UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000.
[ ] 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 November 10, 2000, 2,284,597 shares of Common Stock and 1,840,000 Common
Stock Purchase Warrants were outstanding.
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INDEX
Page
PART I. FINANCIAL INFORMATION
1. Consolidated Financial Statements 3
2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
3. Quantitative and Qualitative Disclosure about Market Risk 10
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 (a)
SIGNATURES 12
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(a)These items are inapplicable or have a negative response and have therefore
been omitted.
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DIGITAL DATA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(unaudited)
Current assets
<S> <C> <C>
Cash and cash equivalents $ 372 $ 215
Trade accounts receivable, net of allowances
for doubtful accounts of $8 56 41
Prepaid expenses and other current assets 3 18
Receivables from officer and director, net of reserves 81 88
------- ------
Total current assets 512 362
Equipment, net 28 34
Investments in equity securities (Note 3) 150 2
Other assets 2 2
------- ------
Total assets $ 692 $ 400
====== ======
Current liabilities
Accounts payable $ 49 $ 29
Accrued payroll and related 20 18
Unearned income 98 31
Other accrued liabilities 151 151
------- ------
Total current liabilities 318 229
Long-term debt and accrued interest 166 172
------- ------
Total liabilities 484 401
------- ------
Commitments and contingencies (Note 4)
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 13,418 13,422
Treasury stock, at cost, 30,000 shares (7) (7)
Unrealized gain (loss) on equity securities available for
sale(Note 3) 90 (58)
Accumulated deficit (13,293) (13,358)
-------- -------
Total stockholders' equity (deficit) 208 (1)
------ -------
Total liabilities and stockholders' equity $ 692 $ 400
====== ======
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, except per share information)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 2000 1999 2000
-------- --------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 183 $ 126 $ 435 $ 412
------- -------- --------- --------
Expenses
Direct operating costs 34 28 154 102
Salaries and related 88 82 245 246
Marketing, general and administrative 39 45 140 139
------- -------- -------- --------
Total expenses 161 155 539 487
------- -------- -------- --------
Other Income (Expense)
Interest expense (3) (2) (8) (5)
Interest income 1 4 22 15
Gain on merger termination settlement
(Note 3) - - 60 -
------- -------- -------- --------
Total other income, net (2) 2 74 10
------- -------- -------- --------
Net income (loss) $ 20 $ (27) $ (30) $ (65)
======= ======== ======== =========
Net loss per share - basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.03)
======== ========= ======== =========
Weighted average shares outstanding 2,284,597 2,284,597 2,284,597 2,284,597
========= ========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements
4
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DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss $ (30) $ (65)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 71 10
Gain on merger termination settlement (60) -
Decrease in accounts payable and accrued liabilities (11) (22)
Decrease in unearned income (62) (67)
Other 23 3
------- ------
Net cash used in operating activities (69) (141)
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Equipment - (16)
Payments received on notes receivable 27 -
Proceeds from terminated merger settlement 319 -
Advances on notes receivable (100) -
------ ------
Net cash used in investing activities 246 (16)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt principal payments (13) -
------ ------
Net cash used in financing activities (13) -
------ ------
Net increase (decrease) in cash and cash equivalents 164 (157)
CASH AND CASH EQUIVALENTS
Beginning of Period 151 372
------ ------
End of Period $ 315 $ 215
======
</TABLE>
See accompanying notes to consolidated financial statements
5
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DIGITAL DATA NETWORKS, INC.
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 the operation
of a "digital information network", a network of computerized electronics
message displays that delivers 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, operates a digital
information network in Dallas, Texas under the name The Transit Network.
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 1999 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 nine-month
period ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year.
Note 2 Financial Condition, Liquidity and Going Concern
While losses from operations have decreased significantly to $57,000 in 1999 and
$65,000 for the nine months ended September 30, 2000, the Company has not yet
generated positive cash flows from operations. The Company has incurred net
losses for several years, including approximately $3 million in 1997 and
$322,000 in 1998. It was in 1998 that the Company's securities were delisted
from the Nasdaq SmallCap Market as a result of non-compliance with tangible net
worth requirements. These conditions raised substantial doubt about the
Company's ability to continue as a going concern.
