As filed with the Securities and Exchange Commission on December 12, 1996
Registration No. 333-
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Digital Data Networks, Inc.
(Exact name of small business issuer in its charter)
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<S> <C> <C>
Washington 4812 91-1426372
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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<S> <C> <C>
3102 Maple Avenue, Suite 230 Donald B. Scott
Dallas, Texas 75201 3102 Maple Avenue, Suite 230
(214) 969-7200 Dallas, Texas 75201
(Address, including zip code, and (214) 969-7200
telephone number, including (Name, Address,including zip code,
area code, of registrant's _________________________ and telephone number, including
principal executive offices) area code, of agent for service)
</TABLE>
Copies to:
Maurice J. Bates, L.L.C.
8214 Westchester, Suite 500
Dallas, Texas 75225
Phone (214) 692-3566
Fax (214) 987-2091
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Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box.
If this form is to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462
(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following box.
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
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(Registration Statement cover page cont'd)
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered Offering Price per Unit(1) Aggregate Offering Price(1) Registration Fee
- ------------------------------- ------------- -------------------------- ----------------------------- ---------------------
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Common Stock,
no par value (2) 1,840,000 (2) (2) (2)
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Common Stock,
no par value (3) 39,625 $5.50 $217,937.50 $66.04
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Total $100.00
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1) Estimated solely for the purpose of calculating the registration fee.
2) Issuable upon exercise of Common Stock Purchase Warrants, which shares
were registered pursuant to Registration Statement File No. 33-95744-D,
effective February 13, 1996. Pursuant to Rule 457(i), no additional
registration fee is required. Pursuant to Rule 416 there are also
registered an indeterminate number of shares of Common Stock, which may be
issued pursuant to the anti-dilution provisions applicable to the Common
Stock Purchase Warrants.
3) Shares to be offered by Selling Shareholders.
Pursuant to Rule 429(b), the Registration Statement also relates to a
Registration Statement 33-95744-D.
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<PAGE>
DIGITAL DATA NETWORKS, INC.
Cross-Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
<TABLE>
Form SB-2 Item Number and Caption Location In Prospectus
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1. Front of Registration Statement and
Outside Front Cover of Prospectus....................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus..................................................... Inside Front Cover Page; Outside
Back Cover Page
3. Summary Information and Risk Factors.................................... Prospectus Summary; Risk Factors;
The Company
4. Use of Proceeds......................................................... Use of Proceeds
5. Determination of Offering Price......................................... Outside Front Cover Page; Risk
Factors
6. Dilution................................................................ *
7. Selling Shareholders.................................................... Selling Shareholders
8. Plan of Distribution.................................................... Outside Front Cover Page; Risk
Factors; Plan of Distribution
9. Legal Proceedings....................................................... *
10. Directors, Executive Officers, Promoters
and Control Persons..................................................... The Company; Management-Executive
Officers and Directors
11. Security Ownership of Certain Beneficial
Owners and Management................................................... Principal Shareholders
12. Description of Securities............................................... Description of Securities
13. Interest of Named Experts and Counsel................................... Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................................................. *
15. Organization Within Last Five Years..................................... The Company
16. Description of Business................................................. Business
17. Management's Discussion and Analysis
or Plan of Operation.................................................... Management's Discussion and
Analysis of Financial Condition
and Results of Operations
18. Description of Property................................................. Business
19. Certain Relationships and Related
Transactions............................................................ Certain Relationships and Related
Transactions
20. Market for Common Equity and Related
Stockholder Matters..................................................... Price Range of Common Stock and
Warrants
21. Executive Compensation.................................................. Management-Executive Compensation
22. Financial Statements.................................................... Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.............................................................. *
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(*) None or Not Applicable
</TABLE>
<PAGE>
Subject to Completion - Dated December 12, 1996
PROSPECTUS
Digital Data Networks, Inc.
1,879,625 Shares of Common Stock, No Par Value
This Prospectus relates to the offer and sale by certain holders (the
"Selling Shareholders") of 39,625 shares of the Common Stock, no par value (the
"Common Stock") of Digital Data Networks, Inc. (the "Company") from time to time
in the market at prevailing market prices pursuant to this Prospectus. The
shares of Common Stock to which this Prospectus relates may be sold by the
Selling Shareholders directly to or through underwriters, dealers or agents in
market transactions or privately negotiated transactions at market-based
negotiated prices. The expenses of this offering, exclusive of brokerage or
other commissions, will be paid by the Company. The Company will not receive any
of the proceeds from the sale of the Common Stock by the Selling Shareholders.
See "Selling Shareholders" and "Plan of Distribution."
This Prospectus also relates to 1,840,000 shares of Common Stock (the
"Warrant Shares") underlying 1,840,000 Common Stock Purchase Warrants (the
"Warrants") issued by the Company in a public offering of 1,322,500 shares of
Common Stock and 1,840,000 Warrants in February 1996. See "Description of
Securities."
The Common Stock and the Warrants are traded on the Nasdaq Small-Cap
Market under the trading symbols "DIDA" and "DIDAW", respectively. The last sale
prices on the Nasdaq Small-Cap Market were $4.63 per share of Common Stock
and $1.06 per Warrant on December 11, 1996. See "Price Range of Common Stock
and Warrants."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER
THE CAPTION "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
Information contained herein is subject to completion or amendment. A
Registration Statment relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitiation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale could be
unlawful prior to registration or qualification under the securities laws of
any such State.
The date of this Prospectus is ____________, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports, proxy or information statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, statements
and other information may be inspected and copied at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the Commission's regional
offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Seven World Trade Center, New York, New York 10007; copies of such material
may also be obtained by mail from the Public Reference Facilities of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates, or on the Internet at http://www.sec.gov. This
Prospectus omits certain information contained in the Registration Statement
which the Company has filed with the Commission under the Securities Act of 1933
(the "Securities Act") and to which reference is hereby made for further
information with respect to the Company and the securities offered hereby.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the Securities
Act of 1933, as amended (the "Securities Act") with respect to the securities
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits thereto as permitted by the rules and regulations of
the Commission. Statements contained in this Prospectus as to the content of any
contract, agreement or any other document referred to therein are not
necessarily complete. With respect to each such contract, agreement or document
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement may be inspected without charge at the principal offices
of the Commission, 450 Fifth Street, N.W., Washington, D.C., and copies of the
Registration Statement, including all exhibits thereto, may be obtained upon
payment of certain fees prescribed by the Commission.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including notes thereto) appearing
elsewhere in this Prospectus. The Securities offered hereby involve a high
degree of risk. Investors should carefully consider the information set forth
under "Risk Factors." All references to share and per share data have been
adjusted to reflect reverse stock splits in the Common Stock in 1995.
The Company
Digital Data Networks, Inc. (the "Company", or "DDN") provides wireless
communications systems to the transit industry and high-end Internet services
for business clients. The Company's Transit Network Division markets the
wireless communications products and the Company's two wholly owned
subsidiaries, Pro.Net Communications, Inc. ("Pro.Net") and Cyber America
Corporation ("Cyber America"), market the Internet-related services. Pursuant to
an exclusive license agreement with the Small Stock News Network ("SSNN"), the
Company also offers, in Canada, financial news coverage of small capitalization
companies to Internet users at SSNN's World Wide Web ("Web" or "WWW") site.
The Company's Transit Network Division markets and operates two systems: a
digital information network and a next-stop automated audio/visual announcement
system ("NextStop"). The digital information network is a network of
computerized electronic displays that delivers information, both text and
graphics, to riders on-board public transit vehicles, utilizing an FM subcarrier
signal to transmit the data. The Transit Network currently operates its digital
information network on the 824-bus fleet of the Dallas Area Rapid Transit
("DART") system, and on 66 buses of the Rhode Island Pubic Transit Authority
("RIPTA") system. The RIPTA system has served as a test site for the Company
since 1988. The DART system began operations in 1991. See "Business - The
Transit Network's Digital Information Network."
The Transit Network also helped fund the development of a system called
NextStop, an automated audio/visual announcement system which utilizes global
positioning satellite ("GPS") technology to transmit latitude and longitude
information to moving vehicles. This information allows the system to track the
vehicle's position, then triggers simultaneous audio and visual announcements of
next stop locations at predetermined points along a route. This technology
allows transit agencies to comply with the guidelines mandated by the Americans
with Disabilities Act of 1990 ("ADA"), which requires that hearing and
sight-impaired riders have access to the same information as non-impaired
riders. As of the date of this Prospectus, the Company has not sold its NextStop
system to any transit authority, but is in discussion with several transit
authorities.
Pro.Net, a Vancouver, British Columbia, Canada based company acquired in
June 1996, is a full service Internet provider that focuses on commercial
clients. Pro.Net has identified four distinct areas of service. The first is
connectivity services aimed at the local business community. Both switched and
permanent Internet connections are provided using a variety of communications
technologies. Pro.Net also provides intranet services to businesses. Services
such as connectivity, consulting and training are provided to these clients who
are building internal Internet systems. The third area is the development of
on-line marketing programs for commercial clients. A fourth area, the result of
a recent acquisition and merger, will allow Pro.Net to offer Web page design and
development. DDN acquired hip Communications, Inc. ("hip"), also of Vancouver,
British Columbia, Canada, in September 1996, which will be operated through
Pro.Net. hip is engaged in the design and building of sophisticated Web sites,
principally for large corporations and government agencies that recognize the
necessity of having a presence on the World Wide Web.
Cyber America, also acquired in June 1996, offers direct, high-speed access
to the backbone of the Internet, utilizing a unique network implementation which
has a patent pending on the implementation of the technology. As a first tier
Internet provider, Cyber America increases performance by not over-subscribing
already congested networks, and eliminating multiple "hops" or routers. Customer
information travels directly to the nearest Network Access Point ("NAP") via
fast packet network services such as Frame Relay and Switched Multi-Megabit Data
Service ("SMDS"). An Asynchronous Transfer Mode ("ATM") network then sends this
information to remote NAPs as necessary. Cyber America targets speed-conscious
customers such as Internet service providers and companies that have built an
intranet or wide area network infrastructure.
<PAGE>
In October 1996, the Company entered into a License Agreement with SSNN to
be the exclusive licensee to sell SSNN's service in Canada. SSNN specializes in
providing comprehensive financial news coverage for small capitalization
companies. Companies pay DDN an annual fee to join SSNN's network and are listed
at SSNN's Web site, where Internet users can access, free of charge, the latest
financial information on subscribing companies.
The Company was incorporated as Transit Information Systems, Inc. under the
laws of the State of Washington on October 17, 1988. The present name was
adopted in July, 1995. The Company operates as The Transit Network under an
assumed name certificate. The Company's offices are located at 3102 Maple
Avenue, Suite 230, Dallas, Texas 75201, and its telephone number is (214)
969-7200.
The Offering
Securities Offered
Common Stock
Selling Shareholders....................... 39,625 shares
Warrant Shares............................. 1,840,000 shares (1)
Outstanding Securities
Common Stock.............................. 2,271,355 shares (2)
Warrants.................................. 1,840,000 (2)
Risk Factors................................ The shares offered hereby are
speculative and involve a high
degree of risk and should not be
purchased by investors who cannot
afford the loss of their entire
investment. See "Risk Factors."
NASDAQ Small-Cap Market Symbols
Common Stock............................. "DIDA"
Warrants................................. "DIDAW"
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(1) Shares underlying the Common Stock Purchase Warrants.
(2) Unless otherwise indicated, all share and per share information contained
in this Prospectus excludes shares issuable upon the exercise of options
and warrants outstanding upon the date of this Prospectus or to be issued
as follows: (i) 1,840,000 shares issuable upon exercise of the Warrants;
(ii) 115,000 shares and 160,000 warrants underlying Underwriters' Warrants
granted in connection with the Company's public offering in February 1996;
(iii) 111,807 shares reserved for issuance under the Company's 1994 Stock
Compensation Plan, of which approximately 104,000 options have been
granted; (iv) 250,000 shares reserved for issuance under the Company's 1996
Combined Incentive and Nonqualified Stock Option Plan, of which
approximately 180,000 options have been granted; and (v) approximately
256,000 shares subject to other outstanding options and warrants. See
"Business - Software License," "Management - Stock Compensation Plans," and
"Certain Relationships and Related Transactions."
<PAGE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
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Operating Data: 1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $466 $498 $350 $406
Direct operating costs 503 465 357 327
Other operating costs 1,530 1,302 1,020 1,584
Interest expense (income) 189 140 95 (71)
Net loss (1,756) (1,409) (1,122) (1,434)
Net loss per share $(4.38) $(2.17) $(1.77) $(0.76)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996
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Balance Sheet Data:
<S> <C> <C>
Working Capital $ (1,098) $ 2,581
Total Assets 657 5,094
Total Liabilities 2,324 1,276
Shareholders' Equity (1,667) 3,818
</TABLE>
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE
OTHER INFORMATION SET FORTH IN THE PROSPECTUS BEFORE PURCHASING THE SHARES
OFFERED HEREBY.
Limited Revenue; History of Losses
Since inception, the Company has generated limited revenues from fees
charged to advertisers in the Dallas and Providence markets. For the period from
October 1988 (inception) through September 30, 1996, the Company incurred
cumulative losses approximating $10.6 million, including losses of $1.8 million
in 1994, $1.4 million in 1995 and $1.4 million during the first nine months of
1996. Unless and until the Company's Transit Network Division expands its
operations, and demand for such services and products increase, management
anticipates that losses will continue for this division. There can be no
assurance that The Transit Network will be able to implement successfully its
marketing strategy, generate sufficient revenues or ever achieve profitable
operations. During the 1996 fiscal year the Company acquired three companies,
Pro.Net, Cyber America and hip. For the nine month period ended September 30,
1996, Pro.Net and hip had net losses of approximately $165,000 and $55,000
respectively. Cyber America is a development stage company which had no prior
revenues when it was acquired by DDN and had net losses of approximately $90,000
for the nine month period ended September 30, 1996. It is therefore anticipated
that all three companies acquired in 1996 will contribute net operating losses
for fiscal year 1996. See "Financial Statements."
Potential Fluctuations in Quarterly Results
The Company expects to experience significant fluctuations in future
quarterly operating results and uses of cash that may be caused by many factors,
some of which are outside of the Company's control, including demand for the
Company's products and services, capital expenditures and other costs relating
to the expansion of some of its operations, changes in pricing strategies by the
Company and competitors, retention rates of the Company's customer base, and
general economic conditions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Background."
Uncertainty of New Product Development and Other Technological Factors
The Transit Network's wireless communications systems are subject to
rapidly changing technology and evolving industry standards which could result
in product obsolescence or short product life cycles. The Company believes that
its future success will depend on its ability to anticipate and respond to such
changes. The Company is working with its manufacturers to refine and improve
both the hardware and software components of these systems. Continued system
refinement and improvement efforts remain subject to the risks inherent in new
product development, including unanticipated technical and other problems which
could result in material delays and/or increased costs. Additionally, there can
be no assurance that other parties with financial resources far greater than
those of the Company will not develop technologies or products that render the
Company's products obsolete or less marketable. See "Business - The Transit
Network's Digital Information Network" and "- The Transit Network's NextStop
Automated Audio/Visual Announcement System."
Pro.Net's and Cyber America's operations are highly dependent upon
technologically sophisticated equipment, and are also subject to rapidly
changing advancements in hardware and software being used in their industry.
Continued technological improvements could result in outdated equipment after a
very short period, requiring the Company to reinvest more capital in order to
stay competitive. See "Business - Pro.Net Communications, Inc." and "- Cyber
America Corporation."
Possible Acquisitions
Management allocated $1,000,000 of the net proceeds from its initial
public offering for the acquisition or funding of media or technology related
companies and has funded approximately $375,000 in connection with these
acquisitions including working capital. As of the date of this Prospectus,
management has acquired three companies for stock - Pro.Net, Cyber America and
hip. Management intends to continue to review other potential acquisitions and
will have broad discretion in the selection of these businesses to be acquired
or funded, without a review or vote by shareholders on the financial statements
of unspecified acquisitions. The Company has not currently identified any
specific businesses for acquisition and is not currently involved in any such
<PAGE>
negotiations. There can be no assurance that any such acquisitions would have a
positive impact on the Company's operating results. See "Business - Pro.Net
Communications, Inc.", and "- Cyber America Corporation."
Risk of Redemption of Warrants
Commencing March 13, 1997, the Company may redeem the Warrants for
$0.25 per Warrant, at any time, provided that the average closing bid price per
share of the Common Stock on the NASDAQ Small-Cap Market has equaled or exceeded
$9.00 for twenty of the immediately prior thirty consecutive trading days ending
within fifteen days of the date on which notice of redemption is given. Notice
of redemption of the Warrants could force the holders thereof (i) to exercise
the Warrants and pay the exercise price at a time when it may be disadvantageous
or difficult for the holders to do so, (ii) to sell the Warrants at the then
current market price when they might otherwise wish to hold the Warrants, or
(iii) to accept the redemption price, which could be less than the market value
of the Warrants at the time of redemption. See "Description of Securities -
Common Stock Purchase Warrants."
Investors May be Unable to Exercise Warrants
Any exercise of the Warrants must be made pursuant to a Prospectus
which is current at the time of exercise. The Company is obligated to file
post-effective amendments to the registration statement or a new registration
statement containing a Prospectus which meet the "current prospectus"
requirements. The Company will endeavor to maintain a current effective
registration statement under the Securities Act relating to the Common Stock
issuable on exercise of the Warrants. This Prospectus is intended to satisfy
that requirement. If the Company is unable to maintain a current registration
statement for any reason, the holders of the Warrants will be unable to exercise
them. Although the Warrants offered in the public offering were not knowingly
sold to purchasers in jurisdictions in which they were not registered or
otherwise qualified for sale, investors may purchase Warrants in the aftermarket
in, or purchasers of the Warrants may move to, jurisdictions in which the shares
of Common Stock underlying the Warrants are not registered or qualified during
the period when the Warrants are exercisable. In such event, the Company would
be unable to issue shares to those persons desiring to exercise their Warrants
unless and until the shares could be registered or qualified for sale in
jurisdictions in which such purchasers reside, or an exemption to such
qualification exists in such jurisdictions. No assurance can be given that the
Company will be able to effect any required registration or qualification. The
Company intends to apply for listing of its Common Stock on the Nasdaq National
Market before the Warrants may be redeemed or exercised. If the listing is
approved, the Warrant Shares would not be required to be registered in the
public offering because of exemptions available under most state securities laws
or because of the applicability of the National Securities Markets Improvement
Act of 1996, which became effective in October 1996. There can be no assurance
that such listing application will be approved. See "Description of Securities -
Common Stock Purchase Warrants."
Competition
The Company's Transit Network Division operates its digital information
network pursuant to contracts with transit authorities. While the Company is
currently engaged in discussions with other transit authorities, there can be no
assurance the Company will secure any additional markets. Transit authorities
are government entities which typically require the involvement of several
departments, and have therefore traditionally been slow in making decisions
involving contracts of this type. If the Company fails to secure additional
transit authority contracts or secures them substantially slower than expected,
the Company's financial performance will be materially adversely affected. The
Company does not believe there is presently significant competition for the use
by transit authorities of an electronic on-board communication and advertising
system similar to its digital information network. There is no assurance,
however, that other parties with financial resources far greater than the
Company's will not enter the market. See "Business - The Transit Network's
Digital Information Network."
The Company's Transit Network Division markets its NextStop system to
transit authorities who are interested in automated audio and/or visual
announcement systems for their transit vehicles. Currently there are
approximately a dozen other companies that market an automated audio and/or
visual announcement system, but many of them are significantly different from
the Company's. Some competitors' systems are manually activated and not
automated, while others that are automated use a triggering mechanism other than
GPS to activate their system, such as odometer readings. The Company believes
that its ability to offer the higher demand features, such as a fully automated
system and GPS capability, combined with the Company's strategy to price its
NextStop system below its competitors, will give The Transit Network a
<PAGE>
competitive advantage and allow it to win future contracts. However, there can
be no assurance that more of The Transit Network's competitors will not offer
the same features, and/or price their systems below The Transit Network's. See
"Business - The Transit Network's NextStop Automated Audio/Visual Announcement
System."
Pro.Net is an Internet service provider ("ISP") which, for a monthly
fee, provides a wide range of services to individuals and businesses, such as
e-mail, File Transfer Protocol, which allows customers to send and receive files
across the Internet, and access to the World Wide Web. With the merger of hip's
operations, Pro.Net also now designs and builds Web sites, targeting high-end
customers that require sophisticated, up-to-the-minute content available to
visitors of their Web site. Pro.Net also offers Internet marketing services,
providing customers with appropriate Internet-links to related Web sites. The
market for ISPs that offer dial-up access to the Internet is extremely
competitive. There are no substantial barriers to entry, and the Company expects
that competition will intensify in the future. The Company believes that its
ability to compete successfully depends upon a number of factors, including
market presence; the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the Company's ability to support
existing and emerging industry standards; and industry and general economic
trends. Competition in the Web page design industry is extremely intense, and is
growing as an increasing number of graphic designers provide this service.
Additionally, software allowing individuals and end-users to design their own
Web sites is becoming more available, creating another competitive disadvantage.
These competitive forces could result in erosion of Pro.Net's potential market
share and adversely affect Pro.Net's future operating results from that which
could otherwise be attained. See "Business - Pro.Net Communications, Inc."
Cyber America is a first tier Internet provider which delivers high
speed access directly to the backbone of the Internet. Unlike ISPs which
typically sell their services to individuals and small businesses, Cyber America
targets speed conscious customers such as ISPs and companies that have built an
intranet or wide area network infrastructure, by leasing them bandwidth on T-1
or DS-3 lines. To date, Cyber America's competitors have been traditional access
providers such as MCI, Apex Global Information Systems ("AGIS") and UUNET
Technologies. Most traditional access providers are applying technologies that
have been in use since the early 1960s, while Cyber America utilizes a design
implementation that has a patent pending, allowing it to create service that is
three to five times faster than traditional methods. Additionally, Cyber America
adheres to a low over-subscription rate in comparison to its competitors. See
"Business - Cyber America Corporation."
There are many Web sites on the Internet which provide information on
publicly traded companies, but few, if any, specifically provide financial
information on small cap companies in Canada, which is what the Company offers
under the terms of its license agreement with SSNN. Most Web sites which provide
information on publicly traded companies fall into one of four types of Web
sites: sites providing space for public companies to advertise their financial
statements and press releases; sites where information on public companies is
posted by someone who has a vested interest in the performance of a company and
its underlying shares (such as a promoter or an investment newsletter); sites
that are maintained by someone who is charging the end user for information or
is intending to charge the end user for their information; or, sites that are
the home pages of a publicly traded company. The Company believes that these
four existing types of Web sites are very static with infrequent updates,
preventing a potential investor from making an immediate decision, due to the
lack of current, usable information. Because the Company's SSNN Web site will be
providing daily updated information on its subscribing companies, the Company
believes that many small cap companies that are currently listed on the
Vancouver Stock Exchange, the Toronto Stock Exchange and the Montreal Stock
Exchange will pay the Company an annual fee to have their information available
to visitors of the SSNN Web site, since these visitors are potential buyers of
their company's stock. See "Business - SSNN License Agreement."
Management of Growth
The Company has in the past and, depending on the extent of its future
growth, may in the future, experience a strain on its management, operations and
financial resources. The Company's ability to effectively manage such growth
will require it to continue to implement and improve its operational and
financial systems and to train, motivate and manage its employees. These demands
may require the addition of new management personnel and the development of
additional expertise by existing management. The Company's future operating
results will also depend on its ability to expand its sales and marketing
organizations. If the Company is unable to manage growth effectively, the
Company's business, operating results and financial condition will be materially
adversely affected.
<PAGE>
Dependence on Network Infrastructure; Risk of System Failure; Security Risks
The future success of Pro.Net's and Cyber America's business will
depend upon the capacity, reliability and security of their network
infrastructure. Pro.Net and Cyber America must continue to expand and adapt
their network infrastructure as the number of users and the amount of
information they wish to transfer increases, and to meet changing customer
requirements. The expansion and adaptation of Pro.Net's and Cyber America's
network infrastructures will require substantial financial, operational and
management resources. There can be no assurance that Pro.Net and Cyber America
will be able to expand or adapt their network infrastructure to meet additional
demand or their customers' changing requirements on a timely basis, at a
commercially reasonable cost, or at all, or that they will be able to deploy
successfully the contemplated network expansion. Any failure of Pro.Net or Cyber
America to expand their network infrastructure on a timely basis or to adapt it
to changing customer requirements or evolving industry standards could have a
material adverse effect on the Company's business, operating results and
financial condition. Pro.Net's and Cyber America's operations are also dependent
in part upon their ability to protect their internal network infrastructure
against damage from physical break-ins, natural disasters, power loss,
telecommunications failures and similar events. Any such break-in or damage or
failure that causes interruptions in their operations could materially adversely
affect the Company's business, operating results or financial condition.
Government Regulation
The Company is not currently subject to direct regulation by the
Federal Communications Commission or any other agency, other than regulations
applicable to businesses generally. Changes in the regulatory environment
relating to commerce on or access to the Internet, including regulatory changes
which directly or indirectly affect telecommunication costs or increase the
likelihood or scope of competition, could have an adverse effect on the
Company's business. The Company cannot predict the impact, if any, that future
regulation or regulatory changes may have on its operations.
Exclusive Supply Agreement - The Transit Network
The Company purchases its LED message signs and related hardware
exclusively from Sunrise Systems, Inc. ("Sunrise Systems") and Sunrise Systems
has agreed to sell LED message signs and related hardware to the Company
pursuant to an agreement which expires December 31, 1996 (the "Hardware
Agreement"). The Company intends to negotiate an extension of the Hardware
Agreement, but it believes that if it is not able to do so, it would be able to
find another hardware supplier because the components and subassemblies are
available from multiple sources, although there can be no assurance that it will
be able to do so. The failure or delay in finding a replacement for Sunrise
Systems could have a material adverse effect on the Company's business. See
"Business Digital Information Network - - Hardware Agreement." Any hardware
required for the operations of Pro.Net and Cyber America are readily available
from several sources.
Dependence on Key Personnel
The success of DDN will be significantly dependent on the continued
services of its Chairman, CEO and President, Donald B. Scott, and its Vice
President, Finance and Operations, Richard J. Boeglin. The operations of Pro.Net
and hip are under the direction of Pro.Net's President, Peter V. Ciccone. Simon
D. Liebman is President of Cyber America. The loss of the services of Messrs.
Scott, Boeglin, Ciccone or Liebman could be particularly detrimental to the
Company in their respective areas of the Company's business because of their
experience, knowledge and contacts in their particular fields. The Company has
entered into an employment agreement with Mr. Scott which expires on May 15,
1997. The Company has also entered into a consulting agreement with Mr. Ciccone
through March 1998. The Company does not have key person life insurance on the
lives of its executive officers. See "Management - Directors and Executive
Officers."
