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, 1999
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.)
7334 South Alton Way, Suite F, Englewood, Colorado 80112
(Address of principle executive offices) (Zip Code)
(303) 267-0111
(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's reported interest and other income for the fiscal year ended
June 30, 1999 was $176,726.
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 1, 1999 was $560,950. As of October 1, 1999, the
registrant had outstanding 23,774,275 shares of Common Stock.
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Table of Contents
Part I. Page
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.........................14
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................14
Part III.
Item 9. Directors and Executive Officers of the Registrant and Compliance...14
with Section 16(a) of the Exchange Act
Item 10. Executive Compensation..............................................16
Item 11. Security Ownership of Certain Beneficial Owners
and Management....................................................19
Item 12. Certain Relationships and Related Transactions......................22
Item 13. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................................22
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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).
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PART I
Item 1. BUSINESS
Introduction
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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 video and other display 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".
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).
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. 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. Effective December 31, 1997, DOL was
dissolved. Display Group was dissolved on June 29, 1999.
Product Efforts
- ---------------
Since inception, the Company has sought to develop a display screen system
(the "FiberVisionTM Screen" or "Screen") using 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 many times on the face of the screen.
This magnification factor depends on the number of fibers and the amount of
space between each fiber on the face of the Screen. Possible applications
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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, roadways, 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 projected image depends upon several key factors,
resolution, color reproduction, and contrast ratio. Resolution of a display
screen can be characterized as the total number of dots or pixels which, when
observed by a viewer's eyes, form the picture. 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, ambient light
reflected back to the viewer's eyes is minimized, resulting in a greater
contrast ratio.
Management believes that several of the Company's future Screen
technologies, if successfully developed, will possess unique features when
compared to other large screen display technologies. One embodiment of the
Screen technology features a viewing angle of up to 170 degrees, both
horizontally and vertically. Another embodiment of the Screen technology allows
for variable viewing angles with the ability to incorporate off axis light
emission of the viewable image.
Excluding the image 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 expected to be less costly to produce than some competitive
systems due to the overall 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 and mechanical components of a Screen
system are limited to projection system technologies.
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 image
projection systems, the working capital necessary to aggressively market its
products and certain deficiencies relating to image quality on the Screen
surface. Less than ideal overall quality of the Screen has been primarily due to
the overall design and 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 in the past, are adequate to utilize as a
demonstration unit for limited marketing purposes and may also be adequate to be
sold for limited applications. Nevertheless, it is the Company's goal to
continue to address and resolve these limiting factors and resume the aggressive
marketing of its Screen technologies utilizing various product configurations.
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Current Developments
- --------------------
Management efforts during the fiscal year ended June 30, 1999 were
primarily focused on raising additional capital for operations focused on
refining and redesigning the screen system 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 image projection systems substantially
brighter and possessing a better cost to performance ratio than some of those
commercially available today are needed to provide adequate illumination for the
successful marketing of its Screen in full color image projection applications.
Toward that end, the Company placed illumination, projection, electrical, and
mechanical engineering specialists under contract to design and develop
adequately bright projection systems for use with the Screen. The Company did
not fully achieve the desired results due to various factors and suspended
further development of a specific video projection system during the quarter
ended March 31, 1999. However, since this point in time, the Company has
explored alternate image projection, and manufacturing technologies which, in
the future, may achieve desirable results for certain applications of the Screen
technologies.
The Company has also continued to investigate possible alternative uses and
markets for its fiber optic screen systems. Currently, the Company is directing
its efforts toward alternative applications and markets which may utilize
various image projection system technologies in conjunction with its Screen
technologies. A new market study has been completed which will be used by the
Company in preparing a comprehensive business plan for these product
applications and other product lines. The Company has completed a first
generation prototype for use in technology demonstrations and preliminary
testing programs with positive results. A second generation prototype will be
completed for more extensive demonstrations and testing during the current
fiscal year.
Approximately $163,180 was spent on research and development by the Company
during the fiscal year ended June 30, 1999.
If the Company is unable to successfully demonstrate the prototypes or
acquire or develop adequately suitable image projection systems and
manufacturing technologies for other applications, 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, 1999, two of the
five members of the board of directors resigned and one new member was appointed
which leaves the Board currently with four 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).
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Manufacturing
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The Company has in the past developed and patented a semi-automated
manufacturing system for production of the FiberVision 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,
manufacture and product applications for the Screen technologies in order to
improve perceived image quality, develop additional markets, and also to prepare
the Screen technologies for more fully automated production.
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
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 optical fibers from Mitsubishi Rayon of Japan. The Company
is aware of two additional fiber suppliers with comparable quality and
competitive pricing.
Marketing
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The Company has in the past concentrated its immediate marketing efforts
toward selling products in the large screen market. In this market, the Company
initially targeted sports facilities, convention and transportation centers,
casinos, users of message boards, and users of signage for advertising and
information applications. The Company suspended the aggressive marketing of its
Screens in January 1998 when the Company began investigating alternatives to the
overall design of the Screen and the associated manufacturing processes. Since
this time, the Company has renewed marketing efforts and has explored possible
alternative uses and markets for its fiber optic screen systems. Currently, the
Company is directing its efforts toward alternative applications and markets
which may utilize various image projection system technologies in conjunction
with the Company's Screen technologies. In addition to exploring these alternate
applications and markets, the Company has continued to pursue the development of
the large screen market through continuous improvements in the Screens overall
design and manufacturing technologies.
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As the product redesign effort and automation of the manufacturing process
become more fully developed, ADTI will continue to 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.
