ (1,037,291) $ 464,000
Basic and diluted earnings (loss) per
share
As reported $ (2.50) $ 2.25
Pro forma $ (2.50) $ 2.00
</TABLE>
Such pro forma information reflects only options granted since June 30,
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma
information presented above because compensation cost is reflected over
the options vesting period of four years and compensation cost for
options granted prior to July 1, 1995 is not considered.
F-23
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 8 - SHAREHOLDERS' DEFICIT (Continued)
Stock Option and Equity Incentive Plans (Continued)
---------------------------------------
As permitted by SFAS No. 123, the fair value of these options was
estimated at the date of grant using the minimum value method with the
following weighted-average assumptions for the years ended June 30,
2000 and 1999: dividend yields of 0% and 0%, respectively; risk-free
interest rates of 0% and 5.447%, respectively; and expected lives of 0
and 3.5 years, respectively. The weighted-average fair value of options
granted during the years ended June 30, 2000 and 1999 was $0 and $5.90,
respectively, per share.
Warrants
--------
The Company issued 26,667 shares of common stock to investors during
the year ended June 30, 1994. In accordance with the common stock and
warrant purchase agreement, each investor received a warrant to
purchase an additional 2,000 or 4,000 shares of common stock depending
on the amount invested. The total number of warrants granted as of June
30, 1994 was 18,000 at an exercise price of $17.50 per share. On
December 30, 1997, the term of the warrants, which originally expired
in December 1997 and March 1998, was extended to December 31, 1998, and
on September 29, 1998, further extended to July 31, 2000. The fair
value of the extended warrants was estimated at approximately $353,000
and $384,000 as of the December 30, 1997 and September 29, 1998 grant
dates, respectively. The warrants expired on July 31, 2000.
The extensions of the term of the warrants were determined to be
capital transactions similar to the issuance of a divided-in-kind;
however, there is no accounting impact on the Company's financial
statements since the Company does not have retained earnings. The fair
value of the extended warrants was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions at
December 30, 1997: expected dividend yield of 0%, risk-free interest
rate of 5.5%, contractual life of one year, and a volatility of 70%;
and at September 29, 1998: contractual dividend yield of 0%, risk-free
interest rate of 4.6%, contractual life of 1.8 years, and a volatility
of 70%.
F-24
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 8 - SHAREHOLDERS' DEFICIT (Continued)
Warrants (Continued)
--------
The Company granted 6,600 warrants to 12 individuals and two companies
in connection with $165,000 in loans it received from July through
December 1993. Each investor has a right to purchase the Company's
common stock at an exercise price of $25 per share. On September 29,
1998, the term of the warrants which originally expired in September
through December 1998 was extended to July 31, 2000. The extension of
the term of the warrants was determined to be a capital transaction
similar to the issuance of a dividend-in-kind; however, there is no
accounting impact on the Company's financial statements since the
Company does not have retained earnings. The fair value of the extended
warrants was estimated at approximately $115,000 as of the September
29, 1998 grant date, using the Black-Scholes option pricing model with
the following weighted-average assumptions; expected dividend yield of
0%, risk-free interest rate of 4.4%, contractual life of 1.8 years, and
a volatility of 70%. The warrants expired on July 31, 2000.
NOTE 9 - INCOME TAXES
<TABLE>
<CAPTION>
The tax effects of temporary differences that give rise to deferred
taxes at June 30, 2000 are as follows:
<S> <C>
Deferred tax assets
Deferred revenue $ 505,000
Compensated absences and deferred salaries,
principally due to accrual for financial reporting
purposes 18,000
Net operating loss carryforwards 4,600,000
--------------
Total gross deferred tax assets 5,123,000
Less valuation allowance 5,123,000
--------------
Net deferred tax assets --
Deferred tax liabilities
Plant and equipment, principally due to
differences in depreciation --
--------------
Net deferred tax liability $ --
==============
</TABLE>
F-25
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
The valuation allowance decreased by $308,000 and $53,000 during the
years ended June 30, 2000 and 1999, respectively. No provision for
income taxes for the years ended June 30, 2000 and 1999 is required,
except for minimum state taxes, since the Company incurred losses
during such years.