Shares of Common Stock Eligible for Future Sale
Future sales of substantial amounts of Common Stock under Rule 144 or
otherwise by the present stockholders could have a material adverse impact on
the market price for the Common Stock at that time. There are presently
2,271,355 shares of Common Stock of the Company outstanding, of which 898,750
are "restricted securities" as that term is defined pursuant to Rule 144, and
under certain circumstances may be sold without registration pursuant to the
provisions of such Rule. In general, under Rule 144, a person or persons whose
shares are aggregated, and who has satisfied a two-year holding period may,
under certain circumstances, sell within any three-month period a number of
restricted securities which does not exceed the greater of one percent (1%) of
<PAGE>
the shares outstanding or the average weekly trading volume during the four
calendar weeks preceding the notice of sale required by Rule 144. In addition,
Rule 144 permits, under certain circumstances, the sale of restricted securities
by a person who is not an affiliate of the Company and has satisfied a
three-year holding period without any quantity limitations. As of the date of
this Prospectus, a total of 898,750 shares of Common Stock held by present
shareholders are eligible for sale under Rule 144, of which 57,666 shares will
become eligible under Rule 144 between February and August 1997. In addition,
510,572 shares are subject to a lock-up agreement with the Underwriter of the
public offering until February 1998.
Outstanding Options and Warrants; Risk of further Dilution
As of the date of this Prospectus, the Company has outstanding options
and warrants to purchase approximately 540,000 shares of Common Stock at prices
ranging from $0.27 to $19.68 per share. While such options and warrants are
outstanding, the holders thereof are given the opportunity to profit from a
rise, if any, in the value of or market price for the Common Stock without
assuming the risk of ownership. See "Management - Stock Compensation Plans," and
"Certain Relationships and Related Transactions."
Underwriters' Warrants; Risk of Further Dilution
The Company sold to the Underwriter, in connection with its public
offering, warrants (the "Underwriters' Warrants") to purchase 115,000 shares of
Common Stock and 160,000 Common Stock Purchase Warrants, which are exercisable
at $8.25 and $.24, respectively. The Company agreed to register such warrants
and their underlying securities, at its expense, under the Securities Act of
1933, as amended (the "Securities Act"), and applicable state securities acts.
For the life of the Underwriters' warrants, the holders thereof are given, at
nominal cost, the opportunity to profit from the difference, if any, between the
exercise prices of the Underwriters' warrants and the value of or market price,
if any, of the securities, with a resulting dilution in the interest of existing
shareholders. The terms on which the Company could obtain additional capital
during the exercise period of the Underwriters' warrants may be adversely
affected as the holders of the Underwriters' warrants may be expected to
exercise them when, in all likelihood, the Company would be able to raise
capital by a new placement of securities on terms more favorable than those
provided for by the Underwriters' warrants.
No Dividends
The Company has never paid any form of cash dividend or distribution
and does not anticipate the distribution of cash dividends in the foreseeable
future. Further, the Company's board of directors presently intends to retain
all of the Company's earnings, if any, for the expansion of its business. Any
future decision by the Company's board of directors to pay cash dividends will
depend, among other factors, upon the Company's earnings, financial position,
and cash requirements. See "Dividend Policy."
Denial of Cumulative Voting and Preemptive Rights; Lack of Control
Holders of the Common Stock have no preemptive rights in connection
with such securities. The security holders may be further diluted in their
percentage ownership of the Company if additional securities are issued by the
Company in the future. Cumulative voting in the election of directors is
prohibited. Accordingly, the holders of a majority of the outstanding shares of
Common Stock, present in person or by proxy, will be able to elect all the
members of the Company's board of directors. See "Description of Securities."
NASDAQ SmallCap Market Listing; Disclosure Relating to Penny Stocks
The Company's Securities are traded on the NASDAQ SmallCap Market.
Failure of the Company to meet the maintenance requirements of the NASDAQ
SmallCap Market could result in the Company's Securities being delisted from
such market, with the result that the Company's Securities would trade on the
OTC Electronic Bulletin Board or in the "pink sheets" maintained by the National
Quotation Bureau, Inc., which are generally considered to be less efficient
markets. Listing on the Bulletin Board requires a filing by a broker/dealer
willing to make a market in the Company's securities and filing by the Company
of periodic reports under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company is subject to the reporting requirements of the Exchange Act
and currently files such reports. Among other consequences, delisting from the
NASDAQ Small-Cap Market may cause a decline in the stock price, difficulty in
conducting trades and difficulty in obtaining future financing. There can be no
assurance that a sustained market for the Securities will continue.
If, at any time, the Securities are not listed on the NASDAQ SmallCap
Market, the Securities could become subject to the "penny stock rules" adopted
pursuant to Section 15 (g) of the Exchange Act. The "penny stock rules" apply to
<PAGE>
companies whose common stock trades at less than $5.00 per share or which have
tangible net worth of less than $5,000,000 ($2,000,000 if the company has been
operating for three or more years). Such rules require, among other things, that
brokers who trade "penny stock" to persons other than "established customers"
complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the security,
including a risk disclosure document and quote information under certain
circumstances. Many brokers have decided not to trade "penny stock" because of
the requirements of the penny stock rules and, as a result, the number of
broker-dealers willing to act as market makers in such securities is limited.
Authorization of Preferred Stock
The Company's Restated Articles of Incorporation, as amended, authorize
the issuance of 1,000,000 shares of preferred stock with such designations,
rights and preferences as may be determined from time to time by the board of
directors, without shareholder approval. In the event of issuance, the preferred
stock could be utilized under certain circumstances as a method of discouraging,
delaying or preventing a change in control of the Company. At present the
Company has no particular plans to issue any shares of its preferred stock. The
Company has agreed with the Representative of the Underwriters not to issue any
shares of preferred stock until February 13, 1999 without the prior approval of
the Representative except for the purpose of acquiring another business. See
"Description of Securities."
Influence on Voting by Officers and Directors
The Company's officers and directors currently beneficially own
approximately 20% of the Company's outstanding Common Stock and equivalents
(assuming exercise of outstanding options and warrants). As a result, the
Company's officers and directors may be able to impact the vote on matters
submitted to shareholders, including the election of directors. See "Principal
Shareholders."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Common
Stock by the Selling Shareholders pursuant to this Prospectus. However, the
Company would receive gross proceeds of $11,040,000 if all of the Warrants were
exercised. It is expected that any such proceeds would be added to working
capital and general corporate purposes, although the actual use of such proceeds
would depend upon several factors, including the Company's requirements for cash
at the various times when the Warrants might be exercised and the actual
proceeds received. Proceeds may also be used to acquire businesses, technologies
or products that expand or complement the businesses of the Company. No such
transactions are currently being negotiated. Pending such uses, the Company
intends to invest the net proceeds in short-term, interest-bearing investment
grade securities. It should be noted that the Warrants are exercisable at $6.00
per share until February 13, 2001, but are not subject to redemption until at
least March 13, 1997, when, upon 30 days prior notice, and provided that the
closing sale or bid price per share of the Company's Common Stock equals or
exceeds $9.00 per share for 20 of the 30 consecutive trading days ending within
15 days of the date notice of redemption is given, the Warrants are subject to
redemption by the Company at a price of $0.25 per Warrant.
<PAGE>
PRICE RANGE OF COMMON STOCK AND WARRANTS
The Company's Common Stock (symbol "DIDA") and Warrants (symbol
"DIDAW") have traded on the NASDAQ SmallCap Market since February 13, 1996. The
following table sets forth the high and low sales prices for the Company's
Common Stock and Warrants as reported by the NASDAQ Stock Market for the periods
indicated:
Common Stock
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
1996:
<S> <C> <C>
1st Quarter (beginning February 13, 1996) $ 8.75 $ 6.00
2nd Quarter 11.38 6.50
3rd Quarter 8.00 4.88
4th Quarter (through October 31, 1996) 6.13 3.75
</TABLE>
Warrants
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
1996:
<S> <C> <C>
1st Quarter (beginning February 13, 1996) $ 4.25 $ 2.25
2nd Quarter 6.63 2.63
3rd Quarter 3.50 1.38
4th Quarter (through October 31, 1996) 2.00 .88
</TABLE>
The above prices represent inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not represent actual transactions. As of March
26, 1996, there were approximately 204 record owners of the Company's Common
Stock and approximately five record owners of the Company's Warrants.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock, and it
does not anticipate that it will pay cash dividends in the foreseeable future.
The payment of dividends by the Company will depend on its earnings and
financial condition and such other factors as the board of directors of the
Company may consider relevant. The Company currently intends to retain all of
its earnings, if any, to provide for the development and growth of the Company.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations."
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of financial condition and results of
operations should be read in conjunction with the Company's financial statements
appearing elsewhere in this Prospectus.
Background
From inception in October 1988, through December 1992, the Company
generated insignificant revenues, and as a result of the costs and expenses
associated with funding the development and initial implementation of the
digital information network, the Company incurred significant cumulative net
losses which were financed by the issuance of debt and Common Stock. During
1988, the Company completed the installation of the RIPTA test market. In 1990,
the Company was awarded a contract from DART to install an electronic
advertising system on all of its buses. Installation commenced in 1991, but was
not immediately completed, due to insufficient financial resources to purchase
needed equipment and labor. During 1992, the Company attempted, unsuccessfully,
to raise additional capital, and by the end of the year, had depleted its cash
and was without any immediate prospect of additional funding. Accordingly, the
majority of senior management resigned. The current President accepted the
position of Acting President in December 1992.
The Company's Transit Network Division has historically experienced an
increase in revenues in the fall of each year, due to special programming and
advertising sales associated with professional football games, but otherwise the
Company is not subject to seasonal variations. Contribution to total revenue and
gross profit at the Company's Transit Network Division is derived primarily from
the Division's DART operation, where historically about 90% of its total
contribution originates. The remaining contribution stems from the Division's
RIPTA operation.
In February 1996, the Company closed its initial public offering and
received net cash proceeds of approximately $5.9 million, after deduction for
underwriters commissions and certain other offering related costs, from the
issuance of 1,322,500 shares of its Common Stock and 1,840,000 of its Common
Stock Purchase Warrants. The Common Stock Purchase Warrants are redeemable after
one year, under certain circumstances, and entitle the holder to purchase one
share of the Company's Common Stock at an exercise price of $6 per share for a
five year period commencing upon issuance.
In June 1996, the Company acquired all of the outstanding common stock
of Pro.Net for 100,000 shares of the Company's Common Stock. In addition, the
Company issued 10,000 shares of its Common Stock each to Peter Ciccone and
Stephen Willey in consideration for signing consulting agreements with the
Company. Pro.Net, based in Vancouver, British Columbia, Canada, is a full
service Internet provider that provides local access to the Internet, and
consulting and training services for customers interested in building internal
Internet systems or on-line marketing programs. Pro.Net become operational in
October 1994.
Also in June 1996, the Company acquired all of the outstanding common
ctock of Cyber America, a Pennsylvania based corporation, for 50,000 shares of
the Company's Common Stock. Cyber America, an early stage development company
which began operations in March 1996, offers direct, high-speed access to the
backbone of the Internet.
In September 1996, the Company acquired all of the outstanding common
stock of hip, also a Vancouver, British Columbia based corporation, for 30,000
shares of the Company's Common Stock. Hip is a Web page design and development
company targeting high-end corporate customers that became operational in June
1994. The Company subsequently merged hip's operations into Pro.Net's.
Comparison of the Nine Months Ended September 30, 1995 and September 30, 1996
For the nine months ended September 30, 1996, revenues increased
$56,000 from $350,000 to $406,000, an approximate 16% increase from the
comparative prior year period. This increase is primarily the result of
contributions from Pro.Net, which has generated revenues of $51,000 since its
acquisition in June 1996. Revenue from the Company's Transit Network Division
increased slightly, from $350,000 to $355,000. Total expenses increased from
<PAGE>
$1,377,000 to $1,911,000, or approximately 39%, during the nine months ended
September 30, 1996 as compared to the prior year period, due primarily to a
one-time charge of $303,000 taken in connection with the acquisition of Cyber
America, and a $296,000 increase in salaries and related which has increased
primarily because of additional employees resulting from the Company's
acquisitions during 1996. During this same comparative period, marketing,
general and administrative increased by $239,000, due primarily to additional
working capital requirements of the Company's acquisitions, while financing,
legal and other consulting expenses decreased $274,000, the result of decreased
requirements for these services since the Company successfully completed its
public offering in 1996. The non-recurring product development costs charge of
$303,000 relates to the expensing of the estimated fair value of intangible
assets acquired as it relates to products in development acquired in the Cyber
America acquisition. Under generally accepted accounting principles, such
product development costs are required to be expensed until technological
feasibility, as defined, has been attained.
Comparison of the Fiscal Years Ended December 31, 1994 and December 31, 1995
For the year ended December 31, 1995, revenues were $498,000, an
approximate 7% increase from the prior year, due primarily to an increase in the
advertising revenues generated from the DART system. The Company experienced an
increase in the number of clients, as well as an increase in its advertising
rates which accounted for this revenue increase. Total expenses for the year
ended December 31, 1995 decreased approximately $266,000, or 13%, due to the
following changes. Salaries and related expenses increased $185,000, resulting
from an increase in cash compensation paid to the Company's president as well as
an increase in sales commissions paid. The increase in salaries and related
expenses were more than offset, primarily by a $453,000 decrease in financing,
legal and other consulting expenses, which was the result of a decrease in
expenses related to raising capital, as well as the recording of $309,000 of
expense during the year ended December 31, 1994 relating to the cancellation and
reissuance of stock options. Direct operating costs in 1995 decreased $38,000
from 1994, the result of tighter cost controls and $8,000 less in depreciation
expense. Marketing, general and administrative expenses increased $40,000 in
1995, or 15%, primarily due to increases in office expenditures. Net cash used
by operating activities for each of the years ended December 31, 1994 and 1995
of $507,000 and $527,000 respectively, did not vary significantly.
Financial Condition
Prior to the Company's initial public offering, the Company incurred
significant operating losses which were funded primarily by (i) converting the
majority of its previously outstanding debt to equity, (ii) raising cash through
the issuance of short-term promissory notes and Common Stock, and (iii)
otherwise financing its operations through the continued renegotiation and
refinancing of its obligations. Further, the Company had a working capital
deficit prior to its initial public offering, which, for the most part, was the
result of the forbearance of its creditors.
In February 1996, the Company closed its initial public offering and
realized net cash proceeds of approximately $5.9 million, net of underwriter's
commissions and certain offering related costs. Approximately $1 million of
offering proceeds was utilized for the repayment of certain notes payable,
resulting in the elimination of approximately $70,000 in annual interest
expense, and $225,000 of offering proceeds was utilized for the payment of
amounts due relating to expanded software license obligations. Cash used by
operating activities for the nine months ended September 30, 1996 approximated
$907,000 and included payment from offering proceeds of approximately $70,000 of
accrued interest and $60,000 of accounts payable for which payment had been
deferred beyond normal terms as a result of creditors' forbearance, as well as
approximately $375,000 in working capital to fund the on-going operations of the
companies acquired in 1996.
Over the next six months, the Transit Network Division plans to
install, if given the approval by DART, 80 of its digital information network
signs on DART's light rail vehicles that were put into service in June 1996, at
a cost of approximately $100,000. The Company believes that the increase in
advertising revenue resulting from the installation on these light rail vehicles
will be sufficient to offset the initial capital outlay.
The Company anticipates that the companies it has acquired in 1996 will
require additional working capital until they become profitable.
<PAGE>
A valuation allowance has been recorded for the full amount of deferred
taxes as realization of such deferred tax asset is not considered to be more
likely than not.
Liquidity and Capital Resources
As a result of the Company's initial public offering in February 1996,
the Company has reduced its total liabilities 43%, from $2.3 million as of
December 31, 1995, to $1.3 million as of September 30, 1996. In addition, as a
result of remaining proceeds from its initial public offering, cash and cash
equivalents have increased from $12,000 as of December 31, 1995 to $3,209,000 as
of September 30, 1996, and stockholders' deficit in the amount of $1,667,000 on
December 31, 1995 has improved to stockholders' equity in the amount of
$4,230,000 as of September 30, 1996.
At September 30, 1996, the Company's principal assets consisted of
approximately $3.2 million of cash, of which approximately $3.1 million was
invested in short-term, interest-bearing investments with banks and other
financial institutions, and from which interest income is earned. The Company's
total obligations of approximately $1.3 million consisted primarily of $477,000
in accrued expenses, $555,000 in short-term notes payable incurred by the
Company's Transit Network Division, and $188,000 in noncurrent liabilities.
The Company allocated approximately $1 million of proceeds from its
public offering to business acquisitions, and while 1996 acquisitions were for
Company stock, the Company has utilized approximately $375,000 to fund
operations of acquired businesses. Pending use of offering proceeds to fund
operating activities, capital expenditures, and potential future business
acquisitions, the Company has invested such proceeds in short-term,
interest-bearing investments primarily with banks and other commercial financial
institutions.
The Company believes that its future operating results, liquidity, and
capital resources will improve, the result of anticipated revenue growth by
Pro.Net, and the commencement of revenue generation by Cyber America in the near
future.
The Company believes that with the cash it has invested in short-term
financial instruments, interest earned from these investments, and anticipated
revenues from operations, the Company's working capital requirements will be
sufficient for at least the next 24 months.
Effect of Recently Issued Accounting Standards
Recently issued accounting standards having relevant applicability to
the Company consist primarily of Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), which establishes standards for accounting for stock-based
compensation. SFAS No. 123 is effective for financial statements for fiscal
years beginning after December 15, 1995. It is not expected that the Company
will adopt the "fair value based method" of accounting for stock options, which
is encouraged by SFAS No. 123, but rather will continue to account for such,
utilizing the "intrinsic value based method" as is allowed by that statement.
<PAGE>
BUSINESS
General
DDN provides wireless communication systems to the transit industry,
and Internet services, targeting primarily the business community.
The Company's Transit Network Division markets two wireless communication
systems to the transit industry: a digital information network which uses
an FM subcarrier signal to transmit information, both text and graphic, to
riders on-board public transit vehicles; and a next-stop automated
audio/visual announcement system which utilizes Global Positioning System
(GPS) technology to track a vehicle's position, then triggers simultaneous
audio and visual announcements of next-stop locations at predetermined
points along a route;
Two wholly owned subsidiaries of the Company market Internet services:
Pro.Net is a full service Internet service provider and Web page design
firm; and Cyber America is a first-tier Internet provider delivering high
speed access directly to the backbone of the Internet. Additionally, the
Company recently acquired from SSNN an exclusive license to sell financial
news coverage in Canada to small capitalization companies, and to make that
financial information available to Internet users at SSNN's Web site.
History
The Transit Network
The Company's Transit Network Division markets and operates two
systems: a digital information network and a next-stop automated audio/visual
announcement system ("NextStop"). The digital information network is a network
of computerized electronic displays that delivers information, both text and
graphics, to riders on-board public transit vehicles, utilizing an FM subcarrier
signal to transmit the data. The Transit Network currently operates its digital
information network on the 824-bus fleet of the DART system, and on 66 buses of
the RIPTA system. The RIPTA system has served as a test site for the Company
since 1988. The DART system began operations in 1991.
Following passage of the Americans with Disabilities Act ("ADA"),
transit authorities began to realize that this law included a mandate that they
would have to provide the same information to hearing- and sight-impaired
passengers that non-impaired passengers have. The Company foresaw the need to
provide audio and visual next-stop announcements for hearing- and sight-impaired
riders, and began development of NextStop, a fully automated audio and visual
next-stop announcement system utilizing GPS technology. NextStop was
successfully tested on the Company's system in Providence, Rhode Island in
October of 1994. Although there are no NextStop systems in operation, the
Company intends to aggressively market this product to transit agencies in North
America. According to METRO, a transit industry magazine, their 1995 survey of
transit bus fleets indicated there were 52,428 buses in service in the largest
100 markets in the U.S. and Canada. Tens of thousands more exist in authorities
operating fleets in smaller markets. The Company believes that a substantial
number of transit authorities are not in compliance with all areas of the ADA,
especially as it concerns the requirement for transit agencies to provide
hearing- and sight-impaired passengers with the same information as non-impaired
passengers.
Pro.Net Communications, Inc.
Pro.Net, a Vancouver, British Columbia based corporation, was organized
in October 1994, as a provider of Internet services. Pro.Net's local access
service provides customers with a local (i.e. the Greater Vancouver area) point
of presence access to the Internet. This service is comprised of quality
telecommunications hardware, proven software and reliable communications
facilities. Pro.Net intends to continue capitalizing on the demand for Internet
access from corporations and individuals by providing Internet access via leased
and dial-up lines. Pro.Net also provides consulting or training for clients
interested in building an intranet or on-line marketing program. Pro.Net was
acquired by the Company in June 1996.
In September 1996, the Company acquired hip Communications, Inc.,
another Internet-related company, based in Vancouver, which designs and builds
Web sites, primarily for large corporations and government agencies. hip's
operations have subsequently been merged with Pro.Net's, allowing Pro.Net to
offer Web page design and development in addition to their other Internet
services.
<PAGE>
Cyber America Corporation
With a growing number of businesses emphasizing the importance of high
speed connectivity to the Internet, Cyber America's founders originated a unique
design implementation process which delivers information to and from the
backbone of the Internet faster that traditional methods. Incorporated in March
1996, Cyber America filed a patent application on this design implementation in
July, 1996. This pending patent was subsequently assigned to the Company in
connection with the acquisition of Cyber America. Unlike traditional primary
access providers who are connected to the backbone of the Internet using
point-to-point wide area networks, Cyber America has implemented connections
from the Internet backbone into various carrier networks, delivering Internet
connectivity via broadband fast packet services. This means Cyber America does
not have to oversubscribe already congested networks, and can eliminate the
multiple layers of routing involved, greatly improving access performance.
License Agreement with SSNN, Inc.
SSNN became operational in December 1995, and provides financial
information on public companies to Internet users free of charge. SSNN charges
an electronic archiving and distribution fee to public companies listed on its
Web sites. SSNN intends to use its software and marketing expertise to provide
on-line financial news and e-mail services for most foreign equities markets,
since foreign public companies have also been traditionally hard to access. SSNN
granted an exclusive license to the Company in October 1996, in consideration
for 25,000 shares of the Company's Common Stock, which allows the Company to
market SSNN's service in Canada. SSNN is currently in negotiations with several
other groups who are interested in licensing SSNN's service in Europe,
Australia, New Zealand and Hong Kong. The Company believes that if SSNN is
successful in establishing name identification in world-wide markets, it will be
beneficial to the Company's marketing efforts in Canada.
Strategy
The Company's strategy centers around three distinct business plans.
First, to market its digital information network and NextStop system to transit
authorities across the United States and Canada; secondly, to capitalize on the
growing demand for Internet services by building its customer base for these
services through its Pro.Net and Cyber America operations; and thirdly, to
aggressively market SSNN's service to small capitalization companies in Canada
who are anxious to expand their financial news coverage to potential buyers of
their publicly-traded stock. The Company's strategy to market its wireless
communications systems, build its customer base for Internet services and market
SSNN's service consists of the following key elements:
Successful installation of The Transit Network's NextStop system
in the near future. In order for The Transit Network to
successfully and rapidly expand its NextStop system, the Company
believes it is critical to get its first NextStop system installed
quickly. With the number of competitors in the industry growing,
many of whom also do not yet have their systems installed in any
transit fleets, it would be a significant competitive advantage to
have a successful, working system in place. The Company is
currently preparing to respond to two Requests For Proposals
("RFP"s) for such systems, and believes that it has an excellent
chance of being the winning bidder on one or both of these
contracts. However, there can be assurance that any contracts will
be awarded to the Company.
Continued compliance with and enforcement of the Americans with
Disabilities Act. The federal mandates that require transit
authorities to provide hearing and sight-impaired passengers
access to the same information as able-bodied passengers has been
the impetus behind transit authorities' willingness to install
automated next-stop announcement systems on their transit
vehicles. The Company believes it is vital that the Justice
Department continue to enforce and pressure transit authorities to
comply with all aspects of the Americans with Disabilities Act
("ADA"), or most transit authorities would cease to address these
needs, making it difficult to survive in a market with increasing
competitors and a reduced demand for these products. The Company
will continue to encourage and support disadvantaged and disabled
groups whose constituents would benefit from these audio and
visual next-stop announcement systems.
Continued availability of funds for transit authorities. Funding
for wireless communications systems such as The Transit Network's
digital information network and NextStop announcement system
typically originates from federal programs that pay for 80% to 90%
of the total cost, with the remaining difference funded by the
local transit authority. The amount of federal dollars available
<PAGE>
to transit authorities has been shrinking the past few years as
the United States Congress has been attempting to reduce the
federal budget deficit. The Company believes that if funding
remains near current levels, or is reduced only slightly in the
future, adequate federal funding exists for transit authorities to
purchase these types of systems. Even in the event that federal
funding is severely reduced from current levels, the Company
believes that transit authorities will still be expected to
fulfill all of the ADA requirements. The Company's strategy is to
assist interested transit authorities in applying for these funds
which are available under certain federal grant programs.
Additionally, for transit authorities that can obtain the federal
funds, but don't have the necessary 10% - 20% required from local
sources, the Company may finance or arrange financing for, all or
a portion of that 10% - 20% through a public/private partnership,
since it would have long-term benefits for both parties.
Approval of the Company's pending patent application. On July 12,
1996, Simon D. Liebman, an officer and director of Cyber America,
filed a new patent application for "Fast Packet Internet Access,"
which was assigned to the Company as part of the Company's
acquisition of Cyber America. This patent relates to Internet
communications, and is a system for increasing the efficiency and
data communication throughput for corporate Internet users and
retail Internet user access providers by eliminating many POPs
(Points of Presence), routers and other slow network elements. If
granted, the Company would be protected from competitors copying
the same design implementation, allowing the Company to keep its
competitive advantage as it relates to fast and efficient
communication over the Internet. If not, there can be no assurance
that other companies will not copy this same system, eliminating
one of the advantages Cyber America now has over several of it
competitors.
Cyber America maintaining a low customer over-subscription ratio.
A key element of Cyber America's strategy is to maintain a 2.5:1
customer over-subscription ratio. While some competitors
over-subscribe their available bandwidth by ratios as high as 8:1,
few, if any, have committed to maintaining such a low ratio. The
Company believes it is important to keep this ratio low in order
to better handle the higher volume applications such as video
distribution and electronic commerce, and intends to adhere to
this low over-subscription ratio.
Pro.Net maintaining problem-free access to its service. The
fundamental thrust of Pro.Net's strategy is to attract and
maintain corporate customers and individuals who want access to
the Internet but are unwilling to tolerate the connection and
navigating problems that currently exit with so many other
Internet service providers. Pro.Net intends to continue addressing
these customer concerns by providing unlimited, high quality
set-up assistance, reliable service, state-of-the-art navigation
tools and continual emphasis on customer support.