Competition
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Fiber Optic Systems: Management is not aware of any other products on the
market which are based on the same design or manufacturing technologies as the
Company's Screens. However, InWave, Inc. of Eugene, Oregon and American Shizuki
Corporation (ASC) of Louisville, Colorado also manufacture and/or sell fiber
optic display screens. The Company believes that InWave is currently selling its
product for advertising applications and ASC has concentrated on product
introductory efforts for video display 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. The fiber optic display currently being marketed by ASC in the United
States is based on technology purportedly acquired from Nippon Telephone &
Telegraph (NTT). ASC, a wholly owned subsidiary of Shizuki Electric Company,
Inc. of Japan, is primarily a manufacturer of electronic capacitors in the
United States and has limited experience in the fiber optic screen market.
Light Bulb or CRT Systems: Several companies, including Sony, Panasonic,
Toshiba, and Mitsubishi, manufacture large video screens which are based on
light bulb, cathode luminescent or CRT technology. These systems are competitive
with the Screen in certain applications and currently represent a significant
portion 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
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rear screen projection systems. However, these projection systems represent a
majority of the market in certain 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 over 108
separate companies including some major electronics manufacturers such as Sony,
Mitsubishi and Panasonic. However, some of the LED screens sold and operated
over the past few years have begun to exhibit undesirable viewing
characteristics. These include "pixel to pixel" and "module to module", color or
chromatic shift, variations in uniform luminous intensities, and other optical
variations due to inconsistent thermal dissipation and variations in the
manufacturing processes of LED components. Also, LED screens have a relatively
high "cost per pixel" ratio when compared to the Company's Screen technology.
In summary, the Company is subject to active competition from various
companies in the large screen image projection and display industry. Most of
these companies have substantially greater financial resources, human resources
and production capabilities than those of the Company. Some of 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.
Proprietary Rights
- ------------------
The Company's product is predicated on proprietary fiber optic display
technologies 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 fiber optic display technologies. 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 optic display technologies 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 nonessential has
expired. The Company subsequently filed and was issued one additional patent by
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the U.S. Patent and Trademark Office in fiscal year ended June 30, 1999. In
August 1999 the Company filed another patent which has a current status of
"patent pending" with the U.S. Patent and Trademark Office. This latest "patent
pending" reflects new intellectual property created through the Company's
ongoing research and development efforts.
During the fiscal year ended June 30, 1999, 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 issued
patents. Accordingly, the Company has written off capitalized costs associated
with these patents. However, the Company intends to hold and maintain these
issued patents.
The Company intends to protect its intellectual property through trade
secrets, patents pending, 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
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As of October 8, 1999, ADTI employed three full-time employees, who
directed research and development and conducted administrative functions. The
Company may employ additional staff as further development or manufacturing
requirements dictate and working capital permits. The Company has placed
illumination, projection, electrical, and mechanical engineering specialists
under contract to design and develop adequately bright image projection and
manufacturing technologies. The Company also retains various consultants on a
contract basis as needed for management, engineering, legal and accounting
services.
Item 2. DESCRIPTION OF PROPERTY
The Company leases one unit containing office, R&D and manufacturing space
at 7334 South Alton Way, Building 14, Suite F, Englewood, Colorado 80112. The
current facility has a total of 1,411 square feet at a current base rental of
$1,058 per month plus operating expenses of $415 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
May 31, 2002. The Company has one option to terminate and cancel the lease
effective May 31, 2000 by providing the landlord with notice to vacate ninety
days prior and paying a penalty equal to four monthly base lease payments. As
working capital permits and operations dictate, the Company may consider
alternative space in the future to accommodate space requirements to further
develop the product and an automated manufacturing method.
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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 former 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.
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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
- -------------------- ---- ---
1998
----
September 30, 1997 $0.3125 $0.0625
December 31, 1997 .2500 .1875
March 31, 1998 .2188 .1563
June 30, 1998 .2200 .1875
1999
----
September 30, 1998 $0.2200 $0.0600
December 31, 1998 .0600 .0200
March 31, 1999 .1000 .0200
June 30, 1999 .0550 .0500
As of October 1, 1999 there were approximately 1,757 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.
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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.)
Results of Operations
- ---------------------
For the fiscal year ended June 30, 1999, the Company reported a net loss of
($582,813) as compared to ($2,971,929) for fiscal 1998. The loss in 1998
included an increase to interest expense of approximately $1,014,000 related to
below market conversion feature on debt, compensation expense of approximately
$214,000 related to issuances of stock options to employees 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.
The Company reported consulting revenue and interest income of $1,170 and
$32,621 for the fiscal years ended June 30, 1999 and 1998, respectively. The
1999 revenue consisted entirely of interest income. The 1998 revenue consisted
of $2,621 in interest income and $30,000 in 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.
During the fiscal year ended June 30, 1999, the Company received funds in
settlement of previously pending litigation. (See Item 3. "Legal Proceedings",
above.) In connection with a settlement agreement effective August 10, 1998 (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.
The Company reported no revenue from the sale of its product for either
fiscal year. 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.
The Company reported general and administrative expenses of $469,282 and
$1,103,730 for the fiscal years ended June 30, 1999 and 1998, respectively.
Legal and accounting fees decreased by approximately $119,500 in 1999 from 1998
due to the settlement of litigation and less complex financial reporting in 1999
following completion of the Exchange. Due to downsizing, salaries and related
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employee benefits decreased for the fiscal year ended June 30, 1999 from 1998 by
approximately $132,500. In addition, the Company reported additional
compensation expense 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 reflected 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 began
investigations of 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
issued patents. Accordingly, the Company wrote down capitalized costs of
$451,492 associated with these patents to $0 during the fiscal year ended June
30, 1998.
During the fiscal year ended June 30, 1998 the Company determined that
image projection systems substantially brighter and possessing a better cost to
performance ratio than those commercially available today are needed to provide
adequate illumination for the successful marketing of its Screen in full color
image projection applications. Toward that end, the Company placed illumination,
projection, electrical, and mechanical engineering specialists under contract to
design and develop adequately bright projection systems for use with the Screen.
