As filed with the Securities and Exchange Commission on June 12, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ending February 28, 1997 Commission File No. 33-16343
AMERICAN DIGITAL COMMUNICATIONS, INC.
(Exact name of registrant as specified in charter)
Wyoming 13-3411167
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5575 DTC Parkway, Suite 355 (303) 770-8283
Englewood, Colorado 80111 (Registrant's Telephone No. incl. area
(Address of Principal's Executive code)
Offices)
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or infor-
mation statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K ( x ).
Based on the closing high bid price on May 9, 1997, the aggregate market
value of the voting stock held by non-affiliates of the registrant was
approximately $3,780,389.
On May 9, 1997, the number of shares outstanding of the registrant's
Common Stock was 24,468,407.
DOCUMENTS INCORPORATED BY REFERENCE: None
Total number of pages, including cover page 43. Exhibit Index begins at
page 16.
Part I
------
Item 1. Business.
-----------------
Certain matters discussed in this Annual Report may constitute forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 (the "Reform Act") and as such may involve risks and
uncertainties. These forward-looking statements relate to, among other things,
expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market and
statements regarding the Company's goals The Company's actual results,
performance, or achievements expressed or implied in such forward-looking
statements. For discussion of the factors that might cause such a difference,
see Item 6 Management's Discussion and Analysis or Plan of Operations.
Introduction.
-------------
American Digital Communications, Inc. ("American Digital", "ADC" or the
"Company") is a corporation organized June 30, 1993 under the laws of the
state of Wyoming. The Company's executive offices are located at 5575 DTC
Parkway, Suite 355, Englewood, Colorado 80111, and its telephone number is
(303) 770-8283, fax (303) 770-8315 and web address www.adcm.com.
American Digital Communications (ADC) is the successor to Mont Rouge
Resources, Inc., a New York corporation organized on March 19, 1987. The
company completed a small public offering in 1987 and in March of 1988
acquired American Fidelity Holding Corporation, a Delaware corporation, in a
stock-for-stock exchange. The acquisition was rescinded in 1989, and the
company was dormant until early 1993. Mont Rouge Resources redomiciled to
the State of Wyoming on February 14, 1993 . At this point, management made
the decision to enter the wireless communications business and became active
in June, 1993.
Overview of Current Business.
-----------------------------
The company's initial strategy was to acquire wireless communications
800 MHz analog licenses with the intent of eventually implementing an
Enhanced Specialized Mobile Radio (ESMR) service. Even though the company
completed agreements for approximately nine hundred 800 MHz channels, it was
not successful in securing sufficient contiguous spectrum in any market. The
reason was simple. During this time Nextel, OneComm, Dial-Call, Pittencrief
and others were acquiring the 800 and 900 MHz licenses and beginning to
implement 800 MHz analog to digital conversion strategies utilizing
Motorola's ESMR technology (later called iDEN).
Mr. Gene Klawetter joined the Company in March of 1994 as President (See
Part III, Item 9, Directors and Executive Officers of the Registrant). Given
the shortage of 800 MHz licenses and the accelerated conversion of the 800
MHz spectrum to digital he decided to amicably dissolve ADC's pending agree-
ments for tentatively acquiring these licenses, put the company in order and
to pursue aggregation of 220 MHz licenses. Strategically ADC planned to
implement the 220 MHz spectrum as an "off-load" platform for low cost
analog dispatch users, users that were being squeezed out of the 800 MHz
playing field as a result of the fast-paced digital conversion which was
taking place. The strategy was subsequently proven to be excellent as the
industry's need for alternative voice dispatch spectrum became paramount.
220 MHz Operations.
-------------------
In 1991 the FCC had granted, through lottery, 3,300 licenses and 4
national licenses in the 220 MHz spectrum. An early lawsuit, however, brought
by a disgruntled potential licensee froze any activity in the roll-out of the
220 industry. But by 1994 the lawsuit was settled and 220 was launched in
early April. ADC proceeded to acquire 500+ channels of 220 MHz spectrum and
concurrently pursued funding to build out the licenses.
The funding, it turned out, was extremely difficult to find. Investment
capital that was available to the wireless industry was finding its way to
the highly visible 800 MHz-based digital mobile radio implementation. At the
same time the FCC continued to change the construction deadlines for 220 by
granting extensions, some as short as four months, a period of time so brief
it discouraged many manufacturers from taking the risk to make enough equip-
ment to satisfy the potential construction demand. Motorola, a significant
player in any wireless market elected not to develop equipment for 220 MHz,
an unheard of occurrence which caused the investment community to conclude,
"if Motorola is not in 220, it must not be very good or very significant."
This, among other factors, became major impediments to finding timely funding
support for construction and operation of 220 MHz.
As a result of the dynamics occurring throughout the wireless industry,
220 development was slow. To date, minimal national license build-out has
occurred. It is estimated that less than 750 of the original 3,300 licenses
have been built. The reason for this poor performance was lack of funding
brought about by 1) construction deadline issues, 2) insufficient demand to
generate product availability, 3) delay caused by the original lawsuit, 4)
the spectrum auction process, 5) available funds diverted to other wireless
activity, i.e. PCS, Digital Paging, IVDS, etc., and 6) a final set-in-stone
construction deadline of 8/17/96. The Federal Government , as a result of
item 6, will recapture a significant number of un-built licenses. In late
summer or fall of 1997, the FCC will conduct 220 MHz spectrum auctions. This
move will, in all probability, place a premium on the price of the new 220
MHz licenses awarded in the auction of which only a few large participants
can take advantage.
Nevertheless, the 220 MHz spectrum will be exploited and will eventually
be successful... but only for a few larger aggregators who are emerging with
the bulk of the existing licenses and who will have deep enough pockets to
not only compete in the upcoming auctions but have sufficient capital to
operate large networks.
While ADC was unable to construct as many licenses as it had targeted
during this time, the Company accomplished a great deal. Twenty three
licenses for a total of 115 channels were constructed and are operational.
ADC was able to establish a strategic relationship with Simmonds Capital Ltd.
SCL is the parent organization of Simmonds Electronics (of Canada). Midland
International, Helix, Simmonds Distribution, PowerTel and a principal in
Intek Diversified Inc. Intek is a merger between Securicor Radiocoms Ltd. (a
significant manufacturer of 220 MHz radio equipment), RoamerOne (a large 220
MHz aggregator), and Midland International Corp. (a distributor of wireless
radio equipment in the US) and is the largest 220 MHz operator in the United
States. SCL owns approximately 30% of ADC's stock and has been instrumental
in ADC's success in building out the 23 systems. ADC has become operational
and relatively sound financially, even though cash flow is not yet at an
acceptable level.
During the period beginning early 1994 until the present the company has
grown asset value from $599K to today's asset value of $4.0 M. Of more
significance the shareholder's equity, during the same period, went from
$119K to $2.2 M.
In simple words, ADC did a good job of focusing on an industry that
hasn't gotten off the ground...an industry that made it very difficult for a
smaller player to survive. ADC, therefore, will no longer pursue the acquisi-
tion of, or build-out of enough licenses to be a relevant factor in the
industry. The reasons have become obvious:
1) There are no more licenses available as a result of the 8/15/96
construction deadline.
2) Licenses made available in the 1997 auction will be extremely
expensive.
3) Loading of ADC's existing sites will take 2 to 3 years and, at the
end of that time, the maximum realizable yearly revenue with
systems fully subscribed is approximately $12,000,000.
4) As a company, ADC desires growth faster than is currently possible
in 220 with the limited availability of resources necessary to
achieve it.
Having said this, it should be noted that the Company has been contacted
by a number of individual 220 MHz system owners and "other" 220 groups, i.e.
220 Limited Liability Companies (LLC) partnerships. These various entities
are seeking someone to manage or acquire their systems. A number of industry
factors are driving the current owners uncertainty, etc. It is possible that
the Company could take advantage, particularly in a financial sense, of
certain opportunities and will continue to entertain them on an individual
basis. Any continuing involvement by the Company in 220 will be based solely
on benefit accruing to the Company. There can be no assurance, however that
the Company will enter into any additional 220 MHz transactions.
Current Activities.
-------------------
On April 15, 1997, the Company and Intek Diversified Corporation (Intek)
of Torrance, California reached an agreement and entered into a letter of
intent by which Intek will acquire ADC's 22 constructed 220 MHz systems.
Under the terms of the contract, Intek will pay ADC $75,000 at
closing. Part of the purchase price will be paid by returning to the Company
1,150,000 shares of ADC common which was issued in August, 1996 at $0.39 per
share as partial payment to finance the acquisition of Securicor transmitter
equipment. Additionally, ADC will receive 2.6 million shares of Ventel, Ltd.
stock currently held by Intek at $0.11 per share or $286,000. The total
value of this transaction, as stated in the Agreement, is approximately
$3.7 million.
Transaction Amount
----------- ------
Gross sale at $168K per system paid as follows:
Cash 75,000
1,150,000 shares ADC @ $0.39 per share 448,500
2,600,000 shares Ventel @ $0.11 per share 286,000
759,473 shares Intek (IDC) @ $3.80 per share 2,886,500
---------
Total value as stated in the agreement: 3,696,000
=========
As noted, Intek will issue stock for payment of the net balance based
upon a share price of $3.80. At the time of actual closing, the share price
could be less than the $3.80 strike price.
The Company will possibly attempt to settle the 3 year, 8% inventory
note which was negotiated with Simmonds Communications Ltd. (SCL) in November
1996. However there can be no assurance of this until done. The Company will
strive to settle debt with Intek stock. The Company will net a significant
number of Intek shares which can be leveraged for cash as needed.
