UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1999
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACTS
For the transition period from ______________ to ______________
Commission file number 000-21659
---------------------------------
ENTERTAINMENT DIGITAL NETWORK, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 94-3173300
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Union Street, San Francisco, California 94111
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(415) 274-8800
- -------------------------------------------------------------------------------
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 23,201,398 shares of Common Stock at
December 31, 1999
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
1
<PAGE>
Part I. FINANCIAL INFORMATION
<TABLE>
Entertainment Digital Network, Inc.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and September 30, 1999
<CAPTION>
ASSETS 12/31/99 09/30/99
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 150,839 $ 282,862
Accounts receivable, net of allowance for doubtful accounts
of $15,108 and $18,453 at December 31, 1999 and
September 30, 1999, respectively 783,395 713,452
Accounts and interest receivable - related party 9,661 32,698
Accounts receivable, escrow 50,000 50,000
Inventories, net 976,909 576,433
Prepaid expenses 42,177 45,952
Other current assets 3,238 2,500
----------- -----------
TOTAL CURRENT ASSETS $ 2,016,219 $ 1,703,897
----------- -----------
Property and equipment, net 429,275 385,698
Other assets 7,659 5,254
----------- -----------
TOTAL ASSETS $ 2,453,153 $ 2,094,849
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,191,498 $ 628,959
Accrued expenses 217,685 225,374
Notes payable - related party 290,500 290,500
Current portion of capital lease obligations 8,475 11,580
----------- -----------
TOTAL CURRENT LIABILITIES 1,708,158 1,156,413
----------- -----------
Capital lease obligations 2,568 4,045
----------- -----------
TOTAL LIABILITIES 1,710,726 1,160,458
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock; par value $0.001 per share
Authorized 50,000,000 shares; 23,201,398 and 23,186,398
issued and outstanding at December 31, 1999 and
September 30, 1999, respectively 22,521 22,506
Capital paid in excess of par value of Common Stock 7,502,876 7,501,391
Secured note receivable (250,000) (283,746)
Unearned compensation (38,044) (45,511)
Accumulated deficit (6,494,926) (6,260,249)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 742,427 934,391
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,453,153 $ 2,094,849
=========== ===========
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Entertainment Digital Network, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months ended December 31, 1999 & 1998
<CAPTION>
1999 1998
(Unaudited) (Unaudited)
------------ ------------
Revenue:
<S> <C> <C>
Usage & hosting fees $ 426,818 $ 413,395
Equipment sales 347,187 244,521
Installation and monthly fees 185,515 155,371
Webcasting 171,842 --
Rental fees 27,133 18,090
Web design and consulting -- 191,661
Other 2,811 4,520
------------ ------------
1,161,306 1,027,558
Cost of sales 942,290 704,882
------------ ------------
Gross Profit 219,016 322,676
Sales and marketing expenses 115,237 136,841
General and administrative expenses 336,906 279,732
------------ ------------
452,143 416,573
Loss from operations before other income (expenses)
and provision for income taxes (233,127) (93,897)
------------ ------------
Other income:
Interest income 8,171 5,644
Interest expense (9,721) (6,142)
Gain on sale of subsidiary assets -- 663,530
------------ ------------
Total other income (expense), net (1,550) 663,032
------------ ------------
Income (loss) before provision for income taxes (234,677) 569,135
Income taxes -- 4,000
------------ ------------
Net income (loss) (234,677) 565,135
------------ ------------
Basic income (loss) per share:
Net income (loss) (0.01) 0.03
Diluted income (loss) per share:
Net income (loss) (0.01) 0.02
Weighted-average number of shares outstanding 23,188,898 16,761,836
Effect of dilutive stock options and warrants 11,886,878
------------ ------------
23,188,898 28,648,714
============ ============
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Entertainment Digital Network, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the Three Months ended December 31, 1999 and 1998
<CAPTION>
12/31/99 12/31/98
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income (234,677) $ 565,135
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 34,703 53,195
increase in reserve for bad debt 3,750 --
Noncash compensation expenses 7,467 --
Gain from sale of assets - IBS -- (663,530)
(Increase) decrease in accounts receivable (50,656) 49,418
Increase in inventory (400,476) (26,763)
Decrease (increase) in prepaid expenses and other assets 632 (67,479)