Rapid enrollment of a sufficient number of small capitalization
companies joining the SSNN network in Canada. The Company believes
that it will be important to enroll a sufficient number of small
capitalization companies as quickly as possible in order for the
service to be beneficial to visitors of the Company's SSNN Web
site, allowing visitors to browse information on several
companies, and enticing them to return as an increasing number of
companies are added to the network. This will be equally important
to subscribing companies joining the SSNN network, as they will
want to see other companies on the network to justify their
investment in the program. In order to accomplish this goal, the
Company will enact two strategies: the Company and SSNN will
leverage existing relationships and develop new relationships with
brokerage firms that conduct business in small capitalization
stocks; and, mount an aggressive mailing and print advertising
campaign which will target stock brokers. The Company believes
that these actions will enable it to quickly enroll a sufficient
number of small capitalization companies at its Web site to create
on-going demand for information of this type.
The Transit Network's Digital Information Network
Background
The Transit Network's digital information network is a network of
computerized electronic displays that delivers transit authority messages, news,
information and may optionally include advertising, to riders on-board public
transit vehicles. The network consists of specialized electronic LED displays,
<PAGE>
transmission protocol, and control software. Each system requires an agreement
with a local FM radio station for the use of an FM subcarrier frequency. The
Company does not believe that the cost of these arrangements will be a
significant expense.
The electronic display utilized on the DART and RIPTA buses is
approximately six inches high by twenty-six inches in length, strategically
located behind and slightly above the driver, and is visible from most areas
inside the vehicle. The software for the digital information network is licensed
from Sunrise Systems.
See "--Digital Information Network Technology" and "--Software License."
News briefs, weather, trivia questions, sports reports and transit
authority information are continuously presented, and can be interspersed with
advertising messages as well. The program sequence runs approximately 12-15
minutes, generally assuring that the full program cycle is viewed more than once
during an average commute, which lasts approximately 30 minutes according to
United States Department of Transportation statistics. Programs are usually
updated twice a day, changing content to reflect the demographic profile of
riders at different times, to update the news, and to include new information
from the transit authority. News stories may be changed more frequently if the
events of the day warrant such updates. The Company subscribes to United Press
International's (UPI) wire service and receives continuous news stories every
few minutes throughout the day via satellite transmission and UPI's software
package. With UPI's full service package, the Company is able to obtain
up-to-the minute programming information on news, weather, sports and
entertainment. Advertising copy is usually supplied by the advertiser, while
public service and transit information announcements are provided by the transit
authority.
The digital information network has other important capabilities,
including the ability to (i) target specific buses and routes with different
programming, (ii) custom design special programming, and (iii) display in
Spanish and other foreign languages. The network allows certain messages to be
displayed system-wide, on selected vehicles, or on selected routes. In addition
to regular programming, special programming can be custom-tailored for specific
events. For example, in Dallas, the transit authority uses approximately 100-125
buses to transport fans to Dallas Cowboys football games. Those buses are
targeted with a special program that is filled with football and other
sports-related features, while the other buses in the fleet continue to run the
regular program. This ability to target buses and routes is a feature of the
system that can be sold to advertisers desiring to reach specific riders.
Targeting of individual buses which have been chartered for one-day special
events is also available on the system.
Digital Information Network Technology
The digital information network consists of specialized electronic LED
displays, transmission protocol, and control software. The software allows a
programmer to enter information and entertainment data into a personal computer.
The program is updated via a high-speed modem connected between the programming
site and the transmitting location. It is then broadcast through an FM
subcarrier frequency and received by a small antenna located on each bus. The
digital information is then transferred into buffer memory inside the LED
display. As the program then being displayed completes its cycle, the new data
automatically replaces the old data without any interruption. The entire
broadcast cycle - from in-house computer, to transmitter, to transit vehicle, to
its on-screen appearance, can be completed in just minutes. The Company is
responsible for repairing or replacing its electronic displays that are
defective or damaged after installation. The Company performs monthly
maintenance on all installed message displays.
Software License
The Company licenses the software to operate its digital information
network from Sunrise Systems, pursuant to a License Agreement (the "Software
License") dated November 1, 1995, as amended. The Software License grants the
Company a perpetual, fully paid up license to use the software wherever it
wishes. The Software License is exclusive with regard to each metropolitan area
in the United States and Canada (the "Primary Territory") which has a population
of at least 100,000 people, and is otherwise non-exclusive in the Primary
Territory. In areas other than the United States and Canada (the "Option
Territory"), the Software License is non-exclusive, although the Software
License allows it to become exclusive if certain conditions are met. The
Software License requires the Company to pay Sunrise Systems a site fee of
$7,500 for any new transit market it enters and allows the Company to sublicense
its rights in the software to other entities.
<PAGE>
Hardware Purchase Agreement
The Company purchases its LED message signs and related hardware
exclusively from Sunrise Systems, Inc. ("Sunrise Systems") and Sunrise Systems
has agreed to sell LED message signs and related hardware to the Company
pursuant to an agreement which expires December 31, 1996 (the "Hardware
Agreement"). The Company intends to negotiate an extension of the Hardware
Agreement, but it believes that if it is not able to do so, it would be able to
find another hardware supplier because the components and subassemblies are
available from multiple sources, although there can be no assurance that it will
be able to do so. The failure or delay in finding a replacement for Sunrise
Systems could have a material adverse effect on the Company's business.
Transit Authority Marketing
The Company has contracted with transit authorities in Dallas and
Providence, and is continuing to solicit other public transit authorities for
the purchase of its digital information network, and/or contract for the
exclusive rights to operate its system inside the transit vehicles operated by
the authorities. In the latter case, the Company's strategy is to seek
long-term, exclusive contracts with transit authorities. The Company initially
will seek to penetrate the domestic public transit market comprised of the top
transit fleets. In cases where the Company sells its system to transit agencies,
the Company will require initial capital during the early stages of
installation, since transit authorities typically cannot or will not make
payments until certain performance requirements are satisfied. There can be no
assurance that the Company will be awarded contracts in any new markets.
Dallas Area Rapid Transit
The Transit Network's Dallas operation serves as a prototype for
operations in a large transit market. Dallas ranks 13th in the United States bus
transit market, with approximately 824 vehicles. The Company entered into a
contract with DART on October 16, 1990, which granted the Company exclusive
rights to install and operate its digital information network on-board DART's
buses for a period of five years. Installation of the DART system was completed
in August 1993. The Company and DART entered into a new contract effective
October 16, 1995 for an additional three years, which gives DART the right to
extend the contract for two additional one-year terms. Under the new contract,
the Company pays DART 4% of its gross advertising receipts. In addition, DART
has reserved a permanent position on the digital information network program for
its exclusive use, as well as limited access to advertising space for its own
printed material. The Company must reserve up to 30% of available space on
interior advertising panels and one message block on the digital information
network during each cycle of messages for DART'S use and public service
announcements. Advertising revenues from the interior advertising panels account
for less than five percent of total advertising revenues and the reservation of
advertising space to DART does not materially affect the Company's total
advertising revenues. Maintenance of the digital information network is
subcontracted to an independent party. Each bus is inspected at least monthly to
ensure that the hardware is functioning properly and the program is accurately
displayed. Defective hardware is returned to Sunrise Systems for repair or
replacement. Programming errors to date have been minor and are corrected at the
Company's office.
Rhode Island Public Transit Authority
The Company has operated its digital information network as a test
market on approximately 66 RIPTA buses since October 1988. The Company operates
the system under an oral arrangement to continue the five-year contract with
RIPTA, dated April 1988, which has expired. The contract provided for the
exclusive right to install and operate electronic displays on-board RIPTA
vehicles in return for a royalty based on a fixed percentage of gross
advertising revenues, and for RIPTA to have access to a certain percentage of
the Company's program time to display transit authority messages and promotions.
Advertiser Participation
In the DART and RIPTA markets, where The Transit Network depends on the
sale of advertising to generate revenues, its clients consist primarily of local
consumer products and service companies, as well as regional and local offices
of national companies. The Company will initially focus on local and regional
companies until its system is installed in a sufficient number of transit
markets, at which time large advertisers will consider use of their national
advertising budgets for transit advertising.
<PAGE>
Competition for Advertisers
The advertising industry is intensely competitive. The Company competes
for advertising dollars with all advertising and promotional channels, including
television, radio, magazines, newspapers and direct mailings. Management
believes that its primary competition is radio and newspapers, which charge
rates significantly higher than those charged by the Company. The Company
believes that the primary basis for competition in the advertising industry is
price and value, although other factors such as market coverage, audience
demographics, and time and cost of production are also of importance.
Manufacturing, Supply and Installation
The Company does not intend to manufacture or supply its hardware, but
will contract with third parties to produce the equipment. Sunrise Systems
assembles The Transit Network's hardware from components and subassemblies
manufactured by others pursuant to an exclusive agreement with the Company.
While the Company believes that most of such components and subassemblies are
available to Sunrise Systems from multiple sources, there can be no assurance
that Sunrise Systems will be able to obtain commitments from qualified
manufacturers to provide the components and subassemblies within the Company's
time and cost estimates. The Company incorporates both system and application
software, most of which is licensed from Sunrise Systems. See "-Software
License" and "- Hardware Purchase Agreement."
The Company will contract with third party electrical contractors to
install the hardware in participating transit authority vehicles. The Company
has an agreement with a Dallas electrical contractor who has installed The
Transit Network's hardware in DART vehicles, whereby the contractor has the
right of first refusal to install the hardware in other transit systems in the
United States, unless there are union labor or transit authority requirements
which the contractor cannot meet.
The Transit Network's NextStop Automated Audio/Visual Announcement System
Background
The Transit Network's NextStop unit was developed in response to the
transit industry's requirement to comply with the ADA. Based on the tests of the
NextStop announcement system conducted on RIPTA buses, the Company has
demonstrated that its system provides hearing- and sight-impaired passengers the
same information as non-impaired passengers have with respect to bus routes,
destination and stopping points on a route.
Among other requirements, the ADA requires transit authorities to
provide hearing- and sight-impaired passengers with the same type of service
they provide to non-impaired passengers. As that relates to transit usage,
agencies must provide a means for hearing- and sight-impaired passengers to
determine what route they are boarding, and what destinations are upcoming once
they begin a trip. To accomplish this, transit authorities must have some type
of audio and visual announcement system which can accommodate these
requirements.
Because of heavy capital costs incurred for compliance with the ADA,
transit authorities have been forced to gradually phase in compliance with these
requirements. Numerous transit agencies have issued Expressions of Interest
("EOIs") or RFPs through public announcements in industry publications to
ascertain which vendors' products exist to address these compliance mandates.
Description
The NextStop system provides audio and visual announcements of upcoming
stops along a bus route. Precise latitude and longitude coordinates for each
stop along a route are programmed into the NextStop unit, along with voice
announcements that the transit authority wishes to make. An internal GPS
receiver tracks the location of the vehicle, and once it crosses one of the
designated latitude and longitude points, it acts as a triggering mechanism and
activates an audio announcement, while simultaneously displaying the same
message visually on a single-line LED screen.
Using a prototype, NextStop was field-tested on October 11, 1994, in
Providence, Rhode Island. RIPTA supplied a map of a typical inner city route
which had 24 major stops. The latitude and longitude points were determined for
these stops, and then programmed into the unit, along with the appropriate audio
and visual announcements. NextStop was initially tested for a seven-day period.
After minor modifications, the unit was demonstrated again in April 1995 with
positive results.
<PAGE>
Competition
Over the past twelve to eighteen months, competition in this industry
has intensified, as the number of companies providing automated audio and/or
visual next-stop announcement systems has grown to approximately twenty. While
not every company uses GPS as the triggering mechanism for these automated
announcement systems, at least ten companies do. Many of the latter entries into
this market are defense-related companies who previously concentrated on
marketing their GPS products to the military, but have subsequently targeted the
transit industry as potential users of their GPS products. In addition to the
downward pressure these competitors create on the pricing of the Company's
system, many of these companies have financial resources far greater than the
Company's, creating the possibility that they will underbid smaller competitors
such as the Company for these contracts, even though these larger companies may
lose money or just break even. There can be also be no assurance that additional
competitors will not enter this market.
Manufacturing and Installation
The Company does not intend to manufacture the NextStop hardware, but
plans to contract the manufacture and installation to third parties. The Company
believes that there are multiple manufacturers that can supply GPS-related
products. However, there is no assurance that another source will provide the
same quality at comparable costs as the Company's existing supplier.
Revenue from Maintenance Contracts
In addition to revenues resulting from the sale of NextStop units, The
Transit Network believes it will be able to generate annual revenues from
maintenance contracts with transit authorities to service and maintain the
system's hardware and software after the warranty period has expired.
Pro.Net Communications, Inc.
Background
Pro.Net is a full service Internet provider that provides local access
to the Internet, consulting and training services for customers interested in
building internal Internet systems or on-line marketing programs, and Web page
design and development. Pro.Net became operational in October 1994, and targets
primarily corporate customers and government agencies that want access to or a
presence on the Internet.
The Internet as it applies to Pro.Net
The Internet is a global web of computer networks, allowing individuals
and companies to transfer and access data worldwide by communicating with other
computers or networks connected to the Internet. All that is required to
successfully communicate via the Internet is a personal computer, a modem and an
Internet access provider, such as Pro.Net.
The World Wide Web
One part of the Internet which has seen significant growth in
popularity over the past few years is the World Wide Web, which links
information of various kinds and allows the user to browse these areas at will.
The Web, based on a client/server model and a set of standards for information
access and navigation, can be accessed using software that allows users to
exploit the capabilities of the Internet. The Web enables users to find,
retrieve and link all types of information available on the Internet.
Services Provided
Pro.Net's primary service is providing local access to the Internet for
individuals and companies in the Greater Vancouver area. Pro.Net believes there
are a large number of potential customers who want to access the Internet, but
are unwilling to suffer the connection and navigation problems that exist with
many other Internet service providers. To address these concerns, Pro.Net makes
every effort to ensure that customers enjoy simple first-time access to the
Internet when using Pro.Net. This is accomplished by providing set-up assistance
if requested, an adequate number of access lines and quality communications
equipment to ensure rapid and reliable connection to the Internet, and automated
installation of user-friendly software that allows easy navigation once the
customer is connected to the Internet.
Pro.Net believes that there will be tremendous growth in internal
Internet systems, called intranets, which allow private corporate networks that
use Internet software to link employees and business partners to share selective
<PAGE>
information. Because of the experience and knowledge of Pro.Net's staff, Pro.Net
is able to offer training and consulting services to customers who are
interested in setting up their own intranet. Pro.Net also provides consulting
services for customers who are interested in marketing their products or
services on the Internet.
As a result of the Company's acquisition of hip Communications, Inc.,
Pro.Net now offers Web page design and development in addition to its other
Internet-related services. Unlike many graphic design firms and advertising
agencies, Pro.Net builds sophisticated Web sites, and will therefore continue to
target large corporations and government agencies which typically require
relatively complex Web sites for their users.
Customer Support
In choosing an Internet service provider, customers often make their
decision based on the quality of a company's customer support. Because Pro.Net
believes it is of the utmost importance to provide prompt and effective
assistance to its customers when they request it, it has arranged for a
professionally trained staff to provide quality customer support twenty-four
hours per day, seven days per week.
Competition
The principal competition to Pro.Net's local Internet access comes from
approximately five other Internet access companies in British Columbia, most of
whom have larger customer bases than Pro.Net. However, many of these competitors
have experienced difficulties in providing easy access and reliable service.
Pro.Net believes that with its continued commitment to customer service and
quality hardware, it will be able to increase its market share for these
services.
There are several companies in British Columbia that provide Web page
design work. However, many of these competitors do not specialize in complex,
sophisticated Web sites as Pro.Net does. In addition, the Company believes hip
has established a favorable reputation for designing quality Web sites from
which the Company expects to benefit.
Cyber America Corporation
Background
Cyber America is an early stage development company which began
operations in March 1996. With companies placing ever-increasing importance on
high speed connectivity to the Internet, Cyber America was formed after its
founders originated a unique design implementation process which delivers
information to and from the backbone of the Internet faster than traditional
methods. Located in Willow Grove, Pennsylvania, Cyber America delivers Internet
access directly to the National Science Foundation Network's ("NSFNet") access
point, or NAP site.
The Internet as it applies to Cyber America
The Internet is a global web of computer networks. Developed over
twenty-five years ago, this network allows any computer attached to the Internet
to talk to any other using the Internet Protocol. The Internet has traditionally
been subsidized by the U.S. federal government, but as the number of commercial
entities that rely on the Internet for business communications and commerce has
increased, the level of federal subsidies has significantly diminished, and
funding for the Internet infrastructure and backbone operations has shifted
primarily to the private sector.
Individuals and companies connect directly to the Internet through
Internet access services such as those provided by MCI, AGIS, Sprint and UUNET
Technologies. In addition, consumer online services such as America Online and
CompuServe have also introduced Internet access gateways for their subscribers.
With these gateways, large numbers of unforeseen users have crowded onto the
Internet, creating bottlenecks and data clogs. This in turn has created an
increasing demand for and interest in high speed connectivity.
Intranet
Intranets, which heretofore have had a lower profile than the Internet,
are private corporate networks that use Internet software to link employees and
business partners, allowing for selective distribution of company information.
According to estimates by Forrester Research Inc. of Cambridge, Massachusetts,
the entire market for Internet software will grow from $342 million in 1996 to
$8.5 billion by 1999. The Company believes that intranets will become an
<PAGE>
important segment of the Internet landscape, and will help drive the demand for
speed conscious connectivity.
Pending Patent
Cyber America filed a patent application in July, 1996 for Fast Packet
Internet Access, a system which eliminates many slow network elements associated
with Internet connectivity and enhances efficiency and data communication
throughput for Internet users. This pending patent was assigned to the Company
in connection with the acquisition of Cyber America.
Technology
Cyber America is a first tier Internet provider, connecting its
customers directly to the backbone of the Internet. Online service providers
such as America Online and CompuServe offer Internet access via network
gateways, but this forces millions of their subscribers to share the gateway's
limited bandwidth, resulting in bottlenecks that create slow response time.
Utilizing Cyber America's patent pending network design and its interconnections
to NSFNet's NAP sites through an Asynchronous Transfer Mode ("ATM") network,
Cyber America delivers high speed connectivity to the Internet.
Competition
Unlike other Internet providers which typically sell their services to
individuals and small businesses, Cyber America targets speed conscious
customers such as ISPs and companies that have built Intranet or Wide Area
Network infrastructures, by leasing them bandwidth on T-1 or DS-3 lines. Cyber
America competes primarily with the traditional backbone providers such as MCI,
AGIS, Sprint and UUNET Technologies. Most of these traditional access providers
are applying technologies that have been in use since the early 1960s, while
Cyber America utilizes its patent pending network design, allowing it to create
service that is three to five times faster than traditional methods. Cyber
America also offers a lower over-subscription ratio than most competitors. Some
competitors over-subscribe their available bandwidth by ratios as high as 8:1,
while Cyber America has committed to maintaining a 2.5:1 over-subscription
ratio. The Company believes that this low over-subscription ratio is important
to better handle the higher volume applications such as video distribution and
electronic commerce.
Customer Support
The Company believes that it is important to provide prompt and
effective assistance to its customers. Cyber America provides assistance
twenty-four hours a day, seven days a week. The Company anticipates demand for
its customer support to grow as Cyber America's customer base expands. There can
be no assurance that the Cyber America's customer support resources will be
sufficient to manage the expansion in its customer base. A failure to adequately
match customer support resources to projected increases in customers could
adversely affect the Company.
SSNN License Agreement
Background
SSNN provides financial information on public companies to Internet
users free of charge. SSNN designs and builds Web sites which provide Internet
users or investors with convenient and easily accessible locations where they
can find information on publicly traded companies worldwide. Through exclusive
license agreements, SSNN intends to use its software and marketing expertise to
expand its service to foreign equities markets. SSNN granted an exclusive
license to the Company in October 1996 to market SSNN's service in Canada, and
is currently negotiating with other groups to provide SSNN's service in Europe,
Australia, New Zealand and Hong Kong as well. The Company believes that if SSNN
is successful in establishing name identification in world-wide markets, it will
be beneficial to the Company's marketing efforts in Canada.
The Internet as it applies to SSNN
The Internet is a global web of computer networks, allowing anyone with
a personal computer, a modem and an Internet access provider, to talk to any
other computer or network connected to the Internet. This connectivity feature
means the Internet can be used to transfer and access data and communications
worldwide.
<PAGE>
The World Wide Web
One part of the Internet which has seen significant growth in
popularity over the past few years is the World Wide Web, which links
information of various kinds and allows the user to browse these areas at will.
The Web, based on a client/server model and a set of standards for information
access and navigation, can be accessed using software that allows users to
exploit the capabilities of the Internet. The Web enables users to find,
retrieve and link all types of information available on the Internet.
Description
The Company believes that SSNN's service fills a void in the stock
market industry by providing comprehensive financial news coverage for small
capitalization companies (market caps of less than $500 million Canadian).
Because of the difficulty in obtaining this type of information, print
publishers currently cannot efficiently report news on small, publicly traded
companies. Now, however, people with access to the Internet will be able to get
this information on small capitalization Canadian companies free of charge at
the Company's SSNN Web site. Information such as historical trading data, press
releases, regulatory filings, current stock market quotes, current market cap,
and research reports will be available. Small capitalization companies that join
this network pay an annual subscription fee to keep this information about their
company accurate and up-to-date. Statistical information for each subscribing
company is updated nightly, while press releases are updated immediately.
For visitors to the Company's Web site, the objective is to offer one
stop free shopping for investors, both individual and professional, by providing
a wealth of information on small capitalization companies that is complete, up
to date, convenient and easily accessible, so that an investment decision can be
made without looking any further. In addition to one stop free shopping, SSNN
and the Company intend to provide a proprietary "E-mail Alert" system which
alerts investors to important information about particular stocks or public
companies they are following, through their electronic mail ("e-mail"). By
utilizing this feature, investors can easily be kept abreast of new developments
on a multiple number of companies automatically, without having to notify each
individual public company when they wish to be added to or deleted from an
e-mail list.
Content
Information on subscribing companies that will be available to visitors
of the Company's Web site will include: corporate information - basic
information such as address, phone numbers, trading symbol, and a description of
the company and its business; stock trading information - one and two year stock
charts, past 52 week price range, 30 day average volume and current market
capitalization, all updated nightly; press releases all regular announcements
plus any additional pertinent announcements on new products and services,
awarded contracts, the hiring of key personnel, etc., which may not be deemed to
be newsworthy enough to be picked up by the major wire services; information
available from other sources - whenever available, research reports and
recommendations by brokerage firms and newsletters, and articles from
newspapers, magazines and trade journals; and, corporate events schedule -
notices of annual meeting, proxy deadlines, road shows and teleconferences. In
addition, direct links will be provided to the subscribing company's home page
or other related Web sites.
The information available at the Company's Web site is not proprietary,
and the same information could be obtained by users or investors if they wanted
to spend their time going to multiple sources to compile it. However,
information on small capitalization stocks has traditionally been hard to find.
By their very nature and definition, most small capitalization stocks have not
yet been "discovered". One reason for that is because information on them is not
easily accessible, resulting in a much less efficient market than the markets
for mid capitalization or larger stocks. This void of information can create an
opportunity for investors, and the Company believes that a significant portion
of the Canadian investment public will be interested in quickly finding this
type of information, especially when it can be found at one site, and can be
obtained for no charge.
Strategy
The Company intends to establish a foothold in Canada for on-line
financial news and e-mail services for small capitalization companies. By first
focusing on the niche of distributing financial news and e-mail services for
small capitalization companies, the Company intends to position itself to become
highly visible, and recognized as a credible source for small companies. Once
this foothold is established, the Company believes it will be able to use its
user/viewer base to attract advertisers, creating additional revenue.
Additionally, the Company intends to construct other related Web sites for
Canadian small capitalization companies which would be built for specific
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industries or categories. For example, a gas and oil company listed on the
Company's original SSNN Web site could also be listed at a Web site entitled
"GAS&OILSTOCKS." Each Web site would have links to all other related Web sites,
and the subscribing company would pay an additional fee to be listed at
additional sites.
Competition
While there are many Web sites on the Internet which provide
information on publicly traded companies, the Company believes few, if any,
provide credible information on small capitalization companies in Canada. Most
Web sites which provide financial information on publicly traded companies fall
into one of four categories:
Web sites providing space for public companies to advertise their
financial statements and press releases. These types of sites
comprise most of the financial Internet Web sites. The information
on them changes infrequently. Because the information is not kept
up to date, it is not credible enough to warrant an immediate
investment decision by a visitor to the Web site, and the visitor
is not likely to revisit the Web sites for this reason.
Web sites where information on public companies is made available
by someone who has a vested interest in the performance of
specific companies. Typically these types of sites are run by
promoters or investment newsletters. These types of sites
discriminate, in that they select the companies and what
information is made available at their Web sites. Because of
someone's vested interest in the companies found at these sites,
rarely does the visitor see information that may be negatively
perceived, or have easy access to documents filed with regulatory
agencies. These types of sites have several problems: they do not
list enough companies and information to attract and maintain
heavy user traffic; most investors prefer to make up their own
minds as to what they are looking for in possible investments, and
often spurn promotions; and, information is typically very static.
Web sites maintained by someone who is charging, or intends to
charge, the end user for information. These Web sites have a
different marketing approach, one that is driven by the end user
paying a fee to access the available information. The problem with
these sites is that many people are reluctant to pay for access to
Web content. A recent research survey conducted by Georgia Tech
University indicated that 65% of Internet users said they would
not be willing to pay for access to Web content.
Web sites that are the home pages of a public company. While some
companies make their financial information available at their home
page, often this information is static, and they often they lack
in comprehensive content. Credibility can be a problem as well,
since investors and regulators may be leery of a company appearing
to promote its own stock on its home page.
Employees
As of October 31, 1996, the Company had eighteen employees, of which
eight were employed by The Transit Network Division, eight by Pro.Net, and two
by Cyber America.
Properties
The Company leases (i) approximately 1,370 square feet in Dallas for
$1,770 per month pursuant to a 3-year lease which commenced December 1, 1996;
(ii) approximately 300 square feet in Providence, Rhode Island for $100 per
month on a month-to-month basis; (iii) approximately 3,800 square feet in
Vancouver, British Columbia for $3,847 (Canadian) per month pursuant to three
separate lease agreements which expire at various times through July 2000; and
(iv) approximately 200 square feet in Willow Grove, Pennsylvania for $725 per
month for a one-year period which commenced May 1, 1996.
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information concerning the
directors and executives officers of the Company as of the date of this
Prospectus.