Income tax expense differs from the amounts computed by applying the
United States federal income tax rate of 34% to income taxes as a
result of the following for the years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---------- -------------
<S> <C> <C>
Computed "expected" tax benefit (34.0)% (34.0)%
Increase in income taxes resulting from
Change in the beginning-of-the-year balance of
the valuation allowance for deferred tax
assets allocated to income tax expense 34.0 34.0
Other -- 0.4
---------- -------------
Total -- % 0.4%
========== =============
</TABLE>
As of June 30, 2000, the Company had consolidated net operating loss
carryforwards of $13,451,000 and $5,290,000 for federal and state
income tax reporting purposes, respectively, which expire in varying
amounts through 2020. Should a substantial change in the Company's
ownership occur, there could be an annual limitation on the amount of
the net operating loss carryforwards available for use in the future.
F-26
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 10 - EXTRAORDINARY ITEM
On April 1, 1999, DDJ established FMITS with an initial investment of
$5,000 for 200,000 shares of common stock. On June 1, 1999, 45,695
shares of common stock of FMITS (an approximate 23% interest) were
transferred to Nichimen in consideration for the cancellation of the
accounts payable to Nichimen in the amount of $951,980. The difference
between the amount payable to Nichimen and the carrying amount of
45,695 shares of common stock of FMITS ($1,142) was recognized as an
extraordinary gain resulting from the restructuring of the accounts
payable.
In addition, the Company and certain other creditors arrived at
settlements, whereby $429,882 of the Company's accounts payable were
forgiven during the year ended June 30, 1999. This forgiveness of
accounts payable has also been included as a component of the
$1,380,720 extraordinary gain recognized in the accompanying
consolidated statement of operations.
During August 1999 through December 1999, the Company renegotiated a
settlement regarding certain amounts due to vendors for telephone
services provided to the Company. As a result of this settlement, the
Company recognized a gain on extinguishment of debt of $55,314 during
the year ended June 30, 2000.
NOTE 11 - GEOGRAPHIC, SEGMENT, AND SIGNIFICANT CUSTOMER INFORMATION
The Company adopted the provisions of SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," during the year
ended June 30, 1999. SFAS No. 131 establishes standards for the
reporting by public business enterprises of information about operating
segments, products and services, geographic areas, and major customers.
The method for determining what information to report is based on the
way that management organizes the operating segments within the Company
for making operational decisions and assessments of financial
performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer. This officer reviews financial
information presented on a consolidated basis accompanied by
disaggregated information about revenues by products for purposes of
making operating decisions and assessing financial performance.
Therefore, the Company operates in a single operating segment: FM
Subcarrier Service System.
F-27
<PAGE>
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
--------------------------------------------------------------------------------
NOTE 11 - GEOGRAPHIC, SEGMENT, AND SIGNIFICANT CUSTOMER INFORMATION (Continued)
The Company's software licensing fees are principally in Europe. The
following is geographic revenue information for the years ended June
30, 2000 and 1999:
2000 1999
------------ -------------
Germany $ 405,000 $ 270,833
Netherlands 60,000 -
France - 86,667
United States - 25,650
Other - 61,299
------------ -------------
Total $ 465,000 $ 444,449
============ =============
NOTE 12 - SUBSEQUENT EVENTS
On August 30, 2000, the Company's shareholders and Board of Directors
approved the following:
o To distribute 95% of the outstanding shares of four of the
Company's subsidiaries, Digital DJ, Inc., Latin America
Subcarrier Services, European Licensing Group, and Domestic
Transmission Technologies, to the Company's shareholders.
o To change the name of the Company to Digital Holdings, Inc.
o To effect a one-for-25 reverse split of its common stock.
o To sell up to 1,000,000 shares of common stock for up to $0.10
per share.
F-28
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The information required by this item is incorporated by reference to
the Form 8-K/A filed as of November 22, 1999, regarding changes in Registrant's
Certifying Accountant.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
The following persons are directors and executive officers of the
Company and all persons nominated or chosen to become such as of June 30, 2000
and where indicated after the Company's special shareholders meeting on August
30, 2000.
Name Age Position with the Company
Tsutomu Takahisa 40 Director, President, Secretary,
Treasurer
Yasuhiko Ohmnori (1) 69 Director
Koyo Hasagawa (1) 47 Director
Mark Van Wagoner (2) 53 Director
Clifford Wildes (2) 50 Director
-------------------------
(1) Outgoing director. Resigned as a director on August 30, 2000.