The Company, which transitioned from developmental stage to a revenue-
generating operational stage in January 1996 and continuing into 1997, has
been engaged in several aspects of the wireless telecommunications business
in the United States. Based on the preceding rationale the Company's strategic
direction will materially change. Concurrently, ADC is actively attempting
to deploy all of its remaining assets in a manner which assures the company
of an ongoing revenue stream, either in the form of royalty payments or pay-
ments based on a predetermined sale price of its Midland distribution rights.
Original
Book
Asset Disposition Value
----- ----------- --------
Option to purchase Midland Europe Currently under
Limited (MEL) consideration N/A
Exclusive US marketing rights to
Midland 800 MHz LTR land mobile For sale or
radios Sub-licensed $360,000
Exclusive Midland LMR marketing ADC
rights to Mexico and South evaluating
America offers $315,000
Exclusive Midland LMR marketing Actually
rights for Pacific Rim, sub-licensed,
Australia, New Zealand, evaluating
Thailand and Southeast Asia options $315,000
Exclusive Midland LMR marketing
rights to certain western Territory
Canadian provinces sub-licensed $367,500
The Midland marketing rights will be sub-licensed or sold on a negotiat-
ed basis with either 3 or 5 year payouts. In the transaction currently under
negotiation the structure involves a cash down payment with ownership retain-
ed by ADC and a royalty paid by the purchasing party to ADC for a fixed term.
The purchaser will have an option to buy at the end of that term with the
royalty payments applied to and deducted from the principal. At the end of
the term the amortized book value will be such that the sale is favorable to
ADC. While it is expected that the disposition of the above assets will go
according to plan and be favorable to the Company, there can be no assurance
that such will be the case.
Plan of Operations.
-------------------
Upon completion of the 220 MHz liquidation and full deployment of the
remaining assets, the Company's profile will include reduction of shares
outstanding by 1.150 M, the Company will hold as much as 2.6 million shares
of Ventel stock and, after satisfying the Ventel debt, will hold over 500K
shares of Intek stock. Further, the company will have all of its assets
deployed under some form of revenue agreement with the revenue applied
against a predetermined purchase price. With the completion of the asset
deployment the Company will have, ostensibly, fully disengaged from the
radio business.
The Company entered the wholesale radio business as an adjunct to that
of operating and providing radio dispatch services. With the decision to exit
the 220 MHz market it also followed to somewhat modify ADC's original
strategy for the land mobile radio product distribution business. After care-
ful consideration ADC made the decision to sublicense territories and deploy
certain assets in order to more aggressively pursue other opportunities. The
decision is based on the following:
1) The 800 and 900 MHz spectrum has, for all intents and purposes, been
converted to digital and/or PCS-like services.
2) The 450 MHz spectrum in the U.S. will continue to be used by low-
cost operators, and paging hardware sales volume projections
don't justify the Company's participation. 450 MHz trunking is
not a viable option since it involves many of the investment
challenges presented by 220 MHz.
3) Acceptance of on-going gross margins in the highly competitive LMR
radio business is difficult.
4) Start-up costs (inventory and parts) will require substantial
investment.
5) Lead time to new technology from the radio manufacturer (8 months)
is not consistent with the Company's needs.
The decision is also consistent with the Company's near-term objectives
of employing assets in such a way as to realize immediate operating results
by generating 1) short-term cash and 2) ongoing revenue streams.
Concurrently ADC will look to acquire an existing operating company
using assets realized from the sale of the constructed 220 systems. While the
Intek stock has a twelve-month hold the Company would expect to leverage the
stock to accomplish the acquisition. ADC has been and continues to look at
possible acquisition alternatives on the basis of:
1) ADC's ability to offer a valuable management team (See bios in Part
III).
2) As a public company ADC affords a vehicle of opportunity to compan-
ies interested in long-term liquidity.
3) ADC provides a significant tax loss carry-forward that could be
used to favorably affect future profits of an operating company.
4) A comparatively strong balance sheet.
The Company feels confident it will be able to find a fit based on what
it has to offer and what potential candidates are seeking. ADC, within two
months of the completion of the aforementioned activities, intends to
identify and begin the due-diligence process with a high technology related
company which has been and will continue to be profitable and which has a
history of and potential for future growth. As of this date ADC has looked at
companies in voice processing, software development, wireless access to the
Internet and other Internet-related activities.
The acquisition of an operating company with cash flow is uppermost in
ADC's plan to improve shareholder value.
Employees.
----------
The Company had in its employ as of February 28, 1997, five full-time
salaried employees.
Item 2. Description of Property.
--------------------------------
The Company leases from unaffiliated parties approximately 5,000 square
feet of office space in the Denver Tech Center of Englewood, just south of
Denver. Management believes that these facilities will be sufficient for the
Company's corporate headquarters for the foreseeable future and the cost is
less than that of the Company's previous location.
Item 3. Legal Proceedings.
--------------------------
The Company is not a party to any pending or threatened litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------
No meeting of shareholders was held during the fiscal year ended
February 28, 1997.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
----------------------------------------------------------------------
The Company's common stock trades in the over-the-counter market and is
quoted (symbol ADCM) on the OTC Electronic Bulletin Board operated by the
National Association of Securities Dealers, Inc. The table below sets forth
the high and low bid quotations for the common stock for the fiscal years
ended February 28, 1997 and February 29, 1996.
Fiscal Year Ended Fiscal Year Ended
2/28/97 2/29/96
----------------- -----------------
High Low High Low
---- --- ---- ---
First Quarter 1 1/2 1 5/16
Second Quarter 19/32 5/16 2 1/8 1
Third Quarter 15/32 1/4 29/32 7/16
Fourth Quarter 19/64 9/64 1 1/16 7/16
These quotations reflect only inter-dealer prices, without retail mark-
up, mark-down or commissions and may not represent actual transactions.
Shareholders.
-------------
On April 30, 1997, the Company had 178 shareholders of record. The
Company believes it has approximately 400 shareholders including holders
whose securities are held in street name or nominee accounts.
Dividends.
----------
The Company has never paid a cash dividend on its common stock and does
not expect to pay one in the foreseeable future. Payment of dividends in the
future will depend on the Company's earnings and its cash requirements at
that time.
Item 6. Management's Discussion and Analysis or Plan of Operation.
------------------------------------------------------------------
Financial Condition.
--------------------
During fiscal year 1997, the Company continued as a revenue-generating
operation and experienced total revenue from sales of $596,507. The Company
expects this to change radically as it sheds its current assets as discussed
earlier. It is anticipated that this will be of relatively short duration
with substantially greater revenues realized from the acquisition of an
operating company. While the Company believes this to be the direction it
will take there can be no assurances it will happen as planned.
During the year ended February 28, 1997, total assets increased 101%,
from $2,001,092 to $4,014,745 and shareholders equity increased 69%, from
$1,292,803 to $2,178,389. More critical for the Company is that current
assets against current liabilities is 2.1 times as compared to a year
earlier where current assets against current liabilities was 5.5 times. Cash
on hand decreased during the year ended from $115,312 to $31,701. The Company
had accumulated a deficit of $5,665,041 compared to a year earlier of
$4,432,639.
Results of Operations.
----------------------
The Company's fiscal year end 1997 revenue was $596,507 against expenses
of $1,828,909. The $1,232,402 net loss was diverse and primarily preparatory
to operations that began in January 1996. These activities include signing
letters of intent, the purchase of 800 MHz LTR inventory and the right to do
business world wide, purchase agreements to acquire wireless systems, enter-
ing into agreements for the management, build out and operation of wireless
licenses, and obtaining financing for all
activities.
Liquidity and Capital Resources.
--------------------------------
Cash on-hand on February 28, 1997 decreased over the previous year, but
was nominal in light of the Company's acquisition plan. During the fiscal
year ended February 28, 1997, the Company issued 2,990,922 shares of its
common stock in exchange for cash of $573,994. During the year, 4,750,000
restricted common shares were issued for distribution rights valued at
$997,500. The company also issued 1,150,000 restricted common shares in
exchange for 50% of the purchase of 13 "turn-key" 220 MHz communication
systems valued at $448,500 and 331,942 shares in exchange for the payment /
purchase of 220 MHz licenses valued at $62,994.
Inflation.
----------
The Company believes that inflation affects the Company's business to no
greater extent than the general economy.
Recent Authoritative Pronouncements.
------------------------------------
In February 1997, Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" was issued and is effective for periods ending
after December 15, 1997. Earlier application is not permitted. This statement
is not expected to have a material effect on the Company's reported per share.
Item 7. Financial Statements and Supplementary Data.
-----------------------------------------------------
The financial statements of the Company as of February 28, 1997 and
1996, and for each of the years in the two-year period ended February 28,
1997 and 1996, are included as part of this report beginning on page F-1
hereof. An index to the financial statements appears at page 18.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
------------------------------------------------------------------------
In April of 1995, the Company engaged Causey Demgen & Moore Inc. to
serve as the Company's independent accountants, replacing BDO Seidman, who
had reported on the Company's financial statements for the fiscal years
ending February 28, 1994 and 1993. The Company has engaged the accounting
firm of Causey Demgen & Moore Inc. to report on the fiscal years ending
February 28, 1997 and February 29, 1996, as included in this annual report.
There were no reportable disagreements on matters of accounting principles,
practices, financial statement disclosures, auditing scope or procedures
with BDO Seidman in connection with that firm's audit of the fiscal years
ended February 28, 1994 or 1993 or through the date of this annual report.