Name Age Position with the Company
- ---- --- -------------------------
Donald B. Scott 41 President and Chairman of the Board
James F. Biagi, Jr. * 40 Secretary and Director
Richard F. Rutkowski * 40 Treasurer and Director
Steven R. Willey 42 Director
Richard J. Boeglin 39 Vice President, Finance and Operations
Chief Financial Officer
Susan E. Hassel 50 Vice President, Sales
* Member of Audit Committee
Donald B. Scott has been President and a director of the Company since
March 1993. In July 1996, Mr. Scott was also elected as the Company's Chairman
of the Board. Mr. Scott served as the Company's Acting President from December
1992 through March 1993. Mr. Scott was previously a principal of Rutkowski,
Erickson, Scott ("RES"), a consulting firm, from 1991 to July 1995. Prior to his
association with RES, Mr. Scott was with Paine Webber in New York from 1987 to
1991. He has worked on Wall Street in various capacities since starting at E. F.
Hutton in 1979. He has a B.A. degree in communications and economics from the
University of Denver.
James F. Biagi, Jr. has been Secretary and a director of the Company
since its inception in 1988. He is a practicing attorney in Seattle, Washington,
and has been a principal of the law firm Monahan & Biagi since March 1996. Prior
to Monahan & Biagi, Mr. Biagi practiced law at the firm Monahan & Robinson since
1989, where he has specialized in tax, corporate and securities matters. Mr.
Biagi received his B.A. from Boston College, his J.D. from Gonzaga University
and his LL.M. in Taxation from the University of Denver.
Richard F. Rutkowski has been a director and Treasurer of the Company
since January 1995. Since December 1994, Mr. Rutkowski has been the Chief
Executive Officer of Microvision, Inc., a developer of virtual reality
technology, including the virtual retinal display. From October 1994 to December
1994, Mr. Rutkowski served as Microvision's Chief Operating Officer. Between
November 1992 and May 1994, Mr. Rutkowski served as Executive Vice President of
Medialink Technologies Corporation (formerly Lone Wolf Corporation), a developer
of high speed digital networking technology for multimedia applications in
audio-video computing, consumer electronics and telecommunications. Between
February 1990 and April 1995, Mr. Rutkowski was principal of RES.
Stephen R. Willey has been a director of the Company since August 1996.
Mr. Willey has served as Executive Vice President of Microvision, Inc., a
developer of virtual reality technology, since October 1995 and as a director
for Microvision since June 1995. Between January 1994 and April 1996, Mr. Willey
served as an outside consultant to Microvision through DGI, The Development
Group, Inc., a business and technology consulting firm that Mr. Willey founded
in 1982, and CSI Connection Systems, Inc., also a business and technology
consulting firm founded by Mr. Willey. Mr. Willey also co-founded Pro.Net
Communications, Inc., an Internet services company acquired by the Company in
June 1996, and has served as a director of Pro.Net since 1994.
Richard J. Boeglin is the Chief Financial Officer, and has been Vice
President, Finance and Operations since April 1995. He has been with the Company
since 1991. He has ten years of management experience, including direct
management of transit system design, development and installation. From 1987 to
<PAGE>
1991, Mr. Boeglin worked in the outdoor advertising industry. He has a B.S. in
Marketing and Management from Indiana University.
Susan E. Hassel is the Vice President of Sales and has been with the
Company since 1992. She has fourteen years of sales and marketing experience.
From 1985 until 1991, Ms. Hassel was the Director of Sales and Marketing for The
Relocation Center, a relocation counseling company in Dallas, Texas. Ms. Hassel
has a B.S. in Education from the University of Cincinnati.
The Company has agreed to elect to the board of directors a person
chosen by Sunrise Systems. However, no nominee has been designated by Sunrise
Systems as of the date of this Prospectus. See "Business - The Transit Network's
Digital Information Network - Software License."
Executive Compensation
The following table sets forth summary information regarding cash and
non-cash compensation paid by the Company during each of the Company's last
three fiscal years to the Company's Chief Executive Officer and the only other
most highly compensated executive officer of the Company whose annual
compensation exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
Name and ------------------- Securities
Principal Position Year Salary Bonus Underlying Options
---- ------ ----- ------------------
<S> <C> <C> <C> <C>
Donald B. Scott, President 1995 $120,000 $74,558 44,723
1994 17,000 -0- 4,920
1993 30,000 -0- -0-
Susan E. Hassel, V.P. Sales 1995 $114,790 -0- 559
1994 95,982 -0- 11,179
1993 75,065 -0- 1,118
</TABLE>
Employment Agreement
Mr. Scott entered into an employment agreement with the Company
effective May 15, 1995, for a period of twenty-four months. Under the terms of
this employment agreement, Mr. Scott is to receive an annual salary of $120,000
for the fiscal year 1995, $144,000 for the fiscal year 1996 and $180,000 per
year thereafter subject to review by the Board of Directors. Any bonuses paid to
Mr. Scott are also subject to review by the Board of Directors.
Stock Compensation Plans
1994 Stock Compensation Plan
The Company's 1994 Stock Compensation Plan was approved by the board of
directors on February 3, 1994 and by the shareholders on May 16, 1994 to provide
for the grant of incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended, and options which do not
constitute incentive options to officers, directors (other than Outside
Directors), employees and advisors of the Company or a subsidiary of the
Company. A total of 111,807 shares of Common Stock has been authorized and
reserved for issuance under the 1994 Stock Compensation Plan, subject to
adjustment to reflect changes in the Company's capitalization in the case of a
stock split, stock dividend or similar event. The 1994 Stock Compensation Plan
<PAGE>
is administered by the Compensation Committee, consisting of Company directors.
The Compensation Committee has the sole authority to interpret the 1994 Stock
Compensation Plan, to determine the persons to whom options will be granted, to
determine the basis upon which the options will be granted, and to determine the
exercise price, duration and other terms of options to be granted under the 1994
Stock Compensation Plan; provided that, (i) the exercise price of each option
granted under the 1994 Stock Compensation Plan may not be less than the fair
market value of the Common Stock on the day of the grant of the option, (ii) the
exercise price must be paid in cash upon exercise of the option, (iii) no option
may be exercisable for more than 10 years after the date of grant, and (iv) no
option is transferable other than by will or the laws of descent and
distribution. No option is exercisable after an optionee ceases to be employed
by the Company or a subsidiary of the Company, subject to the right of the
Compensation Committee to extend the exercise period for not more than six
months following the date of termination of an optionee's employment. An
optionee who was a director or advisor may exercise their option at any time
within six months after such optionee's status as a director or advisor
terminates to the extent they were entitled to exercise such option at the date
of termination of their status. If an optionee's employment is terminated by
reason of disability, the Compensation Committee has the authority to extend the
exercise period for not more than one year following the date of termination of
the optionee's employment or service as an advisor or director. If an optionee
dies and shall hold options not fully exercised, such options may be exercised
in whole or in part within one year of the optionee's death by the executors or
administrators of the optionee's estate or by the optionee's heirs. The vesting
period, if any, specified for each option will be accelerated upon the
occurrence of a change of control or threatened change of control of the
Company.
As of the date of this Prospectus, approximately 105,000 options have
been granted under the 1994 Stock Compensation Plan.
1996 Combined Incentive and Nonqualified Stock Option Plan
On May 2, 1996, the board of directors unanimously approved and
recommended that the shareholders consider and approve the Company's 1996
Combined Incentive and Nonqualified Stock Option Plan (the "1996 Plan") to
provide for the grant of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, and nonqualified stock
options at the discretion of the board of directors. The 1996 Plan was approved
by the shareholders of the Company on June 17, 1996 at the annual meeting of
shareholders. A total of 250,000 shares of Common Stock have been authorized and
reserved for issuance under the 1996 Plan, subject to adjustment to reflect
changes in the Company's capitalization in the case of a stock split, stock
dividend or similar event. The 1996 Plan is to be administered by the board of
directors of the Company. The board of directors has the sole authority to
interpret the 1996 Plan, to determine the persons to whom options will be
granted, to determine the basis upon which options will be granted, to determine
whether each option is to be an incentive stock option or nonqualified stock
option, and to determine the number of shares, exercise price, the period during
which the option may be exercised, and any other terms and conditions of the
options to be granted under the 1996 Plan; provided that, (i) the exercise price
of each incentive stock option granted under the 1996 Plan may not be less than
the fair market value of the Common Stock on the day of the grant, while the
exercise price of each nonqualified stock option may be greater or less than the
fair market value of the Common Stock, at the discretion of the board of
directors; (ii) the exercise price must be paid in cash upon exercise of the
option, or, to the extent permitted by applicable laws and regulations, may be
exercised by delivery of shares of Common Stock of the Company held by the
optionee having a fair market value equal to the exercise price, such fair
market value to be determined in good faith by the board of directors; (iii) no
option may be exercisable for more than 10 years after the date of grant; and
(iv) no option is transferable other than by will or the laws of descent and
distribution. After an optionee ceases to be employed by the Company or a
subsidiary of the Company, the option may be exercised by the optionee at any
time prior to the expiration of three months after the date of such termination
of employment (unless by its terms the option sooner terminates or expires), but
only if, and to the extent the optionee was entitled to exercise the option at
the date of such termination. If an optionee's employment is terminated by
reason of disability, the option may be exercised by the optionee at any time
prior to the expiration of one year after the date of such termination (unless
by its terms the option sooner terminates or expires), but only if, and to the
extent the optionee was entitled to exercise the option at the date of such
termination. If an optionee dies and shall hold options not fully exercised,
such options may be exercised in whole or in part within one year of the
optionee's death by the executors or administrators of the optionee's estate or
by the optionee's heirs. Any optionee may receive one or more grants of options
as the board of directors shall from time to time determine, but no optionee
shall receive an option in excess of 75,000 shares of Common Stock. Optionees
who are not employees will only be eligible to receive nonqualified stock
options.
<PAGE>
In July 1996, the Company granted Donald B. Scott, President, James F.
Biagi, Jr., Secretary, Richard F. Rutkowski, Treasurer, and Richard J. Boeglin,
Chief Financial Officer, incentive stock options under the 1996 Plan to purchase
60,000 shares, 40,000 shares, 40,000 shares and 40,000 shares respectively, at
$7.13 per share, the market value of the Company's Common Stock on that date. As
of the date of this Prospectus, 180,000 options have been granted under the 1996
Plan.
The following table sets forth information regarding options granted
during the fiscal year ended December 31, 1995 to the Company's Chief Executive
Officer and the only other most highly compensated executive officer of the
Company whose annual compensation exceeded $100,000.
Option Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Number of % of Total Options
Securities Granted to
Underlying Employees in Exercise or Base
Name Options Granted Fiscal Year Price Per Share Expiration Date
---- --------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Donald B. Scott 44,723 59 $5.00 March 9, 2000
President
Susan E. Hassel 559 1 $8.94 May 5, 2000
V.P. Sales
</TABLE>
The following table sets forth information regarding exercised options
and the value of unexercised options as of December 31, 1995 held by the
Company's Chief Executive Officer and the only other most highly compensated
executive officer of the Company whose annual compensation exceeded $100,000.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities
Underlying
Unexercised
Options at Value of Unexercised
Fiscal In-the-Money-Options
Shares Acquired Year-End At Fiscal Year-End
Name on Exercise Exercisable Exercisable (1)
---- ----------- ----------- ---------------
<S> <C> <C> <C>
Donald B. Scott 0 118,769 $ 0
President
Susan E. Hassel 0 12,856 $ 0
V.P. Sales
</TABLE>
- -----------------
(1) The value of unexercised options is based on the market value of the
Company's Common Stock on October 31, 1996, of $4.75 per share.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In consideration of Donald B. Scott's loan of $44,000 to the Company in
1992, the Company granted Mr. Scott an option to purchase 4,920 shares of Common
Stock at $8.94 per share in 1994. During 1994, the Company canceled outstanding
options held by Mr. Scott and reissued to him new options to purchase 67,084
shares at $0.27 per share until December 12, 2002. See "Management - Executive
Compensation." During 1994, the Company advanced to Mr. Scott $59,000, which was
an unsecured non-interest bearing receivable. During 1995, the receivable was
repaid in consideration for compensation earned during 1995.
Paul Miller and Henry Appleton are principals of Sunrise Systems, the
Company's principal electronic equipment supplier and systems integrator.
Additionally, one of them may be nominated to serve on the Company's board of
directors pursuant to their agreement with the Company. They work closely with
the Company to obtain system components and manufacturing resources plus design
product enhancements. The Company licenses its software from, and has an
exclusive hardware purchase agreement with, Sunrise Systems. The Company granted
options to purchase shares of its Common Stock to Sunrise Systems in February
1993 in connection with the execution of the Hardware and Software Agreements.
Such options were subsequently modified in December 1993 and December 1994 as
partial consideration for extending the Hardware and Software Agreements. As a
result of the original grant and modifications, Sunrise Systems holds options
which expire in 2003, to purchase Common Stock of the Company as follows:
Shares Price/Share
------ -----------
18,448 $0.09
5,590 $0.89
36,388 $9.93
In December 1994, Bruce S. Glant, a former director of the Company
filed a lawsuit against the Company for payment of a demand note in the
principal amount of approximately $53,000 plus interest. Pursuant to a
Settlement Agreement dated as of April 21, 1995, the Company agreed to pay Mr.
Glant $5,000 upon execution of the Settlement Agreement and $2,000 per month
thereafter until the note was paid in full. The Company also granted to Mr.
Glant (i) the right to implement the digital information network technology in
the greater Seattle, Washington market, and (ii) warrants to purchase 11,181
shares at $8.94 per share for five years. Mr. Glant directed 1,118 of such
warrants to be issued to each of the two managers in the Company's Dallas
office. The Company paid the outstanding balance of $37,757 upon conclusion of
its public offering in February 1996.
In January 1995, James F. Biagi, Jr., Secretary and a director, Ronald
P. Erickson, a former director, and Richard F. Rutkowski, a director, exchanged
$119,829 of outstanding 5% promissory notes of the Company with accrued interest
for 8,933 shares of Common Stock at $13.42 per share. In November 1995, Mr.
Biagi exchanged $19,095 of a 5% demand note with accrued interest for 4,774
shares at $4.00 per share.
In June 1996, in consideration for acquiring all of the outstanding
capital stock of Pro.Net Communications, Inc., the Company issued 100,000 shares
of the Company's Common Stock to shareholders of Pro.Net Communications, Inc.,
including 28,500 shares to Stephen R. Willey, who was elected a director of the
Company in August, 1996 to fill the vacancy created by the resignation of Ronald
P. Erickson, former chairman of the board of directors. Mr. Willey received an
additional 10,000 shares of the Company's Common Stock in June 1996 for entering
into a two-year consulting agreement with the Company.
In June 1996, in consideration for acquiring all of the outstanding
capital stock of Cyber America Corporation, the Company issued 23,500 shares of
the Company's Common Stock to Simon D. Liebman and Joseph S. Rutkowski, and
2,500 shares of the Company's Common Stock to Richard S. Rutkowski, Cyber
America's three principal shareholders. Richard F. Rutkowski, the Company's
treasurer and a director, is the brother of Joseph S. Rutkowski and son of
Richard S. Rutkowski.
The Company believes that the foregoing transactions with its officers
and directors were on terms no less favorable than could have been obtained from
independent third parties. All future transactions with such persons will also
be on terms no less favorable than could be obtained from independent third
parties and will be approved by a majority of the independent, disinterested
directors.
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of September 30, 1996
by (i) each person known by the Company to be the beneficial owner of more than
5% of the total outstanding shares of Common Stock, (ii) each director of the
Company, and (iii) all directors and executive officers of the Company as a
group. Except as otherwise indicated, all persons listed below have (i) sole
voting power and investment power with respect to their shares of Common Stock,
except to the extent that authority is shared by spouses under applicable law,
and (ii) record and beneficial ownership with respect to their shares of Common
Stock of the Company.
Name of Number of Shares Percentage
Beneficial Owner Beneficially Owned of Ownership
- ---------------- ------------------ ------------
Donald B. Scott 189,412 (1) 8.3%
James F. Biagi, Jr. 95,019 (2) 4.2
Richard F. Rutkowski 53,797 (3) 2.4
Stephen R. Willey 38,500 1.7
All directors and executive
Officers as a group (6 persons) 446,357 (1)(2)(3) 19.7%
(1) Includes options to purchase 178,769 shares for terms ranging from 5 to 10
years, of which approximately 131,000 shares may be exercised at any time
and approximately 48,000 shares may be exercised over the next 19 months.
(2) Includes options to purchase 79,133 shares for terms ranging from 5 to 10
years, of which approximately 47,000 shares may be exercised at any time
and approximately 32,000 shares may be exercised over the next 19 months.
(3) Includes options to purchase 42,042 shares for terms ranging from 5 to 10
years, of which approximately 10,000 shares may be exercised at any time
and approximately 32,000 shares may be exercised over the next 19 months.
The addresses of the foregoing persons are as follows: Donald B. Scott, 3102
Maple Avenue, Suite 230, Dallas, Texas 75201; James F. Biagi, Jr., 701 5th Ave.,
Suite 5701, Seattle, Washington 98104; Richard F. Rutkowski, 2203 Airport Way
South, Suite 100, Seattle, Washington 98134; and Stephen R. Willey, 2203 Airport
Way South, Suite 100, Seattle, Washington 98134.
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth the number of shares of Common Stock
which may be offered by the Selling Shareholders pursuant to this Prospectus.
None of the Selling Shareholders own as much as 1% of the outstanding shares.
<TABLE>
<CAPTION>
Shares Beneficially Shares Number of Shares
Owned Prior to this to be Sold Beneficially Owned
Name Offering in this Offering After this Offering
---- -------- ---------------- -------------------
<S> <C> <C> <C>
Commonwealth Associates 14,256 (1) 14,256 0
Mark Marshall 6,709 (2) 6,709 0
Fred Meyers 12,419 (3) 12,419 0
George Orban 6,241 (4) 6,241 0
--------- -------- -
Total 19,369 39,625 0
</TABLE>
- ----------
(1) Shares underlying warrants issued to Commonwealth Associates pursuant to
Warrant Agreements dated May 7, 1992, June 15, 1992 and June 30, 1992, all
of which are exercisable at $1.12 per share and expire on May 7, 1997.
Commonwealth Associates has advised the Company that it intends to exercise
its Warrants and sell the underlying shares pursuant to this Prospectus.
(2) Of such shares, 3,354 shares are subject to the Underwriters' Lock Up
Agreement until February 13, 1998.
(3) Includes 6,000 options exercisable at $4.50 per share at any time until
March 2001.
(4) Of such shares, all 6,241 shares are subject to the Underwriters' Lock Up
Agreement until February 13, 1998.
<PAGE>
DESCRIPTION OF SECURITIES
The Company was incorporated on October 17, 1988 with an authorized
capital of 10,000,000 shares of Common Stock, no par value. The authorized
shares were increased to 25,000,000 shares of common stock, no par value, and
1,000,000 shares of preferred stock, no par value on July 14, 1995 by amendment
to the Articles of Incorporation. At such date the Company also effected a one
for four reverse split of its authorized and outstanding capital stock as a
result of which the authorized capital stock consisted of 6,250,000 shares of
Common Stock, no par value, of which 1,472,737 shares were issued and
outstanding and 250,000 shares of preferred stock, no par value, no shares
outstanding. In October 1995 the Company effected a reverse stock split of 1
share for each 2.236 shares outstanding and amended its authorized capital to
provide for 10,000,000 shares of Common Stock, no par value, and 1,000,000
shares of preferred stock, no par value. As of the date of this Prospectus there
are 2,271,355 shares of Common Stock issued and outstanding and no shares of
preferred stock issued and outstanding.
Common Stock
The Company is authorized to issue 10,000,000 shares of Common Stock,
no par value per share. The holders of the Common Stock are entitled to share
ratably in any dividends paid on the Common Stock when, as and if declared by
the board of directors out of funds legally available. Each holder of Common
Stock is entitled to one vote for each share held of record. The Common Stock is
not entitled to cumulative voting or preemptive rights and is not subject to
redemption. Upon liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in the net assets legally
available for distribution. All outstanding shares of Common Stock are fully
paid and nonassessable.
Common Stock Purchase Warrants
In its public offering in February 1996, the Company issued and sold
1,840,000 Common Stock Purchase Warrants ("Warrants") to purchase an aggregate
of 1,840,000 shares of Common Stock at a price of $6.00 per share. The Warrants
are exercisable at any time until February 13, 2001. The Warrants are governed
by a warrant agreement ("Warrant Agreement") between the Company and Continental
Stock Transfer & Trust Company as warrant agent (the "Warrant Agent"). The
information included herein concerning the Warrants is subject to the detailed
provisions of the Warrant Agreement, a copy of which is available at the office
of the Warrant Agent or the Company.
Provision is made in the Warrant Agreement for adjustment of the price
and number of shares of Common Stock issuable thereunder pursuant to certain
anti-dilution provisions upon the occurrence of certain events, including the
issuance or sale of or granting of rights to purchase shares of Common Stock at
a price less than the exercise price then in effect and in the event of stock
dividends, stock splits, recapitalizations and reclassifications. No adjustment
to the exercise price will be made, however, upon issuance or sale by the
Company of any shares of Common Stock for a consideration consisting, wholly or
partly, of other than cash, for assets or acquisitions, to key employees or
advisors to the Company or pursuant to the Warrants offered hereby or any stock
option plan that is in effect on the date hereof. No adjustment in the exercise
price will be made unless such adjustment would require an increase or decrease
of at least 2% in the number of shares subject to the Warrants; however, any
such adjustment not so made will be taken into account and carried forward in
determining the amount of any subsequent adjustments.
The Company is not required to issue fractions of shares upon exercise
of Warrants; if any fraction of a share is issuable upon exercise of a Warrant,
the Company shall purchase such fraction based upon the then current market
value of the Common Stock.
The Warrants do not confer upon the holder any voting, dividend or
other rights of a stockholder of the Company.
The Warrants are subject to redemption by the Company after March 13,
1997, upon 30 days prior written notice, at a price of $0.25 per Warrant
provided that the closing sale or bid price per share of the Company's Common
Stock equals or exceeds $9.00 per share for 20 of the 30 consecutive trading
days ending within 15 days of the date notice of redemption is given.
<PAGE>
The Company must have a currently effective registration statement on
file with the Securities and Exchange Commission in order for a Warrant holder
to be able to exercise his Warrants. The Warrant Agreement requires the Company
to endeavor to maintain such current effective registration. There can be no
assurance that the Company will, at all times during the life of the Warrants,
be able to maintain such registration, and in the event it is unable to do so,
the Warrants will not then be exercisable. Additionally, the exercise of the
Warrants is subject to the requirement that the Common Stock issuable upon
exercise be registered or qualified for sale under applicable state securities
laws in the states where the Warrant holders reside. There can be no assurance
that the Company will be able to comply with applicable state laws where all
Warrant holders reside. The Company intends to apply for listing of the Common
Stock on the Nasdaq National Market. If successful, the requirement to register
or qualify the Warrant Shares for sale in jurisdictions in which they were not
registered in the February 1996 public offering may not be applicable because of
exemptions available in most state securities laws or because of the
applicability of the National Securities Markets Improvement Act of 1996, which
became effective in October 1996.
Preferred Stock
The board of directors, without further action by the shareholders, is
authorized to issue up to 1,000,000 shares of preferred stock in one or more
series and to fix and determine as to any series, any and all of the relative
rights and preferences of shares in such series, including, without limitation,
preferences, limitations or relative rights with respect to redemption rights,
conversion rights, voting rights, dividend rights and preferences on
liquidation. The Company has no present intention to issue any preferred stock,
but may determine to do so in the future. Under the terms of the Underwriting
Agreement, the Company may not issue any shares of preferred stock without the
prior written approval of the Representative until February 13, 1999 except for
purposes of acquiring another business.
Underwriters' Stock Warrants and Underwriters' Warrants
In connection with the public offering, the Company sold to the
Representative of the Underwriters, 115,000 warrants (the "Underwriters' Stock
Warrants") entitling the holder thereof to purchase up to 115,000 shares of
Common Stock at a price of $8.25 per share for a period of four years commencing
February 13, 1997 and 160,000 warrants entitling the holders to purchase up to
160,000 Common Stock Purchase Warrants at a price of $0.24 per Warrant, for a
like period.
Transfer Agent and Warrant Agent
The Transfer Agent for the Company's Common Stock and the Warrant Agent
under the Warrant Agreement is Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10004.
Reports
The Company intends to furnish to its shareholders after the close of
each fiscal year, an annual report containing audited financial statements. In
addition, the Company may furnish to its shareholders such other reports as
management may determine.
PLAN OF DISTRIBUTION
The Common Stock offered hereby may be sold from time to time to
purchasers directly by any of the Selling Shareholders. Alternatively, the
Selling Shareholders may from time to time offer the Common Stock through
underwriters, dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling Shareholders
and/or the purchasers of the Common Stock for whom they may act as agent. Such
sales may be effectuated at any time or from time to time, so long as the
Registration Statement, to which this Prospectus is a part, remains effective,
through transactions that may take place on the Nasdaq SmallCap Market, in
privately-negotiated transactions or through sales to one or more broker-dealers
for resale of such Common Stock, as principals, at market prices prevailing at
the time of sale, at prices relating to such prevailing market prices or at
negotiated prices. The Company will not receive any of the proceeds from the
sale by the Selling Shareholders of the shares of Common Stock offered hereby.
The Company will pay the expenses incident to the offering of the Common Stock
offered hereby relating to the preparation of the Registration Statement, of
which this Prospectus is a part.
<PAGE>
Under agreements which may be entered into by the Selling Shareholders,
underwriters, dealers and agents who participate in the distribution of the
Common Stock offered hereby may be entitled to indemnification by the Selling
Shareholders against certain liabilities, including liabilities under the
Securities Act, or to contribution with respect to payments which the
underwriters, dealers or agents may be required to make in respect thereto.
Underwriters, dealers and agents may be customers of, engaged in transactions
with, or perform services for the Company or the Selling Shareholders in the
ordinary course of business.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Maurice J. Bates, L.L.C., 8214 Westchester, Suite 500, Dallas,
Texas, 75225.
EXPERTS
The financial statements of Digital Data Networks, Inc. included in
this Prospectus have been audited by BDO Seidman, LLP., independent certified
public accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
<PAGE>
DIGITAL DATA NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS: Page
Report of Independent Certified Public Accountants................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statement of Stockholders' (Deficit) Equity............. F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION:
Introduction......................................................... F-17
Unaudited Pro Forma Consolidated Statements of Operations............ F-18
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Digital Data Networks, Inc.
