FORM 10-KSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to _____________
Commission file number 000-21659
Entertainment Digital Network, Inc
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(Name of small business issuer in its charter)
Delaware 94-3173300
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
One Union Street, San Francisco, California 94111
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Address of principal executive offices (Zip Code)
Issuer's telephone number, including area code (415) 274-8800
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
(See Disclosure Items Omitted)
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Issuer's revenues for the twelve months ended September 30, 1999 were
$3,910,466.
As of December 23, 1999, the aggregate market value of the Common Stock of the
Registrant based upon the closing bid prices of the Common Stock, as quoted on
the OTC Bulletin Board, held by non-affiliates of the Registrant was
approximately $10,894,747.
As of December 23, 1999, 23,201,398 shares of $0.001 par value Common Stock, of
the Registrant were outstanding.
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PART I
ITEM 1 DESCRIPTION OF BUSINESS
Summary of Business
Entertainment Digital Network, Inc., ("EDN" or the "Company"), a Delaware
corporation develops and markets digital communications systems for the North
American advertising and entertainment industry. These systems help our clients
deliver, store and manage professional-quality audio and video files over
proprietary networks. Our private wide-area network, which we established
through strategic alliances with long distance carriers, regional telephone
companies, satellite operators and independent fiber-optic telecommunications
providers, enables our clients to exchange high quality audio, compressed video
and multimedia data communications. We provide engineering services, technical
advice, and audio, video and networking hardware and software together with our
networking services. In January of this year, we expanded our business to
include the production of live audio and video streaming broadcasts over the
Internet for our corporate and entertainment clients. We also provide crews and
equipment for live audio and video conferences, and the digital communication
lines for transporting the media back to its server for live streaming
distribution over the Internet.
Industry Overview
The digital communications industry originated in the 1970s based on the ability
of digital technology to support new and advanced communication applications.
Digital content can be compressed, enabling data-dense applications such as the
instantaneous exchange of large amounts of high-quality media in real or
near-real time over any distance. Important communications equipment suppliers
increasingly recognize our expertise in systems integration using
telecommunications and Internet technology.
Business of the Company
Principal Markets. We sell services to advertising and entertainment industry
clients, including production and post-production companies, advertisers,
producers, directors and talent. Our networking technology makes it possible for
producers, directors and talent to interact in real time, with less interruption
of their schedules, despite being in separate locations. Management believes
this is of growing importance in the entertainment industry because, while the
production of audio and video entertainment is inherently a creative process
requiring the collaboration of many parties, the participants in this process
are often in separate locations. Traditionally, this meant frequent travel and
delay in the audio and video production process. Our technology allows the
collaborative process to go forward without delay despite physical separation.
We expanded our market during the past year by entering into the business of
producing audio and video live streaming distribution over the Internet. We have
extended this service into the corporate market.
Audio and Video Network Systems Development Process. We use a standardized
process for developing audio and video network communications systems for our
customers. When we contract with a new audio or video network customer, we
determine the technical information and specifications regarding the customer's
existing facility, equipment and communications
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requirements. Based on those specifications, we determine the configuration of
the new system, select the appropriate equipment components, modify the software
and/or hardware as needed, and perform the final quality control procedures.
Next, we package and ship the system to the customer. Affiliated technicians can
usually install the system with telephone support from our in-house engineers.
After installation, our technical personnel typically perform a routine series
of system checks and diagnostics from the headquarters over the remote network
to ensure that the newly installed equipment functions properly.
Technical Support. Our technical support staff responds directly to customer
inquiries during business hours. For emergency support during non-business
hours, domestic customers can contact us through a toll-free 800 number, and a
special direct-dial telephone number is available for international customers.
The technical support staff can resolve the vast majority of technical support
issues directly through remote network connection techniques, which enables the
staff to perform remote diagnostics on a customer's equipment. If we are unable
to diagnose and service a hardware or software problem over the remote network
connection, a customer can ship equipment to us for on-site, or "bench",
diagnostics and service. We have a supply of field replacement equipment for
occasional customer emergencies. These services are included in the customers'
fees.
Key Suppliers and Alliances. We act as a systems integrator by acquiring other
companies' technologies and integrating them into an effective communications
solution. We do not manufacture any of the components used in the networks.
Instead, we purchase digital communications equipment components directly from
manufacturers such as Dolby Labs, Telos, Musicam USA, APT, PictureTel, and
Telestream. We are the North American master distributor for certain Dolby and
APT equipment, and we are the primary maintenance support for APT equipment in
the United States. Because the individual components used in the systems are
generally available from more than one reliable source or manufacturer,
management believes the risk of an adverse impact to our business from an
interruption in supply from any single supplier is minimal. We also maintain a
small ongoing inventory of all of the components of our various communications
products. Most of our suppliers have offices and/or distribution points near our
San Francisco headquarters. In the event we do not have sufficient inventory
on-hand to fill a system hardware order, we can usually order and receive
additional inventory with turnaround times of as little as twenty-four hours and
generally no more than four weeks. This does not exclude an adverse effect in
the event that any of our suppliers, for which we have exclusive
distributorship, files bankruptcy or ceases operations.
Marketing. We market our services through a direct full-time sales staff,
through appearances at industry trade shows, and through selling arrangements
such as the agreement with PR Newswire.
Description of Current and Developing Products
Audio Networking Services. Our integrated audio networking systems allow artists
and sound engineers in remote locations to record a single audio track. We
provide compression and transmission of studio quality audio signals over
fiber-optic lines (i.e., telephone digital data lines) between separate studios.
Operators can send time codes with audio data so that operators at the different
studios can synchronize the audio to film projectors or VCR machines for real
time editing of movies and video. When we install an audio media communications
system and the requisite sound equipment, a studio becomes an "affiliate
studio", equipped with a device to digitize, compress, send, receive and
decompress audio media (known as a "codec"). In addition, the studio becomes a
part of our network of media production and post-production studios. Studios
enter into agreements with us to join our network of recording studios, usually
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for three years. Joining the network allows an affiliate studio to establish a
link with, and transmit audio and/or video information to, any other affiliate
studio. An affiliate studio may participate in joint promotional and advertising
activities describing the network, and it has access to technical support and a
software directory of affiliate studios. Affiliate studios pay lower link-up
rates than non-affiliate studios pay to connect to studios with incompatible
equipment. Currently, our network is comprised of over 550 studios across North
America, with major concentrations in Los Angeles, San Francisco, Seattle, St.
Louis, Chicago, Minneapolis, and Atlanta and on the East Coast from Washington,
D.C. to New York and Boston. By granting access to the network, we earn one-time
fees from customers for the sale and installation of equipment and ongoing fees
for the use of the network.
Our audio communications systems cost from $3,500 to $18,000. We pay local
telephone service providers the telephone connection installation charges
(depending upon bandwidth requirements, from $250 to $1,000) and monthly
recurring connection charges (from $40 to $300). Our customers reimburse us for
all of these charges. Outside customers (non-affiliates) seeking to access media
production facilities or otherwise review or record an audio clip with the
assistance of a person in a different location can do so through our affiliate
studios. With Electronic Directory software or through EDN's web site, an
affiliate studio can quickly determine whether their studio, or another
affiliate studio, operates equipment that is compatible with the non-affiliate's
needs. After choosing an appropriate affiliate studio, the customer can schedule
an appointment to use the network. If nearby studios do not have compatible
equipment, technicians in our San Francisco Network Operations Center (NOC) can
digitally "bridge" the studios together. The customer then pays us a network
access fee. The primary market for our audio services are radio and television
advertisers, motion picture and television program production companies and
music recording companies.
Video Networking Services. The video networking service is similar in concept to
the audio networking service, in that it provides end to end service for the
transmission of video from one affiliate to another. The video network presently
incorporates the "ClipMail(TM)Pro ("ClipMail") appliance developed and
manufactured by Telestream, Inc., of Nevada City, California. The ClipMail is a
"Store and Forward" system, in that the transmission of the video is not in
"real time." Using this technology, video media producers and their customers
can efficiently and effectively transmit video for approval, rather than wait
for overnight delivery of tapes. We liken these systems to e-mail for video.
Compared to conventional methods of transmitting video, such as mail or physical
travel, it can significantly increase the speed and efficiency of the video
editing and decision making process.
The ClipMail system uses MPEG-2 compression technology, and Internet Protocol
("IP") data networks to allow video professionals to send and receive approval
of digital-master quality video and audio over a range of standard data
networks. Professionals use these systems primarily to transmit short form video
such as commercials, special effects, graphics, storyboards and animation shots.
However, with the increase in high bandwidth data lines, both terrestrial and
satellite, directors, photographers and other professionals have been able to
send audio and video dailies from remote locations to editors working back at
the home studio by using EDN's network rather than conventional mail or delivery
methods.
Company's Internet-Based Virtual Private Network. Our video systems cost from
$9,250 to $16,250 depending on the different types of available products. The
customer pays through us for the Internet Service Providers ("ISP"), the
connectivity installation charges (depending upon bandwidth requirements, from
$500 to $5,000) and monthly recurring connection charges (from $200 to $3,000).
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We offer customer service for the ClipMail video product through a separate
virtual private network ("VPN"). This network offers customers wide-area
connections, based on a variety of technologies, including ISDN, DSL, or frame
relay T-1. With these wide-band connections, in addition to ClipMail for sending
audio and video, we can provide other services, such as e-mail, Internet
connectivity and hosting. This VPN network is also offered through
representatives selling ClipMail throughout the United States and Canada. This
service also provides applications support, software upgrades, media file
conversion and data storage. We bill monthly fees to customers who have direct
access to the IP network. These fees cover local loop costs and high-speed
Internet access. Other services, such as e-mail and hosting services are
additional revenue for the Company.
Webcasting. We provide crews and equipment for live audio and video conferences,
and the digital communications lines to transport the media back to the main
office for live streaming distribution over the Internet. We expect that the
webcasting services for our audio and video network affiliates, and other
businesses in the fast growing streaming media market will become an
increasingly important part of our business.
Competition
In the past our business involved primarily audio networking services. We
limited our video networking services to transmission of short form video,
including commercials, special effects and animation, because video transmission
is costlier than audio transmission. This is due to the size of the files
required for video compared to audio and the high cost of wider bandwidth needed
for video transmission, which we must procure from telephone companies.
We believe that there are strong opportunities for growth with our video
transmission services, and we plan to increase these services despite the higher
cost of video transmission. There is also likely to be an increase in the number
of competitors providing wide-band services for moving video. Several long
distance and regional telephone companies have offered video wide-area
networking services to their clients from time to time, but we believe that
their efforts have not been substantial.
Audio and Video Networking. Competition in the audio and video networking
business is based on the ability to provide systems compatibility and
proprietary off-the-shelf codecs. Due to the difficulty and expense of
developing and maintaining private digital networks, management believes that
the number of competitors is, and will remain, small. Our principal competitor
in audio networking has been Globecast or 3D2, a division of IDB, which is owned
by French Telecom. Until March 31, 1995, 3D2 was the exclusive North American
distributor of apt-X codecs manufactured by Audio Processing Technology ("APT"),
which were in demand in the radio voice-over market. EDN was able to negotiate
an agreement allowing it to represent APT, and quickly became the brand's
largest seller. In 1998, we became the exclusive distributors in North America
of the apt-X codecs. Our primary video networking competitors are VYVX, a
division of Williams Co., and WAM!NET, a private Minnesota company. These
companies focus on video-networking services utilizing more expensive,
higher-bandwidth fiber connections than our current networking services.
