UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1996.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ________________to_______________
Commission file number: 0-27704
DIGITAL DATA NETWORKS, INC.
(Name of small business issuer in its charter)
Washington 91-1426372
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3102 Maple Avenue, Suite 230
Dallas, Texas 75201
(Address of principal executive offices) (Zip Code)
(214) 969-7200
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value Common Stock Purchase Warrants
(Title of class) (Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year were $683,000.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on March 26, 1997 was $11,854,054.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 26, 1997, 2,337,496
shares of Common Stock and 1,840,000 Common Stock Purchase Warrants were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: 1) The information required by Items 9, 10,
11 and 12, Part III is incorporated by reference from the Registrant's
definitive proxy statement.
<PAGE>
PART I
Item 1. Business.
Company Background
Digital Data Networks, Inc. (the "Registrant" or 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 also operates as The Transit Network under an assumed name certificate.
The Company's offices are currently located at 3102 Maple Avenue, Suite 230,
Dallas, Texas 75201, and its telephone number is (214) 969-7200.
In February 1996, the Company completed the sale of 1,322,500 shares of
Common Stock and 1,840,000 Common Stock Purchase Warrants through its initial
public offering (the "Public Offering"), and received net cash proceeds of
approximately $5.8 million. The Company's Common Stock and Common Stock Purchase
Warrants are listed on the Nasdaq SmallCap Market under the trading symbols
"DIDA" and DIDAW", respectively.
General
DDN provides wireless communication systems to the transit industry,
and Internet services, targeting primarily the business community.
The Company's Transit Network Division markets two wireless communication
systems to the transit industry: a digital information network which uses
an FM subcarrier signal to transmit information, both text and graphic, to
riders on-board public transit vehicles; and a next-stop automated
audio/visual announcement system which utilizes Global Positioning System
(GPS) technology to track a vehicle's position, then triggers simultaneous
audio and visual announcements of next-stop locations at predetermined
points along a route;
Two wholly owned subsidiaries of the Company market Internet services:
Pro.Net is a full service Internet service provider and Web page design
firm; and Cyber America is a first-tier Internet provider delivering high
speed access directly to the backbone of the Internet. Additionally, the
Company recently acquired from SSNN an exclusive license to sell financial
news coverage in Canada to small capitalization companies, and to make that
financial information available to Internet users at SSNN's Web site.
History
The Transit Network
The Company's Transit Network Division markets and operates two
systems: a digital information network and a next-stop automated audio/visual
announcement system ("NextStop"). The digital information network is a network
of computerized electronic displays that delivers information, both text and
graphics, to riders on-board public transit vehicles, utilizing an FM subcarrier
signal to transmit the data. The Company operates its digital information
network on the 824-bus fleet of the DART system as The Transit Network under an
assumed name certificate, while its wholly owned subsidiary, DDN Rhode Island,
Inc., operates the 66-bus fleet of the RIPTA system under the assumed name The
Transit Network. The RIPTA system has served as a test site for the Company
since 1988. The DART system began operations in 1991.
<PAGE>
Following passage of the Americans with Disabilities Act ("ADA"),
transit authorities began to realize that this law included a mandate that they
would have to provide the same information to hearing- and sight-impaired
passengers that non-impaired passengers have. The Company foresaw the need to
provide audio and visual next-stop announcements for hearing- and sight-impaired
riders, and began development of NextStop, a fully automated audio and visual
next-stop announcement system utilizing GPS technology. NextStop was
successfully tested on the Company's system in Providence, Rhode Island in
October of 1994. Although there are no NextStop systems in operation, the
Company intends to aggressively market this product to transit agencies in North
America. According to METRO, a transit industry magazine, their 1995 survey of
transit bus fleets indicated there were 52,428 buses in service in the largest
100 markets in the U.S. and Canada. Tens of thousands more exist in authorities
operating fleets in smaller markets. The Company believes that a substantial
number of transit authorities are not in compliance with all areas of the ADA,
especially as it concerns the requirement for transit agencies to provide
hearing- and sight-impaired passengers with the same information as non-impaired
passengers.
Pro.Net Communications, Inc.
Pro.Net, a Vancouver, British Columbia based corporation, was organized
in October 1994, as a provider of Internet services. Pro.Net's local access
service provides customers with a local (i.e. the Greater Vancouver area) point
of presence access to the Internet. This service is comprised of quality
telecommunications hardware, proven software and reliable communications
facilities. Pro.Net intends to continue capitalizing on the demand for Internet
access from corporations and individuals by providing Internet access via leased
and dial-up lines. Pro.Net also provides consulting or training for clients
interested in building an intranet or on-line marketing program. Pro.Net was
acquired by the Company in June 1996.
In September 1996, the Company acquired hip Communications, Inc.,
another Internet-related company, based in Vancouver, which designs and builds
Web sites, primarily for large corporations and government agencies. hip's
operations have subsequently been merged with Pro.Net's, allowing Pro.Net to
offer Web page design and development in addition to their other Internet
services.
Cyber America Corporation
With a growing number of businesses emphasizing the importance of high
speed connectivity to the Internet, Cyber America's founders originated a unique
design implementation process which delivers information to and from the
backbone of the Internet faster that traditional methods. Incorporated in March
1996, Cyber America filed a patent application on this design implementation in
July, 1996. This pending patent was subsequently assigned to the Company in
connection with the acquisition of Cyber America. Unlike traditional primary
access providers who are connected to the backbone of the Internet using
point-to-point wide area networks, Cyber America has implemented connections
from the Internet backbone into various carrier networks, delivering Internet
connectivity via broadband fast packet services. This means Cyber America does
not have to oversubscribe already congested networks, and can eliminate the
multiple layers of routing involved, greatly improving access performance.
License Agreement with SSNN, Inc.
