As filed with the Securities and Exchange Commission on July 15, 1998.
===============================================================================
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, 1998
Commission file number 000-28506
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.)
745 FIFTH AVENUE
SUITE 900, NEW YORK, NY 10151
(Address of Principal Executive Offices) (Zip Code)
(212) 486-7424
(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, 1998 are as follows:
CLASS OF SECURITIES SHARES OUTSTANDING
Common Stock, $.0001 par value 24,777,886
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<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet................................................3
Statements of Operations and Comprehensive Income............5
Statements of Cash Flows.....................................6
Notes to Financial Statements............................... 7
Item 2. Management's Discussion and Analysis or Plan of Operations...8
PART II. OTHER INFORMATION
Items 1 - 5.............................................................11
Item 6. Exhibits and Reports on Form 8-K
A) Exhibit 27 Financial Data Schedule
B) Form 8-K - None
Signatures..............................................12
2
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MAY 31, February 28,
1998 1998
<S> <C> <C>
Current Assets:
Cash 8,924 19,558
Notes receivable 8,548 8,548
Due from related parties 34,044 -
Marketable securities 1.540,672 1,209,844
- -----------------------------------------------------------------------------------------------------
Total current assets 1,592,188 1,237,950
- -----------------------------------------------------------------------------------------------------
Property and equipment:
Office equipment 129,439 125,052
Furniture and fixtures 26,082 26,082
- -----------------------------------------------------------------------------------------------------
155,521 151,134
Less: Accumulated depreciation 146,827 146,370
- -----------------------------------------------------------------------------------------------------
Net property and equipment 8,694 4,764
Other assets:
Distribution rights, net of amortization 181,275 201,672
TrackPower trademarks and other intellectual property rights 398,412 398,412
- -----------------------------------------------------------------------------------------------------
Total other assets 579,687 600,084
TOTAL ASSETS 2,180,569 1,842,798
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY MAY 31, February 28,
1998 1998
<S> <C> <C>
Current Liabilities:
Accounts payable 139,010 243,716
Accounts payable - related parties 70,319 36,289
Accrued expenses 396 59,193
Accrued interest - related parties 47,527 40,294
Notes payable 500,000 -
Notes payable - related parties 30,370 30,370
Current portion of capital lease obligations 5,951 5,075
Current portion of long term note - -
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 793,573 414,937
Long term debt:
Capital lease obligations - 876
Long term note payable - related party 157,461 157,461
- -----------------------------------------------------------------------------------------------------------------
Total long term debt 157,461 158,337
Shareholders' equity:
Convertible preferred stock, no par value, unlimited shares 1,000,000 1,000,000
authorized, (liquidation value $1,000,000)
Common stock, $.0001 par value; Unlimited shares authorized, issued 2,483 2,412
and outstanding 24,777,886 shares, issued and outstanding 24,113,624 on
February 28, 1998.
Additional paid in capital 7,123,334 6,986,409
Common stock subscribed (214,262 - 1998) - 41,995
Accumulated deficit (7,429,509) (6,905,424)
Accumulated other comprehensive income 533,227 144,132
- -----------------------------------------------------------------------------------------------------------------
Total shareholder's equity 1,229,535 1,269,524
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2,180,569 1,842,798
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
May 31,
1998 1997
---- ----
<S> <C> <C>
Revenue
Two way radio sales - 113,021
220 mHz tower equipment sales - 115,000
Royalties from distribution rights 4,629 -
---------------------------------------------------------------------------------------
Total revenue 4,629 228,021
Costs and expenses:
General and administrative 313,097 170,128
Cost of equipment sales - 81,413
Cost of 220 MHz equip./Distribution rights - 95,607
Financing costs 145,985 -
Non-recurring Denver office costs 48,778 -
Depreciation and amortization 20,854 17,255
---------------------------------------------------------------------------------------
Total costs and expenses 528,714 364,403
---------------------------------------------------------------------------------------
Net loss (524,085) (136,382)
Other comprehensive income:
Unrealized holding gain on marketable securities 389,095
---------------------------------------------------------------------------------------
Comprehensive loss (134,990) (136,382)
---------------------------------------------------------------------------------------
Net loss per share of common stock (0.02) (0.01)
---------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 24,552,886 23,627,431
---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
May 31,
INCREASE (DECREASE) IN CASH
