SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year ended December 31, 1999 Commission File Number 0-21934
DIGITAL PRIVACY, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 52-1680936
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
4820 Minnetonka Blvd., Suite 410, St. Louis Park, MN 55416
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number,
including Area Code: (612) 285-1163
Securities registered pursuant
to Section 12(b) of the Act: None
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, par value $.01
Indicate by check mark whether the issuer (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 twelve (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 ninety (90) days. Yes [X] No [ ]
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
registrant's best 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. [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Issuer: Indeterminate - No existing market
The number of shares outstanding of Issuer's Common Stock as
of March 30, 2000: 3,903,113
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Check whether the Issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [X] No [ ]
Revenues for the most recent fiscal year (September 9, 1999 (exit from
bankruptcy) through December 31, 1999): $761
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ITEM 1. BUSINESS
Important background information
Before carefully reading the substantive parts of this
section, there is some background information about us that you should know. We
feel this information will help you understand us a little better and will make
the following sections more meaningful.
As you see us today, we are the result of a merger on December
30, 1999 between a publicly held Delaware corporation called Telepad Corporation
and Digital Privacy, Inc., a privately held Minnesota corporation. Prior to the
merger, both companies recently came out of bankruptcy proceedings, Digital
Privacy, Inc. in September 1999 and Telepad Corporation in November 1999. As a
result of the bankruptcy, the Delaware corporation emerged as a shell with no
significant assets or liabilities and no business operations. The Minnesota
corporation emerged from bankruptcy with its business operations intact. In the
merger, the Minnesota corporation merged into the Delaware corporation and the
Delaware corporation changed its name to Digital Privacy, Inc. and began
carrying out the Minnesota corporation's business activities.
Thus, today, we are really the publicly held Delaware
corporation carrying on the business of the former Minnesota corporation. This
means that whenever we talk about "us" or "we" it is referring to the Delaware
corporation, and when we talk about our business, we mean the operations of the
former Minnesota corporation that are now owned and being run by us (otherwise
known as the Delaware corporation).
Since both companies recently came out of bankruptcy prior to
the merger, and only one company had any business activities, there are unusual
accounting rules that apply. The significant information is presented from
September 9, 1999 through December 31, 1999. This information reflects the
operations of the Minnesota corporation from the time it emerged from bankruptcy
through the end of the year. Any information regarding the pre-merger operations
of the Delaware corporation are not meaningful since we no longer carry on that
business.
Forward-looking Statements
The following discussion should be read in conjunction with
the financial statements and related notes which are included elsewhere in this
prospectus. Statements made below which are not historical facts are
forward-looking statements. Forward-looking statements involve a number of risks
and uncertainties including, but not limited to, general economic conditions,
our ability to complete development and then market our products and services,
competitive factors and other risk factors.
Our Business
Our mission is to become a leading provider of smart card
based computer and data security products and customized multi-application smart
card solutions for corporations, government agencies and organizations
worldwide.
We expended a considerable amount of time and resources to
develop a product line for computer and data security which we believe is one of
the most comprehensive in the industry. We design, develop and market multiple
security applications utilizing smart card technology for personal computers,
laptops and network computers. Our suite of products control access to systems
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and information, authenticates users through various techniques and secures
proprietary documents, files and other information through encryption, all
incorporating smart card technology. Our products can also be integrated with
new or existing applications for multi-application solutions. Key industries for
multi-application solutions are facility security, banking and payment systems,
health care, travel and transportation and e-commerce.
Our strength is in our smart card and digital security
expertise. We believe that smart cards are destined to become the interoperable
token of the future. This interoperable token, a credit card sized plastic card
with an embedded, programmable computer chip, is an extremely secure and
versatile tool that, with the right applications, can solve many of the security
issues of today. We believe that a major shift is beginning to occur for smart
card solution providers inasmuch as computer system manufacturers and operating
system developers will become the smart card solution providers of the future.
This is a dramatic transition from the niche-market focus that smart card
vendors have today. The confluence of the need for digital security and the
advance of smart card technology present the opportunity we intend to attempt to
exploit.
We possess broad method and apparatus patents that are
valuable for computer and information security, communications, electronic
commerce and telephony markets. We plan to deploy our unique combination of
smart card and security expertise to gain the leadership position for smart card
security while also providing other applications for that marketplace.
Our strategy is to deploy our unique combination of security
and smart card expertise in open systems architecture design to gain a
leadership position within the information security market.
The smart card and computer security market independently are
growing rapidly. However, the intersection of these two markets occurs because
of the need for a secure digital world. We believe that this can be best
achieved through the utilization of smart card technology. Opportunities in
these intersecting markets are enormous. Currently, the computer security market
offers a wide variety of products fulfilling a singular customer need.
Alternatively, the smart card market is characterized by integrating a product
with a uniform physical form (the smart card) that offers many vertical markets
a wide variety of customer applications in addition to a security solution.
Smart cards secure information by controlling end-user access
to both desktop, notebook and network computers. Encryption software extends
protection to wherever the data is stored within the distributed network.
Furthermore, virtual private networks and associated secure messaging products
facilitate the protection of data in transit.
We believe that security capabilities will become part of all
standard network components; routers, with their additional functionality, will
subsume firewalls; network directory server functionality will subsume
Certificate Servers; and virtual private networks and secure messaging will be
included in the browser and e-mail products and ultimately will be embedded into
all operating systems. Already, smart card readers are being embedded in
desktop, notebook, Thin-client and Network computers. In all of these instances,
our Tool Kit with its smart card enabling technology, the most robust on the
market, will be wholly integrated.
In the year 2000, we believe that smart cards will begin to
become the single largest industry segment for security. This occurs because the
largest component of an information system is the end-user's computer, which
will have an integrated smart card reader. The inclusion of
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certification servers and encryption software within the network structure will
enable the computer to become a secure access point into the network.
Our Privacy Suite is the label we have attached to all of the
products which have been derived from our core technology. Our Privacy Suite
includes:
o Privacy.ACCESS(TM) - controls access and authenticates
thin-clients, NC or PC users
o Privacy.APP(TM) - provides developers with the open
migration facility to incorporate smart cards in their
applications
o Privacy.FILE(TM) - transparently encrypts / decrypts user
proprietary files and provides non-repudiation with digital
signatures
o Privacy.WEB(TM) - secures browsers and web-site accessibility
o Professional Services - smart card integration services
allowing proprietary applications to reside on a single smart card
Privacy.ACCESS
The ability to identify and authenticate users of computers
and servers has become an increasingly costly and troublesome task for
corporations. With the rapid growth and utilization of mobile computing and
Internet access compounding this problem, organizations are in dire need of a
scalable and extendable solution for authentication and access control. We
believe we have developed the ultimate enterprise-wide access solution,
Privacy.ACCESS.
Privacy.ACCESS is an access and authentication application
that enables organizations and individuals to easily integrate access control
capabilities into their existing networking systems. Privacy.ACCESS is an easy
to install, user friendly security application that ensures that only authorized
users have access to proprietary computer systems, applications and information.
Upon insertion of a smart card, and after valid
authentication, a user will have access to the system and designated data.
Privacy.ACCESS also offers optional password and fingerprint biometric
authentication for enhanced security and administrative control. Privacy.ACCESS
can be incorporated into a number of platforms and is compatible with the
leading smart card and smart card readers available. We also offer a software
only version that does not require a smart card reader.
Privacy.APP
As smart card technology becomes a mainstream peripheral in
the computing world, a number of prominent worldwide corporations such as
Honeywell, Microsoft, HP and IBM are making significant investments in
integrating smart card capabilities. Because smart card applications are just
beginning to emerge from a nascent stage, there is a high degree of
misunderstanding associated with the proper development of applications for the
computing market. We have been developing smart card based applications for over
seven years and have created the most comprehensive smart card tool kit
available for developing robust, open, smart card applications.
Privacy.APP is DPI's smart card tool kit that provides an
intuitive Application Program Interface (API) allowing developers to create
smart card based applications. It also permits the integration of smart cards
into existing applications. Smart cards are ideal for controlling data
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that requires portability and security. With the protection afforded by an
external physical token, the smart card, software application can be
significantly enhanced by incorporating this technology for added security and
multi-functionality.
Privacy.APP provides three levels of security for
authentication of the smart card. Additionally, the smart card will lock up and
be marked unusable after three unsuccessful log-on attempts by a non-authorized
user.
Privacy.FILE
Organizations, in both the public and private sector, as well
as individuals, are all lacking in the ability to adequately secure proprietary
informational assets. One of the most significant corporate or government needs
is a secure, reliable, cost effective and easy to deploy method of safeguarding
data and information that reside on computers. We provide a unique and simple
solution with our Privacy.FILE product.
Privacy.FILE is a high performance data security solution. It
is one of the most comprehensive encryption applications on the market today.
Privacy.FILE protects data by utilizing a unique encryption
key (E-Key(TM)) that is stored on the hard drive or a floppy disk. Privacy.FILE
also offers digital signature capabilities for enhanced security. Privacy.FILE
ensures that only authorized users have access to protected data. In order to
access their protected data, the user must provide the necessary personal
identification responses.