The report of Causey, Demgen & Moore, Inc. contains no adverse opinion
or disclaimer of opinion, nor was qualified or modified as to uncertainty of
audit scope or accounting principles.
Part III
--------
Item 9. Directors and Executive Officers of the Registrant.
------------------------------------------------------------
During the fiscal year in audit, the Company appointed Kenneth Adelberg
of Philadelphia and Ian McDonald, Tri-Capital Management, Toronto, to its
Board. The Company expects to make three additional appointment's to complete
its seven member board and to appoint one of the members as its new Chairman.
Mr. Klawetter will continue as a Director, President and CEO of the Company.
The present director and executive officer of the Company, their age,
positions held in the Company and duration as such, are listed below. Each
director will serve until the next annual meeting of shareholders, or until
his respective successor has been elected and duly qualified. Directors serve
one-year terms. Officers hold office at the pleasure of the Board of
Directors, absent any employment agreement.
Name Age Position Held and Tenure
---- --- ------------------------
R. Gene Klawetter 59 Chairman of the Board, Director
Chief Executive Officer, President
(since March 15, 1994)
Kenneth Adelberg 50 Director, Board member
(Since April 1, 1996)
Ian McDonald 41 Director, Board member
(Since April 1, 1996)
Daniel M. Smith 33 Acting Chief Financial Officer ,
Chief Accounting Officer, Controller
(since March 29, 1994)
The following is a brief account of the business experience during at
least the past five years of each director and executive officer, indicating
the principal occupation and employment during that period, and the name and
principal business of the organization in which such occupation and employ-
ment were carried out.
R. Gene Klawetter
-----------------
Mr. Klawetter brings a decade of professional wireless communications
experience and growth to ADC. He was previously President and CEO of Millicom
Radio Telephone Company, Inc., a 900 MHz provider in 5 states. Mr. Klawetter
has extensive experience in working with the FCC in the areas of licensing
and legal interface. He has successfully negotiated contracts, management
agreements, option, lease and purchase agreements which gave him the adminis-
trative expertise necessary to manage a SMR operation. Subsequent to the
decision of Millicom's parent company to exit the SMR industry, Mr. Klawetter
successfully liquidated approximately $5 million in assets on behalf of
Millicom. Mr. Klawetter's extensive experience in the computer, communica-
tions and information systems environment has given him the executive skills
necessary to successfully implement the strategies of ADC.
Mr. Klawetter is formerly the President and Chief Operating Officer of
Pinetree Computer Systems, a company he helped take public in 1984 (OTC) and
was National Sales Manager of NBI, Inc., of Boulder, Colorado when NBI, Inc.
went public in 1979 (NASDAQ). As a result, Mr. Klawetter's public market and
financial management experience will serve ADC well.
Mr. Klawetter attended Blinn College, TCU and Pace University in New
York. Also, during his 9 year career with Xerox, he attended case study
school at Exeter Academy in New Hampshire, which was taught by Harvard
Business School Professors.
Kenneth Adelberg
----------------
Kenneth Adelberg, BS (Biophysics), BS (Psychology), and MBA, is the
President, CEO of HiFi House Group of Companies, Founding Shareholder /
Director of Republic Bank, and Founding Shareholder / Director of U.S. Watts.
Mr. Adelberg has extensive experience in the electronics distribution busi-
ness and the financing of entrepreneurial growth activities.
Ian McDonald
------------
Ian McDonald, BS (Economics), MBA (Marketing) and C.A., is the Managing
Director of Tri-Capital Management Limited, a Toronto based private Merchant
Bank since 1989. Mr. McDonald has extensive experience in strategic planning,
consulting, mergers/acquisitions, recapitalization, and financing of growth
businesses.
Former Officers and Directors.
John D. Brasher, Jr.
--------------------
Mr. Brasher served as a director of the Company until December 1995 and
was Secretary of the Company until January 1997. Mr. Brasher is still legal
counsel to the Company. Mr. Brasher is an attorney engaged since February
1988, in the practice of law in Denver, Colorado, concentrating in the fields
of corporate and securities law. From February 1987 to February 1988 he
practiced law with the firm of Pred and Miller, Denver, Colorado, concentra-
ting in corporate and securities law. Mr. Brasher holds a BA degree in
English and a law degree, both awarded by Louisiana State University.
Significant Employees.
Other than the Company's executive officers listed above, the following
persons also are expected to have a significant role in the Company's growth
and development.
Daniel M. Smith
---------------
Mr. Smith has a demonstrated history of management in corporate opera-
tions, commercial banking, cost accounting standards, and standard asset
management. Previously, as controller with Millicom Radio Telephone Company,
Inc. of Dallas, and the Accounting Manager for the Resolution Trust Corpora-
tion (RTC). Mr. Smith is highly regarded for his ability in the areas of
SMR financial statement development and cost analysis with regard to the SMR
communications and banking industries.
Further, Mr. Smith helped manage the receivership and was responsible
for the final disposition and RTC legal settlement of 120 failed savings and
loans in the Texas area. Additional experience includes his experience inter-
nationally working for Texas Instruments with budget development, business
case proforma proposals and forecast models.
Mr. Smith graduated from the University of Akron, Ohio with a BS in
Accounting.
George E. Sullivan
------------------
Mr. Sullivan, who serves as manager of contract administration, retired
from the IBM Corporation in 1993 after twenty years in sales and marketing.
For the last 15 (fifteen) years Mr. Sullivan successfully led a sales and
technical team representing IBM to all of the major holding company banks in
Colorado and to two major credit card processing firms. The banking team was
responsible for generating more than $30M in net revenue and managed yearly
revenues of approximately $10M. Mr. Sullivan has a strong background in
solving business problems with computers and communications technology. His
strong organizational and management skills and analytical capabilities are
particularly applicable to managing the contracts and procedures associated
with building and operating 220 MHz systems.
Upon retiring from IBM, Mr. Sullivan joined Wavelink Corporation, a
start-up company involved in the development of a proprietary digital video
compression technology. He developed a business lan for the company and ran
Wavelink's office operation before leaving to join American Digital Communica-
tions, Inc.
Mr. Sullivan graduated from the University of Texas at El Paso with a BS
in Electrical Engineering.
Item 10. Executive Compensation.
---------------------------------
The following table sets forth information regarding compensation paid
to the Company's Chief Executive Officer and board members during the last
two fiscal years. The CEO's total annual salary and bonus did not exceed
$100,000, nor did that of any other board member.
Summary Compensation Table
--------------------------
Securities All Other
Name Other Annual Underlying Compensation
and Principal Year Salary($) Bonus Compensation Options ($) (2) (3)
Positio ($) (1) ($)
- ------------- ---- -------- ----- ------------ ---------- ------------
R. Gene
Klawetter,CEO,
Chairman, 1996 $80,000 $4,000 - - $50,000
President 1997 $80,000 $9,000 - - -
(1) Certain of the Company's executive officers receive personal benefits
in addition to salary and cash bonuses. The aggregate amount of
the personal benefits, however, does not exceed the lesser of
$50,000 or 10% of the total of the annual salary and bonus reported
for the named officers.
(2) These amounts were paid on behalf of the listed executive officers
for life insurance benefits.
(3) 100,000 shares of common stock was awarded to Mr. Klawetter.
Options Granted During The Last Fiscal Year
Individual Grants
--------------------------------------------
Number of % of Total
Securities Options
Name Underlying Granted to Excercise or
and Principal Options Employees in Base Price Expiration
Position Granted Fiscal Year ($/Share) Date
- ------------- ---------- ------------ ------------ -----------
R. Gene
Klawetter, CEO 500,000 22% $0.425 Jan. 2000
President 750,000 33% $0.35 Jan. 2000
Kenneth
Adelberg 250,000 11% $0.10 Apr. 2000
Ian McDonald 250,000 11% $0.10 Apr. 2000
Option Exercises In Last Fiscal Year
and Fiscal year-end Option Values
-------------------------------------
Number of
Securities $ Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
No. of Shares $ FY End FY End
Acquired on Value Exercisable / Exercisable /
Name Exercise Realized Unexercisable Unexercisable
- ------------- ------------- -------- -------------- -------------
R. Gene
Klawetter - - 1,250,000 / None $Nil / $Nil
Kenneth
Adelberg - - 250,000 / None $Nil / $Nil
Ian
McDonald - - 250,000 / None $Nil / $Nil
The Company has no stock appreciation rights (SAR) plan in place and has
not awarded SAR's to any person. The Company has no long-term incentive
plans, as that term is defined in the rules and regulations of the Securities
and Exchange Commission.
1993 Employee Stock Compensation Plan.
---------------------------------------
The Company has adopted an Employee Stock Compensation Plan for
employees, officers, directors of the Company and advisors to the Company
(the "ESC Plan"). The Company has reserved a maximum of 2,000,000 Common
Shares to be issued upon the grant of awards under the ESC Plan. Employees
will recognize taxable income upon the grant of Common Stock equal to the
fair market value of the Common Stock on the date of the grant and the
Company will recognize a compensation deduction at such time. The ESC Plan
will be administered by the Board of Directors. No stock has been granted
under the ESC Plan at February 28, 1997. This plan was registered under the
Securities Act in July, 1996.
1993 Incentive Stock Option Plan.
---------------------------------
The Company has adopted an Incentive Stock Option Plan for key employees
(the "ISO Plan"). The Company has reserved a maximum of 2,000,000 Common
Shares to be issued upon the exercise of options granted under the ISO Plan.
