UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
Commission File Number 0-15224
ADVANCE DISPLAY TECHNOLOGIES, INC.
---------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0969445
---------------------- -------------------------
(State of incorporation) (I.R.S. Identification No.)
1251 S. Huron, Unit C, Denver, Colorado 80223
--------------------------------------- --------
(Address of principle executive offices) (Zip Code)
(303) 733-5339
-------------------------------------------------
(Registrant's telephone number including area code)
Securities registered under Section 12 (b) of the Exchange Act:
None
Securities registered under Section 12 (g) of the Exchange Act:
Title of Class
----------------------------
Common Stock $.001 par value
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [ ]
The issuer reported revenues and interest income of $32,621 for the fiscal
year ended June 30, 1998.
The aggregate market value of the 7,011,879 shares of voting stock held by
non-affiliates of the registrant, computed as the average of the closing bid and
asked prices as of October 5, 1998 was $390,036. As of October 5, 1998 the
registrant had outstanding 23,774,275 shares of Common Stock.
<PAGE>
Table of Contents
Page
Part I.
Item 1. Business...................................................... 1
Item 2. Description of Property....................................... 7
Item 3. Legal Proceedings..............................................8
Item 4. Submission of Matters to a Vote of Security Holders............9
Part II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................9
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................10
Item 7. Financial Statements and Supplementary Data...................15
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................15
Part III.
Item 9. Directors and Executive Officers of the Registrant and
Compliance with Section 16(a) of the Exchange Act ........16
Item 10. Executive Compensation.........................................19
Item 11. Security Ownership of Certain Beneficial Owners
and Management...........................................22
Item 12. Certain Relationships and Related Transactions.................24
Item 13. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...............................................26
ii
<PAGE>
Special Note Regarding Forward Looking Statements
Certain statements contained herein constitute "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward looking statements include, without limitation, statements regarding
Advance Display Technologies, Inc.'s ("ADTI" or the "Company") anticipated
marketing and production, need for working capital, future revenues and results
of operations. Factors that could cause actual results to differ materially
include, among others, the following: future economic conditions, the ability of
the Company to obtain sufficient capital, to further develop and improve the
manufacturing process for its product, to manufacture its product at a cost that
would result in profitable sales, to sell a sufficient number of screens at a
sufficient price to result in positive operating margins, to attract and retain
qualified management and other personnel, and generally to successfully execute
a business plan that will take the Company from a development stage entity to a
profitable operating company. Many of these factors are outside the control of
the Company. Investors are cautioned not to put undue reliance on forward
looking statements. Except as otherwise required by rules of the Securities and
Exchange Commission, the Company disclaims any intent or obligation to update
publicly these forward looking statements, whether as a result of new
information, future events or otherwise.
Statements in this Report are qualified in their entirety by reference to
contracts, agreements, and other exhibits filed or incorporated with this Report
(See Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K).
---------------------------------------------------------------
iii
<PAGE>
PART I
Item 1. BUSINESS
Introduction
- ------------
Advance Display Technologies, Inc. ("ADTI" or the "Company") is a
development stage company, incorporated under the laws of the State of Colorado
on October 7, 1983. ADTI was formed to engage in the business of manufacturing
full color display video screen systems. ADTI completed its initial public
offering in April 1986, selling five million shares of its Common Stock for net
proceeds of $4.2 million. Since that date, ADTI's Common Stock has been split
such that each 50 shares previously outstanding are now equal to one share. ADTI
has not received material revenues from the sale of its products, as its
activities since inception have been primarily focused on research and
development of its technology and raising capital. The Common Stock of ADTI is
currently traded over the counter and is quoted on the electronic bulletin board
under the symbol, "ADTI".
In December, 1993, ADTI and individual investors organized a limited
partnership to obtain capital and to continue development of the fiber optic
video technology and other related technology. Display Optics, Ltd. ("DOL" or
the "Partnership") was a Colorado limited partnership of which ADTI served as a
general partner and Display Group, LLC ("Display Group") acted as the managing
general partner. Display Group was formed by the limited partners of the
Partnership and other individuals and entities to manage and partially fund
operations of the Partnership. Display Group had no equity interest in DOL as
all interests of Display Group in DOL were in the form of convertible debt. ADTI
transferred its technology, including patent rights and a non-exclusive license
agreement to the Partnership in exchange for a then-majority interest in the
Partnership. ADTI's majority interest was subject to a reduction upon conversion
of rights granted to additional investors.
Effective May 21, 1997, the Company experienced a change in control as a
result of an exchange transaction (the "Exchange") in which the operations of
DOL and Display Group were consolidated with those of the Company. The Company
acquired DOL and Display Group in the Exchange for issuance of Common and
Preferred Stock in ADTI. The Partnership and Display Group became wholly-owned
subsidiaries of the Company. The Partnership was subsequently dissolved
effective December 31, 1997. The investors participating in the Exchange
transferred assets including Series B Preferred Stock of the Company, equity
interests in DOL and Display Group, together with promissory notes representing
loans previously made to such entities, in exchange for an aggregate direct
interest in the Company equal to approximately eighty-two percent (82%) of the
Company's then issued and outstanding Common Stock, as well as shares of a newly
created class of Series C Preferred Stock. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations", below) The Exchange
was designed to simplify administration of the Company's affairs and public
reporting to its shareholders and the Securities and Exchange Commission.
1
<PAGE>
The Product
-----------
The Company's product under development (the "FiberVision(TM)Screen" or
"Screen") uses a projection light source to send images through a bundle of
optical fibers which are evenly disbursed in a matrix pattern forming the
viewable screen face. This screen is designed so that the image input by the
projector is enlarged more than thirty-six (36) times on the face of the screen.
Possible applications include video display systems for stadiums and arenas,
point-of-purchase advertising in such markets as shopping malls, department
stores and supermarkets, as well as providing information and advertising in
such locations as airports, trade shows, race tracks and video billboards.
The Screen is a passive image transfer and magnification device. The Screen
is currently constructed by assembling a multitude of screen modules to form a
screen of virtually any size. For example, a 9' x 12' screen is composed of
modules which collectively may contain up to 500,000 fiber optic strands, each
representing a picture element ("pixel"). The number of pixels per module can be
changed by simply changing the space between fibers, by adding or subtracting a
number of fibers or by using fibers of various diameters to obtain a specific
resolution.
The quality of a video image depends upon two key factors, resolution and
contrast ratio. Resolution is the number of dots or pixels which form the
picture and create the resolution of a screen. The Company's Screen may contain
up to twenty times the number of pixels per square area as competitive large
screen displays. Contrast ratio is the measurable difference between pixels that
are "on" (white) and pixels that are "off" (black). Contrast also depends upon
the amount of ambient light reflected back to the viewer's eyes from the screen
surface. Since the Screen surface is flat black in appearance, very little
ambient light is reflected, resulting in a greater contrast ratio.
Management believes that the Company's future Screen technology, if
successfully developed, will possess unique features when compared to other
large screen display technologies. One of the features of the Screen is a
viewing angle of up to 170 degrees, both horizontally and vertically. Excluding
the projection light source, the Screen itself has no electrical or moving parts
which will wear out or need replacement. Therefore, replacement of the Screen
itself is generally not necessary in permanent installations. Unlike typical
front and rear screen projection technology, the Screen's relatively small input
matrix significantly reduces the image "throw distance" thereby improving image
quality.
The Screens are less costly to produce than some competitive systems due to
the simplicity of the FiberVision design as compared to the more complex, and
expensive components and wiring of competitive systems. The Screen itself is a
"passive" display system and contains no electrical components or moving parts.
The electrical components of a Screen are limited to projection system
technologies.
2
<PAGE>
Current Developments
- --------------------
Management efforts during the fiscal year ended June 30, 1998 were
primarily focused on raising additional capital and refining and redesigning the
product and its method of manufacture. In an effort to eliminate certain
deficiencies related to the screen surface and improve the overall quality of
the system, the Company has investigated new design configurations and
investigated alternative manufacturing processes for building the Screen.
The Company has also determined that a projector substantially brighter and
possessing a better cost to performance ratio than those commercially available
today is needed to provide adequate illumination for the successful marketing of
its Screen. Toward that end, the Company has placed illumination, projection,
and electrical engineering specialists under contract to design and develop an
adequately bright projection system for use with the Screen. (See Research and
Development, below.) As of the date of this report, no definitive solution to
this issue has been reached and there can be no assurance that these specialists
will be successful in this endeavor. If these efforts are not successful, the
ability of the Company to raise additional capital to continue operations will
be significantly hindered and the Company may be forced to discontinue
operations.
Management Changes. During the fiscal year ended June 30, 1998 and in
connection with the Exchange, ADTI increased its board of directors from three
(3) to seven (7) members. Of these seven members, five subsequently resigned and
three new members were appointed as their replacements which leaves the Board
currently with five members. Effective September 11, 1998, Kenneth P. Warner
resigned as President and Chief Executive Officer and Matthew W. Shankle was
appointed President. (See Part III, Item 9. Directors, Executives, Officers,
Promoters and Control Persons of the Registrant; Compliance with Section 16(a)
of the Exchange Act).
Manufacturing
-------------
The Company has in the past developed and patented a semi-automated
manufacturing system for production of the current Screen. This system
automatically aligned the optical fibers allowing the fiber optics and plastic
spacers to be bonded into screen modules These screen modules were then
assembled in rows and columns to create the Screen's front faceplate. This
manufacturing and assembly process was performed by the Company.
The Company has investigated alternatives to the overall design of the
Screen in order to improve perceived image quality and also to prepare the
Screen technology for more fully automated production. Further development of
the screen and commencement of manufacturing operations has been placed on hold
pending the development of an adequately bright projection system. ("See
"Current Developments", above)
Manufacturing has not been a material part of the business to date.
However, the Company manufactured a 9'x12' screen which was installed at the
National Western Event Center in Denver Colorado during fiscal 1997 and an
3
<PAGE>
additional 7' x 9' Screen in August 1997. Screen modules were manufactured by
Company employees. The Screen's structural frame construction was contracted to
a third party. Final assembly and testing of the Screen was also completed by
Company employees.
Raw Materials
- -------------
Procurement of raw materials has not been a significant factor in the
Company's operations due to the early stages of manufacturing in which the
Company is engaged. Raw materials required to produce the Screen consist
primarily of optical fibers, common plastics and metal materials. The Company
currently obtains its fibers from Mitsubishi Rayon of Japan. The Company is
aware of two additional fiber suppliers with comparable quality and pricing.
