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, 1999.
[ ] 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, 1999, 2,314,597 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 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
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 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
- ----------------------------------------------------------------------------
(a) These items are inapplicable or have a negative response and have therefore
been omitted.
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ---------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 151 $ 293
Trade accounts receivable, net of allowances
for doubtful accounts of $7 38 46
Prepaid expenses and other current assets 19 8
Notes receivable, net of reserves of $1,053 (Note 4) 27 103
--------- --------
Total current assets 235 450
Equipment, net 102 35
Investments in equity securities (Note 2) 264 463
Other assets (Note 2) 71 2
--------- --------
Total Assets $ 672 $ 950
========= ========
Current Liabilities
Accounts payable $ 36 $ 15
Accrued payroll and related 14 12
Current portion of long-term debt 13 2
Unearned income 68 36
Other accrued liabilities 152 152
--------- --------
Total current liabilities 283 217
Long-term debt and accrued interest, less current portion 159 163
--------- --------
Total liabilities 442 380
--------- --------
Commitments and contingencies (Note 5)
Stockholders' equity
Preferred stock, no par value, 1,000,000 shares authorized,
no shares issued or outstanding - -
Common stock, no par value, 10,000,000 shares authorized,
2,314,597 shares issued and outstanding 13,473 13,473
Treasury stock, at cost, 30,000 shares (7) (7)
Unrealized appreciation on equity securities available for sale (Note 2) - 390
Accumulated deficit (13,236) (13,286)
--------- --------
Total stockholders' equity 230 570
--------- --------
Total liabilities and stockholders' equity $ 672 $ 950
========= ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in Thousands, Except Per Share Data)
(Reclassified for Discontinued Operations - Note 1)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1999 1998 1999
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Revenues $ 153 $ 147 $ 288 $ 252
--------- -------- --------- -------
Expenses
Direct operating costs 36 56 80 120
Salaries and related 96 79 207 157
Marketing, general and administrative 77 40 129 94
Financing, legal and other consulting 19 1 74 7
-------- --------- --------- -------
Total expenses 228 176 490 378
-------- --------- --------- -------
Other Income (Expense)
Interest expense (2) (3) (4) (5)
Interest income 14 5 26 21
Gain on merger termination settlement (Note 3) - - - 60
---------- ------- --------- --------
Total other income, net 12 2 22 76
-------- --------- --------- -------
Loss from continuing operations (63) (27) (180) (50)
Loss from discontinued operations (14) - (34) -
--------- --------- ---------- -------
Net Loss $ (77) $ (27) $ (214) $ (50)
========= =========== ========== =======
Loss from continuing operations per share $ (0.03) $ (0.01) $ (0.08) $ (0.02)
Loss from discontinued operations per share - - (0.01) -
-------- --------- ------------- -------
Net Loss Per Share $ (0.03) $ (0.01) $ (0.09) $ (0.02)
======== ============ ========= ==========
Weighted Average Shares Outstanding 2,339,267 2,284,597 2,339,267 2,284,597
========= ========= ========= =========
</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,
1998 1999
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (214) $ (50)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 41 67
Gain on merger termination settlement - (60)
Other non-cash operating expenses (30) -
Increase in accounts receivable (58) (8)
(Decrease) increase in accounts payable and accrued liabilities 34 (55)
Other (9) 16
--------- ---------
Net cash used by operating activities (236) (90)
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments received on notes receivable 242 24
Proceeds from terminated merger settlement - 319
Advances on notes receivable - (100)
Purchases of equipment (105) -
Advances to acquisition target (150) -
--------- ---------
Net cash provided by investing activities (13) 243
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt principal payments (10) (11)
--------- ----------
Net cash used by financing activities (10) (11)
-------- ----------
Net (decrease) increase in cash and cash equivalents (259) 142
CASH AND CASH EQUIVALENTS
Beginning of Period 540 151
-------- ---------
End of Period $ 281 $ 293
======== =========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Common Stock Treasury Stock Appreciation on
--------------------- ----------------- Equity Securities Accumulated
Shares Amount Shares Amount Available for Sale Deficit Total
--------- -------- ------ ------ ------------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 2,314,597 $ 13,473 30,000 $ (7) $ - $ (13,236) $ 230
---
Components of Comprehensive Income
Net loss (50) (50)
Unrealized appreciation on equity
Securities available for sale 390 390
---
Total Comprehensive Income 340
--------- ------- ------- ------- --------------- ---------- -----
Balance at June 30, 1999 2,314,597 $ 13,473 30,000 $ (7) $ 390 $ (13,286) $ 570
========= ======== ========= ======== =============== =========== ======
</TABLE>
See accompanying notes to consolidated financial statements
6
<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
In September 1998, the Company disposed of its Internet-related businesses. The
accompanying statement of operations for the three months ended June 30, 1998
has been reclassified from that included in the Company's June 30, 1998
Quarterly Report on Form 10-QSB to present net operating results from
discontinued operations as a separate line item and, accordingly, amounts
relating to this business segment were removed from amounts previously reported
as revenues and expenses. There is no change in previously reported net loss as
a result of these reclassifications.