The ISO Plan is intended to qualify as an "incentive stock option" plan under
Section 422 of the Internal Revenue Code of 1986, as amended. Accordingly,
options will be granted under the ISO Plan at exercise prices at least equal
to the fair market value per share of the Common Stock on the respective
dates of grant and will be subject to the limitations provided by the Code.
However, options may be granted to employees who own more than 10% of the
outstanding shares of the Company of all classes or any parent or subsidiary
thereof (a "Significant Shareholder") only at an option price which on the
date granted is at least 110% of the fair market value of the Common Stock.
With respect to options granted pursuant to Section 422, employees will not
recognize taxable income upon either the grant or exercise of such options.
The Company will not be entitled to any compensation deduction with respect to
such options unless disqualifying dispositions, as defined by such law, are
made. The ISO Plan will be administered by the Board of Directors or a
committee of directors. No options are outstanding under the ISO Plan.
1993 Non-Statutory Stock Option Plan.
-------------------------------------
The Company has adopted a Non-Statutory Stock Option Plan for officers,
key employees, potential key employees, non-employee directors and advisors
(the "NSO Plan"). The Company has reserved a maximum of 2,000,000 Common
Shares to be issued upon the exercise of options granted under the NSO Plan.
The NSO Plan will not qualify as an "incentive stock option" plan under
Section 422A of the Internal Revenue Code of 1986, as amended. Options will
be granted under the NSO Plan at exercise prices to be determined by the
Board of Directors or other NSO Plan administrator. With respect to options
granted pursuant to the NSO Plan, optionees will not recognize taxable income
upon the grant of options, but will realize income (or capital loss) at the
time the options are exercised to purchase Common Stock. The amount of income
will be equal to the difference between the exercise price and the fair
market value of the Common Stock on the date of exercise. The Company will be
entitled to a compensating deduction in an amount equal to the taxable income
realized by an optionee as a result of exercising the option. The NSO Plan
will be administered by the Board of Directors or a committee of directors.
No options were outstanding effective February 28, 1997 under the NSO Plan.
1993 Compensatory Stock Option Plan.
------------------------------------
The Company has adopted a Compensatory Stock Option Plan for officers,
key employees, potential key employees, non-employee directors and advisors
(the "CSO Plan"). The Company has reserved a maximum of 4,000,000 Common
Shares to be issued upon the exercise of options granted under the CSO Plan.
The CSO Plan will not qualify as an "incentive stock option" plan under
Section 422A of the Internal Revenue Code of 1986, as amended. Options will
be granted under the CSO Plan at exercise prices to be determined by the
Board of Directors or other CSO Plan administrator. With respect to options
granted pursuant to the CSO Plan, optionees will not recognize taxable income
upon the grant of options, but will realize income (or capital loss) at the
time the options are exercised to purchase Common Stock. The amount of income
will be equal to the difference between the exercise price and the fair
market value of the Common Stock on the date of exercise. The Company will be
entitled to a compensating deduction in an amount equal to the taxable income
realized by an optionee as a result of exercising the option. The CSO Plan
will be administered by the Board of Directors or a committee of directors.
The options aggregate as of February 28, 1997 under the CSO plan is 2,985,000.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
-------------------------------------------------------------------------
The following table sets forth the names of persons who own of record,
or were known by the Company to own beneficially, more than five percent of
its issued and outstanding common stock, and the beneficial ownership of
stock as of February 28, 1997 date by officers and directors of the Company
and all officers and directors as a group. Except as otherwise noted, each
person listed below is the sole beneficial owner of the shares and has sole
investment and voting power of such shares. No person listed below has any
option, warrant or other rights to acquire additional securities of the
Company, except as may be otherwise noted.
Title Of Name and Address Common Stock Percent
Class Of Beneficial Owners Beneficially Owned Of Class
-------- -------------------- ------------------ --------
Common Stock, R. Gene Klawetter
$.0001 343 Harrison St.
Par Denver, CO 80209 1,250,000 (1) 4.9%
Common Stock, Kenneth Adelberg
$.0001 1001 Sussex Blvd.
Par Broomall, PA 19008 352,000 (2) 1.4%
Common Stock, Ian McDonald
$.0001 36 Toronto St., #850
Par Toronto, Ontario,
Canada M5C 2C5 250,000 (3) 1.0%
Common Stock, Midland Intrntl, Corp.
$.0001 1690 North Topping Ave.
Par Kansas City, MO 64120 4,230,906 17.9%
Common Stock, Simmonds Communication Ltd.
$.0001 5255 Yonge St., Suite 1050
Par Willowdale, Ontario,
Canada M2N 6P4 3,285,714 13.9%
Common Stock, SCL Western
$.0001
Par 1,750,000 7.4%
Common Stock, Ventel, Inc.
$.0001 999 West Hastings St.
Par Suite 900
Vancouver BC V60 2W2 1,500,000 6.3%
Common Stock, Seiler GmbH
$.0001 Bahnhofstrasse 15
Par D-8190 Wolfratshajen,
Austria 1,200,000 5.1%
*All directors and officers 1,852,000 7.0%
(1) This item includes the granted but not exercised option of 500,000
at $0.35 and 750,000 at $0.425.
(2) This item includes the granted but not exercised option of 250,000
at $0.10.
(3) This item includes the granted but not exercised option of 250,000
at $0.10.
Item 12. Certain Relationship and Related Transactions.
--------------------------------------------------------
Henri Hornby, the a shareholder of the Company, loaned the Company
$75,000 on March 15, 1994. The Company signed a new note due April 30, 1997.
As of February 28, 1997 the balance due on Mr. Hornby's 9% interest bearing
note was approximately $10,000.
During the year ended February 28, 1997, the Company purchased approxi-
mately $535,000 of inventory from a related party with a three year eight
percent (8%) promissory note.
(Remainder of page left intentionally blank)
Part IV
-------
Item 13. Exhibits and Reports on Form 8-K.
-------------------------------------------
(a) Exhibits. The following exhibits marked with an asterisk (*) are
included as part of this report. Other exhibits, marked (*), have previously
been filed with the Securities and Exchange Commission and are incorporated
by reference to another registration statement, report or form. References to
the "Company" in this Exhibit Index mean AMERICAN DIGITAL COMMUNICATIONS,
INC., a Wyoming corporation.
Exhibit
Page Page
No. Document No.
- ------- -------- -----
2 Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession...............................
----------------------------------------------------------
2.01 Articles of Merger as filed with the New York Department
of State on February 11, 1994 (incorporated by reference
to Exhibit 2.1 to report on Form 8-K dated February 14,
1994)................................................... *
2.02 Articles of Merger as filed with the Wyoming Secretary of
State on February 14, 1994..(incorporated by reference
to Exhibit 2.2 to report on Form 8-K dated February 14,
1994)................................................... *
2.03 Agreement and Plan of Merger dated July 1, 1993 between
the Company and Mont Rouge Resources, Inc. (incorporated
as Exhibit A to Exhibit 2.2 above)...................... *
3 Articles and Bylaws.......................................
----------------------------------------------------------
3.01 Articles of Incorporation of Mont Rouge Resources, Inc.
as filed with the New York Department of State on
March 19, 1987 (incorporated by reference to Exhibit
3.1 to registration statement on Form S-1, File No.
