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 September 30, 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 [ X ] No [ ]
As of September 30, 1996, 2,271,355 shares of Common Stock and 1,840,000 Common
Stock Purchase Warrants were outstanding.
<PAGE>
INDEX
Page
PART I. FINANCIAL INFORMATION
1. Financial Statements 3
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (a)
Item 2. Changes in Securities (a)
Item 3. Defaults Upon Senior Securities (a)
Item 4. Submission of Matters to a Vote of Security Holders (a)
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
- ----------------------------------------------------------------------------
These items are inapplicable or have a negative response and have
therefore been omitted.
<PAGE>
5
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
--------- ------
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 $1,263 445 496
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 770 555
Current portion of long term debt 76 19
Unearned income 54 37
--------- -------
Total Current Liabilities 1,127 1,088
--------- -------
NONCURRENT LIABILITIES
Long-term debt and accrued interest 947 48
Expanded software license commitment 250 75
Other noncurrent liabilities - 65
--------- -------
Total Noncurrent Liabilities 1,197 188
--------- -------
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>
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1995 1996 1995 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES $ 148 $ 179 $ 350 $ 406
------- ------ ------ ------
EXPENSES:
Direct operating costs 122 82 357 327
Product development costs (Note4) - - - 303
Salaries and related 151 212 474 770
Marketing, general and administrative 63 257 221 460
Financing, legal and other consulting 202 12 325 51
------- ----- ------ ------
Total Expenses 538 563 1,377 1,911
------- ----- ------ ------
Loss Before Interest Expense 390 384 1,027 1,505
------- ----- ------ -----
INTEREST EXPENSE (INCOME):
Interest expense 26 18 95 55
Interest income - (60) - (126)
------- ------ ------ -------
Net Interest Expense (Income) 26 (42) 95 (71)
------- ------ ------ -------
NET LOSS $ (416) $(342) $(1,122) $(1,434)
======== ====== ======== ========
NET LOSS PER SHARE $ (.61) $(.16) $(1.77) $ (.76)
======== ====== ======= =======
</TABLE>
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-----------------------
1995 1996
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss $ (1,121) $ (1,434)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 242 351
Product development costs - 303
Other non-cash operating expenses 163 -
Non-cash compensation expense relating to
Common Stock issued to employees - 95
Increase (decrease) in accrued interest 61 (120)
Increase in accounts payable 40 57
Other 92 (159)
-------- ----------
Net Cash Used by Operating Activities (523) (907)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (19) (192)
Purchases of investments - (367)
-------- ----------
Net Cash Used by Investing Activities (19) (559)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of stock issue costs 25 5,823
Proceeds from issuance of notes payable 555 90
Repayment of expanded license commitment - (225)
Repayment of notes payable (9) (1,025)
--------- ----------
Net Cash Provided by Financing Activities 571 4,663
-------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 29 3,197
CASH AND CASH EQUIVALENTS
Beginning of Period 29 12
-------- ---------
End of Period $ 58 $ 3,209
======== =========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Exchange of debt for equity $ 3,120 $ 124
Common Stock issued in business acquisitions $ - $ 868
</TABLE>
<PAGE>
13
Digital Data Networks, Inc.
Notes to Consolidated 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 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.
As more fully described in Note 4, 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.
The consolidated 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.
Certain reclassifications have been made to prior period financial statements in
order to conform to current period classifications.
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 $5.8 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 February and March 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 nine months ended
September 30, 1996 approximates $(.66) 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 six months ended June 30, 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. 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 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
$(1.68) for the nine months ended September 30, 1995.
Note 4 Business Acquisitions
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 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 $ 949 $ 735
========== ==========
Net loss $ (1,629) $ (1,613)
========== ==========
Net loss per share $ (2.04) $ (0.79)
========== ===========
</TABLE>
The above pro forma financial information does not include non-recurring
expenses of approximately $303,000 recorded in June 1996 immediately subsequent
to recording the Cyber America 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.