Privacy.FILE is a file encryption application utilizing a
smart card. It ensures trusted security of proprietary information stored on a
laptop, desktop or network computer. It secures data by allowing users to select
individual files or directories which are encrypted utilizing unique encryption
keys that are stored on the smart card. These files can be automatically
decrypted when opened and re-encrypted when closed. The more robust PRO version
of Privacy.FILE offers automatic transparent encryption and selected files and
directories without requiring any action by the end user. As with
Privacy.ACCESS, Privacy.FILE also offers a software version only that does not
require a smart card reader.
Privacy.FILE PRO
Privacy.FILE PRO is the smart card enabled version of our high
performance data security solution Privacy.FILE. It is one of the most
comprehensive encryption applications on the market today. Privacy.FILE PRO is
the full-featured version of Privacy.FILE.
Privacy.FILE PRO protects data by utilizing a unique
encryption key (E-Key(TM)) that is stored on the smart card. Privacy.FILE PRO
also offers digital signature capabilities for enhanced security.
Privacy.FILE PRO, through the use of a smart card, ensures
that only authorized users have access to protected data. In order to access
their protected data, users insert their personalized smart card into the smart
card reader and provide the necessary personal identification responses.
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Privacy.FILE Lite
Privacy.FILE Lite is designed with all of the functionality of
Privacy.FILE and Privacy. FILE PRO with the exception of encrypted directories.
Privacy.FILE Lite also offers smart card based key storage for additional
security.
Privacy.FILE protects data by utilizing a unique encryption
key (E-Key(TM)) that is stored on the smart card. Privacy.FILE also offers
digital signature capabilities for enhanced security.
Privacy.FILE Lite, through the use of a smart card, ensures
that only authorized users have access to protected data. In order to access
their protected data, users insert their personalized smart card into the smart
card reader and provide the necessary personal identification responses.
Privacy.FILE Lite protects data by allowing users to select
individual files to be encrypted and decrypted. Privacy.FILE Lite also allows
users to send encrypted files or attachments over non-secure environments such
as the Internet.
Privacy.WEB
Privacy.WEB is still under development and is being designed
to offer the most secure method to authenticate and deploy secure accessibility
to web-sites on the Internet. Privacy.WEB is a combination smart card and
software product that uses our secure smart card software to ensure that
passwords, digital certificates and other authentication mechanisms are securely
stored and transmitted to their destinations.
Digital certificates are becoming an increasingly accepted
means for user identification throughout the Internet world. Non-repudiation can
be achieved as well as two factor authentication with the use of smart cards
enabled to handle digital certificates. This product uses a cryptographic smart
card to store Verisign certificates for Internet access control. Privacy.WEB can
also be used on intranets when utilized with Verisign OnSiteSM software.
With Internet security becoming an increasingly vital concern
for individuals, corporations and governments, we believe that Privacy.WEB will
become an invaluable tool for e-commerce, public network security and other
Internet uses.
We currently expect Privacy.WEB to be ready for alpha testing
in March/April 2000.
Professional Services
We also offer complete software development expertise, smart
card integration and support services. Our leading-edge security products and
smart card expertise give organizations the ability to easily add smart card and
multi-functionality to existing and new applications and environments. We have
the ability to provide clients with the necessary tools and our expertise to
create complete, affordable, scaleable smart card enhanced solutions.
o Software Development
We have been developing smart card software solutions since we
were established in 1990. All of our solutions incorporate smart card technology
with a primary focus on security
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applications. We have created a line of smart card security products that meet
government standards and has introduced several leading-edge product offerings
for the commercial security marketplace. Our Professional Services team is
dedicated to creating flexible customized security solutions which meet the
specific needs of our clients.
o Smart Card Integration
We offer integration services to organizations seeking to
incorporate smart cards into existing applications. These services provide a
real benefit to developers with nominal experience in, and exposure to, smart
card technology. A sampling of projects successfully completed include the
incorporation of smart card functionality into the WinFrame and MetaFrame
clients for Citrix Systems, and an ActiveX plug-in for Honeywell's building
security systems. This smart card based technology merges Honeywell's physical
security products with our computer security products creating a complete
security solution.
o Support Services
Our developer's tool kit, Privacy.APP, is an easy to use
Application Programming Interface (API) that includes sample code for the most
popular compilers. This tool kit allows developers to create smart card based
applications and to integrate smart cards into existing applications. Our
support services are available to assist in adding additional features and
providing smart card support.
o SDK Integration
We currently have integrated eight smart cards and smart card
readers, from various manufacturers, into our Privacy.APP tool kit. Smart card
and reader manufacturers can make their cards and readers available to our
rapidly increasing install base through incorporation of their product code into
our Privacy.APP product.
o Citrix ICA Client Integration
Citrix Systems is providing to all ICA licensees hooks for
smart card technology into their WinFrame and MetaFrame clients. These hooks
include the Gemplus MPCOS smart card and Gemplus GCR-410 reader. Hardware
manufacturers that have selected other readers and smart cards can have hooks
for those designated products incorporated into the clients through us.
o Physical Access Integration
We have been collaborating with both the Honeywell Home and
Building Control and Casi Rusco physical access control systems to provide a
single card solution for access to buildings and computers access. Systems
designed with Privacy.APP can also be made compatible to these physical security
systems with the assistance of our Professional Services team.
The Market
Our primary focus is the Identity/Access smart card market
segment, which includes both facility access (physical access) and computer
access (logical access).
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We believe that the corporate segment of Identity/ Access
Control for the smart cards will become the largest market opportunity for us
and thus, logically, the primary target because smart cards can be incorporated
into many applications in addition to security. Each individual in an
organization will be distributed a smart card which holds their unique access
profile.
The risks associated with the corporate segment of the
Identity/Access market are the slow rate of adoption of new security technology
and the commitment by organizations to deploy a complete enterprise security
solution. We are attempting to influence the rate of adoption and deployment by
delivering a transparent solution to both users and system administrators. This
solution adds significant incremental capabilities and value. One important
capability is single sign on services which allows for one-time (single)
authentication and access to all designated systems, applications and
information. We believe this is a major opportunity for us because the solution
meets the complete needs and expectations of the enterprise.
We believe that colleges, Government Access, and Government ID
segments will also be likely adopters for our products. Generally, colleges are
often early adopters of technology and become valuable partners for the seeding
of new ground. Colleges are also pioneering new trends such as distance
learning, tele-medicine and other remote Internet applications. Because of
required security and the potential cost savings that digital access provides,
government applications are expected to require smart cards as tokens for access
and information control. We have already developed strategic alliances with
government contractors who have added its Privacy Suite portfolio to their
General Services Administration (GSA) schedules and Blanket Purchase Agreements
(BPA).
The residential segment of the Identity/Access market is
undefined and will require the proper consumer product partners. There are many
large companies seeking a presence in this market. Because the residential
market is just emerging, consumer needs and product price points are not fully
understood.
The size of the geographic markets and rate of adoption will
dictate where we will market our suite of products. We have developed an
international version of our Privacy Suite of products and has received
authorization to export from the United States Department of Commerce and
National Security Agency (NSA). Initial international focus will be in Europe
and Asia.
Leadership in ID/access market mandates that the incorporated
security solution must be absolutely transparent to the end-user. When users
open their applications, files must encrypt and decrypt instantaneously and
transparently without perceptible impact on performance. We have made this an
integral feature of our technology.
Ease of administration is another significant customer
requirement. Many organizations are reluctant to commit to purchasing security
technology until they experience a security breach or until an effortless, cost
effective solution has been successfully introduced. Again, we have developed
the products and possesses the skills to meet all customer requirements
including ease of use.
The corporate and government markets are in need of a complete
and reliable security solution. The complete security solution involves securing
computers, information, building facilities, and other resources. Our open and
flexible smart card security solutions provide these markets a comprehensive and
totally secure enterprise environment with the ability to incorporate additional
applications and functionality onto the smart card.
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We have already completed projects for various organizations
including Citrix Systems and Honeywell Home and Building Control Division. We
have also demonstrated compatibility with software that uses the same smart card
platforms such as Casi-Rusco and Hughes ID building control products.
We currently are actively working with the following entities
through either partnerships or alliances:
o Citrix Systems, Inc.
o GE Capital IT Solutions
o Gemplus USA
o Honeywell Home and Building Control Division
o Simple Technology Inc.
o Sytel Systems & Telecommunications
o Harramor Enterprises
Competition
As discussed earlier, we sell into the intersection of the
Computer Security Market and the Smart Card Market. As a result, we are faced
with challenges from both markets. Both markets, however, are growing rapidly
and because the Computer Security Market is just emerging, the competition is
not as well defined as it is in the somewhat more mature Smart Card Market.
As computer hardware companies enter the smart card market, we
believe their focus will be primarily as suppliers of smart card systems that
include both the reader and associated software. These systems are referred to
in the industry as the Card Acceptor Device (CAD). When the CAD is packaged with
an application program interface (API) it is known as the CAD API. Major
companies such as IBM and HP currently ship CAD API products which are
compatible with our software.
We will be competing with the following companies. Their names
and products are listed below:
COMPANY PRODUCT
------- -------
Norton/Symantec For your Eyes Only
Security Dynamics SecurPC
AT&T Secret Agent
Alladin Private File
Litronic SecureSmart
Network Associates PGP for Windows
Fischer Watchdog
Aliroo PrivaFile
Most if not all of these companies have greater resources
available for research and development and marketing than us.
