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 March 31, 2000
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACTS
For the transition period from to
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Commission file number 000-21659
-------------------------------
ENTERTAINMENT DIGITAL NETWORK, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 94-3173300
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(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
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(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: 23,208,424 shares of Common Stock at
March 31, 2000
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 March 31, 2000 and September 30, 1999
<CAPTION>
ASSETS 03/31/00 09/30/99
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 252,958 $ 282,862
Accounts receivable, net of allowance for doubtful accounts
of $18,858 and $18,453 at March 31, 2000 and
September 30, 1999, respectively 1,108,887 713,452
Accounts and interest receivable - related party -- 32,698
Accounts receivable, escrow -- 50,000
Inventories, net 896,704 576,433
Prepaid expenses 44,321 45,952
Other current assets -- 2,500
----------- -----------
TOTAL CURRENT ASSETS $ 2,302,870 $ 1,703,897
----------- -----------
Property and equipment, net 646,657 385,698
Other assets 10,689 5,254
----------- -----------
TOTAL ASSETS $ 2,960,216 $ 2,094,849
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,207,194 $ 628,959
Accounts payable - related party 102,731 --
Accrued expenses 284,914 225,374
Line of credit 100,000 --
Note payable and advances - related parties 572,597 290,500
Current portion of capital lease obligations 6,114 11,580
----------- -----------
TOTAL CURRENT LIABILITIES 2,273,550 1,156,413
----------- -----------
Capital lease obligations 1,043 4,045
----------- -----------
TOTAL LIABILITIES 2,274,593 1,160,458
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock; par value $0.001 per share
Authorized 50,000,000 shares; 23,208,424 and 23,186,398
issued and outstanding at March 31, 2000 and
September 30, 1999, respectively 22,528 22,506
Capital paid in excess of par value of Common Stock 7,503,875 7,501,391
Secured note receivable - related party -- (283,746)
Unearned compensation (30,577) (45,511)
Accumulated deficit (6,810,203) (6,260,249)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 685,623 934,391
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,960,216 $ 2,094,849
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
Entertainment Digital Network, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Six and Three Months ended March 31, 2000 & 1999
<CAPTION>
Six Months Three Months
Ended March 31 Ended March 31
(Unaudited) (Unaudited)
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Usage & hosting fees $ 810,372 $ 837,468 $ 383,554 $ 424,073
Equipment sales 882,946 533,118 535,759 288,597
Installation and monthly fees 374,783 311,994 189,268 156,623
Webcasting 373,564 -- 201,722 --
Rental fees 58,696 35,565 31,563 17,475
Web design and consulting -- 191,661 -- --
Other 6,033 7,489 3,222 2,969
------------ ------------ ------------ ------------
2,506,394 1,917,295 1,345,088 889,737
Cost of sales 2,056,081 1,335,131 1,113,791 630,249
------------ ------------ ------------ ------------
Gross Profit 450,313 582,164 231,297 259,488
Sales and marketing expenses 293,043 215,168 177,806 78,327
General and administrative expenses 697,101 625,049 360,195 345,949
------------ ------------ ------------ ------------
990,144 840,217 538,001 424,276
Loss from operations before other income (expenses)
and provision for income taxes (539,831) (258,053) (306,704) (164,788)
------------ ------------ ------------ ------------
Other income:
Interest income 11,291 17,289 3,120 11,645
Interest expense (18,981) (9,857) (9,260) (3,715)
Other expense -- (3,032) -- (2,400)
Gain on sale of subsidiary assets -- 663,530 -- --
------------ ------------ ------------ ------------
Total other income (expense), net (7,690) 667,930 (6,140) 5,530
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes (547,521) 409,877 (312,844) (159,258)
Income taxes 2,433 4,000 2,433 --
------------ ------------ ------------ ------------
Net income (loss) (549,954) 405,877 (315,277) (159,258)
------------ ------------ ------------ ------------
