As filed with the Securities and Exchange
Commission on July 16, 1997. Registration No. 333-17693
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
AMENDMENT No. 1
TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Digital Data Networks, Inc.
(Exact name of small business issuer in its charter)
--------------------------
<TABLE>
<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)
3102 Maple Avenue, Suite 230 Donald B. Scott
Dallas, Texas 75201 3102 Maple Avenue, Suite 230
(214) 969-7200 Dallas, Texas 75201
(214) 969-7200
(Address, including zip code, and
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)
Copies to:
Maurice J. Bates, L.L.C.
8214 Westchester, Suite 500
Dallas, Texas 75225
Phone (214) 692-3566
Fax (214) 987-2091
-------------------------
</TABLE>
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.
-------------------------
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.
================================================================================
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
(Registration Statement cover page cont'd)
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<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
================================== =================== ============================ ============================= ==================
<S> <C> <C> <C> <C>
Common Stock,
no par value (2) 1,840,000 (2) (2) (2) (7)
- ---------------------------------- ------------------- ---------------------------- ----------------------------- ------------------
Underwriters'
Stock Warrants (3) 115,000 (2) (2) (2) (7)
- ---------------------------------- ------------------- ---------------------------- ----------------------------- ------------------
Common Stock,
no par value (4) 115,000 (2) (2) (2) (7)
- ---------------------------------- ------------------- ---------------------------- ----------------------------- ------------------
Underwriters'
Warrants (3) 160,000 (2) (2) (2) (7)
- ---------------------------------- ------------------- ---------------------------- ----------------------------- ------------------
Common Stock
Purchase Warrants (5) 160,000 (2) (2) (2) (7)
- ---------------------------------- ------------------- ---------------------------- ----------------------------- ------------------
Common Stock,
no par value (6) 160,000 (2) (2) (2) (7)
- ---------------------------------- ------------------- ---------------------------- ----------------------------- ------------------
Common Stock,
no par value (8) 79,738 $3.00 $239,214 $100.00
- ---------------------------------- ------------------- ---------------------------- ----------------------------- ------------------
Total $100.00 (9)
================================== =================== ============================ ============================= ==================
</TABLE>
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.
3) Warrants to purchase up to an aggregate of 115,000 shares of Common Stock
and 160,000 Common Stock Purchase Warrants.
4) Common Stock underlying the Underwriters' Stock Warrants.
5) Common Stock Purchase Warrants underlying the Underwriters' Warrants.
6) Issuable upon exercise of Common Stock Purchase Warrants underlying the
Underwriters' Warrants.
7) 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.
8) Shares to be offered by Selling Securityholders.
9) $100 paid with initial filing on December 12, 1996.
Pursuant to rule 429(b), this Registration Statement also relates to
Registration File Number 33-95744-D.
================================================================================
- --------------------------------------------------------------------------------
<PAGE>
DIGITAL DATA NETWORKS, INC.
Cross-Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
<TABLE>
<CAPTION>
Form SB-2 Item Number and Caption Location In Prospectus
- --------------------------------- ----------------------
<S> <C>
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 Securityholders................................................. Selling Securityholders
8. Plan of Distribution.................................................... Outside Front Cover Page; Risk
Factors; Plan of Distribution
9. Legal Proceedings....................................................... The Company; 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.............................................................. *
</TABLE>
- -----------------------------
(*) None or Not Applicable
<PAGE>
Information contained herein is subject to completion or amendment. A
Registration Statement 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
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to Completion - Dated July 16, 1997
PROSPECTUS
Digital Data Networks, Inc.
79,738 Shares of Common Stock, No Par Value,
115,000 Underwriters' Stock Warrants
and
160,000 Underwriters' Warrants
This Prospectus relates to the offer and sale by certain holders (the
"Selling Securityholders") of (i) 79,738 shares of the Common Stock, no par
value (the "Common Stock") of Digital Data Networks, Inc. (the "Company"), (ii)
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 its
initial public offering ("Initial Public Offering") in February 1996, and (iii)
115,000 Underwriters' Stock Warrants and 160,000 Underwriters' Warrants sold to
nominees of the Underwriters of the Company's Initial Public Offering and the
Common Stock Purchase Warrants and shares of Common Stock underlying such
warrants ("Underwriters' Warrant Shares"). See "Description of Securities."
The Common Stock offered by the Selling Securityholders, the Warrant
Shares, the Underwriters' Stock Warrants, the Underwriters' Warrants and the
shares of Common Stock underlying such warrants are collectively referred to
herein as the "Securities".
The Securities to which this Prospectus relates may be sold by the
Selling Securityholders directly to or through underwriters, dealers or agents
in market transactions or privately negotiated transactions at market-based
negotiated prices. Such brokers or dealers may be deemed underwriters as that
term is defined in the Securities Act of 1933, as amended (the "Securities
Act"). 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 Securityholders.
See "Selling Securityholders" and "Plan of Distribution."
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 $2.375 per share of Common Stock and
$0.438 per Warrant on July 9, 1997. 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.
-------------------------
The date of this Prospectus is ____________, 1997.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under 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 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"). This
Registration Statement and 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, including all exhibits thereto,
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.
2
<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."
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, DDN Digital Data Networks (Canada), Inc. ("DDN Canada") and Cyber
America Corporation ("Cyber America"), market the Internet-related services. The
Company acquired an exclusive license agreement from the Small Stock News
Network ("SSNN") to offer, in Canada, financial news coverage of small
capitalization companies to Internet users at SSNN's World Wide Web ("Web" or
"WWW") site, which the Company intends to market in the near future.
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 Public 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 RIPTA and other
transit authorities.
In June 1996, the Company acquired Pro.Net Communications, Inc.
("Pro.Net"), a Vancouver, British Columbia, Canada based company which is a full
service Internet provider that focuses on commercial clients. Pro.Net
subsequently changed its name to DDN Canada. DDN Canada 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. DDN Canada 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 September 1996
acquisition of hip Communications, Inc. of Vancouver, British Columbia, Canada,
allows DDN Canada to offer web page design and development of sophisticated Web
sites, principally for large corporations and government agencies.
Cyber America, also acquired in June 1996, offers direct, high-speed access
to the backbone of the Internet, utilizing a unique network implementation
technology which has a patent pending. As a first tier Internet provider, Cyber
America increases performance by not over-subscribing already congested
networks, and eliminating multiple "hops" or routers. Cyber America targets
speed-conscious customers such as Internet service providers and companies that
have built an intranet or wide area network infrastructure.
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 will pay DDN an annual fee to join SSNN's network to be
listed at SSNN's Web site, where Internet users can access, free of charge, the
latest financial information on subscribing companies. As of the date of this
Prospectus, the Company has not marketed the SSNN service in Canada.
3
<PAGE>
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 Securityholders............................... 79,738 shares
Warrant Shares........................................ 1,840,000 shares (1)
Underwriters' Stock Warrants.......................... 115,000 warrants
Underwriters' Warrants................................ 160,000 warrants
Common Stock Purchase Warrants........................ 160,000 warrants (2)
Underwriters' Warrant Shares.......................... 275,000 shares
Outstanding Securities
Common Stock.......................................... 2,339,597 shares (3)
Warrants.............................................. 1,840,000 Warrants (3)
Underwriters' Stock Warrants.......................... 115,000 warrants
Underwriters' Warrants................................ 160,000 warrants
Risk Factors................... The Securities 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"
- ---------------------------
(1) Shares underlying the Common Stock Purchase Warrants.
(2) Underlying Underwriters' Warrants.
(3) 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 Initial Public Offering (such
shares and the shares underlying such Warrants are included in the shares
registered hereby. See "Selling Securityholders."); (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 220,000 options have
been granted; and (v) approximately 456,000 shares subject to other
outstanding options and warrants. See "Management - Stock Compensation
Plans."
4
<PAGE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------- ------------------
Operating Data: 1995 1996 1996 1997
<S> <C> <C> <C> <C>
Revenues $498 $683 (a) $101 $218 (a)
Direct operating costs 465 653 86 160
Other operating costs 1,302 2,137 410 473
Interest expense (income) 140 (141) (b) 4 (32) (b)
Net loss (1,409) (1,966) (399) (383)
Net loss per share $(2.17) $(0.98) $(0.29) $(0.16)
</TABLE>
December 31, 1996 March 31, 1997
----------------- --------------
Balance Sheet Data:
Working Capital $ 2,306 $ 2,136
Total Assets 4,277 3,807
Total Liabilities 1,170 922
Shareholders' Equity 3,107 2,885
- ---------------
(a) Beginning in the second quarter of 1996, the Company acquired three
businesses. See Note 2 in the Notes to Financial Statements for further details.
(b) In February 1996, the Company completed its Initial Public Offering and
received net proceeds of approximately $5.8 million. The Company utilized a
portion of the offering proceeds for the repayment of approximately $1 million
of notes payable and related accrued interest and payment of $225,000 for an
Expanded License payment to one of its vendors. The remaining balance has
primarily been invested in short-term financial instruments.
5
<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.
Risks Associated with Forward-looking Statements
This Prospectus contains certain "forward-looking statements" which
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning industry performance and the Company's operations,
performance, financial condition, growth and strategies. For this purpose, any
statements contained in this Prospectus, except for historical information, may
be deemed to be forward-looking statements. Without limiting the generality of
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "could," "estimate," or "continue," or the negative or other
variations thereof, or comparable terminology, are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond the Company's control, and
actual results may differ materially depending on a variety of important
factors, including those described below in the "Risk Factors" section and
elsewhere in this Prospectus.
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 March 31, 1997, the Company incurred cumulative
losses approximating $10.4 million, including losses of approximately $2 million
in 1996 and $383,000 during the first three months of 1997. 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 businesses, DDN Canada, Cyber America and hip. For the
fiscal year ended 1996, DDN Canada and hip had net losses of approximately
$300,000 and $220,000 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 $330,000 for the fiscal year ended 1996. It is anticipated that
all three companies acquired in 1996 will also contribute net operating losses
for fiscal year 1997. See "Consolidated 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."
DDN Canada'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 - DDN Digital Data Networks (Canada), Inc." and
"- Cyber America Corporation."
6
<PAGE>
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 - DDN Canada, 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, under certain circumstances, a required review or
vote by shareholders on the financial statements of unspecified acquisitions.
There can be no assurance that additional acquisitions will be consummated, or
that these or any other acquisitions will have a positive impact on the
Company's operating results. See "Business - DDN Digital Data Networks (Canada),
Inc." and " - Cyber America Corporation."
Risk of Collecting ACIS Loans
In February 1997, the Company entered into a Letter of Intent with ACIS
whereby the Company would acquire all of the capital stock of ACIS through a
merger exchange of stock. The Letter of Intent was subject to a number of
conditions, including the approval of the transaction by the boards of directors
and shareholders of both companies; ACIS providing audited financial statements
of its operations in a form acceptable for filing with the Commission; and loans
from the Company to ACIS for working capital pending the closing of the
transaction. The Company advanced ACIS approximately $1,048,000 in five
different loans which became due June 1, 1997 and are secured by a subordinated
security interest in certain of ACIS's assets and shares of ACIS stock.