Patents & Trademarks
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We do not own any patents and rely instead on a combination of statutory and
common-law copyright, trademark and trade secret laws to protect the rights of
our proprietary technologies. We have registered "EDnet", "Entertainment Digital
Network" and "ZeroC" as trademarks with the U.S. Patent and Trademark Office.
Research and Development
We had no research and development expenditures in 1999 or 1998. We did not
spend any funds on material customer-sponsored research and development either
of the past two years.
Governmental Approvals and Regulation
Our products and services are currently not subject to regulation by any
government agency or regulatory body.
Subsidiaries
We currently operate through a wholly owned subsidiary also known as
Entertainment Digital Network, Inc., which is a California corporation. We sold
all of the assets of Internet Business Solutions to Enterprise Communications
Consulting, Inc., a wholly owned subsidiary of Attachmate Corporation of
Bellevue, Washington, as of December 11, 1998. We sold those assets because we
believe that the product and service offerings of that subsidiary would not
remain profitable or cost-effective to us in the long term.
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IBS Transaction. We acquired all of the outstanding shares of Common Stock of
Internet Business Services, Inc. ("IBS"), an unrelated Internet services
provider, through a merger of IBS into a subsidiary of the Company pursuant to
an Agreement and Plan of Reorganization dated June 24, 1996 (the "IBS
Agreement"). As consideration for such merger, we issued to the two IBS
shareholders, Trevor Stout and Randall Schmitz: (i) two promissory notes in the
aggregate principal amount of $250,000 (the "First IBS Notes"); (ii) two
promissory notes in the aggregate principal amount of $250,000 (the "Second IBS
Notes"); and (iii) 311,284 shares of Common Stock. The First IBS Notes were due
sixty (60) days after the closing of the IBS Agreement and were repaid by the
Company in August 1996. The Second IBS Notes originally provided for interest of
eight percent (8%) and maturity on the earlier of one year from the closing of
the IBS Agreement or fifteen (15) days after the closing of a public offering by
the Company of Common Stock. In addition, pursuant to an earn-out plan, Messrs.
Stout and Schmitz were originally entitled to receive up to an aggregate of
500,000 shares of Common Stock if IBS met certain specified performance goals.
During a period commencing on the effective date of the IBS Agreement and ending
120 days after June 30, 1999 (the "Earnout"). Messrs. Stout and Schmitz entered
into three-year employment agreements with the Company and IBS (collectively,
the IBS Employment Agreements). We granted options to three IBS employees to
purchase an aggregate of 50,000 shares of Common Stock under the Company's
Non-Qualified Stock Option Plan at $1.25 per share. These options vest over a
three-year period. The merger was accounted for as a purchase.
IBS Reorganization - Breakthrough Software, Inc. Subsequently, we determined
that the cost of supporting IBS in researching, developing and marketing certain
software related to the development,
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operation and maintenance of world-wide web sites (the "IBS Website Software")
was, in management's view, prohibitively expensive. Accordingly, pursuant to an
Amendment to the Agreement and Plan of Reorganization dated as of January 31,
1997 and certain collateral documents, IBS licensed the IBS Website Software to
a new entity, Breakthrough Software, Inc., a California corporation
("Breakthrough"). We agreed to lend up to $250,000 to Breakthrough to be used
for specified purposes. Breakthough prepared an unsecured promissory note in
favor of the Company, payable 30 days after demand after July 1, 1997 or upon
the date that Breakthrough closed a financing of not less than $1,000,000 (the
"Breakthrough Note"). Breakthrough issued to the Company 2,000,000 shares of
convertible Series A Preferred Stock (the "Breakthrough Series A Preferred
Shares") representing (after conversion into Breakthrough Common Stock) 40% of
Breakthrough's outstanding Common Stock (the remainder of Breakthrough's Common
Stock was held by Mr. Stout and Mr. Schmitz). We canceled the Second IBS Notes;
and reduced the number of shares of Common Stock subject to the Earnout from
500,000 to 125,000.
In November 1997, we sold the Company's 2,000,000 shares of Breakthrough Series
A Preferred Stock for $415,000. The first payment of $250,000 for the sale of
the Series A Preferred Stock was received on November 7, 1997, a second payment
of $67,995 was received on December 19, 1997 and the balance of $97,005 was
received on January 21, 1998. The Breakthrough Note was amended as of December
19, 1997. A debt transfer reduced the Breakthrough Note by IBS and assumption by
Breakthrough of certain of EDN's outstanding debts to vendors or suppliers that
were connected with the IBS Website Software development business. These
included a debt of $91,892 to Global Automation, Inc., and an overdue account
with the San Jose Mercury News of $2,000, both of which were assumed by
Breakthrough. The balance of $156,108 in principal due on the Breakthrough Note
was canceled and, in its place, we received a Convertible Subordinated
Promissory Note and warrants to purchase shares of Breakthrough's Common Stock.
On March 13, 1998, we sold this note to an outside investor for $80,000.
Investment by Visual Data Corporation. Faced with substantial short- and
long-term liabilities at the beginning of the 1998 fiscal year, we pursued a
number of fundraising opportunities over the year to finance operations and
reorganize past due liabilities to allow EDN to continue as a going concern.
Toward the end of the fiscal year we identified a suitable investor and
strategic partner in Visual Data Corporation ("VDC"), a Pompano Beach, Florida
multimedia development and production company. VDC specializes in the
production, marketing and distribution of full-motion visual information on the
Internet. VDC develops full-motion video libraries containing short concise
vignettes relating to various topics, including travel, business, education,
health, fitness, medicine and consumer products.
VDC was a potential customer of our video network, and VDC's own customers were
also potential customers of our video network. Subject to the detailed terms and
conditions stated in that certain securities purchase agreement between VDC and
EDN effective as of June 20, 1998 (the "VDC Purchase Agreement"), VDC agreed to
acquire a majority interest in EDN's outstanding shares of Common Stock.
Under the VDC Purchase Agreement, VDC acquired 8,563,417 shares of EDN's Common
Stock, equal to a 51% interest in the Company. Subsequent to the VDC investment,
EDN had approximately 16.7 million shares outstanding. In order to ensure that
VDC had the opportunity to retain ownership as a majority owner in EDN's Common
Stock, VDC was also given an option that mirrors each option and/or warrant
outstanding for EDN Common Stock as of the closing date. Thus
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for every outstanding option and/or warrant existing at the closing date
subsequently exercised, VDC can purchase one additional share of Common Stock at
$0.10 per share.
In consideration, we received $698,004 in cash, 75,000 shares of VDC Common
Stock, warrants to purchase up to 50,000 shares of VDC Common Stock (valued at
$418,250); and a promissory note in the principal amount of $283,746, secured by
the Common Stock and certain real property in Florida, for a total acquisition
price of $1.4 million.
An additional term of the VDC Purchase Agreement, as well as one of EDN's
primary goals in finding an investor, was that we restructure certain accounts
payable debt that the Company had incurred over the prior three years.
Therefore, we used a substantial portion of the proceeds of the VDC Transaction
to repay certain outstanding liabilities and to make current certain delinquent
accounts with suppliers. We paid certain creditors a total of $414,020 in cash,
and assigned others the 75,000 shares of VDC Common Stock and the warrants to
purchase an additional 50,000 shares of VDC Common Stock, in order to settle
claims based on overdue accounts totaling $643,562, and to settle claims for
repayment of principal and interest of $904,019 on certain promissory notes.
As an additional term of its investment, VDC received the right to name four
members to EDN's Board of Directors. With the concurrent resignation of one of
the existing directors, this was intended to give VDC effective control of the
Board. VDC's four nominees began acting as directors at a meeting of the EDN
Board of Directors held on July 10, 1998. At the same time, one of the former
Board members, Avi Fogel, resigned from the EDN Board of Directors. Tom
Kobayashi, Chairman of the Board prior to the VDC investment, stepped down as
Chairman and was replaced by Randy Selman, President of VDC. During October
1998, David Goodman resigned from the Board and Eric Jacobs replaced him. In
addition, we appointed one of the VDC nominees, Brian Service, to a director
position with particular focus on investor relations, strategic funding, and
cash management issues. We have renewed our one-year consulting agreement with
Mr. Service, under which Mr. Service receives a monthly fee of $9,000. Effective
July 1999 Robert Wussler transferred from the Board of Directors of EDN to the
Board of Directors of VDC.
ITEM 2 PROPERTY
Description of Property
Our principal business offices are located at One Union Street, in San
Francisco, California. This office is a 5,000 square foot facility that operates
as administrative headquarters and provides the centralized network hub for
electronically bridging affiliate studios, as well as overall network
management. We lease this facility pursuant to a Sublease dated November 1, 1993
with Varitel Video, Inc. ("Varitel"), an unaffiliated entity. The term of the
sublease was for five years, commencing November 15, 1993. At November 14, 1998,
the lease was renewed for an additional term ending August 31, 2003. Under the
renewed sublease, the monthly lease payment is $13,251 per month. In lieu of a
security deposit, we granted Varitel a security interest in certain of EDN's
equipment with an aggregate purchase price of approximately $75,000. Varitel may
terminate this sublease: upon 90 days prior written notice, upon a change in the
principal ownership of the Company or in the event that the Company engages in a
"competing type of film or video service business like or similar to Varitel".
This excludes any "networking service application" which we offer in connection
with audio, video and other multimedia networking services. Varitel has agreed
not to terminate the lease due to the VDC Purchase Agreement.
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On June 23, 1998, Lantana, a property management company in the Los Angeles
Area, and EDN, Inc. canceled the balance of the lease and the guaranty by Mr.
Kobayashi per mutual agreement.
ITEM 3 LEGAL PROCEEDINGS
EDN is not a party to any legal proceedings.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to the shareholders for vote during the fiscal year
ending September 30, 1999.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Our Common Stock is traded on the OTC electronic bulletin board under the symbol
EDNT. The reported high and low bid information as quoted on the OTC bulletin
board for the period July 1, 1997 through September 30, 1999, is shown below.
The high and low bid information as quoted on the OTC bulletin board represents
prices between brokers and dealers and does not include retail markups,
markdowns or commissions to the broker-dealer.
High and Low Bid Price for Registrant's Common Stock
July 1, 1997 through September 30, 1999
Period High Low
------ ---- ---
Quarter ended September 30, 1999 1.750 0.660
Quarter ended June 30, 1999 4.125 1.000
Quarter ended March 31, 1999 4.875 0.266
Quarter ended December 31, 1998 0.641 0.125
Quarter ended September 30, 1998 0.453 0.094
Quarter ended June 30, 1998 0.719 0.094
Quarter ended March 31, 1998 0.250 0.094
Quarter ended December 31, 1997 0.750 0.125
Quarter ended September 30, 1997 1.047 0.250
The number of holders of record of EDN's Common Stock as of September 30, 1999,
was approximately 650.
Dividends
EDN has never paid cash dividends on Common Stock, and we intend to utilize
current resources to expand our operations. Moreover, outstanding warrants
restrict the ability of the Company to pay dividends. Therefore, we anticipate
that cash dividends will not be paid on the Common Stock in the foreseeable
future.
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ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
report.