(2) Incoming director. Was elected as a director on August 30, 2000.
18
<PAGE>
Executive officers are elected by the Board of Directors and serve
until their successors are duly elected and qualify, subject to earlier removal
by the Board of Directors. Directors are elected at the annual meeting of
shareholders to serve for their term and until their respective successors are
duly elected and qualify, or until their earlier resignation, removal from
office, or death. The remaining directors may fill any vacancy in the Board of
Directors for an unexpired term. See "Board of Directors" for a discussion of
the Directors' terms.
YASUHIKO OHMORI
---------------
Mr. Ohmori is the Chairman and CEO of Ohmori Management Advisory Office
Corporation in Tokyo. Mr. Ohmori's experience includes positions as Chairman and
CEO at Softbank Corporation, Japan's largest computer software distribution
company; Executive Vice President at Secom Company, the unsurpassed provider of
computerized commercial and residential security network systems in Japan; and
General Manager of the Corporate Finance Department at Nomura Securities Company
the largest investment banking firm in Japan. Mr. Ohmori also holds positions as
a Director of MITI (Ministry of International Trad and Industry) Industrial
Structure Council and the Japan Microcomputer Club.
TSUTOMU TAKAHISA
----------------
As the founder who developed the concept of Digital DJ, Mr. Takahisa is
the driving force behind the corporation and the vital link between the
manufacturers in Japan and the United States. He obtained a Masters of Business
Administration from the J.L. Kellogg Graduate School of Management, Northwestern
University. Mr. Takahisa's work experience includes a position as Assistant to
the Senior General Manager at Canon's New Enterprises Division, where he managed
the research and development, design strategies and marketing of their Optical
Memory Card Systems.
KOYO HASEGAWA
-------------
Mr. Hasegawa joined the company as an executive responsible for the
research and development of Digital DJ's core technology and coordination with
worldwide manufacturers. As the manager for major new technology research and
development functions at Canon Central Research Center and Hitachi Magnet
Material Research Laboratory. Mr. Hasegawa holds a Masters Degree in Electrical
Engineering from Nippon University.
Current Directors
On August 30, 2000, the Company held a special meeting of its
Shareholders at which time the holders of the majority of the Company's shares
elected Mark Van Wagoner and Clifford Wildes as new directors in place of Koyo
Hasegawa and Yasuhiko Ohmori. Tsutomu Takahisa was reelected to the Board of
Directors. Biographies on Mr. Van Wagoner and Mr. Wildes are set forth below.
19
<PAGE>
CLIFFORD WILDES
---------------
Clifford H. Wildes has over 20 years in the micro-electronics and
computer hardware and software industries. For the past four years, he has
expanded his credentials to include investment and financial consulting for the
technology sector. Mr. Wildes assists Internet and technology start-up companies
with organization, operations and management, as well as mergers and
acquisitions. He has held operational positions and several public companies as
a Chief Operating Officer and Chief Executive Officer. In 1998, Mr. Wildes
formed Meridian Capital Inc., an investment and business consulting firm
specializing in the public e-commerce technology sector and helped facilitate
over $100 million in equity funding for numerous technology companies. In 1996,
Mr. Wildes co-founded Barclay Partners, Inc., which secured over 200 million
dollars for public technology companies its first year in business. Mr. Wildes
was former CEO, President and Co-founder of Microtech International, Inc.
(1985), a manufacturer of memory and mass storage products for the Macintosh, PC
and NeXT computing platforms. Over the past 10 years, Mr. Wildes has invested
his own funds, as well as Meridian Capital's, into numerous start-up companies
in a diverse range of sectors. Mr. Wildes has a B.S. degree from the University
of Massachusetts and attended the graduate program at UCLA, Los Angeles
California.
MARK O. VAN WAGONER
-------------------
Mr. Van Wagoner is and has been a partner in the Salt Lake City law
firm of Prince, Yeates & Geldzahler since 1995. Prior to joining his existing
firm, he was a partner in Van Wagoner & Stevens and before that, he was with
O'Melveny & Myers in Los Angeles. He has been the owner of several minor league
baseball teams. Mr. Van Wagoner has a Bachelor of Arts in History from Brigham
Young University and a Juris Doctor from Duke University.