SSNN became operational in December 1995, and provides financial
information on public companies to Internet users free of charge. SSNN charges
an electronic archiving and distribution fee to public companies listed on its
Web sites. SSNN intends to use its software and marketing expertise to provide
on-line financial news and e-mail services for most foreign equities markets,
since foreign public companies have also been traditionally hard to access. SSNN
granted an exclusive license to the Company in October 1996, in consideration
for 25,000 shares of the Company's Common Stock, which allows the Company to
market SSNN's service in Canada. SSNN is currently in negotiations with several
other groups who are interested in licensing SSNN's service in Europe,
Australia, New Zealand and Hong Kong. The Company believes that if SSNN is
successful in establishing name identification in world-wide markets, it will be
beneficial to the Company's marketing efforts in Canada.
<PAGE>
Strategy
The Company's strategy centers around three distinct business plans.
First, to market its digital information network and NextStop system to transit
authorities across the United States and Canada; secondly, to capitalize on the
growing demand for Internet services by building its customer base for these
services through its Pro.Net and Cyber America operations; and thirdly, to
aggressively market SSNN's service to small capitalization companies in Canada
who are anxious to expand their financial news coverage to potential buyers of
their publicly-traded stock. The Company's strategy to market its wireless
communications systems, build its customer base for Internet services and market
SSNN's service consists of the following key elements:
Successful installation of The Transit Network's NextStop system
in the near future. In order for The Transit Network to
successfully and rapidly expand its NextStop system, the Company
believes it is critical to get its first NextStop system installed
quickly. With the number of competitors in the industry growing,
many of whom also do not yet have their systems installed in any
transit fleets, it would be a significant competitive advantage to
have a successful, working system in place. The Company is
currently preparing to respond to two Requests For Proposals
("RFP"s) for such systems, and believes that it has an excellent
chance of being the winning bidder on one or both of these
contracts. However, there can be assurance that any contracts will
be awarded to the Company.
Continued compliance with and enforcement of the Americans with
Disabilities Act. The federal mandates that require transit
authorities to provide hearing and sight-impaired passengers
access to the same information as able-bodied passengers has been
the impetus behind transit authorities' willingness to install
automated next-stop announcement systems on their transit
vehicles. The Company believes it is vital that the Justice
Department continue to enforce and pressure transit authorities to
comply with all aspects of the Americans with Disabilities Act
("ADA"), or most transit authorities would cease to address these
needs, making it difficult to survive in a market with increasing
competitors and a reduced demand for these products. The Company
will continue to encourage and support disadvantaged and disabled
groups whose constituents would benefit from these audio and
visual next-stop announcement systems.
Continued availability of funds for transit authorities. Funding
for wireless communications systems such as The Transit Network's
digital information network and NextStop announcement system
typically originates from federal programs that pay for 80% to 90%
of the total cost, with the remaining difference funded by the
local transit authority. The amount of federal dollars available
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.
<PAGE>
Approval of the Company's pending patent application. On July 12,
1996, Simon D. Liebman, an officer and director of Cyber America,
filed a new patent application for "Fast Packet Internet Access,"
which was assigned to the Company as part of the Company's
acquisition of Cyber America. This patent relates to Internet
communications, and is a system for increasing the efficiency and
data communication throughput for corporate Internet users and
retail Internet user access providers by eliminating many POPs
(Points of Presence), routers and other slow network elements. If
granted, the Company would be protected from competitors copying
the same design implementation, allowing the Company to keep its
competitive advantage as it relates to fast and efficient
communication over the Internet. If not, there can be no assurance
that other companies will not copy this same system, eliminating
one of the advantages Cyber America now has over several of it
competitors.
Cyber America maintaining a low customer over-subscription ratio.
A key element of Cyber America's strategy is to maintain a 2.5:1
customer over-subscription ratio. While some competitors
over-subscribe their available bandwidth by ratios as high as 8:1,
few, if any, have committed to maintaining such a low ratio. The
Company believes it is important to keep this ratio low in order
to better handle the higher volume applications such as video
distribution and electronic commerce, and intends to adhere to
this low over-subscription ratio.
Pro.Net maintaining problem-free access to its service. The
fundamental thrust of Pro.Net's strategy is to attract and
maintain corporate customers and individuals who want access to
the Internet but are unwilling to tolerate the connection and
navigating problems that currently exit with so many other
Internet service providers. Pro.Net intends to continue addressing
these customer concerns by providing unlimited, high quality
set-up assistance, reliable service, state-of-the-art navigation
tools and continual emphasis on customer support.
Rapid enrollment of a sufficient number of small capitalization
companies joining the SSNN network in Canada. The Company believes
that it will be important to enroll a sufficient number of small
capitalization companies as quickly as possible in order for the
service to be beneficial to visitors of the Company's SSNN Web
site, allowing visitors to browse information on several
companies, and enticing them to return as an increasing number of
companies are added to the network. This will be equally important
to subscribing companies joining the SSNN network, as they will
want to see other companies on the network to justify their
investment in the program. In order to accomplish this goal, the
Company will enact two strategies: the Company and SSNN will
leverage existing relationships and develop new relationships with
brokerage firms that conduct business in small capitalization
stocks; and, mount an aggressive mailing and print advertising
campaign which will target stock brokers. The Company believes
that these actions will enable it to quickly enroll a sufficient
number of small capitalization companies at its Web site to create
on-going demand for information of this type.
The Transit Network's Digital Information Network
Background
The Transit Network's digital information network is a network of
computerized electronic displays that delivers transit authority messages, news,
information and may optionally include advertising, to riders on-board public
transit vehicles. The network consists of specialized electronic LED displays,
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.
<PAGE>
The electronic display utilized on the DART and RIPTA buses is
approximately six inches high by twenty-six inches in length, strategically
located behind and slightly above the driver, and is visible from most areas
inside the vehicle. The software for the digital information network is licensed
from Sunrise Systems. See "--Digital Information Network Technology" and
"--Software License."