Note 5 Income Taxes
As a result of losses for each of the interim periods, there was no provision
for income taxes recorded.
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Revenues increased $56,000 from $350,000 to $406,000 during the nine
months ended September 30, 1996, as compared to the prior year period. This
increase is primarily the result of contributions from Pro.Net Communications,
Inc. which was acquired in June 1996, and which has generated revenues of
$51,000 since the acquisition. Cyber America Corporation, which was acquired in
June 1996, and hip Communications, Inc., which was acquired in September 1996,
had no revenues during this period. Revenue from the Company's Transit Network
Division increased slightly, from $350,000 to $355,000. Total expenses increased
from $1,377,000 to $1,911,000 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 Corporation,
and a $296,000 increase in salaries and related, which has increased primarily
because of the Company's three 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 three
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.
The $534,000 increase in total expenses, which was offset by the
$56,000 increase in revenues, resulted in a loss before interest in the amount
of $478,000. Interest expense decreased $40,000 due to the retirement of certain
short-term and long-term debt obligations, while interest income, derived from
the investment of the public offering proceeds, increased $126,000, resulting in
a net loss of $312,000 for the nine months ended September 30, 1996 as compared
to the prior year period.
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 was utilized for the repayment of certain notes payable 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
three companies the Company acquired in 1996.
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 primarily
with banks and other commercial financial institutions.
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 $48,000 in long-term debt.
The Company believes that its future operating results, liquidity, and
capital resources will improve, the result of anticipated revenue growth by
Pro.Net Communications, Inc. and the commencement of revenue generation by Cyber
America Corporation 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>
Item 5. Other Information
Pursuant to a Stock Purchase Agreement dated September 12, 1996 and a subsequent
Amendment to the Stock Purchase Agreement dated September 25, 1996, the
Registrant acquired all of the outstanding capital stock of hip Communications,
Inc., a British Columbia, Canada corporation. The Registrant issued 30,000
shares of its Common Stock, no par value, to the sole shareholder of hip
Communications, Inc. in exchange for all of its outstanding capital stock.
The sole shareholder who received shares of the Registrant's Common Stock
relating to this transaction did so for investment purposes and without a view
toward distribution. Further, the stock certificate issued in connection with
this transaction was stamped with a restrictive legend prohibiting transfer of
said shares for a period of twenty-four (24) months.
hip Communications, Inc. is a Web page design and development company targeting
high-end corporate customers.
Item 6. Exhibits and Reports on Form 8-K
Exhibits - none filed with this report.
(b) No Form 8-K was filed by the Registrant during the three
months ended September 30, 1996. The Registrant filed a Form 8-K/A
with the Securities and Exchange Commission on October 24, 1996,
to report the audited financial statements of Pro.Net
Communications, Inc. for the fiscal years ended September 30, 1995
and 1994, and the unaudited six-month interim period ended March
31, 1996, as reported in the Registrant's Form 8-K dated June 18,
1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Digital Data Networks, Inc.
(Registrant)
Date: November 14, 1996 By: /s/ Donald B. Scott, Jr.________
------------------------------
Donald B. Scott, Jr., President
Date: November 14, 1996 By: /s/ Richard J. Boeglin__________
-------------------------------
Richard J. Boeglin
Vice President, Finance & Operations
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 3209
<SECURITIES> 0
<RECEIVABLES> 87
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3744
<PP&E> 1759
<DEPRECIATION> 1263
<TOTAL-ASSETS> 5094
<CURRENT-LIABILITIES> 1088
<BONDS> 188
0
0
<COMMON> 13278
<OTHER-SE> (9460)
<TOTAL-LIABILITY-AND-EQUITY> 5094
<SALES> 406
<TOTAL-REVENUES> 406
<CGS> 630
<TOTAL-COSTS> 1911
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (71)
<INCOME-PRETAX> (1434)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1434)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1434)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> 0
</TABLE>
