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, 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 March 31, 1998, 2,339,267 shares of Common Stock and 1,840,000 Common
Stock Purchase Warrants were outstanding.
<PAGE>
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 Form 10-KSB for the year ended
December 31, 1997.
INDEX
Page
PART I. FINANCIAL INFORMATION
1. Consolidated Financial Statements 3
2. Management's Discussion and Analysis or Plan of Operations 9
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 (a)
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
- ----------------------------------------------------------------------------
(a) These items are inapplicable or have a negative response and have therefore
been omitted.
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
December 31, March 31,
1997 1998
------------ ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 540 $ 633
Trade accounts receivable, net of allowances
for doubtful accounts of $33 and $39. 58 67
Prepaid expenses and other current assets 92 90
Notes receivable, net of reserves of $1,048. 320 129
--------- --------
Total Current Assets 1,010 919
Equipment, net of accumulated depreciation
of $1,543 and $1,563 147 127
Other assets 73 73
--------- --------
TOTAL ASSETS $ 1,230 $ 1,119
========= ========
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 308 $ 342
Accrued payroll and related 44 40
Current portion of long-term debt 21 21
Unearned income 89 88
--------- --------
Total Current Liabilities 462 491
LONG-TERM OBLIGATIONS
Long-term debt and accrued interest, less current portion 164 161
Due to shareholders 114 114
--------- --------
TOTAL LIABILITIES 740 766
--------- --------
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
Accumulated Deficit (12,914) (13,051)
Cumulative foreign currency translation adjustment 5 5
--------- --------
TOTAL STOCKHOLDERS' EQUITY 490 353
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,230 $ 1,119
========= ========
</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
Ended March 31,
1997 1998
---------- ---------
<S> <C> <C>
REVENUES $ 218 $ 211
--------- -------
EXPENSES
Direct operating costs 160 57
Salaries and related 217 131
Marketing, general and administrative 189 110
Financing, legal and other consulting 67 20
--------- -------
Total expenses 633 318
--------- -------
Loss from operations (415) (107)
--------- -------
OTHER INCOME (EXPENSE)
Interest expense (7) (2)
Interest income 39 12
Loss on settlement - (40)
--------- -------
Total other income (expense), net 32 (30)
--------- -------
NET LOSS $ (383) $ (137)
========= =======
NET LOSS PER SHARE $ (.16) $ (.06)
========= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 2,325,271 2,339,267
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Ended March 31,
1997 1998
------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (383) $ (137)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 115 20
Increase in prepaid and other current assets (5) (7)
Increase in accounts payable 7 30
Other non-cash operating expense (40) 1
-------- ---------
Net Cash Used in Operating Activities (306) (93)
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to acquisition target and others (1,025) -
Payments on notes receivable - 191
Purchases of equipment (58) -
Net Cash (Used in) Provided by Investing Activities (1,083) 191
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable (55) (5)
-------- ----------
Net Cash Used in Financing Activities (55) (5)
-------- ----------
Net (Decrease) Increase in Cash and Cash Equivalents (1,444) 93
CASH AND CASH EQUIVALENTS
Beginning of Period 2,865 540
-------- ---------
End of Period $ 1,421 $ 633
======== =========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Exchange of debt for equity $ 161 $ -
CASH PAID DURING THE PERIOD FOR
Interest $ 13 $ -
Taxes $ - $ -
</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"), 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 a digital information network and an operation in
Texas. The Company's Canadian subsidiary, DDN Canada, provides a range of
Internet offerings to business customers, including connectivity services to
local subscribers, intranet services to corporations, the development of on-line
working programs for commercial clients, and web page design and development
targeting corporate customers.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with 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
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 accruals, considered necessary
for a fair presentation have been included. Operating results for the
three-month period ended March 31, 1998 are not necessarily indicative of the
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
DDN incurred a net loss of $137,000 for the three-month period ending March 31,
1998, has an accumulated deficit of $13,051,000, and continues to experience
negative cash flows form operations. In addition, the Company established a
reserve against a note receivable from a failed acquisition target of
$1,048,000. These conditions raise substantial doubt about the Company's ability
to continue as a going concern.
Management believes that its future operating activities and sales strategies
will, in the near term, provide sufficient cash flows to fund ongoing business
activities in Dallas and Canada. Management also believes that, due to a
judgment received in favor of DDN in April 1998 in regards to the
above-mentioned note receivable and the historical financial stability of the
failed acquisition target, all of the $1,048,000 will eventually be recovered.