We have audited the accompanying balance sheet of Digital Data
Networks, Inc., (the Company) as of December 31, 1995 and the related statements
of operations, stockholders' deficit and cash flows for each of the two years in
the period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all
material respects, the financial position of Digital Data Networks, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for each
of the two years in the period then ended in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
March 21, 1996
F-2
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
----------- ------------
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 12 $ 3,209
Short-term investments - 325
Accounts receivable 14 87
Prepaid expenses and other current assets 3 123
--------- -------
Total Current Assets 29 3,744
Equipment, net of accumulated depreciation
of $1,018 and $1,263 (Notes 2 and 3) 445 496
Intangible Assets, net of accumulated amortization of $159 and $288 183 794
Other Assets - 60
--------- -------
TOTAL ASSETS $ 657 $ 5,094
========= ========
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 227 $ 477
Notes payable and accrued interest (Note 3) 770 555
Current portion of long term debt 76 19
Expanded software license commitment - 75
Unearned income 54 37
--------- -------
Total Current Liabilities 1,127 1,163
--------- -------
NONCURRENT LIABILITIES
Long-term debt and accrued interest (Note 3) 947 48
Expanded software license commitment (Note 4) 250 -
Other noncurrent liabilities - 65
--------- -------
Total Noncurrent Liabilities 1,197 113
--------- -------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, 1 million shares authorized, none issued - -
Common Stock, no par value, 10 million shares authorized,
704,547 and 2,271,355 shares issued and outstanding 6,359 13,278
Accumulated Deficit (8,026) (9,460)
--------- --------
Total Stockholders' Equity (Deficit) (1,667) 3,818
--------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 657 $ 5,094
========= ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31 Ended September 30,
------------- -------------------
1994 1995 1995 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 466 $ 498 $ 350 $ 406
------- ------ ------ ------
EXPENSES:
Direct operating costs 503 465 357 327
Product development costs (Note 12) - - - 303
Salaries and related 430 615 474 770
Marketing, general and administrative 267 307 221 460
Financing, legal and other
consulting (Note 6) 833 380 325 51
------- ----- ------ ------
Total Expenses 2,033 1,767 1,377 1,911
------- ----- ------ ------
Loss Before Interest Expense 1,567 1,269 1,027 1,505
------ ----- ------ -----
INTEREST EXPENSE (INCOME):
Interest expense 189 140 95 55
Interest income - - - (126)
------- ----- ------ -------
Net Interest Expense (Income) 189 140 95 (71)
------- ----- ------ -------
NET LOSS $ (1,756) $(1,409) $(1,122) $(1,434)
========= ======== ======== ========
NET LOSS PER SHARE $ (4.38) $ (2.17) $(1.77) $ (.76)
========== ======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
DIGITAL DATA NETWORKS, INC.
STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock
------------ Accumulated
Shares Amount Deficit Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 355 $ 1,954 $ (4,861) $ (2,907)
Shares issued for cash 32 310 - 310
Shares issued for other than cash 23 207 - 207
Issuance of compensatory options - 467 - 467
Net loss - - (1,756) (1,756)
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 410 2,938 (6,617) (3,679)
Shares issued upon debt exchange 239 3,139 - 3,139
Shares issued for other than cash 51 257 - 257
Shares issued for exercise of options 5 25 - 25
Net loss - - (1,409) (1,409)
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 705 6,359 (8,026) (1,667)
Shares issued for cash (unaudited) 1,323 5,823 - 5,823
Shares issued upon debt exchange (unaudited) 31 124 - 124
Shares issued related to bus. acquisitions (unaudited) 180 868 - 868
Shares issued for other than cash (unaudited) 32 104 - 104
Net loss (unaudited) - - (1,434) (1,434)
- -------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 (unaudited) 2,271 $ 13,278 $ (9,460) $ 3,818
=========================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended September 30,
------------ -------------------
1994 1995 1995 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net Loss $ (1,756) $ (1,409) $ (1,122) $ (1,434)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 334 323 243 351
Product development costs - 303 - -
Other Non-cash operating expenses 674 219 163 95
Increase (decrease) in accrued interest 189 140 61 (120)
Increase in accounts payable 118 130 40 57
Other (66) 70 92 159
--------- -------- -------- --------
Net Cash Used by Operating Activities (507) (527) (523) (907)
--------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (5) (24) (19) (192)
Purchase of investments - - - (367)
--------- --------- -------- --------
Net Cash Used by Investing Activities (5) (24) (19) (559)
--------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock,
net of stock issue costs 310 25 25 5,823
Proceeds from issuance of notes payable 199 525 555 90
Repayment of expanded license commitment - - - (225)
Repayment of notes payable (13) (16) (9) (1,025)
--------- --------- -------- --------
Net Cash Provided by Financing Activities 496 534 571 4,663
--------- --------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (16) (17) 29 3,197
CASH AND CASH EQUIVALENTS
Beginning of Period 45 29 29 12
--------- --------- -------- --------
End of Period $ 29 $ 12 $ 58 $ 3,209
========= ========= ======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Exchange of debt for equity $ - $ 3,139 $ 3,120 $ 124
Common Stock issued for other than cash 207 257 - -
Common Stock issued in business acquisitions - - - 868
Issuance of compensatory options 467 - - -
Accounts payable converted to debt - 318 - -
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
DIGITAL DATA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 Description of Business and Summary of Significant Accounting Policies
Digital Data Networks, Inc. (the "Company"), a wireless, passenger communication
and advertising company, is principally engaged in development, design,
installation and operation of the "digital information network", a network of
computerized electronics message displays that deliver current news, information
and advertising to riders on-board public transit vehicles. The digital
information network consists of a series of electronic information displays
utilizing digital radio transmission technology.
The Company, incorporated in 1988, has operated the digital information network
in Dallas, Texas since 1991. The Company currently operates the digital
information network on the entire bus fleet of Dallas Area Rapid Transit
("DART") and on a portion of the buses of Rhode Island Public Transit Authority
("RIPTA"). In July 1995, the Company changed its name from Transit Information
Systems, Inc. to Digital Data Networks, Inc.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the 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 reported period.
Cash and Cash Equivalents
Cash and cash equivalents are comprised primarily of funds on deposit with
banks.
Equipment
Equipment is recorded at cost less accumulated depreciation based on assets
estimated useful lives ranging from five to seven years. Depreciation is
computed using primarily the straight-line method. Maintenance and repairs are
expensed while major improvements are capitalized.
Intangible Assets
Intangible assets includes the cost of the expanded software license and is
amortized on a straight-line basis over five years.
Other Assets
Other assets include stock issue costs incurred in connection with the Company's
initial public stock offering. These costs have been deferred at December 31,
1995 and will be recorded as a reduction in common stock upon completion of the
stock offering.
Income Taxes
Income taxes are accounted for utilizing the liability method. Deferred income
taxes are provided to represent the tax consequence on future years for
temporary differences between tax and financial reporting basis of assets and
liabilities. A valuation allowance has been provided for the total amount of
deferred tax assets which would otherwise be recorded for income tax benefits,
primarily relating to operating loss carryforwards, as realization is not more
likely than not.
Reclassifications
Certain reclassifications have been made to prior financial statements in order
to conform to current period classifications.
F-7
<PAGE>
Note 1 Description of Business and Summary of Significant
Accounting Policies (continued)
Revenue Recognition
The Company records revenue as advertising services are provided. To the extent
payment is received for advertising in advance of providing the service, such
prepaid amounts are recorded as unearned income until services are provided.
Common Stock and Stock Splits
The Company records issuances of its common stock and grants or issuances of
options or warrants to acquire such stock at the amount of cash received or, if
issued for other than cash consideration, at the estimated fair value of such
security at the date of issuance or grant. To the extent that options are issued
or granted with an exercise price less than the estimated fair value of common
stock at the date of grant ("Compensatory" options), the Company records an
increase in amounts ascribed to common stock and expense for such difference.
In October 1995, the Company increased the number of shares of its Common Stock
authorized to 10 million and declared and made effective a reverse 2.236 for 1
stock split. In June 1995, the Company declared and made effective a reverse 4
for 1 stock split. All share and per share information presented in these
financial statements give effect to the reverse stock splits.
Loss per Common Share
Loss per common share data have been computed based upon the weighted average
number of shares of common stock outstanding during the period and give effect
to 1995 reverse stock splits. Stock options did not impact loss per share as
they were antidilutive. The weighted average number of shares of common stock
and common equivalent shares outstanding for the calculation of primary earnings
per share approximated 401,000 and 650,000 for 1994 and 1995, respectively.
On a supplemental basis, giving effect to the exchange of debt for common stock
which occurred during 1995, as if it had occurred at the beginning of the
respective year, loss per share would have approximated $(2.56) and $(2.09) for
years ended December 31, 1994 and 1995, respectively.
Interim Financial Statements
The consolidated financial statements as of September 30, 1996 and for the nine
month periods ended September 30, 1995 and 1996 presented herein include all
adjustments which are, in the opinion of management, considered normal,
recurring adjustments necessary to present fairly the operating results for the
interim periods reported.
Effect of Recently Issued Accounting Standards
Recently issued accounting standards having relevant applicability to the
Company consist primarily of Statement of Financial Accounting Standards No. 121
(`SFAS No. 121"), which establishes accounting standards for, among other
things, the impairment of long-lived assets and certain identifiable
intangibles, and SFAS No. 123 ("SFAS No. 123"), which establishes standards for
accounting for stock-based compensation. SFAS No. 121 will be effective for
financial statements having fiscal years beginning after December 15, 1995, and
is not expected to have a significant effect, if any, on the Company's financial
condition or results of operations. SFAS No. 123 will be effective for financial
statements for fiscal years beginning after December 15, 1995, and required pro
forma disclosures will be included in such statements. It is not expected that
the Company will adopt the "fair value based method" of accounting for stock
options, which is encouraged by SFAS No. 123, but rather will continue to
account for such, utilizing the "intrinsic value based method" as is allowed by
that statement.
F-8
<PAGE>
Note 2 Equipment
Equipment is comprised of the following (thousands of dollars):
<TABLE>
<CAPTION>
December 31,
-----------------------
1994 1995
---- ----
<S> <C> <C>
DDN equipment installed in public transit vehicles $1,390 $ 1,390
Office equipment and other 49 73
------ -------
1,439 1,463
Accumulated depreciation (744) (1,018)
------ -------
Equipment, net $ 695 $ 445
====== =======
</TABLE>
Note 3 Notes Payable and Long-Term Debt
Notes payable due within one year of the balance sheet dates consists of
unsecured promissory notes and is comprised of the following (thousands of
dollars):
<TABLE>
<CAPTION>
December 31,
----------------------
1994 1995
---- ----
<S> <C> <C>
5% due on demand $ 62 $ 40
Accrued interest 22 22
12.5% due on demand 25 -
Accrued interest 10 -
5% convertible due March 1996 - 35
Accrued interest - 6
5% convertible due December 1996 - 54
Accrued interest - 15
10% due December 1995 199 549
Accrued interest 5 49
------- --------
Notes Payable and Accrued Interest $ 323 $ 770
======= ========
</TABLE>
F-9
<PAGE>
Note 3 Notes Payable and Long-Term Debt (continued)
Long-term debt consists of promissory notes, unsecured unless otherwise
indicated, and is comprised of the following (thousands of dollars):
<TABLE>
<CAPTION>
December 31,
--------------------
1994 1995
---- ----
SUBSEQUENTLY EXCHANGED
<S> <C> <C>
5% convertible due 1996 $ 2,468 $ -
Accrued interest 464 -
5% due 1996 150 -
Accrued interest 12 -
------- --------
3,094 -
------- --------
OTHER
5% convertible due March 1997 214 131
Accrued interest 34 20
8% secured due June 1997 276 276
Accrued interest 35 57
10% due March 1997 - 150
Accrued interest - 5
11% to 12% due March and August 1997 155
Accrued interest - 1
10% secured due May 1998 - 225
Accrued interest - 3
------- --------
559 1,023
------- --------
Total Long-Term Debt and Accrued Interest 3,653 1,023
Less current portion - (76)
------- --------
Long-Term Debt and Accrued Interest $ 3,653 $ 947
======= ========
</TABLE>
After the February 1996 closing of its initial public offering, the Company
repaid in full its 10% notes due December 1995 (which had been extended to March
1996), approximately $48,000 (including accrued interest) of its 5% demand
notes, $125,000 of its 8% notes, $150,000 of its 10% notes due March 1997,
$50,000 of its 10% secured notes, and approximately $57,000 of its 11% to 12%
notes.
Convertible promissory notes (the "Convertible Notes") bear interest at an
annual rate of 5% and are convertible at the holder's option into shares of
Company common stock at a $13.42 per share conversion price. The Convertible
Notes are convertible in their separate entire amount including all accrued
unpaid interest. Interest is payable at maturity. The Convertible Notes are
senior in right of payment to other Company indebtedness, except that they rank
equally with the 8% promissory note and junior to trade debt. During the year
ended December 31, 1995, certain holders of Convertible Notes, having a combined
principal and accrued interest total approximating $2.9 million, and the holder
of the 5% $150,000 promissory note agreed to exchange debt and related accrued
interest for approximately 232,500 shares of Company common stock. In 1995, the
Company renegotiated certain terms of a portion of Convertible Notes resulting
in, among other things, extension of the due dates from March 1996 to December
1996 and March 1997.
F-10
<PAGE>
Note 3 Notes Payable and Long-Term Debt (continued)
The 8% promissory note (the "8% Note") is secured by substantially all of the
Company's assets, which have been pledged pursuant to terms of a security
agreement. During the year ended December 31, 1995, the Company renegotiated
certain terms of the 8% Note resulting in, among other things, extension of the
due date from June 1996 to June 1997, and in connection therewith issued shares
of Company common stock to the note holder. The 8% Note is convertible in its
entire amount, including all accrued unpaid interest, into shares of Company
common stock at a $17.89 per share conversion price. The 8% Note ranks equally
with Convertible Notes and senior to other Company indebtedness, except for
unsecured trade debt. Interest is payable at maturity. In February 1996, the
Company repaid $125,000 of the 8% Note pursuant to terms of a mandatory
prepayment requirement, which was effectuated upon the Company's receipt of its
initial stock offering proceeds. As a result of having made the prepayment, the
security interest in the Company assets is in the process of being released.
During 1995, in connection with the borrowings pursuant to terms of 10%
promissory notes due December 1995 and March 1996 (subsequently extended to
March 1997), the Company issued approximately 41,000 shares of Company Common
Stock to note holders. The estimated value shares of issued, approximately
$205,000, has been expensed and included in financing, legal and other
consulting expenses.
During 1995, the Company renegotiated payment terms for amounts owed to DART,
whereby its current payable of approximately $225,000, was exchanged for a
secured 10% note payable due May 1998, with annual $30,000 payments. Pursuant to
terms of the promissory note, as amended, as a result of the Company's receipt
of proceeds from its initial public stock offering in February 1996, the Company
repaid $50,000 of this note payable and the remaining balance is due in March
1997.
During 1995, in connection with settlement of litigation with an individual, the
Company, among other things, (i) refinanced a portion of demand notes payable to
such individual having an approximate balance due, including accrued interest,
of approximately $53,000 whereby such payable now bears interest at an annual
12% rate (previously a combination of 12.5% and 5%) and is due in $2,000 monthly
installments (previously due on demand), subject to accelerated prepayment under
certain conditions, (ii) issued approximately 10,000 warrants to purchase shares
of Company common stock at $8.94 per share, and, (iii) granted to such
individual the exclusive right to implement the digital information network in
the greater Seattle market. In February 1996, the Company repaid this payable in
full.
In 1995, the Company reached an agreement with one of its suppliers to convert
approximately $93,000 of accounts payable into an 11% promissory note payable
due March 1997. In February 1996, the Company repaid $20,000 of this payable.
See Note 12 Events (Unaudited) Subsequent to Date of Report of Independent
Certified Public Accountants regarding repayments and exchanges of debt.
Note 4 Software License and Supply Agreement
Pursuant to terms of a 1993 agreement, as amended, the Company licenses
substantially all of its computer software, which is an essential element of the
digital information network, from Sunrise Systems, Inc. ("Sunrise Systems"), an
electronics supplier and software development company. The license provides the
Company with exclusive rights to such software in metropolitan areas of the
United States and Canada with populations over 100,000 and nonexclusive rights
elsewhere in the world. The software license was to terminate in 1996 if the
Company had not completed a major financing, as defined, by December 1996 and
paid Sunrise Systems $250,000 plus 8% of net financing proceeds over $5 million,
up to a maximum total payment of $300,000, (the "Expanded License Payment"). In
February and in March 1996, the Company paid Sunrise Systems $225,000
representing the Expanded License Payment amount currently due as a result of
the Company's receipt of its initial stock offering proceeds; the remaining
$75,000 is due in 1997.
F-11
<PAGE>
Note 4 Software License and Supply Agreement (continued)
Additionally, until December 31, 1996, the Company has agreed to buy electronic
displays and related hardware exclusively from Sunrise Systems, and Sunrise
Systems has agreed to sell exclusively to the Company, at terms to be
commercially reasonable and agreed upon each order.
Upon payment of the Expanded License Payment, the Company purchased an Expanded
License which is, among other things, a perpetual, fully paid up exclusive
license to use, modify and make derivative works of the source code and related
materials. Effective in 1993, the Company recorded the $250,000 contingent
minimum payment amount as a long-term obligation and the cost of the Expanded
License as an intangible asset in the accompanying balance sheet. Accumulated
amortization was $100,000 and $150,000 at December 31, 1994 and 1995,
respectively. The difference between the total $300,000 actual amount of the
Expanded License Payment over the $250,000 originally recorded will be recorded
as an increase in intangible assets and amortized.
Note 5 Stock Options
The Company has granted to certain of its promissory note holders, stockholders,
officers, directors, employees, suppliers, consultants and financial advisors
non-qualified options and warrants to purchase shares of Company common stock.
Options generally expire within 10 years of grant. Options issued having
exercise prices not less than the fair value of Company common stock at the date
of issuance are referred to as "Non-compensatory" options.
During 1994, the Company adopted a Combined Incentive and Non-Qualified Stock
Option Plan (the "Plan") which permits the issuance of options to acquire shares
of Company common stock. The plan permits grants of incentive stock options to
employees and of non-qualified stock options to employees, directors,
consultants or independent contractors of the Company. The exercise price of
incentive stock options shall not be less than the fair market value of Company
common stock at the date of grant. The exercise price of non-qualified stock
options may be greater or less than the fair market value of Company common
stock at the date of grant. The duration of options shall be established by the
Board of Directors, and shall not exceed ten years. The Plan reserves
approximately 112,000 shares of common stock for grant and provides that terms
of each award be determined by the Board of Directors. During 1994 and 1995, the
Company granted approximately 23,000 and 75,000 Plan options, respectively. No
Plan options have been exercised.
In connection with the Company entering into an underwriting agreement for the
sale of certain of its equity securities, during 1995 the Company and certain of
its directors, officers and employees who had been granted options to acquire
Company Common Stock at exercise prices less than the per share offering price
of $5.00 agreed to a change in exercise price to $5.00 per share.
F-12
<PAGE>
Note 5 Stock Options (continued)
Shares and per share information have been presented on a basis giving effect to
1995 reverse stock splits. The following summarizes stock option and warrant
transactions during the two years ended December 31, 1995 (thousands of shares):
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993 232 $0.09 to $53.66
Granted - Non-compensatory 57 $8.94 to $9.93
Granted - Compensatory 109 $0.27 to $4.47
Canceled or expired (112) $3.40 to $26.83
- ----------------------------------------------------------------------------------------------------------------
Outstanding at December 31,1994 286
Granted - Non-compensatory 100 $8.94
Exercised (5) $4.47
Expired (21) $53.66
- ----------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 360 $0.09 to $17.17
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Range of Exercise Prices Shares Weighted Average Life
------------------------ ------ ---------------------
<S> <C> <C> <C>
$0.09 to $0.89 91 7.0 years
$4.47 to $6.71 140 4.5 years
$8.94 to $9.93 112 4.0 years
$11.18 15 1.5 years
$16.81 to $17.17 2 .3 years
------
360
======
</TABLE>
Note 6 Related Party Transactions
At December 31, 1995 the Company's directors, together as a group, beneficially
own approximately 8% of outstanding Company common stock before giving effect to
exercise of outstanding stock options and the Company's initial public stock
offering, and options to acquire approximately 174,000 shares of Company common
stock, exercisable at per share prices of $0.27 to $17.17. At December 31, 1994,
such officers and directors held approximately $131,000 face amount of Company
promissory notes, most of which were subsequently exchanged for Company common
stock.
A significant portion of the Company's outstanding promissory notes are held by
persons who are also Company stockholders; certain of such security holders are
former officers and directors of the Company.
At December 31,1994, the Company had a $59,000 receivable from an officer and
stockholder. During 1995, the receivable was repaid in consideration for
compensation earned during 1995.
Two of the co-owners and executive officers of Sunrise Systems are members of
the Company's Board of Advisors. Sunrise Systems owns options to acquire
approximately 63,000 shares of Company common stock (36,000 exercisable at $9.93
per share, 18,400 exercisable at $0.09 per share and 5,600 exercisable at $0.89
per share). Included in financing, legal and other consulting expense for the
year ended December 31, 1994 is $45,000 of non-cash expense relating to the
excess of fair value of common stock at date of grant over exercise price of
approximately 24,000 Compensatory Options issued in connection with the
negotiated extension of the software license agreement.
F-13
<PAGE>
Note 6 Related Party Transactions (continued)
During the year ended December 31, 1994, the Company issued common stock to
certain (i) holders of promissory notes, (ii) stockholders and (iii) consultants
in consideration for, among other things, services, financing incentives, and/or
credit forbearance. Included in financing, legal and other consulting expense is
$207,000 of non-cash expense relating to such issuances of stock.
During the year ended December 31, 1994, the Company issued options to acquire
approximately 16,000 shares of Company common stock to certain of its directors.
During 1995, the Company issued to certain of its directors, officers and
employees options to acquire approximately 89,000 shares of Company common
stock. Additionally, during the year ended December 31, 1994, the Company
canceled and reissued options to certain of its directors, resulting in
reductions in the exercise price of such options ("Repriced Options"). Included
in financing, legal and other consulting expense is and $309,000 of non-cash
expense relating to such Repriced Options.
Note 7 Income Taxes
Deferred income taxes recorded for significant temporary differences between tax
and financial reporting basis of assets and liabilities approximate $1 million
and $1.3 million at December 31, 1994 and 1995, respectively, and primarily
relate to operating loss carryforwards. A valuation allowance has been recorded
for the full amount of deferred taxes as realization of such deferred tax asset
is not considered to be more likely than not.
For income tax purposes, at December 31, 1995, the Company has net operating
loss carryforwards approximating $4 million, which begin to expire in 2006. As a
result of changes in the Company's stock ownership, utilization of net operating
loss carryforwards could be subject to annual limitations. The annual amount
that could be utilized is limited to the value of the Company as of the date of
the change in ownership multiplied by the interest rate on federal long-term
exempt securities at that date.
Prior to October 1991, the Company had elected to be an S-Corporation for income
tax purposes. As such, tax attributes, such as taxable loss, are reported by
individual stockholders, and accordingly, Company operating loss carryforwards
do not include any amounts relating to periods prior to October 1991. In
accordance with SEC Staff Accounting Bulletin Topic 4-B, losses accumulated
prior to the Subchapter S termination have been combined with common stock.
Note 8 DART and RIPTA
In October 1995, the Company entered into a new contract with DART, effective
for three years and eligible for extension at DART's option, on terms similar to
the original five-year contract (which expired in October 1995) except that
royalties payable to DART are reduced from 22% to 4% of gross advertising
receipts. In addition, as more fully described in Note 3, the Company
renegotiated payment terms of its approximately $225,000 payable to DART for
royalties due pursuant to terms of the original contract. At December 31, 1994,
approximately $180,000 of fees are due DART.
The Company's arrangement with RIPTA is on a month to month basis and provides
for the Company to pay RIPTA a fee of 25% of advertising revenue received.
F-14
<PAGE>
Note 9 Leases
The Company leases FM side bands for transmission to electronic display signs
located on-board public transit vehicles. One of the FM side band leases is
pursuant to an agreement expiring December 1996, which requires annual payments
of $30,000. The other FM side band lease is on a month-to-month basis. The
Company leases certain of its office facilities under an operating lease
expiring November 1996, which requires annual payments of approximately $16,000.
Rent expense, relating to the aforementioned leases and certain other office
equipment rents, approximated $54,000 during each of the years ended December
31, 1994 and 1995.
Note 10 Significant Customer
One of the Company's customers accounted for approximately 14% and 13% of the
Company's revenues during the years ended December 31, 1994 and 1995,
respectively.
Note 11 Subsequent Event - Initial Public Offering
In February 1996, the Company closed its initial public stock offering and
received net cash proceeds of approximately $5.9 million, after deduction for
underwriters commissions and certain other offering related costs. The Company
issued 1,322,500 shares of its common stock and 1,840,000 of its common stock
purchase warrants. The warrants entitle the holder to purchase one share of the
Company's common stock at an exercise price of $6 per share during the five
years commencing upon issuance. The warrants are redeemable after one year,
under certain circumstances. The Company utilized approximately $1.1 million of
the proceeds to repay certain notes payable and related accrued interest.
The Company's unaudited pro forma supplemental loss per share for the year ended
December 31, 1995 and nine months ended September 30, 1996 approximates $(1.42)
and $(0.66) respectively, presented on a basis as if the 1995 debt exchange and
the 1996 public offering and related debt repayment had occurred at the
beginning of such periods.
Note 12 Events (Unaudited) Subsequent to Date of Report of Independent
Certified Public Accountants
As more fully described below, as a result of recent acquisitions of three
Internet related businesses, the Company is also engaged in other operating and
development activities. The Company's subsidiary, Pro.Net Communications, Inc.
("Pro.Net"), provides a range of Internet offerings to business customers,
including connectivity services to local subscribers, intranet services to
corporations, and the development of on-line working programs for commercial
clients. Pro.Net's present primary operations are in Vancouver, British
Columbia, Canada. The Company's subsidiary, Cyber America Corporation ("Cyber
America"), is a primary services provider to the Internet, presently in the
development stage of implementation and marketing its service capabilities. The
Company's subsidiary, hip Communications, Inc. ("hip"), is a Web page design and
development company targeting high-end corporate customers. The Company's
financial statements are consolidated and include the results of operations of
its acquired subsidiaries from the date of their acquisition. Pro.Net and Cyber
America were acquired in June 1996, hip was acquired in September, 1996.
Intercompany account balances and transactions are eliminated in consolidation.
During the three months ended September 30, 1996, the holder of a Company 5%
promissory note agreed to exchange such debt and related accrued interest which
together totaled $124,000, for approximately 31,000 shares of the Company's
Common Stock.
On June 3, 1996, the Company acquired all of the outstanding common stock of
Pro.Net for 100,000 shares of the Company's common stock valued at approximately
$480,000. Shares of Company common stock issued are subject to a two year resale
restriction, and were recorded at their estimated fair value determined on the
basis of discounting (for, among other things, resale restrictions) the closing
price of Company common stock at the Note 12 (continued)
F-15
<PAGE>
acquisition date. The total purchase price, including assumed liabilities at
their estimated fair values (which approximate book value), is allocated to
assets acquired based on preliminary estimates of fair value. Assets acquired
include tangible assets (which fair values are estimated to approximate book
value) and identifiable intangible assets, a customer subscription base. The
excess of purchase price over fair value of current assets has been allocated to
non-current tangible and intangible assets based upon their relative estimated
fair values. Intangible assets recorded in purchase accounting approximate
$612,000 and are amortized over five years.