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 1998 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 interim
periods ended June 30, 1999 are not necessarily indicative of results that may
be expected for the year.
Note 2 Financial Condition, Liquidity and Going Concern
The Company incurred a net loss of $50,000 for the six months ended June 30,
1999, which included a gain on termination of merger settlement of $60,000. The
Company incurred net losses of approximately $2 million in 1996, $3 million in
1997 and $322,000 in 1998, and continues to experience losses and negative cash
flows from operations. In May 1998, the Company was notified that its securities
were delisted from the Nasdaq SmallCap Market as a result of non-compliance with
tangible net worth continued listing requirements. These are among conditions
which raise substantial doubt about the Company's ability to continue as a going
concern.
The Company has taken actions to reduce negative cash flows, including disposing
of portions of the business, such as the sale of the Internet services segment,
reducing general and administrative expenses, and minimizing capital
expenditures. The Company has pursued merger possibilities and continues to do
so. The ability of the Company to generate positive cash flows from operations
and net income, is dependent, among other things, on 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
these endeavors in the past, there can be no assurance that its efforts will be
successful in the future. These financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Note 3 Terminated Merger Settlement
In February 1999, the Company entered into a Settlement Agreement and Mutual
Release with Internet Sports Network, Inc. ("ISN") terminating the October 1998
Agreement and Plan of Merger between the parties. In connection with the
Settlement Agreement, the Company received approximately $320,000 cash and
delivered shares of ISN common stock to ISN such that the Company retained
ownership of 150,000 shares of ISN common Stock. The recorded value of the
475,000 ISN shares delivered to ISN pursuant to the Settlement Agreement of
$190,000 and costs incurred of $69,000 relating to the merger were removed from
investments in equity securities and other assets, respectively. Cash received
exceeded the recorded value of ISN related assets, exclusive of the remaining
recorded value of the retained shares, by $60,000 and is included in other
income in the accompanying consolidated statement of operations as gain on
settlement.
The Company's investment in 150,000 shares of ISN common stock (the "ISN Stock")
had a cost of $60,000 when purchased in mid-1998, which approximated its
estimated fair value during periods preceding the settlement. ISN stock is
included in investments in equity securities at its estimated fair value of
$450,000 at June 30, 1999. The increase in unrealized appreciation on these
available-for-sale equity securities is included as a separate component of
stockholders' equity.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 Notes Receivable from Related Party
Included in notes receivable at June 30, 1999 is $100,000 due from one of the
Company's directors pursuant to terms of an 8%, secured promissory note due
September 1999.
Note 5 Commitments and Contingencies
In 1997, the Company entered into a letter of intent with Advanced Communication
and Information Services ("ACIS") to acquire all of the issued and outstanding
capital stock of ACIS in exchange for DDN common shares. Pursuant to the letter
of intent, the Company forwarded ACIS $1,048,000 cash under terms of promissory
notes for working capital pending completion of the acquisition. Subsequently,
ACIS issued to the Company 1 million shares of ACIS common stock and withdrew
from the letter of intent. ACIS defaulted on the repayment of amounts owed the
Company and in 1997 the Company fully reserved the notes receivable. In April
1998, the Company received a judgment from the King County Superior Court in the
State of Washington against ACIS, ordering ACIS 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.
The Company has been advised that an action in damages for breach of settlement
agreement has been commenced against the Company in connection with the April
1998 settlement agreement with the former shareholder of hip Communications. As
part of that settlement agreement, the Company was required to transfer the
"hip.com" domain name to the former shareholder. The Company has not transferred
the domain name and no longer has registration rights to such domain name. The
Company has contacted the party which has such registration rights and is
attempting to reacquire the hip.com domain name, but to date has not been
successful in these efforts. Due to the early stage of this litigation and, as
no amounts were named in the action, the Company is unable to determine the
consequences, monetary or otherwise, which might result from the outcome of this
uncertainty.