Increase (decrease) in accounts payable and accrued expenses 554,850 (222,558)
----------- -----------
Net cash (used) in operating activities (84,407) (312,582)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (78,280) (4,220)
Proceeds from sale of assets -- 1,000,000
----------- -----------
Net cash (used) provided by investing activities (78,280) 995,780
----------- -----------
Cash flows from financing activities:
Principal payments on debt -- (158,214)
Repayment on settlement of claim in equity -- (50,000)
Payments on capital leases (4,582) (3,981)
Proceeds from exercise of stock options/warrants 1,500 --
Proceeds from Secured Note Receivable 33,746
----------- -----------
Net cash provided (used) by financing activities 30,664 (212,195)
----------- -----------
Net (decrease) increase in cash (132,023) 471,003
Cash at beginning of period $ 282,862 88,470
Cash at end of period $ 150,839 $ 559,473
=========== ===========
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
ENTERTAINMENT DIGITAL NETWORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The interim, condensed, consolidated financial statements of Entertainment
Digital Network, Inc. (the "Company") included herein have been prepared in
conformity with generally accepted accounting principles. The principles applied
are consistent in all material respects with those used in the Company's Annual
Report on Form 10-KSB for the period October 1, 1998 to September 30, 1999. The
interim financial statements are unaudited but reflect all normal adjustments
which are, in the opinion of management, necessary to provide fair, condensed,
consolidated balance sheets, statements of operations and cash flows for the
interim periods presented. The interim financial statements should be read in
conjunction with the financial statements in the Company's Annual Report on Form
10-KQSB for the period October 1, 1998 to September 30, 1999.
2. Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary Entertainment Digital Network, Inc., a California
corporation (EDN). Material inter-company transactions and balances have been
eliminated. Visual Data Corporation, a Delaware corporation based in Pompano
Beach, Florida ("VDC"), owns 51% of the voting securities of the Company.
3. Earnings 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 period. The computation of net income
(loss) per share was as follows:
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Three months ended December 31, 1999:
Basic income (loss)per share $ (234,677) 23,188,898 $ (0.01)
Effect of dilutive stock
Options and warrants -- -- --
---------- ---------- ----------
Diluted income (loss) per share $ (234,677) 23,188,898 $ (0.01)
========== ========== ==========
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Three months ended December 31, 1998:
Basic income (loss)per share $ 565,135 16,761,836 $ 0.03
Effect of dilutive stock
Options and warrants -- 11,886,878 --
---------- ---------- ----------
Diluted income (loss) per share $ 565,135 28,648,714 $ 0.02
========== ========== ==========
2
<PAGE>
At December 31, 1999 options and warrants, for the purchase of 7,127,668 shares
of Common Stock at prices ranging from $0.10 to $1.25 per share were
antidilutive and therefore not included in the computation of diluted earnings
per share.
4. Secured Note Receivable - Related Party
A note receivable with 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. The acquired Common Stock and a second mortgage secure the note.
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. A
principal payment of $33,746 and an interest payment of $25,467 had been
received as of December 31, 1999.
As of December 31, 1999, the Company recognized interest revenue of $4,992 on
the VDC note receivable. At December 31, 1999 VDC owed the Company $27,403 for
the purchase of equipment and $4,992 of accrued interest on the note receivable.
Expenses paid by VDC offset this receivable. VDC has paid $19,262 for travel
expenses and $41,862 for directors' and officers' insurance premiums.
5. Sale of Subsidiary
On December 11, 1998, the Company completed the sale of substantially all of the
assets of the Company's wholly-owned subsidiary Internet Business Solutions,
Inc. ("IBS"), a California corporation, to Enterprise Communications Consulting,
Inc., a Washington Corporation ("Buyer"), a wholly-owned subsidiary of
Attachmate Corporation of Bellevue, Washington. The transaction was completed
for a total of $1,000,000, of which $100,000 was deposited into an escrow
account. The balance is to be released in full to the Company in increments 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, $50,000 was
to be disbursed in June 1999 and the remaining balance of $50,000 to be paid in
December 1999. The company received the first payment of $50,000 on July 8,
1999.