On June 14, 1996, the Company acquired all of the outstanding common stock of
Cyber America for 50,000 shares of the Company's common stock valued at
approximately $280,000. One of the Company's Directors had a family member who
was a majority shareholder of Cyber America. Shares of Company common stock
issued are subject to a two year resale restriction, and were recorded at their
estimated fair value determined on the basis of discounting (for, among other
things, resale restrictions) the closing price of Company common stock at the
acquisition date. The total purchase price, including assumed liabilities at
their estimated fair values (which approximate book value), is allocated to
assets acquired based on preliminary estimates of fair value. Assets acquired
include tangible assets (which fair values are estimated to approximate book
value) and identifiable intangible assets, products in development. The
estimated value of products in development which are not deemed to have attained
technological feasibility, as defined, are capitalized in purchase accounting at
their estimated fair values of approximately $303,000 and immediately expensed
as product development cost subsequent to recording the business combination.
On September 27, 1996, the Company acquired all of the outstanding common stock
of hip for 30,000 shares of the Company's common stock valued at approximately
$107,000. Shares of Company common stock issued are subject to a two year resale
restriction, and were recorded at their estimated fair value determined on the
basis of discounting (for, among other things, resale restrictions) the closing
price of Company common stock at the acquisition date. The total purchase price,
including assumed liabilities at their estimated fair values (which approximate
book value), is allocated to assets acquired based on preliminary estimates of
fair value. Assets acquired include tangible assets (which fair values are
estimated to approximate book value) and identifiable intangible assets, a
customer subscription base. The excess of purchase price over fair value of
current assets has been allocated to non-current tangible and intangible assets
based upon their relative estimated fair values. Intangible assets recorded in
purchase accounting approximate $118,000 and are amortized over five years.
The following unaudited pro forma summary presents financial information on the
basis as if the business combinations of Pro.Net, Cyber America and hip had
occurred at the beginning of the periods presented. The pro forma information is
based on historical information and is not necessarily indicative of results of
operations that would have occurred, nor is it necessarily indicative of future
results of operations of the combined companies (in thousands, except per share
data):
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1995 September 30, 1996
----------------- ------------------
<S> <C> <C>
Revenues $ 959 $ 737
========== ==========
Net loss $ (1,629) $ (1,613)
========== ==========
Net loss per share $ (2.04) $ (0.79)
========== ==========
</TABLE>
F-16
<PAGE>
Digital Data Networks, Inc.
Pro Forma Consolidated Financial Information
The following unaudited pro forma consolidated financial information has been
prepared in accordance with guidelines established by regulations promulgated by
the Securities and Exchange Commission. The unaudited pro forma consolidated
statements of operations for the year ended December 31, 1995 and the nine
months ended September 30, 1996 include the results of operations of Digital
Data Networks, Inc.("Digital Data"), Pro.Net Communications, Inc. ("Pro.Net"),
Cyber America Corporation ("Cyber America") and hip Communications ("hip") for
the respective periods presented to the extent that such companies were in
existence during such periods and give effect to the pro forma adjustments
determined on the basis as described below as if all such transactions had
occurred at the beginning of the respective periods.
1. The business acquisitions of Pro.Net, Cyber America and hip are
accounted for utilizing the purchase method of accounting. The estimated fair
value attributed to Company Common Stock issued to former Pro.Net, Cyber America
and hip stockholders approximated $480,000, $280,000 and $107,000 respectively.
Shares of Company Common Stock issued are subject to a two year resale
restriction, and were recorded at their estimated fair value determined on the
basis of discounting (for, among other things, resale restrictions) the closing
market value of Company Common Stock at the acquisition date.
2. The total purchase price for each acquired company, including
assumed liabilities at their estimated fair values (which approximates book
value), is allocated to assets acquired based on preliminary estimates of fair
values. Pro.Net assets acquired include tangible assets (which fair values are
estimated to approximate book value) and identifiable intangible assets, a
customer subscription base. The excess of purchase price over fair value of
current assets has been allocated to non-current tangible and intangible assets
based upon their relative estimated fair values. Intangible assets recorded in
purchase accounting approximate $700,000 and are amortized over five years.
Cyber America assets acquired include tangible assets (which fair values are
estimated to approximate book value) and identifiable assets, products in
development. The estimated value of products in development which are not deemed
to have attained technological feasibility, as defined, are capitalized in
purchase accounting at their estimated fair values of approximately $303,000 and
immediately expensed as product development cost subsequent to recording the
business combination.
3. Increased amortization expense results from amortization of
intangible assets recorded in the purchase price allocation of the Pro.Net
business combination based on preliminary estimates of fair value.
These pro forma consolidated financial statements are not necessarily indicative
of future results of operations of the Company.
F-17
<PAGE>
DIGITAL DATA NETWORKS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars, except per share data)
For The Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Digital Cyber Pro Forma Pro Forma
Data Pro.Net America hip Adjustments Consolidated
------- ------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 354 $ 133 $ - $ 250 $ - $ 737
------- ------- ------- ------- ------- -------
EXPENSES
Direct operating costs 268 68 - 20 68(a) 424
Salaries and related 580 42 24 196 - 842
Marketing, general and administrative 351 165 68 84 - 668
Financing, legal and other consulting 49 25 - 2 - 76
------- ------- ------- -------- ------- -------
TOTAL EXPENSES 1,248 300 92 302 68 2,010
------- ------- ------- ------ ------- -------
LOSS BEFORE INTEREST EXPENSE 894 167 92 52 68 1,273
------- ------- ------- ------- ------- -----
INTEREST EXPENSE (INCOME)
Interest Income (126) (1) - (2) - (129)
Interest Expense 67 - - 5 - 72
------- ------- ------- -------- ------- -------
Net interest expense (income) (59) (1) - 3 - (57)
-------- -------- ------- -------- ------- ---------
NET LOSS $ (835) $ (166) $ (92) $ (55) $ (68) $ (1,216) (b)
======== ======== ======== ======== ======== =======
NET LOSS PER SHARE $ ( 0.60) (c)
========
</TABLE>
(a) To reflect pro forma increased amortization charges resulting from the
allocation of the purchase price paid for Pro.Net and hip, based upon
estimated remaining useful lives of five years.
(b) In accordance with guidelines established by the Securities and
Exchange Commission, proforma net loss does not include approximately
$303,000 of expense recorded immediately subsequent to recording the
business combination relating to the esteemed fair value of intangible
assets acquired associated with products in development which have not
been determined to have yet attained technological feasibility.
(c) Calculated on the basis of approximately 2,037,000 weighted average
shares of Common Stock for the nine months ended September 30, 1996.
Stock options were not included in such computations as the effects
were antidilutive.
F-18
<PAGE>
DIGITAL DATA NETWORKS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars, except per share data)
For The Year Ended December 31, 1995
<TABLE>
<CAPTION>
Digital Pro Forma Pro Forma
Data Pro.Net hip Adjustments Consolidated
------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 498 $ 180 $ 281 $ - $ 959
------- --------- --------- ------- -------
EXPENSES
Direct operating costs 466 83 18 144 (a) 711
Salaries and related 615 - 122 - 737
Marketing, general and administrative 306 210 63 - 579
Financing, legal and other consulting 379 42 - - 421
------- --------- --------- ------- -------
TOTAL EXPENSES 1,766 335 203 144 2,448
------- --------- --------- ------- -------
INCOME (LOSS) BEFORE INTEREST EXPENSE (1,268) (155) 78 (144) (1,489)
INTEREST EXPENSE 140 - - - 140
------- --------- --------- ------- -------
NET INCOME (LOSS) $ (1,408) $ (155) $ 78 $ (144) $ (1,629) (b)
======== ========== ======= ======== ========
NET LOSS PER SHARE $ (2.04) (c)
========
</TABLE>
(a) To reflect pro forma increased amortization charges resulting from the
allocation of the purchase price paid for Pro.Net and hip, based upon
estimated remaining useful lives of five years.
(b) In accordance with guidelines established by the Securities and
Exchange Commission, proforma net loss does not include approximately
$303,000 of expense recorded immediately subsequent to recording the
business combination relating to the estimated fair value of intangible
assets acquired associated with products in development which have not
been determined to have yet attained technological feasibility.
(c) Calculated on the basis of approximately 800,000 weighted average
shares of Common Stock for the year ended December 31, 1995. Stock
options were not included in such computations as the effects were
antidilutive.
F-19
<PAGE>
<TABLE>
====================================================================================================================================
<S> <C>
No person has been authorized to give any
information or to make any representation in
connection with this offering other than those
contained in this Prospectus and, if given or
made, such information or representation must not
be relied upon as having been authorized by the
Company or any Underwriter. This Prospectus does 1,879,625 Shares of Common Stock
not constitute an offer to sell or a solicitation No Par Value
of an offer to buy any securities other than the
securities to which it relates or an offer to sell
or the solicitation of an offer to buy such
securities in any circumstances in which such
offer or solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale made
hereunder shall, under any circumstance, create
any implication that there has been no change in
the affairs of the Company since the date hereof
or that the information herein is correct as of
any time subsequent to the date hereof.
Digital Data
Networks, Inc.
------------------
TABLE OF CONTENTS _____________________________
Prospectus
Page _____________________________
Additional Information..................... 2
Prospectus Summary....................... 3
Risk Factors................................. 6
Use of Proceeds............................. 11
Price Range of Common Stock and
Warrants.................................... 12 , 1997
Dividend Policy............................. 12
Management's Discussion and
Analysis of Financial Condition
and Results of Operation................. 13
Business..................................... 16
Management................................ 27
Certain Relationships
and Related Transactions............. 31
Principal Shareholders.................... 32
Selling Shareholders...................... 33
Description of Securities................. 34
Plan of Distribution........................ 35
Legal Matters.............................. 36
Experts...................................... 36
Index to Financial Statements........... F-1
=========================================================================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Pursuant to Section 23B.08.500 of the Washington Business Corporation
Act, a corporation may indemnify an individual made a party to a proceeding
because the individual is or was a director against liability incurred in his
official capacity with the corporation including expenses and attorneys fees.
Article IX of the Bylaws provides that the Company may indemnify and hold
harmless to the full extent permitted by applicable law each person who was or
is made a party to or is threatened to be made a party to or is involved in an
actual or threatened action, suit, or other proceeding, civil or criminal, by
reason of the fact that he is or was a director, officer, employee or agent of
the Company against all expenses, liabilities and losses, including attorneys
fees, judgments, fines, and ERISA excise taxes or penalties, actually or
reasonably incurred or suffered by such person in connection with any such
action.
Article V of the Restated Articles of Incorporation provides that a
director of the Company shall not be personally liable to the Company or its
shareholders for monetary damages for conduct as a director, except for
liability of the director (i) for acts or omissions that involve intentional
misconduct by the director or knowing violation of law by the director, (ii) or
conduct violating Section 23B.08.310 of the Washington Business Corporation Act
(pertaining to liability for unlawful distributions), or (iii) for any
transaction from which the director will personally receive a benefit in money,
property or services to which the director is not legally entitled.
Item 25. Other Expenses of Issuance and Distribution.
Estimated expenses in connection with the public offering of Units by
the Company pursuant to this Registration Statement are as follows:
Securities and Exchange Commission filing fee............... $ 100
Nasdaq National Market filing fee........................... 8,000
Accounting fees and expenses................................ 15,000
Legal fees and expenses..................................... 30,000
Blue Sky fees and expenses.................................. 15,000
Miscellaneous............................................... 31,900
---------
Total....................................................... $ 100,000
=========
Item 26. Recent Sales of Unregistered Securities.
The following is a summary of transactions by the Company during the
last three years involving securities which were not registered under the
Securities Act.
1. From March 1993 through February 1994, the Company sold 74,608 shares at
$8.94 per share to 23 accredited investors who acquired the shares for
investment without a view toward further distribution. The shares were sold
pursuant to Rule 506 of Regulation D under the Securities Act. The majority of
the 23 accredited investors were previously investors who purchased in a
1991-1992 offering of 5% Notes. The investors received a Private Placement
Memorandum and executed a Subscription Agreement in which they verified their
qualifications as an accredited investor and represented and warranted, among
II-1
<PAGE>
other things, that they were taking the securities for investment and not with a
view to distribution. The certificates evidencing such securities bear a
restrictive legend prohibiting transfer in the absence of an effective
registration statement or an opinion of counsel that the securities may be
transferred without registration.
2. In April of 1994, the Company sold 2,236 shares of Common Stock at $17.89 per
share to two accredited investors who acquired the shares for investment without
a view toward further distribution. Both purchasers were accredited investors in
the l992-1993 offering referred to in Item 1 above. The sales were exempt from
registration under Section 4 (2) of the Securities Act as transactions not
involving a public offering. The certificates evidencing such securities bear a
restrictive legend prohibiting transfer in the absence of an effective
registration statement or an opinion of counsel that the securities may be
transferred without registration.
3. In January 1995, the Company issued to 63 individual noteholders 232,559
shares of its Common Stock in exchange for $3.1 million principal amount of
long-term notes with accrued interest. The notes were issued pursuant to the
exemption in Section 3(a)(9) of the Securities Act. No commissions or other
remuneration were paid.
4. From June 1994 through July 1995, the Company sold 19 units for an aggregate
of $475,000. Each unit consisted of 933 shares of Common Stock and an unsecured
promissory note in principal amount of $25,000, bearing interest at a rate of
10% per annum, due and payable five days after the successful completion of a
public offering, five days after the Company raises more than $750,000 in one or
more private financings, or December 31, 1995, whichever would come first. In
August 1995, the Company sold $50,000 of 10% notes and issued a total of 7,456
shares of its Common Stock to two shareholders of the Company. The foregoing
securities were sold pursuant to Rule 506 of Regulation D under the Securities
Act. All of the purchasers were accredited investors, the majority of whom were
investors in a 199l-l992 private offering and acquired the securities for
investment without a view toward distribution. The certificates evidencing such
securities bear a restrictive legend prohibiting transfer in the absence of an
effective registration statement or an opinion of counsel that the securities
may be transferred without registration.
5. In August 1995, the Company sold $150,000 principal amount of 10% notes due
on the earliest of 21 days after the first trading day of the Company's initial
public offering, five days after the date that the Company has raised an
aggregate of $750,000 in a private financing, or December 31, 1995, subsequently
extended to December 31, 1996. The purchaser was an accredited investor who
acquired the securities for investment without a view toward further
distribution. The securities were issued in reliance on the exemption in Section
4(2) of the Securities Act for transactions not involving a public offering. The
certificates evidencing such securities bear a restrictive legend prohibiting
transfer in the absence of an effective registration statement or an opinion of
counsel that the securities may be transferred without registration. This
principal amount plus accrued interest was repaid in March 1996.
6. In May of 1995, the Company issued 5,591 shares of Common Stock to a former
director upon the exercise of outstanding options. The shares were issued in
reliance upon the exemption in Section 4(2) of the Securities Act for a
transaction not involving a public offering. The purchaser took the shares for
investment without a view toward further distribution. The certificates bear a
restrictive legend prohibiting transfer in the absence of an effective
registration statement or an opinion of counsel that the securities may be
transferred without registration.
II-2
<PAGE>
7. During the period December 1993 through November 1996, the Company
granted stock options as follows:
<TABLE>
<CAPTION>
Date Optionee No. Shares Price Term
---- -------- ---------- ----- ----
<S> <C> <C> <C> <C>
December 1993 Sunrise Systems 27,952 $9.93 10 years
January 1994 Donald B. Scott 4,920 $8.94 10 years
Ronald P. Erickson 11,181 $8.94 5 years
former Chairman
February 1994 Richard J. Boeglin 2,236 $8.94 5 years
Susan E. Hassel 2,236 $8.94 5 years
May 1994 Vendor (in lieu of 448 $19.68 5 years
cash payment)
Dallas Office Manager 559 $8.94 5 years
June 1994 Richard J. Boeglin 10,062 $4.47(1) 5 years
Susan E. Hassel 8,943 $4.47(1) 5 years
October 1994 Vendor (in lieu of 504 $13.42 5 years
cash payment)
November 1994 Dallas Office Manager 335 $8.94 5 years
March 1995 Donald B. Scott 44,723 $4.47(2) 5 years
James S. Biagi 27,952 $4.47(2) 5 years
Sales employee 336 $8.94 5 years
Dallas Office Manager 2,013 $8.94(3) 10 years
April 1995 Vendor (in lieu of 1,118 $8.94 5 years
cash payment)
May 1995 Richard J. Boeglin 559 $8.94 5 years
Susan E. Hassel 559 $8.94 5 years
Noteholder 10,063 $8.94 5 years
March 1996 Advisory Member 6,000 $6.00(4) 5 years
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Date Optionee No. Shares Price Term
---- -------- ---------- ----- ----
<S> <C> <C> <C> <C>
July 1996 Donald B. Scott 60,000 $7.13(5) 5 years
James F. Biagi 40,000 $7.13(5) 5 years
Richard F. Rutkowski 40,000 $7.13(5) 5 years
Richard J. Boeglin 40,000 $7.13(5) 5 years
</TABLE>
- ----------
(1) Vesting over a 36-month period. Repriced to $5.00 per share in
October 1995.
(2) Repriced to $5.00 per share in October 1995.
(3) Vesting over a 27-month period.
(4) Repriced to $4.50 per share in December 1996.
(5) Vesting over a 24-month period.
The options were granted to officers and employees of the Company and other
persons associated with the Company in reliance upon the exemption in Section
4(2) of the Securities Act for transactions not involving a public offering.
8. In October 1995, a former director and Chairman of the Executive Committee
agreed to extend his 8% senior note in the principal amount of $276,364 until
June 1997 conditioned upon closing the Company's public offering before February
15, 1996 and the payment by the Company of $125,000 on the Note from the
proceeds of such offering. In consideration for the extension, the Company
issued the noteholder 8,945 shares of Common Stock. The shares were acquired
without a view toward distribution and the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act for transactions not
involving a public offering. The certificates evidencing such securities bear a
restrictive legend prohibiting transfer in the absence of an effective
registration statement or an opinion of counsel that the securities may be
transferred without registration.
9. In October 1995, a former director of the Company agreed to extend his
$53,750 principal amount 5% note due March 21, 1996 to December 29, 1996 in
consideration for the issuance by the Company of 1,433 shares of its Common
Stock. The transaction was effected through the President of the Company in
reliance on Section 4(2) of the Securities Act for transactions not involving a
public offering. The shares were acquired for investment without a view toward
further distribution. The certificates evidencing such securities bear a
restrictive legend prohibiting transfer in the absence of an effective
registration statement or an opinion of counsel that the securities may be
transferred without registration.
10. In May 1996, a shareholder exercised options to purchase 448 shares of the
Company's Common Stock at an option price of $.89 per share. The shares were
acquired for investment without a view toward further distribution. The
certificate evidencing such securities bear a restrictive legend prohibiting
transfer in the absence of an effective registration statement or an opinion of
counsel that the securities may be transferred without registration.
11. In June 1996, the Company acquired all of the outstanding common stock of
Pro.Net Communications, Inc. ("Pro.Net") for 100,000 shares of the Company's
Common Stock, which were issued to shareholders of Pro.Net, all of whom are
residents of Canada. The certificates evidencing such securities bear a
restrictive legend prohibiting transfer in the absence of an effective
registration statement or an opinion of counsel that the securities may be
II-4
<PAGE>
transferred without registration. In connection with the acquisition of Pro.Net,
the Company issued 20,000 shares of Common Stock to two of the principal
shareholders of Pro.Net in consideration for signing consulting agreements with
the Company. The certificates evidencing such securities bear a restrictive
legend prohibiting transfer in the absence of an effective registration
statement or an opinion of counsel that the securities may be transferred
without registration.
12. In June 1996, the Company acquired all of the outstanding common stock of
Cyber America Corporation for 50,000 shares of the Company's Common Stock. The
certificates evidencing such securities bear a restrictive legend prohibiting
transfer in the absence of an effective registration statement or an opinion of
counsel that the securities may be transferred without registration.
13. In June 1996, a former employee of the Company was issued 112 shares of the
Company's Common Stock in consideration for services rendered while an employee
of the Company. Such shares had been earned by the employee during 1994 but had
never been issued. The shares were acquired for investment without a view toward
further distribution. The certificate evidencing such securities bear a
restrictive legend prohibiting transfer in the absence of an effective
registration statement or an opinion of counsel that the securities may be
transferred without registration.
14. In August 1996, the Company issued 30,795 shares of the Company's Common
Stock to a member of the Company's Advisory Board, a resident of Canada, upon
conversion of his outstanding promissory note having a balance of principal and
accrued interest in the amount of $123,949.96, pursuant to an agreement dated
March 1994. The shares were acquired for investment without a view toward
further distribution. The certificate evidencing such securities bears a
restrictive legend prohibiting transfer in the absence of an effective
registration statement or an opinion of counsel that the securities may be
transferred without registration.
15. In September 1996, the Company acquired, from the sole shareholder of hip
Communications, Inc. ("hip"), a resident of Canada, all of the outstanding
common stock of hip for 30,000 shares of the Company's Common Stock. The
certificate evidencing such securities bears a restrictive legend prohibiting
transfer in the absence of an effective registration statement or an opinion of
counsel that the securities may be transferred without registration.
16. In October 1996, the Company signed an exclusive License Agreement with the
Small Stock News Network ("SSNN") to sell its service in Canada in consideration
for agreeing to issue 25,000 shares of the Company's Common Stock. The
certificate evidencing such securities will bear a restrictive legend
prohibiting transfer in the absence of an effective registration statement or an
opinion of counsel that the securities may be transferred without registration.
II-5
<PAGE>
Item 27. Exhibits.
Exhibit No.
3.1 Registrant's Restated Articles of Incorporation, as amended.(3)
3.2 Bylaws of the Registrant.(3)
4.1 Specimen of Common Stock Certificate. (3)
4.2 Revised Form of Warrant Agreement. (3)
4.3 Specimen of Common Stock Purchase Warrant.(3)
5.1 Opinion of Maurice J. Bates, L.L.C.(2)
10.1 Copy of Combined Incentive and Non-Qualified Stock
Option Plan.(3)
10.2 Lease Agreement dated November 19, 1993 for Dallas offices.(3)
10.3 Hardware Purchase and Sale Agreement between the
Registrant and Sunrise Systems, Inc.(3)
10.3.1 Amendment to Hardware Purchase and Sale Agreement. (3)
10.4 License Agreement between the Registrant and Sunrise Systems,
Inc. including grant of options to Sunrise Systems, Inc.(3)
10.4.1 Amendment to License Agreement. (3)
10.5 Agreement dated October 13, 1992 for installation of hardware
on DART buses and future transit systems. (3)
10.6 Employment Agreement between the Registrant and Donald B.
Scott.(3)
10.7 Copy of Assumed Name Certificate for The Transit Network.(3)
10.8 Award/Contract with Dallas Area Rapid Transit Authority dated
as of October 16, 1995. (3)
10.9 Promissory Note payable to DART dated January 24, 1996.(3)
10.10 Offer dated April 19, 1996 outlining terms of acquisition of
Pro.Net Communications, Inc. (4)
10.11 Stock Purchase Agreement dated June 14, 1996 outlining terms of
acquisition of Cyber America Corporation (1)
10.12 Stock Purchase Agreement dated September 12, 1996 and amended
September 25, 1996, outlining terms of acquisition of hip
Communications, Inc. (1)
10.13 License Agreement dated October 4, 1996 between the Company and
SSNN (1)
10.14 Consulting Agreement between the Registrant and Stephen R.
Willey (1)
10.15 Consulting Agreement between the Registrant and Peter V.
Ciccone (1)
24.1 Consent of Certified Public Accountants.(1)
24.2 Consent of Maurice J. Bates, L.L.C. (contained in Exhibit
5.1).(2)
- -----------
(1) Filed herewith.
(2) To be filed by amendment.
(3) Incorporated by reference to Registration Statement Form SB-2, File No.
33-95744-D as permitted by Rule 12b-32.
(4) Incorporated by reference to the Registrant's Form 8-K for the month of
June 1996, as permitted by Rule 12b-32.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes as follows:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted
to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is
against public policy, as expressed in the Securities Act and
is, therefore, unenforceable.
II-6
<PAGE>
In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act
and will be governed by the final adjudication of such issue.
For the purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
the registration statement as of the time it was declared
effective.
For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The Registrant further undertakes
To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act; (ii) to reflect in the
prospectus any facts or events arising after the effective
date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the
information set forth in the registration statement; and (iii)
to include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof;
To remove from registration by means of a post-effective
amendment any of the securities being registered that remain
unsold at the termination of the offering.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused its registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on December ____, 1996.
DIGITAL DATA NETWORKS, INC.
(Registrant)
By: /s/ Donald B Scott, Jr.
-----------------------------
Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Donald B. Scott, Jr. Chairman of the Board, President, Director December 12, 1996
- --------------------------- (Principal Executive Officer)
Donald B. Scott, Jr.
/s/ James F. Biagi Jr. Secretary, Director December 12, 1996
James F. Biagi, Jr.
/s/ Richard F. Rutkowski Treasurer, Director December 12, 1996
Richard F. Rutkowski
/s/ Stephen R. Willey Director December 12, 1996
Stephen R. Willey
/s/ Richard J. Boeglin Vice President, Finance and December 12, 1996
Richard J. Boeglin Operations ( Principal Financial
and Accounting Officer)
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit No.
- ----------
3.1 Registrant's Restated Articles of Incorporation, as
amended.(3)
3.2 Bylaws of the Registrant.(3)
4.1 Specimen of Common Stock Certificate. (3)
4.2 Revised Form of Warrant Agreement. (3)
4.3 Specimen of Common Stock Purchase Warrant.(3)
5.1 Opinion of Maurice J. Bates, L.L.C.(2)
10.1 Copy of Combined Incentive and Non-Qualified Stock Option
Plan.(3)
10.2 Lease Agreement dated November 19, 1993 for Dallas offices.(3)
10.3 Hardware Purchase and Sale Agreement between the Registrant
and Sunrise Systems, Inc.(3)
10.3.1 Amendment to Hardware Purchase and Sale Agreement. (3)
10.4 License Agreement between the Registrant and Sunrise Systems,
Inc. including grant of options to Sunrise Systems, Inc.(3)
10.4.1 Amendment to License Agreement. (3)
10.5 Agreement dated October 13, 1992 for installation of hardware
on DART buses and future transit systems. (3)
10.6 Employment Agreement between the Registrant and Donald B.
Scott.(3)
10.7 Copy of Assumed Name Certificate for The Transit Network.(3)
10.8 Award/Contract with Dallas Area Rapid Transit Authority dated
as of October 16, 1995. (3)
10.9 Promissory Note payable to DART dated January 24, 1996.(3)
10.10 Offer dated April 19, 1996 outlining terms of acquisition of
Pro.Net Communications, Inc. (4)
10.11 Stock Purchase Agreement dated June 14, 1996 outlining terms
of acquisition of Cyber America Corporation (1)
10.12 Stock Purchase Agreement dated September 12, 1996 and amended
September 25, 1996, outlining terms of acquisition of hip
Communications, Inc. (1)
10.13 License Agreement dated October 4, 1996 between the Company
and SSNN (1)
10.14 Consulting Agreement between the Registrant and Stephen R.
Willey (1)
10.15 Consulting Agreement between the Registrant and Peter V.
Ciccone (1)
24.1 Consent of Certified Public Accountants.(1)
24.2 Consent of Maurice J. Bates, L.L.C. (contained in Exhibit
5.1).(2)
- -----------
(1) Filed herewith.