The Company did not fully achieve the desired results due to various factors and
suspended further development of a specific video projection system during the
quarter ended March 31, 1999. However, since this point in time, the Company has
explored alternate image projection, and manufacturing technologies which, in
the future, may achieve desirable results for certain applications of the Screen
technologies.
Currently, the Company is directing its efforts toward alternative
applications and markets which may utilize various image projection system
technologies in conjunction with its Screen technologies. The Company has
completed a first generation prototype for use in technology demonstrations and
preliminary testing programs with positive results. A second generation
prototype will be completed for more extensive demonstrations and testing during
the current fiscal year.
Research and development costs decreased from $364,026 for the year ended
June 30, 1998 to $163,180 for the year ended June 30, 1999. This decrease is
primarily due to the Company's downsizing.
Interest expense decreased from $1,085,302 for 1998 to $127,071 for 1999
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 increased from
$71,368 in the fiscal year ended June 30, 1998 to $127,071 for the same fiscal
period of the current year primarily due to an increase in Convertible,
Redeemable Promissory Notes outstanding for the fiscal year ended June 30, 1999.
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Liquidity and Capital Resources
- -------------------------------
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,
1999, the Company reported negative net worth of $2,043,548 and negative working
capital of $521,458. The Company will require additional capital for
administrative expenses, continued development of the display system, further
design and development of an automated manufacturing process and marketing
costs. Management believes that the Company's continued existence is dependent
upon its ability to: 1) develop or acquire an adequately bright projector or
other light source; 2) complete the design and development of an 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.
Cash flows from financing activities for the fiscal years ended June 30,
1999 and 1998 consisted entirely of the issuance of 10% convertible, redeemable
promissory notes to shareholders totaling $550,242 and $1,050,000, respectively.
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 rates from $.05 to
$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, 1999 were
used for ongoing product and manufacturing process development, alternative
market analysis, operating expenses and investments in capital equipment.
Subsequent to the fiscal year ended June 30, 1999, the Company sold an
aggregate of $180,000 of additional 10% convertible, redeemable promissory notes
under a private placement offered to qualified investors with substantially the
same terms as those discussed above.
ADTI reported a working capital deficit position at June 30, 1999. Current
liabilities exceeded current assets by $521,458. At June 30, 1999, 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.
Pending a favorable outcome of the second phase prototype project described
above, the Company will recommence efforts on further design and development of
the 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.
12
<PAGE>
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
A00" 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, a limited 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 continue its assessment of the potential impact of
the Year 2000 Issue on the Company's business in the future.
13
<PAGE>
Item 7. FINANCIAL STATEMENTS
See indexes to financial statements on page F-1.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 September 25, 1998:
Directors and Officers Age Position with ADTI
- ---------------------- --- ------------------
Gene W. Schneider 73 Chairman of the Board and Director
Matthew W. Shankle* 39 President and Director
Rebecca L. McCall 42 Secretary
David J. Babiarz, Esq. 44 Assistant Secretary
Lawrence F. DeGeorge 54 Director
Mark L. Schneider** 44 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.
14
<PAGE>
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 UnitedGlobalCom, Inc. ("UCOMA"), a NASDAQ listed 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 company, and its predecessors since inception.
United Cable merged with several entities including United Artists
Communications to form United Artists Entertainment 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 UCOMA.
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 product design 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
listed 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 former privately held
subsidiary of the Company. From 1993 to the present, Ms. McCall also provides
general accounting services for several other 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 & Associates, P.C. (OB&A) of Englewood, CO since 1994. From 1992 to
1994, Mr. Babiarz served as a Vice President of OB&A 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
15
<PAGE>
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 served as a director of UCOMA. Since May 1998, Mr. DeGeorge served as a
director of CompleTel, LLC, a multinational provider of switched, local
telecommunications and related services.
Mark L. Schneider - Mr. Schneider was appointed a Director effective
September 16, 1997. Mr. Schneider is currently Chairman and Chief Executive
Officer of United Pan-European Communications ("UPC"), an AEX and NASDAQ listed
company which provides enhanced broadband video, data communication and voice
telephony services. Mr. Schneider is also currently Executive Vice President of
UCOMA where he is responsible for international investments, a position he has
occupied since December, 1996. He has also been a Director of UCOMA since its
inception. From 1989 to December, 1996, Mr. Schneider served as President or a
consultant to UCOMA. 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.
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:
Name of Reporting Person Late Form 3 Late Form 4 Late Form 5 Transactions
------------------------ ----------- ----------- ----------- ------------
Gene W. Schneider 0 0 1 1
Mark L. Schneider 0 0 1 1
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, 1999 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.
16
<PAGE>
SUMMARY COMPENSATION
Year Ended Other Annual
Name June 30, Salary Bonus Compensation Total
---- -------- ------ ----- ------------ -----
Matthew W. Shankle(1) 1999 $ 73,000 -0- -0- $ 73,000
President, Former 1998 $ 68,868 -0- -0- $ 68,868
Vice President 1997 $ -0- -0- -0- $ -0-
Kenneth P. Warner (2) 1999 $ 34,615 -0- -0- $ 34,615
Former President, Former 1998 $ 114,231 -0- -0- $114,231
Chief Executive Officer 1997 $ -0- -0- -0- -0-
(1) Mr. Shankle was appointed President effective September 14, 1998. From
October 3, 1997 until his appointment as President, Mr. Shankle served as
Vice President. Prior to his appointment as Vice President, he received
approximately $35,343 in consulting fees for marketing and research and
development.