Intellectual Property
Our strategy regarding the protection of our intellectual
property is to trademark and patent certain new products thereby providing
barriers to entry for competitors while also attracting valuable alliances for
successful marketing of our product globally.
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In addition to our Privacy Suite of products described earlier
which are marked to indicate that we are seeking trademark protection, we have
also filed trademark registrations for "DPI" and "Digital Privacy" as well as a
servicemark for the latter.
The following patents are either issued or pending. Due to the
sensitivity of the information on patents that are pending, only a brief
description will be offered. However, in the case where the patent has already
been issued and the information is now of public record a more detailed
description is offered.
The initial objective of the patent strategy is to insure that
both the Method (process) and Apparatus (device) of the invention are protected.
An additional objective is to utilize continuances in part, which necessitate
further patent filings, which extend and broaden the claim set of the patent.
o Method and Apparatus for preboot protection of
unauthorized use of programs and data with a card
reader interface. Patent numbers 5,327,497 and
5,515,440. The value of this patent is to provide a
method of securing a computer by controlling access to
all internal devices (i.e. hard drive, COM port,
printer, etc.) via an integrated smart card reader. A
microprocessor controlled card reader interfaces
logically by connecting to the central processing unit
(CPU) of the computer. The device reads and writes
information from and to a smart card inserted in the
smart card reader and performs additional functions
(i.e. access control, authentication, etc.) in response
to commands received from the CPU.
o Method and Apparatus preboot protection for a data
security system with anti-intrusion capabilities.
Patent number 5,610,981. The prominent feature of this
patent allows for a hardware encryption chip to encrypt
all data that is stored on the hard disk. The value of
this hardware feature assures faster processing (8 to
10 times faster) and more effective security of the
customer data. A further feature of this patent is the
system protection methods, which regulate access to the
system. Multiple levels of data protection methods are
provided.
o Method and Apparatus preboot protection for a data
security system with anti-intrusion capabilities. This
patent is a continuation of patent number 5,610,981,
which will include an internal audit system. This will
permit the security officer of a corporation to monitor
the access and usage of the enterprise. This patent is
pending.
o Method and apparatus for a Cellular Phone Call
Management System (CPCMS(R)). Patent number 5,761,624.
This invention pertains generally to cellular
communications systems, particularly to a
microprocessor, which controls the memory interface for
a cellular telephone. This permits the recording of
calls on a memory device as they are placed or
received. It also contains the computer software to
process call transactions.
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o Access controlled / crypto system. This invention
relates to a trusted security system for protecting and
controlling access to data using a system of electronic
keys (E-Key). This patent is pending.
o Card access system supporting multiple cards and card
readers. This invention relates generally to a card
access system which supports multiple cards and card
readers and in particular to a integrated circuit or
smart card access system for supporting multiple models
and makes of integrated circuit or smart cards and
readers. This patent is pending.
Employees
We currently have seven full time employees of which one is an
executive, two are engaged in administrative activities and four are engaged in
marketing activities. Additional financing permitting, we intend to hire up to
20 additional employees. None of our employees are represented by a labor union.
We believe that relations with our employees are good.
ITEM 2. PROPERTIES
Our facilities are located in approximately 1,000 square feet
of leased office space in St. Louis Park, Minnesota. The lease expires on August
31, 2000 and provides for a monthly rental of $1,087. We have only negligible
costs relating to environmental compliance laws.
ITEM 3. LEGAL PROCEEDINGS
We are not currently involved in any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
There is no public trading market for our securities. As of
March 30, 2000, there were 38 record holders of our common stock.
Since inception, we have not paid any dividends on its common
stock and have no current intention to do so in the foreseeable future.
We are authorized to issue up to 5,000,000 shares of blank
check preferred stock. This means that the board of directors has the ability to
determine the rights and preferences of each series of preferred stock to be
issued. As a result, classes or series of preferred stock could be issued with
rights and preferences superior in many ways to our common stock. In December
1999, we created a class called Series A 8% Cumulative Convertible Preferred
Stock, consisting of 40,000 shares. To date, only 30,000 shares of preferred
stock have been issued.
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The Series A preferred stock is convertible into shares of
common stock at any time in an amount determined by taking the sum of the stated
value per share ($10.00) and any accrued and unpaid dividends divided by the
lesser of $1.05 or 77.5% of the average closing bid prices for the five trading
days preceding the conversion. We may redeem the Series A preferred stock, after
the effective date of a registration statement filed with the Securities and
Exchange Commission, upon 30 days notice, for 125% of the stated value plus
accrued dividends. We have reserved 1,200,000 shares of common stock for
conversion of the Series A preferred stock.
Dividends are payable quarterly, at our election, in either
cash or additional Series A preferred shares at the rate of one share of Series
A preferred stock for each $10 of dividends not paid in cash. Dividends may be
paid with Series A preferred stock only if the common stock deliverable upon
conversion of such stock was included for public resale in an effective
registration statement.
Convertible Securities
We currently have an aggregate of 851,059 options and warrants
outstanding, each of which entitles the registered holder thereof to purchase
one share of common stock. All of the derivative securities contain provisions
which protect the holders thereof against dilution by adjustment of the exercise
price and number of underlying shares of common stock, in certain events, such
as stock dividends, stock splits, mergers, sale of substantially all of our
assets, and for other extraordinary events. We also have outstanding a
convertible note in the face amount of $600,000 that is currently convertible
into 1,521,828 shares of common stock. These rights are also protected against
dilution.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the period September
9, 1999 (exit from bankruptcy) through December 31, 1999 is derived from our
audited financial statements included in this Report.
The following data should be read in conjunction with our
financial statements and related footnotes.
Statement of Operations Data
From 9/9/99
(exit bankruptcy)
to 12/31/99
-----------------
Revenue $ 761
Operating Loss $ ( 294,077)
Income Taxes $ -0-
Net Loss $ ( 377,129)
Net Loss Per Share-
Basic and Diluted $ (.11)
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Balance Sheet Data
December 31, 1999
-----------------
Working Capital $ 7,997
Total Assets $ 590,412
Total Liabilities $ 696,014
Stockholders' Deficit $ (105,602)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
the financial statements and related notes which are included elsewhere in this
report. Statements made below which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, our
ability to complete development and then market our products and services,
competitive factors and other risk factors, not all of which are detailed
herein.
We were initially formed in December 1990 and are currently
preparing to begin commercial activity in the first quarter of 2000. We filed
for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code on January 6, 1999
and our Reorganization Plan was confirmed by the U.S. Bankruptcy Court for the
District of Minnesota on September 8, 1999.
After many years of design and development, the full array of
operating software and systems described above in "Business" are available for
commercial use.
We believe we are currently in the pre-launch phase, and are
now in a position to offer a diverse range of products designed around the
concept of providing useful products and services in an attractive, convenient
format to people in their everyday environments.
From December 7, 1990 through December 1998, we raised
approximately $5,000,000 through equity and debt financings from private
investors. As a development stage enterprise, we incurred losses in excess of $8
million.
Following the merger, our ability to continue is dependent on
our ability to raise additional capital and, ultimately, to generate sufficient
cash flow from operations to support our cost structure. The following are
primary obstacles which we feel contributed to our inability to generate cash
flow sufficient to meet scheduled payments and sustain further operations and
forced us into bankruptcy prior to the merger:
1. We experienced significant delays, some unforseeable
and uncontrollable, in the design and development of
our products;
2. We experienced delays in bringing our products to
market because of the slow adaptation and development
of the smart card and security market place in the
United States, and the lack of established distribution
channels;
3. Our inability to deliver to the government market our
hardware based product and the significant time delay
in developing new software products; and
4. We expended a considerable amount of time and resources
in preparing for further financing and growth. It was
necessary to engage an independent auditor to review
and audit historical financials and operational
procedures and to retain consultants to provide
marketing research and prepare a
13
<PAGE>
comprehensive business plan. We also retained the
services of corporate counsel to prepare private
placement memorandum, review our past sales of
securities for compliance with applicable securities
laws and applicable contractual shareholder
obligations, assist in reducing potential liability
resulting from past transactions, and advise on the
revaluation and related issues involved in
recapitalization efforts.
We recognized only very nominal revenues in 1998. Revenues
were generated primarily on integration services and the sale of our developer's
tool kit product. 1998 was the first year we realized sales.
Inadequate cash flow and lack of capital resources continued
to be the most serious concerns facing our management coming into 1999. At
December 31, 1998, we had a significant negative net worth. Having taken steps
to cut expenses and extend the payment schedule on long- term payables, we then
developed a proposal for a restructuring of our debts that would involve the
conversion of secured and certain unsecured debt into common stock. Ultimately,
we concluded that a non-bankruptcy restructuring was unlikely to be completed in
a timely manner. We therefore decided to file a Chapter 11 bankruptcy as the
best method for restructuring our obligations.
Following the bankruptcy proceedings we added to our
management structure and board of directors. Current management is familiar with
our history and recognizes the problems that plagued us prior to the bankruptcy.
Accordingly, we are now focused on two aspects: (i) raising sufficient financing
to support us until positive cash flow from sales are generated and (ii)
generating sales.
