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 March 31, 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 March 31, 1997, 2,334,496 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
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
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 10
Item 6. Exhibits and Reports on Form 8-K 10
Exhibit 3.2 12
- - ----------------------------------------------------------------------------
(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, March 31,
1996 1997
------------ ---------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,865 $ 1,421
Notes receivable 325 1,350
Accounts receivable 83 93
Prepaid expenses and other current assets 169 165
--------- --------
Total Current Assets 3,442 3,029
Equipment, net of accumulated depreciation
of $1,356 and $1,428 386 371
Intangible Assets, net of accumulated
amortization of $263 and $298 362 327
Other Assets 87 80
--------- --------
TOTAL ASSETS $ 4,277 $ 3,807
========= ========
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 290 $ 305
Accrued payroll and related 99 90
Notes payable and accrued interest 71 72
Current portion of long-term debt 501 362
Current portion of expanded license commitment 78 -
Unearned income 97 64
--------- --------
Total Current Liabilities 1,136 893
--------- --------
LONG-TERM OBLIGATIONS
Long-term debt and accrued interest 34 29
--------- --------
Total Long-Term Obligations 34 29
--------- --------
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 2,334,496 shares issued and outstanding 13,099 13,260
Accumulated Deficit (9,992) (10,375)
--------- --------
Total Stockholders' Equity 3,107 2,885
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,277 $ 3,807
========= ========
</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
Ended March 31,
---------------------------
1996 1997
----------- ----------
<S> <C> <C>
REVENUES $ 101 $ 218
----------- ----------
EXPENSES:
Direct operating costs 86 160
Salaries and related 278 217
Marketing, general and administrative 82 189
Financing, legal and other consulting 50 67
------------ ----------
Total Expenses 496 633
------------ ----------
Loss Before Other Income (Expense) (395) (415)
------------ ----------
OTHER INCOME (EXPENSE):
Interest expense (26) (7)
Interest income 22 39
------------ ----------
Total Other Income (Expense) (4) 32
------------ ----------
NET LOSS $ (399) $ (383)
============ ==========
NET LOSS PER SHARE $ (.29) $ (.16)
============ ==========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------------
1996 1997
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss $ (399) $ (383)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 83 115
Decrease in accrued interest (69) (6)
Increase (decrease) in accounts payable (50) 7
Other 69 (39)
----------- ------------
Net Cash Used by Operating Activities (366) (306)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable (50) (1,025)
Purchases of equipment (3) (58)
----------- ------------
Net Cash Used by Investing Activities (53) (1,083)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 5,857 -
Proceeds from issuance of notes payable 30 -
Repayment of expanded software license commitment (225) -
Repayment of notes payable (1,012) (55)
----------- ------------
Net Cash Provided (Used) by Financing Activities 4,650 (55)
----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents 4,231 (1,444)
CASH AND CASH EQUIVALENTS
Beginning of Period 12 2,865
----------- ------------
End of Period $ 4,243 $ 1,421
=========== ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Exchange of debt for equity $ - $ 161
</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, Pro.Net Communications,
Inc. 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 consolidated 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 $5.9 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 three months ended
March 31, 1996 approximates $(.23) 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 three months ended March 31, 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):
Three Months Ended March 31, 1996
---------------------------------
Revenues $ 260
===========
Net loss $ (543)
===========
Net loss per share $ (.35)
============
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.
6
<PAGE>
DIGITAL DATA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
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 Potential Business Acquisition
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 $20 million comprised of a combination of cash and stock. In
accordance with terms of the Letter of Intent, at March 31, 1997 the Company had
advanced ACIS $1 million pursuant to secured, 10% promissory notes due June
1997. In accordance with terms of the Letter of Intent, upon approval of the
proposed acquisition, the Company has agreed to advance up to an additional $1
million.
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.
7
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Revenues increased $117,000, or 115%, from $101,000 to $218,000 during
the three months ended March 31, 1997, as compared to the prior year period.