(2) Mr. Warner was appointed President and Chief Executive Officer (CEO)
effective September 17, 1997. Prior to his appointment, he received
approximately $17,404 in fees for management services. He resigned as
President and CEO effective September 11, 1998.
Aggregated Option/SAR Values at June 30, 1999
Number of Value of
Securities Unexercised
underlying Options/SARs in-the-money
Unexercised Options/SARs Not options/SARs
Name Options/SARs Exercisable Exercisable ($) (1)
---- ------------ ----------- ----------- --- ---
Matthew W. Shankle (2) 500,000 177,083 322,917 $ -0-
Kenneth P. Warner (3) 781,250 781,250 -0- $ -0-
(3) Based on the last sale price of the Company's Common Stock prior to the
fiscal year ended June 30, 1999 of $.055.
(4) 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 September 30, 1999, 177,083 of these
options were vested.
(5) All of these options expired on September 11, 1999 due to termination of
employment by Mr. Warner.
17
<PAGE>
There were no options granted or exercised during the fiscal year ended
June 30, 1999.
Compensation of Directors
- -------------------------
During the fiscal year ended June 30, 1999, 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
- ---------------------
The Company currently has Non-qualified Options to purchase 61,500 shares
of the Company's Common Stock 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, 1999, have not
been exercised and expire from 1999 to 2000.
18
<PAGE>
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
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, 1999, 1,481,250 options were outstanding under this plan at exercise
prices from $.1315 to $.1615 per share. Of these options, 1,093,750 options are
exercisable, of which 781,250 expired in 1999, 100,000 expire in 2000 and
212,500 expire in 2008. Of the 387,500 non-vested options at June 30, 1999, all
expire in 2008.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 30, 1999, certain
information regarding the equity securities of ADTI beneficially owned of record
by each officer, director, each person known by ADTI to beneficially 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 September 30,
1999, 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.
19
<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) 10,854,443 35.65% Preferred 0 .00%
140 Intracoastal Pointe Drive $.001 Par
Suite 410
Jupiter, Florida 33477
Bruce H. Etkin Common (3) 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 (4) 73,347 0.31% Preferred 0 .00%
7334 South Alton Way $.001 Par
Building 14, Suite F
Englewood, CO 80112
G. Schneider Holdings, Co. Common 4,941,959 20.79% Preferred 520,420 28.22%
4643 S. Ulster, Suite 1300 $.001 Par
Denver, CO 80237
Gene W. Schneider (1) Common (5) 11,475,271 37.86% Preferred (4) 520,420 28.22%
4643 S. Ulster, Suite 1300 $.001 Par Direct and
Denver, CO 80237 Indirect
Mark L. Schneider (1) Common (6) 6,062,562 22.18% Preferred 264,232 14.33%
4643 S. Ulster, Suite 1300 $.001 Par
Denver, CO 80237
Matthew W. Shankle (1) Common (7) 177,083 .74% Preferred 0 .00%
7334 South Alton Way $.001 Par
Building 14, Suite F
Englewood, CO 80112
All current officers and Common (8) 28,642,706 70.25% Preferred 784,652 42.55%
directors as a group Direct and
Indirect
20
</TABLE>
<PAGE>
(1) Officer or director.
(2) Includes 6,671,934 shares underlying convertible promissory notes owned by
the reporting person. The notes are convertible at prices ranging from $.05
to $.1615 per share until October 15, 2000 unless the notes are called
sooner by the Company.
(3) Includes 451,740 shares underlying convertible promissory notes owned by
the reporting person. The notes are convertible at $.1615 per share until
October 15, 2000 unless the notes are called sooner by the Company.
(4) Includes options to purchase 65,417 shares of Common Stock that are
currently exercisable at prices ranging from $.1615 to $.25 per share and
which expire from 2000 to 2008.
(5) Includes 6,533,312 shares underlying convertible promissory notes owned by
the reporting person. The notes are convertible at prices ranging from $.05
to $0.1615 per share until October 15, 2000 unless the notes are called
sooner by the Company. Also includes 4,941,959 shares of Common Stock and
520,420 shares of Series C Preferred Stock owned by G. Schneider Holdings
Co. of which Gene W. Schneider is the general partner.
(6) Includes 3,553,389 shares underlying convertible promissory notes owned by
the reporting person. The notes are convertible at prices ranging from $.05
to $0.1615 per share until October 15, 2000 unless the note is called
sooner by the Company.
(7) Includes 177,083 options to purchase Common Stock at $0.1615 per share,
exercisable until 2008.
(8) Includes 16,758,635 shares underlying convertible promissory notes. The
notes are convertible at prices ranging from $.05 to $0.1615 per share
until October 15, 2000 unless the note is called sooner by the Company.
Also includes options to purchase 242,500 shares of Common Stock that are
currently exercisable at prices ranging from $.1615 to $.25 per share and
which expire from 2000 to 2008.
Changes in Control
- ------------------
The Company knows of no arrangement or events, the occurrence of which may
result in a change in control.
21
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gene W. Schneider, Mark L. Schneider, Lawrence F. DeGeorge and Matthew W.
Shankle are Directors of ADTI.
As of October 8, 1999, Messrs. Gene Schneider, Larry DeGeorge and Mark
Schneider have loaned $603,230, $781,041 and $246,710, respectively, for which
they received 10% convertible, redeemable promissory notes of the Company with
conversion rates from $.05 to $.1615. As of June 30, 1999, $152,140 of interest
expense has accrued on these notes.
Management of the Company is of the opinion that the terms and conditions
of the foregoing transactions were no less favorable for the Company 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.)
22
<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).
10.6 Form of Convertible, Redeemable Promissory Notes various investors and the
Company dated from June 28, 1999 through September 10, 1999 (enclosed
herewith).