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 an 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",
since split one-for-six in 2000, now representing 25,000 post split shares) had
a cost of $60,000 when purchased in mid-1998, which approximated its estimated
fair value during period preceding the settlement. ISN Stock is included in
investments in equity securities at its estimated fair value of approximately
$2,000 at September 30, 2000, a decrease due to a decline in the market price of
ISN stock from $150,000 at December 31, 1999. The unrealized gain (loss) on
these available-for-sale securities is included as a separate component of
stockholders' equity.
6
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13
DIGITAL DATA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 Commitments and Contingencies
In April 1998, the Company settled litigation initiated in a lawsuit filed in
the Supreme Court of British Columbia, Canada against the Company in 1997 by the
former stockholder of hip Communications pertaining to the Company's 1996
acquisition of that company. Pursuant to terms of the settlement agreement, the
Company paid approximately $40,000 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 marketing, general and administrative costs
in the accompanying statement of operations. In 1999, an action in damages for
breach of settlement agreement was commenced against the Company. 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. The Company is also exploring
the viability of disputing the current ownership of the hip.com domain name
under the Internet Corporation for Assigned Names and Numbers Uniform Domain
Name Dispute Resolution Policy. 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 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 approximately $1.05 million cash under terms of promissory notes.
Subsequently, ACIS issued to the Company 1,000,000 shares of ACIS common stock
and withdrew from the letter of intent. ACIS defaulted on repayment of amounts
owed, and in 1998, the Company received a judgment from the King County Superior
Court in the State of Washington against ACIS in the principal amount of $1.35
million. Collection efforts with respect to this judgment have not resulted in
any recovery, nonetheless, the Company continues to monitor various collection
actions. There can be no assurance that the Company will recover any, all, or
part of this judgment. The entire amount of the receivable was written off
during 1997.
The Company has a contract to provide services with the Dallas Area Rapid
Transit authority ("DART") that includes a provision for a 4% royalty payment to
DART on certain gross advertising receipts. The agreement expires in October
2001 and DART is required to rebid the contract. There can be no assurance that
the Company will be the successful bidder for the new contract.
In 1999, the Company was named as a defendant in a lawsuit brought before a
United States Bankruptcy Court by the Trustee for the estate of Dally
Advertising, Inc., one of the Company's former customers, seeking to recover
certain payments made by the customer within 90 days of filing its 1997
bankruptcy petition. The Trustee and the Company subsequently agreed to a
settlement in the amount of $2,500, and in June 2000 the Court approved this
settlement.
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 other various legal proceedings will not have a material adverse
impact on the Company's financial position, results of operations or cash flows.
7
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DIGITAL DATA NETWORKS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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 of Financial Condition and Results 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 of Financial Condition and Results of Operations in the Company's Form
10-KSB for the year ended December 31, 1999.
--------------------
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.
Results of Operations
Revenues decreased from $183,000 to $126,000 for the three month period
ended September 30, 2000, due primarily to increased time spent developing a
market for a recently-introduced product, which resulted in less marketing and
sales efforts for existing products. The decline in revenues for this three
month period more than offset revenue increases during the first half of the
year, resulting in a revenue decrease of 5% from $435,000 to $412,000 for the
nine months ended September 30, 2000.
Total expenses decreased from $539,000 to $487,000 during the nine
months ended September 30, 2000, as compared to the prior year period. Direct
costs decreased from $154,000 to $102,000 primarily due to decreased
depreciation expense in 2000 as more equipment became fully depreciated.
Salaries and related increased slightly from $245,000 to $246,000, while
marketing, general and administrative expenses remained relatively unchanged,
decreasing from $140,000 to $139,000 compared to the prior year period. Total
expenses of $155,000 for the three months ended September 30, 2000 declined
slightly from $161,000 during the comparative prior year period.
