<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to_______________
COMMISSION FILE NUMBER: 0-27704
DIGITAL DATA NETWORKS, INC.
(Name of small business issuer in its charter)
WASHINGTON 91-1426372
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3102 MAPLE AVENUE, SUITE 230
DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip Code)
(214) 969-7200
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [ X ]
As of May 3, 1996, 2,027,047 shares of Common Stock and 1,840,000 Common Stock
Purchase Warrants were outstanding.
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INDEX
Page
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PART I. FINANCIAL INFORMATION
1. Financial Statements 3
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
1. Legal Proceedings (a)
2. Changes in Securities (a)
3. Defaults Upon Senior Securities (a)
4. Submission of Matters to a Vote of Security Holders (a)
5. Other Information (a)
6. Exhibits and Reports on Form 8-K (a)
______________________________________________________________________________
(a) These items are inapplicable or have a negative response and have therefore
been omitted.
2
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DIGITAL DATA NETWORKS, INC.
BALANCE SHEETS
(UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 12 $ 4,243
Accounts receivable 14 25
Prepaid expenses and other current assets 3 51
------- -------
Total Current Assets 29 4,319
EQUIPMENT, net of accumulated depreciation
of $1,018 and $1,082 445 385
INTANGIBLE AND OTHER ASSETS 183 156
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TOTAL ASSETS $ 657 $ 4,860
======= =======
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 227 $ 177
Notes payable and accrued interest 770 543
Current portion of long term debt 76 -
Unearned income 54 54
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Total Current Liabilities 1,127 774
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LONG-TERM OBLIGATIONS
Long-term debt and accrued interest 947 212
Expanded software license commitment 250 75
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Total Long-Term Obligations 1,197 287
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STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, 1 million shares authorized, none issued - -
Common Stock, no par value, 10 million shares authorized,
704,547 and 2,027,047 shares issued and outstanding 6,359 12,224
Accumulated Deficit (8,026) (8,425)
------- -------
Total Stockholders' Equity (Deficit) (1,667) 3,799
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 657 $ 4,860
======= =======
</TABLE>
3
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DIGITAL DATA NETWORKS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1995 1996
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<S> <C> <C>
REVENUES $ 105 $ 101
----- -----
EXPENSES:
Direct operating costs 120 86
Salaries and related 182 278
Marketing, general and administrative 62 82
Financing, legal and other consulting 59 50
----- -----
Total Expenses 423 496
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Loss Before Interest Expense 318 395
INTEREST EXPENSE (INCOME):
Interest expense 41 26
Interest income - (22)
----- -----
Net Interest Expense 41 4
----- -----
NET LOSS $ 359 $ 399
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NET LOSS PER SHARE $(.63) $(.29)
===== =====
</TABLE>
4
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DIGITAL DATA NETWORKS, INC.
---------------------------
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
1995 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (359) $ (399)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 80 83
Increase (decrease) in accrued interest 41 (69)
Increase (decrease) in accounts payable 61 (50)
Other 82 69
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Net Cash Used by Operating Activities (95) (366)
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CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable -- (50)
Purchases of equipment -- (3)
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Net Cash Used by Investing Activities -- (53)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 5,857
Proceeds from issuance of notes payable 105 30
Repayment of expanded software license commitment -- (225)
Repayment of notes payable -- (1,012)
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Net Cash Provided by Financing Activities 105 4,650
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Net Increase (Decrease) in Cash and Cash Equivalents (10) 4,231
CASH AND CASH EQUIVALENTS
Beginning of Period 29 12
------ ------
End of Period $ 19 $4,243
====== ======
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Exchange of debt for equity $3,120 $ --
</TABLE>
5
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DIGITAL DATA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF BUSINESS
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
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.
The financial statements presented herein include all adjustments which are,
in the opinion of management, necessary to present fairly the operating
results for the interim periods reported. The financial statements should be
read in conjunction with the audited, annual financial statements for the year
ended December 31, 1995, included in the Company's Annual Report on Form 10-
KSB.
NOTE 2 INITIAL PUBLIC OFFERING AND REPAYMENT OF CERTAIN INDEBTEDNESS
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 Company has reported proceeds received from the
sale of common stock and warrants, net of related stock issue costs, as an
increase in common stock. The 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 during five years
commencing upon issuance.
During the three months ended March 31, 1996, as a result of the closing of
its initial public offering, the Company paid $225,000 representing the
Expanded License Payment obligation due to its software supplier. This
payment included an additional $50,000 over the minimum payment obligation
originally recorded as an intangible asset. This increment has been recorded
as an intangible asset and is being amortized straight line over the remaining
estimated useful life.