In this regard, since December 30, 1999 we have raised
$300,000 from the sale of convertible preferred stock and $566,000 from a
private placement. We believe these funds will be sufficient for at least seven
months. We currently project requiring approximately an additional $1,500,000 to
allow us to grow the business. In the event we are unsuccessful in raising such
funds in this offering, we will have to seek alternative sources of funding. We
currently have no plans how to raise such additional funds.
There can be no assurance that we will be able to raise any
additional proceeds from our current private offering of our securities or
otherwise obtain the substantial additional capital necessary to permit us to
attract and retain a sufficient number of subscribers or that any assumptions
relating to our business plan will prove to be accurate. While we hope to raise
additional financing, we have no current arrangements with respect to, or
sources of, additional financing and there can be no assurance that any such
financing, particularly the significant amounts of financing that would be
required, will be available to us on commercially reasonable terms, or at all.
Any inability to obtain additional financing could have a material adverse
effect, including possibly requiring us to significantly curtail or cease
operations.
At the same time we are actively pursuing sales of our
products. Effective March 1, 2000 we hired a Vice President of Sales to develop
a marketing plan and sales department to increase sales. We are hopeful that
these efforts will be successful. In the event we can increase sales, this will
relieve the burden of financing and allow other members of management to devote
their efforts to growing the business through internal growth.
14
<PAGE>
Once we attain a level of liquidity, we will also look to grow
our business through acquisitions. We currently have no acquisition plans and do
not believe that any such type of transaction is likely in the near future.
While we currently expect to incur a loss from operations in
the first quarter of 2000, we also expect to have an increase of revenues and a
strong working capital position as a result of our recently concluded private
offering.
Year 2000 Disclosure
We are Year 2000 compliant and we do not anticipate any
internal problems. In the event any internal problems should arise, we have many
expert computer technicians on our payroll and we believe that we will be able
to satisfactorily address any such problems. However, we are dependent on the
integrity of the Internet being maintained to increase its use as a commercial
marketplace, thereby increasing demand for our products. Given the currently
available information it does not appear to be likely that the Internet will
suffer major failure and, accordingly, we do not believe that our potential for
profitability or operations will be materially affected by the Year 2000
problem.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein immediately
before the signature page. We are not required to provide supplementary
financial information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Following its merger on December 30, 1999, we retained a new
auditing firm. Current Reports on Form 8-K and 8-K/A reporting this event were
filed January 19, 2000 and March 14, 2000, respectively.
Prior to our bankruptcy filing on March 17, 1999, our
independent auditors were Ernst & Young LLP ("E&Y"). E&Y reported on our
financial statements for the year ended December 31, 1997 and was engaged to
audit our financial statements for the year ended December 31, 1998; however the
1998 audit was not completed due to our bankruptcy filing on March 17, 1999. E&Y
has not performed any professional services for us subsequent to the date of the
bankruptcy filing.
The report of E&Y on our financial statements for fiscal year
1997 did not contain an adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles
except that it included an explanatory paragraph regarding our ability to
continue as a going concern.
In connection with the audit of our financial statements for
the year ended December 31, 1997, and in the subsequent period prior to the
bankruptcy filing, there were no disagreements with us on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of E&Y would
have caused E&Y to make reference to the matter in their report. In connection
with the audit of our financial statements for the year ended December 31, 1997,
there were no "reportable events" as that term is described in Item 304
(a)(1)(v) of Regulation S-K.
15
<PAGE>
In connection with E&Y's engagement to audit our financial
statements for the year ended December 31, 1998, E&Y identified certain issues
such as proper inventory controls, sufficient internal control structure and
management cooperation to discuss with our Audit Committee. Upon notice of these
issues, our Audit Committee Chairman shared E&Y's concerns with management and
expressed an intent to work with E&Y to address these issues. E&Y did not
perform any auditing procedures for us subsequent to the date of the bankruptcy
filing. Therefore E&Y cannot express an opinion as to whether it would have
concluded to make reference to these issues in its report, had the relationship
continued and had the audit for the year ended December 31, 1998 been completed.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
Our officers and directors are as follows:
Name Age Position
- - ---- --- --------
Howard Miller 45 President, Chief Executive Officer and Chairman
J. Virgil Bradley 37 Senior Vice President and Chief Technical Officer
Harold Gruesner 47 Vice President Sales
Peter E. Christensen 48 Director
Daniel Hilliard 41 Director
Stuart Eisenberger 48 Director
Mark Sarna 45 Director
Mr. Howard Miller, President, CEO and Chairman of the Board. Mr. Miller has been
actively involved in numerous and varied corporate ventures either as an
integral participant of senior management or as a member of the Board. Mr.
Miller has had a successful career as a trader and investment banker with
several prominent Wall Street firms. Mr. Miller graduated from Columbia College
attaining his Bachelor of Arts degree in 1976 and a Masters of Business
Administration in Finance from Columbia Graduate School of Business in 1978.
Mr. J. Virgil Bradley, Senior Vice President, CTO. Prior to joining us, Mr.
Bradley spent 14 years in the U.S. Navy. Mr. Bradley has an extensive background
in computer software and hardware, maintenance, testing, training and project
management. Mr. Bradley is an experienced senior manager within defense,
electronic, computer technologies and military intelligence. Mr. Bradley's
background has resulted in major contributions in the design and implementation
of our new security based products.
Mr. Harold Gruesner, Vice President Sales. Prior to joining us, Mr. Gruesner
spent 6 years with InterActive Plus, a valued added reseller specializing in
contact management software and network installations. Prior thereto, Mr.
Gruesner worked for three years for the Institute for Advanced Technology (IAT),
a spin off from Control Data, where he was Vice President of Sales. Before IAT,
he was the Regional Sales Manager for Artisoft Corporation for three years with
responsibility for developing a reseller channel in the Midwest. Mr. Gruesner
has been involved in the computer industry since 1978. Mr. Gruesner graduated
from the University of Minnesota with a B.A. in Business and has been trained by
numerous computer manufacturers including IBM, Compaq, Apple, GoldMine Software
and Novell.
16
<PAGE>
Mr. Peter E. Christensen, Director. Mr. Christensen is the Chairman and Chief
Executive Officer of ComTec. Prior to joining ComTec, Mr. Christensen was a
Managing Director of PaineWebber, Incorporated for 9 years and a member of their
Board of Directors for 4 years. Mr. Christensen has extensive Wall Street
experience in managing the departments of mortgage backed securities, European
fixed income, quantitative research, credit research, fixed income economics,
structured derivative products and financial institutions investment banking.
Mr. Christensen has also served on the Boards of Directors of various small and
medium sized financial institutions and manufacturing companies.
Mr. Daniel Hilliard, Director. Mr. Hilliard is one of three general partners of
the Hilliard Limited Partnership, a family partnership formed in 1997, with a
focus in private equity investments. He also sits on the Boards of Capital Bank
and Vision Aire, a jet airplane development company. Mr. Hilliard was a member
of management at American Medical Security for 5 years and was a planning
analyst and design engineer at Chevron's Richmond, California refinery for 12
years. Mr. Hilliard graduated from the University of Minnesota with a Bachelor
of Science degree in chemical engineering and a Masters of Business
Administration from San Francisco State University.
Mr. Stuart Eisenberger, Director. Stuart Eisenberger has been involved in
brokerage, ownership and management of real estate investment properties for
more than 25 years. He has also been a consultant to investors and investment
funds relating to real estate companies. Since Telepad Corporation's effective
emergence from bankruptcy on November 8, 1999, Mr. Eisenberger was interim
president until his resignation upon the merger on December 30, 1999. Following
the Merger, Mr. Eisenberger agreed to continue as a director. Mr. Eisenberger
was neither an officer nor a director of Telepad Corporation prior to or during
its bankruptcy.
Mr. Mark Sarna, Director. Mr. Sarna is 45 years old and is a 1976 graduate of
Columbia University and a 1980 graduate from New York Law School. Presently, Mr.
Sarna is a real estate developer.
Key Employees
Mr. Paul Kimlinger, Director of Software Engineering. Mr. Kimlinger has been
with us, since our inception. Prior to joining the company, Mr. Kimlinger worked
four years in the Networking Group at Cray Research, Inc and three years in
System Administration at Northwest Airlines. Mr. Kimlinger graduated from
Mankato State University with undergraduate degrees in Finance and Computer
Science as well as post-graduate work in the MBA program.
Mr. Thomas Kimlinger, Software Engineering Manager. Prior to joining us, Mr.
Kimlinger worked for 7 years at Unisys as a Systems Programmer in the I/O and
Processor Control areas of their operating system. Prior to Unisys, he worked
for Western Union as a programmer on their Money Transfer and Mailgram systems.
Mr. Kimlinger graduated with honors from Mankato State University with a BS
degree in Computer Science, specializing in systems programming, and Electrical
Engineering. Mr. Kimlinger also has a technical degree in Business Data
Processing and Accounting.
Indemnification of Directors and Officers
Our By-Laws includes certain provisions permitted pursuant to
the Delaware General Corporation Law whereby our officers and directors are to
be indemnified against certain liabilities to the fullest extent permitted by
law. These provisions of the By-Laws have no effect on any
17
<PAGE>
director's liability under Federal securities laws or the availability of
equitable remedies, such as injunction or recession, for breach of fiduciary
duty. We believe that these provisions will facilitate our ability to continue
to attract and retain qualified individuals to serve as our directors and
officers.
