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 June 30, 2000
[ ] 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: 23,375,448 shares of Common
Stock at June 30, 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 June 30, 2000 and September 30, 1999
<CAPTION>
ASSETS 06/30/00 09/30/99
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 104,327 $ 282,862
Accounts receivable, net of allowance for doubtful accounts
of $24,858 and $18,453 at June 30, 2000 and
September 30, 1999, respectively 958,281 713,452
Accounts and interest receivable - related party -- 32,698
Accounts receivable, escrow -- 50,000
Inventories, net 890,628 576,433
Prepaid expenses 43,889 45,952
Other current assets -- 2,500
----------- -----------
TOTAL CURRENT ASSETS $ 1,997,125 $ 1,703,897
----------- -----------
Property and equipment, net 642,638 385,698
Other assets 4,012 5,254
----------- -----------
TOTAL ASSETS $ 2,643,775 $ 2,094,849
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 740,883 $ 628,959
Accounts payable - related party 51,879 --
Accrued expenses 160,519 225,374
Line of credit 100,000 --
Note payable and advances - related parties 1,121,972 290,500
Current portion of capital lease obligations 5,476 11,580
----------- -----------
TOTAL CURRENT LIABILITIES 2,180,729 1,156,413
----------- -----------
Capital lease obligations -- 4,045
----------- -----------
TOTAL LIABILITIES 2,180,729 1,160,458
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock; par value $0.001 per share
Authorized 50,000,000 shares; 23,375,448 and 23,186,398
issued and outstanding at June 30, 2000 and
September 30, 1999, respectively 22,695 22,506
Capital paid in excess of par value of Common Stock 7,520,586 7,501,391
Secured note receivable - related party -- (283,746)
Unearned compensation (23,111) (45,511)
Accumulated deficit (7,057,124) (6,260,249)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY
463,046 934,391
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,643,775 $ 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 OPERATIONS
For the Nine and Three Months ended June 30, 2000 and 1999
<CAPTION>
Nine Months Three Months
Ended June 30 Ended June 30
(Unaudited) (Unaudited)
------------------------------ -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Usage & hosting fees $ 1,211,526 $ 1,128,458 $ 401,154 $ 373,219
Equipment sales 1,175,122 846,311 292,176 313,193
Installation and monthly fees 553,024 481,731 178,241 169,737
Webcasting 737,518 129,760 363,954 104,075
Rental fees 103,089 65,722 44,393 30,157
Web design and consulting -- 248,205 -- --
Other 11,763 7,490 5,730 --
------------ ------------ ------------ ------------
3,792,042 2,907,677 1,285,648 990,381
Cost of sales 2,966,702 2,022,979 910,621 679,837
------------ ------------ ------------ ------------
Gross Profit 825,340 884,698 375,027 310,544
Sales and marketing expenses 516,128 362,375 223,085 145,040
General and administrative expenses 1,085,633 917,599 388,532 304,041
------------ ------------ ------------ ------------
1,601,761 1,279,974 611,617 449,081
Loss from operations before other income
(expenses) and provision for income taxes (776,421) (395,276) (236,590) (138,537)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 11,874 26,653 583 9,364
Interest expense (29,928) (16,349) (10,947) (6,491)
Other expense -- (7,305) -- (2,960)
Gain on sale of subsidiary assets -- 663,530 -- --
------------ ------------ ------------ ------------
Total other income (expense), net
(18,054) 666,529 (10,364) (87)
------------ ------------ ------------ ------------
(Loss) income before provision for income taxes (794,475) 271,253 (246,954) (138,624)
Income taxes 2,400 7,434 (33) 3,434
------------ ------------ ------------ ------------
Net (loss) income $ (796,875) $ 263,819 $ (246,921) $ (142,058)
------------ ------------ ------------ ------------
Basic and diluted net (loss) income per share: $ (0.03) $ 0.01 $ (0.01) $ (0.01)
Weighted-average number of shares outstanding 23,219,138 18,124,577 23,262,615 20,200,059
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
Entertainment Digital Network, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months ended June 30, 2000 and 1999
<CAPTION>
06/30/00 06/30/99
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (796,875) $ 263,819