This increase is the result of contributions from Pro.Net Communications, Inc.
in the amount of $62,000 and from Cyber America Corporation in the amount of
$27,000, both of which were acquired in the second quarter of 1996, as well as
an increase of $28,000 from the Company's Transit Network Division.
Total expenses increased from $496,000 to $633,000 during the three
months ended March 31, 1997 as compared to the prior year period. The increase
was due to approximately $180,000 of operating and other costs incurred in 1997
by businesses acquired late in the second quarter of 1996, and approximately
$20,000 of amortization of intangible assets recorded for such business
acquisition. The increase was offset by a decrease in salaries and related
expenses of approximately $60,000 due to the absence of IPO-related bonuses and
fewer employees in the Company's Transit Network Division.
Interest income, derived from the investment of the public offering
proceeds, increased from $22,000 to $39,000 as compared to the prior year
period, while interest expense decreased from $26,000 to $7,000 due to the
retirement of certain short-term and long-term debt obligations in 1996.
Financial Condition, Liquidity and Capital Resources
At March 31, 1997, the Company's principal assets consisted of
approximately $1.4 million of cash, of which approximately $1.3 million was
invested in short-term, interest-bearing investments with banks and other
financial institutions, and approximately $1.3 million of short-term notes
receivable. The Company's total obligations of approximately $920,000 consisted
primarily of $305,000 in accounts payable and accrued expenses, and $362,000 of
the current portion of long-term debt incurred by the Company's Transit Network
Division.
Cash used by operating activities for the three months ended March 31,
1997 approximated $300,000, of which approximately $100,000 and $37,000 was for
working capital to fund the on-going operations of Pro.Net and Cyber America,
respectively, and the remainder was for corporate-related activities.
Additionally, the Company advanced $1 million to a potential business
acquisition in the form of short-term, interest-bearing secured notes maturing
June 1997.
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.
8
<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 is not expected that adoption of SFAS 128 will have a significant,
if any, effect on reported EPS data.
9
<PAGE>
Item 1. 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 5. Other Information
On February 4, 1997, the Company's Board of Directors approved an
amendment to Article IV of the Company's By-laws to provide a method to break
any ties resulting from a vote of the members of the Company's Board of
Directors. See Exhibit 3.2.
Item 6. Exhibits
Exhibit 3.2 - By-laws of the Company
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: May 14, 1997 By: /s/ Donald B. Scott, Jr.
------------------------------
Donald B. Scott, Jr., President
Date: May 14, 1997 By: /s/ Richard J. Boeglin
----------------------------
Richard J. Boeglin
Vice President, Finance & Operations
11
<PAGE>
EXHIBIT 3.2
Article IV of the Company's By-laws was amended to include Section
4.15, Voting Ties, as written below:
Section 4.15. Voting Ties. If a quorum of Directors is present, and
during the course of a Directors meeting a vote is taken on a resolution or
other matter which results in an initial tie among the Directors, then the
Chairman of the Board of Directors shall have the right to break the voting tie
by casting an additional vote and the resolution or other matter voted upon
shall be carried in accordance with the Chairman's tie-breaking vote. If the
Chairman of the Board is not present at the meeting, no other Director shall
have a tie-breaking vote.
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,421
<SECURITIES> 0
<RECEIVABLES> 1,443
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,029
<PP&E> 1,799
<DEPRECIATION> 1,428
<TOTAL-ASSETS> 3,807
<CURRENT-LIABILITIES> 893
<BONDS> 29
0
0
<COMMON> 13,260
<OTHER-SE> (10,375)
<TOTAL-LIABILITY-AND-EQUITY> 3,807
<SALES> 218
<TOTAL-REVENUES> 218
<CGS> 160
<TOTAL-COSTS> 633
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (32)
<INCOME-PRETAX> (383)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,837)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (383)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> 0
</TABLE>