Marketing
- ---------
The Company has concentrated its immediate marketing efforts to sell
products in the large screen market. In this market, the Company has initially
targeted sports facilities, convention and transportation centers, casinos,
users of message boards, and users of signage for advertising and information
applications. The Company has not been aggressively marketing its Screens since
January 1998 when the Company began investigating alternatives to the overall
design of the Screen and its manufacturing process. Upon successful completion,
the Company will renew its marketing efforts in the large screen market. The
Company will also target the audio visual rental display market for video
reinforcement at concerts and other special events. The Company also plans to
investigate the small screen video display market in the future.
The Company has made only one commercial sale of the Screen since 1986 due
to multiple factors. Such factors include the lack of cost effective projection
systems, the working capital necessary to aggressively market its products and
certain deficiencies relating to the Screen surface. Less than ideal overall
quality of the Screen has been primarily due to the number of manual vs.
automated processes that have been employed during the Company's limited
manufacturing history. However, the quality of the Screen as produced is
adequate to utilize as a demonstration unit for limited marketing purposes and
may also be adequate to be sold for some applications. Nevertheless, it is the
Company's goal to address and resolve these limiting factors before aggressively
marketing its Screens.
During the fiscal year ended June 30, 1998, the Company completed a current
marketing study and a preliminary marketing plan. The marketing study was
performed by BBC Research & Consulting of Denver, Colorado. The preliminary
marketing plan was assembled by marketing consultants and management. As the
product redesign effort and automation of the manufacturing process are more
fully developed, ADTI may expand its marketing efforts to further explore new
and existing markets. However, there can be no assurance that sufficient capital
will be obtained to undertake these activities or that the new product design or
manufacturing process will be significantly improved.
4
<PAGE>
Competition
- -----------
Fiber Optic Systems: Management is not aware of any other products on the
market which are based on the same technology as the Screens. However, InWave,
Inc. of Eugene, Oregon also manufactures a fiber optic display screen. The
Company believes that InWave is currently selling its product for advertising
applications. The fiber optic display sold by InWave has a lower resolution and
a narrower viewing angle than the FiberVision product and it is manufactured
using a significantly different method.
Light Bulb or CRT Systems: Several companies, including Sony, Panasonic,
Toshiba, and Mitsubishi, manufacture large video screens which are based on
light bulb or CRT technology. These systems are competitive with the Screen and
currently represent the majority of the large screen market. In the opinion of
management, the drawbacks of such systems in comparison with the Screen are
lower resolution, higher maintenance costs, higher consumption of electricity,
and higher purchase price.
Projection Systems: Front and rear screen projection systems are currently
useful only in controlled ambient light environments. Limited viewing angle, low
contrast ratio, and need for a long throw distance are drawbacks to front and
rear screen projection systems. However, these projection systems represent a
majority of the market in the video and display market segments consisting of
conference rooms, schools, sports bars, and casinos.
Videowalls: Videowalls are assembled using multiple rear screen projection
television systems coupled together in rows and columns. Videowalls are mainly
used for sports events, concerts, trade shows, conventions and other special
events for information and amusement. Limitations of this technology include a
limited viewing angle, visible seams, non-uniform color and brightness, lack of
contrast ratio, and lack of necessary brightness for outdoor use.
LED Systems: Full color LED matrix displays represent a major new
competitive challenge for the Screen. Although the Screen has some unique
advantages over LED technology, the LED displays are being marketed by major
electronics manufacturers, including Sony, Mitsubishi and Panasonic.
In summary, the Company is subject to active competition from various
companies in the video display industry. Most of these companies have
substantially greater financial and human resources and production capabilities
than those of the Company. These competitors have more well-established products
and brand names in the market. The Company is at a substantial competitive
disadvantage because of the new technology upon which its products are based and
the limited track record for those products.
5
<PAGE>
Research and Development
- ------------------------
During the fiscal year ended June 30, 1998, the Company continued efforts
to eliminate certain deficiencies related to the screen surface and improve the
overall quality of the system. The Company has investigated new design
configurations and investigated alternative manufacturing processes for building
the Screen.
The Company has also determined that a projector substantially brighter and
possessing a better cost to performance ratio than those commercially available
today is needed to provide adequate illumination for the successful marketing of
its Screen. The Company has placed illumination, projection, and electrical
engineering specialists under contract in an effort to design and develop an
adequately bright projection system for use with the Screen.
Approximately $364,000 was spent on research and development by the Company
during the fiscal year ended June 30, 1998.
Proprietary Rights
- ------------------
The Company's product is predicated on a proprietary fiber optic display
module with coherently ordered fibers which can be designed and configured in a
variety of sizes, shapes and resolution to provide large display screen
products. Since its inception, the Company has been issued various patents
covering its technology, products, components, assembly methods and processes,
primarily relating to the fiber optic module. The first patent for the Screen
and manufacturing method for the Screen was filed in February 1984 and
subsequently issued in March, 1987. The Company acquired this patent and all
technology, processes, formula and know how, that relate directly or indirectly
to fiber optics display technology from the original holder, in exchange for a
limited profit interest in the Company. However, it is Management=s belief that
this profit interest has been relinquished based upon the review of the original
assignment and other documents executed with the original patent holder.
The Company has subsequently been granted or assigned five additional
patents covering the design and manufacturing process for the Screen. One of the
additional patents which was considered by management to be non-essential has
expired. The Company has an additional patent pending with the U.S. Patent and
Trademark Office.
During the fiscal year ended June 30, 1998, the Company investigated
alternative designs and manufacturing methods for the Screens. Based on these
developments, the Company does not expect to generate significant future
revenues from the use of intellectual property contained in its current patents.
Accordingly, the Company has written off capitalized costs associated with these
patents. However, the Company intends to hold and maintain these patents.
6
<PAGE>
The Company intends to protect its intellectual property through trade
secrets and will also file for new patents on proprietary developments as
appropriate. The Company believes intellectual property to be material to its
business objectives and seeks to protect, develop and maintain its technology
for the design and manufacturing of Screens in the strictest confidence.
Employees
- ---------
As of September 30, 1998, ADTI employed two full-time employees, who
conducted research and development and administrative functions. The Company may
employ additional staff as further development or manufacturing requirements
dictate and working capital permits. The Company has also placed illumination,
projection, and electrical engineering specialists under contract in an effort
to design and develop an adequately bright projection system for use with the
Screen. The Company also retains various consultants on a contract basis as
needed for management, legal and accounting services.
Item 2. DESCRIPTION OF PROPERTY
ADTI currently occupies office, R & D and manufacturing space at 1251 South
Huron, Units A, B and C, Denver, Colorado 80223. The facility has a total of
approximately 6,300 square feet at a current rental cost of $3,469 per month. Of
the total space, approximately 40 percent is office space and 60 percent is R &
D and manufacturing area. The Company leases the facility pursuant to a three
year lease expiring June 30, 2001. The Company may terminate the lease prior to
its expiration by providing the landlord with notice to vacate two months prior
and paying a penalty equal to two monthly lease payments. Management deems the
current space to be adequate for its present operations, however, as working
capital permits and operations dictate, the Company may consider additional
space in the future.
7
<PAGE>
Item 3. LEGAL PROCEEDINGS
DISPLAY GROUP, LLC vs. AMERICAN CONSOLIDATED GROWTH CORPORATION.
- ----------------------------------------------------------------
This civil action involved ownership of Common Stock of ADTI. Plaintiff
Display Group, LLC, a subsidiary of the Company, filed a civil action dated July
19, 1996 against American Consolidated Growth Corporation ("ACGC") and AGT
Sports, Inc. in the Arapahoe County District Court, Civil Action No. 96-CV1560,
seeking ownership of approximately 1,400,000 shares of Common Stock of ADTI
pursuant to a security interest owned by Display Group. That security interest
was acquired from the Resolution Trust Corporation ("RTC") pursuant to a public
sale. This civil action was terminated concurrently with the suit discussed
below.
DISPLAY GROUP, LLC vs CORPORATE PARTNERS, INC. and JEFFREY S. ROBINSON
- ----------------------------------------------------------------------
This civil action arose from the same loan package acquired by Display
Group, LLC from the RTC that is described above regarding the claim on the
collateral against American Consolidated Growth Corporation. Plaintiff Display
Group, LLC filed a civil action against Corporate Partners, Inc. ("CPI") and
Jeffrey S. Robinson in the District Court of Lubbock County, Texas, the 140th
Judicial District, Civil Action No. 96-557024. This civil action sought judgment
on a promissory note dated September 19, 1990 (the "Note") and against Jeffrey
Robinson under a Guarantee and Confirmation of Guarantee of that Note.
On August 17, 1998, the Company executed an agreement effective August 10,
1998 (the "Settlement Agreement") in settlement of both matters. In connection
with the Settlement Agreement, CPI and Robinson paid the Company $175,000 cash
and transferred and assigned to the Company a minimum of 1,402,157 shares of
ADTI Common Stock. Prior to the settlement, a portion of this Common Stock was
held by the registry of the court pending completion of trial on the merits of
the case. CPI, Robinson and/or ACGC have also agreed to transfer any additional
shares of ADTI Common Stock owned by any of them and which was not transferred
on the date of closing. The ADTI Common Stock acquired in the settlement was
returned to the authorized but unissued stock of ADTI. The cash received in
settlement of the litigation was used as working capital.
Also as part of the settlement, the parties executed mutual releases and
covenants not to sue for any claims which were or could have been the subject of
the litigation and which existed from the beginning of time to the settlement
date.
Neither the Company, nor any officers or directors in their capacities as
such, are involved in any matters of material litigation as of the date of
filing this report.
8
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders during the fourth
quarter of ADTI's fiscal year.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table shows the range of high and low bids for ADTI's Common
Stock for the last two fiscal years. Since completion of its public offering in
1986, ADTI 's securities have traded over the counter and the Common Stock is
currently quoted on the electronic bulletin board maintained by the NASD and is
listed in the pink sheets maintained by members of the NASD and published by the
National Quotation Bureau. Trading in the Common Stock of ADTI is very limited
at present. The quotations represent prices between dealers as shown on the
electronic bulletin board, do not include retail markup, markdown or
commissions, and may not necessarily represent actual transactions.
Fiscal Quarter Ended High Low
---- ---
1997
September 30, 1996 $0.1250 $0.0625
December 31, 1996 .0625 .0625
March 31, 1997 .2500 .0313
June 30, 1997 .2500 .1250
1998
September 30, 1997 $0.3125 $.0625
December 31, 1997 .2500 .1875
March 31, 1998 .2188 .1563
June 30, 1998 .2200 .1875
As of September 30, 1998 there were approximately 1,740 record holders of
ADTI's Common Stock. No dividends have been paid with respect to ADTI's Common
Stock and ADTI has no present plans to pay dividends in the foreseeable future.