Overview
In December, 1998, we completed the sale of assets of our subsidiary, Internet
Business Solutions ("IBS") to Enterprise Communications Consulting, Inc., a
private company located in Bellevue, Washington. It became apparent to the
management and the Board of Directors of EDN that the web development services
of IBS were being provided by our parent company, Visual Data Corporation. This
sale allowed EDN to focus all of its efforts on pursuing new products and
services in the video market as well as webcasting on the Internet.
We continued to expand our core audio networking services, which has now
expanded to over 550 affiliates in the United States and Canada. The number of
Grammy and Oscar recipients that use the audio network in the music and motion
picture industry has increased annually.
In January of this year, we entered into an agreement with PR Newswire and
Visual Data Corporation to provide customers with live audio and video
webcasting over the Internet
In March, we announced an agreement with Telestream, the manufacturer of a high
quality video delivery system, ClipMail(TM)Pro (which can send video over data
networks using high-speed wide-band, Internet networks). We became the first OEM
dealer for this video appliance. Since its launch at the National Association of
Broadcasting trade show in Las Vegas, this appliance has been well accepted in
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the advertising, television and motion picture production and post-production
market. We feel that this new product and service will become a significant part
of growth in the Company's revenue stream in the coming year.
Liquidity and Capital Resources at September 30, 1999
At September 30, 1999, our principal sources of liquidity included $282,862 in
cash and an unsecured $250,000 revolving line of credit. The current ratio was
greatly improved over the year ending June 30, 1998 as a result of the
restructuring discussed above. At September 30, 1999 the current ratio (current
assets divided by current liabilities) was 1.47, whereas at June 30, 1998 it was
0.87.
Net cash provided by investing activities of $646,484 for fiscal year 1999
related primarily to the sale of our investment in IBS less purchase of property
and equipment. Financing activities provided a net amount of $680,899 for fiscal
year 1999, primarily due to the sale of Common Stock for $655,693.
At September 30, 1999, our accumulated deficit was $6,260,249. Working capital
was $547,484. We have not been able to generate any operating profit since
inception and the loss from operations has increased from $755,731 in the year
ending June 30, 1998 to $793,714 in fiscal year 1999. This is attributed to the
sale of our subsidiary IBS and the launch of new businesses. We have replaced a
portion of the lost revenue with increases in audio equipment sales,
installation, and monthly fees. These revenue streams have lower gross margins
than the lost IBS revenue of web design and consulting. We also introduced two
new business components: webcasting and video equipment sales. As these are
still in the initial phase, these businesses are incurring start up costs that
will decrease over time. These costs are related to personnel, travel, and
overhead and have lower gross margins. In fiscal year 1999, we realized a gain
on the sale of our subsidiary's assets in the amount of $663,530, similar to the
net profit from the gain on the sale of investment and forgiveness of debt
recognized in the year ending June 30, 1998 of $622,225.
Results of Operations: Year Ended September 30, 1999 and Year Ended
June 30, 1998
The following table sets forth for the periods indicated the percentage of net
sales represented by certain line items from our consolidated statements of
operations:
September 30, 1999 June 30, 1998
------------------ -------------
Revenues 100.0% 100.0%
Cost of sales 74.1% 65.0%
----- -----
Gross profit 25.9% 35.0%
Operating expenses:
Sales and marketing 14.1% 16.7%
General and administrative 32.1% 37.2%
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Total operating expenses 46.2% 53.9%
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Loss from operations (20.3%) (18.9%)
Other income 17.3% 14.2%
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Loss before income taxes and
extraordinary item (3.0%) (4.7%)
Provision for income taxes 0.2% 0.1%
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Loss before extraordinary item (3.2%) (4.8%)
Extraordinary item -- 17.7%
----- -----
Net (loss) income (3.2%) (12.9%)
===== =====
13
<PAGE>
Revenues. Net sales for fiscal year 1999 decreased 2.3% to $3,910,466 as
compared to $4,004,341 in the year ended June 30, 1999. Management attributes
the decrease in revenue to the sale of its subsidiary IBS. Revenues from IBS in
fiscal year 1999 were $252,000 compared to $1,117,421 for the fiscal year ended
June 30, 1998. Due to its sale in December 1998, IBS revenue contributed just
slightly more than two months' revenue to the current reporting period as
compared to twelve months' revenue ended June 30, 1998. At June 30, 1998, IBS
contributed 28% of gross sales. This loss of revenue is being replaced by the
introduction of our new businesses, webcasting and video equipment sales, that
in total contributed 9% to our gross sales. Currently video equipment sales
contribute approximately 4% to our gross sales. The equipment component of
revenue increased in the period ended September 30, 1999 due to improved audio
equipment availability and a new line of video equipment. We anticipate revenue
from video equipment sales to increase substantially during the next fiscal
year. Webcasting contributed approximately 5% to our gross sales. We expect this
segment of the business to make a significant contribution in fiscal year 2000
as new strategic alliances have been formed to increase market share.
Gross Profit. Gross Profit decreased to $1,011,925 or 26 % of sales, in the year
ended September 30, 1999 compared to $1,401,847, or 35% of sales in the year
ended June 30, 1998. Decreases in gross profit as a percentage of sales compared
to June 30, 1998 are primarily due to increased costs associated with new lines
of business and discounts to attract this business. The decrease in gross profit
can also be linked to the loss of higher contributions that were provided by the
website hosting and consulting services of our former subsidiary IBS.
Operating Expenses. Operating expenses (including sales & marketing, and general
& administrative) decreased to $1,805,639 in the year ended September 30, 1999
compared to $2,157,578 for the fiscal year ended June 30, 1998. The decrease is
primiarly due to the elimination of sales and marketing expenses of our
subsidiary, IBS. In the year ended June 30, 1998, IBS contributed $322,181 or
48% of the total marketing expense, compared to $58,112 or 11% for the year
ended September 30, 1999. Administrative expenses also decreased for the year
ended September 30, 1999 due to the decrease in investor relations expense.
Investor relations expense for the year ended June 30, 1998 was more than
$420,000. This expense was primarily due to the hiring of the consulting firm of
Liviakas Financial. (see ITEM 12) We hired Liviakas to assist in securing
additional funding.
Other Income and Expenses. Other income and expenses increased to $675,239 in
fiscal year 1999, compared to $565,779 for fiscal year ended June 30,1998. The
increase is due to the sale of our subsidiary, IBS, netting $663,530 (See Note 2
to the Consolidated Financial Statements). Additionally, interest expense
decreased from $63,772 for fiscal year ended June 30, 1998 to $22,773 in the
current fiscal year. The decrease is primarily due to the elimination of senior
note holders. These notes were converted to warrants with demand registration
rights. The majority of these warrants were exercised in the third quarter 1999.
The fiscal year 1999 interest expense is mostly attributable to the funds
provided by Eric Jacobs, which were used to purchase our inventory of video
equipment.
14
<PAGE>
Readiness for Year 2000
We are aware of the issues associated with the programming code in existing
computer systems as the year 2000 approaches. The year 2000 issue relates to
whether computer systems will properly recognize and process information
relating to dates in and after the year 2000. These systems could fail or
produce erroneous results if they cannot adequately process dates beyond the
year 1999 and are not corrected. Many people in the software industry are
uncertain about the potential consequences that may result from the failure of
software to adequately address the year 2000 issue.
We have reviewed the software and hardware we use internally in our support
systems to determine whether they are year 2000 compliant. We are confident that
we have already taken the steps to complete the work required to make our
systems, products and infrastructure year 2000 ready. Most of our software has
already been upgraded by the manufacturer or was recently purchased and is year
2000 compliant. There are no technological issues in the hardware or software
that we sell or rent to our clients that will be affected by year 2000 issues.
We do not believe that the aggregate cost for the year 2000 issue will be
material, but we cannot predict the effect of the year 2000 issue on many of the
entities with which we transact business. We are evaluating the year 2000
readiness of our consultants, vendors and suppliers. Where we determine that
critical suppliers are not year 2000 ready, we will monitor their progress and
take appropriate actions. In particular, the telephone companies that supply us
with services must be year 2000 ready in order to avoid major billing errors.
Though we may experience some temporary delay in our ability to accurately
rebill customers, we do not foresee any permanent liability, should some error
occur on the part of these suppliers.
Forward-Looking Statements
This Annual Report on Form 10-KSB contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause our actual results to differ
materially from those indicated by such forward-looking statements. These
factors include those set forth below under the caption "Factors that May Affect
Future Results."
Factors That May Affect Future Results.
We intend to focus on expanding our audio networking equipment sales and
services and also expanding our video media networking equipment sales and
services. Significant opportunities exist in the audio and video media area as a
result of our affiliation with VDC and the potential use of the video network by
customers VDC's video newswire product. We expect to be able to fund our
expanded activities from within our own cash flow and lines of credit
facilities.
15
<PAGE>
Audio Media Networking Services. We utilize hardware, software and both
public-switched and Internet Protocol ("IP") networks in providing audio
networking services to our customers. This service participates in an industry
that undergoes rapid changes in new products and services. We presently do not
develop hardware or software or build wide-area networks. Instead, we buy
commercially available equipment, purchase network time from long distance
carriers, integrate this equipment and time into full time or 24/7 network
service, and resell this service to our customers. Because we do not develop
software or manufacture hardware itself, we can adapt new hardware or network
offerings to our customers' needs and integrate new equipment and new network
access mechanisms into our services with a minimum of cost, provided that
customers are willing to pay to upgrade to such new network service or
equipment. We will need to be aware of new products and services, since any
delay or failure to anticipate or respond to any new technology could have an
affect upon our anticipated operating results.
Video Networking Services. With the introduction of our new line of video
products from Telestream, we are expecting the revenue from this equipment and
services to be a major contribuor to our current business model. This technology
transmits short form videos, such as commercials, special effects, and daily
shoots over the Internet to virtually any destination the customer desires. With
the increase in high bandwidth data lines, directors, photographers and other
professionals have been able to send and receive audio and video dailies from
remote locations to editors working back at the home studio rather than
conventional mail or delivery mehtods.
We plan to expand the video market and offer our customers the ability to use
our network for their communication requirements. This product was designed for
a store and forward type of transmission. We are currently expanding our
capabilities to be able to provide this service to our customers.
Wecasting. We have entered into the business of webcasting, which provides
corporate customers with live audio and video streaming over the Internet. We
believe the webcasting market will enhance our current business model of
products and services.
16
<PAGE>
ITEM 7 FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Entertainment Digital Network, Inc.
We have audited the accompanying consolidated balance sheets of Entertainment
Digital Network, Inc. and subsidiaries as of September 30, 1999, September 30,
1998, and June 30, 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year, three months, and year then
ended, respectively. 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 audits 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 the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that 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 consolidated financial position of Entertainment
Digital Network, Inc. and subsidiaries as of September 30, 1999, September 30,
1998, and June 30, 1998, and the consolidated results of their operations and
their cash flows for the year ended September 30, 1999, the three months ended
September 30, 1998, and the year ended June 30, 1998, in conformity with
generally accepted accounting principles.
/s/ Burr, Pilger & Mayer.