11. Not applicable.
12. Not applicable.
13. Not applicable. 16. Not applicable.
23
<PAGE>
18. Not applicable.
19. Not applicable.
22. 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.
--------------------
None.
24
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report............................................... F-2
Balance Sheet - June 30, 1999.............................................. F-3
Statements of Operations - For the Years Ended June 30, 1999 and 1998,
and Cumulative from Inception (March 15, 1995)
through June 30, 1999............................................. F-4
Statement of Changes in Stockholders' Equity (Deficit) - For the Period from
Inception (March 15, 1995) through June 30, 1999.................. F-5
Statements of Cash Flows - For the Years Ended June 30, 1999 and 1998,
and Cumulative from Inception (March 15, 1995)
through June 30 1999.............................................. F-7
Notes to Financial Statements.............................................. F-9
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, 1999 and the related statements of operations, changes in stockholders'
equity (deficit) and cash flows for the years ended June 30, 1999 and 1998 and
for the period from inception (March 15, 1995) to June 30, 1999. 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 presentation.
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. as of June 30, 1999 and the results of its operations and its cash flows
for the years ended June 30, 1999 and 1998 and for the period from inception
(March 15, 1995) to June 30, 1999 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 19, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEET
JUNE 30, 1999
ASSETS
------
CURRENT ASSETS:
<S> <C>
Cash $ 80,352
Other current assets 4,311
-----------
Total current assets 84,663
PROPERTY AND EQUIPMENT, net 51,877
-----------
TOTAL ASSETS $ 136,540
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 340,775
Other accrued liabilities 265,346
-----------
Total current liabilities 606,121
CONVERTIBLE NOTES PAYABLE 1,573,967
COMMITMENTS AND CONTINGENCY (Notes 1 and 4)
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,
23,774,275 shares issued and outstanding 23,775
Additional paid-in capital 4,229,130
Deficit accumulated during the development stage (6,298,297)
-----------
Total stockholders' deficit (2,043,548)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 136,540
===========
See accompanying notes to these financial statements.
F-3
</TABLE>
<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,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
CONSULTING REVENUE $ -- $ 30,200 $ 30,200
OTHER INCOME:
Related party interest income -- -- 162,761
Other interest income 1,170 2,421 3,591
Settlement income 175,000 -- 175,000
Other 550 -- 550
------------ ------------ ------------
Total revenue and other income 176,720 32,621 372,102
COSTS AND EXPENSES:
General and administrative 469,282 1,103,730 1,712,367
Research and development 163,180 364,026 3,072,146
Impairment of intangible assets -- 451,492 451,492
Interest expense - related party 127,071 1,085,302 1,434,394
------------ ------------ ------------
Total costs and expenses 759,533 3,004,550 6,670,399
------------ ------------ ------------
NET LOSS $ (582,813) $ (2,971,929) $ (6,298,297)
============ ============ ============
NET LOSS PER COMMON SHARE
(BASIC AND DILUTIVE) $ (0.02) $ (0.12)
============ ============
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING 24,012,450 24,138,224
============ ============
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, 1999
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 Display
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)
See accompanying notes to these financial statements.
F-5
</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, 1999
(continued)
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------------- ---------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1997
(carryforward) 1,843,900 1,844 21,343,923 21,344 2,453,503 (2,743,555) (266,864)
Debt convertable 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)
Retirement of shares
in settlement -- -- (1,402,157) (1,402) 1,402 -- --
Net loss -- -- -- -- -- (582,813) (582,813)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 1999 1,843,900 $ 1,844 23,774,275 $ 23,775 $ 4,229,130 $ (6,298,297) $ (2,043,548)
============ ============ ============ ============ ============ ============ ============
See accompanying notes to these financial statements.
F-6
</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,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net loss $ (582,813) $(2,971,929) $(6,298,297)
Adjustments to reconcile net loss to net
cash used in operating activities:
Acquired research and development
expense -- -- 2,536,494
Impairment of intangibles -- 451,492 451,492
Depreciation and amortization 47,994 117,904 215,747
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 1,896 304 2,200
(Increase) decrease in:
Inventory 16,238 35,581 6,048
Other current assets 3,805 2,262 (135,796)
Increase (decrease) in:
Accounts payable (143,291) (74,082) (105,075)
Accrued interest payable to members 114,702 68,186 386,012
Other accrued liabilities (6,160) 817 (36,008)
----------- ----------- -----------
Net cash used in operating activities (547,629) (1,141,407) (1,749,125)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,355) (75,260) (98,714)
Proceeds from sale of property and equipment 8,630 8,400 17,030
Advances to affiliates -- -- (932,925)
Purchase of note receivable and security
interest -- -- (225,000)
Cash received in acquisition -- -- 303,812
----------- ----------- -----------
Net cash provided by (used in) investing
activities 275 (66,860) (935,797)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions -- -- 103,127
Proceeds from notes payables to stockholders 550,242 1,050,000 2,362,642
Proceeds from line-of-credit -- -- 299,505
----------- ----------- -----------
Net cash flows provided by financing
activities 550,242 1,050,000 2,765,274
----------- ----------- -----------
See accompanying notes to these financial statements.
F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,888 (158,267) 80,352
CASH AND CASH EQUIVALENTS, at beginning of
period 77,464 235,731 --
------------ ------------ ----------
CASH AND CASH EQUIVALENTS, at end of period $ 80,352 $ 77,464 $ 80,352
============ ============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ -- $ 746 $ 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
============ ============ ==========
Conversion of notes payable
stockholders to common stock $ -- $ 550,000 $ 550,000
============ ============ ==========
Conversion of interest payable on
notes to notes payable $ 10,242 $ -- $ 10,242
============ ============ ==========
Retirement of shares in settlement $ 1,402 $ -- $ 1,402
============ ============ ==========
See accompanying notes to these financial statements.