9
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Special Note Regarding Forward Looking Statements
Certain statements contained herein constitute "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. (See
page iii of this report.)
General
- -------
During December 1993, the Company and other individual investors organized
a limited partnership, Display Optics, Ltd. (the "Partnership" or "DOL"), to
obtain capital and to continue development of the fiber optic video technology.
The Company acted as a general partner and the Partnership was managed by
Display Group, LLC. Display Group was formed by the limited partners of the
Partnership and other individuals and entities to manage and partially fund
operations of the Partnership.
The Company conducted substantially all of its business through the
Partnership until the completion of the Exchange effective May 21, 1997 (see
below). Based on an analysis of the Partnership Agreement and generally accepted
accounting principles, a research and development arrangement existed between
the Partnership and the Company which required ADTI to record the expenses
incurred by the Partnership as a liability.
Effective May 21, 1997, the Company acquired the Partnership and Display
Group (the "Exchange") in which the operations of the Partnership and Display
Group were consolidated with those of the Company. The Company issued 17,509,868
shares of Common Stock and 1,843,900 shares of a newly created class of Series C
Preferred Stock in exchange for equity securities and convertible notes
originally acquired by a group of investors. (See "The Exchange" under Item 1.
Business, above) The Exchange resulted in those investors acquiring in the
aggregate a direct interest in Common Stock of the Company equal to
approximately eighty two percent (82%) of the Company's then issued and
outstanding Common Stock.
The Exchange was accounted for using the purchase method of accounting. As
the former members of Display Group acquired a majority of the Company's Common
Stock, for financial statement reporting purposes, the Exchange was treated as a
reverse acquisition whereby Display Group was considered the acquiring entity.
Therefore, the financial statements for periods prior to May 31, 1997 have been
restated to reflect only the results of operations of Display Group. Subsequent
to May 31, 1997, the financial statements reflect the combined operations of the
Company, DOL and Display Group. Effective December 31, 1997, DOL was dissolved.
10
<PAGE>
Results of Operations
- ---------------------
For the fiscal year ended June 30, 1998, the Company reported a net loss of
($2,971,929) as compared to ($2,718,839) for fiscal 1997. The loss in 1998
includes adjustments to interest expense of approximately $1,014,000,
compensation expense of approximately $214,000 and a write-down of intangibles
of $451,492. These adjustments were all non-cash in nature, required pursuant to
generally accepted accounting principles and are more fully described below.
Excluding these three items, the Company would have reported a net loss of
$1,292,379 for the fiscal year ended June 30, 1998. During fiscal 1997, the
Company recorded the research and development (R&D) write down of $2,536,494 in
connection with the Exchange. This amount represents the excess of the purchase
price over the net liabilities acquired which was expensed in that fiscal year
due to the purchase of incomplete research and development.
The Company reported total revenue and interest income of $32,621 and
$97,755 for the fiscal years ended June 30, 1998 and 1997, respectively. The
1998 revenue consisted primarily of consulting fees received in connection with
the Service Agreement between the Company and Toshiba Lighting and Technology
Company ("TLT") whereby TLT paid the Company $5,000 per month for six months in
consideration of market research information. The 1997 revenue consisted
entirely of interest income from loans made by Display Group to the Partnership.
Management does not anticipate that the Company will receive revenue until such
time as it completes development of its product.
The Company reported no revenue from the sale of its product for the fiscal
year ended June 30, 1998. Management believes the lack of sales of products has
been attributed to the inadequacies or cost inefficiencies of projection systems
together with certain deficiencies relating to the screen surface. There was one
sale of the Company's product for $110,000 and other revenues received of
$22,000 (through DOL) during the fiscal year ended June 30, 1997 which are not
reported as revenues in the Company's financial statements due the to reverse
acquisition. The Company manufactured the one screen it sold internally and
installed this 9' x 12' fiber optic screen at the National Western Event Center
in Denver, Colorado. This installation represents the first sale of the
Company's product since the late 1980's.
The Company reported general and administrative expenses of $1,103,730 and
$134,102 for the fiscal years ended June 30, 1998 and 1997, respectively. These
increases in 1998 from amounts reported in 1997 were primarily due to the
inclusion of operational activity of the combined entities for 1998 compared to
the restatement of the financial statements reporting only Display Group
activity through May 31, 1997 for 1997. This increase was also due to additional
compensation expense reported in fiscal 1998 of approximately $214,000 due to
grants of stock options in fiscal 1998 at exercise prices below the quoted price
of the Company's common stock on the grant dates. However, the Company believes
that the exercise price more closely reflects the actual fair market value of
the Company's common stock on the grant dates.
During the fiscal year ended June 30, 1998, the Company investigated
alternative designs and manufacturing methods for the Screens. Based on these
developments, the Company does not expect to generate significant future
11
<PAGE>
revenues from the use of intellectual property contained in its current patents.
Accordingly, the Company has written off capitalized costs of $451,492
associated with these patents.
Research and development costs decreased from $2,544,940 for the year ended
June 30, 1997 to $364,026 for the year ended June 30, 1998. This decrease is
primarily due to the R&D write down in the year ended June 30, 1997 in
connection with the Exchange in which the Company acquired incomplete research
and development. Research and development costs of Display Optics and the
Company for the fiscal year ended June 30, 1997, prior to and immediately
following the Exchange totaled approximately $130,000. In 1998, R&D costs were
primarily expended on the investigation of alternative design and manufacturing
methods for its screen. As a result of this process, the Company determined that
a projector substantially brighter and possessing a better cost to performance
ratio than those commercially available today is needed to provide adequate
illumination for the successful marketing of its Screen. The Company has placed
illumination, projection, and electrical engineering specialists under contract
to design and develop an adequately bright projection system for use with the
Screen. Accordingly, the Company expects to incur additional R&D costs in the
fiscal year ending June 30, 1999.
The Company reported interest income of $97,755 for the fiscal year ended
June 30, 1997 which was a result of funds advanced from Display Group to DOL.
Pursuant to the Exchange, Display Group and DOL became wholly owned subsidiaries
of the Company, therefor, there were no such advances and only a nominal amount
of interest income reported for the fiscal year ended June 30, 1998. Interest
expense increased to $1,085,302 for 1998 from $137,522 for 1997 primarily due to
an additional charge to interest expense in fiscal 1998 of approximately
$1,014,000. This charge was the result of immediately convertible debt that was
issued at a conversion price below the quoted price of the Company's Common
Stock. Otherwise, interest expense would have decreased to $71,368 in the fiscal
year ended June 30, 1998 from $137,552 for the same fiscal period of the prior
year primarily due to a decrease in funds advanced and outstanding from outside
investors for the fiscal year ended June 30, 1998.
Liquidity and Capital Resources
- -------------------------------
Due to significant costs associated with development and marketing the
Company's products and the lack of material sales to date, the Company has
experienced a continuing need for financing since inception. This need became
particularly acute beginning in 1989, following protracted litigation over the
Company's technology. The Company's operations were essentially dormant from
approximately 1990 to 1993. In fiscal 1994, ADTI formed the Partnership to
obtain capital to continue development of its technology. (See General, above)
The Company and its subsidiaries have been totally dependent on financing
from outside sources to fund operations for more than five years. At June 30,
1998, the Company reported negative net worth of $1,460,735 and negative working
capital of $539,052. The Company will require additional capital for
administrative expenses, continued development of the product, further design
and development of an automated manufacturing process and marketing costs.
12
<PAGE>
Management believes that the Company's continued existence is dependent upon its
ability to: 1) develop or acquire an adequately bright projector; 2) complete
the design and development of the alternative automated manufacturing process;
3) successfully market the product; 4) obtain additional sources of funding
through outside sources; and 5) achieve and maintain profitable operations.
There can be no assurance that the Company will be able to achieve its research
and development goals, obtain sufficient additional capital or manufacture or
sell its products on terms and conditions satisfactory to the Company.
During the fiscal year ended June 30, 1998, the Company completed a private
placement of its Common Stock to a single qualified investor. The Company sold
10% convertible promissory notes in the aggregate principal amount of $550,000,
of which $500,000 was received during the prior fiscal year. Effective October
14, 1998, these notes were converted into 4,182,509 shares of the Company's
Common Stock at the rate of $0.1315 per share pursuant to the terms of the note.
Cash flows from financing activities for the fiscal year ended June 30,
1998 consisted entirely of the issuance of 10% convertible, redeemable
promissory notes to shareholders totaling $1,050,000. These notes are due
October 15, 2000 and are convertible, at the option of the noteholder, into
shares of the Company's Common Stock at the rate of $0.1615 per share. These
notes are unsecured. The Company has the right to call these Notes after one
year and the noteholders have 30 days in which to convert if these Notes are
called by the Company. The Company may elect to pay interest on any of these
Notes converted in cash or by issuance of additional shares of the Company's
Common Stock. Cash flows for the year ended June 30, 1998 were used for
manufacturing a 7' x 9' screen, ongoing product and manufacturing process
development, operating expenses and investments in capital equipment.
On August 17, 1998, the Company executed an agreement effective August 10,
1998 (the "Settlement Agreement") in settlement of previously pending
litigation. (See Item 3. "Legal Proceedings", above.) In connection with the
Settlement Agreement, the Company received $175,000 cash and 1,402,157 shares of
ADTI Common Stock. The ADTI Common Stock acquired in the settlement has been
returned to the authorized but unissued stock of ADTI. The cash received in
settlement of the litigation was used to pay certain litigation costs and as
working capital.
On September 25, 1998 and October 5, 1998, the Company sold an aggregate of
$100,000 of 10% convertible, redeemable promissory notes under a private
placement offered to qualified investors with substantially the same terms as
those discussed above.
Cash flows from financing activities for the fiscal year ended June 30,
1997 consisted entirely of a single loan to Display Group from a member of
$5,000. The Company also reported cash flows from investing activities for 1997
in connection with the Exchange of $303,812. Cash flows from financing and
investing activities for 1997 were used for investments in capital equipment of
approximately $15,099 and operating activities and were partially advanced to
DOL prior to the Exchange.
13
<PAGE>
ADTI reported a working capital deficit position at June 30, 1998. Current
liabilities exceeded current assets by $539,052. At June 30, 1998, current
liabilities consisted of trade payables and accrued expenses which were incurred
primarily due to litigation costs, costs of the Exchange, costs associated with
the various private offerings and operating costs. Subsequent to year end, a
substantial portion of the payables related to litigation were satisfied.