San Francisco, California
November 16, 1999
17
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1999, September 30, 1998,
and June 30, 1998
------------
<TABLE>
<CAPTION>
September 30, September 30, June 30,
ASSETS 1999 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current assets:
Cash $ 282,862 $ 88,470 $ 32,911
Accounts receivable, net of allowance for
doubtful accounts of $18,453, $8,500, and
$17,502 at September 30, 1999, September 30, 1998,
and June 30, 1998, respectively 713,452 574,800 471,341
Accounts receivable-related party 32,698 33,008 --
Accounts receivable-escrow 50,000 -- --
Inventories 576,433 122,986 87,157
Prepaid expenses 45,952 4,601 58,823
Other current assets 2,500 826 16,665
----------- ----------- -----------
Total current assets 1,703,897 824,691 666,897
Property and equipment, net 385,698 380,416 391,481
Other assets 5,254 6,455 13,711
----------- ----------- -----------
$ 2,094,849 $ 1,211,562 $ 1,072,089
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 628,959 $ 303,628 $ 388,325
Accrued expenses 225,374 239,476 294,980
Deferred revenue -- 33,421 21,286
Line of credit -- 8,214 8,872
Notes payable-related party 290,500 240,500 40,500
Current portion of capital lease obligations 11,580 17,147 9,288
----------- ----------- -----------
Total current liabilities 1,156,413 842,386 763,251
Capital lease obligations 4,045 15,058 11,470
----------- ----------- -----------
Total liabilities 1,160,458 857,444 774,721
----------- ----------- -----------
Stockholders' equity:
Common stock; $0.001 par value; 50,000,000 shares
authorized; 23,186,398, 16,761,836, and 16,761,836
shares issued and outstanding at September 30, 1999,
September 30, 1998 and June 30, 1998, respectively 22,506 16,761 16,761
Additional paid-in capital 7,501,391 6,755,443 6,755,443
Secured note receivable (283,746) (283,746) (283,746)
Unearned compensation (45,511) -- --
Accumulated deficit (6,260,249) (6,134,340) (6,191,090)
----------- ----------- -----------
Total stockholders' equity 934,391 354,118 297,368
----------- ----------- -----------
$ 2,094,849 $ 1,211,562 $ 1,072,089
=========== =========== ===========
<FN>
The accompanying notes are an integral
part of these consolidated financial statements.
</FN>
</TABLE>
18
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the year ended September 30, 1999,
the three months ended September 30, 1998,
and the year ended June 30, 1998
------------
<TABLE>
<CAPTION>
September 30, September 30, June 30,
1999 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Equipment sales $1,160,617 $ 283,573 $ 874,785
Installation and monthly fees 647,174 153,423 610,514
Usage fees 1,562,387 338,671 1,617,291
Web design and consulting 272,533 348,811 784,528
Webcasting 192,258 -- --
Rental fees 70,072 18,275 99,384
Other 5,425 4,275 17,839
---------- ---------- ----------
3,910,466 1,147,028 4,004,341
Cost of sales 2,898,541 680,078 2,602,494
---------- ---------- ----------
Gross profit 1,011,925 466,950 1,401,847
Sales and marketing 551,480 129,052 666,985
General and administrative 1,254,159 281,990 1,490,593
---------- ---------- ----------
(Loss) income from operations before
other income (expenses) and provision
for income taxes and extraordinary item (793,714) 55,908 (755,731)
---------- ---------- ----------
Other income (expenses):
Interest income 35,300 5,993 4,166
Interest expense (22,773) (5,151) (63,772)
(Loss) gain on sale of equipment (818) -- 3,160
Gain on sale of subsidiary assets 663,530 -- --
Gain on sale of investment -- -- 422,225
Forgiveness of debt -- -- 200,000
---------- ---------- ----------
Total other income 675,239 842 565,779
---------- ---------- ----------
(Loss) income before provision for income
taxes and extraordinary item (118,475) 56,750 (189,952)
Provision for income taxes 7,434 -- 2,400
---------- ---------- ----------
(Loss) income before extraordinary item (125,909) 56,750 (192,352)
Extraordinary item-gain on restructuring of
debt (no applicable income taxes) -- -- 710,488
---------- ---------- ----------
Net (loss) income $ (125,909) $ 56,750 $ 518,136
========== ========== ==========
Basic (loss) income per share:
Loss before extraordinary item $ (0.01) Nil $ (0.02)
Net (loss) income $ (0.01) Nil $ 0.07
Diluted (loss) income per share:
Loss before extraordinary item $ (0.01) Nil $ (0.02)
Net (loss) income $ (0.01) Nil $ 0.07
<FN>
The accompanying notes are an integral
part of these consolidated financial statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
ENTERTAINMENT DIGITAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the year ended September 30, 1999,
the three months ended September 30, 1998,
and the year ended June 30, 1998
------------
<CAPTION>
Common Stock Preferred Stock
-------------------- ----------------- Additional
Shares Amount Shares Amount Paid-in Capital
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
Ending balance, June 30, 1997 5,740,465 $ 5,740 150 $ 117,541 $4,411,559
Common shares issued under Regulation D offering 738,000 738 -- -- 126,382
Common shares issued under S-8 offering 400,000 400 -- -- 399,600
Common shares issued for conversion of note
and accrued interest 1,000,000 1,000 -- -- 374,000
Conversion of preferred shares to common shares 150,000 150 (150) (117,541) 117,391
Common shares issued pursuant to consulting service 169,954 170 -- -- 21,074
Common shares issued to Visual Data Corporation 8,563,417 8,563 -- -- 1,305,437
Net income -- -- -- -- --
---------- ------- ---- --------- ----------
Ending balance, June 30, 1998 16,761,836 16,761 -- -- 6,755,443
Net income -- -- -- -- --
---------- ------- ---- --------- ----------
Ending balance, September 30, 1998 16,761,836 16,761 -- -- 6,755,443
Common shares issued upon exercise of stock options 1,297,500 1,298 -- -- 128,453
Common shares issued upon exercise of warrants pursuant
to S-3 Registration 1,914,831 1,235 -- -- 203,484
Common shares issued to Visual Data Corporation upon
exercise of mirror stock options and warrants 3,212,231 3,212 -- -- 318,011
Stock options issued -- -- -- -- 96,000
Net loss -- -- -- -- --
---------- ------- ---- --------- ----------
Ending balance, September 30, 1999 23,186,398 $22,506 -- -- $7,501,391
========== ======= ==== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Secured Unearned
Note Compen- Accumulated
Receivable sation Deficit Total
---------- ------ ------- -----
<S> <C> <C> <C> <C>
Ending balance, June 30, 1997 -- -- $(6,709,226) $(2,174,386)
Common shares issued under Regulation D offering -- -- -- 127,120
Common shares issued under S-8 offering -- -- -- 400,000
Common shares issued for conversion of note
and accrued interest -- -- -- 375,000
Conversion of preferred shares to common shares -- -- -- --
Common shares issued pursuant to consulting service -- -- -- 21,244
Common shares issued to Visual Data Corporation $(283,746) -- -- 1,030,254
Net income -- -- 518,136 518,136
--------- -------- ----------- -----------
Ending balance, June 30, 1998 (283,746) -- (6,191,090) 297,368
Net income -- -- 56,750 56,750
--------- -------- ----------- -----------
Ending balance, September 30, 1998 (283,746) -- (6,134,340) 354,118
Common shares issued upon exercise of stock options -- -- -- 129,751
Common shares issued upon exercise of warrants pursuant
to S-3 Registration -- -- -- 204,719
Common shares issued to Visual Data Corporation upon
exercise of mirror stock options and warrants -- -- -- 321,223
Stock options -- $(45,511) -- 50,489
Net loss -- -- (125,909) (125,909)
--------- -------- ----------- -----------
Ending balance, September 30, 1999 $(283,746) $(45,511) $(6,260,249) $ 934,391
========= ======== =========== ===========
<FN>
The accompanying notes are an integral
part of these consolidated financial statements.
</FN>
</TABLE>
20
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the year ended September 30, 1999,
the three months ended September 30, 1998,
and the year ended June 30, 1998
------------
<TABLE>
<CAPTION>
September 30, September 30, June 30,
1999 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (125,909) $ 56,750 $ 518,136
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Gain on sale of subsidiary assets (663,530) -- --
Depreciation and amortization 122,380 52,888 199,458
Compensation expense on below market value stock options 50,489 -- --
Loss (gain) on sale of fixed assets 818 -- (3,160)
Stock issued in lieu of consideration for services -- -- 421,244
Gain on sale of investment -- -- (422,225)
Gain on forgiveness of debt -- -- (200,000)
Inventory write-off -- -- 49,061
Noncash debt restructure -- -- (773,026)
(Increase) decrease in assets:
Accounts receivable (335,944) (136,467) (26,220)
Inventories (445,251) (35,829) 66,695
Prepaid expenses and other assets (54,794) 77,317 (56,439)
Increase (decrease) in liabilities:
Accounts payable 331,174 (84,697) (868,083)
Accrued expenses (12,424) (43,141) (31,168)
----------- ----------- -----------
Net cash used in operating activities (1,132,991) (113,179) (1,125,727)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (258,729) (25,849) (31,246)
Sale of investments -- -- 588,892
Proceeds from sale of subsidiary's and other assets 905,213 -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities 646,484 (25,849) 557,646
----------- ----------- -----------
Cash flows from financing activities:
Net decrease in line of credit (8,214) (886) (25,755)
Net increase in short-term related party note 250,000 200,000 --
Principal payments on debt (200,000) -- (115,481)
Payments on capital leases (16,580) (4,527) (27,963)
Proceeds from sale of Common Stock 655,693 -- 739,124
----------- ----------- -----------
Net cash provided by financing activities 680,899 194,587 569,925
----------- ----------- -----------
Net increase in cash 194,392 55,559 1,844
Cash at beginning of year 88,470 32,911 31,067
----------- ----------- -----------
Cash at end of year $ 282,862 $ 88,470 $ 32,911
=========== =========== ===========
<FN>
The accompanying notes are an integral
part of these consolidated financial statements.
</FN>
</TABLE>
21
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
1. Significant Accounting Policies
Nature of Operations
Entertainment Digital Network, Inc. (the Company), a Delaware corporation,
and its subsidiaries develop and market integrated systems for the delivery,
storage, and management of professional quality digital communications for
media-based applications, including audio and video production for the U. S.
entertainment industry. The Company, through strategic alliances with
long-distance carriers, regional telephone companies, satellite operators,
and independent fiber optic telecommunications providers, has established a
worldwide network that enables the exchange of high quality audio, video,
multimedia, and data communications. The Company provides engineering
services and application-specific technical advice, audio, video, and
networking hardware and software as part of its business. In December 1998,
the Company completed the sale of substantially all the assets of its wholly
owned subsidiary, which provided Internet web site development and hosting
services.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its principal subsidiaries, Entertainment Digital Network (EDN) and
Internet Worldwide Business Solutions (IBS). The accounts of IBS have been
included through December 1998 when its principal assets and operations were
sold. All material intercompany transactions have been eliminated in the
consolidated financial statements.
Effective June 20, 1998, the Company became 51% owned by Visual Data
Corporation (VDC), a public company, through the issuance of 8,563,417
shares of the Company's Common Stock (See Note 13). Accordingly, the results
of the Company's operations will be consolidated with those of VDC for
periods subsequent to June 20, 1998.
Use of Estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those and other
estimates.
Allowance for Doubtful Accounts
Bad debts are provided on the allowance method based on historical
experience and management's evaluation of outstanding accounts receivable.
Inventories
Inventories, composed primarily of purchased products for resale, are valued
at the lower of cost or market with cost being determined on the first-in,
first-out basis. During the year ended September 30, 1999, the Company
established an inventory valuation reserve in the amount of $40,000.
