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, 1998.
[ ] 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, 1998, 2,339,267 shares of Common Stock and 1,840,000 Common Stock
Purchase Warrants were outstanding.
1
<PAGE>
INDEX
Page
PART I. FINANCIAL INFORMATION
1. Consolidated Financial Statements 3
2. Management's Discussion and Analysis or
Plan of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds (a)
Item 3. Defaults Upon Senior Securities (a)
Item 4. Submission of Matters to a Vote of Security Holders (a)
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 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)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 540 $ 281
Trade accounts receivable, net of reserves
for doubtful accounts of $33 and $46. 58 109
Prepaid expenses and other current assets 92 64
Notes receivable, net of reserves of $1,048 320 90
--------- --------
Total Current Assets 1,010 544
Equipment, net of accumulated depreciation
of $1,543 and $1,584 147 211
Other assets 73 222
--------- --------
TOTAL ASSETS $ 1,230 $ 977
========= ========
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 308 $ 348
Accrued payroll and related 44 38
Current portion of long-term debt 21 22
Unearned income 89 52
--------- --------
Total Current Liabilities 462 460
LONG-TERM OBLIGATIONS
Long-term debt, less current portion 164 157
Due to shareholders 114 114
--------- --------
TOTAL LIABILITIES 740 731
--------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, no par value, 1,000,000 shares
authorized, no shares issued or outstanding - -
Common Stock, no par value, 10 million shares authorized,
2,339,267 shares issued and outstanding 13,399 13,399
Treasury Stock, at cost, 30,000 shares -- (30)
Accumulated Deficit (12,914) (13,128)
Cumulative foreign currency translation adjustment 5 5
--------- --------
TOTAL STOCKHOLDERS' EQUITY 490 246
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,230 $ 977
========= ========
</TABLE>
See accompanying notes to consolidated 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,
-------------- --------------
1997 1998 1997 1998
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Revenues $ 219 $ 244 $ 437 $ 455
--------- -------- --------- -------
Expenses
Direct operating costs 137 59 297 116
Salaries and related 197 112 414 243
Marketing, general and administrative 299 141 488 251
Financing, legal and other consulting 84 20 152 80
-------- --------- --------- -------
Total expenses 717 332 1,351 690
-------- --------- --------- -------
Loss from operations (498) (88) (914) (235)
--------- ---------- --------- -------
Other Income (Expense)
Interest expense (11) (2) (17) (6)
Interest income 31 13 70 27
-------- --------- --------- -------
Total other income (expense), net 20 11 53 21
-------- --------- --------- -------
Net Loss $ (478) $ (77) $ (861) $ (214)
======== ========== ========= =======
Net Loss Per Share $ (.20) $ (.03) $ (.37) $ (.09 )
======= ======== ======== ==========
Weighted Average Shares Outstanding 2,340 2,319 2,332 2,329
======== ========= ========= =======
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1997 1998
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (861) $ (214)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 219 41
Treasury stock received in settlement - (30)
Increase in accounts receivable - (58)
(Decrease) increase in accounts payable (19) 34
Other (52) (9)
--------- ----------
Net Cash Used by Operating Activities (713) (236)
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to acquisition target (1,048) (150)
Purchases of investments (25) --
Payments received on notes receivable - 242
Purchases of equipment (67) (105)
-------- ----------
Net Cash Used by Investing Activities (1,140) (13)
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable (186) (10)
-------- ----------
Net Cash Used by Financing Activities (186) (10)
-------- ----------
Net Decrease in Cash and Cash Equivalents (2,039) (259)
CASH AND CASH EQUIVALENTS
Beginning of Period 2,865 540
-------- ---------
End of Period $ 826 $ 281
======== =========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Description of Business
Digital Data Networks, Inc. ("the Company" or DDN") was incorporated in 1988.
DDN operates a transit advertising company and markets high-end Internet
services. The Company's Transit Network Division operates a network of
computerized electronic message displays that delivers current news, information
and advertising to riders on-board public transit vehicles, with operations in
Dallas, Texas since 1991. The Company's Canadian subsidiary, DDN Canada,
provides a range of Internet offerings to business customers, including
connectivity services, intranet services, development of on-line working
programs, and web page design and development.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and related notes thereto included in the Company's 1997
Annual Report on Form 10-KSB. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, considered necessary for a fair
presentation have been included. Operating results for 1998 interim periods are
not necessarily indicative of results that may be expected for the year ending
December 31, 1998.