Pending a favorable outcome of the projection project described above, the
Company will recommence efforts on further development of a fiber optic screen
and related manufacturing process. In addition, the Company will continue
efforts on raising additional capital through private placements or other
sources. There can be no assurances that management will be able to acquire the
capital needed or be successful in achieving these objectives.
Impact of the Year 2000 Issue
- -----------------------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date- sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
As of the date of this report, no assessment has been made as to the
effects of the Year 2000 Issue on the Company. Therefore, the Company is unable
to determine whether the Year 2000 Issue will materially affect the Company's
operating ability, future financial results, or cause reported financial
information not to be necessarily indicative of future operating results or
future financial condition.
The Company intends to initiate an assessment of the potential impact of
the Year 2000 Issue on the Company's business in the future.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
The Financial Accounting Standards Board has also recently issued Statement
of Financial Accounting Standards 130, "Reporting Comprehensive Income."
Statement 130 establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, Statement 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that displays with the same prominence as other financial
statements. Statement 130 is effective for financial statements for periods
beginning December 15, 1997 and require comparative information for earlier
years to be restated.
14
<PAGE>
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. This statement established standards for
the way public business enterprises report information about operating segments.
It also establishes standards for related disclosure about products and
services, geographical areas and major customers. This statement is effective
for the Company's financial statements for the year ended June 30, 1999 and
adoption of this standard is not expected to have a material effect on the
Company's financial statements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits," was issued in February 1998. This statement revised
the disclosure requirement for pensions and other post-retirement benefits. This
statement is effective for the Company's financial statements for the year ended
June 30, 1999 and the adoption of this statement is not expected to have a
material effect on the Company's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for the Company's financial
statements for the year ended June 30,2001 and the adoption of this standard is
not expected to have a material effect on the Company's financial statements.
Because of the recent issuance of these standards, management has been
unable to fully evaluate the impact, if any, the standards may have on the
future financial statement disclosures. Results of operations and financial
position, however , will be unaffected by implementation of these standards.
Item 7. FINANCIAL STATEMENTS
See index to financial statements on page F-1.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth certain information as to each director and
executive officer of ADTI as of October 5, 1998:
Directors and Officers Age Position with ADTI
- ---------------------- --- ------------------
Gene W. Schneider 72 Chairman of the Board and Director
Matthew W. Shankle* 38 President and Director
Rebecca L. McCall 41 Secretary
David J. Babiarz, Esq. 43 Assistant Secretary
Lawrence F. DeGeorge 53 Director
Mark L. Schneider** 43 Director
Kenneth P. Warner 43 Director
* Matthew W. Shankle is the son-in-law of Gene W. Schneider and the
brother-in-law of Mark L. Schneider.
** Mark L. Schneider is the son of Gene W. Schneider and the brother-in-law of
Matthew W. Shankle.
Business Experience for Executive Officers and Directors:
- ---------------------------------------------------------
Gene W. Schneider - Mr. Schneider was appointed a Director effective
September 16, 1997 and as Chairman of the Board of Directors on October 3, 1997.
Since 1989, Gene W. Schneider has served as Chairman and/or Chief Executive
Officer of United International Holdings, Inc. ("UIH"), a NASDAQ publicly traded
Company that provides multichannel television services in Europe, Asia/Pacific,
and South America. Prior to that, Mr. Schneider was a Director and Officer of
United Cable Television Corporation, a NYSE publicly-traded company, and its
predecessors since inception. United Cable merged with several entities
including United Artists Communications to form United Artists Entertainment
16
<PAGE>
Company ("UAEC"), a publicly-traded company, where Mr. Schneider was Chairman
until 1991, when UAEC merged with Tele-Communications, Inc. Mr. Schneider is
currently on the board of five private corporations in addition to being on the
board of UIH.
Matthew W. Shankle - Mr. Shankle was appointed President effective
September 14, 1998 and served as a Vice President of the Company from October 3,
1997. He is responsible for the overall day-to-day operations and strategic
direction of the Company in conjunction with the Board of Directors. From June
1996 to September 1997, he served as a consultant to the Company for product
research and development (R&D). He is also currently responsible for leading the
effort to refine and further automate the Company's manufacturing process. From
1995 to 1997, Mr. Shankle served as an operations consultant for several high
tech R&D/manufacturing subsidiaries of Telxon Corporation, a NASDAQ
publicly-traded company. From 1992 to 1995, Mr. Shankle was employed by Virtual
Vision, Inc. as the R&D/manufacturing facility development specialist. Mr.
Shankle began his career at Lockheed Missiles and Space in the San Diego area.
Rebecca L. McCall - Ms. McCall was appointed Secretary of the Company on March
7, 1997. She is also the Company's Controller responsible for the Company's
accounting and reporting functions. Previously she served as the accountant for
the Company and Display Optics, Ltd., a privately held limited partnership
presently wholly-owned by the Company. From 1993 to the present, Ms. McCall
provided general accounting services for several small companies. From 1990 to
1993, she served as the Controller for Television Technology Corporation in
Louisville, Colorado, a small manufacturer of radio and television station
transmission equipment. From 1985 to 1990, Ms. McCall held various accounting
positions with the Company, including Vice President of Administration,
Secretary and Director of Accounting.
David J. Babiarz, Esq. - Mr. Babiarz was appointed Assistant Secretary on
October 3, 1997. He has been President and Director of the law firm of Overton,
Babiarz & Sykes, P.C. (OB&S) of Englewood, CO since 1994. From 1992 to 1994, Mr.
Babiarz served as a Vice President of OB&S and from 1986 to 1992, as the
Secretary and a Director. Mr. Babiarz practices corporate and securities law.
Lawrence F. DeGeorge - Mr. DeGeorge was appointed a Director effective September
2, 1998. Since 1991 Mr. DeGeorge has directed venture capital investment in
telecommunications and biotechnology as Chief Executive Officer of LPL Group,
Inc., LPL Investment Group, Inc., LPL Management Group, Inc., and DeGeorge
Holding, Ltd. From 1986 to 1991, Mr. DeGeorge held various positions with
Amphenol Corporation, a manufacturer of telecommunications interconnect
products, including serving as President from May 1989 to January 1991,
Executive Vice President and Chief Financial Officer from September 1986 to May
1989, and as a director from June 1987 to January 1991. Since June 1997, Mr.
DeGeorge has served as a director of UIH and since May 1998, as a director of
CompleTel, LLC, a multinational provider of switched, local telecommunications
and related services.
17
<PAGE>
Mark L. Schneider - Mr. Schneider was appointed a Director effective September
16, 1997. Mr. Schneider is currently Executive Vice President of UIH where he is
responsible for international investments, a position he has occupied since
December, 1996. He has also been a Director of UIH since its inception. From
1989 to December, 1996, Mr. Schneider served as President or a consultant to
UIH. Mr. Schneider is also currently President and Chief Executive Officer of
United Pan- European Communications ("UPC"), a European private corporation
which provides enhanced video, data communication and voice telephoning
services. Prior to 1989, Mr. Schneider was a Vice President of Corporate
Development of United Cable Television Corporation in international and domestic
acquisitions. Mr. Schneider also held numerous positions as legislative counsel
in Washington, D.C.
Kenneth P. Warner - Mr. Warner was appointed a director effective December 9,
1997. Mr. Warner served as President and Chief Executive Officer of the Company
from September 17, 1997 until resigning these positions effective September 11,
1998. He is currently President and COO of International Series Research,
Incorporated, a development stage technology company that is developing computer
security and other products. From 1995 to 1997, Mr. Warner worked as a
consultant, assisting various start-up companies, including the Company, and
performing investment reviews. From 1994 to 1995, he was President of Cable
Audit Associates, a company auditing the cable television operators on behalf of
the cable television programmers. Mr. Warner was a Regional Vice President of
UIH from 1993 to 1994. In 1988, he started and served as President until 1993 of
a company that opened and operated 112 franchised Blockbuster Video(R) stores.
Prior to that, Mr. Warner was an executive in the cable television industry for
approximately nine (9) years. He began his career with Arthur Andersen & Co., a
Big 6 CPA firm.
COMPLIANCE WITH SECTION 16.
The following sets forth each director, officer or beneficial owner of more
than ten percent of any class of equity securities of the registrant registered
pursuant to Section 12 that failed to file on a timely basis, Forms 3, 4 or 5 as
required by Section 16(a) during the most recent fiscal year or prior years.
The numbers of late Form 3, Form 4 and Form 5 reports, and the late Form 4
transactions reported are as follows:
<TABLE>
<CAPTION>
Name of Reporting Person Late Form 3 Late Form 4 Late Form 5 Transactions
- ------------------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Matthew W. Shankle 0 0 1 1
Rebecca L. McCall 0 0 1 1
</TABLE>
18
<PAGE>
Item 10. EXECUTIVE COMPENSATION
Compensation
- ------------
The following table sets forth the compensation paid, or to be paid, by the
Company for services rendered during the fiscal year ended June 30, 1998 to (a)
the Chief Executive Officer of the Company, and (b) each of the four most highly
compensated executive officers who served as executive officers at the end of
the fiscal year and whose total annual salary and bonus exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION
Other Annual
Name Year Salary Bonus Compensation Total
---- ---- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Darrell D. Avey (3) 1998 $ 51,124 -0- -0- $ 51,124
Former Chairman, 1997 (1) $ 77,846 -0- -0- $ 77,846
President, Secretary 1996 (2) $ 80,000 -0- -0- $ 80,000
Vice President
Kenneth P. Warner (4) 1998 $114,231 -0- -0- $114,231
Former President, 1997 -0- -0- -0- -0-
Chief Executive Officer 1996 -0- -0- -0- -0-
</TABLE>
(1) Includes $71,692 in salary paid by Display Optics, Ltd.
(2) Includes $80,000 in salary paid by Display Optics, Ltd.
(3) Mr. Avey served as Chairman and Secretary until March 7, 1997 when he
resigned as Secretary and was appointed President. Mr. Avey served as
Chairman and President until October 3, 1997 when Mr. Avey was
appointed a Vice President. Mr. Avey resigned from the Company
effective January 7, 1998.
(4) Mr. Warner was appointed President and Chief Executive Officer (CEO)
effective September 17, 1997. Prior to his appointment, he received
approximately $17,404 in fees for management services. He resigned as
President and CEO effective September 11, 1998.