At present, there is no pending litigation or proceeding
involving any of our directors, officers, employee or agents where
indemnification might be required or permitted. We are unaware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
Compensation of Directors
Directors do not receive any cash compensation for their
service as members of the Board of Directors. However, on December 31 of each
year, each Director receives 10,000 stock options.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or
accrued from September 9, 1999 through the year ended December 31, 1999 to its
Chief Executive Officer. No other executive officer was paid or accrued
compensation in excess of $100,000 for such period.
SUMMARY COMPENSATION TABLE(1)(2)
--------------------------------
Long-Term
Annual Compensation Compensation
--------------------- ----------------
(a) (b) (c) (d) (e)
Year Ended
Name/Principal December 31 Restricted Stock
Position (3) Salary ($) Bonus ($) Awards (4)
- - ----------------- ----------- ---------- --------- ----------------
Howard Miller 1999 41,411 -0- 60,000
President and CEO
- - -------------------------
(1) The above compensation does not include the use of an automobile and
other personal benefits, the total value of which do not exceed, as to
any named officer or director or group of executive officers, the
lesser of $50,000 or 10% of such person's or persons' cash
compensation.
(2) Pursuant to the regulations promulgated by the SEC, the table omits
columns reserved for types of compensation not applicable to us.
(3) Covers the period from emergence from bankruptcy on September 9, 1999.
(4) Represents incentive stock options exercisable at $.055 per share.
Employment Agreements
18
<PAGE>
On December 31, 1999, Mr. Howard Miller entered into a five
year employment agreement. The agreement provides for an initial annual salary
of $180,000 and options to purchase 300,000 shares at an exercise price of $.055
per share, vesting equally over five years. Mr. Miller is also entitled to
receive performance options based upon revenues and our market valuation.
On December 31, 1999, Mr. J. Virgil Bradley entered into
a three year employment agreement. The agreement provides for an annual salary
of $100,000 and options to purchase 90,000 shares at an exercise price of $.05
per share vesting equally over three years. Mr. Bradley is also entitled to
receive a bonus based upon sales.
On March 1, 2000, Mr. Harold Gruesner entered into a 10 month
employment agreement. The agreement provides for a salary of $100,000 and
options to purchase 90,000 shares at an exercise price of $2.00 per share
vesting equally over three years, provided he remains an employee.
1997 Stock Option Plan
The Board of Directors and our stockholders have adopted a
Stock Option Plan as an incentive for, and to encourage share ownership by our
officers, directors and other key employees and/or consultants and management of
possible future acquired companies. The Option Plan provides that options to
purchase a maximum of 2,000,000 shares of common stock, subject to adjustment in
certain circumstances, may be granted. The Option Plan also allows for the
granting of stock appreciation rights in tandem with, or independently of, stock
options.
The purpose of the Option Plan is to make both "incentive
stock options" within the meaning of Section 422A of the Internal Revenue Code
of 1986, as amended, and non-qualified options and stock appreciation rights
available to our officers, directors and other key employees and/or consultants
in order to give such individuals a greater personal interest in our success
and, in the case of employees, an added incentive to continue and advance in
their employment.
The Option Plan is currently administered by the majority
vote of a Committee appointed by the Board of Directors and comprised of at
least two "independent" members of the Board, or alternatively, by the entire
Board, who are not eligible to receive options, other than pursuant to a
formula. Currently, each director receives 10,000 options on December 31 of each
year. It is intended that this plan qualify under Rule 16b-3 as promulgated
pursuant to the Securities Exchange Act of 1934, as amended. With specified
limitations, the Committee, or Board, may amend the terms of the Option Plan.
The Committee, or Board, designates those persons to receive
grants under the Option Plan and determines the number of options and/or stock
appreciation rights, as the case may be, to be granted and the price payable for
the shares of common stock thereunder. The price payable for the shares of
common stock underlying each option will be fixed at the time of the grant, but,
for incentive stock options, must be not less than 100% of the fair market value
of common stock at the time the option is granted. The Committee, or Board, will
also determine the term and vesting schedule of all options and stock
appreciation rights granted, provided that no option may be exercisable later
than ten years after the date of grant. The Committee, or Board, may also
institute divesting schedules. All options are payable in cash or check, by
delivery of a secured personal interest bearing note, or by delivery of shares
of common stock equal in value to the cost of the options.
19
<PAGE>
There are currently 441,059 stock options outstanding at an
exercise price of $.05; 300,000 at an exercise price of $.055; 10,000 at an
exercise price of $1.05; and 90,000 at an exercise price of $2.00. Currently
only 451,059 options are vested.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater-than-ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. During fiscal 1999, one outside director did not timely file a Form
3.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of March 30, 2000,
information regarding the beneficial ownership of our common stock based upon
the most recent information available to us for (i) each person known by us to
own beneficially more than five (5%) percent of our outstanding common stock,
(ii) each of our officers and directors and (iii) all of our officers and
directors as a group. Each stockholder's address is c/o Digital Privacy, Inc.,
4820 Minnetonka Blvd., Suite 410, St. Louis Park, MN 55416.
Number of
Shares Owned
Name Beneficially % of Total
- - ---- ------------ ----------
Howard Miller (1) 1,107,837 27.9%
Daniel Hilliard (2)(3) 471,569 12.1%
Mark Sarna (3)(4) 1,531,828 28.2%
Peter Christensen (3) 10,000 *
Stuart Eisenberger (3)(5) 10,000 *
J. Virgil Bradley (6)(7) 92,370 2.3%
Investcor LLC (8) 529,007 13.4%
Lazar Fruchter 242,000 6.2%
Hilliard Limited Partnership 446,569 12.3%
All Officers and Directors
as a Group (6 persons) (9) 3,223,604 57.2%
- - ------------------
* less than 1%
(1) President, CEO and Chairman. Includes 70,000 currently exercisable options.
(2) Includes 446,569 shares held by Hilliard Limited Partnership, of which he
is a General Partner.
(3) Director. Includes 10,000 shares underlying currently exercisable options.
(4) Includes 1,521,828 shares underlying a currently exercisable note.
(5) Does not include 529,007 shares owned by Investcor LLC, which is partially
owned by spouse.
(6) Senior Vice President and Chief Technology Officer.
(7) Consists of currently exercisable stock options.
(8) Includes 33,562 shares underlying convertible preferred stock.
(9) Includes an aggregate of 1,714,198 shares underlying currently exercisable
options and a convertible note and all 446,569 shares owned by Hilliard
Limited Partnership.
20
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Mark Sarna, a director, holds a $600,000 promissory note
issued to him when he provided funds to the Minnesota corporation both during
and following its bankruptcy proceedings. Pursuant to the terms of the merger,
we assumed the note. At the time, Mr. Sarna was not an officer or director. The
Note is convertible at Mr. Sarna's discretion into 1,521,828 shares of our
common stock.
Investcor LLC purchased an aggregate of 3,524 shares of
preferred stock in December 1999 and January 2000. One of the owners of this
entity is the spouse of Mr. Stuart Eisenberger, a director. Five other entities
purchased shares of preferred stock at the same time and on the same terms. The
transaction was approved by our entire board of directors. Mr. Eisenberger
disclaims beneficial ownership of these shares.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements are listed in the Index to Financial
Statements and are filed as part of this annual report.
2. Not Applicable.
3. Exhibits
27 - Financial Data Schedule.
(b) Reports on Form 8-K
None.
21
<PAGE>
DIGITAL PRIVACY, INC.
FINANCIAL STATEMENTS
Period September 9, 1999 through
December 31, 1999, Period January 1,
1999 through September 8, 1999,
Year Ended December 31, 1998
<PAGE>
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1 - 2
FINANCIAL STATEMENTS
Balance sheets 3
Statements of operations 4
Statements of stockholders' deficit 5
Statements of cash flows 6
Notes to financial statements 7 - 16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Digital Privacy, Inc.
St. Louis Park, Minnesota
We have audited the accompanying balance sheets of DIGITAL PRIVACY, INC.
(formerly TelePad Corporation - see Note 1) as of December 31, 1999 and 1998,
and the related statements of operations, stockholders' deficit and cash flows
for the periods September 9, 1999 through December 31, 1999, and January 1, 1999
through September 8, 1999, and the year ended December 31, 1998. 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 audits.
We conducted our audits 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DIGITAL PRIVACY, INC., as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the periods September 9, 1999 through December 31, 1999, and January 1, 1999
through September 8, 1999, and the year ended December 31, 1998, in conformity
with generally accepted accounting principles.
As more fully discussed in Note 2 to the financial statements, the Company
emerged from protection under Chapter 11 of the U.S. Bankruptcy Code pursuant to
a reorganization plan confirmed by the United States Bankruptcy Court for the
District of Minnesota on September 8, 1999. In accordance with American
Institute of Certified Public Accountants (AICPA) Statement of Position No.
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," the Company was required to account for the reorganization using "Fresh
Start Reporting" whereby its assets, liabilities and new capital structure were
adjusted to reflect estimated fair values as of September 9, 1999. Accordingly,
all financial statements prior to September 9, 1999, are not comparable to the
financial statements for the period after reorganization.
