UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to_______________
Commission file number: 0-27704
DIGITAL DATA NETWORKS, INC.
(Name of small business issuer in its charter)
Washington 91-1426372
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3102 Maple Avenue, Suite 230
Dallas, Texas 75201
(Address of principal executive offices) (Zip Code)
(214) 969-7200
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
As of June 30, 1997, 2,339,597 shares of Common Stock and 1,840,000 Common Stock
Purchase Warrants were outstanding.
1
<PAGE>
INDEX
Page
PART I. FINANCIAL INFORMATION
1. Financial Statements 3
2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (a)
Item 2. Changes in Securities (a)
Item 3. Defaults Upon Senior Securities (a)
Item 4. Submission of Matters to a Vote of Security Holders (a)
Item 5. Other Information (a)
Item 6. Exhibits and Reports on Form 8-K (a)
- ----------------------------------------------------------------------------
(a) These items are inapplicable or have a negative response and have therefore
been omitted.
2
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,865 $ 826
Notes receivable 325 1,398
Accounts receivable 83 82
Prepaid expenses and other current assets 169 109
--------- --------
Total Current Assets 3,442 2,415
Equipment, net of accumulated depreciation
of $1,356 and $1,498 386 311
Intangible Assets, net of accumulated
amortization of $263 and $333 362 292
Other Assets 87 107
--------- --------
TOTAL ASSETS $ 4,277 $ 3,125
========= ========
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 290 $ 284
Accrued payroll and related 99 85
Notes payable and accrued interest 71 73
Current portion of long-term debt 501 170
Current portion of expanded license commitment 78 -
Unearned income 97 61
--------- --------
Total Current Liabilities 1,136 673
--------- --------
LONG-TERM OBLIGATIONS
Long-term debt and accrued interest 34 23
--------- --------
Total Long-Term Obligations 34 23
--------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, no par value, 1 million shares
authorized, none issued - -
Common Stock, no par value, 10 million shares authorized,
2,297,473 and 2,339,597 shares issued and outstanding 13,099 13,282
Accumulated Deficit (9,992) (10,853)
--------- --------
Total Stockholders' Equity 3,107 2,429
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,277 $ 3,125
========= ========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- ---------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 126 $ 219 $ 227 $ 437
------- ------ ------ -------
EXPENSES:
Direct operating costs 139 137 245 297
Salaries and related 280 197 558 414
Marketing, general and administrative 120 291 202 472
Financing, legal and other consulting 10 76 40 136
Product development costs, including
amortization of intangible assets 303 16 303 32
------- ------ -------- -------
Total Expenses 852 717 1,348 1,351
------- ------ -------- -------
Loss Before Other Income (Expense) 726 498 1,121 914
------- ------ -------- -------
OTHER INCOME (EXPENSE):
Interest expense (15) (11) (41) (17)
Interest income 48 31 70 70
------- ------ -------- -------
Total Other Income (Expense) 33 20 29 53
------- ------ -------- -------
NET LOSS $ (693) $ (478) $ (1,092) $ (861)
======= ====== ======== =======
NET LOSS PER SHARE $ (0.34) $(0.20) $(0.63) $ (0.37)
======= ====== ======== =======
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
------------------------
1996 1997
------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (1,092) $ (861)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 215 219
Product development costs 303 -
Non-cash compensation expense relating to
Common Stock issued to employees 95 -
Decrease in accrued interest (123) (72)
Decrease in accounts payable (191) (19)
Other 17 20
-------- ---------
Net Cash Used by Operating Activities (776) (713)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable - (1,073)
Purchases of equipment (22) (67)
Net Cash Used by Investing Activities (22) (1,140)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of stock issue costs 5,823 -
Proceeds from issuance of notes payable 30 -
Repayment of expanded software license commitment (225) -
Repayment of notes payable (1,000) (186)
-------- ---------
Net Cash Provided (Used) by Financing Activities 4,628 (186)
-------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 3,830 (2,039)
CASH AND CASH EQUIVALENTS
Beginning of Period 12 2,865
-------- ---------
End of Period $ 3,842 $ 826
======== =========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Exchange of debt for equity $ - $ 161
Common Stock issued in business acquisitions $ 761 $ -
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
DIGITAL DATA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 Description of Business
Digital Data Networks, Inc. (the "Company") provides wireless communications
systems to the transit industry and high-end Internet services for business
clients. The Company's Transit Network Division markets the wireless
communications products and the Company's subsidiaries, DDN Canada and Cyber
America Corporation ("Cyber America"), market the Internet-related services.