Management of ACIS did not deliver its stock as security for the Company's loans
as was initially required, but rather, ACIS delivered a new certificate for
1,000,000 shares of ACIS common stock. As of the date of this Prospectus, the
loans are past due, however the Company and ACIS are negotiating a plan for
repayment of the ACIS loans, as well as a cancellation fee to the Company,
including reimbursement of the Company's expenses incurred in connection with
the transaction. Management of the Company believes that ACIS will repay its
loans and other related fees and expenses within the next eight months. There
can be no assurance that the Company will be successful in collecting from ACIS
any or all of the monies owed to the Company. See "Business - ACIS Acquisition."
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. Subsequent to the date the Warrants
have been eligible for redemption, the Common Stock has not traded as high as
$9.00. 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.
Although the Company does not currently meet the listing requirements, the
Company intends to apply for listing of its Common Stock on the Nasdaq National
Market in the future. 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."
7
<PAGE>
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, the Company's financial performance could 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
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."
DDN Canada 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, DDN Canada 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. DDN Canada 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 DDN Canada's potential
market share and adversely affect DDN Canada's future operating results from
that which could otherwise be attained. See "Business - Digital Data Networks
(Canada), 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.
However, there can be no assurance that other companies in the future will not
utilize technologies similar or superior to Cyber America's, or will not adhere
to a low over-subscription rate such as Cyber America's. See "Business - Cyber
America Corporation."
8
<PAGE>
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. However, there can be no assurance that
another Web site with this type of up-to-date information will not be available
in the future. 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.
Dependence on Network Infrastructure; Risk of System Failure; Security Risks
The future success of DDN Canada's and Cyber America's business will
depend upon the capacity, reliability and security of their network
infrastructure. DDN Canada 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 DDN Canada's and Cyber America's
network infrastructures will require substantial financial, operational and
management resources. There can be no assurance that DDN Canada 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 DDN
Canada 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. DDN Canada'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.
9
<PAGE>
Exclusive Supply Agreement - The Transit Network
The Company previously purchased its LED message signs and related
hardware exclusively from Sunrise Systems, Inc. ("Sunrise Systems") pursuant to
an agreement which expired December 31, 1996 (the "Hardware Agreement").
Although the Company continues to purchase its signs and related hardware from
Sunrise Systems, the Company did not renew this Hardware Agreement because it
believes the components and subassemblies are available from multiple sources.
However, a failure or delay in finding a replacement for Sunrise Systems could
have a material adverse effect on the Company's business.
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 DDN
Canada are under the direction of DDN Canada'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 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
2,339,597 shares of Common Stock of the Company outstanding, of which 942,804
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 one-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
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 two-year
holding period without any quantity limitations. As of the date of this
Prospectus, a total of 942,804 shares of Common Stock held by present
shareholders are eligible for sale under Rule 144, all of which will become
eligible under Rule 144 between July 1997 and April 1998. Of the 942,804 total
shares of Common Stock eligible for sale under Rule 144, 504,332 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 818,000 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
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. 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. The
shares underlying the Underwriters' Warrants and the Common Stock Purchase
Warrants are included in the registration statement of which this Prospectus is
a part. See "Selling Securityholders."
10
<PAGE>
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
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 14% 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."
11
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the
Securities by the Selling Securityholders pursuant to this Prospectus. However,
the Company would receive gross proceeds of $11,040,000 if all of the Warrants
were exercised, $948,750 if the Underwriters' Stock Warrants were exercised and
$960,000 if the Common Stock Purchase Warrants underlying the Underwriters'
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 conditions then existing, including the Company's
requirements for cash at the various times when the Securities 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. Other than ACIS, no such transactions are currently being
negotiated. See "Business - ACIS Acquisition." 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, subject to redemption at a price of $0.25 per
Warrant beginning 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.
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 trade 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 6.13 3.75
1997:
1st Quarter 7.00 4.63
2nd Quarter 6.50 2.25
3rd Quarter (through July 9, 1997) 3.19 2.13
</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 2.00 .88
1997:
1st Quarter 1.97 1.13
2nd Quarter 1.50 .44
3rd Quarter (through July 9, 1997) .97 .44
</TABLE>
The above prices represent inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not represent actual transactions. As of June
24, 1997, there were approximately 183 record owners of the Company's Common
Stock and approximately fourteen (14) record owners of the Company's Warrants.
12
<PAGE>
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."
13
<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 consolidated
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 and the
system began to generate limited revenue, but the installation was not
immediately completed, due to insufficient financial resources to purchase
needed equipment and labor. During 1993, the Company raised approximately
$670,000 from the sale of Common Stock. These funds were used to complete the
installation of the DART digital information network and to hire additional
sales personnel and programmers.
The following year and a half was a transitional period for the
Company, as it continued to operate the DART and RIPTA systems, negotiated the
conversion of debt to equity, funded the development of a new product (an
automated audio/visual next-stop announcement system), expanded its sales and
operations departments in Dallas, and implemented changes to its senior
management and Board of Directors.
During the years prior to the Company's public offering, the Company
incurred significant financing, legal and other consulting expenses in
connection with, among other things, extension of credit, modification of
existing contract or agreement terms, debt exchanges, services provided, and the
continued forbearance of its creditors, for which the Company issued shares of
its Common Stock and options to acquire shares of its Common Stock. The
estimated fair value of such securities issued was recorded as financing, legal
and other consulting expense.
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.
Subsequent to the Company's initial public offering, the Company
completed several business acquisitions and an exclusive license agreement. On
June 3, 1996, the Company acquired all of the outstanding common stock of
Pro.Net, a Vancouver, British Columbia, Canada-based Internet service provider,
for 100,000 shares of the Company's Common Stock. Pro.Net subsequently changed
its name to DDN Canada. 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. Cyber America, based in Willow Grove, Pennsylvania, offers
high-speed access to the backbone of the Internet. On September 27, 1996, the
Company acquired all of the outstanding common stock of hip, a Web page design
firm located in Vancouver, British Columbia, for 30,000 shares of the Company's
Common Stock. Hip's operations have subsequently been merged with DDN Canada's.
On October 4, 1996, the Company entered into an exclusive license agreement with
SSNN to offer SSNN's financial news coverage in Canada. In consideration of this
exclusive license agreement, the Company issued 25,000 shares of its Common
Stock to SSNN.
Comparison of the Three Months Ended March 31, 1996 and March 31, 1997
Revenues for the three months ended March 31, 1997 increased $117,000
from $101,000 to $218,000, an approximate 115% increase from the comparative
prior year period. This increase is primarily the result of revenues from DDN
Canada in the amount of $62,000 and from Cyber America in the amount of $27,000,
both of which were acquired in the second quarter of 1996, as well as an
increase of $28,000 from the Company's Transit Network Division. Total expenses
increased from $496,000 to $633,000, or approximately 28%, during the three
months ended March 31, 1997 as compared to the prior year period, due primarily
to approximately $180,000 of operating and other costs incurred in 1997 by
businesses acquired late in the second quarter of 1996, and approximately
$20,000 of amortization of intangible assets recorded for such business
acquisitions. The increase was offset by a decrease in salaries and related
expenses of approximately $60,000 due to the absence of IPO-related bonuses and
fewer employees in the Company's Transit Network Division. Interest income,
derived from the investment of the public offering proceeds, increased from
$22,000 to $39,000 as compared to the prior year period, while interest expense
decreased from $26,000 to $7,000 due to the retirement of certain short-term and
long-term obligations in 1996.
14
<PAGE>
Comparison of the Fiscal Years Ended December 31, 1995 and December 31, 1996
Revenues for the year ended December 31, 1996 increased $185,000 from
$498,000 to $683,000 from the prior year. This increase is primarily the result
of contributions from DDN Canada, which generated revenues of $109,000 and was
acquired in June 1996, and Cyber America, which generated revenues of $82,000
and was acquired in June 1996. Revenues from the Transit Network Division
remained relatively unchanged, decreasing from $498,000 to $493,000. Total
expenses rose from $1,767,000 for the year ended December 31, 1995 to $2,790,000
for the year ended December 31, 1996 due to the following changes. Direct
operating costs increased approximately $188,000, primarily due to hardware
purchases associated with new DDN Canada and Cyber America clients, as well as
$75,000 in amortization expense related to the software license. Salaries and
related rose from $615,000 to $880,000 due to an increase of $169,000 resulting
from the Company's 1996 business acquisitions, and $96,000 in discretionary
bonus awards. Marketing, general and administrative expenses increased from
$307,000 to $722,000 in 1996, primarily due to $338,000 incurred by the
Company's 1996 business acquisitions, as well as additional working capital
requirements for new corporate activities resulting from being a publicly traded
company. Increases in salaries and related expenses and marketing, general and
administrative expenses were partially offset by a decrease in financing, legal
and other consulting expenses of $174,000, the result of decreased requirements
for these services subsequent to completion of the Company's public offering.
Product development costs and amortization of intangible assets in the amount of
$329,000 in 1996 relates to the amortization of intangible assets acquired in
the DDN Canada and hip acquisitions, and the expensing of product development
costs associated with the Cyber America acquisition.
Financial Condition
Cash used by operating activities for the years ended December 31, 1995
and 1996 were $527,000 and $1,456,000 respectively. In 1995 this was funded by
financing activities involving the issuance of Common Stock and notes payable.
In 1996, cash used by operating activities was funded by the Company's initial
public offering wherein it received net cash proceeds of approximately $5.8
million, after deducting for underwriter's 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's
stockholders' equity increased from approximately ($1,667,000) at December 31,
1995 to $3,107,000 at December 31, 1996 as losses of approximately $2 million
were offset by increases to Common Stock resulting from the Company's public
offering and other issuances of the Company's Common Stock, including shares
issued in connection with business acquisitions and debt exchanges. Total
borrowings approximated $1.2 million at December 31, 1996 as compared to $2.3
million the prior year, the change resulting from certain current and long-term
obligations which were paid after the public offering.
In June 1996, DART put into service 40 light rail vehicles. The Company
is interested in installing its digital information network on these vehicles,
and is currently discussing the terms and conditions under which that may occur.
If an agreement is reached, the Company estimates that it will incur
approximately $200,000 of additional equipment and installation costs. The
Company believes, however, that advertising revenues from these light rail
vehicles will increase in amounts sufficient to offset the initial capital
outlay. See "Business-Digital Information Network."
In August 1996, one of the Company's noteholders exercised his right to
covert the entire amount of principal and accrued but unpaid interest to shares
of the Company's Common Stock. Pursuant to that exercise, the Company issued
30,795 shares of its Common Stock in exchange for approximately $124,000 of
principal and interest. Subsequent to December 31, 1996, two other noteholders
converted promissory notes of principal and accrued interest together
approximating $161,000 to 37,023 shares of the Company's Common Stock.
