As filed with the Securities and Exchange Commission on June 16, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ending February 28, 1999 Commission File No. 000-28506
AMERICAN DIGITAL COMMUNICATIONS, INC.
(Exact name of registrant as specified in charter)
Wyoming 13-3411167
(State or other jurisdiction (I.R.S. Employer
Identification No.)
745 Fifth Avenue, Suite 900 (212) 486-7424
New York, NY 10151 (Registrant's Telephone No.
incl. area
Securities registered pursuant to None
Securities registered pursuant to None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes ( x) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation SB is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ( ).
For the fiscal year ended February 28, 1999, the Company's revenues were
$12,226.
Based on the closing high bid price on May 21, 1999, as reported by the
National Association of Securities Dealer's Over The Counter electronic bulletin
board, the aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant was approximately $39,483,543.
On May 21, 1999, the number of shares outstanding of the registrant's
Common Stock was 27,911,578.
Transitional Small Business Disclosure Format (Check One): Yes No X
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Part I
Item 1. Description of Business
Certain matters discussed in this Annual Report may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") and as such may involve risks
and uncertainties. These forward-looking statements relate to, among other
things, expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market and
statements regarding the Company's goals. The Company's actual results,
performance, or achievements may differ from those expressed or implied in such
forward-looking statements. For discussion of the factors that might cause such
a difference, see Item 6 Management's Discussion and Analysis or Plan of
Operations.
Introduction
American Digital Communications, Inc. ("American Digital", "ADC" or the
"Company") is a corporation organized June 30, 1993 under the laws of the state
of Wyoming. The Company's offices are located at 745 Fifth Avenue, New York, NY
10151 (telephone number 212-486-7424) and 580 Granite Court, Pickering, Ontario
L1W 3Z4 (telephone number 905-839-1430 and fax number 905-837-1139).
ADC is the successor to Mont Rouge Resources, Inc. ("Mont Rouge"), a New
York corporation organized on March 19, 1987. Mont Rouge completed a small
public offering in 1987 and in March 1988 acquired American Fidelity Holding
Corporation, a Delaware corporation, in a stock-for-stock exchange. The
acquisition was rescinded in 1989 and Mont Rouge became dormant until early 1993
when it was redomiciled to the State of Wyoming.
In 1993 and 1994, ADC acquired a series of 220 Mhz licenses. The
acquisition strategy was to aggregate as many licenses as possible in order to
offer a low cost analog alternative to digital 800 and 900 Mhz spectrum. During
1997 the Company reviewed its strategic direction concerning the implementation
of a 220 Mhz spectrum system as funding became very difficult. Based on certain
developments occurring in the industry, ADC determined that it would be unable
to operate an analog dispatch system effectively and profitably at the requisite
scale. As a result, in 1998, management decided to take advantage of an
opportunity to sell its tower sites and licenses to a large 220 Mhz aggregator
and free up its investment in the 220 Mhz spectrum.
Between December 1995 and November 1996, ADC acquired Midland Land
Mobile Radio distribution rights from Simmonds Capital Limited ("SCL"). The
rights included exclusive Midland 800 Mhz rights in the United States, exclusive
international (defined as Mexico, South America, Pacific Rim, Australia, New
Zealand, Thailand and Southeast Asia) rights for all Midland radios and the
rights to certain western Canadian provinces. During 1997 the Company was able
to divest, by way of sale or sub-license, all of it's Midland distribution
rights except for a group of Midland radio rights known as "LTR" in the United
States.
In January 1998, the Company acquired certain development-stage assets
of SCL, including the TrackPower trademark and other information and
communications technology and contractual and intellectual property rights. As
consideration therefor, the Company issued to SCL $1.0 million of preferred
stock of the Company (convertible at any time into common stock of the Company
at $1.00 per share) and warrants to purchase 500,000 shares of common stock of
the Company exercisable any time before January 31, 2001. The Company also
agreed, subject to certain terms, to pay SCL an earnout of up to $1.5 million.
ADC also assumed certain accounts payable and certain lease obligations of SCL
and agreed to pay SCL a monthly fee for the services of those employees who
became officers of ADC. The TrackPower service, when fully implemented, will
distribute live horse racing video to subscribers' homes via satellite and such
subscribers will be able to place wagers interactively through their television.
The Company will not accept or place any wagering transactions, but intends to
deliver the wager to a state licensed account wagering entity.
In February 1998, the Company entered into a series of agreements with
the Ontario Jockey Club ("OJC"),
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a horse racing institution, to design and develop the TrackPower service
acquired from SCL. SCL had been partners with OJC in the development of a
Multi-channel Multi-point Distribution System ("MMDS") wireless video version of
the TrackPower business. The OJC project served as a pilot whereby 100 OJC
telephone account wagering account holders were given the opportunity to test
the TrackPower concept. The pilot project, which ended in July 1998, serves as
the basis for the Company's current business plan. During the pilot project the
Company decided to change the method of video delivery from MMDS to a satellite
based system with a footprint throughout North America.