The consolidated financial statements presented herein include all adjustments
which are, in the opinion of management, necessary to present fairly the
operating results for the interim periods reported. Results for the 1997 interim
periods are not necessarily indicative of the results that may be expected by
the Company for the complete fiscal year. The financial statements should be
read in conjunction with the audited, annual financial statements for the year
ended December 31, 1996, included in the Company's Annual Report on Form 10-KSB.
Certain reclassifications have been made to prior period financial statements in
order to conform to current period classifications.
Note 2 Initial Public Offering and Supplemental Loss Per Share
In February 1996, the Company closed its initial public offering and received
net cash proceeds of approximately $5.8 million, after deduction for
underwriters commissions and certain other offering related costs, from the
issuance of 1,322,500 shares of its common stock and 1,840,000 of its common
stock purchase warrants.
The Company's proforma supplemental loss per share for the six months ended June
30, 1996 approximates $(.60) presented on a basis as if the 1996 public offering
and related debt repayment with a portion of the proceeds therefrom, had
occurred at the beginning of 1996.
Note 3 Debt Exchange
During the six months ended June 30, 1997, certain of the Company's creditors
exchanged approximately $161,000 of the Company's debt obligations for
approximately 37,000 shares of the Company's common stock.
Note 4 Business Acquisitions and Proforma Information
During 1996, the Company acquired certain Internet related businesses. The
following unaudited pro forma financial information is presented on the basis as
if such business combinations had occurred at the beginning of 1996. The pro
forma information is based on historical operating results 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):
Six Months Ended June 30, 1996
------------------------------
Revenues $ 308
===========
Net loss $ (799)
===========
Net loss per share $ (0.43)
===========
The above pro forma financial information does not include non-recurring
expenses of approximately $303,000 recorded in 1996 immediately subsequent to
recording business combinations 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.
6
<PAGE>
Note 5 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 a business acquired by the Company in 1996
has initiated a lawsuit in the Supreme Court of British Columbia against 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 misrepresentations 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 6 Income Taxes
As a result of losses for each of the interim periods, there was no provision
for income taxes recorded.
Note 7 Notes Receivable
In February 1997, the Company entered into a Letter of Intent with Advanced
Communication and Information Services, Inc. ("ACIS") whereby the Company would
acquire all of the capital stock of ACIS through a merger exchange of stock. The
Letter of Intent was subject to a number of conditions, including the approval
of the transaction by the boards of directors and shareholders of both
companies; ACIS providing audited financial statements; and loans from the
Company to ACIS for working capital pending the closing of the transaction. The
Company advanced ACIS approximately $1,048,000 in five different loans which
became due June 1, 1997 and are secured by a subordinated security interest in
certain of ACIS's assets and shares of ACIS stock. Management of ACIS did not
deliver previously issued and outstanding stock as security for the Company's
loans as was initially required, but rather, ACIS delivered a new certificate
for 1,000,000 shares of ACIS common stock. As of the date of this filing, the
loans are past due, however the Company and ACIS are negotiating a plan for
repayment of ACIS loans, as well as a cancellation fee to the Company, including
reimbursement of the Company's expenses incurred in connection with the
transaction. Management of the Company believes that ACIS will repay its loans
and other related fees and expenses within the next six months. There can be no
assurance that the Company will be successful in collecting from ACIS any or all
of the monies owed to the Company.
Note 8 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. Other relevant recently issued accounting standards consist of
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131 "Disclosures
about Segments of an Enterprise and Related Information", which relate to
additional reporting and disclosure requirements effective for financial
statement periods beginning after December 15, 1997. It is not expected that the
adoption of these accounting pronouncements will have a material effect on the
Company's operating results or financial condition.
7
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Revenues increased $210,000, or 93%, from $227,000 to $437,000 during
the six months ended June 30, 1997, as compared to the prior year period. This
increase is the result of revenues from DDN Canada in the amount of $163,000 and
from Cyber America Corporation in the amount of $37,000, both of which were
acquired in the second quarter of 1996 and had combined revenues of $18,000 in
the prior comparison period, as well as an increase from $209,000 to $237,000
from the Company's Transit Network Division.