Certain reclassifications have been made to prior period financial statements in
order to conform to current period classifications.
Note 2 Financial Condition, Liquidity and Going Concern
During 1996, 1997 and the first six months of 1998, DDN incurred losses of
approximately $2 million, $2.9 million and $214,000, respectively, and continues
to experience negative cash flows from operations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management believes that its future operating activities and strategies, which
include, but are not limited to, reductions in general and administrative
expenses, possible capital infusions from equity sources, possible acquisitions
or divestitures of assets or businesses, and cutbacks in capital expenditures
will, in the near term, provide sufficient cash flows to fund ongoing business
activities.
The ability of the Company to generate positive cash flows from operations and
net income, is dependent on, among other things, market conditions, the recovery
of recorded assets, cost control, and the Company's ability to raise capital
under acceptable terms. While the Company has had some successes in certain of
these endeavors in the past, there can be no assurance that its efforts in these
endeavors will be successful in the future. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Note 3 Debt Exchanges
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 Commitments and Contingencies
During the six months ended June 30, 1998, the Company settled litigation
pertaining to one of the Company's 1996 acquisitions. Pursuant to terms of the
settlement agreement, the Company paid approximately $40,000 U.S. and received
30,000 shares of DDN common stock. The estimated value of stock received has
been recorded as Treasury stock based upon prevailing market prices around the
settlement agreement date. Settlement net costs are included in financing, legal
and administrative costs in the accompanying statements of operations.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 Commitments and Contingencies (continued)
During 1997, the Company entered into a letter of intent with Advanced
Communication and Information Services ("ACIS") to acquire all of the issued and
outstanding voting stock of ACIS in exchange for DDN common shares. Under
provisions of the letter of intent, the Company forwarded ACIS $1,048,000
pursuant to terms of five promissory notes to be used as working capital pending
the completion of the acquisition. Subsequently, ACIS issued to the Company
1,000,000 shares of ACIS common stock and withdrew from the letter of intent. In
accordance with the terms of the agreement, the promissory notes are due in
full; however, ACIS has defaulted on that debt. The entire amount of the
receivable was reserved during 1997. In April 1998, the Company received a
judgment from the King County Superior Court in the State of Washington against
ACIS, ordering them to pay the Company the amount of the loan, plus interest,
plus a $300,000 cancellation fee. The Company continues to pursue various
collection actions, including, but not limited to, additional litigation and
acquisition of debtor assets and/or businesses. There can be no assurance that
the Company will be successful in recovering any, all, or part of this judgment.
Note 5 Potential Business Combination
During the three months ended June 30, 1998, the Company entered into a Letter
of Intent, as amended, with Internet Sports Network, Inc. ("ISN"), a sports
entertainment and information company that offers interactive competitive sports
leagues, pools and contests via the Internet, pursuant to which, subject to
certain conditions, ISN would merge (the "Merger") with and into DDN, such that
following completion of the Merger, ISN shareholders would own approximately 80%
of the merged entity, and DDN shareholders and optionholders would own
approximately 20% of the merged entity. The Merger is subject to a number of
certain conditions, including, among other things, consummation of a private
financing by ISN raising in excess of $1 million, the negotiation of a
definitive merger agreement, and shareholder approval. In connection with the
proposed Merger, during June 1998, the Company acquired for $150,000 cash, in a
private placement transaction, 375,000 shares of ISN common stock, which such
investment is included in other assets in the accompanying consolidated balance
sheet.
Note 6 Effect of Recently Issued Accounting Standards
In March and April of 1998, the Accounting Standards Executive Committee of the
American Institute of CPAs, issued Statement of Position 98-1, "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1") and Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). Adoption of these standards is not expected to have a
material impact on the Company's financial position, results of operations, or
cash flows. The standards are effective for transactions entered into in fiscal
years beginning after December 15, 1998.
7
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations
Safe Harbor Statement
Forward-looking statements, within the meaning of Section 21E of the Securities
and Exchange Act of 1934, are made throughout this Management's Discussion and
Analysis or Plan of Operations. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes", "anticipates", "plans", "expects", "estimates" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the results of the Company to
differ materially from those indicated herein. These factors include, but are
not limited to, those set forth in Item 7 entitled Management's Discussion and
Analysis or Plan of Operations in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997.