Board of Directors
The Company's Bylaws fix the size of the Board of Directors at no fewer
than one and no more than 5 members, to be elected annually by a plurality of
the votes cast by the holders of Common Stock, and to serve until the next
annual meeting of stockholders and until their successors have been elected or
until their earlier resignation or removal. Currently, there are three (3)
directors.
Section 16(a) - Beneficial Ownership
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Registrant under Rule 16(a)-3(e) during its most recent fiscal
year, each of the following persons was an officer, director or beneficial owner
of more than 10% of the Company's common stock who failed to file on a timely
basis as disclosed in the Forms 3, 4 and/or 5, reports required by Section 16(a)
during the most recent fiscal year.
20
<PAGE>
Name Position
Tsutomu Takahisa Director, CEO, CFO, Secretary, $0% shareholder
Yasuhiko Ohmnori (1) Director
Koyo Hasagawa (1) Director
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the compensation paid or accrued by the
Company for the fiscal year ended June 30, 2000, to or for the account of the
Chief Executive Officer. No other executive officer of the Company received an
annual salary and bonus in excess of $100,000 or more during the stated period.
Accordingly, the summary compensation table does not include compensation of
other executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Restricted
Other Annual Stock Options/
Name & Principal Salary Bonus Compensation Award SARS
Position Year ($) ($) ($) ($) ($)
---- ------ ----- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Tsutomu Takahisa
President, CEO 1999 98,000 -0- -0- -0- -0-
2000 98,000 -0- -0- -0- -0-
Yasuhiko Ohmnori
Director 1999 -0- -0- -0- -0- (1)
2000 -0- -0- -0- -0- (1)
Koyo Hasagawa
Director, Vice Pres. 1999 95,000 -0- -0- -0- (2)
2000 95,000 -0- -0- -0- (2)
</TABLE>
--------------------
1 The Compensation paid to former officers and directors of the Company
who served through November 21, 1999 is reflected in the Company's Form
10-QSB filed as of November 15, 1999, a copy of which is incorporated
therein by this reference.
21
<PAGE>
The Company does not have employment agreements with any of its
employees.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The information provided in the table below provides information with
respect to each exercise of stock options during fiscal 2000 by each of the
executive officers named in the summary compensation table and the fiscal year
end value of unexercised options.
a b c d
----------------- ----------------- ------------------- -------------------
Shares Acquired Options at FY-E
Name Exercise Value Realize($)(1) Exercisable/Une
----------------- ----------------- ------------------- -------------------
Tsutomu Takahisa -0- -0- -0-
(1) The aggregate dollar values in column (c) and (e) are calculated by
determining the difference between the fair market value of the Common
Stock underlying the options and the exercise price of the options at
exercise or fiscal year end, respectively. In calculating the dollar
value realized upon exercise, the value of any payment of the exercise
price is not included
Director Compensation
The Company has no direct contractual agreements with its directors.
Tsutomu Takahisa received no additional compensation for his services as a
director of the Company beyond the salary he was paid as an officer. Koyo
Hasagawa received 200,000 options as consideration for his services as a member
of the Board of Directors. Yasuhiko Ohmnori received 500,010 options as
compensation for his services as a member of the Board of Directors.
22
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following Table sets forth certain information with respect to the
beneficial ownership known to the Company of shares of the Company Common Stock
owned as of June 30, 2000 beneficially by (i) each person who beneficially owns
more than 5% of the outstanding Company Common Stock, (ii) each director of the
Company, (iii) the Officers of the Company, and (iv) directors and executive
officers of the Company as a group:
Name and Address of
5% Shareholders, and Name of Number of Shares Percent of
Officers, Directors and Nominees Owned(1) Class(1)
-------------------------------- -------- --------
All Current Officers and Directors
as a Group (3 persons) (1)(2)(3) 189,838 28.47
Yasuhiko Ohmori, Current Director (1) 20,000 3.00
[address]
Tsutomu Takahisa, Current Director,
President, Chief Executive Officer,
Secretary, Treasurer, Nominee Director
(2) 169,432 25.41
Koyo Hasegawa, Current Director (3) 406 .06
[address]
Clifford Wildes, Nominee Director 0
677 North Washington Boulevard
Suite 50
Sarasota, FL 34236
Mark Van Wagoner, Nominee Director 0
175 East 400 South
Suite 900
Salt Lake City, UT 84111
(1) Consists of shares owned by Ohmac, a company of which Mr. Ohmori is a
principal.