Total expenses did not vary significantly, increasing from $1,348,000
to $1,351,000 during the six months ended June 30, 1997 as compared to the prior
year period. Direct costs increased from $245,000 to $297,000, attributable
primarily to the fact that DDN Canada and Cyber America were not acquired until
June 1996, while salaries and related expenses decreased 26%, from $558,000 to
$414,000, the result of discretionary bonus awards distributed to key employees
in 1996. Financing, legal and consulting expenses increased from $40,000 to
$136,000, largely the result of expenses related to a possible acquisition, as
well as a legal proceeding DDN Canada is involved in. Marketing, general and
administrative grew from $202,000 to $472,000, due primarily to an increase of
approximately $150,000 in DDN Canada's operation which reflected expenses for
only a few weeks in the comparison period, and the amortization of intangible
assets in the amount of $85,000. Total expenses were also offset by a one-time
charge in the prior year period in the amount of $303,000 relating to the
acquisition of Cyber America.
Interest income in the amount of $70,000, earned on the investment of
public offering proceeds, did not vary as compared to the prior year period,
while interest expense decreased from $41,000 to $17,000, due to the retirement
of certain short-term and long-term debt obligations.
Financial Condition, Liquidity and Capital Resources
At June 30, 1997, the Company's principal assets consisted of
approximately $826,000 of cash, most of which was invested in short-term,
interest-bearing investments with banks and other financial institutions, and
approximately $1.4 million of short-term notes receivable. The Company's total
obligations of $696,000 consisted primarily of $369,000 in accounts payable and
accrued expenses, and $266,000 of notes payable.
Cash used by operating activities for the six months ended June 30,
1997 approximated $713,000, of which approximately $207,000 was for working
capital to fund the on-going operations of DDN Canada and Cyber America.
In February 1997, the Company entered into a Letter of Intent with
Advanced Communication and Information Services, Inc. ("ACIS") whereby the
Company would acquire all of the capital stock of ACIS through a merger exchange
8
<PAGE>
of stock. The Letter of Intent was subject to a number of conditions, including
the approval of the transaction by the boards of directors and shareholders of
both companies; ACIS providing audited financial statements; and loans from the
Company to ACIS for working capital pending the closing of the transaction. The
Company advanced ACIS approximately $1,048,000 in five different loans which
became due June 1, 1997 and are secured by a subordinated security interest in
certain of ACIS's assets and shares of ACIS stock. Management of ACIS did not
deliver previously issued and outstanding stock as security for the Company's
loans as was initially required, but rather, ACIS delivered a new certificate
for 1,000,000 shares of ACIS common stock. As of the date of this filing, the
loans are past due. However, the Company and ACIS are negotiating a plan for
repayment of ACIS loans, as well as a cancellation fee to the Company, including
reimbursement of the Company's expenses incurred in connection with the
transaction. Management of the Company believes that ACIS will repay its loans
and other related fees and expenses within the next six months. There can be no
assurance that the Company will be successful in collecting from ACIS any or all
of the monies owed to the Company.
The Company believes that its future operating results, liquidity, and
capital resources will improve, the result of anticipated revenue growth by the
companies it acquired in 1996.
The Company believes that with the cash it has invested in short-term
financial instruments, interest earned from these investments, and anticipated
revenues from operations, the Company's working capital requirements will be
sufficient for at least the next twelve months.
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 a business acquired by the
Company in 1996 has initiated a lawsuit in the Supreme Court of British Columbia
against 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 misrepresentations 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.
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
9
<PAGE>
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. Other relevant recently issued accounting standards
consist of Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information", which
relate to additional reporting and disclosure requirements effective for
financial statement periods beginning after December 15, 1997. It is not
expected that the adoption of these accounting pronouncements will have a
material effect on the Company's operating results or financial condition.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Digital Data Networks, Inc.
(Registrant)
Date: August 19, 1997 By: /s/ Donald B. Scott, Jr.
------------------------------
Donald B. Scott, Jr., President
Date: August 19, 1997 By: /s/ Richard J. Boeglin
----------------------------
Richard J. Boeglin
Vice President, Finance & Operations
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 826
<SECURITIES> 0
<RECEIVABLES> 1,480
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,415
<PP&E> 1,809
<DEPRECIATION> 1,498
<TOTAL-ASSETS> 3,125
<CURRENT-LIABILITIES> 673
<BONDS> 23
0
0
<COMMON> 13,282
<OTHER-SE> (10,853)
<TOTAL-LIABILITY-AND-EQUITY> 3,125
<SALES> 437
<TOTAL-REVENUES> 437
<CGS> 297
<TOTAL-COSTS> 1,351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (53)
<INCOME-PRETAX> (861)
<INCOME-TAX> 0
<INCOME-CONTINUING> (861)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (861)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> 0
</TABLE>
