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, 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 June 30, 2000, 2,284,597 shares of Common Stock and 1,840,000 Common Stock
Purchase Warrants were outstanding.
1
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INDEX
Page
PART I. FINANCIAL INFORMATION
1. Consolidated Financial Statements 3
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 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 12
Item 5. Other Information (a)
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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(a) These items are inapplicable or have a negative response and have
therefore been omitted.
2
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DIGITAL DATA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30,
December 31, 2000
1999 (Unaudited)
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 372 $ 277
Trade accounts receivable, net of allowances
for doubtful accounts of $8 56 56
Prepaid expenses and other current assets 3 3
Receivables from officer and director, net of reserves 81 85
------------ ------------
Total current assets 512 421
Equipment, net 28 21
Investments in equity securities (Note 3) 150 50
Other assets 2 2
------------- -------------
Total assets $ 692 $ 494
====== ======
Current liabilities
Accounts payable $ 49 $ 24
Accrued payroll and related 20 18
Unearned income 98 61
Other accrued liabilities 151 151
------------ ------------
Total current liabilities 318 254
Long-term debt and accrued interest 166 170
------------ ------------
Total liabilities 484 424
------------ ------------
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 13,418
Treasury stock, at cost, 30,000 shares (7) (7)
Unrealized gain (loss) on equity securities available for sale (Note 3) 90 (10)
Accumulated deficit (13,293) (13,331)
------------ ------------
Total stockholders' equity 208 70
------------ ------------
Total liabilities and stockholders' equity $ 692 $ 494
====== ======
</TABLE>
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DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, except per share information)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 2000 1999 2000
-------- --------- ---------- -------
<S> <C> <C> <C> <C>
Revenues $ 147 $ 143 $ 252 $ 286
--------- -------- --------- -------
Expenses
Direct operating costs 56 36 120 74
Salaries and related 79 84 157 164
Marketing, general and administrative 41 41 101 94
-------- --------- --------- -------
Total expenses 176 161 378 332
-------- --------- --------- -------
Other Income (Expense)
Interest expense (3) (2) (5) (4)
Interest income 5 6 21 12
Gain on merger termination settlement
(Note 3) - - 60 -
---------- ------- ---------- -------
Total other income, net 2 4 76 8
---------- ------- ---------- -------
Net loss $ (27) $ (14) $ (50) $ (38)
========= ======= ========== ==========
Net loss per share - basic and diluted $ (0.01) $ (0.01) $(0.02) $ (0.02)
======== ============ ======== ==========
Weighted average shares outstanding 2,284,597 2,284,597 2,284,597 2,284,597
========= ========= ========= =========
</TABLE>
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DIGITAL DATA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 2000
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (50) $ (38)
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 67 7
Gain on merger termination settlement (60) -
Decrease in accounts payable and accrued liabilities (55) (27)
Other 8 (37)
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Net cash used by operating activities (90) (95)
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CASH FLOWS FROM INVESTING ACTIVITIES
Payments received on notes receivable 24 -
Proceeds from terminated merger settlement 319 -
Advances on notes receivable (100) -
------------- -----------
Net cash provided by investing activities 243 -
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt principal payments (11) -
------------- -----------
Net cash used by financing activities (11) -
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Net increase (decrease) in cash and cash equivalents 142 (95)
CASH AND CASH EQUIVALENTS
Beginning of Period 151 372
------------- -----------
End of Period $ 293 $ 277
====== =====
</TABLE>
See accompanying notes to consolidated financial statements
5
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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.
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 six-month
period ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the year.
Note 2 Financial Condition, Liquidity and Going Concern
The Company incurred a net loss of $38,000 for the six months ended June 30,
2000. The Company incurred net losses of approximately $3 million in 1997,
$322,000 in 1998, and $57,000 in 1999, and continues to experience losses and
negative cash flows from operations. While losses from operations have decreased
significantly, the Company has not yet generated positive cash flows from
operations. In 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 conditions 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
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.
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")
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 $50,000 at June 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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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.
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
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 Trustee and the Company have agreed to a settlement in the
amount of $2,500, and the Trustee has filed a motion with the Court seeking
approval of this settlement. If the settlement is not approved, a trial is
tentatively scheduled for September 2000.