22
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
1. Summary of Significant Accounting Policies, continued
Property and Equipment and Leasehold Improvements
Property and equipment are carried at cost and are depreciated on the
straight-line basis over their estimated useful life of five years. The
costs of leasehold improvements are amortized over the lesser of the lease
term or the life of the improvement. Expenditures for improvement or
expansion of property and equipment are capitalized. Repairs and maintenance
are charged to expense as incurred. When the assets are sold or retired,
their cost and related accumulated depreciation are removed from the
accounts with the resulting gain or loss reflected in the statement of
operations.
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income tax assets and liabilities are computed annually for differences
between the financial reporting and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
Fair Value of Financial Instruments and Credit Risk
The carrying amounts of certain financial instruments, including cash,
accounts receivable, notes receivable, accounts payable, accrued expenses,
notes payable, and line of credit, approximate fair value because of the
relatively short-term maturity of these instruments. The Company and its
subsidiaries maintain cash in bank deposit accounts at accredited financial
institutions. The balances in these accounts may, at times, exceed federally
insured limits.
Long-lived Assets
Long-lived assets such as property and equipment are evaluated for
impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. When the indicators of
impairment are present and the estimated undiscounted future cash flows from
the use of these assets are less than the assets' carrying value, the
related assets will be written down to fair value.
Revenue Recognition
A significant component of revenue relates to the sale of equipment, which
is recognized when the equipment is installed or upon signing of a contract
after a free trial period. During the trial period a customer normally
receives an extended period of time before purchasing the product. During
this trial period, the Company accounts for the product as inventory and
recognizes the revenue upon signature of the contract by the customer.
Installation fees are recognized when the installation has been completed.
Usage fees are recognized over the period the equipment is used based on the
relative usage level. Deferred revenues represented billings in excess of
revenue recognized.
23
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
1. Summary of Significant Accounting Policies, continued
Revenue Recognition, continued
The Company leases some equipment to customers under terms that are
accounted for as operating leases. Under the operating method, rental
revenue from leases is recognized ratably over the life of the lease and the
related equipment is depreciated over its estimated useful life.
Stock-Based Compensation
The Company has elected to account for stock-based compensation under the
intrinsic value method in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Under this method, no compensation expense is recorded for
stock options granted when the exercise price of the option granted is equal
to or exceeds the fair market value of the Company's Common Stock. The
Company makes the pro forma disclosures of stock-based compensation required
by SFAS No. 123.
Earnings (Loss) per Share
Earnings (loss) per share have been computed according to SFAS No. 128,
Earnings per Share for all periods presented. Basic earnings per share are
computed using the weighted-average number of shares of Common Stock
outstanding during the periods. Diluted earnings per share are computed
using the weighted-average number of common shares and common share
equivalents outstanding during the period.
Reclassification
Certain reclassifications have been made to the prior year financial
statements in order for them to conform to the current year presentation.
2. Internet Business Solutions (IBS)
On December 11, 1998, the Company completed the sale of substantially all of
the assets of the Company's wholly owned subsidiary. The transaction was
completed for a total of $1,000,000, of which $50,000 was deposited in an
escrow account. The balance is to be released in full to the Company upon
the termination of the statute of limitations governing certain potential
claims against IBS or the Buyer connected with the disposition of IBS's
assets, or upon the earlier agreement of the Buyer. Pursuant to the sales
agreement, the balance of $50,000 is to be paid in December 1999.
Results of operations for the year ended September 30, 1999 include total
IBS revenues and expenses of $252,000 and $229,000, respectively. The sale
of IBS resulted in a $663,530 realized gain for the Company.
24
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
3. Accounts Receivable
Accounts receivable at September 30, 1999 and 1998, and June 30, 1998
comprise the following:
September 30, September 30, June 30,
1999 1998 1998
--------- --------- ---------
Receivables $ 561,863 $ 353,757 $ 444,243
Unbilled charges 170,042 229,543 44,600
--------- --------- ---------
731,905 583,300 488,843
Less allowance for doubtful
accounts (18,453) (8,500) (17,502)
--------- --------- ---------
Total $ 713,452 $ 574,800 $ 471,341
========= ========= =========
Additions to the allowance for doubtful accounts are made as a percentage of
sales, adjusted annually based upon review of the individual accounts
receivable. Accounts are written off when deemed to be uncollectible. Total
bad debt expense was $17,945, $3,218, and $1,501 for the year ended
September 30, 1999, the three months ended September 30, 1998, and the year
ended June 30, 1998, respectively.
The Company also maintains a receivable of $50,000 from the escrow account
utilized during the sale of IBS (see Note 2).
4. Related Party Transactions
A note receivable, at the face value of $283,746, due from VDC is part of
the payment resulting from VDC's purchase of 8,563,417 shares of the
Company's Common Stock (See Note 13). The note is secured by the acquired
Common Stock and second mortgage. Principal payment of $56,749 plus interest
is due annually commencing July 1, 1999 until July 1, 2003; the note bears a
fixed interest rate of 7% per annum. No payment had been made as of
September 30, 1999.
At September 30, 1999 VDC owed the Company $18,584 for webcasting events and
$14,114 for other inter-company items.
In March 1999, the Company began incurring management fees of $5,000 per
month payable to VDC (see Note 6).
25
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ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
5. Property and Equipment
Property and equipment are summarized by major category as follows at
September 30, 1999 and 1998, and June 30, 1998:
September 30, September 30, June 30,
1999 1998 1998
---------- ---------- ----------
Network and related equipment $ 991,549 $ 918,450 $ 881,473
Furniture and fixtures 175,279 239,804 234,984
Computer software 29,176 16,801 16,802
Leasehold improvements 26,183 26,183 26,183
---------- ---------- ----------
Subtotal 1,222,187 1,201,238 1,159,442
Depreciation and amortization (836,489) (820,822) (767,961)
---------- ---------- ----------
Property and equipment, net $ 385,698 $ 380,416 $ 391,481
========== ========== ==========
Depreciation and amortization included in the statements of operations
amounted to $122,380, $52,888, and $199,458 for the year ended September 30,
1999, the three months ended September 30, 1998, and the year ended June 30,
1998, respectively.
6. Accrued Expenses
Accrued expenses are summarized by major category as follows at September
30, 1999 and 1998, and June 30, 1998:
September 30, September 30, June 30,
1999 1998 1998
---------- ---------- ----------
Accrued expenses-other $101,886 $116,313 $ 92,805
Vacation 45,462 27,720 28,520
Management fees-related party
(Note 4) 30,000 -- --
Payroll 46,693 90,955 144,995
Customer deposits 1,333 4,488 28,660
-------- -------- --------
$225,374 $239,476 $294,980
======== ======== ========
26
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
7. Notes Payable and Other Debt
Notes Payable
Notes payable-related party consist of the following:
September 30
---------------- June 30,
1999 1998 1998
---- ---- ----
Note payable to Eric Jacobs, a Director of the
Company and VDC, with original principal of
$200,000 at 12% interest. This note was paid
in full in December 1998. In May 1999, a
new note payable to Eric Jacobs with a
principal of $250,000 at 12% was issued. The
principal balance and accrued interest is due
on November 17, 1999. Interest has been paid
to date as of September 30, 1999. $250,000 $200,000 --
Notes payable to officers, interest at 6% per
annum, uncollateralized. Accrued interest
payable as of September 30, 1999 is $1,823.
The notes are subordinated to the $250,000
credit line discussed below. Notes are due on
demand thereafter. 40,500 40,500 40,500
-------- -------- -------
Total notes payable-related party $290,500 $240,500 $40,500
======== ======== =======
Line of Credit
The Company had a line of credit of $10,000 with a financial institution, of
which $8,214, and $8,872 was outstanding as of September 30, 1998, and June
30, 1998, respectively.
In 1999 the Company obtained a line of credit of $250,000 with a different
financial institution. The line of credit bears interest at the
institution's published reference rate plus 2.5%. The assets of the Company
collateralize the line of credit. There is no balance on the line of credit
as of September 30, 1999.
Restructuring of Debt
During the fiscal year ended June 30, 1998 the Company restructured its
accounts payable and debt which was a contingent requirement of the
agreement whereby VDC acquired its 51% ownership interest in the Company.
The following table summarizes the adjustments made according to the
accounts payable and debt settlement agreements:
Amount Debt Amount
Due Discharge Settled
---------- --------- --------
Entertainment Digital Network, Inc.:
Trade and unsecured claims $ 257,376 $137,817 $119,559
Notes payable 904,019 381,269 522,750
Entertainment Digital Network:
Trade and unsecured claims 179,664 109,435 70,229
Internet Worldwide Business Solutions:
Trade and unsecured claims 201,699 81,967 119,732
---------- -------- --------
Total $1,542,758 $710,488 $832,270
========== ======== ========
27
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ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
8. Income Taxes
The provision for income taxes for the fiscal year ended September 30, 1999
and June 30, 1998 consists of California franchise taxes. A reconciliation
of the expected and reported provision for income taxes follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended
September 30, 1999 September 30, 1999 June 30, 1998
------------------ ------------------ -------------
<S> <C> <C> <C>
Benefit (provision) expected based
on federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 6.1 6.1 6.1
Utilization of net operating loss
carryforwards -- (40.1) --
Valuation allowance, net (40.1) -- (40.2)
----- ----- -----
Net income tax provision 0.0% 0.0% 0.1%
===== ===== =====
</TABLE>
The Company has Federal and California net operating loss (NOL)
carryforwards totaling approximately $6.4 million and $2.8 million,
respectively, as shown below. The utilization of these NOL carryforwards is
limited due to a change of ownership as defined in the Internal Revenue
Code. As a result, the federal and state NOLs can be utilized at the rate of
$68,000 a year through the year 2012.
At September 30, 1999 the Company had NOL carryforwards for tax purposes
expiring as follows:
Year Expires Federal State
------------ ------- -----
2009 $ 204,000 --
2010 386,000 --
2011 1,181,000 $ 485,000
2012 4,262,000 2,131,000
2013 395,000 196,000
---------- ----------
Total loss carryforwards $6,428,000 $2,812,000
========== ==========
The tax effects of significant temporary differences representing deferred
tax assets as of September 30, 1999 and 1998, and June 30, 1998 are as
follows:
September 30, September 30, June 30,
1999 1998 1998
--------- --------- ---------
Deferred tax assets:
Net operating loss carryforwards $ 405,000 $ 385,000 $ 413,000
Property and equipment 24,000 28,000 28,000
--------- --------- ---------
Total deferred tax assets 429,000 413,000 441,000
Less: valuation allowance (429,000) (413,000) (441,000)
--------- --------- ---------
Net deferred tax asset -- -- --
========= ========= =========
28
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ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
9. Earnings (Loss) Per Share
Basic earnings (loss) per share are computed using the weighted-average
number of shares of Common Stock outstanding during the periods. Diluted
earnings per share are computed using the weighted-average number of common
shares and common share equivalents outstanding during the year. The
computation of net income (loss) per share was as follows:
<TABLE>
<CAPTION>
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Twelve months ended September 30, 1999:
Basic loss per share $(125,909) 19,298,846 $(0.01)
Effect of dilutive stock options and warrants -- -- --
--------- ---------- ------
Diluted loss per share $(125,909) 19,298,846 $(0.01)
========= ========== ======
Three months ended September 30, 1998:
Basic earnings per share $ 56,750 16,761,836 Nil
Effect of dilutive stock options and warrants -- 5,344,156
--------- ---------- ------
Diluted earnings per share $ 56,750 22,105,992 Nil
========= ========== ======
Twelve months ended June 30, 1998:
Basic and diluted loss before extraordinary item $(192,352) 7,936,358 $(0.02)
Extraordinary item 710,488 -- 0.09
--------- ---------- ------
Basic and diluted net loss per share $ 518,136 7,936,358 $ 0.07
========= ========== ======
</TABLE>
At September 30, 1999, options and warrants for the purchase of 7,142,668
common shares at prices ranging from $0.10 to $1.25 were antidilutive and
therefore not included in the computation of diluted earnings per share.