F-8
</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 and other display screen systems. The Company
has not yet commenced principal operations and is therefore still in the
development stage.
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
$521,458 as of June 30, 1999. The Company has also received notice from the
State of Colorado alleging past due sales tax and related accrued interest
totaling approximately $220,000. 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 years ended June 30, 1998 and 1999, 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 in full color image projection
applications. The Company placed several illumination, projection,
mechanical and electrical engineering specialists under contract to design
and develop an adequately bright projection system for use with the Fiber
Vision Screen. The Company did not fully achieve the desired results due to
various factors and suspended further development of the specific video
projection system during the quarter ended March 31, 1999. Currently, the
Company is directing its efforts on an alternative application and market
which will utilize a different light source. The Company completed a first
generation prototype for technology demonstration and preliminary testing
programs with positive results. A second generation prototype is expected
to be completed for more extensive demonstrations and testing during the
current fiscal year. 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.
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 7 years) of the
respective assets. Depreciation expense for the years ended June 30, 1999
and June 30, 1998 was $47,994 and $39,778, respectively.
F-9
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
Intangibles - Intangibles previously included patents and technology
related to the Company's video display systems. These intangibles were
written off at June 30, 1998 pursuant to Statement of Financial Accounting
Standards (SFAS) No. 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.
Impairment of Long-Lived Assets - In fiscal 1997, the Company adopted SFAS
No. 121, Accounting for Impairment of Long-Lived Assets. 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 wrote 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
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, 1999.
Stock-Based Compensation - As permitted under SFAS No. 123, Accounting for
Stock-Based Compensation, the Company accounts for its stock-based
compensation in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. As
such, compensation expense is recorded on the date of grant if the current
market price of the underlying stock exceeds the exercise price. Certain
pro forma net income and EPS disclosures for employee stock option grants
are also included in the notes to the financial statements as if the fair
value method as defined in SFAS No. 123 had been applied. Transactions in
equity instruments with non-employees for goods or services are accounted
for by the fair value method.
F-10
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE 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. SFAS No. 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 1999 and 1998 because the Company had losses from
operations and therefore, the effect of all potential common stock was
anti-dilutive.
Comprehensive Loss - In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income. SFAS No. 130, which is effective for fiscal
years beginning after December 15, 1997, defines comprehensive income as
all changes in shareholders' equity exclusive of transactions with owners,
such as capital investments. Comprehensive income includes net income or
loss, changes in certain assets and liabilities that are reported directly
in equity such as translation adjustments on investments in foreign
subsidiaries, and certain changes in minimum pension liabilities. The
Company's comprehensive loss was equal to its net loss for all periods
presented in these financial statements.
2. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment consist of the following at June 30, 1999:
Equipment $ 111,685
Office furniture 23,939
---------
135,624
Less accumulated depreciation and amortization (83,747)
---------
Property and equipment, net $ 51,877
=========
3. NOTES PAYABLE:
--------------
At June 30, 1999, the Company had $1,573,967 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, $1,173,725 at a rate of $.1615 per share and
$400,242 at a rate of $.05 per share. For 1998 issuance of $1,023,725, this
conversion feature was below quoted market price of the common stock and
the debt was immediately convertible so the Company recorded approximately
$1,014,000 of additional interest expense during fiscal 1998. However, the
F-11
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
Company believes the conversion price represented the fair market value of
the common stock at the time of the transactions. For 1999 issuances of
$550,242, this conversion feature was above quoted market price of the
common stock, so no additional interest expense was recorded during fiscal
1999. Of these notes payable, $1,563,967 and $164,340 of accrued interest
payable at June 30, 1999 were to directors of the Company or owners of more
than 5% of the Company's common stock. Interest expense associated with
notes to directors was $127,071 and $1,085,302 for the years ended June 30,
1999 and 1998, respectively.
4. COMMITMENT AND CONTINGENCY:
---------------------------
Office Lease - The Company leases office and warehouse facilities under a
three-year operating lease. Total rental expense was $35,442 and $27,796
for the years ended June 30, 1999 and 1998, respectively.
The Company's lease requires monthly payments of approximately $1,473.
As of June 30, 1999, lease payments are due during the fiscal year ended
June 30 as follows:
2000 $ 17,680
2001 17,680
2002 16,206
--------
$ 51,566
========
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. At June 30, 1999, options were outstanding
to purchase 61,500 shares. These options expire in fiscal 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 10 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
fiscal 2000.
F-12
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
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, Non-Qualified Stock Options, Restricted Stock Awards, Stock
Appreciation Rights, Stock Bonuses, Stock Units and other stock grants.
No options were granted during fiscal 1999. 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 781,250 common
shares had vested when the officer resigned during fiscal 1999. The vested
options will expire in fiscal 2000. In January 1998, the Company granted
options to purchase 750,000 shares at a price of $.1615 per share under the
Plan. Of these 750,000 options, 600,000 were granted to an officer and an
officer/director of the Company. Options to purchase 150,000 shares of
common stock vested in January 1999 and the remaining 450,000 options vest
equally on a monthly basis from February 1999 through January 2002. These
options expire in 2008 or within 90 days of termination of employment with
the Company. Options for the purchase of 100,000 shares of common stock
were granted pursuant to a separation agreement with a former officer of
the Company, and vested immediately upon grant and expire in fiscal 2000.
The remaining options for the purchase of 50,000 shares were granted to an
employee, did not vest, and expired in July 1998 due to termination of
employment.