Adjustments to reconcile net (loss) income to cash used in operating
activities:
Depreciation and amortization 126,457 96,179
Increase in reserve for bad debt 6,405 12,556
Noncash compensation expenses 22,400 --
Gain from sale of assets - IBS -- (663,530)
Increase in accounts receivable (251,234) (226,321)
Decrease in accounts receivable - related party 84,577 18,534
Decrease (increase) in accounts receivable - escrow 50,000 (100,000)
Increase in inventory (314,195) (369,072)
Decrease (increase) in prepaid expenses
and other assets 5,805 (67,398)
Increase (decrease) in accounts payable
and accrued expenses 47,069 (79,019)
Decrease in deferred revenue -- (34,666)
----------- -----------
Net cash used in operating activities (1,019,591) (1,148,918)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (383,397) (150,428)
Proceeds from sale of assets -- 1,000,000
----------- -----------
Net cash (used) provided by investing activities (383,397) 849,572
----------- -----------
Cash flows from financing activities:
Proceeds from Line of Credit 100,000 --
Proceeds from advances - related party 871,972 550,000
Principal payments on debt (40,500) (308,214)
Repayment on settlement of claim in equity -- (50,000)
Payments on capital leases (10,149) (11,889)
Proceeds from exercise of stock options/warrants 19,384 410,988
Proceeds from Secured Note Receivable 283,746 --
----------- -----------
Net cash provided by financing activities
1,224,453 590,885
----------- -----------
Net (decrease) increase in cash (178,535) 291,539
Cash at beginning of period 282,862 88,470
----------- -----------
Cash at end of period $ 104,327 $ 380,009
=========== ===========
<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 (loss) earnings per share are computed using the weighted-average
number of shares of Common Stock outstanding during the periods. Diluted
(loss) earnings per share are computed using the weighted-average number of
common shares and common share equivalents outstanding during the period.
Since fully diluted (loss) earnings per share were antidilutive in 2000 and
1999, basic and diluted (loss) earnings per share are the same. At June 30,
2000, options and warrants for the purchase of 6,953,618 common shares at
prices ranging from $0.10 to $1.25 per share were antidilutive and
therefore not included in the computation of diluted (loss) 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 an additional $122,597 on March 31, 2000. These
funds were also used to purchase inventory. Additional advances, which were
used to purchase Telestream product, were made on May 3, May 18 and June 14
in the amount of $150,000, $155,625 and $243,750, respectively.
<TABLE>
Note payable and advances-related parties consist of the following:
<CAPTION>
June 30, Sep 30,
2000 1999
---------- ----------
<S> <C> <C>
Note payable to Eric Jacobs, a director of VDC and the
Company, principal of $250,000 at 12% interest. The
principal balance is due on demand. Accrued interest
payable as of June 30, 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
Advances from parent company without interest, not
collateralized 871,972 --
---------- ----------
Total note payable and advances-related parties $1,121,972 $ 290,500
========== ==========
</TABLE>
7. Line of Credit
In 1999 we obtained a line of credit of $250,000 with 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 June 30,
2000. At June 30, 2000 we were out of compliance with loan covenants on our
line of credit.
6
<PAGE>
8. Commitments under Master Distribution Agreement
We entered into a Master Distribution Agreement ("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 "Initial Term") commencing on
March 19, 2000.
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, high-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 market.
9. Proposed Acquisition of Remaining Outstanding Shares
In March 2000, 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 previously announced intention to acquire the remaining 49% of our
outstanding shares. The decision to postpone the acquisition was made due
to market conditions at that date. On April 17, 2000 we were served with a
complaint filed as a purported class action lawsuit initiated by a
shareholder (Zevin v. Entertainment Digital Network, Inc., et al, and Case
No. 311263 in the Superior Court of California for San Francisco County).