<PAGE>
DIGITAL DATA NETWORKS, INC.
Results of Operations (continued)
Other income, net decreased significantly from $74,000 to $10,000 for
the nine months ended September 30, 2000, primarily the result of a $60,000 gain
on termination of merger settlement in the prior year period, described in Note
3 in the financial statements.
The Company continues to record a valuation allowance for the full
amount of deferred income taxes, which would otherwise be recorded for tax
benefits relating to operating losses, as realization of such deferred assets
cannot be determined to be more likely than not.
Financial Condition, Liquidity and Capital Resources
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."
Net cash used by operating activities for the nine months ended
September 30, 2000 was $141,000, a $72,000 increase as compared to the $69,000
used during the comparative prior year period. Most of the year-to-date increase
occurred during the three months ended September 30, 2000 resulting primarily
from the increase in net loss. Cash used by financing included $16,000 for
capital expenditures during the three months ended September 30, 2000. There
were no sources or uses of cash relating to financing activities during 2000, as
the Company has not disposed of investments and continues to minimize capital
expenditures.
The Company is currently re-installing its information system on DART
buses that are periodically being added to DART's fleet to replace older buses.
In addition, the Company will soon be incurring other capital costs relating to
the installation of its Marquee Headliner advertising product. The Company is
funding the re-installation of its information system and the installation of
its Marquee Headliner product from existing cash and new product revenues. The
Company's contract with DART is due to expire in October 2001 and DART is
required to rebid the contract. There can be no assurance that the Company will
be the successful bidder for the new contract.
At September 30, 2000, the Company's principal current assets consisted
primarily of $215,000 of cash, most of which was invested in short-term,
interest-bearing investments with banks and other financial institutions, and
$41,000 of net accounts receivable. The Company's investment in ISN common stock
is included in investments in equity securities at its estimated fair value of
$2,000 at September 30, 2000. The Company's total liabilities of $401,000
consisted of $47,000 in accounts payable and accrued payroll and related
liabilities, $31,000 of
9
<PAGE>
unearned income, $151,000 in accrued liabilities of discontinued operations, and
$172,000 of long-term debt.
DIGITAL DATA NETWORKS, INC.
Financial Condition, Liquidity and Capital Resources (continued)
The Company has incurred net losses for several years, including
approximately $3 million in 1997 and $322,000 in 1998. It was in 1998 that the
Company's securities were delisted from the Nasdaq SmallCap Market as a result
of non-compliance with tangible net worth requirements. These conditions raised
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. While losses from operations have decreased significantly to
$57,000 in 1999 and $65,000 for the nine months ended September 30, 2000, the
Company has not yet generated positive cash flows from operations. 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 yet-to-be-determined
receptiveness by the advertising community to the Company's recently introduced
advertising products, 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.
Item 3 Quantitative and Qualitative Disclosure about Market Risk
The Company believes that it does not have any material exposure to
interest or commodity risks. The Company does not own any derivative instruments
and does not engage in any hedging transactions.
10
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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.
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. The Company is also exploring the viability
of disputing the current ownership of the hip.com domain name under the Internet
Corporation for Assigned Names and Numbers Uniform Domain Name Dispute
Resolution Policy. 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 1999, the Company was named as a defendant in a lawsuit brought
before a United States Bankruptcy Court by the Trustee for the estate of Dally
Advertising, Inc., one of the Company's former customers, seeking to recover
certain payments made by the customer within 90 days of filing its 1997
bankruptcy petition. The Trustee and the Company subsequently agreed to a
settlement in the amount of $2,500, and in June 2000 the Court approved this
settlement.
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.
Item 6. Exhibits and Reports on Form 8-K
None.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Digital Data Networks, Inc.
(Registrant)
Date: November 14, 2000 By: /s/ Donald B. Scott, Jr.
------------------------------
Donald B. Scott, Jr., President
Date: November 14, 2000 By: /s/ Richard J. Boeglin
----------------------------
Richard J. Boeglin
Vice President, Finance & Operations
12
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