1998 1997
---- ----
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH USED IN OPERATIONS
Net loss (524,085) (136,382)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 20,854 17,255
Gain on sale of fixed assets - 19,393
Issuance of stock for bridge financing 95,000 -
Changes in:
Accounts receivable - 18,158
Due from related parties (34,044) -
Inventory - 81,293
Other current assets - 31,312
Accounts payable (70,675) (62,435)
Accrued expenses (58,797) (4,933)
Other accrued liabilities 7,233 (82,134)
-------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (564,514) (118,473)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 58,267 -
License expenditures - (10,000)
Sale/(purchase) of fixed assets (4,387) 115,000
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 53,880 105,000
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net - -
Payments of capital lease obligations - (1,275)
Proceeds on issuance of notes payable 500,000 -
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities: 500,000 (1,275)
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH (10,634) (14,748)
-------------------------------------------------------------------------------------------------------------------
CASH, beginning of period 19,558 31,701
-------------------------------------------------------------------------------------------------------------------
CASH, end of period 8,924 16,953
-------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
Notes to Financial Statements
May 31, 1998
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the financial position
as of May 31, 1998 and February 28, 1998, and the results of operations and cash
flows for the periods ended May 31, 1998 and 1997.
NATURE OF BUSINESS:
The Company was organized June 30, 1993 under the laws of Wyoming, The
Company was in the wireless telecommunications business and had intended to
provide two-way communications in the 220 mHz. band. The Company held various
distribution rights for certain Midland brand commercial land mobile radios and
radio parts. The distribution rights were acquired in separate transactions over
the last several years. During fiscal year 1998 the Company sold, sub-licensed
or wrote-off all remaining distribution rights. On January 15, 1998, the Company
acquired the TrackPower trade name and other intellectual property rights. The
technology is in use in southern Ontario, Canada to market a service whereby a
subscriber views live horse racing on television via Multi Point Microwave
Distribution System (MMDS) and places wagers using Telephone Account Betting
(TAB). The Company plans to expand the delivery system to a satellite based
system and to ultimately provide interactive wagering through a set top box and
telephone line throughout North America. It is anticipated that the new service
will be launched late in calendar 1998. No revenues were generated by the
TrackPower business during the first quarter.
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 risk
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.
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.
7
<PAGE>
MARKETABLE SECURITIES:
The Company's marketable securities consist of restricted and
unrestricted common stock of publicly traded companies. The securities are
considered held for sale and therefore are recorded at market value at the
balance sheet date.
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.
AMORTIZATION OF DISTRIBUTION RIGHTS:
The cost of the remaining distribution rights, which have been
sub-licensed to a third party, is being amortized over the term of the agreement
(4 years).
It is reasonably possible that revenues generated from the distribution
of products pursuant to the agreement will not be sufficient to recover these
capitalized costs.
MEASUREMENT OF INTANGIBLES IMPAIRMENT:
The Company annually reviews the amount of the recorded intangible
assets for impairment. If the sum of 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.
NET LOSS PER SHARE:
Basic 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The business focus for the Company has changed from a wireless
telecommunications distribution business to a development stage enterprise. The
focus of management is negotiating future business contracts and agreements. See
"Notes to Financial Statements - Summary of Significant Accounting Policies -
Nature of Business".
The Company has financed the operating losses using bridge financing
supported by its marketable securities and expects to be able to manage on those
resources until it enters into permanent financing arrangements.
RESULTS OF OPERATIONS
The revenues of $4,629, during the three month period ended May 31,
1998, were from Midland distribution rights royalties. Revenues in the prior
year were from the direct sale of Midland two-way radios and the sale of 220 mHz
tower equipment.
The Company does not expect any revenues from the TrackPower business
until the new service is launched later on during the year.
8
<PAGE>
General and administrative expenses, during the quarter, increased from
$170,128 in 1997 to $313,097 in 1998. The increase is a result of;
1) key consulting and management services agreements required for
the development of the TrackPower business,
2) the costs of operating the existing MMDS TrackPower business.