In January 1999, the Company was named as one of approximately 150 defendants in
a lawsuit brought before the United States Bankruptcy Court for the Northern
District of Texas Dallas Division by the Chapter 7 Trustee for the estate of
Dally Advertising, Inc. ("Dally"). Through this action, the Trustee seeks to
avoid as preferences and to recover certain payments made by Dally within 90
days of the January 1997 filing of its bankruptcy petition. Dally was one of the
Dallas Transit Network customers. The Complaint to Recover seeks $28,656 of
payments allegedly made to the Company. The Company has responded to the Court
regarding this matter, among other things, denying the allegations of
preferential transfer, asserting its own affirmative defenses, and requesting
the Court to deny the relief requested by the Plaintiff. The Company is unable
to determine the consequences, monetary or otherwise, which might result from
the outcome of this uncertainty.
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. Company management currently believes that
resolution of such legal matters will not have a material adverse impact on the
Company's financial position, results of operations or cash flows.
8
<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 6 entitled Management's Discussion and
Analysis or Plan of Operations in the Company's Form 10-KSB for the year ended
December 31, 1998.
--------------------
The following discussion and analysis should be read in conjunction
with the Company's interim consolidated financial statements included elsewhere
in this Quarterly Report on Form 10-QSB and with the Company's consolidated
annual financial statements and management's discussion and analysis included in
the Company's Annual Report on Form 10-KSB.
In September 1998, the Company disposed of its Internet related
businesses. The accompanying statements of operations present the results of the
Internet services business segment operations as a one-line item net loss from
discontinued operations. The following management's discussion has been prepared
on the basis giving effect to this sale of the Internet services business
segment as discontinued operations consistent with the manner presented in the
accompanying financial statements.
Results of Operations
Revenues decreased from $288,000 to $252,000 during the six months
ended June 30, 1999, as compared to the prior year period, primarily due to
decreased demand for transit advertising services during this period.
Total expenses decreased from $490,000 to $378,000 during the six
months ended June 30, 1999, as compared to the prior year period. Direct costs
increased from $80,000 to $120,000 primarily due to increased depreciation
expense on equipment installed on light rail vehicles. Salaries and related
decreased 24%, or $50,000, as a result of elimination of certain executive
salaries. Marketing, general and administrative costs decreased $35,000, or 27%,
due primarily to reduced corporate related costs as a result of reduced merger
and investment related activity. Financing, legal and consulting expenses
decreased significantly from $74,000 to $7,000, primarily due to decreased
merger-related activities and one-time settlements incurred in the prior year
period.
9
<PAGE>
Other income, net increased from $22,000 to $76,000 primarily the
result of a $60,000 gain on termination of merger settlement as described in
Note 3 in the financial statements.
Financial Condition, Liquidity and Capital Resources
Net cash used by operating activities for the six months ended June 30,
1999 was $90,000, a significant improvement of $146,000 as compared to the
$236,000 used during the comparative prior year period. The improvement was
primarily the result of the lower net loss in 1999 compared to 1998. Net cash
provided by investing activities increased to $243,000 from $(13,000) due to the
receipt of $319,000 merger termination settlement proceeds offset by the
decrease in receipt of payments on notes receivable, such decrease due to a
declining investment in notes receivable, as well as an advance on notes
receivable as described in Note 4 in the financial statements.
At June 30, 1999, the Company's principal current assets consisted
primarily of $293,000 of cash, most of which was invested in short-term,
interest-bearing investments with banks and other financial institutions,
$103,000 of notes receivable, and $46,000 of net accounts receivable. The
Company's total liabilities of $380,000 consisted of $27,000 in accounts payable
and accrued payroll and related liabilities, $36,000 of unearned income,
$152,000 in accrued liabilities of discontinued operations, and $165,000 of
long-term debt, including current portion.
The Company's investment in 150,000 shares of ISN common stock is
included in investments in equity securities at its estimated fair value of
$450,000 at June 30, 1999. The increase in unrealized appreciation on these
available-for-sale securities is included as a separate component of
stockholders' equity.