News briefs, weather, trivia questions, sports reports and transit
authority information are continuously presented, and can be interspersed with
advertising messages as well. The program sequence runs approximately 12-15
minutes, generally assuring that the full program cycle is viewed more than once
during an average commute, which lasts approximately 30 minutes according to
United States Department of Transportation statistics. Programs are usually
updated twice a day, changing content to reflect the demographic profile of
riders at different times, to update the news, and to include new information
from the transit authority. News stories may be changed more frequently if the
events of the day warrant such updates. The Company subscribes to United Press
International's (UPI) wire service and receives continuous news stories every
few minutes throughout the day via satellite transmission and UPI's software
package. With UPI's full service package, the Company is able to obtain
up-to-the minute programming information on news, weather, sports and
entertainment. Advertising copy is usually supplied by the advertiser, while
public service and transit information announcements are provided by the transit
authority.
The digital information network has other important capabilities,
including the ability to (i) target specific buses and routes with different
programming, (ii) custom design special programming, and (iii) display in
Spanish and other foreign languages. The network allows certain messages to be
displayed system-wide, on selected vehicles, or on selected routes. In addition
to regular programming, special programming can be custom-tailored for specific
events. For example, in Dallas, the transit authority uses approximately 100-125
buses to transport fans to Dallas Cowboys football games. Those buses are
targeted with a special program that is filled with football and other
sports-related features, while the other buses in the fleet continue to run the
regular program. This ability to target buses and routes is a feature of the
system that can be sold to advertisers desiring to reach specific riders.
Targeting of individual buses which have been chartered for one-day special
events is also available on the system.
Digital Information Network Technology
The digital information network consists of specialized electronic LED
displays, transmission protocol, and control software. The software allows a
programmer to enter information and entertainment data into a personal computer.
The program is updated via a high-speed modem connected between the programming
site and the transmitting location. It is then broadcast through an FM
subcarrier frequency and received by a small antenna located on each bus. The
digital information is then transferred into buffer memory inside the LED
display. As the program then being displayed completes its cycle, the new data
automatically replaces the old data without any interruption. The entire
broadcast cycle - from in-house computer, to transmitter, to transit vehicle, to
its on-screen appearance, can be completed in just minutes. The Company is
responsible for repairing or replacing its electronic displays that are
defective or damaged after installation. The Company performs monthly
maintenance on all installed message displays.
Software License
The Company licenses the software to operate its digital information
network from Sunrise Systems, pursuant to a License Agreement (the "Software
License") dated November 1, 1995, as amended. The Software License grants the
Company a perpetual, fully paid up license to use the software wherever it
wishes. The Software License is exclusive with regard to each metropolitan area
in the United States and Canada (the "Primary Territory") which has a population
of at least 100,000 people, and is otherwise non-exclusive in the Primary
Territory. In areas other than the United States and Canada (the "Option
Territory"), the Software License is non-exclusive, although the Software
License allows it to become exclusive if certain conditions are met. The
Software License requires the Company to pay Sunrise Systems a site fee of
$7,500 for any new transit market it enters and allows the Company to sublicense
its rights in the software to other entities.
<PAGE>
Transit Authority Marketing
The Company has contracted with transit authorities in Dallas and
Providence, and is continuing to solicit other public transit authorities for
the purchase of its digital information network, and/or contract for the
exclusive rights to operate its system inside the transit vehicles operated by
the authorities. In the latter case, the Company's strategy is to seek
long-term, exclusive contracts with transit authorities. The Company initially
will seek to penetrate the domestic public transit market comprised of the top
transit fleets. In cases where the Company sells its system to transit agencies,
the Company will require initial capital during the early stages of
installation, since transit authorities typically cannot or will not make
payments until certain performance requirements are satisfied. There can be no
assurance that the Company will be awarded contracts in any new markets.
Dallas Area Rapid Transit
The Transit Network's Dallas operation serves as a prototype for
operations in a large transit market. Dallas ranks 13th in the United States bus
transit market, with approximately 824 vehicles. The Company entered into a
contract with DART on October 16, 1990, which granted the Company exclusive
rights to install and operate its digital information network on-board DART's
buses for a period of five years. Installation of the DART system was completed
in August 1993. The Company and DART entered into a new contract effective
October 16, 1995 for an additional three years, which gives DART the right to
extend the contract for two additional one-year terms. Under the new contract,
the Company pays DART 4% of its gross advertising receipts. In addition, DART
has reserved a permanent position on the digital information network program for
its exclusive use, as well as limited access to advertising space for its own
printed material. The Company must reserve up to 30% of available space on
interior advertising panels and one message block on the digital information
network during each cycle of messages for DART'S use and public service
announcements. Advertising revenues from the interior advertising panels account
for less than five percent of total advertising revenues and the reservation of
advertising space to DART does not materially affect the Company's total
advertising revenues. Maintenance of the digital information network is
subcontracted to an independent party. Each bus is inspected at least monthly to
ensure that the hardware is functioning properly and the program is accurately
displayed. Defective hardware is returned to Sunrise Systems for repair or
replacement. Programming errors to date have been minor and are corrected at the
Company's office.
Rhode Island Public Transit Authority
The Company has operated its digital information network as a test
market on approximately 66 RIPTA buses since October 1988. The Company operates
the system under an oral arrangement to continue the five-year contract with
RIPTA, dated April 1988, which has expired. The contract provided for the
exclusive right to install and operate electronic displays on-board RIPTA
vehicles in return for a royalty based on a fixed percentage of gross
advertising revenues, and for RIPTA to have access to a certain percentage of
the Company's program time to display transit authority messages and promotions.
<PAGE>
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 intend to manufacture or supply its hardware, but
will contract with third parties to produce the equipment. Sunrise Systems
assembles The Transit Network's hardware from components and subassemblies
manufactured by others pursuant to an exclusive agreement with the Company.
While the Company believes that most of such components and subassemblies are
available to Sunrise Systems from multiple sources, there can be no assurance
that Sunrise Systems will be able to obtain commitments from qualified
manufacturers to provide the components and subassemblies within the Company's
time and cost estimates. The Company incorporates both system and application
software, most of which is licensed from Sunrise Systems. See "-Software
License."