33-16343)............................................... *
3.02 Articles of Incorporation of the Company, as filed with
the Wyoming Secretary of State on June 30, 1993
(incorporated by reference to Exhibit 3.1 to report on
Form 8-K dated July 14, 1993)........................... *
3.03 Bylaws of the Company (incorporated by reference to Exhibit
3.2 to report on Form 8-K dated July 14, 1993........... *
4 Instruments Establishing Rights of Security Holders.......
----------------------------------------------------------
4.01 Specimen Stock Certificate of the Company (incorporated
by reference to Exhibit 4.1 to report on Form 8-K dated
July 14, 1993........................................... *
10 Material Contracts........................................
----------------------------------------------------------
10.01 1993 Incentive Stock Option Plan of the Company dated July
15, 1993 (incorporated by reference to Exhibit 10.1 to
report on Form 8-K dated July 14, 1993)................. *
10.02 1993 Non-Statutory Stock Option Plan of the Company dated
July 15, 1993 (incorporated by reference to Exhibit 10.2
to report in Form 8-K dated July 14, 1993).............. *
10.03 1993 Employee Stock Compensation Plan of the Company dated
July 15, 1993 (incorporated by reference to Exhibit 10.3
to report on Form 8-K dated July 14, 1993).............. *
10.04 1993 Employee Stock Compensation Plan of the Company dated
November 5, 1993 (incorporated by reference to Exhibit
10.4 to report on Form 8-K dated February 14, 1994)..... *
10.05 Letter of Intent dated March 22, 1994 between SEA, Inc.,
Narrowband Network Systems (NNS), and the Company....... *
10.06 Asset Purchase Agreement dated January 11, 1994 between
Nevada Communications Equipment Company, Inc. and the
Company................................................. *
10.07 Agreement Not To Compete among Nevada Communications
Equipment Company, Inc., Dale Krotke, individually,
and the Company (filed as Exhibit E to the Asset Purchase
Agreement Exhibit 10.6 above)........................... *
10.08 Consulting Agreement between Dale Krotke and the Company
(filed as Exhibit F to the Asset Purchase Agreement
Exhibit 10.6 above)..................................... *
10.09 Asset Purchase Agreement dated March 18, 1994 between
Columbia Communications, Inc. and the Company........... *
10.10 Agreement Not To Compete among Columbia Communications,
Inc., R.F. Hill, and the Company (filed as Exhibit A
to the Asset Purchase Agreement Exhibit 10.8 above)..... *
10.11 Agreement Not To Compete between R.F. Hill and the Company
(filed as Exhibit B to the Asset Purchase Agreement
Exhibit 10.8 above)..................................... *
10.12 Consulting Agreement between R.F. Hill and the Company
filed as Exhibit C to the Asset Purchase Agreement
Exhibit 10.8 above)..................................... *
10.13 Asset Purchase Agreement dated November 30, 1993, between
Donley Communications, Inc., Douglas Donley DBA Donley
Communications, Inc. and the Company.................... *
10.14 Agreement Not To Compete among Donley Communications,
Inc., Douglas Donley, individually, as sole proprietor,
and the Company (filed as Schedule 4.01(f) to the Asset
Purchase Agreement Exhibit 10.12 above)................. *
10.15 Agreement Not To Compete among Douglas Donley DBA Donley
Communications, Inc., Douglas Donley, individually and
the Company (filed as Exhibit A to the Asset Purchase
Agreement Exhibit 10.12 above).......................... *
10.16 Asset Purchase Agreement dated January 11, 1994, between
Schwartz Radio, Inc., Robert L. Schwartz and the
Company................................................. *
10.17 Agreement Not To Compete among Schwartz Radio, Inc.,
Robert Schwartz, individually, and the Company (filed
as Exhibit E to the Asset Purchase Agreement Exhibit
10.15 above)............................................ *
10.18 Consulting Agreement between Robert Schwartz and the
Company (filed as Exhibit F to the Asset Purchase
Agreement Exhibit 10.15 above).......................... *
10.19 Asset Purchase Agreement dated March 15, 1994 between
William E. Orgel and the Company........................ *
10.20 Management And Marketing Agreement between William E.
Orgel and the Company (filed as Exhibit C to the
Asset Purchase Agreement Exhibit 10.18 above)........... *
10.21 Form of Management And Lease Agreement For 800 MHz
Licenses between the Company and each of its
Licensees............................................... *
10.22 Form of Financing Agreement For 800 MHz Licenses between
the Company and each of its Licensees................... *
10.23 Form of Management And Lease Agreement for 220 MHz
Licenses between the Company and each of its
Licensees............................................... *
10.24 FCC Authorization Granted on May 25, 1994................. *
10.25 Amendment To Asset Purchase Agreement dated May 31, 1994,
by and between American Digital Communications, Inc.,
and R.F. Hill and Columbia Communications, Inc.......... *
10.26 Second Amendment To Asset Purchase Agreement Dated July
21, 1994, by and between American Digital
Communications, Inc., and R.F. Hill and Columbia
Communications, Inc..................................... *
10.27 Escrow Agreement dated August 1, 1994, between American
Digital Communications, Inc., and R.F. Hill and
Columbia Communications, Inc............................ *
10.28 Settlement Agreement and Mutual release dated November
11, 1994, by and between American Digital Communications,
Inc. and Douglas Donley D/B/A Donley Communications,Inc. *
10.29 Termination and Release Agreement dated November 14, 1994,
by and between American Digital Communications, Inc.
and Nevada Communications Equipment Company, Inc........ *
10.30 Termination and Release Agreement dated November 14, 1994,
by and between American Digital Communications, Inc.
and Robert L. Schwartz (an individual) and Schwartz
Radio, Inc., collectively referred to as Schwartz....... *
10.31 Termination and Release Agreement dated November 29, 1994,
by and between American Digital Communications, Inc.
and William E. Orgel.................................... *
10.32 Asset Purchase Agreement dated February 24, 1995 for the
sale of 800 MHz communications equipment by and between
American Digital Communications, Inc. and Chadmoore
Communications, Inc..................................... *
10.33 Settlement and Release Agreement dated September 11, 1995,
by and between American Digital Communications, Inc.
and R.F. Hill and Columbia Communications, Inc.......... *
10.34 Amendment To Asset Purchase Agreement dated October 24,
1995 for the sale of 800 MHz communications equipment
by and between American Digital Communications, Inc.
and Chadmoore Communications, Inc....................... *
10.35 Loan Agreement dated November 29, 1995 for the finance and
construction for 13 220 MHz communication systems by
and between American Digital Communications, Inc. and
Brookline Capital Corporation presently Ventel, Inc.),
incorporated by reference to Exhibit 10.35 report on
Form 8-K dated February 14, 1996...................... *
10.36 Assignment and Assumption Agreement dated February 24, 1996
between American Digital Communications, Inc. and Voice
Data Communications, Inc................................ *
10.37 Letter of Intent dated February 26, 1996, by and between
American Digital Communications, Inc. and Pager Plus
Cellular, Inc........................................... *
10.38 Registering under Section 12(g) of the Securities Exchange
Act of 1934 filed on May 6, 1996........................ *
10.39 S-8 Registration Statement of American Digital
Communications, Inc. Compensatory Stock Option plan
under the Securities Exchange Act of 1933 on July 18,
1996.................................................... *
10.40 S-8 Registration Statement of American Digital
Communications, Inc. Employee stock Compensation plan
under the Securities Exchange Act of 1933 on September
27, 1996................................................ *
10.41 Asset purchase agreement dated November 8, 1996 for the
sale of certain licensing rights, distribution rights,
and right to acquire up to $1,000,000 in certain
inventory by and between Simmonds Capital Limited, SCL
Distributors (Western) Ltd., Midland International
Corporation, and American Digital Communications, Inc... *
Index to Financial Statements
-----------------------------
Independent Auditors' Reports F-1
Financial Statements:
Balance Sheet F-2
Statement of Operations F-4
Statement of Changes in Stockholders' Equity (Deficit) F-5
Statement of Cash Flows F-8
Notes to Financial Statements F-10
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
To the Stockholders and Board of Directors
American Digital Communications, Inc.
Denver, Colorado
We have audited the accompanying balance sheet of American Digital
Communications, Inc. as of February 28, 1997 and February 29, 1996,
and the related statements of operations, stockholders' equity, and
cash flows for the years then ended. 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 the audits 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
American Digital Communications, Inc. at February 28, 1997 and
February 29, 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally
accepted accounting principles.
As explained in Note 1, the capitalized costs of the distribution
rights may be reduced materially in the near term.
Denver, Colorado
April 18, 1997 CAUSEY DEMGEN & MOORE INC.
F-1
AMERICAN DIGITAL COMMUNICATIONS, INC.
BALANCE SHEET
February 28, 1997 and February 29, 1996
Assets
------
1997 1996
---------- ----------
Current assets:
Cash $ 31,701 $ 115,312
Accounts receivable 21,110 43,020
Notes receivable 8,548 -
Inventories 469,415 628,602
Radio tower equipment and related
licenses held for sale (Notes 2
and 9) 2,126,636 -
Other current assets 3,888 7,642
---------- ----------
Total current assets 2,661,298 794,576
Property and equipment (Notes 2 and 3):
Office equipment 125,052 112,801
Radio tower equipment - 564,254
Furniture and fixtures 26,082 26,082
---------- ----------
151,134 703,137
Less: Accumulated depreciation 142,286 99,091
---------- ----------
Net property and equipment 8,848 604,046
Other assets:
Distribution rights, net of amorti-
zation of $52,901 (1997) and $6,667
(1996) (Notes 4, 6 and 7) 1,344,599 393,333
Deposits and other (Note 7) - 209,137
---------- ----------
Total other assets 1,344,599 602,470
---------- ----------
$4,014,745 $2,001,092
============ ===========
See accompanying notes.
F-2
AMERICAN DIGITAL COMMUNICATIONS, INC.
BALANCE SHEET
February 28, 1997 and February 29, 1996
Liabilities and Stockholders' Equity
------------------------------------
1997 1996
---------- -----------
Current liabilities:
Accounts payable $ 149,531 $ 4,220
Accounts payable - related parties
(Note 4) 9,510 2,576
Accrued payroll and payroll taxes 4,933 9,593
Accrued interest - related parties 248,471 50,503
Accrued warranty liability 10,373 23,620
Notes payable - related parties
(Note 2) 60,370 37,881
Current portion of capital lease
obligations (Note 3) 6,195 12,886
Current portion of long-term notes
payable - related parties (Note 2) 806,077 2,756
----------- -----------
Total current liabilities 1,295,460 144,035
Long-term debt:
Capital lease obligations (Note 3) 5,597 -
Long-term notes payable - related
parties (Note 2) 535,299 564,254
----------- -----------
Total long-term debt 540,896 564,254
Commitments and contingencies (Notes
1, 3, 6, 7 and 9)
Stockholders' equity (Notes 6, 7 and 9):
Common stock, $.0001 par value;
unlimited shares authorized,
issued and outstanding, 23,627,431
shares in 1997, 14,590,760 shares
in 1996 2,363 1,459
Additional paid-in capital 7,747,767 5,723,983
Common stock subscribed, 436,193 shares 93,300 -
Accumulated deficit (5,665,041) (4,432,639)
----------- -----------
Total stockholders' equity 2,178,389 1,292,803
----------- -----------
Total liabilities and stockholders'
equity $4,014,745 $2,001,092
============ ============
See accompanying notes.