At September 30, 1998 options and warrants, for the purchase of 1,391,643
common shares at prices ranging from $.375 to $2.50 per share, for which the
exercise price was greater than the average market price of common shares
were not included in the computation of diluted earnings per share.
At June 30, 1998 options and warrants for the purchase of 12,126,944 common
shares at prices ranging from $.10 to $2.50 per share were antidilutive and
therefore not included in the computation of diluted earnings per share.
29
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
10. Commitments
Lease Commitments
As of September 30, 1998, the Company leases office space and certain
equipment under various noncancelable capital and operating leases. The
operating lease is effective for two years with yearly options thereafter
for not more than five years. The lease began in January 1999. The capital
leases begin expiring in March 2000. The equipment under lease secures the
capital lease. Future minimum lease payments required under the
noncancelable leases are as follows:
Operating Capital
Year Ending September 30: Leases Leases
-------- -------
2000 $155,703 $12,795
2001 159,016 4,239
2002 159,016 --
2003 159,016 --
2004 39,754 --
-------- -------
Total minimum lease payments $672,505 17,034
========
Less amount representing interest 1,409
-------
Present value of net minimum lease payments 15,625
Less current portion 11,580
-------
Long-term portion $ 4,045
=======
Total rental expense for all operating leases for the year ended September
30, 1999, the three months ended September 30, 1998, and the year ended June
30, 1998 amounted to $137,521, $52,146, and $195,925, respectively.
Employment Contracts
The Company and its subsidiaries have entered into employment contracts with
several of their key employees that expire at different times through
December 31, 2000. At September 30, 1999 the commitment under all of the
contracts was approximately $495,000.
Annual Volume Commitment
The Company has entered into an agreement with a major telecommunications
company for network usage discounts. The Company committed to a two-year
term commencing March 31, 1998 to a $480,000 annual volume commitment. As of
September 30, 1999, the commitment remaining was approximately $240,000.
30
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
11. Concentration of Credit Risk
Cash
The Company maintains cash balances primarily with two major financial
institutions and, as such, from time to time the balances may be in excess
of the federally insured limit of $100,000 per institution.
12. Employee Benefit Plans
The Company has a 401(k) Income Deferral Plan (the Plan) for employees who
have completed three months of service and are 21 years or older. The
Company may make a discretionary contribution to the Plan each year,
allocable to all Plan participants. However, the Company elected to make no
contributions for the year ended September 30, 1999. Administrative fees for
the plan totaled $2,075.
13. Stockholders' Equity
Investment by Visual Data Corporation
On June 20, 1998, the Company entered into an agreement with VDC, a public
company, to sell a 51% (8,563,417 shares) ownership interest in the
Company's Common Stock. The form of payment consisted of:
Cash $ 698,004
VDC stock: 75,000 shares (valued at $3.75 per share) 281,250
VDC warrants: 50,000 (valued at $2.74 per warrant) 137,000
Note receivable - secured Common Stock (see Note 4) 283,746
----------
1,400,000
Less expenses 86,000
----------
Net investment $1,314,000
==========
In addition, the Company issued a blanket mirror option covering 6,542,722
shares (3,304,979 options and 3,237,743 warrants), which entitles VDC to
acquire shares equal to those actually purchased upon exercise of options
and warrants by others at $.10 per share. In addition, the Company granted
the investment banker who organized the transaction 750,000 warrants at an
exercise price of $.145. The transaction was contingent upon certain
restructuring of accounts payable debt the Company had incurred over the
prior three years (See Note 7).
31
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
13. Stockholders' Equity, continued
Regulation D Equity Placement
In July 1997, the Company offered up to a maximum of 3,750,000 units (each
consisting of one share of Common Stock and one warrant) for T Bar W Ranch
Investments (T Bar) to purchase shares of the Company at a price of $.20 per
unit. Each warrant is exercisable until the fifth anniversary of the date of
its issuance and entitles the holder to purchase one share at an exercise
price of $1.00 per share. The warrants had an antidilution clause in their
terms. T-Bar invested $147,600 to acquire 738,000 units. Expenses on the
offering amounted to $20,480 resulting in net proceeds of the Company of
$127,120. The Company negotiated an agreement with T-Bar in June 1998 to
reduce the warrant exercise price to $.10 per share in exchange for removal
of the antidilution clause.
Warrants
At September 30, 1999, the Company has reserved 1,971,210 common shares for
potential exercise of outstanding warrants issued in connection with various
equity and debt financing activities as follows:
Number of Expiration
Warrants Date Price
-------- ---- -----
September 30, 1999:
Conversion of notes, August 1997 974,000 2002 1.250
Senior note warrants, November 1996 11,605 2003 0.250
VDC mirror warrants 985,605 1999-2003 0.100
---------
Total warrants 1,971,210
=========
14. Stock Compensation Plans
The Company adopted a stock option plan on April 3, 1998 which allows the
Company to grant incentive or nonqualified options up to 3,000,000 shares of
Common Stock to its employees, board members, and certain other consultants
in order to motivate them to maintain their commitment to the Company at
this stage of its development. In February 1999, the plan was amended to
allow the Company to grant up to 5,000,000 shares of Common Stock.
Additionally, the Company has stock options outstanding under two
nonqualified stock option plans adopted in 1995.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for options where the exercise
price has equaled the stock fair value on the date of grant. During fiscal
1999, an employee was granted options to acquire 75,000 shares of Common
Stock at exercise prices below the fair value at the date of grant. Total
compensation expense recognized for these grants in fiscal 1999 was $50,489,
and unearned compensation in the amount of $45,511 relating to these options
was recorded as a reduction in stockholders' equity.
32
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
14. Stock Compensation Plans, continued
Had compensation expense been determined for stock options granted during
three months ended September 30, 1998 and the twelve months ended June 30,
1998, based on the fair value at grant dates consistent with SFAS No. 123,
the Company's condensed Pro Forma Statement of Operations for those periods
would have been as follows:
<TABLE>
<CAPTION>
September 30, September 30, June 30,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported $(125,909) $56,750 $518,136
========= ======= ========
Pro forma $(376,833) $46,998 $505,065
========= ======= ========
Basic and diluted income (loss) per share:
As reported $ (0.01) Nil $ 0.07
========= ======= ========
Pro forma $ (0.02) Nil $ 0.06
========= ======= ========
</TABLE>
The pro forma amounts were estimated using the Black-Scholes option-pricing
model with the following assumptions for the 12 months ended September 30,
1999, the 3 months ended September 30, 1998 and the 12 months ended June 30,
1998, respectively.
September 30, 1999 September 30, 1998 June 30, 1998
------------------ ------------------ -------------
Interest rate 4.45% - 5.80% 5.5% 5.5%
Dividend yield 0% 0% 0%
Expected volatility 197% - 214% 228% 228%
Expected life in years 5 4.5 4.5
The following table summarizes employee stock option plan activity for the
twelve months ended September 30, 1999, the three months ended September 30,
1998 and the twelve months ended June 30, 1998:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998 June 30, 1998
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period 6,271,458 $0.11 5,651,458 $0.12 787,146 $0.92
Granted 1,525,000 0.81 620,000 .10 5,346,479 0.10
Canceled 30,000 0.11 -- -- 482,167 1.25
Exercised 2,595,000 0.10 -- -- -- --
---------- --------- ---------
Outstanding 5,171,458 0.34 6,271,458 0.11 5,651,458 0.12
Eligible for exercise, end of period 4,901,458 0.31 6,271,458 0.11 5,651,458 0.12
Weighted average fair value of options
granted during the year -- 0.81 -- 0.10 -- 0.10
</TABLE>
33
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
14. Stock Compensation Plans, continued
The following table summarizes information regarding stock options
outstanding at September 30, 1999:
Weighted Weighted Number Average
Exercise Number Average Average Exercisable Exercise
Price Outstanding Remaining Life Exercise Price at 9/30/99 Price
------ ----------- -------------- -------------- ---------- -----
$1.250 74,500 2.1 years $1.250 74,500 $1.250
1.000 1,195,000 4.5 years 1.000 1,000,000 1.000
0.145 800,000 4.0 years 0.145 800,000 0.145
0.110 260,479 2.0 years 0.110 245,479 0.110
0.100 2,841,479 4.5 years 0.100 4,781,479 0.100
--------- ---------
5,171,458 6,901,458
========= =========
15. Supplemental Cash Flow Information
The following table presents additional cash flow information for the year
ended September 30, 1999, the three months ended September 30, 1998, and the
year ended June 30, 1998:
September 30, September 30, June 30,
1999 1998 1998
------- ------- --------
Interest paid $22,773 $ 3,317 $ 97,193
Income taxes paid 7,434 -- 2,400
Assets and lease obligations
capitalized -- 15,974 --
Common Stock issued for consulting
services -- -- 421,244
Common Stock issued for settlement
of note and accrued interest -- -- 375,000
Stock option-related compensation 50,489 -- --
16. Segment Information
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," as of September 30, 1999. SFAS No. 131
establishes reporting standards for an enterprise's operating segments and
related disclosures about its services, geographic areas and major
customers.
The Company's operations involve developing and marketing integrated audio
and video production applications for the entertainment industry. As such,
the Company has a single reportable segment, digital communications. The
Company's management relies on an internal management accounting system that
presents various data for management to run the business. Company management
makes financial decisions and allocates resources based on the information
it receives from this internal system.
34
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
NOTES TO CONSOLIDATED STATEMENTS, Continued
------------
16. Segment Information, continued
All material balances related to Company sales, primary business activities,
and location of property, plant, and equipment are within the United States.
For the year ended September 30, 1999, the three months ended September 30,
1998, and the year ended June 30, 1998, no single customer accounted for 10%
or more of the Company's net sales.
17. Year 2000
Because many computer systems use only two digits to record the year in date
field, such systems may not be able to accurately process dates including
the year 2000 and after.
The Company has taken measures to prepare itself for this uncertainty. The
cost of this compliance effort has been expensed as incurred and funded by
cash flows from operations. It is, however, difficult to assess with any
accuracy the degree to which the Company's vendors and customers have also
prepared themselves or the degree to which this issue may potentially affect
the Company's future operations.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's accountants
regarding accounting and financial disclosure.
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following sets forth the names, ages and current positions with the Company
held by Directors, Executive Officers and significant employees, together with
the year such positions were assumed. Tom Kobayashi, the Chief Executive
Officer, and David Gustafson, President and Chief Operating Officer, are
brothers-in law. Other than as described in the preceding sentence, there is no
immediate family relationship between or among any of the Directors, Executive
Officers or significant employees. We are not aware of any arrangement or
understanding between any Director or Executive Officer and any other person
pursuant to which he was elected to his current position.