19
<PAGE>
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
(Individual Grants)
Number of Percent of total Value of
Securities options/SARs unexercised
underlying granted to Exercise in-the-money
Options/SARS employees in or base Expiration options/SARs
Name granted (#) fiscal year price ($/Sh) date at FY-end ($)(1)
---- ----------- ----------- ------------ ---- ----------------
<S> <C> <C> <C> <C> <C>
Darrell D. Avey 100,000 4.44% $.1615 01/29/00 $ 3,850
Rebecca L. McCall (2) 100,000 4.44% $.1615 01/29/08 $ 0
Matthew W. Shankle (2) 500,000 22.22% $.1615 01/29/08 $ 0
Kenneth P. Warner (3) 1,500,000 66.67% $.1315 09/17/99 $ 49,235
</TABLE>
(1) Based on the last sale price of the Company's Common Stock prior to
the fiscal year ended June 30, 1998 of $.20.
(2) One quarter of these options vest each year (annually for the first
year and then on a monthly basis) during which the individual remains
employed by the Company, for four years. As of the date of this
report, none of these options were vested.
(3) 437,500 of these options vested upon grant and the remaining options
vested at the rate of 31,250 per month on the sixteenth (16th) day of
each month that the individual was employed by the Company. As of the
fiscal year ended June 30, 1998, 718,750 of these options were vested.
As of the date of this report, 781,250 of these options were vested
and no additional options will vest due to termination of employment
by Mr. Warner.
Ms. McCall also holds options to purchase 30,000 shares of the Company's Common
Stock at $.25 per share. These options are currently exercisable and expire in
2000.
There were no options exercised during the fiscal year ended June 30, 1998.
Employment Contract
- -------------------
The previous President and Chief Executive Officer signed a three year
employment contract effective September 17, 1997. The contract provided for an
initial annual base salary of $150,000 per year and reimbursement of expenses
incurred on behalf of the Company. The contract was terminable at will by either
party upon advance written notice.
The executive also received non-qualified stock options for the purchase of
1,500,000 shares of the Company's Common Stock at an exercise price of $0.1315
per share pursuant to an option agreement as part of the employment contract. Of
that amount, 437,500 of these options vested upon signing of the contract and
31,250 shares vested on the 16th of each month that the executive was an
employee of the Company.
20
<PAGE>
This employment contract was terminated by the executive effective
September 11,1998. As of the termination date, 781,250 of these options had
vested. The executive may exercise these options until September 11, 1999. He
did not receive any severance payments.
Compensation of Directors
- -------------------------
During the fiscal year ended June 30, 1998, no fees were paid to directors
for attendance at meetings of the Board of Directors. However, members are
reimbursed for expenses to attend the meetings.
Incentive Plans
Non-qualified Incentive Stock Option Plan
- -----------------------------------------
Effective February 6, 1990, ADTI's Board of Directors adopted a
Non-qualified Incentive Stock Option Plan and reserved 100,000 shares of ADTI's
Common Stock for issuance under this plan. The purpose of this plan is to
provide incentives to key employees, directors and consultants of ADTI. The Plan
is to be administered by ADTI's Board of Directors (the "Board") or a committee
(the "Committee") consisting of not less than three persons. The Board or
Committee has the power under the Plan to grant stock options, discount stock,
stock appreciation rights and related benefits such as loans, tax benefits,
surrender and other rights (each of which is referred to as an "Award").
Eligibility to receive Awards pursuant to the Plan is limited to individuals who
render services which tend to contribute materially to the success of ADTI or
its subsidiaries or which may reasonably be anticipated to contribute materially
to the future success of ADTI or its subsidiaries. The Board or Committee has
discretion as to the number and nature of the Awards granted to any individual.
No option granted under the plan shall have a term in excess of ten years from
the grant date.
Pursuant to this plan, ADTI's Board of Directors, effective February 6,
1990, granted an aggregate of 65,000 options to purchase shares of ADTI's Common
Stock for a per share exercise price of $3.50. All of these options are still
outstanding, exercisable and expire in 2000.
Non-qualified Options
- ---------------------
Prior to fiscal 1997, the Company granted options to purchase 61,500 shares
at $.25 to $10.00 per share. These Non-qualified Options were granted at fair
market value. None of these options have a term in excess of ten years. These
options were outstanding at June 30, 1998, have not been exercised and expire
from 1999 to 2000.
Equity Incentive Plan
- ---------------------
On September 18, 1997, the Board adopted, subject to shareholder approval,
an Equity Incentive Plan and reserved 2,500,000 shares of the Company's Common
Stock for issuance under this plan. The purposes of this plan are to provide
21
<PAGE>
those who are selected for participation in the Plan with added incentives to
continue in the long-term service of the Company and to create in such persons a
more direct interest in the future success of the operations of the Company by
relating incentive compensation to increases in shareholder value, so that the
income of those participating in the Plan is more closely aligned with the
income of the Company's shareholders. The Plan is also designed to provide a
financial incentive that will help the Company attract, retain and motivate the
most qualified employees and consultants. The Plan permits the grant of
Incentive Stock Options, Non-qualified Stock Options, Restricted Stock Awards,
Stock Appreciation Rights, Stock Bonuses, Stock Units and other stock grants. As
of June 30, 1998, 2,250,000 options were outstanding under this plan at exercise
prices from $.1315 to $.1615 per share. Of these options, 818,750 options are
exercisable, of which 718,750 expire in 1999 and 100,000 expire in 2000. Of the
non-vested options at June 30, 1998, 768,750 expired in 1998 due to termination
of employment, 62,500 expire in 1999 and 600,000 expire in 2008.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of October 5, 1998, certain information
regarding the equity securities of ADTI beneficially owned of record by each
officer, director, each person known by ADTI to own 5% or more of the voting
securities of ADTI, and all officers and directors as a Group. Information
regarding certain beneficial ownership was derived from Schedule 13D, as
amended, received by ADTI from the reporting persons pursuant to requirements of
the Securities and Exchange Commission. As of October 5, 1998, the Company had
outstanding 23,774,275 shares of Common Stock. The voting securities of the
Company consist of i) Common Stock which is entitled to one vote per share; and,
ii) Series C Preferred Stock which have no voting rights with respect to matters
on which the holders of shares of Common Stock are entitled to vote, and one
vote with respect to those matters on which holders of Series C Preferred Stock
are alone entitled to vote, except as provided by law. Unless otherwise stated,
all ownership is direct by the reporting person.
22
<PAGE>
<TABLE>
<CAPTION>
Amount and Amount and
nature of nature of
Name and address of Title of Beneficial Percent Title of Beneficial Percent
Beneficial owners Class Ownership of Class Class Ownership of Class
- ------------------- -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
David J. Babiarz, Esq. (1) Common 0 .00% Series C 0 .00%
7720 E. Belleview Ave $.001 Par Preferred
Suite 200 "Preferred"
Englewood, CO 80223
William W. Becker Common 1,873,369 7.88% Preferred 197,278 10.70%
Box 143 $.001 Par
Grand Cayman Island
British West Indies
Lawrence F. DeGeorge (1) Common (2) 7,477,971 27.62% Preferred 0 .00%
3127 Casseckey Island Road $.001 Par
Jupiter, Florida 33477
Bruce H. Etkin Common 3,699,196 15.27% Preferred 341,978 18.55%
1512 Larimer St., No. 325 $.001 Par
Denver, CO 80202
Rebecca L. McCall (1) Common (3) 37,930 0.16% Preferred 0 .00%
1251 S. Huron, Unit C $.001 Par
Denver, CO 80223
G. Schneider Holdings Common 4,941,959 20.79% Preferred 0 .00%
4643 S. Ulster, Suite 1300 $.001 Par
Denver, CO 80237
Gene W. Schneider (1) Common (4) 7,781,105 29.24% Preferred 520,420 28.22%
4643 S. Ulster, Suite 1300 $.001 Par Direct and
Denver, CO 80237 Indirect
Mark L. Schneider (1) Common (5) 2,818,771 11.70% Preferred 264,232 14.33%
4643 S. Ulster, Suite 1300 $.001 Par
Denver, CO 80237
Matthew W. Shankle (1) Common 0 .00% Preferred 0 .00%
1251 S. Huron, Unit C $.001 Par
Denver, CO 80223
Kenneth P. Warner (1) Common (6) 781,250 3.18% Preferred 0 .00%
1251 S. Huron, Unit C $.001 Par
Denver, CO 80223
All current officers and Common (2-6) 18,897,027 60.90% Preferred 784,652 42.55%
directors as a group Direct and
Indirect
23
</TABLE>
<PAGE>
(1) Officer or director.
(2) Includes 3,295,462 shares underlying convertible promissory notes
owned by the reporting person. The notes are convertible at the rate
of $0.1615 per share until October 15, 2000 unless the note is called
sooner by the Company.
(3) Includes options to purchase 30,000 shares of Common Stock that are
currently exercisable at $.25 per share and expire in 2000.
(4) Includes 2,839,146 shares underlying convertible promissory notes
owned by the reporting person. The notes are convertible at the rate
of $0.1615 per share until October 15, 2000 unless the note is called
sooner by the Company. Also includes 4,941,959 shares of Common Stock
owned by G. Schneider Holdings Co. of which Gene W. Schneider is the
general partner.
(5) Includes 309,598 shares underlying convertible promissory notes owned
by the reporting person. The notes are convertible at the rate of
$0.1615 per share until October 15, 2000 unless the note is called
sooner by the Company.
(6) Includes 781,250 options to purchase Common Stock at $0.1315 per
share, exercisable until September 11, 1999.
Changes in Control
- ------------------
The Company knows of no arrangement or events, the occurrence of which will
result in a change in control.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended June 30, 1997, certain individuals and
entities advanced money to DOL, for which the Company acted as general partner.
Display Group, LLC, the Managing General Partner of Display Optics, Ltd.,
together with certain of its former members, advanced an aggregate of $1,670,046
to DOL as of the year ended June 30, 1997. Proceeds from those loans were
utilized by the Partnership to continue research, development, manufacturing and
marketing of the Company's fiber optic display technology.
Effective May 21, 1997, these loans, together with certain equity interests
in the Company, the Partnership and Display Group, were exchanged for a total of
17,673,868 shares of the Company's Common Stock valued at $.1315 per share and
1,843,900 shares of a newly created Series C Preferred Stock. Each shareholder,
including certain officers and directors of the Company, received a pro-rata
24
<PAGE>
share of the newly issued capital stock based on their investment in these
entities. Further, in connection with the Exchange Agreement, the parties
contributed certain assets, including the security interest in the Company's
technology, and all debt and equity of the Partnership and Display Group to the
Company for an economic equivalent of equity in the Company.
During the fiscal years ended June 30, 1998 and 1997, the Company paid or
accrued certain administrative fees to individuals or entities listed as
officers, directors or principal shareholders of the Company. Kenneth P. Warner
was appointed President and Chief Executive Officer ("CEO") of the Company
effective September 17, 1997. Prior to his employment, Mr. Warner received
approximately $17,404 in fees for management services prior to his employment
with the Company. Mr. Warner resigned as President and CEO effective September
11, 1998.