F-3
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
For the Years Ended February 28, 1997 and February 29, 1996
1997 1996
----------- -----------
Revenues (Note 8):
Two-way radio sales $ 596,507 $ 74,664
220 MHz radio tower equipment
sales - 331,500
------------ ------------
Total revenues 596,507 406,164
------------ ------------
Costs and expenses:
General and administrative 923,795 737,438
Cost of two-way radio sales 587,030 53,126
Write-down of two-way radio
inventory 123,000 -
Cost of 220 MHz radio tower
equipment sales - 272,800
Losses on 220 MHz and 800 MHz
SMR systems
acquisitions (Note 7) 105,654 318,989
Depreciation and amortization 89,430 65,700
----------- -----------
Total costs and expenses 1,828,909 1,448,053
----------- -----------
Net loss $(1,232,402) $(1,041,889)
============ ============
Net loss per share of
common stock $ (.07) $ (.13)
============ ============
Weighted average number of
common shares outstanding 18,047,000 8,311,000
============ ============
See accompanying notes.
F-4
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended February 28, 1997 and February 29, 1996
<TABLE>
<CAPTION> Additnl Common
Common stock paid-in stock Accum.
Shares Amount capital subscrbd deficit
--------------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1995 6,772,826 $677 3,509,538 - (3,390,750)
Issuance of common stock
pursuant to Regulation D
private offerings
(Note 6):
For cash 1,345,460 134 447,605 - -
For services 119,407 12 59,692 - -
For payment of
accounts payable 145,813 15 75,042 - -
Issuance of common stock
for cash pursuant to
Regulation S offering
(Note 6) 285,714 29 99,971 - -
Sale of common stock to
finance company
(Note 6) 1,600,000 160 399,840 - -
Issuance of common stock
in conjunction with
settlement of asset
purchase agreement
(Note 7) 90,634 9 74,991 - -
Issuance of common stock
in conjunction with
purchase of inventory
and distribution
agreement (Note 6) 4,230,906 423 1,057,304 - -
Net loss - - - - (1,041,889)
---------- ----- --------- -------- ----------
Balance, February 29,
1996 14,590,760 1,459 5,723,983 - (4,432,639)
</TABLE>
(Continued on following page)
See accompanying notes.
F-5
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended February 28, 1997 and February 29, 1996
<TABLE>
<CAPTION>
(Continued from preceding page)
Additnl Common
Common stock paid-in stock Accum.
Shares Amount capital subscrbd deficit
--------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock
pursuant to Regulation
D private offering for
cash (Note 6) 308,186 31 125,126 - -
Issuance of common stock
and subsequent exercise
of warrants for
cash (Note 6) 2,058,814 206 304,331 - -
Exercise of stock
options for cash 40,000 4 9,996 - -
Issuance of common
stock in payment
for one half the
cost of radio tower
equipment (Note 6) 1,150,000 115 448,385 - -
Issuance of common
stock for cash
pursuant to private
placement (Note 6) 208,705 21 47,979 - -
Issuance of common
stock in conjunc-
tion with purchase
of distribution agree-
ment (Notes 4 and 6) 3,000,000 300 629,700 - -
Issuance of common
stock in conjunc-
tion with purchase
of distribution
agreement (Note 6) 1,750,000 175 367,325 - -
</TABLE>
(Continued on following page)
See accompanying notes.
F-6
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended February 28, 1997 and February 29, 1996
<TABLE>
<CAPTION>
(Continued from preceding page)
Additnl Common
Common stock paid-in stock Accum.
Shares Amount capital subscrbd deficit
--------------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of common
stock to acquire
licenses (Note 6) 270,966 27 55,967 - -
Issuance of shares of
common stock for
interest on related
party note payable
(Note 4) 250,000 25 34,975 - -
Stock subscriptions
received for:
Cash (375,217 shares) - - - 86,300 -
Purchase of licenses
(60,976 shares) - - - 7,000 -
Net loss - - - - (1,232,402)
--------- ----- -------- ----------- -----------
Balance, February 28,
1997 23,627,431 2,363 7,747,767 93,300 (5,665,041)
========== ===== ========= ========== ===========
See accompanying notes.
</TABLE>
F-7
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
For the Years Ended February 28, 1997 and February 29, 1996
1997 1996
Operating activities: ------------ -----------
Net loss $(1,232,402) (1,041,889)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 89,430 65,700
Write off of deposits and costs
of licenses 105,654 259,926
Gain on sale of fixed assets - (41,923)
Issuance of stock for interest
expense 35,000 -
Issuance of common stock for
services and in conjunction
with asset purchase agreements - 134,704
Changes in:
Accounts receivable 21,910 (43,020)
Inventory 694,486 52,745
Other current assets 3,754 (5,142)
Accounts payable 83,745 (189,008)
Accrued payroll and payroll taxes (4,660) (54,243)
Other accrued liabilities 41,954 44,701
----------- -----------
Net cash used in operating
activities (161,129) (817,449)
Investing activities:
Purchase of office and radio tower
equipment (380,000) -
License expenditures (114,316) -
Deposits - payments - (11,521)
Deposits applied - (29,500)
Note receivable (8,548) -
Proceeds from sale of fixed assets - 77,972
----------- -----------
Net cash provided by (used in)
investing activities (502,864) 36,951
Financing activities:
Proceeds from sale of common
stock, net 487,694 947,739
Proceeds from stock subscriptions 86,300 -
Payments of capital lease
obligations (13,345) (13,780)
Payments of note payable (2,756) (1,918)
Borrowings from related party 50,000 -
Payments of notes payable - related
parties (27,511) (41,119)
----------- -----------
Net cash provided by
financing activities 580,382 890,922
----------- -----------
(Continued on following page)
See accompanying notes.
F-8
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
For the Years Ended February 28, 1997 and February 29, 1996
(Continued from preceding page)
1997 1996
----------- -----------
Increase (decrease) in cash (83,611) 110,424
Cash, beginning of period 115,312 4,888
----------- -----------
Cash, end of period $ 31,701 $ 115,312
=========== ===========
Supplemental disclosures of non-cash investing and financing activities:
During the year ended February 28, 1997, the Company financed the
acquisition of $12,251 of equipment through a capital lease and
inventory of $535,299 through a note payable. During the years
ended February 28, 1997 and February 29, 1996, the Company financed
the acquisition of $310,323 and $564,254 of radio tower equipment
through accounts payable and notes payable. During the year ended
February 28, 1997, the Company capitalized interest of $142,766 on
the radio tower equipment and licenses now held for sale.
During the years ended February 28, 1997 and February 29, 1996, the
Company issued common stock for the following:
1997 1996
----------- -----------
Inventory $ - $ 681,347
Radio tower equipment 448,500 -
Licenses 62,994 -
Interest expense 35,000 -
Distribution agreements 997,500 400,000
Warranty liability assumed - (23,620)
Reduction of accounts payable - 75,057
----------- -----------
$1,543,994 $1,132,784
=========== ===========
Supplemental disclosure of cash flow information:
1997 1996
----------- -----------
Cash paid for interest $ 26,311 $ 11,465
See accompanying notes.
F-9
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
1. Summary of significant accounting policies
------------------------------------------
Nature of business:
The Company was organized June 30, 1993 under the laws of
Wyoming. The Company is in the wireless telecommunications
business and intends to provide two-way communications in the 220
MHz band. The Company is the U.S. distributor for 800 MHz LTR
Midland products. The Company also owns the rights to be a
distributor in Canada and other parts of the world for certain
Midland brand commercial land mobile radios and radio parts. The
distribution rights to the Midland brand products were acquired
in three separate transactions described in Notes 4 and 6 herein.
The distribution of Midland brand products outside the United
States had commenced but has not generated significant revenues
at February 28, 1997 and the Company has entered into a letter of
intent to sublicense a portion of the distributorship in Canada
and Asia to other companies (see Notes 7 and 9). The Midland
brand products are currently produced by one supplier; any
interruption of this relationship would adversely affect the
Company. Prior to February 28, 1994, the Company's focus was in
the 800 MHz band. Subsequently, the Company decided to
discontinue the 800 MHz band properties and concentrate on the
220 MHz band. The Company had entered into several asset
purchase agreements to purchase licenses and other related assets
in the 800 MHz band. During the year ended February 29, 1996,
the Company settled its obligations relating to the remaining 800
MHz asset purchase agreements (Note 7).
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Accounts receivable:
No provision for doubtful accounts was deemed necessary at
February 28, 1997 or February 29, 1996.
Inventories:
Inventories are carried at the lower of cost (first-in, first-
out) or market. Inventories consist primarily of two-way radios
and radio parts and supplies and are subject to technological
obsolescence.
F-10
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
1. Summary of significant accounting policies (continued)
------------------------------------------------------
During the year ended February 28, 1997, sales of one product
resulted in approximately $123,000 of losses. The Company has
discontinued the sale of this product.
Depreciation:
Office equipment, furniture and fixtures, including assets under
capital leases, are stated at cost. Depreciation is computed
over the estimated useful life of three years using the straight-
line method. The radio tower equipment will be depreciated, as
soon as customers are loaded on the system, using the straight-
line method over its estimated useful life of 5-10 years.
Amortization of distribution rights:
The cost of distribution rights are being amortized over the term
of the agreement (ten years) or 40 years if no legal term exists,
the period estimated by management to be benefitted.
It is reasonably possible that revenues generated from the
distribution of products pursuant to the agreements will not be
sufficient to recover these capitalized costs. As a result the
capitalized costs may be reduced materially in the near term and
the amortization period shortened.
Measurement of intangibles impairment:
The Company annually reviews the amount of recorded intangible
assets for impairment. If the sum of the expected cash flows
from these assets is less than the carrying amount of these
assets, the Company will recognize an impairment loss in such
period.
Deposits and SMR licenses:
Cost associated with the acquisition of 220 MHz SMR systems and
related FCC licenses were included in deposits and other. These
costs were added to the purchase price of the 220 MHz SMR systems
and licenses upon the successful completion of the acquisition.
