As filed with the Securities and Exchange Commission on January 14, 1999.
===============================================================================
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 November 30, 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 January 8, 1999 are as follows:
Class of Securities Shares Outstanding
------------------------------- --------------------
Common Stock, $.0001 par value 25,127,886
================================================================================
American Digital Communications, Inc.
<PAGE>
INDEX
PART I Financial Information
Item 1. Financial Statements
Balance Sheet.......................................... 3
Statements of Operations and Comprehensive Income...... 5
Statements of Cash 6
Flows..................................................
Notes to Financial Statements.......................... 7
Item 2. Management's Discussion and Analysis or
Plan of Operations.................................. 8
PART II. Other Information
Items 1 - 5. ...................................................... 12
Item 6. Exhibits and Reports on Form 8-K
A) Exhibit 27 Financial Data Schedule.......... 13
B) Form 8-K - None
Signatures........................................... 14
<PAGE>
American Digital Communications, Inc.
Balance Sheet
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS November 30, February 28,
- ------ ------------ ------------
1998 1998
---- ----
<S> <C> <C>
Current Assets:
Cash, restricted (see notes to financial statements) 123,624 19,558
Notes receivable 8,548 8,548
Due from related parties - -
Marketable securities, pledged (see notes to financial statements) 632,690 1,209,844
- -----------------------------------------------------------------------------------------------------------------
Total current assets 764,862 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 147,733 146,370
- -----------------------------------------------------------------------------------------------------------------
Net property and equipment 7,788 4,764
Other assets:
Distribution rights, net of amortization 140,481 201,672
TrackPower trademarks and other intellectual property rights 398,412 398,412
- -----------------------------------------------------------------------------------------------------------------
Total other assets 538,893 600,084
TOTAL ASSETS 1,311,543 1,842,798
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
American Digital Communications, Inc.
Balance Sheet
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY November 30, February 28,
- ------------------------------------ ------------ ------------
1998 1998
---- ----
<S> <C> <C>
Current Liabilities:
Accounts payable 427,241 243,716
Accounts payable - related parties 12,576 36,289
Accrued expenses 1,302 59,193
Accrued interest - related parties 91,527 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 157,461 -
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 1,576,428 414,937
Long term debt:
Capital lease obligations - 876
Long term note payable - related party - 157,461
- -----------------------------------------------------------------------------------------------------------------
Total long term debt - 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 (8,193,675) (6,905,424)
Accumulated other comprehensive income (246,027) 144,132
- -----------------------------------------------------------------------------------------------------------------
Total shareholder's equity (264,885) 1,269,524
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,311,543 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 Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Two way radio sales - - - 113,275
220 mHz tower equipment sales - 3,696,000 - 4,051,000
Gain on sale of marketable securities 6,849 - 6,849 -
Royalties from distribution rights 2,378 - 10,125 -
-----------------------------------------------------------------------------------------------------------------------
Total revenue 9,227 3,696,000 16,974 4,164,275
Costs and expenses:
General and administrative 235,563 87,451 906,722 302,691
Cost of equipment sales - - - 81,667
Cost of 220 MHz equip./Distribution rights - 3,229,302 - 3,941,784
Financing costs 25,522 - 287,170 -
Non-recurring Denver office costs - - 48,778 -
Depreciation and amortization 20,850 1,021 62,554 19,297
-----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 281,935 3,317,774 1,305,224 4,345,439
-----------------------------------------------------------------------------------------------------------------------
Net loss (272,708) 378,226 (1,288,250) (181,164)
Other comprehensive income:
Unrealized holding gain on marketable securities 131,481 - (390,159) -
-----------------------------------------------------------------------------------------------------------------------
Comprehensive loss (141,227) 378,226 (1,678,409) (181,164)
-----------------------------------------------------------------------------------------------------------------------
Net loss per share of common stock (0.01) 0.02 (0.07) (0.01)
-----------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 25,127,886 23,448,407 24,897,330 22,627,431
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
American Digital Communications, Inc.
Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
Increase (Decrease) in Cash
1998 1997 1998 1997
---- ---- ---- ----
-------------------------------------------------------------------------------------------------------------------
Net cash used in operations
<S> <C> <C> <C> <C>
Net loss (272,708) (378,226) (1,288,250) (181,164)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 20,850 13,099 62,554 48,917
Gain on sale of marketable securities (6,849) - (6,849) -
Loss on sale of fixed assets - 376,875 - 376,875
Issuance of stock for bridge financing - - 144,001 -
Changes in:
Accounts receivable - - - 21,110
Due to related parties (1,012) - (23,713) -
Inventory - - - 268,272
Other current assets 300 136,015 - (535,644)
Accounts payable 195,713 (13,606) 183,525 (76,206)
Accrued expenses 706 - (57,891) (4,933)
Other accrued liabilities 25,500 526,513 51,233 (2,571)
-------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (37,500) 1,040,247 (935,390) (85,344)
-------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 135,576 - 193,843 -
Sale/(purchase) of fixed assets - - (4,387) 240,000
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 135,576 - 189,456 240,000
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock, net - - - 9,582
Payments of capital lease obligations - (1,275) - (3,825)
Proceeds on issuance of notes payable - (1,024,548) 850,000 (166,429)
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities: - (1,025,823) 850,000 (160,672)
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 98,076 14,424 104,066 (6,016)
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Cash, beginning of period 25,548 11,261 19,558 31,701
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Cash, end of period 123,624 25,685 123,624 25,685
-------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
American Digital Communications, Inc.
Notes to Financial Statements
November 30, 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 November 30, 1998 and February 28, 1998, and the results of operations and
cash flows for the periods ended November 30, 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 ended on
September 30, 1998, after proving the technology to be both commercially and
technically viable. All operating costs of the project have been expensed in the
relevant period which ended with the termination of the Ontario Jockey Club
Agreement. 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 has been in
discussions with key business partners and expects to launch the new service
early in calendar 1999. No revenues were generated by the TrackPower business
during the third 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
<PAGE>
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Marketable securities:
The Company's marketable securities consist of restricted and
unrestricted common stock of publicly traded companies. The securities, which
are pledged as security to a bridge loan, 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.
Subsequent event:
The Company sold a portion of marketable securities during the current
quarter. The cash balance at November 30, 1998 represents the proceeds of
disposition. Subsequent to the end of the quarter, the Company repaid $127,500
of the bridge loan on a pro-rata basis. On December 31, 1998 the restricted cash
balance held for future repayment was $14,091.
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. During the first and second quarters of this fiscal year
the Company borrowed amounts supported by its marketable securities. In the
<PAGE>
third quarter the Company sold a portion of the marketable securities in order
to generate cash for note repayment. Subsequent to the end of the fiscal quarter
the Company partially repaid the bridge loan. 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
For the three months ended November 30, 1998 and 1997:
The Company continues to collect a nominal royalty on Midland
distribution rights. The remaining Midland distribution rights, attracting a
royalty stream, are from certain territories in Western Canada under a
sub-license agreement with a third party. Prior year revenues of $3,696,000
represents the sale of the Company's 220 mHz tower equipment to Intek Global
Corporation.
The Company sold 87,400 Intek shares during the quarter at an average
price of $1.47 for total proceeds of $128,327 representing a nominal gain of
$5,421. The Company also sold 70,000 Ventel shares at an average price of
approximately $0.10 for total proceeds of $7,250 representing a gain of $1,428.
The Company does not expect any revenues from the TrackPower business
until the new service is launched.
General and administrative expenses were $235,563 in the third quarter,
a decrease of 36% over the prior quarter. General and administrative expenses
totaled $87,451 in the prior year and represent the overhead required prior to
the change in the business direction of the Company.
Financing costs totaled $25,522 during the second quarter. These costs
were primarily interest.