The Company will contract with third party electrical contractors to
install the hardware in participating transit authority vehicles. The Company
has an agreement with a Dallas electrical contractor who has installed The
Transit Network's hardware in DART vehicles, whereby the contractor has the
right of first refusal to install the hardware in other transit systems in the
United States, unless there are union labor or transit authority requirements
which the contractor cannot meet.
The Transit Network's NextStop Automated Audio/Visual Announcement System
Background
The Transit Network's NextStop unit was developed in response to the
transit industry's requirement to comply with the ADA. Based on the tests of the
NextStop announcement system conducted on RIPTA buses, the Company has
demonstrated that its system provides hearing- and sight-impaired passengers the
same information as non-impaired passengers have with respect to bus routes,
destination and stopping points on a route.
Among other requirements, the ADA requires transit authorities to
provide hearing- and sight-impaired passengers with the same type of service
they provide to non-impaired passengers. As that relates to transit usage,
agencies must provide a means for hearing- and sight-impaired passengers to
determine what route they are boarding, and what destinations are upcoming once
they begin a trip. To accomplish this, transit authorities must have some type
of audio and visual announcement system which can accommodate these
requirements.
Because of heavy capital costs incurred for compliance with the ADA,
transit authorities have been forced to gradually phase in compliance with these
requirements. Numerous transit agencies have issued Expressions of Interest
("EOIs") or RFPs through public announcements in industry publications to
ascertain which vendors' products exist to address these compliance mandates.
<PAGE>
Description
The NextStop system provides audio and visual announcements of upcoming
stops along a bus route. Precise latitude and longitude coordinates for each
stop along a route are programmed into the NextStop unit, along with voice
announcements that the transit authority wishes to make. An internal GPS
receiver tracks the location of the vehicle, and once it crosses one of the
designated latitude and longitude points, it acts as a triggering mechanism and
activates an audio announcement, while simultaneously displaying the same
message visually on a single-line LED screen.
Using a prototype, NextStop was field-tested on October 11, 1994, in
Providence, Rhode Island. RIPTA supplied a map of a typical inner city route
which had 24 major stops. The latitude and longitude points were determined for
these stops, and then programmed into the unit, along with the appropriate audio
and visual announcements. NextStop was initially tested for a seven-day period.
After minor modifications, the unit was demonstrated again in April 1995 with
positive results.
Competition
Over the past twelve to eighteen months, competition in this industry
has intensified, as the number of companies providing automated audio and/or
visual next-stop announcement systems has grown to approximately twenty. While
not every company uses GPS as the triggering mechanism for these automated
announcement systems, at least ten companies do. Many of the latter entries into
this market are defense-related companies who previously concentrated on
marketing their GPS products to the military, but have subsequently targeted the
transit industry as potential users of their GPS products. In addition to the
downward pressure these competitors create on the pricing of the Company's
system, many of these companies have financial resources far greater than the
Company's, creating the possibility that they will underbid smaller competitors
such as the Company for these contracts, even though these larger companies may
lose money or just break even. There can be also be no assurance that additional
competitors will not enter this market.
Manufacturing and Installation
The Company does not intend to manufacture the NextStop hardware, but
plans to contract the manufacture and installation to third parties. The Company
believes that there are multiple manufacturers that can supply GPS-related
products. However, there is no assurance that another source will provide the
same quality at comparable costs as the Company's existing supplier.
Revenue from Maintenance Contracts
In addition to revenues resulting from the sale of NextStop units, The
Transit Network believes it will be able to generate annual revenues from
maintenance contracts with transit authorities to service and maintain the
system's hardware and software after the warranty period has expired.
Pro.Net Communications, Inc.
Background
Pro.Net is a full service Internet provider that provides local access
to the Internet, consulting and training services for customers interested in
building internal Internet systems or on-line marketing programs, and Web page
design and development. Pro.Net became operational in October 1994, and targets
primarily corporate customers and government agencies that want access to or a
presence on the Internet.
<PAGE>
The Internet as it applies to Pro.Net
The Internet is a global web of computer networks, allowing individuals
and companies to transfer and access data worldwide by communicating with other
computers or networks connected to the Internet. All that is required to
successfully communicate via the Internet is a personal computer, a modem and an
Internet access provider, such as Pro.Net.
The World Wide Web
One part of the Internet which has seen significant growth in
popularity over the past few years is the World Wide Web, which links
information of various kinds and allows the user to browse these areas at will.
The Web, based on a client/server model and a set of standards for information
access and navigation, can be accessed using software that allows users to
exploit the capabilities of the Internet. The Web enables users to find,
retrieve and link all types of information available on the Internet.
Services Provided
Pro.Net's primary service is providing local access to the Internet for
individuals and companies in the Greater Vancouver area. Pro.Net believes there
are a large number of potential customers who want to access the Internet, but
are unwilling to suffer the connection and navigation problems that exist with
many other Internet service providers. To address these concerns, Pro.Net makes
every effort to ensure that customers enjoy simple first-time access to the
Internet when using Pro.Net. This is accomplished by providing set-up assistance
if requested, an adequate number of access lines and quality communications
equipment to ensure rapid and reliable connection to the Internet, and automated
installation of user-friendly software that allows easy navigation once the
customer is connected to the Internet.
Pro.Net believes that there will be tremendous growth in internal
Internet systems, called intranets, which allow private corporate networks that
use Internet software to link employees and business partners to share selective
information. Because of the experience and knowledge of Pro.Net's staff, Pro.Net
is able to offer training and consulting services to customers who are
interested in setting up their own intranet. Pro.Net also provides consulting
services for customers who are interested in marketing their products or
services on the Internet.
As a result of the Company's acquisition of hip Communications, Inc.,
Pro.Net now offers Web page design and development in addition to its other
Internet-related services. Unlike many graphic design firms and advertising
agencies, Pro.Net builds sophisticated Web sites, and will therefore continue to
target large corporations and government agencies which typically require
relatively complex Web sites for their users.