The costs were expensed for such acquisitions that were not
consummated.
Income taxes:
The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 ("FASB No. 109").
Temporary differences are differences between the tax basis of
assets and liabilities and their reported amounts in the
financial statements that will result in taxable or deductible
amounts in future years. The Company's temporary differences
consist primarily of tax operating loss carryforwards and start-
up costs capitalized for tax purposes.
F-11
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
1. Summary of significant accounting policies (continued)
------------------------------------------------------
Fair value of financial instruments:
Cash, accounts receivable, accounts payable and accrued
liabilities are carried in the financial statements in amounts
which approximate fair value because of the short-term maturity
of these instruments. Long-term debt is carried in the financial
statements in amounts which approximate fair value because
interest rates have not changed significantly after the debt was
incurred.
Advertising costs:
The Company expenses the costs of advertising as incurred.
Cash flows:
For purposes of the statement of cash flows, the Company
considers cash and all highly liquid investments purchased with
an original maturity of three months or less to be cash
equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and
trade receivables. The Company places its cash with high quality
financial institutions. At February 29, 1996, the balance at one
financial institution exceeded FDIC limits by $15,312.
The Company provides credit, in the normal course of business, to
customers throughout the United States. The Company performs
ongoing credit evaluations of its customers.
Net loss per share:
Net loss per common share is based on the weighted average number
of shares outstanding during each period presented. Options to
purchase stock are included as common stock equivalents when
dilutive.
2. Notes payable
-------------
Short-term notes payable:
The Company's short-term notes payable consist of the following
loans from shareholders at February 28, 1997 and February 29,
1996:
F-12
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
2. Notes payable (continued)
-------------------------
1997 1996
9% note payable - shareholder, due ---------- ---------
April 30, 1997, unsecured $10,370 $37,881
12% note payable - shareholder, due June
30, 1997, secured by radio tower
equipment and the related license 50,000 -
---------- ---------
$60,370 $37,881
Long-term notes payable: ========== =========
Long-term notes payable consist of the following at February 28,
1997 and February 29, 1996:
1997 1996
---------- ---------
Note payable - Ventel, Inc., a related
finance company (Note 4), payable in
monthly installments of $24,199 in the
aggregate including interest of 21% per
annum commencing September 30, 1997,
certain of the Company's radio tower
equipment which is currently held for
sale is pledged as security for the
note (see Note 9) $806,077 $564,254
Note payable - SCL, a related company
(Note 4), payable on November 1, 1999
including interest at 8% per annum,
unsecured 535,299 -
Note payable - office equipment company,
payable in monthly installments of
$278 including interest, secured by
office equipment - 2,756
----------- ---------
1,341,376 567,010
Less current portion 806,077 2,756
----------- ---------
Amount due after one year $ 535,299 $564,254
=========== =========
At February 28, 1997, the maturities of long-term notes payable
are as follows:
1998 $ 806,077
1999 -
2000 535,299
-----------
$1,341,376
===========
F-13
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
2. Notes payable (continued)
-------------------------
During the year ended February 28, 1997, the Company capitalized
interest of $135,123 on the build out of the radio tower
equipment.
Interest expense amounted to $89,156 and $30,966 for the years
ended February 28, 1997 and February 29, 1996, respectively.
3. Lease commitments
-----------------
Real estate lease commitments:
In November 1996, the Company entered into a building lease for
office space in Englewood, Colorado. Minimum monthly rent is
between $4,909 and $5,189 for the three-year lease term. The
lease contains one three-year renewal option. The Company has
also entered into leases for tower spaces for its equipment.
Rent expense for the years ended February 28, 1997 and February
29, 1996 amounted to $110,119 and $138,563, respectively.
Lease commitments:
The Company leases equipment under capital leases. The minimum
annual commitments under the real estate lease, tower space
leases and capital leases are as follows:
Real Tower
Year ended Capital estate space
February 28, leases lease leases Total
------------- -------- -------- -------- --------
1998 $ 7,853 $ 59,185 $ 41,500 $108,538
1999 5,383 60,869 33,700 99,952
2000 897 62,271 9,000 72,168
-------- -------- -------- --------
Total minimum lease
payments 14,133 $182,325 $ 84,200 $280,658
Amount representing ======== ======== ========
interest (2,341)
Present value of future --------
minimum payments 11,792
Current portion of
lease obligations 6,195
Obligations under --------
capital leases due
after one year $ 5,597
========
F-14
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
3. Lease commitments (continued)
-----------------------------
Assets recorded under capital leases at February 28, 1997 are as
follows:
Cost $46,105
Accumulated depreciation 38,336
-------
$ 7,769
=======
4. Related party transactions
--------------------------
At February 28, 1995, the Company owed legal fees of $102,261 to
a law firm owned by a former director/officer of the Company.
During the year ended February 29, 1996, $66,157 of this
obligation was settled by the issuance of 132,313 shares of the
Company's common stock. In connection with the issuance of
stock, the individual agreed to cancel 750,000 options (see Note
6). For the years ended February 28, 1997 and February 29, 1996,
the Company incurred legal fees of $28,148 and $34,306 to the
related law firm of which $9,510 and $2,576 remained unpaid at
February 28, 1997 and February 29, 1996, respectively.
During the years ended February 28, 1997 and February 29, 1996,
the Company constructed and financed $241,823 and $806,077,
respectively, of 220 MHz radio tower equipment through Ventel,
Inc., a major stockholder of the Company. Upon the sale of
certain of the radio tower sites, $241,823 of the loans were
assumed by the purchaser leaving a balance due of $806,077 at
February 28, 1997. In December 1996, the Company issued 250,000
shares of its common stock valued at $35,000 ($.14 per share) to
extend the commencement of monthly payments due under the note
agreement until September 30, 1997, which amount has been
recorded as interest expense.
On November 1, 1996, the Company issued 3,000,000 shares of its
common stock, in exchange for certain Midland distribution
rights, to Simmonds Capital Limited ("SCL") a significant
shareholder of the Company and 100% owner of Midland
International Corporation. The agreement specified a purchase
price of $900,000 or 3,000,000 restricted common shares of ADC
which was the $.30 quoted market price of the Company's stock on
the day of the transaction. For accounting purposes the
restricted common stock was entered on the books at $630,000
($.21 per share) which compared favorably to other similar
transactions. The distribution right grants the Company an
exclusive license to market and sell certain Midland brand
commercial two-way radio products including modifications,
improvements and replacement products for an indefinite period of
time throughout the world excluding certain countries such as the
United States, Canada and certain portions of Europe and Asia.
In addition, the Company purchased inventory of $535,299 for a
note payable to SCL.
F-15
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
5. Income taxes
------------
The book to tax temporary differences resulting in deferred tax
assets and liabilities are primarily net operating loss
carryforwards of $2,849,000 and start-up costs capitalized for
income tax purposes of $2,804,000.
As of February 28, 1997 and February 29, 1996, total deferred tax
assets, liabilities and valuation allowances are as follows:
1997 1996
---------- ----------
Deferred tax assets $1,045,000 $ 958,000
Deferred tax assets resulting from
loss carryforward 1,063,000 653,000
Valuation allowance (2,108,000) (1,611,000)
----------- -----------
$ - $ -
=========== ===========
The Company's net operating losses are restricted as to the
amount which may be utilized in any one year. The Company's net
operating loss carryforwards expire as follows:
2004 $ 798,000
2009 92,000
2010 726,000
2011 1,233,000
----------
$2,849,000
==========
6. Stockholders' equity
--------------------
Stock offerings:
During the fiscal year ended February 29, 1996, the Company
issued 1,345,460 shares of its common stock in exchange for cash
of $447,739 ($.33 per share), 119,407 shares in exchange for
services valued at $59,704 ($.50 per share), and 145,813 shares
in exchange for payment of accounts payable of $75,057 ($.515 per
share) all pursuant to a Regulation D offering of the Company's
common stock.
In the above Regulation D offering, the Company also sold
1,600,000 shares of the Company's common stock for $400,000 ($.25
per share) to Ventel, Inc. (see Note 4).
F-16
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
6. Stockholders' equity (continued)
--------------------------------
On May 9, 1995, the Company entered into a letter of intent to
sell 285,714 shares of the Company's common stock in a Regulation
S offering to Simmonds Mercantile (a wholly owned subsidiary of
SCL) a distributor and systems integrator in the wireless
communications market for $100,000 ($.35 per share), which amount
was received on May 18, 1995. Upon purchase of the Company's
common stock, the Company granted to the distributor a first
right of refusal to acquire the Company's rights and obligations
under all 220 MHz management agreements.
On December 29, 1995, the Company issued 4,230,906 shares of its
common stock valued at $1,057,727 ($.25 per share) to Midland
International Corporation, a subsidiary of SCL, to acquire
inventory of radios and radio parts of $681,347 and a
distribution agreement valued at $400,000. The distribution
agreement grants the Company an exclusive license to market and
sell certain 800 MHz LTR Midland products throughout the United
States for a period of ten years. Pursuant to the agreement, the
Company has agreed to assume the seller's obligations under an
outstanding purchase order for the inventoried products (a
commitment of $500,000 per contract year) and the seller's
warranty obligations estimated at $23,620.
During the fiscal year ended February 28, 1997, the Company
issued 308,186 shares of its common stock in exchange for cash of
$125,157 ($.406 per share) pursuant to a Regulation D offering.
During August 1996, the Company sold 1,521,729 shares of its
common stock in a Regulation S offering for $350,000 in cash
($.23 per share) less offering costs of $46,000. In connection
with this transaction the Company granted warrants to purchase
537,085 shares of the Company's stock for cash of $537 which were
exercised when certain conditions were met.