15
<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
At March 31, 1997, the Company's principal assets consisted of
approximately $1.4 million of cash, of which approximately $1.3 million was
invested in short-term, interest-bearing investments with banks and other
financial institutions, and approximately $1.3 million of short-term notes
receivable. The Company's total obligations of approximately $922,000 consisted
primarily of $305,000 in accrued expenses, and $362,000 of the current portion
of long-term debt incurred by the Company's Transit Network Division.
Although the Company has no present commitments to do so, as described
more fully in the prospectus relating to the Company's stock offering, estimates
of anticipated uses of proceeds include approximately $1 million for capital
expenditures. The Company anticipates that the companies it has acquired in 1996
will require additional working capital until they become profitable. 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 institutions.
In February 1997, the Company entered into a Letter of Intent with ACIS
whereby the Company would acquire all of the capital stock of ACIS through a
merger exchange of stock. The Letter of Intent was subject to a number of
conditions, including the approval of the transaction by the boards of directors
and shareholders of both companies; ACIS providing audited financial statements
of its operations in a form acceptable for filing with the Commission; and loans
from the Company to ACIS for working capital pending the closing of the
transaction. The Company advanced ACIS approximately $1,048,000 in five
different loans which became due June 1, 1997 and are secured by a subordinated
security interest in certain of ACIS's assets and shares of ACIS stock.
Management of ACIS did not deliver its stock as security for the Company's loans
as was initially required, but rather, ACIS delivered a new certificate for
1,000,000 shares of ACIS common stock. As of the date of this Prospectus, the
loans are past due, however the Company and ACIS are negotiating a plan for
repayment of the ACIS loans, as well as a cancellation fee to the Company,
including reimbursement of the Company's expenses incurred in connection with
the transaction. Management of the Company believes that ACIS will repay its
loans and other related fees and expenses within the next eight months. There
can be no assurance that the Company will be successful in collecting from ACIS
any or all of the monies owed to the Company.
The Company believes that its future operating results, liquidity, and
capital resources will improve, the result of anticipated revenue growth by DDN
Canada and Cyber America. 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 12 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.
128 ("SFAS 128"), which establishes standards for computing and presenting
earnings per share ("EPS") and has the effect of simplifying the standards for
computing earnings per share and makes them comparable to international EPS
standards. It is not expected that adoption of SFAS 128 will have a significant,
if any, effect on reported EPS data.
16
<PAGE>
BUSINESS
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: DDN
Canada 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 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.
The Transit Network
The Company's Transit Network Division markets and operates two
systems: a digital information network and NextStop, an automated audio/visual
announcement system. 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.
DDN Digital Data Networks (Canada), Inc.
DDN Canada, a Vancouver, British Columbia based corporation, was
organized in October 1994, as a provider of Internet services. DDN Canada'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. DDN Canada intends to continue capitalizing on the demand for
Internet access from corporations and individuals by providing Internet access
via leased and dial-up lines. DDN Canada also provides consulting or training
for clients interested in building an intranet or on-line marketing program. DDN
Canada 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 DDN Canada's, allowing DDN Canada
to offer Web page design and development in addition to their other Internet
services.
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.
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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. As of the date of this
Prospectus, the Company has not marketed the SSNN service 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 DDN Canada and Cyber America operations; and thirdly, to
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 important to get its first NextStop system
installed in the near future. 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 will continue to respond to Requests
For Proposal ("RFP"s) for such systems. However, there can be
assurance that any such contract 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 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.
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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.
DDN Canada maintaining problem-free access to its service. The
fundamental thrust of DDN Canada'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. DDN Canada 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.
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 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
a mailing and print advertising campaign which will target stock
brokers. The Company believes that these actions will enable it
to 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,
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.
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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.
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 800 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. The Company is currently in
negotiation with DART to extend this contract by an additional three years and
provide for the installation of the Company's system on DART's Light Rail
Vehicles which were placed in service about June 1996. Under the existing
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.
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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.
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 manufacture its hardware, but contracts 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."
The Company contracts 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.
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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.
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 manufacture the NextStop hardware, but contracts
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.
DDN Digital Data Networks (Canada), Inc.
Background
DDN Canada 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. DDN Canada 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 DDN Canada
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 DDN Canada.
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.
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Services Provided
DDN Canada's primary service is to provide local access to the Internet
for individuals and companies in the Greater Vancouver area. DDN Canada 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, DDN
Canada makes every effort to ensure that customers enjoy simple first-time
access to the Internet when using DDN Canada. 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.
DDN Canada believes that there will be substantial 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
information. Because of the experience and knowledge of DDN Canada's staff, DDN
Canada is able to offer training and consulting services to customers who are
interested in setting up their own intranet. DDN Canada 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.,
DDN Canada currrently offers Web page design and development in addition to its
other Internet-related services. Unlike many graphic design firms and
advertising agencies, DDN Canada 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 provider's customer support. Because DDN
Canada 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 DDN Canada's local Internet access comes
from approximately five other Internet access companies in British Columbia,
most of which have larger customer bases than DDN Canada. However, many of these
competitors have experienced difficulties in providing easy access and reliable
service. DDN Canada 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 DDN Canada does. In addition, the Company believes
hip 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 users 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.
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Users 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
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.
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Description
The Company's SSNN service will provide comprehensive financial news
coverage for small capitalization companies (market caps of less than $500
million Canadian). Interested persons 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 once it has been established. 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 will pay an annual
subscription fee to keep this information about their company accurate and
up-to-date. Statistical information for each subscribing company will be updated
nightly, while press releases will be updated immediately.
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
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. As of the date of this Prospectus, the Company has not
marketed the SSNN service in Canada.
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.
ACIS Acquisition
In February 1997, the Company entered into a Letter of Intent with ACIS
whereby the Company would acquire all of the capital stock of ACIS through a
merger exchange of stock. The Letter of Intent was subject to a number of
conditions, including the approval of the transaction by the boards of directors
and shareholders of both companies; ACIS providing audited financial statements
of its operations in a form acceptable for filing with the Commission; and loans
from the Company to ACIS for working capital pending the closing of the
transaction. The Company advanced ACIS approximately $1,048,000 in five
different loans which became due June 1, 1997 and are secured by a subordinated
security interest in certain of ACIS's assets and shares of ACIS stock.
Management of ACIS did not deliver its stock as security for the Company's loans
as was initially required, but rather, ACIS delivered a new certificate for
1,000,000 shares of ACIS common stock. As of the date of this Prospectus, the
loans are past due, however the Company and ACIS are negotiating a plan for
repayment of the ACIS loans, as well as a cancellation fee to the Company,
including reimbursement of the Company's expenses incurred in connection with
the transaction. Management of the Company believes that ACIS will repay its
loans and other related fees and expenses within the next eight months. There
can be no assurance that the Company will be successful in collecting from ACIS
any or all of the monies owed to the Company.
Employees
As of March 31, 1997, the Company had eighteen employees, of which
eight were employed by The Transit Network Division, eight by DDN Canada, and
two by Cyber America.
25
<PAGE>
Properties
The Company leases (i) approximately 1,370 square feet in Dallas for
$1,770 per month pursuant to a three-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 on a month-to-month basis.
Legal Proceedings
On November 6, 1996, Activeware Internet Corp. ("Activeware") and Dick
Hardt ("Hardt"), Plaintiffs, filed a claim against DDN and its subsidiary, hip,
Defendants, in the Supreme Court of British Columbia, in connection with certain
agreements entered into by all parties in September 1996, whereby Hardt agreed
to sell to DDN all of the outstanding capital stock of hip. Hardt alleges that,
among other things, he signed one of the agreements against his will, certain
agreements are not enforceable, DDN failed to provide him with certain payments
and a stock certificate in a timely fashion, DDN and hip breached certain
agreements and obligations, and DDN and hip have failed to pay the Plaintiffs
for work performed. The Plaintiffs are seeking against DDN and/or hip, among
other things, a declaration that certain agreements are unenforceable, specific
performance of certain agreements, damages of $500,000 (Canadian) for breach of
the agreements, monies owing pursuant to certain agreements, general damages,
punitive damages, and costs. The Company denies these claims and intends to
vigorously defend this lawsuit, and further in that regard, on January 22, 1997,
DDN and hip filed a Counterclaim against the Plaintiffs, alleging that, among
other things, the Plaintiffs breached certain terms of the Stock Purchase
Agreement, the Consulting Agreement, and the Intellectual Property Transfer and
Use Agreement. DDN and hip are seeking against the Plaintiffs, among other
things, rescission of certain agreements, an order compelling the Plaintiffs to
transfer ownership of the hip.com domain name to hip forthwith, an order for
possession of the office space, an injunction restraining and enjoining the
Plaintiffs with respect to the design or hosting of Web sites and to return
certain confidential information to hip, damages for misrepresentation, damages
for breach of contract, punitive damages, and costs. The Company believes that
the resolution of this legal proceeding will not have a material adverse impact
on the Company's financial position, results of operations or cash flows. The
suit is in the discovery stage and a trial date is expected for 1999.
26
<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 42 President, Director and
Chairman of the Board
James F. Biagi, Jr. * 40 Secretary and Director
Richard F. Rutkowski * 41 Treasurer and Director
Steven R. Willey 43 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. (subsequently renamed DDN Digital Data Networks (Canada),
Inc.), an Internet services company acquired by the Company in June 1996, and
has served as a director of DDN Canada 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
1991, Mr. Boeglin worked in the outdoor advertising industry. He has a B.S. in
Marketing and Management from Indiana University.
27
<PAGE>
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 most highly
compensated executive officers 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 1996 $144,000 $74,872 60,000 (1)
1995 120,000 74,558 44,723
1994 17,000 -0- 4,920
Richard J. Boeglin, V.P. Finance 1996 $96,000 $15,650 40,000 (1)
and Operations
1995 66,086 -0- 559
1994 59,161 -0- 12,298
Susan E. Hassel, V.P. Sales 1996 $129,637 -0- 15,000 (2)
1995 114,790 -0- 559
1994 95,982 -0- 11,179
</TABLE>
- -------------------
(1) These options to vest on a pro-rata basis over a 24-month period commencing
July 1, 1996.
(2) These options to vest on a pro-rata basis over a 24-month period commencing
December 1, 1996.
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
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.
28
<PAGE>
As of the date of this Prospectus, approximately 104,000 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.
29
<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. In
December 1996, the Company changed the exercise price of these shares to $5.50
per share and granted Stephen W. Willey, director, incentive stock options under
the 1996 Plan to purchase 40,000 shares at $5.50 per share, a price determined
by the Company's board of directors to be not less than the price of the
Company's Common Stock at the date of change. As of the date of this Prospectus,
220,000 options have been granted under the 1996 Plan.