Basic and diluted net income (loss) per share: (0.02) 0.02 (0.01) (0.01)
Weighted-average number of shares outstanding 23,197,400 17,086,826 23,205,902 17,411,836
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
Entertainment Digital Network, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the Six Months ended March 31, 2000 and 1999
<CAPTION>
03/31/00 03/31/99
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (549,954) $ 405,877
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 76,409 74,479
increase in reserve for bad debt 7,500 4,248
Noncash compensation expenses 14,934 --
Gain from sale of assets - IBS -- (663,530)
Change in operating assests and liabilities:
(Increase) decrease in accounts receivable (320,237) (103,550)
Increase in inventory (447,711) (96,892)
Decrease (increase) in prepaid expenses
and other assets (1,304) (78,786)
Increase (decrease) in accounts payable
and accrued expenses 740,506 (122,134)
Decrease in deferred revenue (31,870)
----------- -----------
Net cash used in operating activities (479,857) (612,158)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (209,928) (83,104)
Proceeds from sale of assets -- 1,000,000
----------- -----------
Net cash (used) provided by investing activities (209,928) 916,896
----------- -----------
Cash flows from financing activities:
Proceeds from Line of Credit 100,000 --
Proceeds from advances - related party 322,597 --
Principal payments on debt (40,500) (108,214)
Repayment on settlement of claim in equity -- (50,000)
Payments on capital leases (8,468) (8,100)
Proceeds from exercise of stock options/warrants 2,506 76,293
Proceeds from Secured Note Receivable 283,746 --
----------- -----------
Net cash provided (used) by financing activities 659,881 (90,021)
----------- -----------
Net (decrease) increase in cash (29,904) 214,717
Cash at beginning of period 282,862 88,470
----------- -----------
Cash at end of period $ 252,958 $ 303,187
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC
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 10KSB 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 10KSB 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.
Since fully diluted earning (loss) per share were antidilutive in 2000 and
1999, basic and diluted earnings (loss) per share are the same. At March
31, 2000, options and warrants for the purchase of 7,120,642 common shares
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 was part of the
payment resulting from VDC's purchase of 8,563,417 shares of the Company's
Common stock. This resulted in a 51% ownership of the Company by VDC. At
January 25, 2000, VDC paid the note and accrued interest in full.
5
<PAGE>
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 , a wholly-owned
subsidiary of Attachmate Corporation of Bellevue, Washington. The sale of
IBS resulted in a gain of $663,530. The final payment of $50,000 was
received on January 6, 2000.
6. Note Payable and Advances - 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 were used for purchasing inventory.
On February 15, 2000, our parent VDC advanced $200,000 for the purchase of
inventory. VDC advanced and additional $122,597 on March 31, 2000. These
funds were also used to purchase inventory.
<TABLE>
Note payable and advances-related parties consist of the following:
<CAPTION>
March 31, Sep 30,
2000 1999
---------------- ----------------
<S> <C> <C>
Notepayable to Eric Jacobs, a director of VDC and of the Company,
principal of $250,000 at 12% interest. The principal balance
is due on demand. Accrued interest payable as of March 31,
2000 is $1,151. $ 250,000 $ 250,000
Notes payable to officers at 6% interest, not collateralized.
Paid in full January 19, 2000. -- 40,500
Advance from parent company without interest, not collateralized. 322,597 --
---------------- ----------------
Total note payable and advances-related parties $ 572,517 $ 290,500
================ ================
</TABLE>
7. Line of Credit
In 1999 we obtained a line of credit of $250,000 from Union Bank of
California. The line of credit bears interest at the institution's
published reference rate plus 2 1/2% and is collateralized by our assets.
There is a balance of $100,000 owed on the line of credit as of March 31,
2000. As of March 31, 2000 we were out of compliance with a loan covenant
relating to profitability on our line of credit.