(2) To be filed by amendment.
(3) Incorporated by reference to Registration Statement Form SB-2, File No.
33-95744-D as permitted by Rule 12b-32.
(4) Incorporated by reference to the Registrant's Form 8-K for the month of
June 1996, as permitted by Rule 12b-32.
<PAGE>
EXHIBIT 10.11
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of June 14, 1996
----------------------
(the "Agreement"), between Simon D. Liebman, Joseph Rutkowski and Richard S.
Rutkowski (collectively "Sellers" or individually "Liebman", "J. Rutkowski" and
"R. Rutkowski"), the holders of Two Thousand (2,000) shares of common stock of
Cyber America Corporation, a Pennsylvania corporation ("Cyber America") which
represents 100% of the issued and outstanding stock of Cyber America
Corporation, and Digital Data Networks, Inc. ("Buyer" or "DDN").
WHEREAS Sellers desire to sell and Buyer desires to purchase from
Sellers Two Thousand (2,000) shares of common stock of Cyber America Corporation
(the "Purchased Stock"), which represents 100% of the issued and outstanding
stock of Cyber America Corporation, on the terms and subject to the conditions
set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and intending to be legally bound hereby, the parties agree as
follows:
1. The Transaction
1.1 Sale and Purchase of Stock. On the terms and subject to the
conditions set forth in this Agreement, at the Closing referred to in Section
1.3 below (the "Closing"), the Sellers shall sell the Purchased Stock to the
Buyer and the Buyer shall purchase the Purchased Stock from the Sellers.
1.2 Stock Transaction. DDN shall issue shares of common stock in
DDN to the Sellers in the following amounts: Simon D. Liebman, 23,750 shares,
Joseph Rutkowski, 23,750 shares and Richard S. Rutkowski, 2,500 shares. In
exchange, Sellers shall surrender 100% of the issued and outstanding stock of
Cyber America to DDN.
1.2(a) As an inducement for Sellers to enter into this
Agreement and to sell their stock, DDN covenants as follows:
1.2(i) DDN will provide up to $100,000 in working
capital to finance operating losses of Cyber America during year one of
operations. Of this amount, $50,000 will be made available beginning on June 15,
1996 with the remaining to be disbursed as needed;
1.2(ii) DDN will authorize the repayment of
outstanding loans made by R. Rutkowski to Cyber America up to a maximum of
$10,000 from the initial disbursement of $50,000 working capital; and
1.2(iii) DDN will enter into employment contracts
with Simon Liebman and Joseph Rutkowski substantially in the form attached
hereto which will include terms for employee compensation as well as
non-competition, confidentiality and assignment of future developments during
the term of the employment agreement plus an additional two years.
Stock Purchase Agreement - Page 1
<PAGE>
1.3 Seller's Consideration. As added incentive for Buyer to enter into
this Agreement, Liebman agrees to assign exclusive rights to his network design
"invention" to DDN and its Cyber America division.
1.4 Closing. The closing (the "Closing") under this Agreement shall
take place on June 14, 1996, or at such other time and place as shall be
mutually agreed upon.
2. Representation and Warranties of the Buyer
2.1 Authorization and Enforceability. Buyer has all requisite power and
authority to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
authorized, executed and delivered by Buyer and constitutes the valid and
binding obligation, fully enforceable in accordance with its terms.
2.2 No Finder. Buyer has not taken any action which would give to any
firm, corporation, agency or other person a right to a consultant's or finder's
fee or any type of brokerage commission in relation to or connection with the
transactions contemplated by this Agreement.
3. Representation and Warranties of Sellers
Sellers individually and collectively represent and warrant to Buyer
that, except as otherwise set forth herein, or otherwise specifically disclosed:
3.1 All Authorized Capitalization, Outstanding Shares, Title. Each
Seller is the record and beneficial owner of and has legal and valid title to
his shares of stock, free and clear of all liens, pledges, charges, claims and
other encumbrances, actual or alleged. Delivery of the shares to Buyer at the
Closing of this Agreement will transfer to Buyer legal and valid title to the
shares sold hereunder, free and clear of any liens, pledges, charges, claims and
other encumbrances.
3.2 Authorizations and Enforceability. Each Seller has all requisite
power and authority to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby. This Agreement constitutes the
valid and binding obligation of each of the Sellers and is fully enforceable in
accordance with its terms.
3.3 Effective Agreement. To the best of each Seller's knowledge, the
execution, delivery, and performance of this Agreement by Sellers and the
consummation of the sale contemplated hereby will not, with or without the
giving of notice of lapse of time or both, result in the breach of or conflict
with any terms, covenant, condition or provision of, result in the modification
or termination of, constitute a default under it, or result in the creation or
imposition of, any lien, security interest, charge, or encumbrance upon any of
the properties or assets of the Seller or Cyber America pursuant to any charter,
bylaw, commitment, contract or other agreement or instrument, to which he/it is
a party or by which any of his/its assets or properties is or may be bound or
affected or from which Cyber America derives a benefit which violation would
have a material adverse affect on the value of the shares being purchased.
Stock Purchase Agreement - Page 2
<PAGE>
3.4 Restrictions, Burdensome Agreements. None of the Sellers is a party
to any contract, commitment or agreement, and none of the Sellers is subject to
or bound or affected by any charter, bylaw or other corporate restriction, or
any order, judgment, decree, law, statute, ordinance, rule, regulation or other
restriction of any kind or character, which would prevent Seller from entering
into this Agreement or from consummating the sale contemplated hereby.
3.5 Representation and Warranty of Sellers; No Finder. Sellers have not
taken any action which would give to any firm, corporation, agency or other
person a right to a consultant's or finder's fee or any type of brokerage
commission in relation to or in connection with the transactions contemplated by
this Agreement.
4. Exemption from Registration-Disclosure-Access to Information
4.1 Information Available to Buyer. A partial inducement to the Sellers
to enter into this Agreement is the representation by Buyer that it has a high
degree of business and financial sophistication concerning the industry and the
business operations and prospects of Cyber America. Buyer has available all
business and financial data of Cyber America. Although Sellers have made such
information available based on their knowledge of relevant operating data, the
scope and examination by and on behalf of Buyer has been determined by Buyer,
based on its own sophistication and experience. Buyer has received all of the
information regarding Cyber America and its business which has been requested.
5. Access to Information
Buyer represents that its access to information has been as set forth
above. Without limiting the general nature of the representation, Buyer
acknowledges and represents that it has had access to certain specific matters
and the opportunity to consider in detail the business and investment
ramifications of information obtained.
6. Issuance of Certificates
Sellers agree to cause Cyber America to issue the stock certificate in
the name of Digital Data Networks, Inc.
7. Conditions to Closing and Termination
7.1 Conditions Precedent to Obligations of the Buyer. The obligations
of Buyer to proceed with the Closing under this Agreement are subject to the
fulfillment prior to or at the Closing of the following conditions:
Stock Purchase Agreement - Page 3
<PAGE>
7.1.1 Performance and Compliance. Sellers shall have performed
all of the covenants and complied with all of the provisions required by this
Agreement to be performed or complied with by them on or before the Closing.
7.1.2 Satisfactory Documents. Sellers shall have delivered to
Buyer such instruments and documents as are required to be executed by Sellers
hereunder or as are reasonably necessary to consummate and effectuate the
transaction contemplated hereby.
7.2 Conditions Precedent to Obligations of Sellers. The
obligations of Sellers to proceed with the Closing under this Agreement are
subject to the fulfillment or prior to or at the Closing of the following
conditions:
7.2.1 Satisfactory Instruments. All instruments and documents
required on the part of Buyer to effectuate and consummate the transactions
contemplated hereby shall be delivered to Sellers and shall be in form and
substance reasonably satisfactory to Sellers and their counsel.
7.3 Termination.
7.3.1 When Agreement May be Terminated. This Agreement may be
terminated at any time prior to the Closing by mutual consent of Buyer and
Sellers.
7.3.2 Effect of Termination. In the event of termination of
this Agreement by either Sellers or Buyer as provided above, this Agreement
shall forthwith terminate and there shall be no liability on the part of either
Sellers or Buyer except for liabilities arising from a breach of this Agreement
prior to such termination.
8. Other Provisions
8.1 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given when
personally delivered or, if mailed, three days after mailed by United States
first-class, certified or registered mail, postage prepaid, to the other party
at the following addresses (or at such other address as shall be given in
writing by any party to the other):
8.1.1 If to Buyer, then to:
Mr. Donald Scott
Digital Data Networks, Inc.
3102 Maple Avenue, Suite 230
Dallas, Texas, 75201
Stock Purchase Agreement - Page 4
<PAGE>
8.1.2 If to Sellers, then to:
Simon Liebman and Joseph Rutkowski
P.O. Box 348
Lafayette Hill, PA 19444
8.2 Successors and Assigns. This Agreement, and all rights and powers
granted hereby, shall bind and inure to the benefit of the parties and their
respective successors and assigns.
8.3 Governing Law. This Agreement has been made, executed and delivered
in and is to be governed and construed in accordance with the laws of the State
of Texas.
8.4 Captions. The captions in this Agreement are inserted solely for
convenience of reference and do not constitute a part of this Agreement, nor
shall they affect its meaning, construction or effect.
8.5 Further Assurances. Each party shall cooperate and take such action
as may be reasonably requested by another party in order to carry out the
provisions and purposes of this Agreement and the transactions contemplated
hereby.
8.6 Amendment and Waiver. The parties may by mutual agreement amend
this Agreement in any respect, and any party, but only as to such party, may (a)
extend the time for the performance of any of the obligations of any other
party; (b) waive any inaccuracies in representations by any other party; (c)
waive compliance by any other party with any of its agreements contained herein
and the performance of any obligations by such other party; and (d) waive the
fulfillment of any condition that is precedent to the performance by such party
of any of its obligations under this Agreement. To be effective, all such
amendments or waivers must be in writing and be signed by the party against whom
enforcement of the amendment or waiver is sought.
8.7 Entire Agreement. This Agreement and the schedules and exhibits
hereto, each of which is hereby incorporated herein, sets forth all of the
promises, covenants, agreements, conditions and undertakings between the parties
hereto with respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements and understandings, and inducements or conditions, if
any, expressed or implied, and whether oral or written.
Stock Purchase Agreement - Page 5
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Stock
Purchase Agreement as of the date first above written.
DATED this 14th day of June, 1996.
SELLERS:
/s/ Simon D. Liebman
-----------------------
Simon D. Liebman
/s/ Joseph Rutkowski
-----------------------
Joseph Rutkowski
/s/ Richard S. Rutkowski
---------------------------
Richard S. Rutkowski
BUYER:
DIGITAL DATA NETWORKS, INC.
By: /s/ Donald B. Scott
--------------------
Its: President
Stock Purchase Agreement - Page 6
<PAGE>
EXHIBIT 10.12
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement is made and entered into this l2th day of
September, 1996 by and between Dick Clarence Hardt, (the "Stockholder"), the
sole stockholder of hip Communications, Inc. a British Columbia corporation (the
"Company") and Digital Data Networks, Inc., a Washington corporation, (the
"Buyer"), with reference to the following recitals:
Stockholder owns all of the outstanding capital stock of the Company (the
"Stock") and desires to sell the Stock to the Buyer upon and subject to the
terms and conditions hereinafter set forth; and
Buyer desires to purchase the Stock from Stockholder upon and subject to the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, it is hereby covenanted and agreed by and among the parties that they
shall carry out the following Stock Purchase Agreement (the "Agreement"):
1. Purchase and Sale of Stock. The Stockholder, in reliance upon the
representations, warranties and covenants of Buyer contained herein and subject
to the terms and conditions of this Agreement, shall sell all of the Stock to
the Buyer for the purchase price set forth below. Buyer, in reliance upon the
representations, warranties and covenants of the Stockholder contained herein
and subject to the terms and conditions of this Agreement, shall purchase the
Stock from Stockholder for the purchase price set forth below.
2. Purchase Price. The purchase price for the purchase of the Stock shall
be 80,000 shares (the "Shares") of Buyer's common stock, no par value (the
"Purchase Price"). The parties agree that the fair market value of the Shares as
of the date of this agreement is $500,000 Canadian. The Purchase Price is based
upon a preliminary audit of the Company's financial statements which reflect,
for the fiscal year ended June 30, 1996, gross revenues of $440,000 and
Stockholder's representation that such gross revenues will not change materially
when the preliminary financial statements are certified by an independent public
accounting firm.
3. The Closing. The Closing of the purchase and sale of the Stock shall
take place at the offices of ProNet Communications, Inc. on or before September
30, 1996, subject to the receipt by Buyer of the certified financial statements
of the Company referred to in Section 4.4. below or at such other time and place
as may be mutually agreed upon by Buyer and Stockholder (the date of Closing
herein being referred to as the "Closing Date").
Page 1
<PAGE>
At the Closing, Stockholder shall deliver to Buyer, free and clear of all liens,
encumbrances, claims, and other charges thereon of any kind, a certificate for
the Stock, duly endorsed, with signature witnessed, to Buyer. Buyer shall
deliver to Stockholder a due bill in the form of Exhibit A attached hereto
representing the Shares until such time as the Buyer's transfer agent is able to
deliver a certificate or certificates representing the Shares. The Buyer shall
deliver to the Stockholder's lawyer the issued Shares within 21 days of the
Closing Date. The Shares win be held in escrow by the Stockholder's lawyers
until the holding period expires. While the shares are in escrow, the
stockholder shall have no right to vote the shares and any dividends paid will
be paid into escrow.
4. Representations and Warranties of the Stockholder. The Stockholder
represents and warrants to Buyer as follows:
4.1. Organization, Standing, Qualification and Capitalization. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of British Columbia, Canada, and has the corporate power to perform its business
as presently conducted and to own and lease the properties used in connection
therewith. A complete and correct copy of the Articles of Incorporation and all
amendments thereto of the Company certified by the Registrar of Companies of the
Province of British Columbia and a complete and correct copy of its By-laws and
all amendments thereto, certified by the secretary of the Company, will be
delivered to Buyer prior to the Closing. The Company is duly qualified to do
business and is in good standing in British Columbia and the conduct of its
business or the ownership of its property does not require such qualification in
any other jurisdiction.
The total authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, no par value per share, of which one share is issued and
outstanding, fully paid and non-assessable. Neither the Company nor the
Stockholder at the Closing will be a party to or be bound by any written or oral
contract or agreement which grants to any person an option or right of first
refusal or other right of any character to acquire at any time, or upon the
happening of any stated event, shares of Common Stock of the Company, whether or
not presently issued or outstanding.
4.2. Stock Ownership. The Stockholder is the lawful owner of record and
beneficially of the Stock, free and clear of all liens, encumbrances, claims and
other charges of every kind, and has full legal power and all authorization
required by law to transfer and deliver the Stock in accordance with this
Agreement.
4.3. Subsidiaries of the Company. The Company owns no shares of any
corporation and has no interest in any partnership, joint venture or other legal
entity.
Page 2
<PAGE>
4.4. Financial Statements. Stockholder has delivered to Buyer copies of the
following financial statements:
(i) Balance sheet of the Company as of June 30, 1996, in preliminary
audit form.
(ii) Statements of operations of the Company for the fiscal year ended June 30,
1996 in preliminary audit form.
(iii) Stockholder agrees to provide to Buyer, prior to the Closing Date,
certified financial statements of the Company audited by Davidson & Company, or
any other independent public accounting firm acceptable to the Buyer,
experienced in United States Securities and Exchange Commission ("SEC")
accounting practices and generally accepted accounting principles. Such
financial statements shall be in form suitable for filing by Buyer with the SEC
upon consummation of the transaction or readily adaptable therefor. Such
certified financial statements, as finally delivered, are herein referred to as
the "Financial Statements".
(a) Accounts Receivable. The Accounts receivable of the Company set forth
on the Financial Statements are collectible in full in the ordinary course of
business in the aggregate reported amounts less any reserves reflected in the
balance sheet.
(b) Inventory. All inventory of the Company as set forth in the Financial
Statements consisted, and all such inventory as of the Closing Date will
consist, of a quality and quantity usable or salable in the ordinary course of
business of the Company. The value at which inventories were reflected in the
Financial Statements was the lower of cost or replacement market value and with
adequate provision for obsolete material, all in accordance with generally
accepted accounting principles applied on a basis consistent with that of the
prior fiscal year.
(c) Other Assets. The prepaid expenses and other assets of the Company as
shown on the Financial Statements or arising thereafter prior to the Closing
represent amounts which will benefit the Company in future periods. All material
tangible assets owned and used by the Company in its operations are reflected in
the Financial Statements.
(d) Fixed Assets. The fixed assets of the Company are stated at cost on the
Financial Statements. The reserves for depreciation and amortization provided
against these assets have been established in accordance with the notes to the
Financial Statements and are adequate to reduce any idle fixed asset to net
realizable value.
(e) Schedule A & B. The Stockholder will also provide Schedule A (all
patents, patent applications, registered trademarks, registered service marks,
trademark and service mark applications, unregistered trademarks and service
marks, copyrights and copyright applications, owned or filed by the Company or
Page 3
<PAGE>
in which the Company has an interest and the nature of such interest) and
Schedule B (a true and accurate list of the name and location of each bank in
which the Company has an account; each safety deposit box or custody agreement;
and the names of the persons authorized to draw thereon or to withdraw
therefrom) which shall be attached to this Stock Purchase Agreement.
4.5. Title to Properties. The Company has good and marketable title to all
its properties and assets reflected in the Financial Statements, free and clear
of all mortgages, liens, pledges, charges or other encumbrances of any nature
whatsoever, except as disclosed in the Financial Statements; liens for current
taxes not yet due and payable.
4.6. Tax Matters. To the best of the Stockholder's knowledge, the amounts
set up in the Financial Statements as provisions for taxes are sufficient for
the payment of all foreign, Canadian, provincial and local taxes and all
employment and payroll related taxes, including any penalties and interest
thereon, whether disputed or not, of the Company. The Company has duly made all
deposits required by law to be made with respect to employees' withholding
taxes. The Company has duly filed all income, foreign, franchise, excise,
employment and payroll related, real and personal property, sales and gross
receipts tax returns and all other tax returns which were required to be filed
by it, and has paid, or has set up adequate reserves for the payment of all
taxes shown on such returns. To the knowledge of the Stockholder, no agreement
for the extension of time for the assessment of any deficiency or adjustment
with respect to any tax return filed by the Company has been assessed, and
Stockholder knows of no unassessed tax deficiency proposed or threatened against
the Company.
4.7. Insurance. The Company is insured under various policies of fire,
liability and other forms of insurance, which policies are in full force
enforceable in accordance with their terms and provide adequate insurance for
the business of the Company and its assets and properties.
4.8. Patents. Schedule A attached hereto sets forth all patents, patent
applications, registered trademarks, registered service marks, trademark and
service mark applications, unregistered trademarks and service marks, copyrights
and copyright applications, owned or filed by the Company or in which the
Company has an interest and the nature of such interest. To the best of the
Stockholder's knowledge,: a) no other patent, trademark or service mark,
copyright or license is necessary to permit the business of the Company to be
conducted as it is now conducted; b) no Person, firm or corporation has any
proprietary, financial or other interest in any such patents, patent
applications, registered trademarks, registered service marks, trademark and
service mark applications, unregistered trademarks and service marks, copyrights
and copyright application; c) there are no violations by others of any of the
rights of the Company thereunder; d) the Company is not infringing on any
patent, trademark or service mark, or copyright or otherwise violating the
Page 4
<PAGE>
rights, of any third party; e) no proceedings have been instituted or are
pending or, to the knowledge of the Stockholder or the Company, are threatened,
and no claim has been received by the Company, alleging any such violation; f)
the Company is not a party to or bound by any license agreement requiring the
payment by the Company of any royalty payment, except as set forth in
Schedule A.
4.9. Absence of Undisclosed Liabilities. To the best of the Stockholder's
knowledge, there are no liabilities or obligations of the Company either
accrued, absolute, contingent or otherwise, including, but not limited to, any
tax liabilities due to or to become due except as disclosed in the Financial
Statements and those incurred in accordance with past business practice in the
ordinary course of business.
4.10. Bank Accounts and Officers. Schedule B Attached hereto contains a true
and accurate list of the name and location of each bank in which the Company has
an account, each safety deposit box or custody agreement and the names of the
persons authorized to draw thereon or to withdraw therefrom.
4.11. Investment Representations. Stockholder agrees to take the Shares
issued hereunder for investment and not with a view to distribution. Each such
Buyer's share issued will be subject to a resale restriction from the date of
issue pursuant to rule 144 which is currently 2 years (the "Holding Period") and
thereafter may only be sold in compliance with the United States Securities Act
of 1933 and the securities laws of any jurisdiction in which the sale may be
effected. Stockholder acknowledges that the certificate(s) representing the
Shares will be marked with a restrictive legend which states that the Shares may
not be sold or transferred in the absence of an effective registration statement
under the United States Securities Act of 1933, or an opinion of counsel that
registration is not necessary and that a stop transfer order will be placed
against the Shares with the transfer agent of Buyer.
5. Representations and Warranties of Buyer. Buyer represents and warrants
to the Stockholder that:
5.1. Organization, Good Standing and Authority. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Washington, and has full corporate power and authority to own its properties and
assets and to carry on its business as it has been and is conducted. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby are within the corporate power of Buyer and
have been duly authorized by all necessary corporate and other action, including
any necessary approvals of securities regulatory authorities. The Agreement
constitutes the valid
Page 5
<PAGE>
obligation of the Buyer legally binding upon it in accordance with its terms.
The Shares, when issued, will be validly issued, fully paid and non-assessable.
5.2. Validity of Contemplated Transaction. Neither the execution and
delivery of this Agreement nor the consummation of the transaction contemplated
hereby will violate any agreement to which Buyer is a party or by which it is
bound or any law, order or decree or any provision of its Articles of
Incorporation or By-laws.
6. Covenants of Buyer and Stockholder.
6.1. Consulting Agreement. At the Closing, Stockholder (or assignee) and
Company shall enter into the attached Consulting Agreement.
6.2. Sub-lease and Intellectual Property Agreements. At the Closing,
Stockholder (or assignee) and Company shall enter into the attached Sub-Lease
Agreement and Intellectual Property Transfer and Use Agreement.
6.3. Repayment of Stockholder Loans. Buyer agrees to pay or to cause the
Company to pay to Stockholder certain outstanding loans from Stockholder to the
Company not to exceed $40,000 Canadian. Payment of funds shall be given to
Stockholder within seven (7) business days of closing. The Company will apply
the remaining $7,433.31 of outstanding loans towards rent due from the
Stockholder (or assignee) per the attached Sub-Lease Agreement.
6.4. Covenant Not to Compete. Stockholder agrees that for a period of three
years from the Closing Date, he will not, unless acting as an employee or a
consultant to the Company or Buyer or with Buyer's or the Company's written
consent, directly or indirectly, own manage, operate, join, control, or
participate in the ownership, management operation or control of, or be
connected as an officer, employee, partner or otherwise with any business
engaged in any business which is presently conducted by the Company, namely web
site development and hosting, within any state of the United States or any
Province of the Dominion of Canada in which the Company or Buyer presently
maintains an office or conducts its business, other than owning not more than 5%
of a class of equity securities traded on a national securities exchange in the
United States or Canada. Stockholder agrees that the remedy at law for any
breach of the foregoing will be inadequate and that the Company and Buyer shall
be entitled, among other things, to temporary and permanent injunctive relief
without the necessity of proving actual damage to the Company or Buyer.
6.5. No Negotiations For Sale Of Company. Stockholder agrees, prior to the
Closing or September 30, 1996, whichever is later, that he will not enter into
any negotiations with, or offer to sell the Stock or assets of the Company to
any other person without the prior written consent of Buyer.
Page 6
<PAGE>
7. Conditions Precedent to Buyer's Obligations. All obligations of Buyer
under this Agreement are subject to the fulfillment, prior to or at the Closing,
of each of the following conditions:
7.1. Representations and Warranties. The Stockholder's representations and
warranties contained in this Agreement shall be true at and as of the time of
Closing as though such representations and warranties were made at and as of
such time (except to the extent they are stated therein to be true as of some
other date).
7.2. Compliance With Agreements. The Stockholder and the Company shall have
performed or complied with all agreements and conditions required by this
Agreement to be performed or complied with by them prior to or at the Closing.
8. Conditions Precedent to Stockholder's Obligations. AJI obligations of
the Stockholder under this Agreement are subject to the fulfillment, prior to or
at the Closing, of each of the following conditions:
8.1. Representations and Warranties. Buyer's representations and warranties
contained in this Agreement shall be true at and as of the time of Closing as
though such representations and warranties were made at and as of such time.
8.2. Compliance With Agreements. Buyer shall have performed and complied
with all agreements and conditions required by this Agreement to be performed or
complied with prior to or at the Closing including execution of the attached
Consulting Agreement, Sub-Lease Agreement, and Intellectual Property Transfer
and Use Agreement.
9. Conditions Precedent to Both Parties Obligations. This agreement is
subject to the approval of the board of directors of the Buyer, to be obtained
on or before September 17'th, 1996.
10. Broker and Finder's Fees. Stockholder and Buyer each represent and
warrant to one another that they have not engaged or dealt with any broker or
finder who would be entitled to a brokerage fee or commission in respect to this
Agreement or the consummation of the transaction contemplated hereby. Each of
the parties hereto shall indemnify and hold harmless the other against all
claims, losses, liabilities or expenses which may be asserted against such other
party as a result of such first party's dealing, arrangements or agreements with
any such broker or person.
11. Expenses. Each party shall bear its own costs and expenses incurred in
connection with the negotiation and consummation of this Agreement and the
transaction contemplated hereby and neither party shall have a claim against the
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<PAGE>
other party for contribution to costs and expenses for any reason including
failure to consummate the transaction.