The following table sets forth information regarding options granted
during the fiscal year ended December 31, 1996 to the Company's Chief Executive
Officer and the other most highly compensated executive officers 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 60,000 44 $5.50 June 30, 2001
President
Richard J. Boeglin 40,000 30 $5.50 June 30, 2001
V.P. Finance and
Operations
Susan E. Hassel 15,000 11 $5.50 November 30, 2001
V.P. Sales
</TABLE>
The following table sets forth information regarding exercised options
and the value of unexercised options as of December 31, 1996 held by the
Company's Chief Executive Officer and the other most highly compensated
executive officers 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 Value of
Shares Options at Fiscal Unexercised
Acquired Value Year-End At Fiscal Year-Ends
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable (1)
---- ----------- -------- ------------------------- -----------------------------
<S> <C> <C> <C> <C>
Donald B. Scott 0 0 133,769 / 45,000 $ 300,536 / 0
President
Richard J. Boeglin 0 0 21,739 / 32,236 $ 0 / 0
V.P. Finance and
Operations
Susan E. Hassel 0 0 11,573 / 16,283 $ 0 / 0
V.P., Sales
</TABLE>
(1) The value of unexercised in-the-money options is based on the market value
of the Company's Common Stock at fiscal year-end, of $4.75 per share.
30
<PAGE>
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 November 1995, Mr. James F. Biagi, Jr., Secretary and a director,
exchanged $19,095 of a 5% demand note with accrued interest for 4,774 shares of
the Company's Common Stock at $4.00 per share.
In June 1996, in consideration for acquiring all of the outstanding
capital stock of DDN Canada, the Company issued 100,000 shares of the Company's
Common Stock to shareholders of DDN Canada, 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 23,750 shares of
the Company's Common Stock to Simon D. Liebman and Joseph S. Rutkowski, and
2,500 shares 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.
31
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of June 30, 1997 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.
<TABLE>
<CAPTION>
Name of Number of Shares Percentage
Beneficial Owner Beneficially Owned of Ownership
- ---------------- ------------------ ------------
<S> <C> <C>
Donald B. Scott, Jr. 164,412 (1) 6.6%
James F. Biagi, Jr. 62,466 (2) 2.6
Richard F. Rutkowski 37,130 (3) 1.6
Stephen R. Willey 53,500 (4) 2.2
All directors and executive
Officers as a group (6 persons) 376,094 (5) 13.8%
</TABLE>
(1) Includes options to purchase 153,769 shares which may be exercised within
60 days from the date of this Prospectus.
(2) Includes options to purchase 62,466 shares which may be exercised within 60
days from the date of this Prospectus.
(3) Includes options to purchase 25,375 shares which may be exercised within 60
days from the date of this Prospectus.
(4) Includes options to purchase 15,000 shares which may be exercised within 60
days from the date of this Prospectus.
(5) Includes options to purchase 312,399 shares which may be exercised within
60 days from the date of this Prospectus.
The addresses of the foregoing persons are as follows: Donald B. Scott, Jr.,
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.
32
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth the number of Securities which may be offered by
the Selling Securityholders pursuant to this Prospectus. None of the Selling
Securityholders will own as much as 1% of the outstanding shares if all of the
Securities registered are sold except for Sunrise Systems, which will own 1.5%
if all of its shares registered herein are sold and all of its options are
exercised.
<TABLE>
<CAPTION>
Underwriters'
Stock Underwriters'
Shares Number of Warrants Warrants
Beneficially Shares Shares Beneficially Beneficially
Owned Prior to be Sold Beneficially Owned and Owned and
to this in this Owned After to be Sold in to be Sold in
Name Offering Offering this Offering this Offering this Offering
---- -------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Commonwealth Assoc. (1) 14,256 14,256 - - -
Mark Marshall (2) 6,709 6,709 - - -
Fred Meyers (3) 14,919 14,919 - - -
Sunrise Systems, Inc. (4) 80,192 43,854 36,338 - -
John A. Bruno (5) 125,000 125,000 - 50,000 75,000
Michael J. Wills (6) 65,000 65,000 - 25,000 40,000
John C. Cioffoletti (7) 45,000 45,000 - 20,000 25,000
Mason, Hill & Co., Inc. (8) 40,000 40,000 - 20,000 20,000
-------- -------- --------- -------- --------
Total 391,076 354,738 36,338 115,000 160,000
</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 November 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) Shares acquired in private transaction prior to the Company's Initial
Public Offering. Of such shares, 3,355 shares are subject to the
Underwriters' Lock Up Agreement until February 13, 1998.
(3) Includes 6,419 shares acquired in private transaction prior to the
Company's Initial Public Offering and 8,500 shares subject to options
granted in December 1996 for services rendered, exercisable at $4.50 per
share at any time until March 2001.
(4) Includes 1,119 shares acquired in private transaction prior to the
Company's Initial Public Offering and 18,697 shares in March 1997 in
connection with the conversion of debt. Of such shares, 1,119 shares are
subject to the Underwriters' Lock Up Agreement until February 13, 1998.
Also includes 24,038 shares subject to options granted prior to the
Company's Initial Public Offering in connection with a license agreement,
exercisable at prices ranging from $.09 per share to $.89 per share
exercisable for certain periods ranging until February 2003. Sunrise
Systems has agreed not to sell any of its shares being sold in this
Offering until the outstanding Warrants are redeemable or until September
30, 1997, whichever occurs first.
(5) Acquired in connection with the Company's Initial Public Offering. Includes
50,000 shares underlying warrants exercisable at $8.25 per share until
February 13, 2001 and 75,000 shares underlying warrants exercisable at
$6.00 per share until February 13, 2001. See "Risk Factors-Underwriters'
Warrants" and "Description of Securities-Underwriters' Stock Warrants and
Underwriters' Warrants."
(6) Acquired in connection with the Company's Initial Public Offering. Includes
25,000 shares underlying warrants exercisable at $8.25 per share until
February 13, 2001 and 40,000 shares underlying warrants exercisable at
$6.00 per share until February 13, 2001. See "Risk Factors-Underwriters'
Warrants" and "Description of Securities-Underwriters' Stock Warrants and
Underwriters' Warrants."
(7) Acquired in connection with the Company's Initial Public Offering. Includes
20,000 shares underlying warrants exercisable at $8.25 per share until
February 13, 2001 and 25,000 shares underlying warrants exercisable at
$6.00 per share until February 13, 2001. See "Risk Factors-Underwriters'
Warrants" and "Description of Securities-Underwriters' Stock Warrants and
Underwriters' Warrants."
(8) Acquired in connection with the Company's Initial Public Offering. Includes
20,000 shares underlying warrants exercisable at $8.25 per share until
February 13, 2001 and 20,000 shares underlying warrants exercisable at
$6.00 per share until February 13, 2001. See "Risk Factors-Underwriters'
Warrants" and "Description of Securities-Underwriters' Stock Warrants and
Underwriters' Warrants."
33
<PAGE>
DESCRIPTION OF SECURITIES
The Company was incorporated on October 17, 1988. As a result of
reverse stock splits and amendments to its Articles of Incorporation in 1995,
its authorized capital consists of 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 2,339,597 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.
34
<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 the 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. Although the Company does not currently meet the listing
requirements, the Company intends to apply for listing of its Common Stock on
the Nasdaq National Market in the future. 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 Initial Public Offering, the Company sold to
nominees of the Underwriters, 115,000 Underwriters' Stock Warrants entitling the
holders thereof to purchase up to 115,000 shares of Common Stock at a price of
$8.25 per share for a period of five years, commencing February 13, 1996, and
160,000 Underwriters' 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 Securities offered hereby may be sold from time to time to
purchasers directly by any of the Selling Securityholders. Alternatively, the
Selling Securityholders may from time to time offer the Securities through
underwriters, dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling
Securityholders and/or the purchasers of the Securities 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 Securities, as principals, at market prices
prevailing at the time of sale, at prices relating to such prevailing market
prices or at negotiated prices. Such brokers or dealers may be deemed
underwriters as that term is defined in the Securities Act. The Company will not
receive any of the proceeds from the sale by the Selling Securityholders of the
shares of the Securities offered hereby. The Company will pay the expenses
incident to the offering of the Securities offered hereby relating to the
preparation of the Registration Statement, of which this Prospectus is a part.
35
<PAGE>
Under agreements which may be entered into by the Selling
Securityholders, underwriters, dealers and agents who participate in the
distribution of the Securities offered hereby may be entitled to indemnification
by the Selling Securityholders 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
Securityholders 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.
36
<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' Equity (Deficit)........ F-5
Consolidated Statements of Cash Flows............................ F-6
Notes to Consolidated Financial Statements....................... F-7
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 consolidated balance sheets of Digital
Data Networks, Inc. and its subsidiaries (the Company), as of December 31, 1995
and 1996 and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the years 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 consolidated financial statements present fairly,
in all material respects, the financial position of Digital Data Networks, Inc.
and its subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years then ended in conformity
with generally accepted accounting principles.
