UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 1997, 2,364,597 shares of Common Stock and 1,840,000 Common
Stock Purchase Warrants were outstanding.
<PAGE>
INDEX
Page
PART I. FINANCIAL INFORMATION
1. Financial Statements 3
2. Management's Discussion and Analysis of 9
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, September 30,
1996 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,865 $ 642
Notes receivable 325 1,363
Accounts receivable 83 103
Prepaid expenses and other current assets 169 111
--------- ---------
Total Current Assets 3,442 2,219
Equipment, net of accumulated depreciation
of $1,356 and $1,546 386 263
Intangible Assets, net of accumulated (Note 9)
amortization of $263 and $406 362 362
Other Assets 87 94
--------- ---------
TOTAL ASSETS $ 4,277 $ 2,938
========= =========
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 290 $ 369
Accrued payroll and related 99 53
Due to related party - 132
Notes payable and accrued interest 71 -
Current portion of long-term debt 501 174
Expanded license commitment 78 -
Unearned income 97 48
--------- ---------
Total Current Liabilities 1,136 776
--------- ---------
LONG-TERM OBLIGATIONS
Long-term debt and accrued interest 34 18
--------- ---------
Total Long-Term Obligations 34 18
--------- ---------
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 2,364,597 shares issued and outstanding 13,099 13,319
Accumulated Deficit (9,992) (11,175)
--------- ---------
Total Stockholders' Equity 3,107 2,144
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,277 $ 2,938
========= =========
</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 Nine Months
Ended September 30, Ended September 30,
--------------------- ----------------------
1996 1997 1996 1997
------- ------ ------ -------
<S> <C> <C> <C> <C>
REVENUES $ 179 $ 260 $ 406 $ 697
------- ------ ------ -------
EXPENSES:
Direct operating costs 82 136 327 401
Salaries and related 212 183 770 597
Marketing, general and administrative 257 188 460 692
Financing, legal and other consulting 12 59 51 195
Product development costs, including -
amortization of intangible assets - 54 303 86
------- ------ ------ -------
Total Expenses 563 620 1,911 1971
------- ------ ------ -------
Loss Before Other Income (Expense) 384 360 1,505 1,274
------- ------ ------ -------
OTHER INCOME (EXPENSE):
Interest expense (18) (5) (55) (23)
Interest income 60 43 126 114
------- ------ ------ -------
Total Other Income (Expense) 42 38 71 91
------- ------ ------ -------
NET LOSS $ (342) $ (322) $(1,434) $(1,183)
======= ====== ======= =======
NET LOSS PER SHARE $ (0.16) $(0.14) $ (0.76) $ (0.51)
======= ====== ======= =======
</TABLE>
See acompanying notes to financial statements
4
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
--------------------
1996 1997
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (1,434) $ (1,183)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 351 248
Product development costs 303 86
Non-cash compensation expense relating to
Common Stock issued to employees 95 -
Change in operating assets and liabilities, net
of business acquisitions (685) (849)
Decrease in accrued interest (120) (13)
Increase in accounts payable 57 79
Other (159) (5)
-------- --------
Net Cash Used by Operating Activities (907) (788)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable, net - (1,038)
Purchases of equipment (192) (67)
Purchases of investments (466) -
Cash acquired upon acquisition of businesses 99 -
-------- --------
Net Cash Used by Investing Activities (559) (1,105)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of stock issue costs 5,823 -
Proceeds from issuance of notes payable 90 -
Repayment of expanded software license commitment (225) (78)
Repayment of notes payable (1,025) (240)
Payments on related party note - (12)
-------- ---------
Net Cash Provided (Used) by Financing Activities 4,663 (330)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 3,197 (2,223)
CASH AND CASH EQUIVALENTS
Beginning of Period 12 2,865
-------- --------
End of Period $ 3,209 $ 642
======== ==========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Exchange of debt for equity $ 124 $ 161
Common Stock issued in business acquisitions $ 868 $ -
Payable to related party $ - $ 144
Expenses paid in common stock $ - $ 59
</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. 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 nine months ended
September 30, 1996 approximates $(.66) 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 nine months ended September 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):
Nine Months Ended September 30, 1996
------------------------------------
Revenues $ 735
======
Net loss $(1,613)
======
Net loss per share $ (0.79)
======
The above pro forma financial information does not include non-recurring
expenses of approximately $303,000 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.