(2) Does not include a total of 37,500 shares held by various relatives of Mr.
Takahisa. These figures also do not give effect to the possible exercise of
warrants to purchase a total of 3,360 shares of the Company's common stock, held
by relatives of Mr. Takahisa.
23
<PAGE>
(3) Does not include or give effect to the possible exercise of options held by
Mr. Hasegawa, entitling him to purchase a total of 20,000 of the Company's
common stock, at an exercise price of $35.00, all of which are vested.
(4) The nominees for election to the Company's Board of Directors, which are not
current members of the Board, control 11,200 shares.
These shares of Common Stock held by beneficial owners are "Restricted"
within the meaning of Rule 144 adopted under the Securities Act (the "Restricted
Shares"), and may not be sold unless they are registered under the Securities
Act or sold pursuant to an exemption from registration, such as the exemptions
provided by Rule 144 and Rule 701 promulgated under the Securities Act. The
Restricted Shares were issued by the Company in private transactions in reliance
upon exemptions from registration under the Securities Act and may only be sold
in accordance with the provisions of Rule 144 or Rule 701 of the Securities Act.
In general, under Rule 144 as currently in effect any person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned shares for a period of at least one year is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of:
(1) 1% of the then-outstanding shares of Common Stock; and
(2) the average weekly trading volume in the Common Stock
during the four calendar weeks immediately preceding the date on which the
notice of such sale on Form 144 is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to provisions relating to notice
and manner of sale and the availability of current public information about us.
In addition, a person (or persons) whose shares are aggregated) who has not been
an affiliate of us at any time during the 90 days immediately preceding a sale,
and who has beneficially owned the shares for at least two years, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitation and other conditions described above. While the foregoing discussion
is intended to summarize the material provisions of Rule 144, it may not
describe all of the applicable provisions of Rule 144, and, accordingly, you are
encouraged to consult the full text of that Rule.
The possibility of future sales by existing stockholders under Rule 144
or otherwise may, in the future, have a depressive effect on the market price of
the Common Stock, and such sales, if substantial might also adversely affect the
Company's ability to raise additional capital.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into an agreement with MSI to supervise the
search for target companies as potential candidates for a business combination.
The agreement will continue until such time as the Company has effected a
business combination.
24
<PAGE>
MSI may only locate potential target companies for the Company and is
not authorized to enter into any agreement with a potential target company
binding the Company. The Company's agreement with MSI is exclusive. MSI may
provide assistance to target companies incident to and following a business
combination, and receive payment for such assistance from target companies.
MSI, through its affiliates, owns approximately 32,000 shares of the
Company's common stock for which it paid nominal consideration.
MSI has entered, and anticipates that it will enter, into agreements
with other consultants to assist it in locating a target company and may share
its stock in the Company with or grant options on such stock to such referring
consultants and may make payment to such consultants from its own resources.
MSI may seek to locate a target company through solicitation. Such
solicitation may include newspaper or magazine advertisements, mailings and
other distributions to law firms, accounting firms, investment bankers,
financial advisors and similar persons, the use of one or more Web sites and
similar methods. If MSI engages in solicitation, no estimate can be made as to
the number of persons who may be contacted or solicited. To date MSI has not
utilized solicitation and expects to rely on consultants in the business and
financial communities for referrals of potential target companies.
Undertakings and Understandings Required of Target Companies
As part of a business combination agreement, the Company intends to
obtain certain representations and warranties from a target company as to its
conduct following the business combination. Such representations and warranties
may include (i) the agreement of the target company to make all necessary
filings and to take all other steps necessary to remain a reporting company
under the Exchange Act (ii) imposing certain restrictions on the timing and
amount of the issuance of additional free-trading stock, including stock
registered on Form S-8 or issued pursuant to Regulation S and (iii) giving
assurances of ongoing compliance with the Securities Act, the Exchange Act, the
General Rules and Regulations of the Securities and Exchange Commission, and
other applicable laws, rules and regulations.
A prospective target company should be aware that the market price and
trading volume of the Company's securities, when and if listed for secondary
trading, may depend in great measure upon the willingness and efforts of
successor management to encourage interest in the Company within the United
States financial community. The Company does not have the market support of an
underwriter that would normally follow a public offering of its securities.