BDO Seidman, LLP
Seattle, Washington
March 25, 1997
F-2
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
------------ March 31,
1995 1996 1997
---- ---- ---------
(Unaudited)
CURRENT ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 12 $ 2,865 $ 1,421
Notes receivable - 325 1,350
Accounts receivable 14 83 93
Prepaid expenses and other current assets 3 169 165
--------- -------- ---------
Total Current Assets 29 3,442 3,029
Equipment, net of accumulated depreciation 445 386 371
Intangible Assets, net of accumulated
amortization of $159, $263 and $298 (Note 2) 100 362 327
Other Assets 83 87 80
--------- -------- ---------
TOTAL ASSETS $ 657 $ 4,277 $ 3,807
========= ======== =========
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 159 290 $ 305
Accrued payroll and related 68 99 90
Notes payable and accrued interest (Note 4) 770 71 72
Current portion of long-term debt (Note 4) 76 501 362
Current portion of expanded license commitment (Note 5) - 78 -
Unearned income 54 97 64
-------- -------- ---------
Total Current Liabilities 1,127 1,136 893
-------- -------- ---------
LONG-TERM OBLIGATIONS
Long-term debt and accrued interest (Note 4) 947 34 29
Expanded software license commitment (Note 5) 250 - - -
-------- -------- ---------
Total Long-Term Obligations 1,197 34 29
-------- -------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 6, 10, 11 and 13)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, no par value, 1 million shares
authorized, none issued - - -
Common Stock, no par value, 10 million shares authorized,
704,547, 2,297,473 and 2,334,496 shares issued and
outstanding 6,359 13,099 13,260
Accumulated Deficit (8,026) (9,992) (10,375)
--------- -------- ---------
Total Stockholders' Equity (Deficit) ( 1,667) 3,107 2,885
--------- -------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 657 $ 4,277 $ 3,807
========= ======== =========
</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 Three Months
December 31 Ended March 31,
----------- ---------------
1995 1996 1996 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 498 $ 683 $ 101 $ 218
------- ------ ------ ------
EXPENSES:
Direct operating costs 465 653 86 160
Salaries and related 615 880 278 217
Marketing, general and administrative 307 722 82 175
Financing, legal and other
consulting (Note 7) 380 206 50 67
Product development costs, including
amortization of intangible assets (Note 2) - 329 - 14
------- ------ ------ ------
Total Expenses 1,767 2,790 496 633
------- ------ ------ ------
Loss Before Other Income (Expense) (1,269) (2,107) (395) (415)
------- ------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense (140) (51) (26) (7)
Investment income - 192 22 39
------- ------ ------ ------
Total Other Income (Expense) (140) 141 (4) 32
------- ------ ------ ------
NET LOSS $ (1,409) $(1,966) $ ( 399) $ (383)
========= ======== ========= ========
NET LOSS PER SHARE $ (2.17) $ (0.98) $ (0.29) $ (0.16)
========= ======== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in Thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Deficit Total
------------ ------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1995 410 $ 2,938 $ (6,617) $ (3,679)
Shares issued upon debt exchange (Note 4) 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 (Note 6) 1,322 6,612 - 6,612
Warrants issued for cash - 276 - 276
Stock offering costs - (1,066) - (1,066)
Shares issued in connection with acquisitions of:
Pro.Net Communications, Inc. 100 325 - 325
Cyber America Corporation 50 163 - 163
hip Communications, Inc. 30 98 - 98
Shares issued upon debt exchange 31 124 - 124
Shares issued for other than cash 59 170 - 170
Warrants issued for other than cash - 38 - 38
Net loss - - (1,966) (1,966)
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,297 13,099 (9,992) 3,107
Shares issued upon debt exchange (Unaudited) 37 161 - 161
Net loss (Unaudited) - - (383) (383)
- ----------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 (Unaudited) 2,334 $ 13,260 $ (10,375) $ 2,885
================================================================================================================
</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 Three Months
December 31, Ended March 31,
------------ ---------------
1995 1996 1996 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net Loss $ (1,409) $ (1,966) $ (399) $ (383)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 323 427 83 115
Product development costs - 329 - -
Other non-cash operating expenses 219 209 - -
Changes in assets and liabilities
exclusive of the
effects of business combinations:
Increase in prepaid and other
current assets - (149) - -
Increase (decrease) in accrued interest 140 (69) (69) (6)
Increase (decrease) in accounts payable
and accrued liabilities 130 (252) (50) 7
Other 70 15 69 (39)
----------- ----------- ----------- -----------
Net Cash Used by Operating Activities (527) (1,456) (366) (306)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable - (325) (50) (1,025)
Purchases of equipment (24) (15) (3) (58)
Cash acquired upon acquisition of businesses - 99 - -
----------- ----------- ----------- -----------
Net Cash Used by Investing Activities (24) (241) (53) (1,083)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock
and warrants, net of stock issue costs 25 5,822 5,857 -
Proceeds from issuance of notes payable 525 - 30 -
Repayment of expanded license commitment - (225) (225) -
Repayment of notes payable (16) (1,047) (1,012) (55)
----------- ----------- ----------- -----------
Net Cash Provided (Used) by Financing Activities 534 4,550 4,650 (55)
----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (17) 2,853 4,231 (1,444)
CASH AND CASH EQUIVALENTS
Beginning of Period 29 12 12 2,865
----------- ----------- ----------- -----------
End of Period $ 12 $ 2,865 $ 4,243 $ 1,421
=========== ====== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
Exchange of debt for equity $ 3,139 $ 124 $ - $ 161
Common Stock and warrants issued for other
than cash 257 208 - -
Common Stock issued in business acquisitions - 586 - -
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.
As more fully described in Note 2, 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, DDN Digital Data Networks
(Canada), Inc. ("DDN Canada"), previously known as Pro.Net Communications, Inc.
("Pro.Net") before it changed its name in January 1997, 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. The Company's subsidiary, hip
Communications, Inc. ("hip"), which subsequently merged its operations with DDN
Canada, is a Web page design and development company targeting corporate
customers. DDN Canada currently operates primarily in Vancouver, British
Columbia, Canada. The Company's subsidiary, Cyber America Corporation ("Cyber
America"), offers direct high speed access to the backbone of the Internet and
targets speed conscious customers such as Internet service providers and
companies that have built an intranet or wide area network infrastructure. Cyber
America's primary operations are in Pennsylvania, and its customers are
primarily located in the northeast region of the United States.
Principles of Consolidation - 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 and hip was acquired in September 1996. Intercompany account balances
and transactions are eliminated in consolidation.
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 generally consist of cash,
commercial paper and other money market instruments. The Company invests its
excess cash in deposits with major banks and money market securities of
investment grade companies. These securities have original maturity dates not
exceeding three months. Such investments are stated at cost, which approximates
fair value, and are considered cash equivalents for purposes of reporting cash
flows.
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 identifiable and unidentifiable assets recorded in connection with
business combinations accounted for utilizing purchase accounting. Intangible
assets are amortized on a straight-line basis over estimated productive lives
not exceeding five years. Cost and accumulated amortization of fully amortized
intangible assets are removed from the accounts.
F-7
<PAGE>
Note 1 Description of Business and Summary of Significant Accounting Policies
(continued)
Impairment of Long-Lived Assets - The Company evaluates at each balance sheet
date the carrying value of long-lived assets and intangible assets, and the
appropriateness of the remaining lives of such assets considering whether any
events have occurred or conditions have developed which may indicate that the
remaining life or the amortization method requires adjustment. After reviewing
the appropriateness of the remaining lives, the Company then assesses the
overall recoverability of the assets by determining if the unamortized balance
can be recovered through undiscounted future operating cash flows. If such
evaluations were to indicate a material impairment of these assets, such
impairment would be recognized by a write down of the applicable asset. Absent
any unfavorable findings, the Company continues to amortize its intangible
assets based upon existing estimated lives.
Other Assets - Other assets at December 31, 1995 include stock issue costs
incurred in connection with the Company's initial public stock offering. These
costs were deferred and recorded as a reduction in common stock upon completion
of the stock offering in 1996.
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.
Fair Value of Financial Instruments - The Company's financial instruments
include cash and cash equivalents, short-term investments, and notes payable.
Amounts recorded for these instruments approximate fair value due to either
their maturity or the nature of these instruments.
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.
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.
Stock-Based Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") encourages, but does not
require companies to record compensation cost for stock-based employee
compensation. The Company has chosen to continue to account for stock-based
employee compensation utilizing the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, employee compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Pro forma net loss and loss per share presented on the basis as if compensation
cost had been determined pursuant to FAS 123 is disclosed in Note 6.
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 650,000 and 1,997,000 for
1995 and 1996, respectively, and (unaudited) 1,367,000 and 2,325,000 for the
three months ended March 31, 1996 and 1997, respectively.
F-8
<PAGE>
Note 1 Description of Business and Summary of Significant Accounting Policies
(continued)
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 year,
loss per share would have approximated $(2.09) for the year ended December 31,
1995. On a supplemental basis, giving effect to the repayment of debt with a
portion of its initial public offering proceeds which occurred during 1996, as
if it had occurred at the beginning of the respective years, loss per share
would have approximated $(1.47) and $(0.96) for years ended December 31, 1995
and 1996, respectively, and (unaudited) $(.23) for the three months ended March
31, 1996.
Significant Customers - Revenues from major customers exceeding 10% of total
revenue included one customer accounting for approximately 13% and 10% of the
Company's revenues during the years ended December 31, 1995 and 1996,
respectively.
Interim Financial Statements - The interim financial data as of and for the
three months ended March 31, 1996 and 1997 is unaudited; however, in the opinion
of Company management, the interim data includes all adjustments, consisting
only of normal recurring adjustments necessary for a fair statement of results
for the interim periods. The 1997 interim period results of operations are not
necessarily indicative of results for the entire year.
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. 128 ("SFAS 128"), which
establishes standards for computing and presenting earnings per share ("EPS")
and has the effect of simplifying the standards for computing earnings per share
and makes them comparable to international EPS standards. It replaces
presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes
dilution for the effect of common stock equivalents such as options or warrants.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997 (earlier application is not permitted) and requires
restatement of all prior period EPS data presented. It is not expected that
adoption of SFAS 128 will have a significant, if any, effect on reported EPS
data.
Note 2 Business Acquisitions
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 valued at approximately
$325,000. 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 market
price of Company common stock. The total purchase price, including assumed
liabilities at their estimated fair values (which approximated book value), is
allocated to assets acquired based on 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 identifiable intangible assets based upon their
relative estimated fair values. Intangible assets recorded in purchase
accounting approximate $325,000 and are amortized over five years.
In June 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
$163,000. One of the Company's Directors is related to 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
market price of Company common stock. The total purchase price, including
assumed liabilities at their estimated fair values (which approximated book
value), is allocated to assets acquired based on 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 by generally accepted accounting
principles, are capitalized in purchase accounting in the amount of
approximately $183,000 and immediately expensed as product development cost
subsequent to recording the business combination.
F-9
<PAGE>
Note 2 Business Acquisitions (continued)
In September 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
$98,000. 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 market
price of Company common stock. The total purchase price, including assumed
liabilities at their estimated fair values (which approximated book value), is
allocated to assets acquired based on estimates of fair value. Assets acquired
include tangible assets (which fair values are estimated to approximate book
value) and identifiable intangible assets, a customer base, and unidentifiable
intangible assets. Intangible assets recorded in purchase accounting approximate
$109,000 and are amortized over their estimated productive lives, which are not
in excess of two 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>
Three Months Ended
Year Ended December 31, March 31,
---------------------------------------------------------------
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 878 $ 1,019 $ 260
=========== ========= ============
Net loss $ (1,678) $ (1,947) $ (543)
=========== ========== ============
Net loss per share $ (2.02) $ (0.94) $ (0.35)
=========== ========== ============
</TABLE>
The above pro forma financial information does not include non-recurring
expenses of approximately $183,000 recorded in 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 3 Equipment
Equipment is comprised of the following (thousands of dollars):
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996
---- ----
<S> <C> <C>
DDN equipment installed in public transit vehicles $1,390 $ 1,390
Office equipment and other 73 352
------ -------
1,463 1,742
Accumulated depreciation (1,018) (1,356)
------ -------
Equipment, net $ 445 $ 386
====== =======
</TABLE>
F-10
<PAGE>
Note 4 Notes Payable and Long-Term Debt
Notes payable due within one year of the balance sheet dates consist of
unsecured promissory notes and are comprised of the following (thousands of
dollars):
<TABLE>
<CAPTION>
December 31,
1995 1996
------- --------
<S> <C> <C>
5% convertible due December 1996 $ 54 $ 54
Accrued interest 15 17
5% due on demand and March 1996 75 -
Accrued interest 28 -
10% due December 1995 549 -
Accrued interest 49 -
------- --------
Notes Payable and Accrued Interest $ 770 $ 71
======= ========
</TABLE>
Long-term debt consists primarily of promissory notes, unsecured unless
otherwise indicated, and is comprised of the following (thousands of dollars):
<TABLE>
<CAPTION>
December 31,
1995 1996
------- --------
<S> <C> <C>
5% convertible due March 1997 $ 131 $ 25
Accrued interest 20 6
8% due June 1997 276 126
Accrued interest 57 69
10% due March 1997 150 -
Accrued interest 5 -
11% to 12% due March 1997 155 101
Accrued interest 1 10
10% secured due March 1997 225 144
Accrued interest 3 1
8.5% payable $2 monthly, due July 1999, collateralized
by equipment and $60,000 of Certificates of Deposit - 53
------- --------
Total Long-Term Debt and Accrued Interest 1,023 535
Current portion (76) (501)
------- --------
Long-Term Debt and Accrued Interest $ 947 $ 34
======= ========
</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
F-11
<PAGE>
Note 4 Notes Payable and Long-Term Debt (continued)
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. In 1996, the Company issued 30,795 shares of its common
stock upon conversion of approximately $124,000 (including accrued interest) of
its 5% convertible notes due March 1997.