Randy S. Selman, age 43, has served as the Chairman of the Board of Directors of
EDN since July 1998. Mr. Selman also has served as the Chief Executive Officer,
President, and Chairman of the Board for VDC since its inception in May 1993,
and since September 1996, as VDC's acting Chief Financial Officer.
Brian K. Service, age 51, has served on the Board of Directors and presides over
the Audit and Remuneration Committees of the Board of Directors since 1998. Mr.
Service is an international business consultant with clients in North and South
America, the United Kingdom, Asia, Australia and New Zealand. Mr. Service has
served as a member of the Board of Directors and on the Audit and Compensation
Committees of VDC since July 1997. In addition to becoming a Director in 1998,
Mr. Service was appointed the CFO and Secretary of Travel Dynamics in 1999.
Effective September 15, 1999, Mr. Service was appointed CEO of 3D Systems, Inc.,
a publicly traded company.
35
<PAGE>
Tom Kobayashi, age 70, has served as a Director and Chief Executive Officer of
EDN from 1992 to present. Mr. Kobayashi also has served on the Executive
Committee of EDN since August 1998. From June 1992 to July 1998, Mr. Kobayashi
served as the Chairman of the Board of Directors of EDN. Mr. Kobayashi is a
member of the American Engineering Society, the Society of Motion Picture and
Television Engineers (SMPTE), the Society of Professional Audio Recording
Studios (of which he has been a member of the Board of Governors for over twelve
years), the Academy of Motion Picture Arts and Sciences and the Academy of
Television Arts and Sciences.
David Gustafson, age 53, has served as a Director of the Company since 1992. He
has held his current position on the Executive Committee of EDN since August
1998. He has occupied his current positions as the President, Secretary and
Chief Operating Officer of EDN since March 1996, and previously served as Vice
President, Marketing and Sales, from July 1992 to March 1996.
Eric Jacobs, age 52, has been a member of the Board of Directors since December
1998. He has served on the Board of Directors of Visual Data Corporation since
July 1997 and has served as Secretary since February 1999. From March 1996 until
August 1997, Mr. Jacobs was Vice President and General Manager of VDC's wholly
owned subsidiary, HotelView Corporation and thereafter he has served as Vice
President and General Manager of their wholly owned subsidiary, ResortView
Corporation. Since 1976, Mr. Jacobs has served as the Chairman of the Miami
Beach Visitor and Convention Authority and since September 1995 as Chairman of
the Greater Miami and the Beaches Hotel Association. Since 1972, Mr. Jacobs has
been a member of Miami Beach Chamber of Commerce and has served as its Chairman
since September 1996.
Alan M. Saperstein, age 40, has served as a Director and on the Remuneration
Committee of the Board of Directors since 1998. Mr. Saperstein also has served
as the Executive Vice President, Treasurer and a director of VDC since its
inception in May 1993. Mr. Saperstein also provides consulting services for
corporations that have set up their own sales and training video departments.
Tom Scott, age 55, has served as the Vice-President and Chief Technology Officer
of the Company since 1992. Mr. Scott is active in numerous professional
organizations and standards committees, including the Audio Engineering Society,
Society of Motion Picture and Television Engineers, the Society of Professional
Audio Recording Studios, the National Academy of Recording Arts and Sciences,
and the Academy of Motion Picture Arts and Sciences. He currently chairs the
Audio subcommittee for the Digital Cinema committee of the SMPTE.
Employment Contracts
We maintain employment contracts with key management and employees as listed
below. All referenced contracts contain identical non-competition provisions:
Name, Title Date of Agreement Expiration Date
- ----------- ----------------- ---------------
Tom Kobayashi, CEO September 1, 1995 December 31, 2000
36
<PAGE>
David Gustafson, President COO September 1, 1995 December 31, 2000
Tom Scott, VP Engineering September 1, 1995 December 31, 2000
Each contract provides that for the period following the date of the employment
agreement, the employee will not, directly or indirectly, within any county,
city or part thereof and other areas in the United States of America
(collectively, the "Locations"), so long as the Company continues to be engaged
in the same or similar business or activity (the "Business") in such Location:
(i) own, manage, operate, control, or be connected in any manner with the
ownership, management, operation or control of any person or entity that engages
in the same or similar type of Business as the Business or engages in a business
competitive with the Business (a Competitive Business), which includes but is
not limited to, acting as a director, officer, agent, employee, consultant,
partner or stockholder of a Competitive Business; (ii) engage in any activity
which is the same as, similar to or in competition with the Business; (iii)
interfere with, disrupt or attempt to disrupt the business relationship,
contractual, employment or otherwise, between the Company and any customer or
prospective customer, supplier, lessee or employee of the Company, including
without limitation the customers and suppliers of the Business prior to the date
of the employment agreement; (iv) solicit employment for or of employees of the
Company or induce any employee to leave the employ of the Company; (v) lend or
allow his name or reputation to be used by or in connection with any Competitive
Business; or (vi) otherwise allow his skill, knowledge or experience to be used
in or by any Competitive Business.
Each employment agreement provides that the employee may invest in up to 5% of
the shares of any public corporation without violating the non-competition
provisions. Such non-competition provisions will survive the termination of the
employment agreement, excepting: (a) the employee exercises his right to
terminate the employment agreement upon a sale or transfer of substantially all
of the assets of the Company, or a change in control of the Company, (b) when
the Company exercises its right to terminate the employment agreement upon 30
days written notice, or (c) the Company breaches the employment agreement and
fails to cure such breach within thirty (30) days of receipt of written notice
thereof. A court applying California law may decline to enforce (or may
partially enforce) these non-competition provisions.
Compliance with Section 16(a) of the Exchange Act
Under the Securities Laws of the United States, the Company's Directors, its
Executive (and certain other) Officers, and any persons holding more than ten
percent (10%) of the Company's Common Stock are required to report their
ownership of the Company's Common Stock and any changes in that ownership to the
Securities and Exchange Commission and the NASDAQ stock market. Specific due
dates for these reports have been established and the Company is required to
disclose in this report any failure to file by these dates during the preceding
fiscal year.
All of these filing requirements were satisfied by its Officers and Directors
and ten percent (10%) holders, except the following: prior to the VDC
Transaction, (See Part I, Item 1 - Description of Business - Subsidiaries -
Investment by Visual Data Corporation) Charles Clark, a Director from July 7
1997 to April 2, 1998, and John Wampler, a 10% holder by definition of Section
16, failed to file with the Commission, on a timely basis, an Initial Statement
of Beneficial Ownership of Securities on Form 3. Additionally, Mr. Clark may
have failed to file on a timely basis subsequent Statements of Changes in
Beneficial Ownership on Form 4. In making these statements, the Company has
relied on the representation of its Directors and Officers or copies of the
reports that they have filed with the Commission. Due to an administrative
oversight Messrs. Selman, Saperstein, Service and Goodman failed to file on a
timely basis an Initial Statement of Beneficial Ownership of
37
<PAGE>
Securities on Form 3, and subsequent Statements of Changes in Beneficial
Ownership on Form 4. As of the date of this report, these forms have been filed.
ITEM 10 EXECUTIVE COMPENSATION
The following table sets forth information concerning all annual compensation
paid to our Chief Executive Officer and each of the two highest paid persons
other than the Chief Executive Officer who were officers or directors for the
fiscal year ended September 30, 1999:
Name and title of individual Additional
or identity of group Year Salary Bonus remuneration
-------------------- ---- ------ ----- ------------
Tom Kobayashi 1999 $132,708 (1) -- --
Chief Executive Officer 1998 131,000
and Director 1997 132,000
David Gustafson 1999 $131,831 (2) -- --
President and Chief Operating Officer 1998 131,000
and Director 1997 139,000
Tom Scott 1999 $111,403 (3) -- --
Vice-President, 1998 90,000
Chief Technology Officer 1997 94,000
1999 $375,942 -- --
1998 352,000
Total of Above 1997 365,000
(1) Mr. Kobayashi has an Employment Agreement with the Company, expiring
December 2000, with a base salary of $11,666 per month. FY 1999
compensation includes $6,000 of auto allowance.
(2) Mr. Gustafson has an Employment Agreement with the Company, expiring
December 2000, with a base salary of $11,333 per month. FY 1999
compensation includes $6,000 of auto allowance.
(3) Mr. Scott has an Employment Agreement with the Company that provides for a
three-and-one-half-year term expiring December 2000, with a base salary of
$10,000 per month.
With the exception of Mr. Service, who has a one-year consulting contract under
which he receives $9,000 per month, Directors of the Company do not receive any
compensation for their services as directors. They receive reimbursement from
the Company for reasonable out-of-pocket travel expenses incurred in connection
with attending director meetings in person.
38
<PAGE>
Stock Options
As a result of the recapitalization, these options were converted into options
to purchase Common Stock at a conversion of .87495 per share for each Company
share, resulting in 230,479 options outstanding on September 30, 1999 at a price
of $.11 per share. These fully vested options expire on September 29, 2000.
There were no options exercised during the period.
Our initial nonqualified option plan was terminated as of April 3, 1998. At that
time, the Board of Directors of the Company adopted and approved the Company's
1998 Stock Option Plan (the "Plan") for its employees, board members and certain
other consultants in order to motivate them to maintain their commitment to the
Company. Options under this Plan may be either Incentive Stock Options or
Nonstatutory Stock Options and may be exercised no later than five (5) years
from the date of their grant. The Board of Directors of the Company administers
the Plan. The Board has directed the officers of the Company to reserve three
million (3,000,000) shares of Common Stock for issuance upon exercise of options
granted pursuant to the Plan. As of September 30, 1999, we had granted options
under the Plan to purchase a total of 2,041,500 shares of Common Stock at a
price of $.10 per share. There were 1,297,500 options exercised during fiscal
year ended September 30, 1999. The Plan is currently subject to the approval of
EDN's shareholders at its upcoming annual shareholders' meeting.
Other than as discussed herein, we do not have any pension, profit sharing,
stock bonus, or other benefit plans. In addition, we make available certain
non-monetary benefits to its executive officers with a view to acquiring and
retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses.
The following table sets forth certain information concerning the granting of
stock options during the fiscal year ended September 30, 1999 to each of the
named Executive Officers:
Shares of Common % of Total Options
Stock Underlying Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price Date
- ---- --------------- -------------- ----- ----
Tom Kobayashi 120,000 8% $1.00 3/19/04
David Gustafson 120,000 8% $1.00 3/19/04
Tom Scott 120,000 8% $1.00 3/19/04
-------
Total 360,000
=======
There were no options exercised during the fiscal year.
ITEM 11 SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of September 30, 1999, regarding
shares of Common Stock (a) held of record and (b) that the named owner has the
right to acquire within sixty days from options, warrants, rights, conversion
privilege or similar obligations by: (i) officers or directors; (ii) all
officers and directors as a group; and (iii) each shareholder who owns more than
5% of any class of our securities, including those shares subject to outstanding
39
<PAGE>
options and warrants. Unless indicated otherwise, each shareholder exercises
sole voting and investment power with respect to shares owned.