8. Commitments under Master Distribution Agreement
We entered into a Master Distribution Agreement (the "Agreement") on
January 7, 2000 with Telestream, Inc., a Delaware Corporation
("Telestream"). The Agreement sets forth terms and conditions for us to
acquire video equipment from Telestream and distribute to end-users. The
Agreement shall be effective for a fixed period of one year (the "Intial
Term") commencing on March 19, 2000. During the Initial Term, the Company
is expected to achieve minimum sales goals (the Company purchases from
Telestream) of a total of $2,000,000 within the twelve months of the
Initial Term, pro-rated monthly. At the end of the nine months of the
Initial Term (the Nine Month Period), if the Company has not achieved such
minimum sales goals, pro-rated for the Nine Month Period, Telestream has
the right to terminate the Agreement with sixty (60) days notice. If the
Company has achieved such minimum sales goals, pro-rated for the Nine Month
Period, the Agreement automatically renews for one additional fixed term of
one (1) year (the "Renewal Term"), provided that the parties mutually agree
in writing upon minimum sales goals for the Renewal Term and provided that
during the Renewal Term the Agreement may be terminated by the Telestream
with sixty (60) days notice if the Company fails to meet such agreed upon
minimum sales goals during any quarter of the Renewal Term.
We have purchased $406,250 of the $2,000,000 requirement leaving a balance
of $1,593,750 to be purchased over the remaining period.
The agreement also sets forth distribution rights regarding Telestream's
Clipmail Pro(TM), its high quality video delivery system, which can send
video over data networks using high-speed wide-band, Internet networks.
Telestream has granted us an exclusive license to be the sole master
distributor of Clipmail Pro for the advertising and entertainment segments
of the markets.
6
<PAGE>
9. Proposed Acquisition of Remaining Outstanding Shares
In March 2000, Visual Data Corporation ("VDC"), which currently owns
approximately 51% of our outstanding shares, signed a Letter of Intent with
us providing for a proposed tax-free reorganization whereby we would become
a wholly-owned subsidiary of VDC. The proposed terms included the right to
receive one share of VDC for every ten outstanding shares of our capital
stock, and the conversion of every ten of our outstanding options or
warrants into one option or warrant to purchase a share of VDC common
stock. The transaction is subject to the execution of a definitive
agreement and approval of our shareholders. On April 17, 2000, VDC
announced that they were postponing the previous announced intention to
acquire of the remaining 49% of our outstanding shares. The decision to
postpone the acquisition was made due to market conditions at that date.
Coincidentally, on the same day, we were served with a complaint filed in a
purported class action lawsuit initiated by a shareholder (Zevin v.
Entertainment Digital Network, Inc., et al, Case No. 311263 in the Superior
Court of California for San Francisco Coutny). The lawsuit seeks to prevent
the proposed merger. We believe there is no merit to the lawsuit, even if
we and VDC decided to pursue the proposed merger.
7
<PAGE>
ENTERTAINMENT DIGITAL NETWORK, INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended March 31, 2000, our revenues were $1,345,088 an
increase of 51% compared to revenues of $889,737 in the comparable period last
year. Revenues for the six months ended March 31, 2000 increased 31% to
$2,506,394 compared to revenues of $1,917,295 in the comparable period last
year. Increases in revenue are primarily due to the growth of the video
equipment and webcasting. These two areas have steadily increased each quarter.
Gross Profit decreased to $231,297 or 17% of sales, in the three months ended
March 31, 2000 compared to $259,488 or 29% of sales, in the equivalent period
last year. For the six months ended March 31, 2000 gross profit decreased to
$450,313 or 18% of sales, from $582,164, or 30% of sales in the equivalent
period last year. Decreases in gross profit for the current quarter and year to
date were due primarily to the sale of IBS that had contributed $162,866 to the
gross profit for the six months ended March 31, 1999. The hosting services,
which were provided by IBS, have a higher gross profit and thus affected the
gross profit percentages. We have been discounting the video products in an
effort to place more units in the market. This helped move products but has an
impact on gross profit.
Operating expenses (including Sales & Marketing, and General & Administrative)
increased to $538,001 in the three months ended March 31, 2000 compared to
$424,276 in the equivalent period last year. This increase is due to expansions
of our business. We have hired additional personnel in sales and administration.
We are continuing to expand in these areas as the business grows. For the six
months ended March 31, 2000 operating expenses increased to $990,144 from
$840,217 in the equivalent period last year. There were significant expenditures
for the current six months ended such as costs associated with building up new
lines of business. We have hired and trained manufacturers' representatives for
the Telestream unit.