6. Notes Payable - Related Parties
On May 17, 1999, a Promissory Note in the amount of $250,000 was executed
between the Company and Eric Jacobs, a member of the Company's and VDC's Board
of Directors. These funds are used for purchasing inventory.
Notes payable-related party consist of the following:
Dec 31, Sep 30,
1999 1999
--------- ---------
Note payable to Eric Jacobs, a director of VDC and EDN,
principal of $250,000 at 12% interest. The principal
balance is due on demand. Accrued interest payable as
of December 31, 1999 is $1,151. $ 250,000 $ 250,000
Notes payable to officers, at 6% interest,
uncollateralized. Accrued interest payable as of
December 31, 1999 is $2,430. Notes are due on demand. $ 40,500 $ 40,500
--------- ---------
Total notes payable-related party $ 290,500 $ 290,500
========= ==========
3
<PAGE>
7. Subsequent Events
Agreement with Telestream, Inc.
On January 21, 2000, we completed an Agreement with Telestream to become the
Master Distributor of all of their Clip(TM)Mail Pro products in the United
States for the entertainment and advertising community. We plan to add regional
sales offices in Detroit, New York City and Atlanta in addition to Rep sales
channels during the next quarter.
Receipt of Final Escrow Funds from the Sales of IBS
On January 6, 2000, we received the final payment of $50,000 plus interest from
the sale of IBS.
Receipt of Equity Accounts Receivable from Visual Data Corporation
On January 25, 2000 we received $250,000 for the notes receivable due from
Visual Data Corporation from the sale of 51% of the Company to VDC in June of
1998.
4
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC.
RESULTS OF OPERATIONS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the three months ended December 31, 1999, the Company's revenues increased
to $1,161,306, compared to revenues of $1,027,558 in the comparable period last
year. The Company has shown a significant increase in equipment sales revenue
compared to the equivalent period in the previous year. This revenue increase is
from the success of our new product line of video equipment. During the three
months ended December 31, 1999, video equipment sales contributed $185,000 to
total equipment revenue. This was partially offset by a decrease in the retail
prices of the new audio equipment that are now being offered to our customers.
The increase in revenue from installation and monthly fees is due to the
increase in the number of network affiliates and also the installation of higher
bandwidth lines for the new video products. The web design and consulting
revenue was contributed solely by our former subsidiary, IBS. Webcasting,
introduced in February 1999, has replaced 90% of the revenue loss from the sale
of IBS. Rental income has also substantially increased over the previous period
primarily due to the rental of the new video products.
Gross Profit decreased to $219,016 or 19% of sales, in the three months ended
December 31, 1999 compared to $322,676 or 31% of sales, in the equivalent period
last year. The decrease in gross profit is due to the lower gross profit of
video equipment sales compared to the higher gross profit of web design and
consulting. We offered discounts on the new video products to introduce the
products into the production and entertainment industry. For the comparable
period last year, our gross profit was higher due to the web design revenue,
which has a higher gross profit margin than that of video equipment sales.
Operating expenses (including Sales & Marketing, and General & Administrative)
increased to $452,143 in the three months ended December 31, 1999 from $416,573
in the equivalent period last year. The General and Administrative expenses have
increased due to the costs associated with new product lines and the expansion
of infrastructure. Sales and marketing expenses decreased primarily due to the
reduction in the sales and marketing expense of IBS, which was sold in December
1998.
Interest income increased from $5,644 in the prior equivalent quarter to $8,171
in the quarter ending December 31, 1999. Interest expense increased from $6,142
for the quarter ended December 31, 1998 to $9,721 for the equivalent current
year period. This increase is attributable to the interest charged on the larger
note payable balances. Other income for the three months ended December 31, 1998
included the gain on the sale IBS in the amount of $663,530.