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 of its operations in a
form acceptable for filing with the Commission; and loans from the Company to
ACIS for working capital pending the closing of the transaction. The Company
advanced ACIS approximately $1,048,000 in five different loans which became due
June 1, 1997 and are secured by a subordinated security interest in certain of
ACIS's assets and shares of ACIS stock. Management of ACIS did not deliver its
stock as security for the Company's loans as was initially required, but rather,
ACIS delivered a new certificate for 1,000,000 shares of ACIS common stock. As
of the date of this 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 moneys owed to the Company.
Note 8 Shut down of Cyber America
On September 5, 1997, the Company closed the operations of Cyber America (a
recently acquired business-see Note 4). The Company has not formally adopted a
plan for disposition, but anticipates the business will be disposed of within
the next six months. At September 30, 1997, assets, consisting primarily of
Property, Plant and Equipment, totaled approximately $79,000. Liabilities
totaling approximately $104,000 consist primarily of amounts due vendors. Cyber
America reported a net loss from operations for the nine months ended September
30, 1997, of approximately $220,000. No gain or loss from disposition can be
estimated at this time.
Note 9 Due to Related Party
Amounts due to related party consist of amounts owed to certain shareholders for
consulting services rendered. Services were rendered for a recently acquired
business (see Note 4) prior to the purchase date. Accordingly, goodwill related
to this business acquisition was increased.
Note 10 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
7
<PAGE>
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.
8
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Revenues increased $291,000, or 72%, from $406,000 to $697,000 during
the nine months ended September 30, 1997, as compared to the prior year period.
This increase is the result of revenues from DDN Canada in the amount of
$287,000 and from Cyber America Corporation in the amount of $39,000, both of
which were acquired in the second quarter of 1996 and had combined revenues of
$51,000 in the prior comparison period, as well as an increase from $355,000 to
$371,000 from the Company's Transit Network Division.
Total expenses increased from $1,911,000 to $1,971,000 during the nine
months ended September, 1997 as compared to the prior year period. Direct costs
rose from $327,000 to $401,000, attributable primarily to the fact that DDN
Canada and Cyber America were not acquired until June 1996, while salaries and
related expenses decreased 22%, from $770,000 to $597,000, the result of
discretionary bonus awards distributed to key employees in 1996. Financing,
legal and consulting expenses increased from $51,000 to $195,000, largely the
result of expenses related to a possible acquisition, and a legal proceeding DDN
Canada is involved in. Marketing, general and administrative expenses increased
to $692,000 compared to $460,000 in the prior year period, due primarily to an
increase of approximately $201,000 in DDN Canada's operation, which reflected
expenses for only a few months in the comparison period. Total expenses were
also offset by a reduction in product development costs from $303,000 to
$86,000, the result of a one-time charge in the prior year period relating to
the acquisition of Cyber America.
Interest income in the amount of $114,000, earned primarily on the
investment of public offering proceeds, decreased from $126,000 in the prior
year period, primarily due to the fact that there was more cash available to
invest in the prior year period. Interest expense decreased from $55,000 to
$23,000, due to the retirement of certain short-term and long-term debt
obligations.
Financial Condition, Liquidity and Capital Resources
At September 30, 1997, the Company's principal assets consisted of
approximately $642,000 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 $794,000 consisted primarily of $422,000 in accounts payable and
accrued liabilities, and $192,000 of notes payable.
Cash used by operating activities for the nine months ended September
30, 1997 approximated $788,000, of which approximately $238,000 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
9
<PAGE>
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.
In September 1997, the Company closed the Cyber America operation, due
to the fact that it was unable to approach profitability.
The Company believes that its future operating results, liquidity, and
capital resources will improve, the result of closing the Cyber America
operation, and anticipated revenue growth by DDN Canada and the Company's
Transit Network Division.
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
10
<PAGE>
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.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Digital Data Networks, Inc.
(Registrant)
Date: November 14, 1997 By: /s/ Donald B. Scott, Jr.
------------------------------
Donald B. Scott, Jr., President
Date: November 14, 1997 By: /s/ Richard J. Boeglin
----------------------------
Richard J. Boeglin
Vice President, Finance & Operations
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 642
<SECURITIES> 0
<RECEIVABLES> 1,466
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,219
<PP&E> 1,809
<DEPRECIATION> 1,546
<TOTAL-ASSETS> 2,938
<CURRENT-LIABILITIES> 776
<BONDS> 18
0
0
<COMMON> 13,319
<OTHER-SE> (11,175)
<TOTAL-LIABILITY-AND-EQUITY> 2,144
<SALES> 697
<TOTAL-REVENUES> 697
<CGS> 487
<TOTAL-COSTS> 1,971
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (91)
<INCOME-PRETAX> (1,183)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,183)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,183)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> 0
</TABLE>