The Company incurred a net loss of $50,000 for the six months ended
June 30, 1999, which included a gain on termination of merger settlement of
$60,000. The Company incurred net losses of approximately $2 million in 1996, $3
million in 1997 and $322,000 in 1998, and continues to experience losses and
negative cash flows from operations. In May 1998, the Company was notified that
its securities were delisted from the Nasdaq SmallCap Market as a result of
non-compliance with tangible net worth continued listing requirements. These are
among conditions which raise substantial doubt about the Company's ability to
continue as a going concern.
The Company has taken actions to reduce negative cash flows, including
disposing of portions of the business, reducing general and administrative
expenses, and minimizing capital expenditures. The ability of the Company to
generate positive cash flows from operations and net income, is dependent on,
among other things, overall market conditions, the receptiveness of the Dallas
market to the Company's new advertising product which the Company introduced in
the second quarter of 1999, 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 will be successful in the future. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
10
<PAGE>
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. Company management currently believes
that resolution of such legal maters will not have a material adverse impact on
the Company's financial position, results of operations or cash flows. See
"Legal Proceedings."
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In 1997, the Company entered into a letter of intent with Advanced
Communication and Information Services ("ACIS") to acquire all of the capital
stock of ACIS in exchange for DDN common shares. Pursuant to the letter of
intent, the Company forwarded ACIS $1,048,000 cash under terms of promissory
notes for working capital pending completion of the acquisition. Subsequently,
ACIS withdrew from the letter of intent and defaulted on repayment of amounts
owed. In April 1998, the Company received a judgment from the King County
Superior Court in the State of Washington against ACIS, ordering ACIS to pay the
Company the amount of the loan, plus interest, plus a $300,000 cancellation fee.
The Company continues to monitor various collection actions. There can be no
assurance that the Company will be successful in recovering any, all or part of
this judgment.
The Company has been advised that an action in damages for breach of
settlement agreement has been commenced against the Company in connection with
the April 1998 settlement agreement with the former shareholder of hip
Communications. As part of that settlement agreement, the Company was required
to transfer the "hip.com" domain name to the former shareholder. The Company has
not transferred the domain name and no longer has registration rights to such
domain name. The Company has contacted the party which has such registration
rights and is attempting to reacquire the hip.com domain name, but to date it
has not been successful in these efforts. The Company has suggested a list of
alternative but similar domain names it would transfer to Plaintiff, but as of
this date, no agreement has been reached. Due to the early stage of this
litigation and, as no amounts were named, the Company is unable to determine the
consequences, monetary or otherwise, which might result from the outcome of this
uncertainty.
In January 1999, the Company was named as one of approximately 150
defendants in a lawsuit brought before the United States Bankruptcy Court for
the Northern District of Texas Dallas Division by the Chapter 7 Trustee for the
estate of Dally Advertising, Inc. ("Dally"). Through this action, the Trustee
seeks to avoid as preferences and to recover certain payments made by Dally
within 90 days of the January 1997 filing of its bankruptcy petition. Dally was
one of the Dallas Transit Network customers. The Complaint to Recover seeks
$28,656 of payments allegedly made to the Company. The Company has responded to
the Court regarding this matter, among other things, denying the allegations of
preferential transfer, asserting its own affirmative defenses, and requesting
the Court to deny the relief requested by the Plaintiff. A trial date is
currently scheduled for September 1999. The Company is unable to determine the
consequences, monetary or otherwise, which might result from the outcome of this
uncertainty.
Item 5. Other Information
None.
12
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K - None.
13
<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 12, 1999 By: /s/ Donald B. Scott, Jr.
------------------------------
Donald B. Scott, Jr., President
Date: August 12, 1999 By: /s/ Richard J. Boeglin
----------------------------
Richard J. Boeglin
Vice President, Finance & Operations
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 293
<SECURITIES> 0
<RECEIVABLES> 149
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 450
<PP&E> 35
<DEPRECIATION> 0
<TOTAL-ASSETS> 950
<CURRENT-LIABILITIES> 217
<BONDS> 163
0
0
<COMMON> 13,473
<OTHER-SE> (13,286)
<TOTAL-LIABILITY-AND-EQUITY> 950
<SALES> 252
<TOTAL-REVENUES> 252
<CGS> 120
<TOTAL-COSTS> 378
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (16)
<INCOME-PRETAX> (50)
<INCOME-TAX> 0
<INCOME-CONTINUING> (50)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50)
<EPS-BASIC> (0.02)
<EPS-DILUTED> 0
</TABLE>