Lastly, management believes reductions in general and administrative expenses,
possible capital infusions from equity sources, and cut backs in capital
expenditures will bring the Company to profitable operations.
The ability of the Company to achieve its operating goals, and thus generate
positive cash flows from operations and net income, is dependent on market
conditions, the recovery of the reserved note receivable, and the Company's
ability to raise capital under acceptable terms. While the company has been
successful in 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
In January 1997, the Company amended the terms of a software license agreement
with Sunrise Systems, Inc. to include an equity conversion feature, allowing the
principal and interest due to be converted to DDN common stock at a conversion
price of $4.20 per share, the fair market value at the date of amendment. In
January 1997, Sunrise Systems, Inc. exercised its option and the outstanding
balance of principal and interest of $78,524 was converted into 18,697 shares of
DDN common stock.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 Debt Exchanges (continued)
In February 1997, the Company amended the terms of its 11% note due a Company to
include an equity conversion feature, allowing the principal and interest due to
be converted to DDN common stock at a conversion price of $4.50 per share, the
fair market value at the date of amendment. In March 1997, the lender exercised
its options and the outstanding balance of principal and interest of $82,464 was
converted into 18,326 shares of DDN common stock.
Note 4 Commitments and Contingencies
The former stockholder of hip, one of the Company's 1996 business acquisitions,
initiated a lawsuit in the Supreme Court of British Columbia against hip and the
Company claiming, among other things, damages for breach of contract. Pursuant
to a settlement agreement reached in April 1998, the Company has recognized a
$40,000 loss on settlement in the three months ended March 31, 1998.
During the year ended December 31, 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. On April 2, 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. As management has been unable to determine either the
financial stability of ACIS, or the amount, if any, the Company will eventually
recover, the entire amount of the receivable was reserved during 1997.
During the three months ended March 31, 1998, the Company ceased operations in
Providence, Rhode Island as a result of continuing net operating losses of that
venture and also stopped marketing certain related products. Consequently, the
Company has notified the Rhode Island Public Transit Authority ("RIPTA") that it
will not be able to complete the contract that it had been previously awarded.
No provision for loss has been reflected in the financial statements as a result
of this contingency as the fair value of the venture's assets continues to
exceed the associated net book value.
Note 5 Effect of Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Both statements
become effective for the fiscal years beginning January 1, 1998. Adoption of
these statements did not impact the Company's financial position, results of
operations or cash flows and any effect is limited to the form and content of
its disclosures.
In December 1997, the Accounting Standards Executive Committee of the American
Institute of CPA's ("AcSEC") issued Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. The standard became effective for transactions entered into during
the fiscal year beginning January 1, 1998. Adoption of this standard did not
have a material impact on the Company's financial position, results of
operations, or cash flows.
In March and April of 1998, respectively, the AcSEC 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
7
<PAGE>
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.
8
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations
Results of Operations
Revenues decreased slightly, from $218,000 to $211,000 during the three
months ended March 31, 1998, as compared to the prior year period. The Company's
Transit Network Division and DDN Canada had increases of $9,000 and $11,000
respectively, but that was offset by a decrease of $27,000 by Cyber America
Corporation, one of the Company's subsidiaries, which ceased operation in the
third quarter of 1997.
Total expenses decreased from $633,000 to $318,000 during the three
months ended March 31, 1998, as compared to the prior year period. Direct costs
fell from $160,000 to $57,000, salaries and related decreased 40%, or $86,000,
and marketing, general and administrative expenses were lowered from $189,000 to
$110,000. These decreases in expenses are attributable primarily to the fact
that Cyber America ceased operating in the third quarter of 1997. Financing,
legal and consulting expenses also decreased, from $67,000 to $20,000, largely
the result of less acquisition-related activity than in the prior year period.
Interest income in the amount of $12,000, earned primarily on the
investment of 1996 public offering proceeds, decreased from $39,000 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 $7,000 to
$2,000, due to the retirement of certain obligations.
Financial Condition, Liquidity and Capital Resources
At March 31, 1998, the Company's principal assets consisted of
approximately $633,000 of cash, most of which was invested in short-term,
interest-bearing investments with banks and other financial institutions, while
$129,000 was in short-term notes receivable, and $67,000 in accounts receivable.
The Company's total obligations of $766,000 consisted primarily of $382,000 in
accounts payable and accrued liabilities, approximately $182,000 of long-term
debt, and $88,000 of unearned income.