A summary of stock option activity is as follows:
1999 1998
--------------------- ------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beginning of year 2,376,500 $ .24 126,500 $2.04
Granted -- $ .00 2,250,000 $ .14
Canceled (768,750) $ .13 -- $ .00
---------- ---------
Outstanding, end of year 1,607,750 $ .29 2,376,500 $ .24
========== =========
F-13
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
At June 30, 1999, options for 1,220,250 shares were exercisable (at a
weighted average exercise price of $0.34 with 150,000, 150,000 and 87,500
shares becoming exercisable in fiscal 2000, 2007, and 2008, respectively,
subject to continued employment by certain individuals. If not previously
exercised, options outstanding at June 30, 1999, will expire as follows:
Weighted
Average
Number Exercise
Year Ending June 30, of Shares Price
-------------------- --------- -----
2000 1,007,750 $.37
2008 600,000 $.16
---------
1,607,750 $.29
=========
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. Accordingly, compensation cost of
$214,725 was recorded during fiscal 1998 for grants of options 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 SFAS No. 123, the Company's net
loss applicable to common stockholders and the related per share amounts
would have been increased to the pro forma amounts indicated below.
Year Ended June 30,
-----------------------------
1999 1998
---- ----
Net loss applicable to common stockholders:
As reported $ (582,813) $ (2,971,929)
Pro forma $ (639,905) $ (3,206,772)
Net loss per common share:
As reported $ (0.02) $ (0.12)
Pro forma $ (0.03) $ (0.13)
F-14
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
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, 1999, 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
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. SETTLEMENT AGREEMENT:
---------------------
During the fiscal year ended June 30, 1999, 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.
7. INCOME TAXES:
-------------
A long-term deferred tax asset totaling approximately $5,900,000 is
primarily the result of the Company's net operating loss carryforward,
which the Company has fully reserved through a valuation allowance.
F-15
<PAGE>
ADVANCE DISPLAY TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
This valuation allowance increased by approximately $198,000 during 1999
mainly 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.
A reconciliation between the amount of reported Federal income tax benefit
and the amount computed by multiplying the applicable statutory Federal
income tax rate is as follows at June 30:
<TABLE>
<CAPTION>
1999 % 1998 %
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computed expected tax benefit $ (198,000) (34)% $(1,010,000) (34)%
(Increase) decrease in tax
benefit resulting from:
Non-deductible expenses -- -- 535,000 18
Increase (reduction) in
valuation allowance
related to net operating
loss carryforwards and
change in temporary
differences 198,000 34 475,000 16
----------- ----- ----------- ----
$ -- 0% $ -- 0%
=========== ===== =========== ====
</TABLE>
As of June 30, 1999, the Company has accumulated net operating loss
carryforwards of approximately $17,465,000 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 2019 if not utilized sooner.
8. RELATED PARTY TRANSACTIONS:
---------------------------
At June 30, 1999, the Company had payables totaling $44,251 due to related
entities (mainly companies with common directors) of the Company. Also see
Notes 3 and 9.
9. SUBSEQUENT EVENT:
-----------------
Subsequent to June 30, 1999, the Company issued an additional $180,000 in
10% convertible notes to three directors of the Company. These notes are
due October 15, 2000, and are convertible immediately into common stock at
a rate of $.05 per share.
F-16
<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 8, 1999
- ------------------------------ ---------------------
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 8, 1999
- ---------------------- ---------------------
By: Gene W. Schneider
Chairman of the Board and Director
/s/ Lawrence F. DeGeorge Date: October 8, 1999
- ------------------------ ---------------------
By: Lawrence F. DeGeorge
Director
/s/ Mark L. Schneider Date: October 8, 1999
- ---------------------- ---------------------
By: Mark L. Schneider
Director
/s/ Matthew W. Shankle Date: October 8, 1999
- ---------------------- ---------------------
By: Matthew W. Shankle
Director
25
Advance Display Technologies, Inc.
Form 10-KSB
for the Fiscal Year Ended
June 3, 1999
Exhibit 10.6
<PAGE>
THE SECURITIES EVIDENCED BY THIS PROMISSORY NOTE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR STATE SECURITIES LAWS. THE SECURITIES
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933,
APPLICABLE STATE SECURITIES LAWS AND THE APPLICABLE RULES AND REGULATIONS
THEREUNDER.
$_________________________ Englewood, Colorado
(Amount)
___________________
(Date)
ADVANCE DISPLAY TECHNOLOGIES, INC.
Series D 10% Convertible, Redeemable Promissory Note
Advance Display Technologies, Inc., a Colorado corporation (the "Company"),
for value received hereby promises to pay to ___________________ ("Holder"), or
registered assigns, the principal sum of ___________________ and no/100 Dollars
($___________________), together with accrued interest, at the office of the
Company in Englewood, Colorado on October 15, 2000.
Interest shall accrue from the date hereof on the amount of principal from
time to time owed on this Note at the rate of ten percent (10%) per annum,
payable at maturity.
This note is one of a series of similar Notes issued by the Company in the
total principal amount of $750,000. The Company also has outstanding Series A,
Series B and Series C Notes for an aggregate total of 1,173,695. The Notes
differ from each other only with regard to the date, principal amount,
conversion rate and the Holder.
Conversion
- ----------
At the option of the Holder hereof, the principal on this Note or any
portion thereof may be converted into Common Stock of the Company at any time
prior to maturity, unless the Note is sooner called as set forth below, at a
conversion rate of $___ per share of Common Stock. No fractional shares will be
issued in connection with any conversion; shares will be rounded to the next
highest number for purposes of determining the conversion rights. All Common
Stock to be issued by the Company in conversion of the Notes shall be issued
pursuant to an exemption from registration requirements of the 1933 Act, and
accordingly, bear the restrictive legend required by Rule 144. If the principal
amount of this Note is so converted, accrued interest on this Note to the date
of conversion shall be paid in cash on October 15, 2000; provided, however, the
Company may elect to pay the interest through issuance of Common Stock at a
<PAGE>
conversion rate of $___ Per share of Common Stock, either at the date of
conversion, or at maturity. In such event, notice of the Company's decision to
issue common Stock in payment of the interest shall be given to the Holders in
writing, and the Common stock shall be issued within a reasonable time
thereafter. No interest on interest shall accrue except in the event of default.