Customer Support
In choosing an Internet service provider, customers often make their
decision based on the quality of a company's customer support. Because Pro.Net
believes it is of the utmost importance to provide prompt and effective
assistance to its customers when they request it, it has arranged for a
professionally trained staff to provide quality customer support twenty-four
hours per day, seven days per week.
Competition
The principal competition to Pro.Net's local Internet access comes from
approximately five other Internet access companies in British Columbia, most of
whom have larger customer bases than Pro.Net. However, many of these competitors
have experienced difficulties in providing easy access and reliable service.
Pro.Net believes that with its continued commitment to customer service and
quality hardware, it will be able to increase its market share for these
services.
<PAGE>
There are several companies in British Columbia that provide Web page
design work. However, many of these competitors do not specialize in complex,
sophisticated Web sites as Pro.Net does. In addition, the Company believes hip
has established a favorable reputation for designing quality Web sites from
which the Company expects to benefit.
Cyber America Corporation
Background
Cyber America is an early stage development company which began
operations in March 1996. With companies placing ever-increasing importance on
high speed connectivity to the Internet, Cyber America was formed after its
founders originated a unique design implementation process which delivers
information to and from the backbone of the Internet faster than traditional
methods. Located in Willow Grove, Pennsylvania, Cyber America delivers Internet
access directly to the National Science Foundation Network's ("NSFNet") access
point, or NAP site.
The Internet as it applies to Cyber America
The Internet is a global web of computer networks. Developed over
twenty-five years ago, this network allows any computer attached to the Internet
to talk to any other using the Internet Protocol. The Internet has traditionally
been subsidized by the U.S. federal government, but as the number of commercial
entities that rely on the Internet for business communications and commerce has
increased, the level of federal subsidies has significantly diminished, and
funding for the Internet infrastructure and backbone operations has shifted
primarily to the private sector.
Individuals and companies connect directly to the Internet through
Internet access services such as those provided by MCI, AGIS, Sprint and UUNet
Technologies. In addition, consumer online services such as America Online and
CompuServe have also introduced Internet access gateways for their subscribers.
With these gateways, large numbers of unforeseen users have crowded onto the
Internet, creating bottlenecks and data clogs. This in turn has created an
increasing demand for and interest in high speed connectivity.
Intranet
Intranets, which heretofore have had a lower profile than the Internet,
are private corporate networks that use Internet software to link employees and
business partners, allowing for selective distribution of company information.
According to estimates by Forrester Research Inc. of Cambridge, Massachusetts,
the entire market for Internet software will grow from $342 million in 1996 to
$8.5 billion by 1999. The Company believes that intranets will become an
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.
<PAGE>
Competition
Unlike other Internet providers which typically sell their services to
individuals and small businesses, Cyber America targets speed conscious
customers such as ISPs and companies that have built Intranet or Wide Area
Network infrastructures, by leasing them bandwidth on T-1 or DS-3 lines. Cyber
America competes primarily with the traditional backbone providers such as MCI,
AGIS, Sprint and UUNet Technologies. Most of these traditional access providers
are applying technologies that have been in use since the early 1960s, while
Cyber America utilizes its patent pending network design, allowing it to create
service that is three to five times faster than traditional methods. Cyber
America also offers a lower over-subscription ratio than most competitors. Some
competitors over-subscribe their available bandwidth by ratios as high as 8:1,
while Cyber America has committed to maintaining a 2.5:1 over-subscription
ratio. The Company believes that this low over-subscription ratio is important
to better handle the higher volume applications such as video distribution and
electronic commerce.
Customer Support
The Company believes that it is important to provide prompt and
effective assistance to its customers. Cyber America provides assistance
twenty-four hours a day, seven days a week. The Company anticipates demand for
its customer support to grow as Cyber America's customer base expands. There can
be no assurance that the Cyber America's customer support resources will be
sufficient to manage the expansion in its customer base. A failure to adequately
match customer support resources to projected increases in customers could
adversely affect the Company.
SSNN License Agreement
Background
SSNN provides financial information on public companies to Internet
users free of charge. SSNN designs and builds Web sites which provide Internet
users or investors with convenient and easily accessible locations where they
can find information on publicly traded companies worldwide. Through exclusive
license agreements, SSNN intends to use its software and marketing expertise to
expand its service to foreign equities markets. SSNN granted an exclusive
license to the Company in October 1996 to market SSNN's service in Canada, and
is currently negotiating with other groups to provide SSNN's service in Europe,
Australia, New Zealand and Hong Kong as well. The Company believes that if SSNN
is successful in establishing name identification in world-wide markets, it will
be beneficial to the Company's marketing efforts in Canada.
The Internet as it applies to SSNN
The Internet is a global web of computer networks, allowing anyone with
a personal computer, a modem and an Internet access provider, to talk to any
other computer or network connected to the Internet. This connectivity feature
means the Internet can be used to transfer and access data and communications
worldwide.
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.
<PAGE>
Description
The Company believes that SSNN's service fills a void in the stock
market industry by providing comprehensive financial news coverage for small
capitalization companies (market caps of less than $500 million Canadian).
Because of the difficulty in obtaining this type of information, print
publishers currently cannot efficiently report news on small, publicly traded
companies. Now, however, people with access to the Internet will be able to get
this information on small capitalization Canadian companies free of charge at
the Company's SSNN Web site. Information such as historical trading data, press
releases, regulatory filings, current stock market quotes, current market cap,
and research reports will be available. Small capitalization companies that join
this network pay an annual subscription fee to keep this information about their
company accurate and up-to-date. Statistical information for each subscribing
company is updated nightly, while press releases are updated immediately.
For visitors to the Company's Web site, the objective is to offer one
stop free shopping for investors, both individual and professional, by providing
a wealth of information on small capitalization companies that is complete, up
to date, convenient and easily accessible, so that an investment decision can be
made without looking any further. In addition to one stop free shopping, SSNN
and the Company intend to provide a proprietary "E-mail Alert" system which
alerts investors to important information about particular stocks or public
companies they are following, through their electronic mail ("e-mail"). By
utilizing this feature, investors can easily be kept abreast of new developments
on a multiple number of companies automatically, without having to notify each
individual public company when they wish to be added to or deleted from an
e-mail list.