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 the Dally matter referred to above and 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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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 or Plan of Operations in the Company's Form 10-KSB for the year ended
December 31, 1999.
An additional factor that could materially affect future performance involves
the Company's contract with DART that is due to expire in October 2001. DART is
required to rebid the contract, and there is no guarantee that the Company will
be the successful bidder for the new contract.
--------------------
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
Although revenues for the three months ended June 30, 2000 decreased
$4,000 to $143,000 as compared to the prior year period, revenues increased 13%
from $252,000 to $286,000 during the six months ended June 30, 2000, as compared
to the prior year period, primarily due to generally increased demand for
transit advertising services during 2000.
Total expenses decreased from $378,000 to $332,000 during the six
months ended June 30, 2000, as compared to the prior year period. Direct costs
decreased from $120,000 to $74,000 primarily due to decreased depreciation
expense in 2000 as more equipment became fully depreciated. Salaries and related
increased 4% from $157,000 to $164,000, while marketing, general and
administrative expenses decreased from $101,000 to $94,000, due primarily to
less acquisition related activities compared to the prior year period. For the
three month period ended June 30, 2000, total expenses decreased from $176,000
to $161,000, primarily the result of decreased depreciation expense compared to
the prior year period.
8
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Other income, net decreased significantly from $76,000 to $8,000 for
the six months ended June 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 six months ended June 30,
2000 was $95,000, a $5,000 increase as compared to the $90,000 used during the
comparative prior year period. There were no sources or uses of cash relating to
investing or financing activities during 2000, as the Company has not disposed
of investments and continues to minimize capital expenditures.
The Transit Network Division is currently re-installing the Company's
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.
At June 30, 2000, the Company's principal current assets consisted
primarily of $277,000 of cash, most of which was invested in short-term,
interest-bearing investments with banks and other financial institutions, and
$56,000 of net accounts receivable. 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 $50,000 at June 30, 2000. The Company's total
liabilities of $424,000 consisted of $42,000 in accounts payable and accrued
payroll and related liabilities, $61,000 of unearned income, $151,000 in accrued
liabilities of discontinued operations, and $170,000 of long-term debt.
The Company incurred a net loss of $38,000 for the six months ended
June 30, 2000. The Company incurred net losses of approximately $3 million in
1997, $322,000 in 1998 and $57,000 in 1999. While losses from operations have
decreased significantly, the Company has not yet consistently generated positive
cash flows from operations. In 1998, the Company's 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.
9
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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 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 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
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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 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 recover certain payments made by Dally within 90 days of the January
1997 filing of its bankruptcy petition. Dally was one of The Transit Network
customers. The Complaint to Recover seeks $28,656 of payments allegedly made to
the Company. In April 2000 the Trustee filed a motion to compromise seeking
approval of a proposed settlement with the Company and other defendants. If
approved by the court, the Company would pay $2,500 to settle the matter. If the
settlement is not approved, a trial is tentatively scheduled for September 2000.
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.
11
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Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of the stockholders (the "Annual
Meeting") on June 28, 2000. Matters submitted to a vote of the Company's
stockholders and voting results were as follows:
(i) Stockholders elected James F. Biagi, Jr., Robert F. Hussey and Donald
B. Scott, Jr. as directors of the Company. Shares cast at the Annual
Meeting with respect to this matter included 1,769,277 shares voted in
favor of election of James F. Biagi, Jr., with 41,321 shares withheld;
1,769,277 shares voted in favor of election of Robert F. Hussey, with
41,321 shares withheld; and 1,767,111 shares voted in favor of Donald
B. Scott, Jr., with 43,487 shares withheld.
(ii) Stockholders ratified the appointment of BDO Seidman, LLP as the
Company's independent public accountants for the year 2000. Shares cast
at the Annual Meeting with respect to this matter included 1,804,237
shares voted in favor of appointment, with 6,061 shares voted against
and 300 abstaining.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
12
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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: August 14, 2000 By: /s/ Donald B. Scott, Jr.
------------------------------
Donald B. Scott, Jr., President
Date: August 14, 2000 By: /s/ Richard J. Boeglin
----------------------------
Richard J. Boeglin
Vice President, Finance & Operations
13