<PAGE>
- 2 -
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Notes 2 and 3 to the financial
statements, the Company has incurred losses since commencement of operations,
filed for bankruptcy under Chapter 11 with the United States Bankruptcy Court,
and had their bankruptcy reorganization plan recently confirmed. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans concerning these matters are also disclosed.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
LURIE, BESIKOF, LAPIDUS & CO., LLP
Minneapolis, Minnesota
February 22, 2000
<PAGE>
- 3 -
DIGITAL PRIVACY, INC.
BALANCE SHEETS
<TABLE>
December 31,
ASSETS 1999 1998
------------ --------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 84,493 $ 4,233
Inventory 14,765 11,835
Other 4,753 38,983
---------- ------------
TOTAL CURRENT ASSETS 104,011 55,051
---------- ------------
PROPERTY AND EQUIPMENT 48,584 85,455
---------- ------------
OTHER ASSETS
Patents and trademarks 387,821 374,116
License fee escrow 49,996 49,996
Deferred finance costs (net of accumulated
amortization of $-0- and $622,975) - 326,371
---------- ------------
437,817 750,483
---------- ------------
$ 590,412 $ 890,989
========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable to stockholders $ - $ 1,831,539
Notes payable to vendor 10,000 -
Accounts payable 56,326 489,053
Accrued interest 13,601 159,072
Accrued expenses - other 16,087 40,802
---------- ------------
TOTAL CURRENT LIABILITIES 96,014 2,520,466
---------- ------------
NOTE PAYABLE TO DIRECTOR 600,000 -
---------- ------------
STOCKHOLDERS' DEFICIT
Preferred stock:
Series A, 8% cumulative convertible - $.01 par value, $10 stated and
liquidation value (authorized - 40,000 and 0 shares; issued
and outstanding - 15,000 and 0 shares) 150,000 -
Undesignated - $.01 par value (authorized - 4,960,000 and
10,000,000 shares; no shares issued and outstanding) - -
Common stock - $.01, par value (authorized - 95,000,000 and
20,000,000 shares; issued and outstanding - 3,620,113 and
6,307,106 shares) 36,201 63,071
Additional paid-in capital 80,449 5,454,002
Warrants 4,877 1,640,240
Accumulated deficit ( 377,129) ( 8,786,790)
---------- -------------
( 105,602) ( 1,629,477)
---------- ------------
$ 590,412 $ 890,989
========== ============
See notes to financial statements.
</TABLE>
<PAGE>
- 4 -
DIGITAL PRIVACY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
Period Period
September 9, January 1,
1999 Through 1999 Through Year Ended
December 31, September 8, December 31,
1999 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUE $ 761 $ 322 $ 19,736
COST OF GOODS SOLD 442 89 1,432
---------- ----------- -----------
GROSS PROFIT 319 233 18,304
---------- ----------- -----------
OPERATING EXPENSES
Selling, general and administrative 228,805 603,225 2,790,916
Research and development 65,591 172,969 381,277
---------- ----------- -----------
294,396 776,194 3,172,193
---------- ----------- -----------
OPERATING LOSS ( 294,077) ( 775,961) ( 3,153,889)
INTEREST EXPENSE 13,010 14,507 148,333
---------- ----------- -----------
LOSS BEFORE REORGANIZATION ITEMS
AND EXTRAORDINARY GAIN ( 307,087) ( 790,468) ( 3,302,222)
---------- ----------- -----------
REORGANIZATION ITEMS
Recapitalization under fresh start
reporting - 889,655 -
Professional fees 35,769 ( 133,882) -
Chapter 11 settlement expense 34,273 ( 94,535) -
---------- ----------- -----------
70,042 661,238 -
---------- ----------- -----------
LOSS BEFORE EXTRAORDINARY GAIN ( 377,129) ( 129,230) ( 3,302,222)
EXTRAORDINARY GAIN ON DISCHARGE
OF PREPETITION LIABILITIES - 1,838,259 -
---------- ----------- -----------
NET INCOME (LOSS) ($ 377,129) $ 1,709,029 ($ 3,302,222)
========== =========== ===========
NET LOSS PER SHARE OF COMMON STOCK -
BASIC AND DILUTED ($ .11)
==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,375,122
See notes to financial statements.
</TABLE>
<PAGE>
- 5 -
DIGITAL PRIVACY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
Preferred Stock Common Stock
------------------- -------------------- Additional
Number Number Paid-in Accumulated
of Shares Amount of Shares Amount Capital Warrants Deficit Total
--------- ------- ---------- ------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1997 - $- 5,563,605 $55,636 $4,176,876 $ 748,800 ($5,484,568) ($ 503,256)
Net loss for year - - - - - - ( 3,302,222) (3,302,222)
Issuance of stock - - 743,501 7,435 1,277,126 - - 1,284,561
Issuance of warrants - - - - - 891,440 - 891,440
------- ---- --------- ------ -------- --------- --------- --------
BALANCE,
DECEMBER 31, 1998 - - 6,307,106 63,071 5,454,002 1,640,240 ( 8,786,790) (1,629,477)
Net income for period - - - - - - 1,709,029 1,709,029
Bankruptcy
reorganization
adjustments - - ( 3,961,993) ( 39,620) (5,397,901) ( 1,640,240) 7,077,761 -
------- ---- --------- ------ -------- --------- --------- --------
BALANCE,
SEPTEMBER 9, 1999 - - 2,345,113 23,451 56,101 - - 79,552
Issuance of common
stock and warrants - - 275,000 2,750 34,348 4,877 - 41,975
Issuance of preferred
stock 15,000 150 - - 149,850 - - 150,000
TelePad merger - - 1,000,000 10,000 ( 10,000) - - -
Net loss for period - - - - - - ( 377,129) ( 377,129)
------- ---- --------- ------ -------- --------- --------- --------
BALANCE,
DECEMBER 31, 1999 15,000 $150 3,620,113 $36,201 $ 230,299 $ 4,877 ($ 377,129) ($ 105,602)
====== === ========= ====== ======== ========= ========= ========
See notes to financial statements.
</TABLE>
<PAGE>
- 6 -
DIGITAL PRIVACY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Period Period
September 9, January 1,
1999 Through 1999 Through Year Ended
December 31, September 8, December 31,
1999 1999 1998
--------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($ 377,129) $ 1,709,029 ($ 3,302,222)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Extraordinary gain on discharge of
prepetition liabilities - ( 1,838,259) -
Common stock issued for services 2,420 - -
Depreciation 9,379 19,259 33,796
Loss on sale or disposal of property and
equipment - 9,292 15,075
Amortization and impairment of deferred
finance costs - 326,371 747,188
Changes in operating assets and liabilities:
Inventory ( 3,012) 82 ( 5,798)
Other current assets 885 33,346 ( 4,924)
Accounts payable 75,710 ( 468,882) 85,540
Accrued expenses and other liabilities ( 220,657) 67,190 66,199
---------- ----------- -----------
Net cash used by operating activities ( 512,404) ( 142,572) ( 2,365,146)
---------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment ( 1,059) - -
Patent and trademark costs ( 3,230) ( 10,475) ( 46,933)
Proceeds from sale of property and equipment - - 32,700
---------- ----------- -----------
Net cash used by investing activities ( 4,289) ( 10,475) ( 14,233)
---------- ----------- -----------
FINANCING ACTIVITIES
Issuance of stock 150,000 - 1,284,561
Proceeds from notes payable 450,000 150,000 1,206,488
Payments on notes payable - - ( 34,401)
Decrease in checks issued in excess of deposits - - ( 38,639)
Deferred finance costs - - ( 57,906)
---------- ----------- -----------
Net cash provided by financing activities 600,000 150,000 2,360,103
---------- -----------
NET INCREASE (DECREASE) IN CASH 83,307 ( 3,047) ( 19,276)
CASH
Beginning of period 1,186 4,233 23,509
---------- ----------- -----------
End of period $ 84,493 $ 1,186 $ 4,233
========== =========== ===========
See notes to financial statements.
</TABLE>
<PAGE>
- 7 -
DIGITAL PRIVACY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Description of the Company and Summary of Significant Accounting Policies
The Company
The Company designs, develops and markets smart card technology for
personal computers, laptops and network computers.
Merger
On December 30, 1999, TelePad Corporation, a Delaware corporation
("TelePad"), completed a merger with Digital Privacy, Inc., a privately
owned Minnesota corporation ("DPI"). The combined entity, in which
TelePad was the surviving corporation, changed its name to Digital
Privacy, Inc.
As discussed in Note 2, DPI's bankruptcy reorganization plan was
confirmed by the U.S. Bankruptcy Court for the District of Minnesota on
September 8, 1999. On March 17, 1999, TelePad sought protection of the
Bankruptcy Court and started a Chapter 11 proceeding. TelePad emerged
from bankruptcy on November 8, 1999, as an empty shell with no
significant assets or liabilities.
The merger was accounted for as a recapitalization of DPI, and because
the operations of TelePad prior to the merger are not meaningful, the
financial statements reflect that of DPI and have not been restated to
reflect TelePad.
