SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarter Ended May 31, 1997
Commission file number 0-28506
AMERICAN DIGITAL COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
Wyoming 13-3411167
(State of Incorporation) (IRS. Employer ID No.)
5575 DTC Parkway
Suite 355, Englewood, Colorado 80111
(Address of Principal Executive (Zip Code)
Offices)
(303) 770-8283
(Registrant's Telephone No. incl. area code)
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 __
The number of shares outstanding of each of the Registrant's class of common
equity, as of June 2, 1997 are as follows:
Class of Securities Shares Outstanding
------------------- ------------------
Common Stock, $.0001 par value 24,628,407
This quarterly report on Form 10-QSB contains 13 pages.
American Digital Communications, Inc.
INDEX
PART I Financial Information
Item 1. Financial Statements
Balance Sheet................... 3
Statements of Operations........ 5
Statements of Cash Flows........ 6
Notes to Financial Statements... 7
Item 2. Management's Discussion and
Analysis or Plan of Operations.. 9
Cautionary Statement Pursuit to Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995.
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
A) Exhibit 27 Financial Data Schedule
B) Form 8-K - None
Signature........................ 13
American Digital Communications, Inc.
Balance Sheet
(UNAUDITED)
ASSETS May 31, February 28,
1997 1997
--------- ------------
Current Assets:
Cash 16,953 31,701
Accounts receivable 2,952 21,110
Notes Receivable 8,548 8,548
Inventories 201,397 469,415
Tower equip. and related lcns held for sale 2,091,324 2,126,636
Other current assets 7,888 3,888
----------- -----------
Total current assets 2,329,062 2,661,298
Property and equipment:
Office equipment 125,052 125,052
Furniture and fixtures 26,082 26,082
----------- -----------
151,134 151,134
Less: Accumulated depreciation (143,307) (142,286)
----------- -----------
Net property and equipment 7,827 8,848
Other assets:
Distribution rights, net of amortization 1,328,365 1,344,599
----------- -----------
TOTAL ASSETS 3,665,254 4,014,745
=========== ===========
See accompanying notes to financial statements.
American Digital Communications, Inc.
Balance Sheet
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY May 31, February 28,
1997 1997
----------- -------------
Current Liabilities:
Accounts payable 86,871 149,531
Accounts payable - related parties 9,765 9,510
Accrued payroll and payroll taxes - 4,933
Accrued interest - related parties 302,975 248,471
Accrued warranty liability 7,802 10,373
Notes payable - related parties 60,370 60,370
Current portion of capital lease obligations 6,195 6,195
Current portion of long term note 756,077 806,077
---------- ------------
Total current liabilities 1,230,055 1,295,460
Long term debt:
Capital lease obligations 4,322 5,597
Long term note payable 40,295 -
Long term note payable - related party 348,575 535,299
--------- -----------
Total long term debt 393,192 540,896
Shareholders' equity:
Common stock, $.0001 par value; Unlimited
shares authorized, issued and outstanding
24,628,407 shares, issued and outstanding
23,627,431 on February 28, 1997. 2,463 2,363
Additional paid in capital 7,747,767 7,747,767
Common stock subscribed 93,300 93,300
Accumulated deficit (5,801,523) (5,665,041)
----------- -----------
Total shareholder's equity 2,042,007 2,178,389
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 3,665,254 4,014,745
=========== ===========
See accompanying notes to financial statements.
American Digital Communications, Inc.
Statements of Operations
(UNAUDITED)
Three Months Ended May 31,
1997 1996
------------ -----------
Revenue
Two-way radio sales 113,021 198,385
220 MHz radio tower equipment sales 115,000 -
------------ -----------
Total revenue 228,021 198,385
Costs and expenses:
General and administrative 170,128 165,115
Cost of two-way radio sales 81,413 207,221
Cost of 220 MHz radio tower equipment sales 95,607 -
Depreciation and amortization 17,255 11,573
------------ -----------
Total costs and expenses 364,403 383,909
------------ -----------
Net loss: (136,382) (185,524)
------------ -----------
Net loss per share of common stock (0.01) (0.01)
------------ -----------
Weighted average number of common shares
outstanding 2,362,7431 1,465,0845
============ ===========
See accompanying notes to financial statements.
American Digital Communications, Inc.