Matthew W. Shankle was appointed a Vice President of the Company on October
3, 1997. During the fiscal years ended June 30, 1998 and 1997, Mr. Shankle
received $15,000 and $25,343 in consulting fees, respectively. Carla G. Shankle
received payments totaling approximately $10,083 in consulting fees during the
fiscal year ended June 30, 1997, a portion of which related to an accrued
balance carried forward from the fiscal year ended June 30, 1996. Ms. Shankle is
the wife of Matt Shankle, daughter of Gene Schneider and sister of Mark
Schneider.
In connection with a dispute regarding rights to certain technology, the
Company commenced a civil action in July 1996 against Mr. Nixon, a former
officer and director of the Company and certain other entities. During the
fiscal year ended June 30, 1997, in connection with the settlement of that
litigation, Display Group made payments of $41,000 to or on behalf of Mr. Nixon
and certain other defendants for payment of legal fees associated with this
case.
During the fiscal years ended June 30, 1998 and 1997, the Company paid $0
and $48,600, respectively, to Keith Hancock and Joan C. Hancock, his wife,
collectively, for management and administrative services rendered. Also during
the fiscal years ended June 30, 1998 and 1997, the Company incurred net fees of
approximately $(2,710) and $5,100, respectively, for management consulting,
rent, furniture and other administrative expenses, to Reserve Battery Cell,
L.P., a Colorado limited partnership. During the fiscal years ended June 30,
1998 and 1997, the Company paid approximately $12,844 and $6,200, respectively,
in management and administrative fees to Castle Pines Associates, LLC, a
Colorado limited liability company. Mr. Hancock was a Director of the Company
and is the President, Chief Executive Officer and Manager of Castle Pines
Associates, LLC and was the President and Chief Executive Officer of Reserve
Battery Cell, L.P.
Mark L. Schneider and Gene W. Schneider are Directors of ADTI. Gene W.
Schneider and G. Schneider Holdings are limited partners of Reserve Battery
Cell. Mark Schneider is the son of Gene Schneider and a limited partner of G.
Schneider Holdings. Matthew W. Shankle is the son-in- law of Gene Schneider and
the brother-in-law of Mark Schneider.
25
<PAGE>
During the year ended June 30, 1997, DOL and the Company also incurred rent
and other administrative expenses to two entities in which Gene and Mark
Schneider are members. During the fiscal year ended June 30, 1998, the Company
paid approximately $1000 to Wild West Development, LLC which related to amounts
incurred in the years prior. During the year ended June 30, 1997, DOL and the
Company incurred expenses of approximately $6,100 each to Schneider Investments,
LLC and Wild West Development, LLC.
Management of the Company is of the opinion that the terms and conditions
of the foregoing transactions were no less favorable than could be obtained from
unaffiliated third parties.
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules.
----------------------------------
The Financial Statements and Schedules filed herein are described in
the Index to Financial Statements included in Item 8 and indexed on
page F-1.
(b) Exhibits.
--------
The following exhibits are filed or incorporated herein by reference,
as indicated below:
Exhibit No.
3.1 Amended and Restated Articles of Incorporation of ADTI dated December 5,
1985 (incorporated by reference, Registration Statement on Form S-18, File No.
2-164-D-33).
3.2 Amended and Restated Bylaws of ADTI (incorporated by reference, Registration
Statement on Form S-18, File No. 2-164-D-33 and Annual Report on Form 10-K for
the fiscal year ended September 30, 1986).
3.3 Form of Certificate of Designation and Determination of Preference of Series
A Convertible Preferred Stock as filed with the Colorado Secretary of State on
January 4, 1990 (incorporated by reference, Annual Report Form 10-K for the
fiscal year ended September 30, 1989).
3.4 Corrected Articles of Amendment to the Articles of Incorporation dated
August 5, 1994. (incorporated by reference, Annual Report Form 10-KSB for the
fiscal year ended June 30, 1995).
3.5 Articles of Amendment to the Company's Articles of Incorporation regarding
designation of the Series C Preferred Stock (incorporated by reference, Form 8-K
dated May 21, 1997.)
26
<PAGE>
4.1 Specimen certificate for Common Stock, par value $.001 per share of ADTI
(incorporated by reference, Annual Report Form 10-K for the fiscal year ended
September 30, 1987).
4.2 (Reference is made to Exhibit Nos. 3.1, 3.2, 3.3 and 4.1 above).
5. Not applicable.
6. Not applicable.
7. Not applicable.
8. Not applicable.
9. Not applicable.
10.1 ADTI's 1984 Non-Employee Incentive Plan (incorporated by reference, Annual
Report Form 10-K for the fiscal year ended September 30, 1987).
10.2 ADTI's 1997 Equity Incentive Plan (incorporated by reference, Annual Report
Form 10-K for the fiscal year ended June 30, 1997).
10.3 Exchange Agreement by and between the Company, the Partnership, Display
Group and the Investors, dated May 21, 1997 without exhibits (incorporated by
reference to Form 8-K dated May 21, 1997).
10.4 Form of Indemnification Agreement between the Company and its Officers and
Directors (incorporated by reference, Annual Report Form 10-K for the fiscal
year ended June 30, 1997).
10.5 Executive Employment Agreement between Kenneth P. Warner and the Company
effective September 17, 1997 including: Exhibit A, Non-Qualified Stock Option
Agreement between Kenneth P. Warner and the Company (effective September 17,
1997), and Exhibit B, Covenant Not to Compete between Kenneth P. Warner and the
Company effective September 17, 1997 (incorporated by reference, Annual Report
Form 10-K for the fiscal year ended June 30, 1997).
11. Not applicable.
12. Not applicable.
13. Not applicable.
16. Not applicable.
18. Not applicable.
27
<PAGE>
19. Not applicable.
List of Subsidiaries of the Company (incorporated by reference, Annual
Report Form 10-K for the fiscal year ended June 30, 1997).
23. Not applicable.
24. Not applicable.
25. Not applicable.
26. Not applicable.
27. Not applicable
28. Not applicable.
29. Not applicable.
Reports on Form 8-K.
--------------------
ADTI filed a Form 8-K dated August 10, 1998 to report the acquisition of
certain assets in connection with the settlement of pending litigation.
28
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report on Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
ADVANCE DISPLAY TECHNOLOGIES, INC.
/s/ Matthew W. Shankle Date: October 13, 1998
- ------------------------------ -----------------
By: Matthew W. Shankle
President
(Chief Executive and Financial Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Gene W. Schneider Date: October 13, 1998
- ---------------------- -----------------
By: Gene W. Schneider
Chairman of the Board and Director
/s/ Lawrence F. DeGeorge Date: October 13, 1998
- ------------------------ -----------------
By: Lawrence F. DeGeorge
Director
/s/ Mark L. Schneider Date: October 13, 1998
- ---------------------- -----------------
By: Mark L. Schneider
Director
/s/ Matthew W. Shankle Date: October 13, 1998
- ------------------------------ -----------------
By: Matthew W. Shankle
Director
/s/ Kenneth P. Warner Date: October 13, 1998
- ------------------------------ -----------------
By: Kenneth P. Warner
Director
29
<PAGE>
Advance Display Technologies, Inc.
(A Development Stage Company)
Financial Statements
June 30, 1998
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report..............................................F-2
Balance Sheet - June 30, 1998 ............................................F-3
Statements of Operations - For the Years Ended June 30, 1998
and 1997, and Cumulative from Inception (March 15, 1995)
through June 30, 1998 ...........................................F-4
Statement of Changes in Stockholders' Equity (Deficit) - For
the Period from Inception (March 15, 1995) through
June 30, 1998....................................................F-5
Statements of Cash Flows - For the Years Ended June 30, 1998
and 1997, and Cumulative from Inception (March 15, 1995)
through June 30 1998.............................................F-6
Notes to Financial Statements.............................................F-8
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Advance Display Technologies, Inc.