Additionally, during the three months ended March 31, 1996, as a result of the
closing of its initial public offering the Company repaid in full, totaling
approximately $548,000, its 10% promissory notes due December 1995 (which had
been extended to March 1996), and in accordance with certain mandatory
prepayment conditions, repaid certain of its other promissory notes payable,
including approximately $48,000 of its 5% demand notes, $125,000 of its 8%
notes, $150,000 of its 10% notes due March 1997, $50,000 of its secured notes,
and approximately $57,000 of its 11% to 12% notes.
The Company's proforma supplemental loss per share for the three months ended
March 31, 1996 approximates $(.23) presented on a basis as if the 1996 public
offering and related interest-bearing debt repayment with a portion of the
proceeds therefrom, had occurred at the beginning of such period.
NOTE 3 EXCHANGE OF DEBT FOR COMMON STOCK
During the three months ended March 31, 1995, certain holders of the Company's
5% Convertible Promissory Notes having a combined principal and accrued
interest total approximating $2.9 million, and the holder of a Company 5%
$150,000 promissory note agreed to exchange such debt and related accrued
interest for approximately 232,500 shares of Company common stock. On a
supplemental basis, giving effect to the exchange of debt for common stock as
if it had occurred at the beginning of such period, loss per share would have
approximated $(.54) for the three months ended March 31, 1995.
NOTE 4 INCOME TAXES
As a result of losses for each of the interim periods, there was no provision
for income taxes recorded.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended March 31, 1996, revenues decreased 4% to
$101,000, due to a decrease in advertising revenues generated from the DART
system. This decrease is primarily the result of having only one salesperson
during this three-month period versus three salespeople last year during the
same period. Direct operating expenses decreased $34,000, primarily the result
of royalty amounts due to DART being reduced from 22% of revenues to 4%, and to
a lesser extent due to tighter cost controls.
The net loss for the three months ended March 31, 1996 increased
approximately $40,000, or 11%, due to the increase in salaries and related
expenses of $96,000, primarily as a result of discretionary bonus awards, and to
a lesser extent to an increase in base compensation for executive officers. The
increase in salaries and related expenses was partially offset by a decrease in
interest expense of $15,000, the result of retiring many of the Company's short-
term and long-term obligations after the Company completed its public offering
in February 1996, and an increase in interest income, the result of earnings on
public offering proceeds.
Financial Condition, Liquidity and Capital Resources
In February 1996, the Company closed its initial public offering and
realized cash proceeds of approximately $5.9 million, net of underwriter's
commissions and certain offering related costs. Approximately $1 million of
offering proceeds were utilized for the repayment of certain notes payable and
$225,000 of offering proceeds were utilized for the payment of amounts due
relating to expanded software license obligations. Cash used by operating
activities approximated $366,000 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.
Although the Company has no present commitments to do so, as described
more fully in the prospectus relating to the stock offering, estimates of
anticipated uses of proceeds include approximately $1 million for capital
expenditures. 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 with
banks and other commercial financial institutions.
In March 1996, the Company signed a Letter of Intent to acquire Pro.NET
Communications, Inc. ("Pro.NET"), a full service Internet provider based in
Vancouver, British Columbia, Canada. In this regard, the Company made a $50,000
bridge loan to Pro.Net. Pro.Net has total assets of approximately $200,000 and
has reported revenues of approximately $200,000 during the past two years since
its incorporation.
The consummation of this business combination is subject to and
contingent upon certain events and yet-to-be-determined conditions,
representations and warranties. If consummated, it is expected that the
acquisition of Pro.NET would be accomplished primarily through the issuance of
shares of the Company's Common Stock.
7
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Financial Condition, Liquidity and Capital Resources (continued)
The Company believes that the cash provided by the net proceeds of its
February 1996 stock offering, interest earned from the proceeds and anticipated
revenues from operations should be sufficient to fund the Company's working
capital requirements 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.
8
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Digital Data Networks, Inc.
(Registrant)
Date: May 10, 1996 By: /s/ Donald B. Scott, Jr.
------------------------------------
Donald B. Scott, Jr., President
Date: May 10, 1996 By: /s/ Richard J. Boeglin
------------------------------------
Richard J. Boeglin
Vice President, Finance & Operations
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,243
<SECURITIES> 0
<RECEIVABLES> 25
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,319
<PP&E> 1,467
<DEPRECIATION> 1,082
<TOTAL-ASSETS> 4,860
<CURRENT-LIABILITIES> 758
<BONDS> 287
0
0
<COMMON> 12,224
<OTHER-SE> (8,409)
<TOTAL-LIABILITY-AND-EQUITY> 4,860
<SALES> 101
<TOTAL-REVENUES> 101
<CGS> 86
<TOTAL-COSTS> 480
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> (399)
<INCOME-TAX> 0
<INCOME-CONTINUING> (399)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (399)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> 0
</TABLE>