For the three months ended December 31, 1999, the Company incurred a net loss of
$(234,677) or ($0.01) per share based on a weighted-average of 23,188,898 shares
outstanding. This compares with a net profit of $565,135, or $0.02 per share
based on a fully diluted weighted-average of 28,648,714 shares outstanding in
the comparable period of the prior year. The net profit from the previous
comparable period was primarily due to the sale of IBS.
In December 1998, we completed the sale of the 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.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
We continue 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 the past fiscal 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 fiscal 1999, 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 the advertising, television and motion picture production and
post-production market. We expect that this new product and service will become
a significant part of growth in the Company's revenue stream in the coming year.
Financial Condition, Liquidity, and Capital Resources
At December 31, 1999, our accumulated deficit was $6,494,926 compared to an
accumulated deficit of $6,260,249 for the prior quarter. Our accumulated deficit
increased due to decreased profit margins and an increase in additional
personnel. These new employees were added to support the two new products and
services introduced in January and April of this calendar year. We had a net
working capital of $308,061 compared to $547,484 for the quarter ended September
30, 1999. This decrease is due to higher inventory balances for the new video
products.
We believe that we have sufficient working capital to fund our current plan of
operation. In the event that the introduction of our new video networking and
webcasting services accelerate at a greater pace than anticipated, we have a
$250,000 Line of Credit available with Union Bank of California. We have
additional financial resources available from our parent company, Visual Data
Corporation.
Payment of Notes Payable to Company Officers
On January 11, 2000 the payment of $40,500 plus interest was paid to two
officers of the Company for the demand notes that have been outstanding since
June 1993.
Disclosure Pursuant to the Private Securities Litigation Reform Act of 1995
When used in this Management's Discussion and Analysis, the words "anticipate,"
"estimate," "expect," and similar expressions are intended to identify
forward-looking statements. These statements are subject to certain risks and
uncertainties, including, but not limited to, the following: risks associated
with fundraising and the company's ability to secure resources necessary to
fully develop business products; risks associated with mergers and acquisitions,
the nature of any transaction consummated, and the ability to successfully
operate a merged entity; business conditions in the telecommunications,
entertainment, advertising and Internet-related industries, and the general
economy; competitive factors such as rival networking technology, competing
products, and competitive pricing; risks associated with development,
introduction, and acceptance of new products; the company's ability to manage
its rapid growth and attract and retain key employees; and
6
<PAGE>
other risk factors. Actual results may differ materially from management
expectations as discussed here.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) (27) Financial Data Schedule, filed electronically.
(b) Reports on Form 8-K: None
7
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Entertainment Digital Network, Inc.
-----------------------------------
(Registrant)
Date February 14, 2000 By: /s/ Tom Kobayashi
----------------- ----------------------------
Tom Kobayashi
Chief Executive Officer,
Principal Accounting Officer
Date February 14, 2000 By: /s/David Gustafson
----------------- ----------------------------
David Gustafson
Secretary
8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 150,839
<SECURITIES> 0
<RECEIVABLES> 798,503
<ALLOWANCES> 15,108
<INVENTORY> 976,909
<CURRENT-ASSETS> 2,016,219
<PP&E> 1,300,467
<DEPRECIATION> (871,192)
<TOTAL-ASSETS> 2,453,153
<CURRENT-LIABILITIES> 1,708,158
<BONDS> 11,043
0
0
<COMMON> 22,521
<OTHER-SE> 719,906
<TOTAL-LIABILITY-AND-EQUITY> 2,453,153
<SALES> 347,187
<TOTAL-REVENUES> 1,161,306
<CGS> 285,325
<TOTAL-COSTS> 942,290
<OTHER-EXPENSES> 452,143
<LOSS-PROVISION> 15,108
<INTEREST-EXPENSE> 9,721
<INCOME-PRETAX> (234,677)
<INCOME-TAX> 0
<INCOME-CONTINUING> (234,677)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (234,677)
<EPS-BASIC> (0.01)
<EPS-DILUTED> 0
</TABLE>