Content
Information on subscribing companies that will be available to visitors
of the Company's Web site will include: corporate information - basic
information such as address, phone numbers, trading symbol, and a description of
the company and its business; stock trading information - one and two year stock
charts, past 52 week price range, 30 day average volume and current market
capitalization, all updated nightly; press releases - all regular announcements
plus any additional pertinent announcements on new products and services,
awarded contracts, the hiring of key personnel, etc., which may not be deemed to
be newsworthy enough to be picked up by the major wire services; information
available from other sources - whenever available, research reports and
recommendations by brokerage firms and newsletters, and articles from
newspapers, magazines and trade journals; and, corporate events schedule -
notices of annual meeting, proxy deadlines, road shows and teleconferences. In
addition, direct links will be provided to the subscribing company's home page
or other related Web sites.
The information available at the Company's Web site is not proprietary,
and the same information could be obtained by users or investors if they wanted
to spend their time going to multiple sources to compile it. However,
information on small capitalization stocks has traditionally been hard to find.
By their very nature and definition, most small capitalization stocks have not
yet been "discovered". One reason for that is because information on them is not
easily accessible, resulting in a much less efficient market than the markets
for mid capitalization or larger stocks. This void of information can create an
opportunity for investors, and the Company believes that a significant portion
of the Canadian investment public will be interested in quickly finding this
type of information, especially when it can be found at one site, and can be
obtained for no charge.
Strategy
The Company intends to establish a foothold in Canada for on-line
financial news and e-mail services for small capitalization companies. By first
focusing on the niche of distributing financial news and e-mail services for
small capitalization companies, the Company intends to position itself to become
highly visible, and recognized as a credible source for small companies. Once
this foothold is established, the Company believes it will be able to use its
user/viewer base to attract advertisers, creating additional revenue.
Additionally, the Company intends to construct other related Web sites for
Canadian small capitalization companies which would be built for specific
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.
<PAGE>
Competition
While there are many Web sites on the Internet which provide
information on publicly traded companies, the Company believes few, if any,
provide credible information on small capitalization companies in Canada. Most
Web sites which provide financial information on publicly traded companies fall
into one of four categories:
Web sites providing space for public companies to advertise their
financial statements and press releases. These types of sites
comprise most of the financial Internet Web sites. The information
on them changes infrequently. Because the information is not kept
up to date, it is not credible enough to warrant an immediate
investment decision by a visitor to the Web site, and the visitor
is not likely to revisit the Web sites for this reason.
Web sites where information on public companies is made available
by someone who has a vested interest in the performance of
specific companies. Typically these types of sites are run by
promoters or investment newsletters. These types of sites
discriminate, in that they select the companies and what
information is made available at their Web sites. Because of
someone's vested interest in the companies found at these sites,
rarely does the visitor see information that may be negatively
perceived, or have easy access to documents filed with regulatory
agencies. These types of sites have several problems: they do not
list enough companies and information to attract and maintain
heavy user traffic; most investors prefer to make up their own
minds as to what they are looking for in possible investments, and
often spurn promotions; and, information is typically very static.
Web sites maintained by someone who is charging, or intends to
charge, the end user for information. These Web sites have a
different marketing approach, one that is driven by the end user
paying a fee to access the available information. The problem with
these sites is that many people are reluctant to pay for access to
Web content. A recent research survey conducted by Georgia Tech
University indicated that 65% of Internet users said they would
not be willing to pay for access to Web content.
Web sites that are the home pages of a public company. While some
companies make their financial information available at their home
page, often this information is static, and they often they lack
in comprehensive content. Credibility can be a problem as well,
since investors and regulators may be leery of a company appearing
to promote its own stock on its home page.
Employees
As of March 26, 1997, the Company had nineteen employees, of which nine
were employed by The Transit Network Division, eight by Pro.Net and two by Cyber
America.
<PAGE>
Item 2. Properties.
The Company leases (i) approximately 1,370 square feet in Dallas for
$1,781 per month pursuant to a 3-year lease which commenced December 1, 1996;
(ii) approximately 300 square feet in Providence, Rhode Island for $100 per
month on a month-to-month basis; (iii) approximately 3,800 square feet in
Vancouver, British Columbia for $3,847 (Canadian) per month pursuant to three
separate lease agreements which expire at various times through July 2000; and
(iv) approximately 200 square feet in Willow Grove, Pennsylvania for $725 per
month for a one-year period which commenced May 1, 1996. The Company believes
its facilities are in good condition.
Item 3. Legal Proceedings.
On November 6, 1996, Activeware Internet Corp. ("Activeware") and Dick
Hardt ("Hardt"), Plaintiffs, filed a claim against Digital Data Networks, Inc.
("DDN") and its subsidiary, hip Communications Inc. ("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.
Company management currently believes that resolving this legal
proceeding will not have a material adverse impact on the Company's financial
position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth
quarter of 1996.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
(a) The Company's Common Stock (symbol "DIDA") and Warrants (symbol
"DIDAW") have traded on the NASDAQ SmallCap Market since February 13, 1996. The
following table sets forth the high and low sales prices for the Company's
Common Stock and Warrants as reported by the NASDAQ Stock Market for the periods
indicated:
Common Stock
Period High Low
------ ---- ---
1996:
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
Warrants
Period High Low
------ ---- ---
1996:
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
The above prices represent inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not represent actual transactions.
(b) As of March 26, 1997, the Company had approximately 250
shareholders of record and 16 warrantholders of record.
(c) The Company has never paid cash dividends on its Common Stock, and
currently intends to retain earnings, if any, for use in the operation and
expansion of its business and therefore does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Background
From inception in October 1988, through December 1992, the Company
generated insignificant revenues, and as a result of the costs and expenses
associated with funding the development and initial implementation of the
digital information network, the Company incurred significant cumulative net
losses which were financed by the issuance of debt and Common Stock. During
1988, the Company completed the installation of the RIPTA test market. In 1990,
the Company was awarded a contract from DART to install an electronic
advertising system on all of its buses. Installation commenced in 1991, but was
not immediately completed, due to insufficient financial resources to purchase
needed equipment and labor. During 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 DART system began to generate its
advertising revenues.