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 Company assets was 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 10%
note payable due May 1998, with annual $30,000 payments. The note is secured by
certain of the Company's equipment. 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 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. In
March 1997, the Company issued 18,326 shares of its common stock in exchange for
the remaining note payable and related accrued interest.
Certain of the Company's promissory notes totaling less than $200,000 are past
due or soon scheduled to be due. The Company is in discussion with the
noteholders regarding potential refinancing or exchange for common stock of such
notes.
F-12
<PAGE>
Note 4 Notes Payable and Long-Term Debt (continued)
During the three months ended March 31, 1997 (unaudited), certain of the
Company's creditors exchanged approximately $161,000 of the Company's debt
obligations for approximately 37,000 shares of the Company's common stock.
Future maturities of the Company's long term debt at December 31, 1996 are as
follows (thousands of dollars):
1997 $ 501
1998 21
1999 13
--------
$ 535
========
Note 5 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
1996, the Company paid Sunrise Systems $225,000 representing the Expanded
License Payment amount then due as a result of the Company's receipt of its
initial stock offering proceeds; the remaining $75,000, together with accrued
interest is due in 1997. In March 1997, the Company issued 18,697 shares of its
common stock in full satisfaction of the remaining obligation.
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. The difference
between the total $300,000 actual amount of the Expanded License Payment over
the $250,000 originally recorded was recorded as an increase in intangible
assets in 1996. Accumulated amortization was $150,000 and $225,000 at December
31, 1995 and 1996, respectively.
Note 6 Common Stock and Stock Options
In February 1996, the Company closed its initial public stock offering and
received net cash proceeds of approximately $5.8 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 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 5 to 10 years of grant.
F-13
<PAGE>
Note 6 Common Stock and Stock Options (continued)
During 1994, the Company adopted a Combined Incentive and Non-Qualified Stock
Option Plan (the "1994 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 1994 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. Prior to 1996, the
Company granted approximately 104,000 1994 Plan options, including 75,000
granted in 1995. No 1994 Plan options have been exercised.
During 1996, the Company adopted a Combined Incentive and Non-Qualified Stock
Option Plan (the "1996 Plan") with provisions similar to the 1994 Plan. The 1996
Plan reserves approximately 250,000 shares of common stock for grant and
provides that terms of each award be determined by the Board of Directors.
During 1996, the Company granted approximately 220,000 1996 Plan options. No
1996 Plan options have been exercised.
In connection with the Company entering into an underwriting agreement for its
initial public stock offering, 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.
During 1996, in connection with an agreement pursuant to which the Company
acquired certain financial consulting services, the Company issued options to
acquire 40,000 shares of its common stock at an exercise price of $6.00 per
share, exercisable for two years. The Company recorded the estimated fair value
of such options as expense and an increase in common stock. Further, for a
period of six to twelve months, the Company agreed to issue additional options
(40,000 for each of specified share prices) contingent upon the average closing
bid price per share of Company common stock attaining $7, $8, $9 and $10 for
twenty out of thirty conservative day time periods. As of December 31, 1996, no
additional options have been issued or are issuable for such contingent options.
The following summarizes stock option and warrant transactions during the two
years ended December 31, 1996 (thousands of shares):
<TABLE>
<CAPTION>
Exercise Price Weighted Average
Shares Per Share Exercise Price
-------- ---------------- ----------------
<S> <C> <C> <C>
Outstanding at January 1, 1995 286 $0.09 to $53.66 $ 7.64
Granted 100 0.09 to 8.94 8.94
Exercised (5) 0.09 to 4.47 4.47
Expired (21) 0.09 to 53.66 53.66
--------
Outstanding at December 31, 1995 360 0.09 to 19.68 5.00
Granted 303 4.50 to 6.00 5.55
Sold in initial public offering 1,840 6.00 6.00
Expired (5) 8.94 8.94
----------------
Outstanding at December 31, 1996 2,498 $0.09 to $19.68 $ 5.79
=========== =============== ==========
</TABLE>
F-14
<PAGE>
Note 6 Common Stock and Stock Options (continued)
Information relating to stock options and warrants at December 31, 1996
summarized by exercise price are as follows (thousands of shares):
<TABLE>
<CAPTION>
Outstanding
-------------------------------------------
Weighted Average Exercisable
----------------------------- ----------------------------
Remaining Weighted
Range of Life Average
Exercise Price Shares in Years Exercise Price Shares Exercise Price
- ------------------------- -------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.09 to $ 1.12 114 5.3 $ 0.37 114 $ 0.37
$ 4.47 to $ 5.00 120 3.5 4.95 116 4.95
$5.50 268 4.6 5.50 61 5.50
$ 6.00 to $ 6.71 1,894 4.0 6.01 1,894 6.01
$ 8.94 to $ 9.93 101 4.4 9.60 101 9.60
$ 13.42 to $ 19.68 1 2.6 16.37 1 17.00
---------- ---------
2,498 4.2 $ 5.79 2,287 $ 5.82
========== =========
</TABLE>
All stock options issued to employees during 1995 and 1996 have an exercise
price not less than the fair market value of the Company's common stock on the
date of grant, and in accordance with accounting for such options utilizing the
intrinsic value method there is no related compensation expense recorded in the
Company's financial statements. Had compensation cost for stock-based
compensation been determined based on the fair value at the grant dates
consistent with the method of SFAS 123, the Company's net loss and loss per
share for the year ended December 31, 1995 would not have changed and for the
year ended December 31, 1996 would have been increased to the pro forma amounts
presented below (in thousands, except per share data):
1996
-----------
Net loss
As reported $ (1,966)
Pro forma $ (2,308)
Loss per share
As reported $ ( 0.98)
Pro forma $ ( 1.16)
The fair value of option grants is estimated on the date of grant utilizing the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: expected life of options of 5 years, expected
volatility of 8%, risk-free interest rate of 6.4% and a 0% dividend yield. The
weighted average fair value at date of grant for options granted during 1996
approximated $1.34 per option. The above proforma disclosures do not include the
effect of options granted prior to 1995 that vest in subsequent years and
accordingly are not necessarily indicative of the financial impact had the
disclosure provisions of SFAS 123 been applicable to all years for previous
option grants.
Note 7 Related Party Transactions
Two of the co-owners and executive officers of Sunrise Systems, the provider of
the Company's Expanded License as described in Note 5, are members of the
Company's Board of Advisors. Sunrise Systems owns options to acquire
approximately 60,000 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). Subsequent to December 31, 1996, Sunrise Systems acquired
approximately 18,700 shares of Company common stock in exchange for certain
amounts owed.
F-15
<PAGE>
Note 8 Income Taxes
Deferred income taxes recorded for significant temporary differences between tax
and financial reporting basis of assets and liabilities approximate $1.3 million
and $2.2 million at December 31, 1995 and 1996, 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, 1996, the Company has net operating
loss carryforwards approximating $6.4 million, which begin to expire in 2011. 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.
Note 9 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.
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.
Note 10 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 2001, 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 operating leases with
various expiration dates. Future annual minimum lease payments approximate
$54,000, $51,000, $50,000 and $15,000 in 1997 through 2000, respectively.
Rent expense, relating to the aforementioned leases and certain other office
equipment rents, approximated $54,000 during each of the years ended December
31, 1995 and 1996.
F-16
<PAGE>
Note 11 Commitments and Contingencies
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business, including the litigation described in the following
sentence. The former stockholder of hip has initiated a lawsuit in the Supreme
Court of British Columbia against hip and the Company, claiming, among other
things, damages for breach of contract in the amount of approximately $550,000
Canadian (approximately $400,000 U.S.), plus punitive damages which are
unquantified. The Company denies these claims and intends to vigorously defend
this lawsuit and, further, in this regard, the Company has counterclaimed
against the plaintiffs for, among other things, damages for misrepresentation
and breach of contract. Company management currently believes that resolving
these various legal proceedings and claims will not have a material adverse
impact on the Company's financial position, results of operations or cash flows.
Note 12 Segment and Geographic Information
Results for the Company's operations in Canada for the year ended December 31,
1996 included revenues of $109,000 and loss before other income of $521,000.
There are no significant sales between foreign and domestic operations.
Identifiable assets relating to foreign operations approximated $552,000 at
December 31, 1996. As a result of its acquisitions of Internet-related
businesses, commencing in 1996 the Company operates principally in two service
industry segments. Certain corporate administrative expenses have been allocated
to the transit segment based upon the nature of the expense. Summarized
financial information by business segment for 1996 is as follows (thousands of
dollars):
<TABLE>
<CAPTION>
Transit Internet Corporate Consolidated
------- -------- --------- ------------
<S> <C> <C> <C> <C>
Revenues $ 493 $ 190 $ - $ 683
====== ====== ======= =======
Operating loss $ (294) $ (852) $ (961) $(2,107)
======= ======= ======= =======
Depreciation, amortization
and non-cash product
development costs $ 316 $ 376 $ 64 $ 756
====== ====== ======= =======
Capital expenditures $ - $ 2 $ 13 $ 15
====== ====== ======= =======
Identifiable assets $ 301 $ 659 $ 3,317 $ 4,277
====== ====== ======= =======
</TABLE>
Operating loss by segment is total operating revenue less expenses which are
deemed to be related to the segment's operating revenue. Identifiable assets by
segment are those assets that are used in the operation of that segment.
Corporate assets consist primarily of cash and cash equivalents and short-term
investments. Capital expenditures are exclusive of assets acquired upon business
acquisition.
Note 13 Subsequent Events
On February 4, 1997, the Company signed a Letter of Intent to acquire Advanced
Communication and Information Services ("ACIS"), a provider of digital
communication and information services to business and government organizations.
The acquisition is subject to, among other conditions, shareholder approval by
both companies and anticipated to be valued at approximately $20 million
comprised of a combination of cash and stock. Subsequent to the execution of the
Letter of Intent, the Company advanced ACIS approximately $1 million pursuant to
secured, short-term promissory notes due June 1997.