Conversion of this Note shall require surrender of this Note, either for
cancellation (if the entire Note is converted) or reissuance in a new principal
amount (if a portion is converted).
The conversion rate may be amended upon the occurrence of certain events.
In the event the Company's Common Stock shall be split, combined or reclassified
prior to conversion or maturity, the number of shares into which this Note is
convertible shall be adjusted accordingly such that the Holder, upon conversion,
may obtain the same number of shares to which he would have been entitled prior
to such split, combination or reclassification.
The Holder of the Note may exercise the conversion right by surrendering to
the Company or any transfer agent of the company, the original of this Note,
accompanied by written notice specifying the principal amount to be converted.
Conversion shall be deemed effective on the date when delivery of notice of an
election to convert and the original Note is made and shall be referred to as
the "Conversion Date". As promptly as practical thereafter, the Company shall
issue and deliver to or upon the written order of such Holder, one or more
certificates for the number of full shares of Common Stock to which such Holder
is entitled. The Holder shall be deemed a holder of record of the Common Stock
on the applicable Conversion Date. Upon conversion of only a portion of the
Note, the Company shall issue and deliver to or upon the written order of the
Holder, at the expense of the Company, a new Note covering the remaining
principal amount unconverted by the Holder.
Redemption
- ----------
This Note and others of a similar series may be called for redemption at
the option of the Company at any time after November 13, 1999 and up to
September 15, 2000. There is no mandatory redemption or sinking fund obligation
with respect to the Notes. If fewer than all of the Notes are called by the
Company, the Company will select those Notes to be redeemed pro rata or by lot
in such manner as the Board of Directors may determine.
Upon notice of redemption by the Company, and following expiration of the
notice period set forth therein, the Company shall pay the principal amount of
the Note, together with interest at the specified rate up to and including the
date of payment (the "Redemption Amount"). Following payment of the redemption
price, all rights of the Holder under this Note shall be extinguished. Interest
on the Notes shall cease to accrue on the date on which payment is actually
made. The right of the Holder to receive payment of the principal and accrued
interest on the Note shall terminate twelve (12) months from the date of notice
set forth herein. Following the expiration of that twelve (12) month period, the
Note shall be void and of no further effect.
Notice of the Company's option to call the Notes shall be sent by or on
behalf of the Company by certified mail, postage prepaid, to the Holders of
record of all Notes at the respective addresses as they appear on the records of
the Company, no less than thirty (30) days prior to the date scheduled for
<PAGE>
payment. Such notice shall set forth (i) the election of the Company to call the
Notes; (ii) the date of payment; (iii) the place or places at which the Notes
may be surrendered for payment of the principal thereof; and (iv) stating the
name and address of any agent selected by the Company to assist in such payment.
Notwithstanding the foregoing provisions, the Company may act as payment agent.
If notice of the Company's decision to call the Notes shall have been given
as set forth above, the Holder's right to convert the Note into Common Stock
shall terminate following expiration of thirty (30) days from the date of
notice. For purposes of this paragraph, the date of notice shall be deemed the
date such notice was placed in the United States Mail, posted and addressed as
set forth above. Notwithstanding the provisions of this paragraph, if the
Company shall fail to make payment of the Redemption Amount on the date
established for such payment, then each Holder, including the Holder of this
Note, shall be entitled to convert into Common Stock up to and including the
date of actual payment.
Miscellaneous
- -------------
Subject to compliance with applicable Federal and state securities laws, if
any, this Note will be transferrable upon its surrender at the office of the
Company in Englewood, Colorado, duly endorsed or accompanied by written
instrument of transfer in a form which is satisfactory to the Company and duly
executed by the Holder thereof or by his attorney, duly authorized in writing.
Any Notes issued upon exchange or transfer shall be issuable in like principal
amount. No service charge will be made for any such transfer or exchange, but
the Company may require payment of a sum sufficient to cover any tax or other
governmental charges in connection with the transfer.
The Company acknowledges that this Note evidences a business loan, and not
a consumer loan nor a consumer-related loan as defined in the Colorado Uniform
Consumer Credit Code.
The Company, all endorsers hereof, and each of them, hereby expressly waive
presentment, demand, notice of dishonor, protest, notice of protest and
nonpayment, and expressly waive any right or defense of setoff for claims which
the Company may have against the Holder.
No failure on the part of the Holder to exercise, and no delay in
exercising any right hereunder shall operate as a waiver of such right; nor
shall any single or partial exercise by Holder of any right hereunder preclude
the exercise of any other right. The remedies herein provided for are cumulative
and not exclusive of any remedies provided by law.
It is agreed that if this Note is not paid when due or declared due
hereunder, and following five (5) days advance written notice by Holder and an
opportunity to cure a default, the entire principal and accrued interest thereon
shall draw interest at the rate of twelve percent (12%) per annum, and that
failure to make any payment of principal or interest when due shall cause the
whole Note to become due at once, or the interest to be counted as principal, at
the option of the holder of the Note. The Company agrees to any extension of
<PAGE>
time of payment and partial payments before, at or after maturity and, in the
event that suit is brought to collect this Note or enforce any provision
thereof, agrees to pay all reasonable costs of collection, including reasonable
attorney's fees.
This Note is made in and shall be governed by and interpreted in accordance
with the laws of the State of Colorado.
ADVANCE DISPLAY TECHNOLOGIES, INC.
a Colorado corporation
By:
Matthew W. Shankle
President
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