Denver, Colorado
We have audited the balance sheet of Advance Display Technologies, Inc. as of
June 30, 1998 and the related statements of operations, changes in stockholders'
equity (deficit) and cash flows for the years ended June 30, 1998 and 1997 and
for the period from inception (March 15, 1995) to June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presenta tion.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advance Display Technologies,
Inc. and subsidiaries as of June 30, 1998 and the results of its operations and
its cash flows for the years ended June 30, 1998 and 1997 and for the period
from inception (March 15, 1995) to June 30, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred substantial losses from
operations, has negative working capital and is in the development stage. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans with regard to these matters are described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
HEIN + ASSOCIATES LLP
Denver, Colorado
August 28, 1998
F-2
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEET
JUNE 30, 1998
ASSETS
------
CURRENT ASSETS:
Cash $ 77,464
Inventory 16,238
Other current assets 8,108
-----------
Total current assets 101,810
PROPERTY AND EQUIPMENT, net 102,042
-----------
TOTAL ASSETS $ 203,852
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 484,060
Other accrued liabilities 156,802
-----------
Total current liabilities 640,862
CONVERTIBLE NOTES PAYABLE 1,023,725
COMMITMENTS AND CONTINGENCY (Notes 1 and 3)
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, 100,000,000 shares
authorized, 1,843,900 shares issued and outstanding
(liquidation preference of $2,765,850) 1,844
Common Stock, $.001 par value, 100,000,000 shares authorized,
25,176,432 shares issued and outstanding 25,177
Additional paid-in capital 4,227,728
Deficit accumulated during the development stage (5,715,484)
-----------
Total stockholders' deficit (1,460,735)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 203,852
===========
See accompanying notes to these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
CUMULATIVE
FROM
INCEPTION
FOR THE YEARS ENDED (MARCH 15, 1995)
JUNE 30, THROUGH
------------------------------------- JUNE 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
CONSULTING REVENUE $ 30,200 $ -- $ 30,200
INTEREST INCOME:
Related party -- 97,755 162,761
Other 2,421 -- 2,421
------------ ------------ ------------
TOTAL REVENUE AND INTEREST INCOME 32,621 97,755 195,382
COSTS AND EXPENSES:
General and administrative 1,103,730 134,102 1,243,085
Research and development 364,026 2,544,940 2,908,966
Impairment of intangible assets 451,492 -- 451,492
Interest expense - related party 1,085,302 137,552 1,307,323
------------ ------------ ------------
Total costs and expenses 3,004,550 2,816,594 5,910,866
------------ ------------ ------------
NET LOSS $ (2,971,929) $ (2,718,839) $ (5,715,484)
============ ============ ============
NET LOSS PER COMMON SHARE
(BASIC AND DILUTIVE) $ (0.12) $ (1.09)
============ ============
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING 24,138,224 2,497,543
============ ============
See accompanying notes to these financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MARCH 15, 1995 (INCEPTION) THROUGH JUNE 30, 1998
PREFERRED STOCK COMMON STOCK Additional
---------------------- ----------------------- Paid-In Accumulated
SHARES Amount Shares Amount Capital Deficit Total
---------- -------- ----------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 15, 1995 (Inception) -- $ -- -- $ -- $ -- $ -- $ --
Capital contributions -- -- 697,095 697 90,971 -- 91,668
Net loss -- -- -- -- -- (286) (286)
----------- -------- ----------- -------- ----------- ----------- -----------
BALANCE, June 30, 1995 -- -- 697,095 697 90,971 (286) 91,382
Capital contributions -- -- 87,141 87 11,372 -- 11,459
Net loss -- -- -- -- -- (24,430) (24,430)
----------- -------- ----------- -------- ----------- ----------- -----------
BALANCE, June 30, 1996 -- -- 784,236 784 102,343 (24,716) 78,411
Conversion of debt to common
stock and issuance of
preferred stock pursuant
to acquisition of Display
Group, LLC and Displa
Optics, Ltd. 1,843,900 1,844 20,559,687 20,560 2,351,160 -- 2,373,564
Net loss -- -- -- -- -- (2,718,839) (2,718,839)
----------- -------- ----------- -------- ----------- ----------- -----------
BALANCE, June 30, 1997 1,843,900 1,844 21,343,923 21,344 2,453,503 (2,743,555) (266,864)
Debt conversion at
below market -- -- -- -- 1,013,933 -- 1,013,933
Conversion of debt to
common stock -- -- 4,182,509 4,183 545,817 -- 550,000
Retirement of shares in
settlement -- -- (350,000) (350) 350 -- --
Employee stock options
issued for services -- -- -- -- 214,125 -- 214,125
Net loss -- -- -- -- -- (2,971,929) (2,971,929)
----------- -------- ----------- -------- ----------- ----------- -----------
BALANCE, June 30, 1998 1,843,900 $ 1,844 25,176,432 $ 25,177 $ 4,227,728 $(5,715,484) $(1,460,735)
=========== ======== =========== ======== =========== =========== ===========
See accompanying notes to these financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
CUMULATIVE
FROM
INCEPTION
FOR THE YEARS ENDED (MARCH 15, 1995)
JUNE 30, THROUGH
-------------------------------- JUNE 30,
1998 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss $(2,971,929) $(2,718,839) $(5,715,484)
Adjustments to reconcile net loss to net cash used
in operating activities:
Acquired research and development
expense -- 2,536,494 2,536,494
Impairment of intangibles 451,492 -- 451,492
Depreciation and amortization 117,904 49,849 167,753
Stock option compensation expense 214,125 -- 214,125
Interest expense related to debt discount 1,013,933 -- 1,013,933
Loss on sale of property and equipment 304 -- 304
(Increase) decrease in:
Inventory 35,581 (45,771) (10,190)
Other current assets 2,262 (97,755) (139,601)
Increase (decrease) in:
Accounts payable (74,082) 112,298 38,216
Accrued interest payable to members 68,186 137,552 271,310
Other accrued liabilities 817 (30,665) (29,848)
----------- ----------- -----------
Net cash used in operating activities (1,141,407) (56,837) (1,201,496)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (75,260) (15,099) (90,359)
Proceeds from sale of property and equipment 8,400 -- 8,400
Advances to affiliates -- (55,500) (932,925)
Purchase of note receivable and security
interest -- -- (225,000)
Cash received in acquisition -- 303,812 303,812
----------- ----------- -----------
Net cash provided by (used in) investing
activities
(66,860) 233,213 (936,072)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions -- -- 103,127
Proceeds from notes payables to stockholders 1,050,000 5,000 1,812,400
Proceeds from line-of-credit -- -- 299,505
----------- ----------- -----------
Net cash flows provided by financing 1,050,000 5,000 2,215,032
activities ----------- ----------- -----------
See accompanying notes to these financial statements.
F-6
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(continued)
CUMULATIVE
FROM
INCEPTION
FOR THE YEARS ENDED (MARCH 15, 1995)
JUNE 30, THROUGH
--------------------------------- JUNE 30,
1998 1997 1998
------------ ----------- ----------
INCREASE IN CASH (158,267) 181,376 77,464
CASH AND CASH EQUIVALENTS, at beginning of 235,731 54,355 --
period ------------ ----------- ----------
CASH AND CASH EQUIVALENTS, at end of period $ 77,464 $ 235,731 $ 77,464
============ =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 746 $ 25,824 $ 26,570
============ =========== ==========
Taxes $ -- $ -- $ --
============ =========== ==========
Non-cash transactions:
Issuance of common stock for
acquisition of Display Group, LLC
and Display Optics, Ltd. and
conversion of convertible debt $ -- $ 2,199,026 $2,199,026
============ =========== ==========
Conversion of notes payable $ 550,000 $ -- $ 550,000
stockholders to common stock ============ =========== ==========
See accompanying notes to these financial statements.
F-7
</TABLE>
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Organization and Nature of Operations - Advance Display Technologies,
Inc.'s ("ADTI" or the "Company") business activity is to develop and
manufacture full color video display systems. In May 1997, ADTI acquired
the equity interests of Display Optics, Ltd. (DOL), and Display Group, LLC
(Group) (the Acquisition). Prior to the Acquisition, ADTI was a general
partner and Group was the managing general partner in DOL, and both ADTI
and Group conducted substantially all of their business through DOL. The
Acquisition was accounted for using the purchase method of accounting,
however, as the former members of Group owned a majority of ADTI's common
stock after the acquisition, Group is considered to be the acquiring entity
for purposes of purchase accounting and financial statement reporting.
Therefore, the financial statements for periods prior to May 31, 1997, have
been restated to reflect only the results of operations of Group.
Subsequent to May 31, 1997, the financial statements reflect the combined
operations of ADTI, Group, and DOL. For legal purposes, however, ADTI is
the acquiring entity. Effective December 31, 1997, DOL was dissolved.
Development Stage Company/Going Concern - The accompanying financial
statements have been prepared on a going concern basis, which contemplates
the realization of assets and the liquidation of liabilities in the normal
course of business. The Company is in the development stage, as it has not
yet commenced principal operations and has not yet realized significant
revenues from its planned operations. Since inception, the Company has
devoted most of its efforts on raising capital and research and development
efforts. Its proposed operations are subject to all of the risks inherent
in the establishment of a new business enterprise and the Company has
incurred losses since inception and has a working capital deficit of
$539,052 as of June 30, 1998. The Company has also received notice from the
State of Colorado alleging past due sales tax and related accrued interest
totaling approximately $174,000. Based on prior discussions with state
personnel, the Company has accrued the amount it believes it will
ultimately pay. However, there can be no assurance as to the ultimate
amount of any settlement with the State of Colorado. These issues raise
substantial doubt about the Company's ability to continue as a going
concern.
During the fiscal year ended June 30, 1998, the Company investigated
alternative design configurations and an alternative manufacturing process
for building the Fiber Vision Screen. The Company believes the new design
will improve perceived image quality and better prepare the product for
more fully automated production. In addition, the Company believes a
projector substantially brighter and more cost effective than those
currently commercially available is necessary for the Company to
successfully market its products. The Company has placed several
illumination, projection and electrical engineering specialists under
contract to design and develop an adequately bright projection system for
use with the Fiber Vision Screen. Management of the Company believes the
Company's continued existence is dependent upon its ability to: develop or
acquire an adequately bright projector at an acceptable cost; complete the
design and development of the alternative manufacturing process;
successfully market the product; obtain additional sources of funding
through outside sources; and achieve and maintain profitable operations.
F-8
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
Inventory - Inventory, which consists of raw materials used in the
construction of its video display systems, is stated at the lower of cost
(first-in, first-out method) or market.
Cash and Cash Equivalents - For purposes of the statements of cash flows,
the Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization are provided principally on the straight-line
method over the estimated useful lives (ranging from 3 to 5 years) of the
respective assets. Depreciation expense for the years ended June 30, 1998
and June 30, 1997 was $39,778 and $2,260, respectively.
Intangibles - Intangibles previously included patents and technology
related to the Company's video display systems and the costs incurred
primarily to protect DOL's interest in certain existing technology. These
intangibles were written off at June 30, 1998 pursuant to FAS 121 (see
Impairment of Long-Lived Assets, below).
Income Taxes - Income taxes are accounted for under the liability method,
whereby deferred tax assets and liabilities are recorded based on the
differences between the financial statement and tax basis of assets and
liabilities and the tax rates which will be in effect when these
differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance which reflects expectations of the extent to which such
assets will be realized.
Research and Development - Research and development for new products or
product improvements are charged to expense as incurred. Since the
Acquisition in May 1997, the Company recorded $372,472 of R&D expense.
Impairment of Long-Lived Assets - In fiscal 1997, the Company adopted
Financial Accounting Standards Board Statement No. 121 "Accounting for
Impairment of Long-Lived Assets" (FAS 121). In the event that facts and
circumstances indicate that the cost of assets or intangibles may be
impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value
is required. Management of the Company is pursuing new technology
alternatives for the production of the fiber vision screens. The Company
does not expect to generate significant future revenues from its current
patents and, accordingly, during fiscal 1998 has written off capitalized
costs associated with those patents.
Use of Estimates - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments under SFAS No. 107, Disclosures About Fair value of
Financial Instruments, are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
F-9
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
cannot be determined with precision. The estimated fair values of the
Company's financial instruments, which includes cash, accounts payable,
notes payable, and other debt, approximate the carrying value in the
financial statements at June 30, 1998.
Stock-Based Compensation - In fiscal 1997, the Company adopted FAS No. 123
"Accounting for Stock- Based Compensation" (FAS 123). FAS 123 encourages,
but does not require, companies to recognize compensation expense for
grants of stock, stock options, and other equity instruments to employees
based on fair value. Companies that do not adopt the fair value accounting
rules must disclose the impact of adopting the new method in the notes to
the financial statements. Transactions in equity instruments with
non-employees for goods or services must be accounted for on the fair value
method. The Company has elected not to adopt the fair value accounting
prescribed by FAS 123 for employees, and will be subject only to the
disclosure requirements prescribed by FAS 123. Adoption of FAS 123 had no
effect on the Company's financial statements.
