As filed with the Securities and Exchange Commission on October 14, 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 August 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 October 2, 1998 are as follows:
CLASS OF SECURITIES SHARES OUTSTANDING
------------------- ------------------
Common Stock, $.0001 par value 25,127,886
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<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 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...................12
B) Form 8-K - None
Signatures...................................................13
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS AUGUST 31, February 28,
1998 1998
---- ----
<S> <C> <C>
Current Assets:
Cash 25,548 19,558
Notes receivable 8,548 8,548
Due from related parties - -
Marketable securities 629,937 1,209,844
- ----------------------------------------------------------------------------------------------------
Total current assets 664,333 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 147,280 146,370
- ----------------------------------------------------------------------------------------------------
Net property and equipment 8,241 4,764
Other assets:
Distribution rights, net of amortization 160,878 201,672
TrackPower trademarks and other intellectual property rights 398,412 398,412
- ----------------------------------------------------------------------------------------------------
Total other assets 559,290 600,084
TOTAL ASSETS 1,231,864 1,842,798
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY AUGUST 31, February 28,
1998 1998
---- ----
<S> <C> <C>
Current Liabilities:
Accounts payable 231,528 243,716
Accounts payable - related parties 13,588 36,289
Accrued expenses 596 59,193
Accrued interest - related parties 66,027 40,294
Notes payable 850,000 -
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 1,198,060 414,937
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 2,518 2,412
and outstanding 25,127,886 shares, issued and outstanding 24,113,624 on
February 28, 1998.
Additional paid in capital 7,172,299 6,986,409
Common stock subscribed (214,262 - 1998) - 41,995
Accumulated deficit (7,920,966) (6,905,424)
Accumulated other comprehensive income (377,508) 144,132
- -----------------------------------------------------------------------------------------------------------------
Total shareholder's equity (123,657) 1,269,524
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,231,864 1,842,798
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Two way radio sales - 254 - 113,275
220 mHz tower equipment sales - 240,000 - 355,000
Royalties from distribution rights 3,118 - 7,747 -
----------------------------------------------------------------------------------------------------------------------
Total revenue 3,118 240,254 7,747 468,275
Costs and expenses:
General and administrative 370,758 45,112 671,159 215,240
Cost of equipment sales - 254 - 81,667
Cost of 220 MHz equip./Distribution rights - 599,333 - 694,940
Financing costs 102,966 - 261,648 -
Non-recurring Denver office costs - - 48,778 -
Depreciation and amortization 20,850 18,563 41,704 35,818
----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 494,574 663,262 1,023,289 1,027,665
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Net loss (491,456) (423,008) (1,015,542) (599,390)
Other comprehensive income:
Unrealized holding loss on marketable securities (910,735) - (521,640) -
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Comprehensive loss (1,402,191) (423,008) (1,537,182) (559,390)
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Net loss per share of common stock (0.06) (0.02) (0.06) (0.02)
----------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 25,011,219 23,907,756 24,782,053 23,627,431
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
INCREASE (DECREASE) IN CASH
1998 1997 1998 1997
---- ---- ---- ----
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET CASH USED IN OPERATIONS
Net loss (511,790) (423,008) (1,035,876) (559,390)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 20,850 18,563 41,704 35,818
Loss on sale of fixed assets - 376,875 - 376,875
Issuance of stock for bridge financing 49,000 - 144,000 -
Changes in:
Accounts receivable - 2,952 - 21,110
Due from related parties 34,044 - - -
Inventory - 254 - 268,272
Other current assets (300) (165,338) (300) (134,026)
Accounts payable 49,120 (195) (21,554) (62,600)
Accrued expenses 200 - (58,597) (4,933)
Other accrued liabilities 25,500 (54,504) 32,733 (2,571)
------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (333,376) (244,401) (897,890) (61,445)
------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities - - 58,267 -
Sale/(purchase) of fixed assets - 240,000 (4,387) 240,000
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities - 240,000 53,880 240,000
------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net - (16) - (16)
Payments of capital lease obligations - (1,275) - (2,550)
Proceeds on issuance of notes payable 350,000 - 850,000 (196,429)
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities: 350,000 (1,291) 850,000 (198,995)
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 16,624 (5,692) 5,990 (20,440)
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
CASH, beginning of period 8,924 16,953 19,558 31,701
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
CASH, end of period 25,548 11,261 25,548 11,261
------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
Notes to Financial Statements
August 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 August 31, 1998 and February 28, 1998, and the results of operations and
cash flows for the periods ended August 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 was in use in a small pilot project of approximately 100 homes in
southern Ontario, Canada. The service provided live horse racing on television
via Multi Point Microwave Distribution System (MMDS) and the subscribers placed
wagers using Telephone Account Betting (TAB). The pilot project was shut down on
September 30, 1998, after proving the technology to be both commercially and
technically viable. The Company plans to change 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. The pilot provided
invaluable knowledge that will be used in the development of the new system.