Results of Operations
Revenues increased slightly, from $437,000 to $455,000 during the six
months ended June 30, 1998, as compared to the prior year period. DDN Canada had
a slight increase, while the Company's Transit Network Division in Dallas, Texas
experienced a 24%, or $55,000, increase. Those increases were offset by
decreases of $37,000 by Cyber America Corporation, one of the Company's
subsidiaries which ceased operation in the third quarter of 1997, and to a
lesser extent by the Providence, Rhode Island Transit Network Division, which
ceased operation in the fourth quarter of 1997.
Total expenses decreased significantly from $1,351,000 to $690,000, or
nearly 50%, during the six months ended June 30, 1998, as compared to the prior
year period. Direct costs fell from $297,000 to $116,000, primarily due to a
$72,000 reduction in depreciation expense by the Transit Network Division's
operations, and $65,000 incurred by Cyber America Corporation in 1997 and which
is no longer in operation. Salaries and related expenses decreased 41%, or
$171,000, primarily as a result of a $65,000 decrease in corporate-related
salaries, a $41,000 decrease by Cyber America Corporation, and a decrease of
$36,000 by DDN Canada, which reduced its staff. Marketing, general and
administrative expenses were reduced significantly, from $488,000 to $251,000,
attributable primarily to a $69,000 reduction by DDN Canada, a $41,000 reduction
by Cyber America Corporation, and decreases in certain other corporation-related
expenses. Financing, legal and consulting expenses also decreased, from $152,000
to $80,000, largely the result of less acquisition-related activity than in the
prior year period.
Interest income, earned primarily on the investment of remaining 1996
public offering proceeds, decreased from the prior year period, due to the fact
that there was more cash available to invest in the prior year period. Interest
expense decreased, due to the retirement of certain obligations.
8
<PAGE>
Trends for the six month periods ended June 30 were consistent with that
of the three month periods then ended.
Financial Condition, Liquidity and Capital Resources
Cash used by operating activities for the six months ended June 30,
1998 approximated $236,000, due primarily to the $214,000 net loss for the
period. During the six months ended June 30, 1998, the Company settled
litigation pertaining to one of the Company's 1996 acquisitions. Pursuant to
terms of the settlement agreement, the Company paid approximately $40,000 U.S.
and received 30,000 shares of DDN common stock. The estimated value of stock
received has been recorded as Treasury stock based upon prevailing market prices
around the settlement agreement date. Settlement net costs are included in
financing, legal and administrative costs in the accompanying statements of
operations.
During the three month period ended June 30, 1998, The Company's
Transit Network Division incurred capital expenditures approximating $94,000 to
install its computerized electronic network on DART's light rail vehicles. Upon
completion of this installation, the Transit Network Division will begin selling
advertising on this new part of their system.
During the three months ended June 30, 1998, the Company entered into a
Letter of Intent, as amended, with Internet Sports Network, Inc. ("ISN"), a
sports entertainment and information company that offers interactive competitive
sports leagues, pools and contests via the Internet, pursuant to which, subject
to certain conditions, ISN would merge (the "Merger") with and into DDN, such
that following completion of the Merger, ISN shareholders would own
approximately 80% of the merged entity, and DDN shareholders and optionholders
would own approximately 20% of the merged entity. The Merger is subject to a
number of certain conditions, including, among other things, consummation of a
private financing by ISN raising in excess of $1 million, the negotiation of a
definitive merger agreement, and shareholder approval. In connection with the
proposed Merger, during June 1998, the Company acquired for $150,000 cash, in a
private placement transaction, 375,000 shares of ISN common stock.
During 1997, the Company entered into a letter of intent with Advanced
Communication and Information Services ("ACIS") to acquire all of the issued and
outstanding voting stock of ACIS in exchange for DDN common shares. Under
provisions of the letter of intent, the Company forwarded ACIS $1,048,000
pursuant to terms of five promissory notes to be used as working capital pending
the completion of the acquisition. Subsequently, ACIS issued to the Company
security in 1,000,000 shares of ACIS common stock and withdrew from the letter
of intent. In accordance with the terms of the agreement, the operating cash
forwarded to ACIS was to be repaid in full, however, ACIS has defaulted on that
debt. The entire amount of the receivable was reserved during 1997. In April
1998, the Company received a judgment from the King County Superior Court in the
State of Washington against ACIS, ordering them to pay the Company the amount of
the loan, plus interest, plus a $300,000 cancellation fee. The Company continues
to pursue various collection actions, including, but not limited to, additional
litigation and acquisition of debtor assets and/or businesses. There can be no
assurance that the Company will be successful in recovering all or part of this
judgment. See "Legal Proceedings."