Statements of Cash Flows
(UNAUDITED)
Increase (Decrease) in Cash Three Months Ended
May 31,
1997 1996
------------ -----------
Net cash used in operations
Net loss (136,382) (185,524)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 17,255 21,573
Gain on sale of fixed assets 19,393 -
Issuance of stock for interest expense - -
Issuance of common stock for services
and in conjunction with asset
purchase agreements - -
Changes in:
Accounts receivable 18,158 (59,557)
Inventory 81,293 206,313
Other current assets 31,312 (1,100)
Accounts payable (62,435) 23,423
Accrued payroll and payroll taxes (4,933) (9,593)
Other accrued liabilities (52,638) 28,248
----------- -----------
Net cash used in operating activities (88,977) 23,783
----------- -----------
Cash flows from investing activities:
Purchase of office and radio tower equip. - (130,166)
License expenditures (10,000) -
Deposits - payments - (20,000)
Proceeds from sale of fixed assets 115,000 -
----------- -----------
Net cash provided by (used in) investing
activities 105,000 (150,166)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock, net - 125,157
Payments of capital lease obligations (1,275) 2,017
Payments of note payable - 623
----------- -----------
Net cash provided by (used in) financing
activities: (1,275) 127,797
----------- -----------
Increase (decrease) in cash (14,748) 1,414
----------- -----------
Cash, beginning of period 31,701 115,312
----------- -----------
Cash, end of period 16,953 116,726
=========== ===========
See accompanying notes to financial statements.
American Digital Communications, Inc.
Notes to Financial Statements
May 31, 1997
Basis of Presentation.
- ----------------------
The unaudited financial statements and related notes have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. The
accompanying financial statements and related notes should be read in
conjunction with the audited financial statements of the Company, and notes
thereto, for the fiscal year ended February 28, 1997. The accounting
policies utilized in the preparation of the financial statements herein
presented are the same as set forth in the Company's annual financial
statements.
Business.
- ---------
Certain matters discussed in this Quarterly 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 may differ. For discussion of the factors that might cause such
a difference, see Item 2 Management's Discussion and Analysis or Plan of
Operations.
Overview.
- ---------
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.
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 1994 as President / CEO. 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 agreements
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
equipment 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. To a degree,
ADC has become operational, even though cash flow is not yet at an acceptable
level.
Distribution Rights Operations.
- -------------------------------
In November 1995, the Company became exclusive licensee in the US for the
next ten years for distribution of 800 MHz Midland LTR Radios. This activity
enabled the Company to become operational in January 1996.
On October 1, 1996, the Company entered into a Letter of Intent to acquire
international distribution rights for the Midland Land Mobile Radio (LMR)
products from Midland International Limited, a wholly owned subsidiary of
Simmonds Capital Limited (SCL). Under the terms of the agreement, the primary
markets include most of Western Canada, Mexico, South America, The Pacific
Rim, Australia and Southeast Asia. This transaction was consummated on
November 8, 1996. As a part of the agreement, the Company could receive up
to $1,000,000 in credit for the purpose of acquiring inventory. To date, the
Company has signed one three year note for $348,573.
The terms of the November 8, 1996 acquisition calls for the Company to
acquire the distribution rights to the Midland LMR products for the
indicated international markets with a combination of 1,750,000 shares of
the Company's common stock which was issued under Regulation S guidelines
with 41 day holding period and 3,000,000 shares of Regulation S common stock
with a 12 month holding period. For accounting purposes the restricted
common stock was entered on the books at $367,500 and $630,000 respectively.
Due to Related Party.
- ---------------------
A significant shareholder of the Company, loaned the Company $75,000 on
March 15, 1994. This year, the Company signed a new note due in 1997. As of
May 31, 1997 the outstanding balance on the 9% interest bearing note was
approximately $10,600.
In December 1995, the Company constructed its first 13 220 MHz communications
systems and financed the systems for $1,047,900 through Ventel, Inc. In
February 1996, the Company sold three of the financed, constructed systems.
In April 1997, the Company also sold one system and currently owes Ventel,
Inc. $756,077 plus interest, a total of approximately $1,059,000. The Company
plans to retire this note from the proceeds of its eventual sale of the
balance of its constructed 220 MHz systems.
In August 1996, the Company financed and constructed 13 additional "turn-key"
communication systems through Securicor Ltd. The terms were $897,000, half
in cash, half in common stock (1,150,000 shares at $0.39).
In May 1997, the Company executed the purchase option under the Management
Agreement of five constructed licenses. To date, the Company owns eleven of
the 22 220 MHz communication systems and projects that additional license
purchase options will be exercised during 1997.
Item 2. Management's Discussion and Analysis or Plan of Operation.
- -------------------------------------------------------------------
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 $168,000 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 Diversified @ $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. The Company will strive to settle debt with Intek stock. The Company
will net a significant number of Intek shares which can possibly be leveraged
for cash as needed, depending on terms. However there can be no assurance of
this until done.