Initial market makers are likely to simply post bid and asked prices and are
unlikely to take positions in the Company's securities for their own account or
customers without active encouragement and a basis for doing so. In addition,
certain market makers may take short positions in the Company's securities,
which may result in a significant pressure on their market price. The Company
may consider the ability and commitment of a target company to actively
encourage interest in the Company's securities following a business combination
in deciding whether to enter into a transaction with such company.
25
<PAGE>
A business combination with the Company separates the process of
becoming a public company from the raising of investment capital. As a result, a
business combination with the Company normally will not be a beneficial
transaction for a target company whose primary reason for becoming a public
company is the immediate infusion of capital. The Company may require assurances
from the target company that it has or that it has a reasonable belief that it
will have sufficient sources of capital to continue operations following the
business combination. It is possible, however, that a target company may give
such assurances in error, or that the basis for such belief may change as a
result of circumstances beyond the control of the target company.
Prior to completion of a business combination, the Company may require
that it be provided with written materials regarding the target company
containing such items as a description of products, services and company
history; management resumes; financial information; available projections, with
related assumptions upon which they are based; an explanation of proprietary
products and services; evidence of existing patents, trademarks, or service
marks, or rights thereto; present and proposed forms of compensation to
management; a description of transactions between such company and its
affiliates during relevant periods; a description of present and required
facilities; an analysis of risks and competitive conditions; a financial plan of
operation and estimated capital requirements; audited financial statements, or
if they are not available, unaudited financial statements, together with
reasonable assurances that audited financial statements would be able to be
produced within a reasonable period of time not to exceed 75 days following
completion of a business combination; and other information deemed relevant.
Competition
The Company will remain an insignificant participant among the firms
which engage in the acquisition of business opportunities. There are many
established venture capital and financial concerns which have significantly
greater financial and personnel resources and technical expertise than the
Company. In view of the Company's combined extremely limited financial resources
and limited management availability, the Company will continue to be at a
significant competitive disadvantage compared to the Company's competitors.
Conflicts of Interest
Clifford Wildes and Mark Van Wagoner, the Company's nominee directors,
are affiliated with MSI. Consequently, there are potential inherent conflicts of
interest in acting as an officer and director of the Company. In addition,
insofar as Mr. Wildes and Mr. Van Wagoner are engaged in other business
activities, they may devote only a portion of their time to the Company's
affairs.
Mr. Wildes is a shareholder of MSI. Mr. Van Wagoner is a practicing
lawyer. As such, demands may be placed on the time of Mr. Wildes and Mr. Van
Wagoner which will detract from the amount of time they are able to devote to
the Company. Mr. Wildes and Mr. Van Wagoner intend to devote as much time to the
activities of the Company as required. However, should such a conflict arise,
there is no assurance that Mr. Wildes and Mr. Van Wagoner would not attend to
other matters prior to those of the Company. Mr. Wildes and Mr. Van Wagoner
estimate that the business plan of the Company can be implemented in theory by
devoting approximately 10 to 25 hours per month over the course of several
months but such figure cannot be stated with precision.
26
<PAGE>
The terms of a business combination may include such terms as Mr.
Wildes and Mr. Van Wagoner remaining a director or officer of the Company and/or
the continuing securities or other legal work of the Company being handled by
the firm of which Mr. Van Wagoner is a principal. The terms of a business
combination may provide for a payment by cash or otherwise to MSI for the
purchase or retirement of all or part of its common stock of the Company by a
target company or for services rendered incident to or following a business
combination. Mr. Wildes and Mr. Van Wagoner would directly benefit from such
employment or payment. Such benefits may influence Mr. Wildes and Mr. Van
Wagoner's choice of a target company. There are no binding guidelines or
procedures for resolving potential conflicts of interest.
Investment Company Act of 1940
Although the Company will be subject to regulation under the Securities
Act of 1933 and the Securities Exchange Act of 1934, management believes the
Company will not be subject to regulation under the Investment Company Act of
1940 insofar as the Company will not be engaged in the business of investing or
trading insecurities. In the event the Company engages in business combinations
which result in the Company holding passive investment interests in a number of
entities the Company could be subject to regulation under the Investment Company
Act of 1940. In such event, the Company would be required to register as an
investment company and could be expected to incur significant registration and
compliance costs. The Company has obtained no formal determination from the
Securities and Exchange Commission as to the status of the Company under the
Investment Company Act of 1940. Any violation of such Act would subject the
Company to material adverse consequences.