The lawsuit seeks injunctive relief and monitary damages. We believe there
is no merit to the lawsuit.
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 June 30, 2000, our revenues were $1,285,648, an
increase of 30% compared to revenues of $990,381 in the comparable period last
year. Revenues for the nine months ended June 30, 2000 increased 30% to
$3,792,042 compared to revenues of $2,907,677 in the comparable period last
year. Revenue for all categories experienced an increase except for a small
decrease in equipment sales. Webcasting increased 250% over the prior year's
quarter. We have revenue growth for all lines of business, with the largest
increases coming from webcasting and video equipment sales which accounts for
28% and 23% respectively.
Gross Profit decreased to $375,027 or 29% of sales, in the three months ended
June 30, 2000 compared to $310,544 or 31% of sales, in the equivalent period
last year. For the nine months ended June 30, 2000 gross profit decreased to
$825,340 or 22% of sales, from $884,698, or 30% of sales in the equivalent
period last year. The decrease in gross profit can be attributed to the increase
in sales of video equipment. Sales of video equipment have a lower profit margin
due to discounts given as incentive for early adopters of this new technology.
Operating expenses (including Sales & Marketing, and General & Administrative)
increased to $611,617 in the three months ended June 30, 2000 compared to
$449,081 in the equivalent period last year. This increase is due to the
expansion of our business and our hiring of additional personnel in sales and
administration. For the nine months ended June 30, 2000 operating expenses
increased to $1,601,761 from $1,279,974 in the equivalent period last year.
There were significant expenditures for the nine months ended June 30, 2000 in
the expansion of our marketing, public relations, trade shows, travel and
salaries to support our growth.
Interest income has decreased for the current quarter ending June 30, 2000
compared to the equivalent quarter in the prior year. This is due to lower cash
balances with Union Bank and VDC's payment of the note receivable.
For the three months ended June 30, 2000, we incurred a net loss of $246,922 or
$(0.01) per share based on a weighted-average of 23,262,615 shares outstanding.
This compares with a net loss of $142,058, or $(0.01) per share based on a
weighted-average of 20,200,059 shares outstanding in the prior year for the
comparable period. We incurred a net loss for the nine months ended June 30,
2000 of $796,875, or $(0.03) per share based on a weighted-average of 23,219,138
shares outstanding, compared with a net income of $263,819, or $0.01 per share,
based on a weighted-average of 18,124,577 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 video webcasting over the
Internet. We have successfully produced and streamed over 1000 live events for
PR Newswire and its clients. Additionally, we have produced events for Yahoo!,
Broadcast.com, E*TRADE, iBeam, SchoolCity.com, and Choiceradio.com. Webcasting
accounts for 20% of our revenue for the nine months ended June 30, 2000.
In fiscal 1999, we announced our agreement with Telestream, to distribute its
ClipMail Pro(TM) product. 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 the video services we offer with this product will become
a significant part of the Company's revenue growth in the coming year.
Financial Condition, Liquidity, and Capital Resources
At June 30, 2000, we had an accumulated deficit of $7,057,124. 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 a negative $183,604 at June 30,
2000, due to our continued loss and infrastructure expansion.
We were out of compliance as of June 30, 2000 with a loan covenant on our line
of credit with Union Bank of California. We expect to pay off the line shortly.
VDC has provided financial resources when needed, providing us with advances to
purchase inventory. We have received a total of $871,972 from VDC. These
resources have been used to pay for Telestream inventory.
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.
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 other risk factors.
Actual results may differ materially from management expectations as discussed
here.
9
<PAGE>
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 shareholder (Zevin v. Entertainment Digital Network,
Inc., et al, Case No. 311263 in the Superior Court of California for San
Francisco County). The lawsuit seeks injunctive relief and monitary damages. We
believe there is no merit to the lawsuit.
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
10
<PAGE>
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 August 14, 2000 By:
--------------- ---------------------------
David Gustafson
Chief Executive Officer,
Principal Accounting Officer,
Secretary
11