Under the terms of the merger, each share of DPI common stock converted
into one share of TelePad common stock. The shareholders of DPI received
2,345,113 shares of common stock of TelePad.
Use of Estimates
The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
these estimates. A significant management estimate relates to the
amortization of patents and trademarks.
Fair Value of Financial Instruments
Financial instruments consist primarily of notes payable, accounts
payable and prepetition liabilities. The carrying amounts approximate
their fair values without regard to the bankruptcy reorganization.
Inventory
Inventory, consisting primarily of smart cards and related readers, is
valued at the lower of cost (first-in, first-out) or market.
(continued)
<PAGE>
- 8 -
DIGITAL PRIVACY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Description of the Company and Summary of Significant Accounting Policies
(continued)
Property and Equipment
Property and equipment were restated to fair value at September 9, 1999
(as required under fresh start reporting) and were reported at cost at
December 31, 1998. Depreciation is provided using the straight- line
method over the estimated useful lives of the assets, primarily five to
seven years.
Patents and Trademarks
The Company capitalizes costs of patents and trademarks. The Company
retained the cost of the patents and trademarks under fresh start
reporting. The Company believes this is the most appropriate value as, to
date, significant revenues have not been generated by these assets.
Patent and trademark costs will be amortized, from the date significant
revenues are first generated on the related products, on a straight-line
basis, over the expected useful life of the products, currently estimated
at five years. No patent or trademark amortization has been recorded as
significant revenues have not been generated. The Company periodically
reviews its patent and trademark portfolios to assess the recoverability
of the recorded amounts.
Deferred Finance Costs
Deferred finance costs were amortized on a straight-line basis over the
term of the related notes. The balance of the deferred finance costs was
expensed in connection with the bankruptcy reorganization plan.
Stock-Based Compensation
The Company accounts for employee stock options under Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and provides the other disclosures required by Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS 123).
Research and Development Costs
Research and development expenditures are charged to expense as incurred.
Earnings per Share
Basic earnings (loss) per common share is computed by dividing the net
loss plus preferred stock dividends by the weighted average number of
shares of common stock outstanding during the period. Diluted earnings
(loss) per common share is computed similar to the computation of basic
earnings (loss) per share, except that the denominator is increased for
the assumed exercise of dilutive options and warrants using the treasury
stock method. No stock options or warrants were included in dilutive
earnings loss per share as their inclusion was antidilutive. Earnings
(loss) per share was not calculated prior to the period beginning
September 9, 1999, as it is not meaningful due to the bankruptcy
reorganization and fresh start reporting. Weighted average number of
shares outstanding reflect the TelePad merger as if it occurred on
September 9, 1999.
<PAGE>
- 9 -
DIGITAL PRIVACY, INC.
NOTES TO FINANCIAL STATEMENTS
2. Bankruptcy Reorganization and Fresh Start Reporting -
DPI filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code on
January 6, 1999. The Reorganization Plan was confirmed by the U.S.
Bankruptcy Court for the District of Minnesota on September 8, 1999. DPI
adopted fresh start reporting upon emergence from Chapter 11 as required
under the provisions of AICPA Statement of Position 90-7, (SOP 90-7),
"Financial Reporting by Entities in Reorganization under the Bankruptcy
Code".
Accordingly, the September 9, 1999, balance sheet was prepared as if DPI
were a new reporting entity and reflected certain reorganization
adjustments that included the restatement of assets and liabilities to
approximate fair value, the discharge of outstanding liabilities related
to creditor claims against DPI, which were satisfied by the bankruptcy
confirmation, and the new capital structure. The financial statements for
the period September 9, 1999 through December 31, 1999, incorporate the
effects of fresh start reporting. However, the financial statements for
the period January 1, 1999 through September 8, 1999, and the year ended
December 31, 1998, are based on historical cost. A bold vertical line was
drawn on the accompanying financial statements to distinguish between the
Reorganized Company and the Predecessor Company.
All common shares issued and outstanding at the time of bankruptcy
reorganization were cancelled. Under the bankruptcy reorganization,
2,345,113 new shares of DPI's common stock were distributed to holders of
claims against the Predecessor Company.
The bankruptcy discharge and fresh start reporting adjustments to the
September 9, 1999, balance sheet were as follows:
<TABLE>
Adjustments to Record
Confirmation of Plan
Preconfirmation ------------------------------ Reorganized
Balance Bankruptcy Fresh Start Balance
Sheet Discharge Reporting Sheet
--------------- ------------- ------------ ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,186 $ - $ - $ 1,186
Inventory 11,753 - - 11,753
Other 21,792 ( 16,155) - 5,637
----------- ----------- ---------- ----------
34,731 ( 16,155) - 18,576
PROPERTY AND EQUIPMENT 56,904 - - 56,904
OTHER ASSETS
Patents and trademarks 384,591 - - 384,591
License fee escrow 49,996 - - 49,996
Deferred finance costs 34,964 - ( 34,964) -
----------- ----------- ---------- -------
$ 561,186 ($ 16,155) ($ 34,964) $ 510,067
=========== =========== ========== ==========
(continued)
</TABLE>
<PAGE>
- 10 -
DIGITAL PRIVACY, INC.
NOTES TO FINANCIAL STATEMENTS
2. Bankruptcy Reorganization and Fresh Start Reporting - (continued)
<TABLE>
Adjustments to Record
Confirmation of Plan
Preconfirmation ------------------------------ Reorganized
Balance Bankruptcy Fresh Start Balance
Sheet Discharge Reporting Sheet
--------------- ------------- ------------ ------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 20,171 $ - $ - $ 20,171
Accrued expenses 107,288 ( 90,000) - 17,288
Prepetition liabilities - - 233,056 233,056
------------- ----------- ----------- ------------
127,459 ( 90,000) 233,056 270,515
------------- ----------- ----------- ------------
NOTES PAYABLE 150,000 10,000 - 160,000
------------- ----------- ----------- ------------
PREPETITION LIABILITIES 2,837,554 ( 2,604,498) ( 233,056) -
------------- ----------- ----------- ------------
STOCKHOLDERS' EQUITY
Common stock 63,071 ( 39,620) - 23,451
Additional paid-in capital 5,454,002 ( 4,508,246) ( 889,655) 56,101
Warrants 1,640,240 ( 1,640,240) - -
Retained earnings (deficit) ( 9,711,140) 8,856,449 854,691 -
------------- ----------- ----------- ------------
( 2,553,827) 2,668,343 ( 34,964) 79,552
------------- ----------- ----------- ------------
$ 561,186 ($ 16,155) ($ 34,964) $ 510,067
============= =========== =========== ============
</TABLE>
3. Going Concern -
DPI has failed to generate significant revenues and incurred operating
losses since its inception. DPI also filed for bankruptcy and had their
reorganization plan confirmed by the bankruptcy court (Note 2). DPI's
ability to continue as a going concern is dependent on its ability to
raise additional capital and, ultimately, to generate sufficient cash
flows from operations. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classifications of assets and liabilities should the
Company be unable to continue as a going concern. Management believes
that it can raise sufficient capital to fund operations until the Company
becomes self-sustaining.
<PAGE>
- 11 -
DIGITAL PRIVACY, INC.
NOTES TO FINANCIAL STATEMENTS
4. Property and Equipment -
Property and equipment consists of the following:
<TABLE>
December 31,
1999 1998
--------- -----------
<S> <C> <C>
Furniture and equipment $ 57,963 $ 167,283
Leasehold improvements - 15,067
-------- ----------
57,963 182,350
Less accumulated depreciation 9,379 96,895
-------- ----------
$ 48,584 $ 85,455
======== ==========
</TABLE>
5. Notes Payable -
Notes payable consist of the following:
<TABLE>
December 31,
1999 1998
---------- -------------
<S> <C> <C>
Notes payable to stockholders - discharged in
bankruptcy reorganization. $ - $ 1,831,539
========= ============
Note payable to vendor, interest at 10%, due
October 2000, unsecured. $ 10,000 $ -
======== =========
Note payable to director, interest at 10%, due October 2001,
convertible into common stock through July 7, 2000, at 36.6% of all
common stock and dilutive securities upon conversion,
collateralized by substantially all Company
assets. $ 600,000 $ -
========== =========
</TABLE>
Interest expense of approximately $120,000 was not recorded on discharged
debt for the period January 6, 1999 (petition date) through September 8,
1999, in accordance with SOP 90-7.
6. Income Taxes -
For the periods September 9, 1999 through December 31, 1999, and January
1, 1999 through September 8, 1999, and the year ended December 31, 1998,
the Company had no current or deferred income tax provision. Similarly,
no income taxes were applied against the extraordinary gain in the period
January 1, 1999 through September 8, 1999.
(continued)
<PAGE>
- 12 -
DIGITAL PRIVACY, INC.