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 $1.56 at August 31, 1998 to $1.84 at November 30, 1998.
The trading value of Ventel shares closed at $.052. Accordingly the Company
recorded an unrealized holding gain on marketable securities of $131,481.
For the nine months ended November 30, 1998 and 1997
Royalty revenue from the Western Canada Midland Distribution Rights
totaled $10,125 in the first nine months of this year. Prior year's revenues of
$113,275 and $4,051,000 represent the direct sale of Midland brand two radios in
licensed territories and the Company's sale of 220 mHz systems to Intek,
respectively.
General and administrative expenses totaled $906,722 against $302,691
in the prior year. Operating expenses are substantially higher than the prior
year due to the cost of developing the Trackpower infrastructure. Costs incurred
during the nine month period ended November 30, 1998 are costs attributable to
financing, to develop the Trackpower technology, to negotiate horse racing
content agreements and other business relationships.
Financing costs totaled $287,170 during the first nine months of the
year. These costs have been incurred to provide the funding of the new business
initiative.
<PAGE>
During the nine months ended November 30, 1998 the Company recorded an
unrealized holding loss on marketable securities of $390,159 due to the decline
in value of the Company's Intek and Ventel shares.
Financial Condition
Total assets increased from $1,231,864 to $1,311,543 during the current
quarter. The increase is primarily a result of an increase in the market value
of the Company's marketable securities.
At the beginning of this fiscal quarter the Company's marketable
securities consisted of 418,381 Intek shares and 499,999 Ventel shares. During
the quarter 87,400 and 70,000 Intek and Ventel were sold. As at November 30,
1998 the Company held 330,981 Intek shares and 429,999 Ventel shares. Subsequent
to the end of the quarter the Company repaid $127,5000 of the bridge loan.
The TrackPower trademarks and other intellectual property rights are
not being amortized until revenues begin to occur from the new business.
The Company's working capital ratio declined from 0.6:1 at August 31,
1998 to approximately 0.5:1 at November 30, 1998. The change is primarily the
result of a $157,461 note payable to a related party now classified as current.
Net equity of the Company also declined from a deficit of $123,657 to a
deficit of $264,885 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. 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 debt is on demand basis and the Company has begun selling the
marketable securities in order to repay the debt.
The continued weakness in the value of the marketable
securities has significantly restricted the Company's liquidity and capital
resources. The current market value of the marketable securities is insufficient
to repay the bridge loan in its entirety. A portion of the Company's marketable
securities became free trading during the quarter. The Company recognizes that
incremental working capital will be required to effect the commercialization of
the TrackPower application and is in the process of planning the financing
strategy.
Year 2000
The Company is engaged in a review of computer systems and software
both internally and in connection with external business relationships.
The Company will have access , through a related party, to an
accounting platform which is Year 2000 compliant system during calendar 1999.
The Company is developing the new Trackpower technology to be Year 2000
compliant. The Company will, prior to consummating any new business agreements,
require Year 2000 compliance certification from the contracting party.
<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.
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: JANUARY 14, 1999 BY:
/s/ John G. Simmonds
-------------------------------------------
John G. Simmonds
President / CEO / Director
(principal executive officer)
DATE: JANUARY 14, 1999 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> NOV-30-1998
<CASH> 123,624
<SECURITIES> 632,690
<RECEIVABLES> 8,548
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 764,862
<PP&E> 155,521
<DEPRECIATION> 147,733
<TOTAL-ASSETS> 1,311,543
<CURRENT-LIABILITIES> 1,576,428
<BONDS> 0
0
1,000,000
<COMMON> 2,518
<OTHER-SE> (1,267,403)
<TOTAL-LIABILITY-AND-EQUITY> 1,311,543
<SALES> 0
<TOTAL-REVENUES> 9,227
<CGS> 0
<TOTAL-COSTS> 235,563
<OTHER-EXPENSES> 46,372
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (272,708)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (272,708)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