F-17
<PAGE>
Note 14 Events (Unaudited) Subsequent to Date of Independent Certified Public
Accountants' Report
As described in Note 13, in February 1997, the Company entered into a Letter of
Intent with ACIS whereby the Company would acquire all of the capital stock of
ACIS through a merger exchange of stock. The Letter of Intent was subject to a
number of conditions, including the approval of the transaction by the boards of
directors and shareholders of both companies; ACIS providing audited financial
statements of its operations in a form acceptable for filing with the
Commission; and loans from the Company to ACIS for working capital pending the
closing of the transaction. The Company advanced ACIS approximately $1,048,000
in five different loans which became due June 1, 1997 and are secured by a
subordinated security interest in certain of ACIS's assets and shares of ACIS
stock. Management of ACIS did not deliver its stock as security for the
Company's loans as was initially required, but rather, ACIS delivered a new
certificate for 1,000,000 shares of ACIS common stock. As of the date of this
Prospectus, the loans are past due, however the Company and ACIS are negotiating
a plan for repayment of the ACIS loans, as well as a cancellation fee to the
Company, including reimbursement of the Company's expenses incurred in
connection with the transaction. Management of the Company believes that ACIS
will repay its loans and other related fees and expenses within the next eight
months. There can be no assurance that the Company will be successful in
collecting from ACIS any or all of the monies owed to the Company.
F-18
<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 79,738 Shares of Common Stock
Company or any Underwriter. This Prospectus does not No Par Value,
constitute an offer to sell or a solicitation of an offer 115,000 Underwriters'
to buy any securities other than the securities to which Stock Warrants
it relates or an offer to sell or the solicitation of an and
offer to buy such securities in any circumstances in which 160,000 Underwriters'
such offer or solicitation is unlawful. Neither the Warrants
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>
<TABLE>
TABLE OF CONTENTS
Page
----
<S> <C> <C>
Additional Information..................... 2 __________________________
Prospectus Summary....................... 3 Prospectus
Risk Factors................................. 6 __________________________
Use of Proceeds............................. 12
Price Range of Common Stock and
Warrants.................................... 12
Dividend Policy............................. 13
Management's Discussion and
Analysis of Financial Condition , 1997
and Results of Operation................. 14
Business..................................... 17
Management................................ 27
Certain Relationships
and Related Transactions............. 31
Principal Shareholders.................... 32
Selling Securityholders................... 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 the
Securities by the Company pursuant to this Registration Statement are as
follows:
Securities and Exchange Commission filing fee............... $ 213
Accounting fees and expenses................................ 15,000
Legal fees and expenses..................................... 30,000
Blue Sky fees and expenses.................................. 15,000
Miscellaneous............................................... 39,787
---------
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. 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.
II-1
<PAGE>
2. 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.
3. 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.
4. 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.
5. During the period June 1994 through June 1997, the Company granted
stock options as follows:
<TABLE>
<CAPTION>
Date Optionee No. Shares Price Term
---- -------- ---------- ----- ----
<S> <C> <C> <C> <C>
June 1994 Richard J. Boeglin 10,062 $4.47 (1) 5 years
Susan 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 335 $8.94 5 years
Dallas Office Manager 2,013 $8.94 (3) 5 years
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Date Optionee No. Shares Price Term
- ---- -------- ---------- ----- ----
<S> <C> <C> <C> <C>
April 1995 Vendor (in lieu of 1,118 $8.94 5 years
cash payment)
May 1995 Richard J. Boeglin 559 $8.94 (4) 5 years
Susan E. Hassel 559 $8.94 (4) 5 years
Noteholder 10,063 $8.94 5 years
March 1996 Advisory Member 6,000 $6.00 (5) 5 years
July 1996 Donald B. Scott 60,000 $7.13 (6) 5 years
James F. Biagi 40,000 $7.13 (6) 5 years
Richard F. Rutkowski 40,000 $7.13 (6) 5 years
Richard J. Boeglin 40,000 $7.13 (6) 5 years
December 1996 Advisory Member 2,500 $4.50 5 years
Susan E. Hassel 15,000 $5.50 (7) 5 years
Dallas Office Manager 20,000 $5.50 (7) 5 years
Stephen R. Willey 40,000 $5.50 (7) 5 years
Public Relations Firm 40,000 $6.00 2 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 $5.50 per share in December 1996.
(5) Repriced to $4.50 per share in December 1996.
(6) Vesting over a 24-month period. Repriced to $5.50 per share in December
1996.
(7) 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.
6. 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.
II-3
<PAGE>
7. 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 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.
8. 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 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 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.
9. In June 1996, the Company acquired all of the outstanding common stock
of DDN Digital Data Networks (Canada), Inc. ("DDN Canada"), previously known as
Pro.Net Communications, Inc. ("Pro.Net") before it changed its name in January
1997, for 100,000 shares of the Company's Common Stock, which were issued to
shareholders of DDN Canada, 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 transferred without registration. In
connection with the acquisition of DDN Canada, the Company issued 20,000 shares
of Common Stock to two of the principal shareholders of DDN Canada in
consideration for signing consulting agreements with the Company. 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.
10. 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 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.
11. 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 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 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.
II-4
<PAGE>
12. 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 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 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.
13. 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 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 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.
14. 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 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 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.
15. In January 1997, the Company issued 1,118 shares of the Company's
Common Stock to a shareholder in consideration for marketing consulting work
performed by him on the Company's behalf in September 1994, for which he was
never fully compensated. 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 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 March 1997, the Company issued 18,697 shares of the Company's Common
Stock to Sunrise Systems, one of its suppliers, upon conversion of its
outstanding promissory note having a balance of principal and accrued interest
in the amount of $78,523.97, pursuant to an agreement dated January 1997. 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 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.
17. In March 1997, the Company issued 18,326 shares of the Company's Common
Stock to its former legal counsel upon conversion of its outstanding promissory
note having a balance of principal and accrued interest in the amount of
$82,464.26, pursuant to an agreement dated February 1997. 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 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.
18. In April 1997, the Company issued 3,000 shares of the Company's Common
Stock for professional services rendered in connection with a potential
acquisition. 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 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.
II-5
<PAGE>
19. In April 1997, the Company issued 2,100 shares of the Company's Common
Stock to a shareholder and former director for shares due for services rendered.
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 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.
II-6
<PAGE>
Item 27. Exhibits.
Exhibit No.
3.1 Registrant's Restated Articles of Incorporation, as
amended.(3)
3.2 Bylaws of the Registrant.(3)
3.2.1 Amendment to Bylaws of the Registrant.(5)
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.(1)
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. (2)
10.12 Stock Purchase Agreement dated September 12, 1996 and amended
September 25, 1996, outlining terms of acquisition of hip
Communications, Inc. (2)
10.13 License Agreement dated October 4, 1996 between the Company
and SSNN. (2)
10.14 Consulting Agreement between the Registrant and Stephen R.
Willey. (2)
10.15 Consulting Agreement between the Registrant and Peter V.
Ciccone. (2)
10.16 Letter of Intent dated February 4, 1997, with ACIS. (1)
21.1 Subsidiaries of the Registrant. (1)
24.1 Consent of Certified Public Accountants. (1)
24.2 Consent of Maurice J. Bates, L.L.C. (contained in Exhibit
5.1). (1)
- -----------
(1) Filed herewith.
(2) Previously filed with this Registration Statement.
(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.
(5) Incorporated by reference to the Registrant's Form 10-QSB filed May 14,
1997, as permitted by Rule 12b-32.
II-7
<PAGE>
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.
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-8
<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 July 16, 1997.
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, July 16, 1997
- --------------------------- President, Director
Donald B. Scott, Jr. (Principal Executive Officer)
/s/ James F. Biagi Jr. Secretary, Director July 16, 1997
- ---------------------------
James F. Biagi, Jr.
/s/ Richard F. Rutkowski Treasurer, Director July 16, 1997
- ---------------------------
Richard F. Rutkowski
/s/ Stephen R. Willey Director July 16, 1997
- ---------------------------
Stephen R. Willey
/s/ Richard J. Boeglin Vice President, Finance and July 16, 1997
- --------------------------- Operations ( Principal Financial
Richard J. Boeglin and Accounting Officer)
</TABLE>
II-9
<PAGE>
INDEX TO EXHIBITS
Exhibit No.
- -----------
3.1 Registrant's Restated Articles of Incorporation, as
amended.(3)
3.2 Bylaws of the Registrant.(3)
3.2.1 Amendment to Bylaws of the Registrant.(5)
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.(1)
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. (2)
10.12 Stock Purchase Agreement dated September 12, 1996 and amended
September 25, 1996, outlining terms of acquisition of hip
Communications, Inc. (2)
10.13 License Agreement dated October 4, 1996 between the Company
and SSNN. (2)
10.14 Consulting Agreement between the Registrant and Stephen R.
Willey. (2)
10.15 Consulting Agreement between the Registrant and Peter V.
Ciccone. (2)
10.16 Letter of Intent dated February 4, 1997, with ACIS. (1)
21.1 Subsidiaries of the Registrant. (1)
24.1 Consent of Certified Public Accountants.(1)
24.2 Consent of Maurice J. Bates, L.L.C. (contained in Exhibit
5.1).(1)
- -----------
(1) Filed herewith.
(2) Previously filed with this Registration Statement.
(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.
(5) Incorporated by reference to the Registrant's Form 10-QSB filed May 14,
1997, as permitted by Rule 12b-32.
- --------
<PAGE>
EXHIBIT 5.1
<PAGE>
Exhibit 5.1
MAURICE J. BATES, L.L.C.
ATTORNEY AT LAW
8214 WESTCHESTER, SUITE 500
DALLAS, TEXAS 75225
Telephone (214) 692-3566
Fax (214) 987-2091
July 15, 1997
Digital Data Networks, Inc.
3102 Maple Avenue, Suite 230
Dallas, Texas 75201
Re: Registration Statement on Form SB-2
File No. 333-17693
Gentlemen:
I have acted as counsel to Digital Data Networks, Inc., a Washington
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended, (the "Securities Act"), of (i) 79,738 shares
of common stock, no par value, (the "Common Stock") to be offered by certain
Selling Security holders, (ii) 115,000 Underwriters Stock Warrants and 115,000
shares of Common Stock underlying such Underwriters Stock Warrants, and (iii)
160,000 Underwriters' Warrants and 160,000 shares of Common Stock underlying
such Underwriters Warrants. The Registration Statement also relates to the offer
and sale of 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 its initial public offering in February 1996, which Warrant Shares and
Warrants were registered in such initial public offering.
A registration statement on Form SB-2 (SEC File No. 333-17693) was
filed with the Securities and Exchange Commission on December 12, 1996 (the
"Registration Statement") and Amendment No. 1 thereto is being filed herewith.