NOTES TO FINANCIAL STATEMENTS
6. Income Taxes - (continued)
Deferred income taxes consist of the following:
<TABLE>
December 31,
1999 1998
---------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,995,000 $ 2,050,000
Deferred finance costs - 318,000
Accrued salaries 2,000 16,000
----------- -----------
1,997,000 2,384,000
Deferred tax liability - depreciation ( 13,000) ( 11,000)
----------- -----------
1,984,000 2,373,000
Valuation allowance ( 1,984,000) ( 2,373,000)
----------- -----------
Net deferred taxes $ - $ -
=========== ===========
</TABLE>
The Company determined the valuation allowance to be appropriate as it is
more likely than not that the net deferred tax assets will not be
realized. The valuation allowance increased by approximately $795,000 for
the year ended December 31, 1998, respectively, primarily due to the
Company's inability to utilize its net operating losses. The valuation
allowance decreased by approximately $320,000 and $69,000 for the periods
January 1, 1999 through September 8, 1999, and September 9, 1999 through
December 31, 1999, respectively, primarily due to limitations on the net
operating loss carryforwards caused by the bankruptcy reorganization.
The effective income tax rate differs from the federal statutory rate
primarily due to the Company's inability to use deferred tax assets.
At December 31, 1999, net operating loss carryforwards were approximately
$5,000,000, starting to expire in 2008. Utilization of tax net operating
losses of approximately $4,700,000 from periods prior to September 9,
1999, are limited to approximately $6,000 annually due to the bankruptcy
reorganization and Internal Revenue Code Section 382.
State tax effects are insignificant and not separately disclosed.
7. Stockholders' Deficit -
Convertible Preferred Stock
The Series A preferred stock is convertible into shares of common stock
at any time determined by the sum of the stated value per share and any
accrued and unpaid dividends divided by the lesser of $1.05 or 77.5% of
the average closing bid prices for the five trading days preceding the
conversion. The Company may redeem the Series A preferred stock, after
the effective date of a registration statement filed with the Securities
and Exchange Commission, upon 30 days notice, for 125% of the stated
value plus accrued dividends. The Company reserved 1,200,000 shares of
common stock for conversion of its Series A preferred stock.
(continued)
<PAGE>
- 13 -
DIGITAL PRIVACY, INC.
NOTES TO FINANCIAL STATEMENTS
7. Stockholders' Deficit -
Convertible Preferred Stock (continued)
---------------------------
Dividends are payable quarterly, at the election of the Company, in
either cash or additional Series A preferred shares at the rate of one
share of Series A preferred stock for each $10 of dividends not paid in
cash. Dividends may be paid at the Company's option with Series A
preferred stock only if the common stock deliverable upon conversion of
such stock was included for public resale in an effective registration
statement.
Preferred Stock
The Company also has available 4,960,000 shares of preferred stock
available for future designation.
Stock Options
The Company has an Omnibus Stock Plan (Plan) which permits the issuance
of incentive and nonstatutory stock options, stock application rights,
performance shares, and restricted stock to employees, officers,
directors, consultants and advisors. The Plan reserved 2,000,000 shares
of common stock for issuance awards with the term of each award to be
determined by the Board of Directors (Board).
The exercise price of incentive stock options may not be less than the
fair market value of the stock on the award date. Options are exercisable
for periods not to exceed ten years from grant date and vest at varying
periods. Stock appreciation rights entitle the recipient to receive a
specified excess of the fair market value of the Company's stock on the
exercise date, as determined by the Board, over the fair market value on
the date of grant. Performance shares entitle recipients to acquire
Company stock upon the attainment of specific performance goals set by
the Board. Restricted stock entitles recipients to acquire Company stock
subject to the right of the Company to repurchase the shares in the event
conditions specified by the Board are not satisfied prior to the end of
the restriction period.
Stock option activity was as follows:
<TABLE>
Weighted Weighted
Average Average Contractual
Exercise Fair Life -
Options Price Value Years
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 195,000 $ 5.00 $ 1.28 4
Granted 60,000 5.00 1.09 8
----------
Balance, December 31, 1998 255,000 5.00 1.23 5
Cancelled in bankruptcy
reorganization ( 255,000) 5.00 1.23 5
Granted 751,059 .07 .01 7.83
----------
Balance, December 31, 1999 751,059 .07 .01 7.83
==========
</TABLE>
(continued)
<PAGE>
- 14 -
DIGITAL PRIVACY, INC.
NOTES TO FINANCIAL STATEMENTS
7. Stock Options and Warrants - (continued)
Stock Options (continued)
-------------
Options outstanding at December 31, 1999, are as follows:
<TABLE>
Outstanding Exercisable
----------------------------- -------------------------
Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Options Life-Years Options Price
--------------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
$0.050 - $0.055 741,059 7.81 441,059 $0.05
$1.05 10,000 10.00 10,000 1.05
---------- ----------
751,059 451,059
========== ==========
</TABLE>
Pro forma stock option disclosures for the Predecessor Company are not
presented as they are not significant nor considered meaningful due to
the bankruptcy reorganization and fresh start reporting. The pro forma
impact on subsequent operations for stock options issued in connection
with the bankruptcy reorganization is insignificant.
Warrants
Warrant activity was as follows:
<TABLE>
Weighted Weighted
Average Average Contractual
Exercise Fair Life -
Warrants Price Value Years
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 585,000 $ 5.00 $ 1.28 5
Granted 1,350,667 3.00 .66 5
-----------
Balance, December 31, 1998 1,935,667 3.60 .85 5
Cancelled in bankruptcy
reorganization ( 1,935,667) 3.60 .85 5
Granted 10,000 1.05 .23 10
-----------
Balance, December 31, 1999 10,000 1.05 .23 10
===========
</TABLE>
In December 1999, the Company issued 25,000 shares of common stock and
issued 10,000 warrants exercisable for 10 years, in satisfaction of
accounts payable of $31,127.
(continued)
<PAGE>
- 15 -
DIGITAL PRIVACY, INC.
NOTES TO FINANCIAL STATEMENTS
7. Stock Options and Warrants - (continued)
Stock Option and Warrant Assumptions
The fair value of stock options and warrants is the estimated present
value at the grant date using the Black- Scholes Option-Pricing Model
with the following weighted average assumptions for 1999 and 1998:
Risk free interest rate 5.0%
Expected life 5 years
Expected volatility (stock not publicly traded) 0%
Expected dividend rate 0%
8. Operating Lease -
The Company leases offices for monthly rents of $1,087 plus operating
expenses, property taxes and repairs through August 2000. Rent expense
under all operating leases was $6,900 for the period September 9, 1999
through December 31, 1999, $16,222 for the period January 1, 1999 through
September 8, 1999, and $51,676 for the year ended December 31, 1998.
Future minimum lease payments for the year ending December 31, 2000 are
approximately $9,500.
9. Commitments -
Employment
Two officers of the Company have salary commitments of $180,000 and
$100,000 for five and three years, respectively. The President and Chief
Executive Officer may also earn additional performance stock options each
year based on net revenues, increase in revenues and the Company
valuation (all as defined in the agreements).
Marketing
In December 1999, the Company entered into a sales and marketing
agreement with two sales representatives under which the Company is
obligated to issue common stock at the rate of 0.5% of total shares
outstanding for every $3,000,000 in gross sales, up to 1.5% of the total
outstanding shares. The agreement expires March 31, 2000, and may be
terminated earlier by either party upon 30 days notice.
<PAGE>
- 16 -
DIGITAL PRIVACY, INC.
NOTES TO FINANCIAL STATEMENTS
10. Supplemental Cash Flow Information -
<TABLE>
Period Period
September 9, January 1,
1999 Through 1999 Through Year Ended
December 31, September 8, December 31,
1999 1999 1998
---------------- -------------- ----------------
<S> <C> <C> <C>
Interest paid $ 3,826 $ - $ 234
Noncash financing activities:
Deferred financing costs $ - $ - $ 891,440
Transfer prepetition accounts
payable to a note - 10,000 -
Recapitalization under fresh
start reporting - 889,655 -
Conversion of accounts payable
to common stock and warrants 39,555 - -
</TABLE>
11. Subsequent Events -
In February 2000, the Company exercised a call option and received
$150,000 for the issuance of 15,000 shares of Series A, 8% cumulative
convertible preferred stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
DIGITAL PRIVACY, INC.
By: /s/ Howard Miller
Howard Miller
President and CEO
Dated: 29th day of March, 2000
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
Registrant and in the capacities indicated.
Signature Title Date
- - --------- ----- ----
/s/ Howard Miller
Howard Miller President, Chief March 29, 2000
Executive Officer
and Chairman
/s/ Peter E. Christensen
Peter E. Christensen Director March 30, 2000
Daniel Hilliard Director March ___, 2000
Stuart Eisenberger Director March ___, 2000
/s/ Mark Sarna Director March 30, 2000
Mark Sarna
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Sep-09-1999
<PERIOD-END> Dec-31-1999
<CASH> 84,493
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 14,765
<CURRENT-ASSETS> 104,011
<PP&E> 57,963
<DEPRECIATION> 9,379
<TOTAL-ASSETS> 590,412
<CURRENT-LIABILITIES> 96,014
<BONDS> 0
0
150,000
<COMMON> 36,201
<OTHER-SE> (291,803)
<TOTAL-LIABILITY-AND-EQUITY> 590,412
<SALES> 761
<TOTAL-REVENUES> 761
<CGS> 442
<TOTAL-COSTS> 442
<OTHER-EXPENSES> 364,438
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,010
<INCOME-PRETAX> (377,129)
<INCOME-TAX> 0
<INCOME-CONTINUING> (377,129)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (377,129)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</TABLE>