During September 1996, the Company issued 1,150,000 shares of its
restricted Rule 144 common stock in payment for one half of its
obligation for the purchase of radio tower equipment from
Securicor Radiocoms Ltd. (an unrelated entity) pursuant to a
funding agreement. The common stock was valued at $448,500 ($.39
per share) which equalled the cash portion of the agreement (see
Note 9).
During October 1996, the Company sold 208,705 shares of its
common stock in a private placement for cash of $48,000 ($.23 per
share).
On November 1, 1996, the Company acquired distribution rights
from a related company in exchange for 3,000,000 shares of common
stock (see Note 4).
F-17
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
6. Stockholders' equity (continued)
--------------------------------
On November 8, 1996, the Company issued 1,750,000 shares of its
common stock, in exchange for certain Midland distribution
rights, to a company 20% owned by SCL. The agreement specified a
purchase price of $525,000 or 1,750,000 restricted common shares
of ADC which was the $.30 quoted market price of the Company's
stock on the day of the transaction. For accounting purposes the
restricted common stock was entered on the books at $367,500
($.21 per share) which compared favorably to other similar
transactions. The distribution right grants the Company an
exclusive license to market and sell certain Midland brand
commercial two-way radio products including modifications,
improvements and replacement products for an indefinite period of
time in three provinces and two territories in Canada.
During February 1997, the Company issued 270,966 shares and plans
to issue an additional 60,976 shares of its restricted Rule 144
common stock to exercise the purchase option for 220 MHz
licenses. These shares are valued at $55,994 ($.21 per share)
and $7,000 ($.115 per share) for those shares issued and to be
issued, respectively, which amounts represent a 30% discount from
the Company's average quoted market price. The Company also
plans to issue 375,217 shares of its restricted Rule 144 common
stock in exchange for $86,300 of cash received for subscriptions
during February 1997.
Stock options:
1993 Compensatory Stock Option Plan ("CSO")
The Company has established the CSO plan for employees, directors
and consultants or other advisors. The Company has reserved a
maximum of 4,000,000 common shares to be issued upon the exercise
of options granted under the CSO plan. The purchase price of
each share of stock under the CSO will be determined by the Board
of Directors or the Compensation Committee. The CSO exercise
term will not exceed five years. The options expire beginning
1998 through 2004.
F-18
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
6. Stockholders' equity (continued)
--------------------------------
The following is a summary of stock option activity:
Option price Number
per share of shares
------------- ---------------
Balance February 28, 1995 $.75 to $2.00 2,790,000
Canceled $.75 to $1.25 (2,450,000)
Reissued $.425 to $1.00 2,450,000
Expired $1.75 (55,000)
Retired (see Note 4) $.425 to $1.00 (750,000)
Balance February 29, 1996 $.425 to $2.00 1,985,000
Canceled $1.00 (500,000)
Reissued $.35 500,000
Granted $.23 to $1.00 1,440,000
Expired $.45 to $2.00 (405,000)
Exercised $.25 (40,000)
------------- ---------------
Balance February 28, 1997 $.23 to $1.75 2,980,000
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation. Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation
costs for the Company's stock option plans been determined based
on the fair value at the grant date for awards during the fiscal
years ended February 28, 1997 and February 29, 1996 in accordance
with the provisions of SFAS No. 123, the Company's net loss and
loss per share would have been reduced to the pro forma amounts
indicated below:
1997 1996
------------ ------------
Net loss - as reported $(1,232,402) $(1,041,889)
Net loss - pro forma (1,549,537) (1,104,605)
Loss per share - as reported (.07) (.13)
Loss per share - pro forma (.09) (.13)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997
and 1996, dividend yield of 0%; expected volatility of 64.28%;
risk-free interest rate of 6.28%; and expected lives of 3.54
years.
F-19
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
6. Stockholders' equity (continued)
--------------------------------
1993 Employee Stock Compensation Plan ("ESC")
The Company has reserved a maximum of 2,000,000 common shares to
be issued upon the grant of awards for employees, directors and
consultants or advisors. No shares have been awarded under this
plan.
1993 Incentive Stock Option Plan ("ISO")
The Company has reserved a maximum of 2,000,000 common shares to
be issued upon the exercise of options granted under the ISO
plan. Options will be granted under the ISO plan at exercise
prices at least equal to the fair market value of the common
stock on the date of grant. At February 28, 1997, no options
remained outstanding under the ISO plan.
1993 Non-Statutory Stock Option Plan ("NSO")
The Company has reserved a maximum of 2,000,000 common shares to
be issued to key employees upon the exercise of options granted
under the NSO plan. Options granted under the NSO plan will be
at exercise prices to be determined by the Board of Directors or
other NSO plan administrator. At February 28, 1997, no options
have been granted under the NSO plan.
7. Commitments and contingencies
-----------------------------
800 MHz agreements:
The Company signed a letter of intent in June 1993 and a purchase
agreement on March 18, 1994 to purchase the assets of a company
which owns an SMR system and other assets for $875,000. The
Company was unsuccessful in selling its rights and obligations
under this agreement and in December 1995 entered into a
settlement agreement whereby the Company forfeited the $259,926
in deposits previously paid, paid cash of $102,105 and issued
90,634 shares of the Company's common stock valued at $75,000 in
exchange for cancellation of the asset purchase agreement,
resulting in a net loss of $427,031, net of the receipt of a
$10,000 forfeited deposit from a potential buyer.
The Company had signed GX 800 MHz Management and Option
Agreements with various individuals. The Company made initial
payments to license holders of $100 each. During the year ended
February 29, 1996, the Company realized a gain of $77,972 on the
sale of 800 MHz equipment and the remaining Management and Option
Agreements. The Company was also successful in disposing of
certain 220 MHz equipment realizing a gain of $30,070.
F-20
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
7. Commitments and contingencies (continued)
-----------------------------------------
220 MHz agreements:
The Company signed 220 MHz Management and Option agreements with
various individuals. The Company made initial payments to
license holders ranging from $100 to $1,000. The Company agreed
to construct and build out the licenses under the Management and
Option agreements. The Company had until August 15, 1996, the
FCC-mandated construction deadline, to construct the stations and
place them in operation, by which time 26 of the licenses had
been constructed. During the year ended February 28, 1997, the
Company acquired 23 of the licenses for $33,500 of cash and
common stock valued at $62,994. Capitalized costs of $105,654
relating to the licenses not built out have been expensed at
February 28, 1997.
Distribution rights agreements:
During January 1997, the Company entered into two option
agreements to acquire a 100% interest in Midland (Europe) Limited
("MEL"). MEL holds the distribution rights for Midland brand
land mobile radio products in the following areas of the world;
Western Europe, the Mediterranean, Africa and India. The options
are exercisable until June 30, 1997. The aggregate exercise
price is $1,350,000 which is composed of $1,000,000 in cash and
shares of ADC common stock with a value of $350,000. The ADC
common stock will be valued at the last quoted bid price on a
date specified in the agreement. The Company has also entered
into a sublicense agreement with MEL for the distribution of
Midland brand land mobile radio products in certain countries in
Asia, Australia and the Philippines. The agreement calls for a
royalty of 3.5% of the sales price of all Midland brand land
mobile radio products sold by MEL.
8. Major customers
---------------
Customers who accounted for over 10% of the Company's gross
revenues for the years ended February 28, 1997 and February 29,
1996 are as follows:
1997 1996
-------- --------
Customer A 44.5% -
Customer B - 81.6%
F-21
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 and February 29, 1996
9. Subsequent events
-----------------
Sublicense of portions of the distribution rights in Canada:
On April 7, 1997, the Company entered into a letter of intent
with SCL Distributors (Pacific) Ltd. ("SCL Pacific") to
sublicense a portion of the distribution rights in Canada owned
by the Company. The letter of intent calls for SCL Pacific to
pay the Company approximately $36,000 on signing of a definitive
agreement and a royalty of 4% of the gross sales price of all
products pursuant to the agreement. The agreement also contains
a purchase option of approximately $288,000 less all previous
payments.
Sale of radio tower equipment and related licenses:
On April 15, 1997, the Company entered into a letter of intent
with Intek Diversified Corporation ("Intek"), a company majority
owned by Securicor Radiocoms Ltd., to sell most of the radio
tower equipment and related licenses in exchange for cash of
$75,000, payment of ADC's note payable to Ventel, Inc.,
return of 1,150,000 shares of ADC's common stock, ( stated
value of $0.39 per share in the agreement), 2,600,000 shares of
Ventel, Inc's common stock (a Canadian public company, stated
value of $0.11 per share in the agreement) and shares of Intek's
common stock (a U.S. public company, stated value of $3.80
per share in the agreement). Using the undiscounted quoted market
price of the stock to be received in the transaction, the
Company estimates the value of the transaction to be
approximately $2,775,000, however this value could change if the
values of the stock to be received change and will change when an
appropriate market discount is determined.
SIGNATURES
----------
In accordance with sections 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereto duly authorized individual.
Date: June 12, 1997
AMERICAN DIGITAL COMMUNICATIONS, INC.
By: /s/ R. Gene Klawetter
-----------------
R. Gene Klawetter, Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ R. Gene Klawetter
-----------------
R. Gene Klawetter Chairman / President / CEO June 12, 1997
/s/ Daniel M. Smith
--------------- Acting Chief Financial Officer /
Daniel M. Smith Controller/ Chief Accounting June 12, 1997
Officer