Reasons for the Actions and Special Factors
The Company has determined that the limited revenues generated by DDJ
and those anticipated to be generated by the other Subsidiaries in the
foreseeable future are inadequate to support the high costs associated with the
maintenance and operation of a publicly traded company.
The Company has determined that if it distributes its Subsidiaries to
the Company's Shareholders, it may be an attractive merger candidate for a
successful operating company. The Company believes that in order to maintain its
operations while it seeks a merger candidate, it will need to raise additional
capital.
The Company also believes that it will be necessary to reduce its
outstanding number of Shares to make itself more attractive to potential merger
candidates. The completion of the reverse split and the issuance of additional
shares will have a substantial dilutive effect upon the Company's current
shareholders. Most merger and acquisition scenarios are likely to result in the
Company's current Shareholders owning less than 7% of the Company's equity
securities after the merger or acquisition.
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The Company's limited funds and its lack of full-time management have
made it impracticable to conduct a complete and exhaustive investigation and
evaluation of DDJ, and the preliminary decision to undertake a reorganization
with DDJ has been made without any feasibility studies, independent analyses,
market surveys, or fairness opinions which may have been otherwise desirable if
the Company had more funds available to it. Accordingly, shareholders are urged
to make their own independent evaluations of the proposed reorganization prior
to voting on the proposals to be considered at the Special Meeting.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON 8-K
(a) The following documents are filed as part of this
report:
(1)(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
Financial Statements are filed as part of this Report
are set forth in Item 7 and are presented at pages F-1 to F-28 of this Report;
which list is incorporated herein by reference.
(a)(3)EXHIBITS.
(b) Reports on Form 8-K
(i) Form 8-K filed February 8, 2000, (ii) April 24,
2000, containing information regarding the Change
of Control and Acquisition of Digital D.J., Inc.
(c) Exhibits. See the Indexes to Exhibits below.
Index to Exhibits
All of the items below are incorporated by reference.
Number Description
------ -----------
2.1 Agreement and Plan of Merger incorporated by reference from
the Company's Form 8-K filed as of November 22, 1999.
2.2 Agreement of Merger dated November 22, 1999, a copy of which
is attached to this Company's 8-K filed on November 22, 1999.
3.1 Amended Articles of Incorporation of Breakthrough Electronics
changing the name to Digital D.J. Holdings, Inc., dated
December 17, 1999.
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3.1 Amendment to Articles of Incorporation changing name (3)
4.1 Form of Common Stock Certificate (Exhibit 4.A of Form SB-2)
13.1 Quarterly Report on Form 10-QSB dated December 31, 1999
incorporated herein by this reference from report filed as of
December 31, 1999
13.2 Quarterly report on Form 10-QSB dated March 31, 2000
incorporated herein by reference from report filed on Form
10-QSB dated as of March 31, 2000
16.1 Letter on Change in Certifying Accountant
17.4 Resignation of Yasuhiko Ohmnori dated August 30, 2000
17.5 Resignation of Koyo Hasagawa dated August 30, 2000
21.1 The Company owns four subsidiaries, Digital D.J. Inc. ("DDJ"),
Domestic Transmission Technologies ("DTT"), European Licensing
Group ("ELG"), Latin American Subcarrier Services ("LASS"),
and FMITS Internet Solutions.
22.1 Notice of Shareholders Meeting, incorporated herein by
reference from the exhibit to the Company's Report on Form 8-K
dated August 1, 2000
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
September 30, 2000 DIGITAL D.J. HOLDINGS, INC.
By:/s/ Tsutomu Takahisa
-----------------------------------
Tsutomu Takahisa
President, Secretary and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
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SIGNATURE TITLE
--------- -----
/s/ Tsutomu Takahisa President and Chief Executive Officer,
-------------------- Secretary, Treasurer (Principal Executive
Tsutomu Takahisa Officer) and Director
/s/ Mark Van Wagoner Director
--------------------
Mark Van Wagoner
/s/ Clifford Wildes Director
--------------------
Clifford Wildes
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