Costs incurred thus far associated with closing the bridge financing
and negotiating permanent financing total $145,985. These costs include $120,978
for the bridge financing concluded during the first quarter. This financing
included the issuance of common shares of ADC - at a total cost of $95,000. This
cost has been expensed during the period. Other costs for the bridge financing
included placement fees and legal costs. The costs incurred thus far for
negotiating permanent financing total $25,007. These costs are primarily legal
and travel related.
The Denver office was closed effective May 15, 1998. Closing costs
including travel, moving, rent and legal fees totaled $48,778. These costs are
non-recurring.
Depreciation and amortization represents the amortization of the
remaining Midland distribution rights and normal depreciation on office
equipment.
The closing trading value of the Company's investment in common shares
of Intek increased from $2 31/32 at February 28, 1998 to $4 at May 31, 1998.
Accordingly the Company recorded an unrealized holding gain on marketable
securities of $389,095. The value of the Ventel shares remain unchanged.
FINANCIAL CONDITION
Total assets increased from $1,842,798 to $2,180,569 during the
quarter.
The Company disposed of 844,446 common shares of Ventel, at book value,
during the quarter in order to generate approximately $58,000 of cash for the
development of the new business. At May 31, 1998 the Company held 499,998 Ventel
Shares valued at approximately $34,500.
The Company still holds 418,381 Intek shares, which are pledged as
security for the bridge financing.
The TrackPower trademarks and other intellectual property rights are
not being amortized until revenues begin to occur from the new business.
The Company borrowed $500,000 by way of notes payable, using the
marketable securities as security, during the quarter.
The Company's working capital ratio declined from 3.0:1 at February 28,
1998 to approximately 2.0:1 at May 31, 1998. The change is primarily due to the
increased notes payable.
Net equity of the Company also declined from $1,269,524 to $1,229,535
during the quarter. It is anticipated that the operating losses prior to the
commencement of its operating business will continue to accrue.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been funding the development of the TrackPower business
through new debt. On April 17, 1998 the Company closed a bridge financing of 100
Units, representing a package of
9
<PAGE>
securities including total debt of $500,000. In June 1998 the Board of Directors
authorized the extension of this debt to $1 million in total. It is anticipated
that based on the current market value of the Company's marketable securities,
an additional $300,000 of this newly authorized debt will be placed during the
second quarter, together with certain equity securities.
The Company is planning more permanent financing and is hopeful to
complete it once certain key business agreements have been concluded.
10
<PAGE>
PART II. Other Information
ITEM 1. LITIGATION
No material legal proceedings to which the Company is a party or to
which the property of the Company is subject is pending and no such material
proceeding is known by management of the Company to be contemplated. No material
legal proceedings to which any director, officer of affiliate of the Company,
any owner of record or beneficially of more than five percent of any class of
the voting securities of the Company, or security holder is a party adverse to
the Company or has a material interest adverse to the Company is pending.
ITEM 2. CHANGE IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits.
EX-27 Financial Data Schedule
Form 8-K None.
<PAGE>
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 15, 1998 BY:
/S/ JOHN G. SIMMONDS
-------------------------------------------------
JOHN G. SIMMONDS
PRESIDENT / CEO / DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
DATE: JULY 15, 1998 BY:
/S/ GARY N. HOKKANEN
-------------------------------------------------
GARY N. HOKKANEN
CHIEF FINANCIAL OFFICER,
(PRINCIPAL FINANCIAL OFFICER)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> MAY-31-1998
<CASH> 8,924
<SECURITIES> 1,540,672
<RECEIVABLES> 8,548
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,592,188
<PP&E> 155,521
<DEPRECIATION> 146,827
<TOTAL-ASSETS> 2,180,569
<CURRENT-LIABILITIES> 793,573
<BONDS> 157,461
0
1,000,000
<COMMON> 2,483
<OTHER-SE> 227,052
<TOTAL-LIABILITY-AND-EQUITY> 2,180,569
<SALES> 2,714,699
<TOTAL-REVENUES> 4,629
<CGS> 0
<TOTAL-COSTS> 313,097
<OTHER-EXPENSES> 215,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (524,085)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (524,085)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