Loss Per Share - Loss per share is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 128 Earnings
Per Share (FAS 128). FAS 128 replaced the presentation of primary and fully
diluted earnings (loss) per share (EPS) with a presentation of basic EPS
and diluted EPS. Basic EPS is calculated by dividing the income or loss
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. Basic and diluted EPS
were the same for 1998 and 1997 because the Company had losses from
operations and therefore, the effect of all potential common stock was
anti-dilutive.
New Pronouncements - Statement of Financial Accounting Standards 130
Reporting Comprehensive Income was issued in 1997. Statement 130
establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, Statement 130
requires that all components of comprehensive income shall be classified
based on their nature and shall be reported in the financial statements in
the period in which they are recognized. A total amount for comprehensive
income shall be displayed in the financial statements where the components
of other comprehensive income are reported. This statement is effective for
the Company's financial statements for the year ended June 30, 1999 and is
not expected to have a material effect on the Company's financial
statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. This statement establishes standards
for the way public business enterprises report information about operating
segments. It also establishes standards for related disclosure about
products and services, geographical areas and major customers. This
statement is effective for the Company's financial statements for the year
ended June 30, 1999 and the adoption of this standard is not expected to
have a material effect on the Company's financial statements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued in February 1998. This statement
revises the disclosure requirement for pensions and other postretirement
F-10
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
benefits. This statement is effective for the Company's financial
statements for the year ended June 30, 1999 and the adoption of this
standard is not expected to have a material effect on the Company's
financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998. This statement establishes accounting
and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for the
Company's financial statements for the year ended June 30, 2001 and the
adoption of this standard is not expected to have a material effect on the
Company's financial statements.
2. PROPERTY AND EQUIPMENT:
----------------------
Property and equipment consist of the following at June 30, 1998:
Equipment $120,816
Office furniture 22,118
--------
142,934
Less accumulated depreciation and amortization (40,892)
-------
Property and equipment, net $102,042
========
3. NOTES PAYABLE:
-------------
At June 30, 1998, the Company had $1,023,725 of notes payable to investors
which mature on October 15, 2000 and accrue interest at 10% per annum.
These notes are convertible into shares of the Company's common stock, at
the option of the holder, at a rate of $.1615 per share. As this conversion
feature was below quoted market price of the common stock and the debt was
immediately convertible, the Company recorded approximately $1,014,000 of
additional interest expense during fiscal 1998. However, the Company
believes the conversion price represented the fair market value of the
common stock at the time of the transactions.
4. COMMITMENT AND CONTINGENCY:
--------------------------
Employment Contract - In September 1997, the Company entered into a
three-year contract with an officer of the Company. The contract provided
for base salary, stock options, and severance under certain conditions.
Subsequent to June 30, 1998, the officer voluntarily resigned from the
Company under conditions that did not require any severance payments.
F-11
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
Office Lease - The Company leases office and warehouse facilities under a
three-year operating lease. Total rental expense was $29,553 and $44,873
for the years ended June 30, 1998 and 1997, respectively.
The Company's lease requires monthly payments of approximately $3,500. The
Company may terminate the lease by providing 60 days written notice and
paying a penalty equal to two monthly lease payments at the end of the
60-day period.
5. STOCKHOLDERS' DEFICIT:
---------------------
Non-Qualified Options - The Non-Qualified Options were issued at fair
market value. No option can have a term in excess of ten years and all
options are non-transferrable. Prior to July 1, 1996, ADTI granted
non-qualified options to employees and at June 30, 1998, options were
outstanding to purchase 61,500 shares. These options expire in the years
1999 through 2000, and are exercisable at $.25 to $10 per share.
Non-Qualified Incentive Stock Option Plan - In 1990, the Company's Board of
Directors adopted a Non-Qualified Incentive Stock Option Plan (NQI Plan)
and reserved 100,000 shares of the Company's common stock for issuance
under this plan. Under the NQI Plan, the Company can grant stock options,
stock, stock appreciation rights and related benefits such as loans, tax
benefits, and other rights (each of which is referred to as an "Award").
Eligibility to receive Awards under the NQI Plan is limited to individuals
who render services which tend to contribute materially to the success of
the Company or which may reasonably be anticipated to contribute materially
to the future success of the Company or its subsidiaries. No option granted
under the NQI Plan shall have a term in excess of ten years from the grant
date.
In 1990, the Company granted an aggregate of 65,000 options under the NQI
plan to purchase shares of the Company's common stock at an exercise price
of $3.50 per share. These options have not been exercised and expire in the
year 2000.
Equity Incentive Plan - On September 18, 1997, the Board adopted, subject
to shareholder approval, the Equity Incentive Plan (the Plan) and reserved
2,500,000 shares of the Company's common stock for issuance under the Plan.
The purposes of the Plan is to provide those who are selected for
participation in the Plan with added incentives to continue in the
long-term service of the Company and to provide a financial incentive that
will help the Company attract, retain, and motivate the most qualified
employees and consultants. The Plan permits the grant of Incentive Stock
Options, NonQualified Stock Options, Restricted Stock Awards, Stock
Appreciation Rights, Stock Bonuses, Stock Units and other stock grants.
During fiscal 1998, the Company issued Non-Qualified Options for the
purchase of 1,500,000 shares of the Company's common stock to an officer of
the Company at an exercise price of $.1315 per share under the Plan.
Options for the purchase of 718,750 common shares had vested as of June 30,
1998. These options will expire by September 1999, due to termination of
employment. In January 1998, the Company granted options to purchase
F-12
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
750,000 shares at a price of $.1615 per share under the Plan. Of these
options, options for the purchase of 100,000 shares of common stock vested
immediately upon grant and expire in 2000. Of the remaining 650,000
options, options for the purchase of 157,500 shares of common stock vest in
January 1999. The remaining options vest equally on a monthly basis from
February 1999 through January 2002. Options for the purchase of 50,000
shares expired in July 1998 due to termination of employment. Options for
the purchase of 650,000 shares of common stock expire in 2008 or within 90
days of termination of employment with the Company.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Outstanding, beginning of year 126,500 $2.04 126,500 $2.04
Granted 2,250,000 $ .14 --
Canceled -- --
--------- -------
Outstanding, end of year 2,376,500 $ .24 126,500 $2.04
========= =======
</TABLE>
At June 30, 1998, options for 945,250 shares were exercisable (at a
weighted average exercise price of $0.37) with 350,000 shares becoming
exercisable in 1999 and 312,500 shares becoming exercisable by June 30,
2001, subject to continued employment by certain individuals. Subsequent to
June 30, 1998, options to purchase 768,750 shares of common stock expired
prior to vesting as a result of employee termination. If not previously
exercised, options outstanding at June 30, 1998, will expire as follows:
Weighted
Average
Number Exercise
Year Ending June 30, of Shares Price
-------------------- --------- -----
1999 770,250 $ .16
2000 1,006,250 .34
2008 600,000 .16
---------
2,376,500 $ .24
=========
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for stock options and
warrants which are granted to employees.
F-13
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
Accordingly, compensation cost of $214,725 has been recorded for grants of
options and warrants to employees as the exercise prices were less than the
quoted market price of the Company's common stock on the grant dates. Had
compensation cost been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of FAS 123,
the Company's net loss applicable to common stockholders and the related
per share amounts would have been reduced to the pro forma amounts
indicated below.
Year Ended
June 30,
1998
-----------
Net income (loss) applicable to common
stockholders:
As reported $(2,971,929)
Pro forma $(2,971,784)
Net income (loss) per common share:
As reported $ (0.12)
Pro forma $ (0.12)
The weighted average fair value of options granted to employees for the
years ended June 30, 1998 was $0.23. The fair value of each employee option
and warrant granted in 1998 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Year Ended June 30,
1998
-------------------------
Options A Options B
--------- ---------
Expected volatility 253% 253%
Risk-free interest rate 6% 6%
Expected dividends - -
Expected terms (in years) 2 10
Preferred Stock - The Company has the authority to issue 100,000,000 shares
of preferred stock. The Board of Directors has the authority to issue such
preferred shares in series and determine the rights and preferences of the
shares.
As of June 30, 1998, the Company has issued 1,843,900 shares of Series C
Preferred Stock (the Preferred Stock). The Preferred Stock entitles holders
to receive dividends, if declared by the Board of Directors, totaling, in
the aggregate, $.83 per share. Dividends on the Preferred Stock shall be
paid before any dividends or other distributions shall be declared or paid
on ADTI's common stock. ADTI may elect to redeem, in cash, some or all the
Preferred Stock, at its option, at the Preferred Stock's liquidation value
F-14
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
of $.67 plus any unpaid dividends. Holders may require ADTI to redeem the
Preferred Stock any time after ADTI has fully paid the dividend of $.83 per
share or at any time after a change in control of ADTI, as defined. If the
Preferred Stock is redeemed at the election of the holder, ADTI has the
option to redeem the Preferred Stock by issuance of either cash or ADTI's
common stock at market value based on a value of $1.50 per preferred share,
less dividends previously paid.
6. INCOME TAXES:
------------
A long-term deferred tax asset totaling approximately $4,300,000 is
primarily the result of the Company's net operating loss carryforward,
which the Company has fully reserved through a valuation allowance. This
valuation allowance increased by $475,000 during 1998 as a result of the
increase in losses.
The Company has had no taxable income under Federal or state laws.
Therefore, no provision for income taxes was included in net loss.
As of June 30, 1998, the Company has accumulated net operating loss
carryforwards of approximately $12,918,000 for income tax purposes subject
to reduction or limitation of use as a result of limitations relating to a
50% change in ownership in prior years. These amounts expire periodically
through 2013 if not utilized sooner.
7. SUBSEQUENT EVENTS:
-----------------
Subsequent to June 30, 1998, the Company issued an additional $100,000 in
10% convertible notes due October 15, 2000. These notes are convertible
immediately into common stock at a rate of $.1615 per share.
Subsequent to June 30, 1998, the Company executed an agreement (the
"Settlement Agreement") in settlement of previously pending litigation. In
connection with the Settlement Agreement, the Company received $175,000
cash and 1,402,157 shares of ADTI common stock. The ADTI common stock
acquired in the settlement has been returned to the authorized but unissued
stock of ADTI.
F-15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 77,464
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 16,238
<CURRENT-ASSETS> 101,810
<PP&E> 142,934
<DEPRECIATION> 40,892
<TOTAL-ASSETS> 203,852
<CURRENT-LIABILITIES> 640,862
<BONDS> 0
0
1,844
<COMMON> 25,177
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 203,852
<SALES> 0
<TOTAL-REVENUES> 32,621
<CGS> 0
<TOTAL-COSTS> 3,004,550
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,085,302
<INCOME-PRETAX> (2,971,929)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,971,929)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