Management is in discussions with key business partners and continues to believe
the Company will launch the new service late in calendar 1998. No revenues were
generated by the TrackPower business during the second 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.
<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 operating losses thus far during fiscal 1998 are generally as
expected. The Company has been incurring the necessary costs to develop future
business relationships. The Company has financed the operating losses using
bridge financing supported by its marketable securities. Management hopes to
complete certain key business contracts and agreements shortly, in order to
provide the necessary substance to attract permanent financing.
RESULTS OF OPERATIONS
The revenues of $3,118, during the three month period ended August 31,
1998 and $7,747, during the six month period ended August 31, 1998, were from
Midland distribution rights royalties. The
<PAGE>
remaining Midland distribution rights attracting a royalty stream are from
certain territories in Western Canada under a sub-license agreement with a third
party. 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.
General and administrative expenses, increased from $313,097 in first
quarter to $370,758 in the second quarter. The increase is a result of the cost
of legal advice and a catch up on a key consulting contract.
Financing costs totaled $102,966 during the second quarter. These costs
include $84,000 for a second bridge financing concluded during the second
quarter. This financing included the issuance of common shares of ADC - at a
total cost of $49,000. This cost has been expensed during the period. Other
costs for the bridge financing included placement fees and legal costs.
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 decreased from $4.00 at May 31, 1998 to $1.56 at August 31, 1998. The
market value of the Ventel shares was generally unchanged during the quarter.
Accordingly the Company recorded an unrealized holding loss on marketable
securities of $910,735.
FINANCIAL CONDITION
Total assets decreased from $1,842,798 to $1,231,864 during the
quarter. The decline is primarily as a result of a fall in the market value of
the Company's marketable securities.
The Company's marketable securities consist of 418,381 Intek shares and
499,998 Ventel 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 an additional $350,000 by way of notes payable,
using the marketable securities as security, during the quarter.
The Company's working capital ratio declined from 2.0:1 at May 31, 1998
to approximately 0.6:1 at August 31, 1998. The change is due to the additional
$350,000 bridge financing and the decline in value of the marketable securities.
Net equity of the Company also declined from $1,229,535 to a deficit of
$123,657 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 decline in the value of the marketable securities has placed a
strain on the Company's liquidity and capital resources. The drop in the value
of the Intek shares was approximately $1 million.
<PAGE>
The Company has been funding the development of the TrackPower business
through new debt. Thus far in 1998 the Company has closed bridge financing of
135 Units, representing a package of securities including total debt of
$850,000. The Board of Directors authorized the extension of this debt to $1
million. However, due to the significant decline in the value of the Company's
securities, it is unlikely that additional amounts will be borrowed based solely
on the marketable securities. The debt is on demand basis and it is expected
that, depending upon market conditions, the Company may begin to dispose of the
marketable securities in order to repay the debt.
The Company is planning more permanent financing and is hopeful to
complete it once certain key business agreements have been concluded.
<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. None.
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: OCTOBER 14, 1998 BY:
/S/ JOHN G. SIMMONDS
---------------------------
JOHN G. SIMMONDS
PRESIDENT / CEO / DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
DATE: OCTOBER 14, 1998 BY:
/S/ GARY N. HOKKANEN
----------------------------
GARY N. HOKKANEN
CHIEF FINANCIAL OFFICER,
(PRINCIPAL FINANCIAL OFFICER)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> AUG-31-1998
<CASH> 25,548
<SECURITIES> 629,937
<RECEIVABLES> 8,548
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 664,333
<PP&E> 155,521
<DEPRECIATION> 147,280
<TOTAL-ASSETS> 1,231,864
<CURRENT-LIABILITIES> 1,198,060
<BONDS> 157,461
0
1,000,000
<COMMON> 2,518
<OTHER-SE> (1,126,175)
<TOTAL-LIABILITY-AND-EQUITY> 1,231,864
<SALES> 0
<TOTAL-REVENUES> 3,118
<CGS> 0
<TOTAL-COSTS> 370,758
<OTHER-EXPENSES> 123,816
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (491,456)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (491,456)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