9
<PAGE>
At June 30, 1998, the Company's principal current assets consisted of
approximately $281,000 of cash, most of which was invested in short-term,
interest-bearing investments with banks and other financial institutions,
$109,000 of trade accounts receivable, and $90,000 of notes receivable. The
Company's total obligations of $721,000 consisted primarily of $386,000 in
accounts payable and accrued liabilities, and approximately $179,000 of
long-term debt.
During 1996, 1997 and the first six months of 1998, DDN incurred losses
of approximately $2 million, $2.9 million and $214,000, respectively, and
continues to experience negative cash flows from operations. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern.
Management believes that its future operating activities and
strategies, which include, but are not limited to, reductions in general and
administrative expenses, possible capital infusions from equity sources,
possible acquisitions or divestitures of assets or businesses, and cutbacks in
capital expenditures will, in the near term, provide sufficient cash flows to
fund ongoing business activities.
The ability of the Company to generate positive cash flows from
operations and net income, is dependent on, among other things, market
conditions, the recovery of recorded assets, cost control, and the Company's
ability to raise capital under acceptable terms. While the Company has had some
successes in certain of these endeavors in the past, there can be no assurance
that its efforts in these endeavors will be successful in the future. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Effect of Recently Issued Accounting Standards
In March and April of 1998, the Accounting Standards Executive
Committee of the American Institute of CPAs issued Statement of Position 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use" and Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." Adoption of these standards is not expected to have a material
impact on the Company's financial position, results of operations, or cash
flows. The standards are effective for transactions entered into in fiscal years
beginning after December 15, 1998.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In January 1998, the Company filed a lawsuit in King County Superior
Court, Seattle, Washington, against ACIS for repayment of its five promissory
notes owed to the Company which are past due. The Company filed for repayment of
the entire principal amount of these promissory notes (approximately
$1,048,000), plus accumulated interest, plus a cancellation fee in the amount of
approximately $300,000. In April 1998, the Company received a judgment against
ACIS in the principal amount of $1,348,367.34. The Company continues to pursue
various collection actions, including, but not limited to, additional litigation
and acquisition of debtor assets and/or businesses. The entire amount of the
receivable was reserved during 1997. There can be no assurance that the Company
will be successful in recovering any, all, or part of this judgment.
Item 5. Other Information
During the three months ended June 30, 1998, the Company entered into a
Letter of Intent, as amended, with Internet Sports Network, Inc. ("ISN"), a
sports entertainment and information company that offers interactive competitive
sports leagues, pools and contests via the Internet, pursuant to which, subject
to certain conditions, ISN would merge (the "Merger") with and into DDN, such
that following completion of the Merger, ISN shareholders would own
approximately 80% of the merged entity, and DDN shareholders and optionholders
would own approximately 20% of the merged entity. The Merger is subject to a
number of certain conditions, including, among other things, consummation of a
private financing by ISN raising in excess of $1 million, the negotiation of a
definitive merger agreement, and shareholder approval.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 - Letter of Intent between DDN and ISN
(to be filed by amendment)
(b) Reports on Form 8-K - None.
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: August 19, 1998 By: /s/ Donald B. Scott, Jr.
------------------------------
Donald B. Scott, Jr., President
Date: August 19, 1998 By: /s/ Richard J. Boeglin
----------------------------
Richard J. Boeglin
Vice President, Finance & Operations
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 281
<SECURITIES> 0
<RECEIVABLES> 199
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 544
<PP&E> 1,795
<DEPRECIATION> 1,584
<TOTAL-ASSETS> 977
<CURRENT-LIABILITIES> 460
<BONDS> 271
0
0
<COMMON> 13,399
<OTHER-SE> (13,128)
<TOTAL-LIABILITY-AND-EQUITY> 977
<SALES> 455
<TOTAL-REVENUES> 455
<CGS> 116
<TOTAL-COSTS> 690
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (21)
<INCOME-PRETAX> (214)
<INCOME-TAX> 0
<INCOME-CONTINUING> (214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (214)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> 0
</TABLE>