Interest income has decreased due to VDC paying off its note and lower cash
balances held at Union Bank of California. Interest expense has increased in the
current quarter due to drawing on the line of credit at Union Bank.
For the three months ended March 31, 2000, we incurred a net loss of $315,277 or
$(0.01) per share based on a weighted-average of 23,205,902 shares outstanding,
which is in line with our forecast. This compares with a net loss of $159,258,
or $(0.01) per share based on a weighted-average of 17,411,836 shares
outstanding in the prior year for the comparable period. We incurred a net loss
for the six months ended March 31, 2000 of $549,954, or $0.02 per share based on
a weighted-average of 23,197,400 shares outstanding, compared with a net income
of $405,877, or $0.02 per share, based on a weighted-average of 17,086,836
shares in the prior period.
8
<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 VDC
to provide corporate clients with live audio and videowebcasting over the
Internet. We have successfully produced and streamed over 600 live events for PR
Newswire and its clients. Additionally, we have produced events for Yahoo!,
Broadcast.com, iBeam, SchoolCity.com, and Choiceradio.com.
In fiscal 1999, we announced our agreement with Telestream, concerning its
ClipMail Pro product. 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 March 31, 2000, we had an accumulated deficit of $6,810,203 This compares to
a September 30, 1999 accumulated deficit of $6,260,249. Our working capital
decreased from $547,484 at September 30, 1999 to $29,320 at March 31, 2000, due
to our continued loss and infrastructure expansion.
We were out of compliance as of March 31, 2000 with a loan covenant on our line
of credit with Union Bank of California. We will be paying the line off in July
2000. Visual Data has provided financial resources when needed. Visual Data has
provided us with two advances to purchase inventory. The first advance was for
$200,000 on February 15, 2000. On March 31, 2000, VDC advanced an additional
$122,597 for a total of $322,597. These resources have been used to pay down the
Telestream inventory balances.
On January 7, 2000, we entered into a Master Distributorship Agreement with
Telestream, Inc. The terms and conditions set forth purchase discounts and
specified purchase levels. We will purchase $2,000,000 of video products between
March 19, 2000 and March 18, 2001. The Agreement is renewable upon the
anniversary date. We have purchased $406,250 of the $2,000,000 requirement
leaving a balance of $1,593,750 to be purchased over the remaining period.
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
9
<PAGE>
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 other risk
factors. Actual results may differ materially from management expectations as
discussed here.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The company was served with a complaint filed in a purported class action
lawsuit initiated by a sharedholder (Zevin v. Entertainment Digital Network,
Inc., et al, Case No. 311263 in the Superior Court of California for San
Francisco County). The lawsuit seeks to prevent the proposed merger with VDC. We
believe there is no merit to the lawsuit, even if we and VDC decided to pursue
the proposed merger.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Securities Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) (27) Financial Data Schedule, filed electronically
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Entertainment Digital Network, Inc.
-------------------------------------
(Registrant)
Date May 12 , 2000 By:
------------- ----------------------------------
Tom Kobayashi
Chief Executive Officer,
Principal Accounting Officer
Date May 12 , 2000 By:
------------- ----------------------------------
David Gustafson
Secretary
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 252,958
<SECURITIES> 0
<RECEIVABLES> 1,127,745
<ALLOWANCES> 18,858
<INVENTORY> 896,704
<CURRENT-ASSETS> 2,302,870
<PP&E> 646,657
<DEPRECIATION> 902,698
<TOTAL-ASSETS> 2,960,216
<CURRENT-LIABILITIES> 2,273,550
<BONDS> 1,043
0
0
<COMMON> 22,528
<OTHER-SE> 663,095
<TOTAL-LIABILITY-AND-EQUITY> 2,960,216
<SALES> 882,946
<TOTAL-REVENUES> 2,517,685
<CGS> 686,480
<TOTAL-COSTS> 3,046,225
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18,858
<INTEREST-EXPENSE> 18,981
<INCOME-PRETAX> (547,521)
<INCOME-TAX> 2,433
<INCOME-CONTINUING> (549,954)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (549,954)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