In connection with rendering this opinion I have examined executed copies of the
Registration Statement and all exhibits thereto and Amendment No. 1 and all
exhibits thereto. I have also examined and relied upon the original, or copies
certified to my satisfaction, of (i) the Articles of Incorporation, as amended,
and the By-laws of the Company, (ii) minutes and records of the corporate
proceedings of the Company with respect to the issuance of the Securities, and
related matters, and (iii) such other agreements and instruments relating to the
Company as I deemed necessary or appropriate for purposes of the opinion
expressed herein. In rendering such opinion, I have made such further
investigation and inquiries relevant to the transaction contemplated by the
Registration Statement as I have deemed necessary to the opinion expressed
herein, and I have relied, to the extent I deemed reasonable, on certificates
and certain other information provided to me by officers of the
<PAGE>
Exhibit 5.1
Digital Data Networks, Inc.
July 15, 1997
Page 2
Company and public officials as to matters of fact of which the maker of such
certificate or the person providing such other information had knowledge.
Furthermore, in rendering my opinion, I have assumed that the
signatures on all documents examined by me are genuine, that all documents and
corporate record books submitted to me as originals are accurate and complete,
and that all documents submitted to me are true, correct and complete copies of
the originals thereof.
Based upon the foregoing, I am of the opinion that the shares of Common
Stock to be offered by the Selling Security holders, the shares of Common Stock
issuable upon exercise of warrants held by certain Selling Security holders, the
Underwriters' Warrants and Underwriters' Stock Warrants and the shares of Common
Stock issuable under such Underwriters' Warrants and Underwriters' Stock
Warrants and the Warrant Shares have been duly authorized for issuance and sale
and the shares of Common Stock issuable upon exercise of the Selling Security
holders warrants, the Warrants, the Underwriters' Warrants and the Underwriters'
Stock Warrants, when issued by the Company, will be validly issued, fully paid
and nonassessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
Maurice J. Bates, L.L.C.
/s/
By Maurice J. Bates
<PAGE>
EXHIBIT 10.16
<PAGE>
Exhibit 10.16
DIGITAL DATA NETWORKS, INC.
3102 Maple Avenue, Suite 230
Dallas, Texas 75201
(214) 969-7200
Fax: (214) 969-7238
February 4, 1997
LETTER OF INTENT
ACIS, Inc.
1430 Spring Hill Road
Suite 401
McLean, VA 22102
Gentlemen:
The purpose of this letter is to outline the terms and conditions upon
which Digital Data Networks, Inc. (DDN), a corporation organized under the laws
of the State of Washington, will acquire all of the outstanding capital stock of
Advanced Communication and Information Services, Inc. (ACIS), a corporation
organized under the laws of the State of Delaware. The parties recognize that
the terms of the transaction are subject to further investigation and will
require preparation and execution of a definitive purchase agreement which sets
forth the terms and conditions of the acquisition. This Letter of Intent
evidences our intention to proceed in good faith to negotiate the terms of
acquisition and to consummate the transaction upon the terms and conditions
outlined herein. All references to monetary amounts refer to U.S. Dollars. We
propose that the transaction be consummated upon the following terms and
conditions:
1. DDN will acquire all of the outstanding stock (which ACIS
represents does not exceed 9.8 million shares fully diluted as of the date of
the signing of this Letter of Intent), options and warrants of ACIS, as shown in
more detail in Attachment A which is to be provided by the management of ACIS.
No cash will be paid to stockholders of ACIS.
1.1 The determination of the value of ACIS and the resulting ratio
of stock exchange will be mutually agreed upon over the next
thirty (30) days using a third party valuation acceptable to
DDN and ACIS. Should a value of ACIS or the resulting ratio of
stock exchange not be mutually agreed upon, then all of the
terms in item 7.3 shall apply except for the cash cancellation
fee of $300,000.
1.2 ACIS agrees to pay all Nasdaq fees with regard to the issuance
of DDN shares to ACIS shareholders.
<PAGE>
Exhibit 10.16
1.3 ACIS agrees that, from the date hereof until the closing of
the transaction, it will not issue any additional shares of
its capital stock or grant or issue any options, warrants or
other securities which would result in the issuance of any
additional shares by ACIS without the written consent of DDN.
2. This transaction will be subject to the approval of the board
of directors of both companies, as well as approval by a
majority of the shareholders of both companies.
3. Prior to closing the transaction, ACIS will furnish DDN with
financial statements audited by Ernst & Young LLP. Such
financial statements shall be in a form acceptable for an
EDGAR filing by DDN with the SEC upon consummation of the
transaction or readily adaptable thereafter. ACIS represents
that combined gross revenues for 1996 will be approximately
$9,000,000.
4. At the closing, Donald Scott will enter into a new three year
employment agreement with DDN to remain as its Chairman.
5. Subsequent to the acquisition of ACIS contemplated herein, and
within ninety (90) days after additional material funds have
been raised from a DDN warrants offering or DDN additional
material financing, each of the former ACIS shareholders shall
have a one-time demand registration right to sell an amount
equal to 15% of each shareholder's ACIS ownership. The
remaining shares shall bear a restrictive legend and be
subject to the Securities Act of 1933, Rule 144 and, if
required by DDN, a lock-up agreement.
6. The final closing date of the transaction shall be no later
than ninety (90) days after the signing of this Letter of
Intent.
7. Upon execution of this Letter of Intent by both parties, DDN
agrees to loan ACIS, on a secured basis, up to a total of
$2,000,000 for working capital, which shall be distributed in
the following manner: upon signing this Letter of Intent, DDN
will advance ACIS $500,000, in the form of a 10% secured
promissory note which will mature on June 1, 1997; upon
acceptance of a mutually acceptable third party valuation, DDN
will advance ACIS an additional $500,000, also in the form of
a 10% secured promissory note which will mature on June 1,
1997; and upon approval of this proposed acquisition
(including the completion and delivery of the final audit of
ACIS by Ernst & Young LLP) by a minimum of 90% of the
shareholders of ACIS, DDN will advance ACIS up to an
additional $1,000,000, in the form of a 10% secured promissory
note which will mature on June 1, 1997. Upon closing the
proposed acquisition of ACIS by DDN, all of these loans will
become part of the acquisition of ACIS by DDN.
7.1 ACIS agrees to grant DDN certain guarantees upon request,
where applicable, and a continuing security interest in and a
right of set-off against capital equipment owned by ACIS to
secure payment, performance and observance of all indebtedness
obligations, liabilities and agreements of any kind with DDN.
ACIS further agrees to assist DDN with the completion of
related UCC filings and financing statements which DDN may
require.
<PAGE>
Exhibit 10.16
7.2 Upon signing this Letter of Intent, ACIS's management agrees
to deposit in an escrow account, 500,000 shares of ACIS's
management common stock which shall be held as additional
collateral for the first loan in the amount of $500,000. Upon
each subsequent loan made to ACIS, ACIS management agrees to
deposit additional shares or lowest price options in an escrow
account equivalent to one share or option for each subsequent
dollar loaned by DDN to ACIS. These shares and options shall
remain in the escrow account as collateral until all loans
made by DDN to ACIS have either been repaid or the proposed
acquisition is completed, at which time these shares and
options can be removed from the escrow account and returned to
management. In the event of a loan default to DDN, the pledged
shares and options in the escrow account shall become the sole
property of DDN.
7.3 Should ACIS cancel the agreement outlining the terms of
acquisition by DDN prior to closing, all loans paid to ACIS
would become immediately due and payable, and DDN would have
the right to convert these loans to equity using a conversion
ratio of $1.00 per share (of principal and accrued interest),
or having ACIS wire the outstanding amount of principal and
interest into a bank account so directed by DDN. In addition
to the immediate repayment of DDN's loans, ACIS also agrees to
pay DDN a cash payment of $300,000 as a cancellation fee.
7.4 Should ACIS require an acceleration of the advancement of the
referenced loans in item 7, DDN will call a special board
meeting to discuss and consider such a request.
8. Upon tender of the moneys advanced to ACIS by DDN, the ACIS
board agrees to immediately appoint Donald B. Scott to its
board of directors and recommend to ACIS shareholders that he
be elected for two one-year terms.
9. Upon closing this transaction, the existing boards of DDN and
ACIS will nominate a new board of directors which will consist
of a total of eight (8) members. The new DDN board will be
comprised of four (4) ACIS directors and the current four (4)
DDN directors. Donald Scott will be the Chairman of DDN's new
board of directors as well as Chairman of ACIS's board of
directors.
10. Present management agrees to accept a new ACIS management team
to be decided by the new DDN board.
11. Other than companies ACIS was previously in discussion with -
Marleau in Toronto, Deutsch Morgan in Toronto and Blue Stone
in New York - ACIS, including its officers and directors, will
not enter into negotiations with, or offer to sell the stock
or assets of ACIS to, any other party without the prior
written consent of DDN. Donald Scott shall be a party to and
consent, in writing, to all such negotiations or agreements.
If future discussions are held with Marleau, Deutsch Morgan
and/or Blue Stone after the signing of this Letter of Intent,
Donald Scott shall be a party to all such discussions and
shall have the right to attend, either in person or
telephonically, and must consent in writing to any such
agreements.
<PAGE>
Exhibit 10.16
12. The parties hereto understand that it is possible that certain
of the conditions of this transaction may fail and that the
acquisition may not be completed notwithstanding the good
faith and best efforts of each party. Therefore, the parties
agree that any information obtained from the other party
hereto pursuant to the negotiations leading to this Letter of
Intent and the final offering document, shall be deemed by
each to be confidential information and/or trade secrets, the
disclosure of which to the public or to other parties could be
detrimental to the party whose information or trade secrets
are disclosed, and each party hereby represents and warrants
that it will not disclose such information to any other person
without the prior consent of the party from whom the
information was obtained.
13. Each party shall bear its own costs and expenses incurred in
connection with the negotiation and consummation of the
transaction contemplated hereby and neither party shall have a
claim against the other for contribution to costs and expenses
for any reason including failure to consummate the
transaction.
14. Items 7, 12 and 13 of this Letter of Intent shall be legally
binding and survive this Letter of Intent.
If ACIS agrees to the terms and conditions set forth herein for the acquisition
of ACIS by DDN, please indicate such acceptance in the space provided below by
signing, dating and returning four fully executed originals to DDN at the
address set forth above.
Very truly yours,
Digital Data Networks, Inc.
By:_______________________________
Donald B. Scott, Chairman and CEO
Accepted and Agreed to:
Advanced Communications and Information Services, Inc.
By:_____________________________
Title:____________________________
Date:____________________________
<PAGE>
EXHIBIT 21.1
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Other States in
Name State of Incorporation Which Qualified DBA Name
- ---- ---------------------- --------------- --------
<S> <C> <C> <C>
DDN Rhode Island, Inc. Rhode Island None The Transit Network
Cyber America Corporation Pennsylvania None None
DDN Digital Data Networks British Columbia, Canada None None
(Canada), Inc. (formerly
Pro.Net Communications, Inc.)
</TABLE>
<PAGE>
EXHIBIT 24.1
<PAGE>
Exhibit 24.1
Consent of Independent
Certified Public Accountants
We hereby consent to the use in the Prospectus constituting a part of this
Amendment No.1 to Registration Statement on Form SB-2 of our report dated March
25, 1997, relating to the consolidated 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
July 15, 1997