12. British Columbia Law to Govern. This Agreement shall be interpreted in
accordance with the laws of the Province of British Columbia and any action or
claim shall be brought in the appropriate courts of such Province.
13. Notices. All notices, requests and other communications which are
required or permitted hereunder shall be sufficient if given in writing and
delivered personally or by registered mail, postage prepaid, as follows (or to
such other addresses as may be set forth in a notice given in the same manner):
If to Buyer:
Digital Data Networks, Inc.
3102 Maple Avenue, Suite 230
Dallas, Texas 75201
Attention: Donald B. Scott, Chairman
(214) 969-7200
If to Stockholder:
Dick C. Hardt
204 1420 Arbutus St.
Vancouver, B.C, Canada V6J3W8
(604) 739-0469
IN WITNESS WHEREOF, This Agreement has been executed as of the day and year
first above written.
Digital Data Networks, Inc.
By: /s/ Donald B. Scott
---------------------
Donald B. Scott, Chairman
By: /s/ Dick C. Hardt
--------------------
Dick C. Hardt, Stockholder
Page 8
<PAGE>
SCHEDULE A
The Company has the trademark "hip webzine" registered in Canada as an online
publication.
<PAGE>
SCHEDULE B
The Company has a single chequeing account, numbered 285833 at branch 10 of
Vancouver City Savings and Credit Union, located at Pender and Hornby in
Vancouver, BC, Canada. The Stockholder is the only signing authority for the
account
<PAGE>
From: Dick Hardt
To: Digital Data Networks, Inc.
RE: Stock Purchase Agreement dated the 12 of September, 1996
We confirm that notwithstanding that the stock purchase agreement has been
signed by all parties, this stock purchase agreement is not to be effective
until such time as Digital Data Networks Inc. has arranged the pay out and has
paid out the loan by Highland Echo Ventures Ltd. Dated for reference May 1, 1996
to Dick Hardt with a current outstanding balance of $57,494.38 Canadian as of
the 12th day of September, 1996.
Signed
/s/ Dick Hardt
- ---------------
Dick Hardt
acknowledged and agreed to this 12 day of September, 1996
Signed
/s/ Donald Scott
- ------------------
Donald Scott, Chairman
Digital Data Networks Inc.
<PAGE>
To: Dick Hardt
From: Digital Data Networks, Inc.
Re.: Amendments to the Stock Purchase Agreement dated September
12th, 1996 and the Consulting Agreement between hip
Communications Inc. and Dick Hardt.
This letter confirms three amendments to the Stock Purchase Agreement dated the
12th of September 1996 between Dick Hardt and Digital Data Networks, Inc. and
two amendments to the Consulting Agreement between hip Communications Inc. and
Dick Hardt.
1. Purchase Price. The purchase price for the purchase of the Stock (all the
outstanding capital stock of hip Communications Inc.) shall be 30,000 shares of
Digital Data Networks, Inc. common stock, no par value.
2. Registration Rights. Digital Data Networks, Inc. agrees to grant
registration rights to the aforementioned 30,000 shares if and when Digital Data
Networks, Inc. completes a secondary share offering.
3. The Closing as stated in section 3 shall be amended to September 27, 1996
at or before 4:00 pm.
hip Communications agrees to amend the Consulting Agreement between Dick Hardt
and hip Communications Inc. in the following manner:
1. At Dick Hardt's option, the Consulting Agreement may be renewed for
one 3 month term after the initial 6 month term expires.
2. The consulting rate shall be changed to $2,500 per month.
IN WITNESS WHEREOF, This agreement has been executed as of September 25th, 1996.
Digital Data Networks, Inc. Dick C. Hardt
By: /s/ Donald B. Scott By: Dick C. Hardt
-------------------- -------------
<PAGE>
EXHIBIT 10.13
<PAGE>
LICENSE AGREEMENT
This Agreement is entered into this 4th day of October 1996, by and
between SSNN, Inc. ("Licensor"), a Nevada corporation, with offices at 377 South
Nevada Street, Carson City, Nevada 89703, and Digital Data Networks, Inc.
("Licensee"), a Washington corporation, with offices at 3102 Maple Avenue, Suite
230, Dallas, Texas 75201.
RECITALS
Licensor is the developer and owner of a Service to provide
comprehensive financial news and other information about small capitalization
companies to persons who subscribe to the service on the Internet.
Licensee desires to acquire the rights from Licensor to use, market and
sell the Service to subscribers in the Territory, and Licensor has agreed to
grant to Licensee an exclusive license to use the Service, and to improve upon,
use, market and sell the Service within the Territory.
1.0 Definitions.
The following terms shall have the meanings set forth herein except to
the extent the context otherwise requires:
(a) "Gross Revenues" means the dollar amount of all
revenues received by Licensee from customers in
Canada and the United States which result from the
sale, use and marketing of the Service, expressed in
U.S. Dollars. Gross Revenues would also include any
and all advertising, promotional fees, Web page
design fees and Web page referral fees received by
Licensee in connection with the Service;
(b) "Initial Term" means the term specified in Section
3.1;
(c) "Internet" means the global network of computers;
(d) "License" means the License granted to Licensee by
Licensor pursuant to this License Agreement;
(e) "License Year" means a period of 12 months commencing
on the date of this Agreement or each consecutive
anniversary of that date;
(f) "Licensee's Improvements" means all improvements to
the whole or any part of the Service (whether
patentable, trademarked or not), including technical
information relating to, being supplied with,
producing, using, marketing or selling the Service
developed or acquired by the Licensee or a
sub-Licensee during the Term of the License;
<PAGE>
(g) "Licensor's Improvements" means all improvements to
the whole or any part of the Service (whether
patentable or not), including technical information
relating to, being supplied with, producing, using,
marketing or selling the Service developed by
Licensor during the Term of the License;
(h) "Persons" and words signifying persons include
individuals, firms, partnerships, corporations,
associations and governments and governmental,
quasi-governmental and local authorities and
agencies;
(i) "Service" means the service developed by Licensor to
provide financial and other corporate information
about small capitalization companies to subscribers;
(j) "Small Cap Companies" means companies with a market
capitalization of less than $300 million;
(k) "Term of the License" means the Initial Term,
together with any further terms, until either party
gives notice pursuant to Section 3.2 hereunder;
(l) "Territory" means the Dominion of Canada;
(m) "Trade Marks" means any trademarks existing or in the
future attributed to the Service, and applications
filed in any jurisdiction within the Territory or in
the United States.
2.0 Grant of License.
2.1 For the Term of the License, the Licensor hereby
grants to the Licensee, who accepts, subject to the terms and
conditions of this License Agreement, an exclusive license within the
Territory to use, market, sell and develop the Service under the Trade
Marks.
2.2 Licensor shall not, for the Term of this License
Agreement and for six months after the termination hereof, use, market
or sell the Service to customers who purchased the Service from the
Licensee within the Territory.
<PAGE>
3.0 Term of the License.
3.1 The License shall commence on the date of this
License Agreement and continue for an Initial Term of one (1) year, and
shall be automatically renewable thereafter for consecutive one-year
terms, provided that Licensee meets or exceeds the following minimum
requirements:
(a) During the Initial Term, Licensee shall contract
with a minimum of twenty-five (25) paying
customers who shall subscribe to the Service at a
fee of no less than $2,000 Canadian;
(b) During subsequent one-year terms, Licensee shall
contract with a minimum of twenty (20) new paying
customers who shall subscribe to the Service at a
fee of no less than $2,000 Canadian;
(c) Once Licensee reaches a cumulative five hundred
(500) paying customers, then Licensee shall have
the right to license the Service in perpetuity.
3.2 The Licensee may give written notice to the Licensor
at any time prior to 90 days before the anniversary date of any License
Year of its intention to terminate this License Agreement and it shall
terminate at the expiration of said License Year.
4.0 Payments to the Licensor.
4.1 In consideration for the grant of the License
hereunder and the use of the License during the Term hereof, Licensee
shall pay to Licensor the following:
(a) Upon execution of this License Agreement, Licensee
shall cause its Transfer Agent to issue to Licensor
25,000 shares of Licensee's Common Stock, no par
value. Licensor hereby agrees to take such shares for
investment and not with a view to distribution. The
certificates representing such shares shall be
stamped with a restrictive legend prohibiting
transfer of such shares in the absence of an
effective registration statement or an opinion of
counsel satisfactory to Licensee that registration is
not necessary;
(b) Within 30 days after the end of each three month
period of the first License Year, 20% of Gross
Revenues received by Licensee during such License
Year resulting from the sale, use and marketing of
the Service within the Territory shall be paid by
Licensee to Licensor;
<PAGE>
(c) Within 30 days after the end of each three month
period of the second License Year, 10% of Gross
Revenues received by Licensee during such License
Year resulting from the sale, use and marketing of
the Service within the Territory shall be paid by
Licensee to Licensor;
(d) Within 30 days after the end of each three month
period of the third License Year, 5% of the Gross
Revenues received by Licensee during such License
Year resulting from the sale, use and marketing of
the Service within the Territory shall be paid by
Licensee to Licensor;
(e) Except as set forth below, no additional payments
shall be made by Licensee after the third License
Year;
(f) If Gross Revenues received by Licensee from the sale,
use and marketing of the Service within the Territory
exceed $1 million in any License Year, Licensee shall
cause to be issued to Licensor 50,000 Common Stock
Purchase Warrants, which shall have a strike price
which is the median price between the closing Bid and
Ask on the last day of the License Year in which
Licensee exceeds the $1 million in Gross Revenues.
These Common Stock Purchase Warrants shall expire
five (5) years from the date of exercise of these
Warrants;
(g) If Gross Revenues received by Licensee from the sale,
use and marketing of the Service within the Territory
exceed $5 million in total, beginning with the
commencement of this License Agreement, Licensee
shall cause to be issued to Licensor 100,000 Common
Stock Purchase Warrants, which shall have a strike
price which is the median price between the closing
Bid and Ask on the last day of the License Year in
which Licensee exceeds the $5 million in Gross
Revenues. These Common Stock Purchase Warrants shall
expire five (5) years from the date of exercise of
these Warrants;
(h) If Gross Revenues received by Licensee from the sale,
use and marketing of the Service within the Territory
exceed $10 million in total, beginning with the
commencement of this License Agreement, Licensee
shall cause to be issued to Licensor 250,000 Common
Stock Purchase Warrants, which shall have a strike
price which is the median price between the closing
Bid and Ask on the last day of the License Year in
which Licensee exceeds the $10 million in Gross
Revenues. These Common Stock Purchase Warrants shall
expire five (5) years from the date of exercise of
these Warrants;
<PAGE>
(i ) Any Warrants reserved for issuance pursuant to
Sections 4.1(f), (g) and (h) above that have not been
issued at the end of five (5) years from the date of
this License Agreement shall be terminated.
5.0 Reports, Records and Inspection
5.1 At the time of making the payments set forth in
Sections 4.1(b), (c) and (d) above, Licensee shall provide Licensor a
written report of Gross Revenues from the sale, use and marketing of
the Service for the period covered by the applicable payment. Similar
reports shall be delivered to Licensor within 90 days after the end of
Licensee's License Year, with respect to any Common Stock Purchase
Warrants to be issued to Licensor pursuant to Sections 4.1(f), (g) and
(h).
5.2 Licensee shall cause to be kept, at its principal
office, true and detailed records of its revenues from the sale, use
and marketing of the Service. Licensor and its authorized
representatives shall have the right to inspect such records at any
time during normal business hours after giving Licensee seven (7)
business days prior written notice of its intention to do so.
6.0 Representations and Warranties of Licensor.
6.1. Licensor represents and warrants to Licensee as
follows:
(a) Licensor is a corporation, duly organized, validly
existing and in good standing and has the requisite
corporate power and authority to carry on its
business as it is now conducted;
(b) Licensor has the requisite corporate power to enter
into this License Agreement, such Agreement has been
duly authorized, executed and delivered by Licensor,
and no other corporate proceedings on the part of
Licensor are necessary for the execution and delivery
of this License Agreement and the grant of the
License hereunder.
(c) No consent, approval authorization or order of any
person or governmental authority is required to be
obtained by the Licensor in connection with the grant
of the License hereunder.
(d) There is no pending or threatened litigation, action
suit, or proceeding involving the Invention, Trade
Marks or License granted hereunder.
<PAGE>
(e) The Licensor has filed all applications and has
obtained all approvals, licenses and authorizations
necessary to own the Service. Licensee has the right
to grant the License hereunder.
7.0 Property Rights
7.1 Licensee acknowledges that:
(a) This License Agreement does not transfer to Licensee
any proprietary rights in any part of the Service;
(b) All existing goodwill in the Service is vested and
all future goodwill in the Service arising out of the
sale, use and marketing of the Service will vest in
Licensor and remain the property of Licensor.
8.0 Infringement of Service.
8.1 Licensee agrees to notify Licensor immediately each
time Licensee becomes aware of any actual or apparent infringement or
unauthorized use of the Service.
8.2 Licensee shall, if required by Licensor, lend its
name and shall otherwise do all reasonable acts, matters and things and
execute all documents which Licensor may reasonably require for the
purpose of any claim or proceedings against any person for actual or
apparent infringement of the Service.
9.0 Default by Licensee.
9.1 Licensee shall be in default under this License
Agreement if:
(a) Licensee fails to make any payments of cash, stock or
warrants required pursuant to Section 4 hereof within
fourteen (14) days of written demand for payment has
been made by Licensor following the due date of
payment;
(b) Licensee fails to remedy any breach of its
obligations under this License Agreement within
fourteen (14) days after written demand for remedy
has been made by Licensor;
(c) Licensee becomes insolvent or makes an assignment for
the benefit of creditors, or there shall be convened
a meeting of creditors of Licensee or a committee of
creditors is appointed for Licensee;
<PAGE>
(d) Any case or proceeding shall be commenced by or
against Licensee under any bankruptcy or insolvency
law of the United States or any state thereof, or any
petition for relief under any such law shall be filed
by or against Licensee and not dismissed with 60 days
thereof;
(e) Any petition or application to any court or tribunal,
at law or in equity, shall be filed by or against
Licensee for the appointment of a receiver, trustee,
liquidator, custodian or conservator for it or any of
its property and not dismissed within 60 days
thereof.
9.2. Upon the occurrence of an event of default as set
forth above, Licensor may exercise one or more of the following
remedies:
(a) Proceed to collect all payments owing Licensor
pursuant to Section 4 hereof; or
(b) Terminate this License Agreement; or
(c) Pursue its rights either by suit in equity, at law or
by other appropriate proceedings.
10.0 Assignment and Sub-Licensing.
Licensee shall have the right to assign in whole or in part
this License Agreement or the License granted hereunder or any benefits
of this License Agreement or the License granted hereunder without the
prior consent in writing of Licensor; provided however, Licensee shall
require any sub-licensee to acknowledge and agree to the terms of this
License Agreement.
11.0 Costs.
Each party shall bear its own costs and expenses in connection
with the preparation and execution of this License Agreement.
12.0 Entire Agreement.
This License Agreement constitutes the entire agreement
between the parties as to its subject matter and supersedes and cancels
all prior agreements, arrangements, understandings and negotiations
with respect thereto. This Agreementmay be altered, amended or changed
only by written agreement executed by both parties.
<PAGE>
13.0 Governing Law.
This License Agreement shall be governed by and interpreted in
accordance with the laws of the State of Texas without reference to
conflict of laws or principles thereunder. All disputes relating to
this License Agreement shall be tried before a court of Dallas County
to the exclusion of all other courts that might have jurisdiction.
14.0 Notices.
All communications hereunder shall be in writing and effective
only on receipt, and shall be mailed, delivered, or sent by facsimile
transmission confirmed,
To Licensor at:
SSNN, Inc.
377 South Nevada Street
Carson City NV 89703
Facsimile No. (206)745-3839
To Licensee at:
Digital Data Networks, Inc.
3102 Maple Avenue, Suite 230
Dallas, Texas 75201
Facsimile No. (214) 969-7238
15.0 Successors.
This License Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and
assigns.
16.0 Counterparts.
This License Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect
as if the signature thereon and hereon were on the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this License Agreement to
be executed by their duly authorized officers this 4th day of October 1996.
SSNN, Inc.
By: /s/ Deborah Anne Picou
------------------------
Deborah Anne Picou, Chief Executive Officer
Digital Data Networks, Inc.
By: /s/ Donald B. Scott
---------------------
Donald B. Scott, Chairman and CEO
<PAGE>
EXHIBIT 10.14
<PAGE>
Contract for Services
THIS AGREEMENT IS DATED FOR REFERENCE THE FIRST 1st DAY OF APRIL, 1996.
BETWEEN: Digital Data Networks, Inc. a Washington state
corporation, located at 3102 Maple Ave., Suite 230, Dallas
Texas 75201 (hereinafter called the "Company"),
AND: Stephen R. Willey, residing at 3695 Marina Drive, West
Vancouver, British Columbia V7N 1N3 (hereinafter called
the "Contractor").
WHEREAS the Company wishes to retain the services of the Contractor and utilize
the same in the conduct of its business and the Contractor wishes to accept such
engagement:
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the covenants
and agreements hereinafter contained (the receipt and sufficiency of which is
hereby acknowledged by the parties) the parties hereto covenant and agree, each
with the other, as follows:
1. APPOINTMENT:
1.1 The Company retains the Contractor to perform the tasks (the "Services")
as set out in Appendix "A" attached hereto.
1.2 The term of this agreement shall commence on the 1st day of April, 1996
and terminate 24 months from this date.
1.3 The Contractor agrees to conscientiously and diligently perform the
contractual obligations in accordance with the terms of this agreement
in a proper workmanlike manner.
1.4 The Contractor will report progress on a monthly basis to the
representative designated by the Company.
<PAGE>
2. PAYMENT:
2.1 In consideration of the services performed by the Contractor, the
Company shall issue to the Contractor 10,000 shares of the Company's
Common Stock. The shares represented by the stock certificate shall bear
a restrictive legend stating that the certificate is subject to a
two-year lock-up period commencing with the date of issuance and
thereafter may only be sold in compliance with the U.S. Securities Act
of 1933.
3. DISBURSEMENTS:
3.1 During the term of this agreement, the Company shall pay the Contractor
all reasonable and proper disbursements, including travel, entertainment
and miscellaneous disbursements, incurred in the provision of the
Services, providing that the Contractor submits to the Company on the
first working day of each month a written statement of disbursements and
such other documentation as it is required under the Company's internal
policy guidelines set by its Board of Directors, and providing that the
Company's representative, or his nominee, approves payment of the said
by disbursements.
4. TERMINATION:
4.1 The Company may terminate this agreement only under the following
conditions:
a) Because of the Contractor's fraud, misappropriation,
embezzlement, misconduct or the like.
b) Because the Contractor violates any provision of this
agreement.
4.2 Notwithstanding any other provisions herein, this Agreement shall
automatically terminate and become null and void upon incapacity of the
Contractor to perform services as an independent contractor on behalf of
the Company, or upon the Company being wound up, or ceasing its
operation.
5. INDEPENDENT CONTRACTOR:
5.1 It is expressly agreed by the parties hereto that the Contractor is an
independent contractor and not the servant, employee or agent of the
Company, and all rights and obligations of the parties hereto are based
upon the Contractor's status as an independent contractor. The
Contractor will pay any and all taxes, Canada Pension Plan, premiums or
contributions, and any other statutory payments or assessments that are
payable by virtue of the Contractor's engagement hereunder.
<PAGE>
5.2 The Contractor shall have no authority to bind, obligate or incur any
liability on behalf of the Company in any way and, without limitation,
shall not enter into any contract that commits the Company in any way
whatsoever other than as shall be expressly permitted by the Company in
writing.
6. CONFLICT OF INTEREST:
6.1 The Contractor agrees during the term of this Agreement not to perform a
service for or provide advice to any person, firm or corporation where
the performance of the service or the provision of the advice may or
does, in a reasonable opinion of the Company, give rise to conflict of
interest. The Contractor further agrees to keep the Company informed at
all times of any activity that could in any way be constructed as a
potential conflict of interest.
7. CONFIDENTIALITY:
7.1 The Contractor will treat as confidential and will not, without the
prior written consent of the Company, publish, release or disclose or
permit to be published, released or disclosed, either before or after
the expiration or termination of the Agreement, any confidential
information supplied to, obtained by, or which comes to the knowledge of
the Contractor as a result of this Agreement
8. MISCELLANEOUS:
8.1 This Agreement may be modified by mutual consent.
8.2 This Agreement shall be constructed under and governed by the laws of
the Province of British Columbia.
8.3 This Agreement shall supersede any previous arrangements of any kind
between the parties, which agreements are hereby terminated.
<PAGE>
In witness whereof, each of the parties hereto has signed this agreement as of
this 1st day of April 1996.
Digital Data Networks, Inc.
By: /s/ Donald B. Scott
---------------------
Donald B. Scott, President and CEO
Stephen R. Willey
By: /s/ Stephen R. Willey
-----------------------
Stephen R. Willey
<PAGE>
Appendix "A"
Services:
Create a strategic business plan for Pro.Net Communications, Inc.
("Pro.Net") and assist in executing the plan
Assist in directing the activities of Pro.Net
Identify and actively pursue potential acquisitions for the Company
Assist the President of the Company in appropriate activities
<PAGE>
EXHIBIT 10.15
<PAGE>
Contract for Services
THIS AGREEMENT IS DATED FOR REFERENCE THE FIRST 1st DAY OF APRIL, 1996.
BETWEEN: Digital Data Networks, Inc., a Washington state
corporation, located at 3102 Maple Ave., Suite 230, Dallas
Texas 75201 (hereinafter called the "Company"),
AND: PVC Investments Ltd., a company incorporated under the
Company Act of British Columbia, residing at 2546 Panorama
Drive, North Vancouver, British Columbia (hereinafter
called the "Contractor").
WHEREAS the Company wishes to retain the services of the Contractor and utilize
the same in the conduct of its business and the Contractor wishes to accept such
engagement:
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the covenants
and agreements hereinafter contained (the receipt and sufficiency of which is
hereby acknowledged by the parties) the parties hereto covenant and agree, each
with the other, as follows:
1. APPOINTMENT:
1.1 The Company retains the Contractor to perform the tasks (the "Services")
as set out in Appendix "A" attached hereto.
1.2 The term of this agreement shall commence on the 1st day of April, 1996
and terminate 24 months from this date.
1.3 The Contractor agrees to conscientiously and diligently perform the
contractual obligations in accordance with the terms of this agreement
in a proper workmanlike manner.
1.4 The Contractor will report progress on a monthly basis to the
representative designated by the Company.
<PAGE>
2. PAYMENT:
2.1 In consideration of the services performed by the Contractor, the
Company shall pay to the Contractor a sum no greater than $219,000
(Canadian) for the completion of Appendix "A" over the 24 month period.
This amount shall be payable pro-rata by monthly installments upon
receipt of invoices from the Contractor. The pro-rata monthly
installments will be $7,500 (Canadian) for the first 6 months, $9,000
(Canadian) for the next 6 months and $10,000 (Canadian) for the next 12
months.
2.2 As further consideration of the services performed by the Contractor,
the Company shall issue to the Contractor 10,000 shares of the Company's
Common Stock. The shares represented by the stock certificate shall bear
a restrictive legend commencing with the date of issuance and thereafter
may only be sold in compliance with the U.S. Securities Act of 1933.
3. DISBURSEMENTS:
3.1 During the term of this agreement, the Company shall pay the Contractor
all reasonable and proper disbursements, including travel, entertainment
and miscellaneous disbursements, incurred in the provision of the
Services, providing that the Contractor submits to the Company on the
first working day of each month a written statement of disbursements and
such other documentation as it is required under the Company's internal
policy guidelines set by its Board of Directors, and providing that the
Company's representative, or his nominee, approves payment of the said
by disbursements.
4. TERMINATION:
4.1 The Company may terminate this agreement only under the following
conditions:
a) Because of the Contractor's fraud, misappropriation,
embezzlement, misconduct or the like.
b) Because the Contractor violates any provision of this
agreement.
<PAGE>
4.2 Notwithstanding any other provisions herein, this Agreement shall
automatically terminate and become null and void upon incapacity of the
Contractor to perform services as an independent contractor on behalf of
the Company, or upon the Company being wound up, or ceasing its
operation.
5. INDEPENDENT CONTRACTOR:
5.1 It is expressly agreed by the parties hereto that the Contractor is an
independent contractor and not the servant, employee or agent of the
Company, and all rights and obligations of the parties hereto are based
upon the Contractor's status as an independent contractor. The
Contractor will pay any and all taxes, Canada Pension Plan, premiums or
contributions, and any other statutory payments or assessments that are
payable by virtue of the Contractor's engagement hereunder.
5.2 The Contractor shall have no authority to bind, obligate or incur any
liability on behalf of the Company in any way and, without limitation,
shall not enter into any contract that commits the Company in any way
whatsoever other than as shall be expressly permitted by the Company in
writing.
6. CONFLICT OF INTEREST:
6.1 The Contractor agrees during the term of this Agreement not to perform a
service for or provide advice to any person, firm or corporation where
the performance of the service or the provision of the advice may or
does, in a reasonable opinion of the Company, give rise to conflict of
interest. The Contractor further agrees to keep the Company informed at
all times of any activity that could in any way be constructed as a
potential conflict of interest.
7. CONFIDENTIALITY:
7.1 The Contractor will treat as confidential and will not, without the
prior written consent of the Company, publish, release or disclose or
permit to be published, released or disclosed, either before or after
the expiration or termination of the Agreement, any confidential
information supplied to, obtained by, or which comes to the knowledge of
the Contractor as a result of this Agreement
<PAGE>
8. MISCELLANEOUS:
8.1 This Agreement may be modified by mutual consent.
8.2 This Agreement shall be constructed under and governed by the laws of
the Province of British Columbia.
8.3 This Agreement shall supersede any previous arrangements of any kind
between the parties, which agreements are hereby terminated.
In witness whereof, each of the parties hereto has signed this agreement or
caused this agreement to be signed in its corporate name by its officer
thereunto duly authorized, as of this 1st day of April 1996.
Digital Data Networks, Inc.
By: /s/ Donald B. Scott
---------------------
Donald B. Scott, President and CEO
PVC Investments Ltd.
By: /s/ Peter V. Ciccone
----------------------
Peter V. Ciccone, Director
<PAGE>
Appendix "A"
Services:
Create a strategic business plan for Pro.Net Communications, Inc.
("Pro.Net") and execute the plan
Direct the activities of Pro.Net on a daily basis
Identify and actively pursue potential acquisitions for the Company
Assist the President of the Company in appropriate activities
<PAGE>
EXHIBIT 24.1
<PAGE>
Exhibit 24.1
Consent of Independent
Certified Public Accountants
Digital Data Networks, Inc.
Dallas, Texas
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement of our report dated March 21, 1996, relating to the
financial statements of Digital Data Networks, Inc., which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
BDO Seidman, LLP
Seattle, Washington
December 12, 1996