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 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.
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. 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 Pro.Net'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.
<PAGE>
Comparison of the 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 Pro.Net, 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 Pro.Net 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 Pro.Net 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 $175,000 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."
<PAGE>
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.
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
In February 1996, the Company received net cash proceeds of
approximately $5.8 million, after deducting for underwriters' commissions and
certain other offering related costs. The Company has 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 of the Expanded License
Payment to Sunrise Systems.
At December 31, 1996, the Company's principal assets consisted of
approximately $2.9 million of cash, of which approximately $2.7 million was
invested in short-term, interest-bearing investments with banks and other
financial institutions, and from which interest income is earned. The Company's
total obligations of approximately $1.2 million consisted primarily of $389,000
in accounts payable liabilities and accrued payroll and related expenses, and
$579,000 as the current portion of long-term debt and expanded software license
commitment incurred by the Company's Transit Network Division. The Company's
long-term debt at December 31, 1996 was $34,000.
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.
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. The purchase transaction is anticipated to be valued at
approximately $30 million, comprised of a combination of cash and stock.
Subsequent to the execution of the Letter of Intent, the Company advanced ACIS
$1 million pursuant to secured, short-term promissory notes.
The Company believes that its future operating results, liquidity and
capital resources will improve, the result of anticipated revenue growth by
Pro.Net 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 revenue from operations, the Company's working
capital requirements will be sufficient for at least the next 12 months.
<PAGE>
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.
Item 7. Financial Statements.
Index to Financial Statements: Page
----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Stockholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to Financial Statements F-6 to F-16
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Items 9, 10, 11 and 12 are incorporated by reference from the Company's
definitive Proxy Statement to be filed by the Company with the Commission.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits - none filed with this report.
(b) The Registrant filed a Form 8-K with the Securities and Exchange
Commission on June 17, 1996, to report the acquisition of Pro.Net
Communications, Inc. The Registrant filed a Form 8-K/A with the
Securities and Exchange Commission on October 24, 1996, to file the
audited financial statements of Pro.Net Communications, Inc. for the
fiscal years ended September 30, 1995 and 1994, and the unaudited
six-month interim period ended March 31, 1996.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIGITAL DATA NETWORKS, INC.
(Registrant)
By: /s/ Donald B. Scott________________
Donald B. Scott, Chairman of the Board
(Principal Executive Officer)
Date: March 31, 1997
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signatures Capacity Date
- ---------- -------- ----
/s/ Donald B. Scott__________ Chairman of the Board, March 31, 1997
- ------------------------------ President, Director,
Donald B. Scott (Principal Executive Officer)
/s/ James F. Biagi, Jr.________ Secretary and Director March 31, 1997
- --------------------------------
James F. Biagi, Jr.
/s/ Richard F. Rutkowski_____ Director March 31, 1997
- ------------------------------
Richard F. Rutkowski
/s/ Stephen R. Willey________ Director March 31, 1997
- ------------------------------
Stephen R. Willey
/s/ Richard J. Boeglin________ Vice President, Finance and March 31, 1997
- ------------------------------- Operations (Principal Financial
Richard J. Boeglin and Accounting Officer)
<PAGE>
F - 1
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
March 25, 1997
<PAGE>
See accompanying Notes to Financial Statements
F - 2
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
1995 1996
-------- --------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 12 $ 2,865
Short-term investments - 325
Accounts receivable 14 83
Prepaid expenses and other current assets 3 169
-------- --------
Total Current Assets 29 3,442
Equipment, net of accumulated depreciation
of $1,018 and $1,356 445 386
Intangible Assets, net of accumulated
amortization of $159 and $263 (Note 2) 100 362
Other Assets 83 87
-------- --------
TOTAL ASSETS $ 657 $ 4,277
======== ========
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 159 $ 290
Accrued payroll and related 68 99
Notes payable and accrued interest (Note 4) 770 71
Current portion of long-term debt 76 501
Current portion of expanded license commitment (Note 5) - 78
Unearned income 54 97
-------- --------
Total Current Liabilities 1,127 1,136
-------- --------
LONG-TERM OBLIGATIONS
Long-term debt and accrued interest (Note 4) 947 34
Expanded software license commitment (Note 5) 250 -
Total Long-Term Obligations 1,197 34
-------- --------
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 and 2,297,473 shares issued and outstanding 6,359 13,099
Accumulated Deficit (8,026) (9,992)
-------- --------
Total Stockholders' Equity (Deficit) (1,667) 3,107
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 657 $ 4,277
========= ========
</TABLE>
<PAGE>
F - 3
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996
-------- --------
<S> <C> <C>
REVENUES $ 498 $ 683
-------- --------
EXPENSES:
Direct operating costs, including depreciation of $311 and $316 465 653
Salaries and related 615 880
Marketing, general and administrative 307 722
Financing, legal and other consulting (Note 7) 380 206
Product development costs, including amortization of
intangible assets (Note 2) - 329
-------- --------
Total Expenses 1,767 2,790
-------- --------
Loss Before Other Income (Expense) (1,269) (2,107)
-------- --------
Other income (expense)
Interest expense (140) (51)
Investment income - 192
Total other income (expense) (140) 141
-------- --------
NET LOSS $ (1,409) $ (1,966)
======== ========
NET LOSS PER SHARE $ (2.17) $ (0.98)
======== ========
</TABLE>
<PAGE>
F - 4
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in Thousands)
<TABLE>
<CAPTION>
Common Stock Accumulated
Shares $ Deficit Total
------ -------- -------------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1995 410 $ 2,938 $ (6,617) $ (3,679)
Shares issued upon debt exchange 239 3,139 - 3,139
Shares issued for other than cash 51 257 - 257
Shares issued for exercise of options 5 25 - 25
Net loss - - (1,409) (1,409)
------- -------- ---------- ---------
Balance, December 31, 1995 705 6,359 (8,026) (1,667)
Shares issued for cash 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
======= ======== ========== ==========
</TABLE>
<PAGE>
F - 5
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss $ (1,409) $ (1,966)
Adjustments to reconcile net loss to net cash
used by operating activities, exclusive of the
effects of business acquisitions
Depreciation and amortization 323 427
Product development costs - 329
Other non-cash operating expense 219 209
Increase in prepaid and other current assets - (149)
Increase (decrease) in accrued interest 140 (69)
Increase (decrease) in accounts payable and accrued liabilities 130 (252)
Other 70 15
-------- --------
Net Cash Used by Operating Activities (527) (1,456)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (24) (15)
Purchases of investments - (325)
Cash acquired upon acquisition of businesses - 99
-------- --------
Net Cash Used by Investing Activities (24) (241)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of stock issue costs 25 5,822
Proceeds from issuance of notes payable 525 -
Repayment of expanded license commitment - (225)
Repayment of notes payable (16) (1,047)
-------- --------
Net Cash Provided by Financing Activities 534 4,550
-------- --------
Net Increase (decrease) in Cash and Cash Equivalents (17) 2,853
CASH AND CASH EQUIVALENTS
Beginning of Period 29 12
-------- --------
End of Period $ 12 $ 2,865
======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Exchange of debt for equity $ 3,139 $ 124
Common stock and warrants issued for other than cash 257 208
Accounts payable converted to debt 318 -
Common stock issued in business acquisitions - 586
</TABLE>
<PAGE>
DIGITAL DATA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
F - 6
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, Pro.Net Communications, Inc.