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
careful consideration ADC made the decision to sublicense territories and
deploy certain assets in order to more aggressively pursue other
opportunities.
Original
Assets Disposition Book Value
------ ----------- ----------
Option to purchase Midland Currently under negotiation N/A
Europe Limited (MEL)
Exclusive US marketing For sale or sub-license $360,000
rights to Midland 800 MHz
LTR land mobile radios
Exclusive Midland LMR ADC evaluating offers $315,000
marketing rights to
Mexico and South America
Exclusive Midland LMR Actually sub-licensed: $315,000
marketing rights for evaluating option to
Pacific Rim, Australia, sale
New Zealand, Thailand
and Southeast Asia
Exclusive Midland LMR Territory sub-licensed, $367,500
marketing rights to option to own
certain western Canada
provinces
The Midland marketing rights will be sub-licensed or sold on a negotiated
basis with either 3 or 5 year payouts. In the transaction currently under
negotiation the structure involves a cash down payment with ownership
retained 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, it is anticipated that 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.
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 1.150M. The Company will hold as much as 2.6 million shares of
Ventel stock and, after satisfying the Ventel debt, will hold approximately
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 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, if necessary, to accomplish the acquisition. ADC has been and
continues to look at possible acquisition alternatives.
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. However, there can be no assurance this
will be accomplished in a timely manner.
Liquidity and Capital Resources.
- --------------------------------
Cash on hand at quarter end was nominal in light of the Company's
acquisition plan. During the quarter ended May 31, 1997, the Company raised
$228,021 through sale of its Midland LTR products and the sale of one 220
MHz communications system.
Through May 1997, the Company has executed the purchase options under the
220 MHz Management Agreements for all constructed licenses for their sale to
Intek Diversified Corporation. Each of these 22 220 MHz communication systems
are constructed and operational.
Although the Company has been operational since January of 1996, historical
lack of operating cash flow has meant that it has been dependent on sales of
its securities, borrowings, leasehold financing or other extensions of
credit. The Company intends to raise additional capital in the current fiscal
year, either through the sale of equity securities or a combination of equity
sales, borrowings and leasehold financing as needed according to the
Company's acquisition plan. Market conditions will dictate what the Company
can do in this regard.
Financial Conditions and results of operations.
- -----------------------------------------------
During the quarter ended May 31, 1997, total assets decreased from $4,014,745
to $3,665,254 and shareholders' equity decreased from $2,178,389 to
$2,042,007. The ratio of current assets versus current liabilities is 2:1.
Cash on hand at May 31, 1997 was approximately $17,000. The Company expects
this to change radically as it sheds its current assets as discussed earlier.
It is anticipated that this will be of relative short duration with
substantially greeter 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.
The Company incurred a loss of $136,382 during the quarter ended May 31,
1997. The activities during the fiscal quarter ended were mainly part of the
sale of the Company's Midland LTR products and the sale of the Companies 220
MHz communication systems.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
American Digital Communications, Inc.
This report contains certain statements of a forward-looking nature relating
to future events or the future financial performance of the Company.
Investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such
statements, investors should specifically consider the various factors which
could cause actual results to differ materially from those indicated in such
forward-looking statements. The most important factors that could cause
actual results to differ from those expressed in the forward-looking state-
ments include, but are not limited to the following:
- The failure of the sale of the 220 MHz systems to Intek Diversified
Corporation.
- The inability to find a hign technology Company for purchase,
acquisition, or merger.
- The risk of business interruption arising from the Company's dependence
on finding a new business.
- The Company's ability to manage potential expansion of operations.
- The Company's ability to attract and retain key personnel.
- The Company's ability to respond to rapid technological changes within
its sphere of interest or influence.
- Changes in rules and regulations of the Federal Communications
Commission.
- Changes in economic conditions affecting the Company's customers.
(Remainder of page left intentionally blank)
PART II. Other Information.
- --------------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
Exhibits. None.
EX-27 Financial Data Schedule
Form 8-K None.
SIGNATURES
----------
Pursuant to the registration requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized.
DATE: JULY 14, 1997 BY:
/s/ R. Gene Klawetter
------------------------------------------
R. Gene Klawetter
President / CEO / Director
DATE: JULY 14, 1997 BY:
/s/ Daniel M. Smith
------------------------------------------
Daniel M. Smith
Acting Chief Financial Officer,
Controller, Chief Accounting Officer
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<LEGEND> This schecdule contains summary financial information
extracted from form 10-QSB for this period ended May 31,
1997 and is qualified in its entirety by reference to
such form 10-QSB.
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<PP&E> 151,134
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