Amount Owned or
Title Name and Address Right to Acquire Percent
of Class of Owner Within 60 Days of Class(1)
- -------- -------- -------------- -----------
Common Tom Kobayashi 932,474(2) 4%
One Union Street
San Francisco, CA 94111
Common David Gustafson 558,684(3) 2%
One Union Street
San Francisco, CA 94111
Common Tom Scott 542,802(4) 2%
One Union Street
San Francisco, CA 94111
Common Randy Selman 300,000(5) 1%
1291 SW 29th Avenue
Pompano Beach, FL 33069
Common Alan Saperstein 300,000(6) 1%
1291 SW 29th Avenue
Pompano Beach, FL 33069
Common Brian Service 300,000(7) 1%
One Union Street
San Francisco, CA 94111
Common Eric Jacobs 350,000(8) 2%
1291 SW 29th Avenue
Pompano Beach, FL 33069
Common Visual Data 11,775,648 51%
Common All officers and directors as 3,283,960 14%
a group
40
<PAGE>
(1) Based upon 23,186,398 shares of Common Stock issued and outstanding as of
September 30, 1999.
(2) Includes right to acquire 232,426 shares within 60 days from options.
(3) Includes right to acquire 547,923 shares within 60 days from options.
(4) Includes right to acquire 127,917 shares within 60 days from options.
(5) Includes right to acquire 300,000 shares within 60 days from options,
excludes VDC shares.
(6) Includes right to acquire 300,000 shares within 60 days from options,
excludes VDC shares.
(7) Includes right to acquire 300,000 shares within 60 days from options,
excludes VDC shares.
(8) Includes right to acquire 350,000 shares within 60 days from options,
excludes VDC shares.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Investment Banking and Brokerage Services
All of the agreements described below were negotiated with unrelated third
parties on an arms-length basis.
Century Financial Partners, Inc. Pursuant to a Consulting Agreement, dated July
31, 1995, between EDN and Century, EDN hired Century to advise EDN with respect
to a merger of EDN with an entity whose securities were publicly traded. Such
consulting agreement granted Century the exclusive right to represent EDN, on a
best efforts basis, to prospective investors for financing and general corporate
advisory services for a period of three years, and a right of first refusal to
provide investment banking services for a period of three years.
As payment for Century's services, the consulting agreement provided that EDN
would grant to Mr. Onggara, an investor in Century, and a shareholder of the
Company holding an aggregate of 100,000 shares of Common Stock, an option to
purchase 1,000,000 shares of the Common Stock of any publicly traded entity into
which EDN would merge, at $1.25 per share, which option shares would be
registered immediately by EDN with the SEC on Form S-8. Management does not
believe that such a registration is legally possible due to the fact that Mr.
Onggara is not an employee of EDN. On August 20, 1997, we provided warrants for
1,000,000 shares of EDN's Common Stock at $1.25 per share as part of a
negotiated settlement of Mr. Onggara's outstanding loan to EDN of $340,000. (See
Short-Term Loans from Officers, Directors and Shareholders in Item 12).
Liviakis Financial Communications, Inc. Pursuant to a Consulting Agreement,
dated as of January 12, 1996, between EDN and Liviakis, Liviakis agreed to
provide public relations consulting services to EDN for a term of one year
ending on January 11, 1997. As payment for its services, Liviakis received
390,000 unregistered shares of Common Stock from us. At the end of the term of
the consulting agreement, Liviakis could demand that we use its best efforts to
register such shares with the Securities and Exchange Commission. Pursuant to an
additional Consulting Agreement effective as of January 12, 1997, between EDN
and Liviakis, Liviakis agreed to provide consulting services to the Company for
a term of one year ending on January 2, 1998. As payment for its services,
Liviakis received 490,000 shares of Common Stock. At the end of the term of the
consulting agreement, Liviakis was to have the same demand registration rights
41
<PAGE>
to register such shares with the SEC as given to investors in a private
placement offering by EDN of Common Stock in December, 1996. On September 18,
1997, Liviakis resigned as EDN's investor relations consultant.
Morgan Fuller Capital Group L.L.C. Pursuant to engagement letters dated May 20,
June 25, June 28, June 28, November 19 and November 21, 1996, we retained Morgan
Fuller to provide investment banking services to and raise capital for EDN. As
of October 10, 1997, EDN had: (i) granted Morgan Fuller 250,000 Warrants at an
exercise price of $6.37 per share for general investment advisory services; (ii)
delivered the Company's Senior Secured Notes payable to Morgan Fuller in the
aggregate principal amount of $1,000,000 (for resale to investors); (iii) paid
Morgan Fuller a loan fee of five percent (5%) of the amount of the Senior
Secured Notes; and (iv) granted Morgan Fuller warrants to purchase 39,255 shares
of Common Stock at an exercise price of $4.25 and warrants to purchase 25.205
shares of Common Stock at an exercise price of $3.69 in connection with the sale
of participation in the notes (the "Participation"). The June 28, 1996
engagement letter provides that in the event that we fail to proceed with a
subsequent Regulation S financing, the Company is obligated to pay to Morgan
Fuller a cash fee of $140,000 and $200,000 in Warrants to purchase Common Stock
at an exercise price equal to the lesser of: (i) $3.00; or (ii) sixty percent
(60%) of the average closing bid price of the Common Stock during a consecutive
ten (10) day period immediately preceding the issuance date of the Warrants. In
connection with the extension of the Participation, we agreed to pay to Morgan
Fuller a cash fee of one and one-half percent (1.5%) of the amount of the Senior
Secured Notes and granted Morgan Fuller three-year warrants to purchase 55,970
shares of Common Stock at an exercise price of $2.68. In connection with a Loan
Modification Agreement effective June 30, 1997, we amended our agreement with
Morgan Fuller and agreed to re-price the warrants held by Morgan Fuller to
$1.50.
On June 20, 1998, Morgan Fuller agreed to accept 75,000 shares of VDC stock at
$3.75 per share, and warrants to purchase 50,000 shares of VDC stock at $2.74
per share, totaling $418,250, in consideration of forgiving the balance of the
debt remaining to Morgan Fuller, totaling $331,750. Additionally, the EDN
warrants held by Morgan Fuller and the noteholders were re-priced at the
exercise price of $.25 per share.
Consulting Agreement with Charles W. Clark. On June 30, 1997, we entered into a
consulting agreement with Mr. Clark, pursuant to which Mr. Clark agreed to serve
the Company in advising and assisting in the structuring of debt and
liabilities, joint venture, acquisitions or merger partners, business
development and developing long term financial plans. We agreed to pay Mr. Clark
for re-structuring and re-organizing our senior notes and debts on the balance
sheet 400,000 shares of Common Stock. These shares were issued to Mr. Clark and
registered with the Securities and Exchange Commission under a Form S-8
registration on July 25, 1997. This agreement was mutually terminated as of
November 17, 1997. Charles Clark was elected to the Board of Directors of EDN,
Inc., on July 7, 1997. On April 2, 1998, Charles W. Clark submitted his
resignation as a director of EDN, Inc.
Consulting Agreement with B.K. Service International Business Consultancy. On
July 1, 1998, we entered into a consulting agreement with Mr. Service, pursuant
to which Mr. Service agreed to serve EDN in preparing SEC filings, corporate
governance, financial planning, cash management, and investor relations. We have
renewed the annual contract for $9,000 per month. The term of this renewal is
for one year.
42
<PAGE>
Consulting Agreement with Mackenzie Shea Inc. On June 16, 1998, we entered into
an agreement with Mackenzie Shea, Inc. ("MSI"), pursuant to which MSI introduced
EDN to Visual Data Corporation and assisted in effecting the closing of the VDC
Purchase Agreement. We agreed to compensate MSI for its services in a lump sum
of $66,000. MSI also received warrants to purchase an aggregate of 750,000
shares of Common Stock at a per share price of $0.145. These warrants were
exercised in May, 1999.
Short-Term Loans from Officers, Directors and Shareholders
Several of the officers and directors of EDN have made short term loans to the
Company, pursuant to promissory notes, each providing for maturity ninety days
after the date thereof and simple interest of 6% on unpaid principal. Such
promissory notes are overdue. Mr. Kobayashi made loans in the aggregate amount
of $36,000, as evidenced by promissory notes dated from June 11, 1993 to
February 10, 1994. As of September 30, 1999, unpaid principal (excluding
interest) of $24,000 was due on Mr. Kobayashi's notes. Mr. Scott, the Vice
President and Chief Technology Officer of EDN, made loans in the aggregate
amount of $43,050, as evidenced by promissory notes dated from August 6, 1993 to
June 12, 1995. As of September 30, 1999, unpaid principal (excluding interest)
of $16,500 was due on Mr. Scott's notes. Each of these individuals has agreed
not to declare default under these notes for an indefinite period and to accept
repayment by the Company at a future date.
Mr. Onggara has made three loans to the Company in the aggregate amount of
$425,000, pursuant to: (a) a promissory note in the principal amount of $250,000
dated February 8, 1996 with a maturity date of August 8, 1996; (b) a promissory
note in the principal amount of $100,000 dated April 18, 1996 with a maturity
date of October 18, 1996; and (c) a promissory note in the principal amount of
$75,000 dated May 20, 1996 with a maturity date of November 20, 1996. All such
promissory notes provide for interest of 7% on unpaid principal and are secured
by a subordinate security interest in the accounts receivable, chattel paper,
accounts and certain other assets of EDN. In August 1996, we made aggregate
principal payments of $120,000 to Mr. Onggara on the first note. Mr. Onggara has
verbally agreed to extend the maturity date of such notes for an indefinite
period and to accept repayment by EDN at a future date, and advanced $35,000 to
the Company under the first note. On August 20, 1997, an agreement was reached
with Mr. Onggara whereby the $340,000 in outstanding principal owed to Mr.
Onggara, plus accrued interest of $35,000, was converted to shares of EDN Common
Stock at $.375 per share, resulting in 1,000,000 shares. EDN addressed an
unresolved commitment of options by issuing 1,000,000 warrants priced at $1.25
each. The warrants are convertible over 3 years and are transferable and
divisible.
43
<PAGE>
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Type of Exhibit
----------- ---------------
(10) Material Contracts.
(a) Form 8-K dated November 5, 1998 to report change in
fiscal year. PREVIOUSLY FILED.
(b) Form 8-K dated December 4, 1998 and amended Form 8-K/A
dated December 11, 1998 to report the sale of EDN's
wholly owned subsidiary Internet Business Solutions,
Inc. PREVIOUSLY FILED.
(c) Form 8-K dated February 23, 1999 to report name change
from EDnet, Inc. to Entertainment Digital Network, Inc.
This form also reported the change in domicile from
Colorado to Delaware. PREVIOUSLY FILED.
(d) Form S-3 dated April 30, 199, a prospectus for 2,900,439
shares of Common Stock in anticipation of the exercise
of previously issued warrants, and as amended at May 12,
1999. PREVIOUSLY FILED.
(27) Financial Data Schedule. FILED HEREWITH.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Entertainment Digital Network, Inc.
(Registrant)
Date: December 29, 1999 By: /s/ Tom Kobayashi
--------------------------------------
Tom Kobayashi, Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: December 29, 1999 By: /s/ Tom Kobayashi
--------------------------------------
Tom Kobayashi, Chief Executive Officer
and Director
44
<PAGE>
Date: December 29, 1999 By: /s/ David Gustafson
--------------------------------------
David Gustafson,President, Chief
Operating Officer and Director
Date: December 29, 1999 By: /s/ Brian Service
--------------------------------------
Brian Service, Director
Date: December 29, 1999 By: /s/ Randy Selman
--------------------------------------
Randy Selman,
Chairman of the Board of Directors
45
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<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 282,862
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