("Pro.Net"), provides a range of Internet offerings to business customers,
including connectivity services to local subscribers, intranet services to
corporations, and the development of on-line working programs for commercial
clients. The Company's subsidiary, hip Communications, Inc. ("hip") is a Web
page design and development company targeting corporate customers. Pro.Net and
hip currently operate 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, 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.
<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.
<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.
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.
Reclassifications - Certain reclassifications have been made to prior period
financial statements in order to conform to current period classifications.
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 approximate 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.
<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 approximate 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):
Year Ended December 31,
------------------------------------------
1995 1996
------------- ----------
Revenues $ 878 $ 1,019
========= =========
Net loss $ (1,678) $ (1,947)
========= =========
Net loss per share $ (2.02) $ (0.94)
========= ========
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):
December 31,
------------
1995 1996
---- ----
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
====== =======
<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):
December 31,
-----------------------
1995 1996
------- --------
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
======= ========
Long-term debt consists primarily of promissory notes, unsecured unless
otherwise indicated, and is comprised of the following (thousands of dollars):
December 31,
-----------------------
1995 1996
------- --------
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
======= ========
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.
<PAGE>
Note 4 Notes Payable and Long-Term Debt (continued)
Convertible promissory notes (the "Convertible Notes") bear interest at an
annual rate of 5% and are convertible at the holder's option into shares of
Company common stock at a $13.42 per share conversion price. The Convertible
Notes are convertible in their separate entire amount including all accrued
unpaid interest. Interest is payable at maturity. The Convertible Notes are
senior in right of payment to other Company indebtedness, except that they rank
equally with the 8% promissory note and junior to trade debt. During the year
ended December 31, 1995, certain holders of Convertible Notes, having a combined
principal and accrued interest total approximating $2.9 million, and the holder
of the 5% $150,000 promissory note agreed to exchange debt and related accrued
interest for approximately 232,500 shares of Company common stock. In 1995, the
Company renegotiated certain terms of a portion of Convertible Notes resulting
in, among other things, extension of the due dates from March 1996 to December
1996 and March 1997. 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
secured 10% note payable due May 1998, with annual $30,000 payments. Pursuant to
terms of the promissory note, as amended, as a result of the Company's receipt
of proceeds from its initial public stock offering in February 1996, the Company
repaid $50,000 of this note payable and the remaining balance is due in March
1997.
During 1995, in connection with settlement of litigation with an individual, the
Company, among other things, (i) refinanced a portion of demand notes payable to
such individual having an approximate balance due, including accrued interest,
of approximately $53,000 whereby such payable 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 in early 1997. The Company is in discussion with
the noteholders regarding potential refinancing or exchange for common stock of
such notes.
<PAGE>
Note 4 Notes Payable and Long-Term Debt (continued)
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 $5.9 million, after deduction for
underwriters commissions and certain other offering related costs. The Company
issued 1,322,500 shares of its common stock and 1,840,000 of its common stock
purchase warrants. The warrants entitle the holder to purchase one share of the
Company's common stock at an exercise price of $6 per share during the five
years commencing upon issuance. The warrants are redeemable after one year,
under certain circumstances. The Company utilized approximately $1.1 million of
the proceeds to repay certain notes payable and related accrued interest.
The Company 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.
<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> <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>
<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.
<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.
<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 and
amortization $ 241 $ 376 $ 139 $ 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. The purchase transaction is anticipated to be valued at
approximately $30 million comprised of a combination of cash and stock.
Subsequent to the execution of the Letter of Intent, the Company advanced ACIS
$1 million pursuant to secured, short-term promissory notes.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1996
<CASH> 2,865
<SECURITIES> 0
<RECEIVABLES> 83
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,442
<PP&E> 1,742
<DEPRECIATION> 1,356
<TOTAL-ASSETS> 4,277
<CURRENT-LIABILITIES> 1,136
<BONDS> 34
0
0
<COMMON> 13,099
<OTHER-SE> (9,992)
<TOTAL-LIABILITY-AND-EQUITY> 4,277
<SALES> 683
<TOTAL-REVENUES> 683
<CGS> 982
<TOTAL-COSTS> 2,790
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (141)
<INCOME-PRETAX> (1,966)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,966)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,966)
<EPS-PRIMARY> (0.98)
<EPS-DILUTED> 0
</TABLE>