Cash used by operating activities for the three months ended March 31,
1998 approximated $93,000.
The Company has established a reserve against notes receivable from a
failed acquisition target of $1,048,000. Management believes that, due to a
judgment received in favor of DDN in April 1998 in regards to these notes
receivable, this money will eventually be recovered. However, there can be no
assurance that the Company will be successful in recovering all or part of this
judgment from ACIS. See "Legal Proceedings."
The Company closed its Cyber America operation during the third quarter
of 1997, and closed The Transit Network Division's Providence, Rhode Island
operation in the fourth quarter of 1997, due to the fact that neither operation
was able to approach profitability.
9
<PAGE>
The Company believes that its future operating results, liquidity and
capital resources will improve, the result of closing the Cyber America and
Providence, Rhode Island operations, as well as anticipated revenue growth by
The Transit Network Division. The Company believes that with the cash it has
invested in short-term financial instruments, interest earned from these
investments, reductions in general and administrative expenses, possible capital
infusions from equity sources, and cutbacks in capital expenditures, the
Company's working capital requirements will be sufficient to fund ongoing
business activities in Dallas and Canada for at least the next six months.
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. The Company was recently involved in
litigation whereby a former stockholder of a business acquired by the Company in
1996 initiated a lawsuit in the Supreme Court of British Columbia against the
Company. Both parties settled these claims on April 28, 1998. See "Legal
Proceedings."
Effect of Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Both statements
become effective for the fiscal years beginning January 1, 1998. Adoption of
these statements did not impact the Company's financial position, results of
operations or cash flows and any effect is limited to the form and content of
its disclosures.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of CPA's ("AcSEC") issued Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. The standard became effective for transactions entered
into during the fiscal year beginning January 1, 1998. Adoption of this standard
did not have a material impact on the Company's financial position, results of
operations, or cash flows.
In March and April of 1998, respectively, the AcSEC 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.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 1996, Activeware Internet Corp. ("Activeware") and Dick
Hardt ("Hardt"), Plaintiffs, filed a claim against DDN and its subsidiary, 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 alleged that,
among other things, he signed one of the agreements against his will, certain
agreements were 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 failed to pay the Plaintiffs for
work performed. The Plaintiffs were 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 denied Plaintiff's claims, and in that
regard, in January 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 were 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.
On April 28, 1998, the Company and Plaintiffs agreed to settle this
matter, with the parties agreeing to the following: DDN to pay Dick Hardt the
sum of $55,000 Canadian (approximately $40,000 U.S.) all inclusive; DDN to pay
the costs of the mediator; Dick Hardt to transfer the 30,000 shares of DDN
common stock to DDN; DDN and hip to transfer the hip.com domain name to Dick
Hardt; DDN and hip to be released from any obligations to either Dick Hardt or
Activeware Internet Corp. pursuant to the Stock Purchase Agreement and
Amendment, Sub-Lease Agreement, Consulting Agreement, or Intellectual Property
Agreement; and, both parties to sign a mutual release dismissing the claim and
counterclaim without costs to either party.
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. On April 2, 1998, the Company received a judgment
against ACIS in the principal amount of $1,348,367.34. The Company is now in the
discovery stage and attempting to collect on this judgment.
11
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibits - none filed with this report
(b) The Registrant filed a Form 8-K with the Securities and Exchange
Commission on January 21, 1998, to report that its Transit Network Division was
closing the Providence, Rhode Island operation, and further, that the Transit
Network Division would no longer market its next-stop automated audio/visual
announcement system.
12
<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 15, 1998 By: /s/ Donald B. Scott, Jr.
------------------------------
Donald B. Scott, Jr., President
Date: May 15, 1998 By: /s/ Richard J. Boeglin
----------------------------
Richard J. Boeglin
Vice President, Finance & Operations
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 633
<SECURITIES> 0
<RECEIVABLES> 196
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 919
<PP&E> 1,690
<DEPRECIATION> 1,563
<TOTAL-ASSETS> 1,119
<CURRENT-LIABILITIES> 491
<BONDS> 275
0
0
<COMMON> 13,399
<OTHER-SE> (13,051)
<TOTAL-LIABILITY-AND-EQUITY> 1,119
<SALES> 211
<TOTAL-REVENUES> 211
<CGS> 57
<TOTAL-COSTS> 318
<OTHER-EXPENSES> (40)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (10)
<INCOME-PRETAX> (137)
<INCOME-TAX> 0
<INCOME-CONTINUING> (137)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (137)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