The Company has developed a business plan which it believes will enable
the Company to reach break even cash flow at achievable subscriber levels. The
Company intends to execute the following business plan in four stages:
Stage I Develop an alliance with a satellite distribution entity
and launch video distribution with the best available
content
Stage II Enter into a wagering hub agreement to earn revenues from
wagering from the subscriber base
Stage III Add comprehensive handicapping information and
interactivity to the system
Stage IV Add interactive wagering over the system for both the
television and PC interfaces
Recent Developments
On February 10, 1999, the Company entered into an agreement with Loral
Skynet (a subsidiary of Loral SpaceCom Corporation), pursuant to which Loral
Skynet will supply technical services and channel capacity on the "Skynet
Direct" Service. This service is a joint venture between EchoStar Satellite
Communications Inc. and Loral Skynet, whereby Loral provides transponder space
on its Telstar 5 satellite and EchoStar performs the uplink, subscriber billing,
and supply of subscriber's equipment. The programming carried by "Skynet Direct"
is added to a package of programming put together by EchoStar called "Sky Vista"
which includes 24 "Best of Satellite" channels, including HBO.
On April 1, 1999, the Company launched the TrackPower service on the
"Sky Vista" service. The Company believes that the Skynet relationship enabled
the Company to launch the TrackPower service in a shorter period of time and
with lower technical risk than would have been the case if the Company had built
its own infrastructure, including a satellite uplink facility and a subscriber
billing system.
On April 29, 1999, the Company entered into a binding letter of intent
with Penn National Gaming Inc. ("Penn National") pursuant to which Penn National
will serve as the Company's exclusive wagering hub operator. Penn National is a
licensed pari-mutuel racetrack operator which operates account wagering in
compliance with Pennsylvania laws and also imports and exports simulcast signals
with numerous harness and thoroughbred racetracks in North America. Pursuant to
the letter of intent, Penn National will (i) process all wagers arising from
TrackPower subscribers; (ii) provide the TrackPower service with all of Penn
National's owned horse racing simulcasts; (iii) assist the Company in the
execution of additional simulcast agreements; (iv) assist in the design of the
Company's marketing plan; and (v) attempt to transfer existing Penn National
account wagering customers to the TrackPower service. In addition, under the
terms of the letter of intent, Penn National will pay the Company a wagering
fee, of up to 4.75%, on all wagers processed from TrackPower subscribers.
Management believes that a definitive Penn National agreement will be executed
by the end of June 1999.
On June 4, 1999, the Company entered into an agreement with Transponder
Encryption Services Corporation ("TESC", a subsidiary of EchoStar Satellite
Communications Inc.) to have the TrackPower service broadcast under the broader
coverage of EchoStar's Dish Network rather than the "Sky Vista" service.
EchoStar's Dish Network currently has over two million subscribers, while Sky
Vista has approximately 10,000. The TESC agreement is for a term of four years
and will allow the Company to broadcast four full time horse racing video
channels plus one data channel.
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[Industry Background
According to a report prepared for the American Horse Council Foundation
by Barents Group LLC in December 1996, the horse industry in the United States
is very large, with over 7 million people participating. It is believed that the
horse industry contributes over $25 billion each year to the Gross Domestic
Product.
A significant trend during the last two decades has been the increase in
off-track wagering. The basis for this trend has been the desire for
convenience. Wagering can occur without actually having to visit a racetrack.
Virtually all tracks now import and export simulcast video of live horse racing
from around the United States. Racetracks have found importing video of premier
tracks to their site or their off-track wagering facility invaluable in
attracting wagering. It is this on-track to off-track trend that the Company
plans to capitalize on by providing the very same full card video signal
available in an off-track facility directly to the subscriber's home or place of
work.
The majority of horse racing wagering is through either pari-mutuel
wagering or fixed-odds wagering. Pari-mutuel wagering is dominant in North
America whereas fixed-odds wagering is much more significant in other parts of
the world such as the United Kingdom.
In Pari-mutuel wagering the entity accepting the wager (or house)
retains a percentage fee from the total amount wagered in the pool. The amount
not retained is paid out to winners. The amount retained is distributed by the
house to tax authorities, horsemen (through purses) and normally a fee to the
simulcast originator. The remainder is profit to the house. Under pari-mutuel
wagering the house is not at risk.
Under fixed odds wagering, the house is at risk to a possible loss. The
house sets odds and the amount taken in, in excess of the amount paid out is the
house fee.
It has been estimated that worldwide horse racing wagering exceeded $100
billion in 1997 and wagering in the United States exceeded $15.0 billion. In
addition, it is believed that over three-quarters of the wagering in the United
States was off track.
Off track wagering includes telephone account wagering, off-track
wagering establishments and wagering on simulcasted races at other tracks.
Telephone account wagering involves establishing a wagering account with a
licensed account wagering entity, depositing funds into the account and then
placing wagers usually using a telephone. Penn National is a licensed account
wagering entity.
Business Plan
The Company intends to execute its business plan through the
implementation of the following:
Stage I
On April 1, 1999, the Company launched TrackPower on the Sky Vista
service. The TrackPower service is digitally transmitted to the subscriber by
way of a medium powered satellite. A subscriber receives the TrackPower signal
using a small thirty-six inch dish, a set top box with a smart card and a remote
control. Stage I of the service is video only. The Company charged a monthly fee
of $19.95 for the TrackPower service and offered a special launch package of
$479.50, representing the purchase price of the set top box and dish and one
year of service. The service has two channels, which the Company intends to
expand to four channels on migration of the TrackPower service to the EchoStar
Dish Network, which is scheduled to occur on July 1, 1999. On July 1, 1999, the
basic dish and set top box required for receiving the Track Power service under
the Echostar Dish Network service will be available from over 17,000 statellite
distributors across the United States for approximately $99.00. A subscriber
will have the option of upgrading to Web TV, hardware which uses the DISHPlayer
set top box, at a cost of approximately $199.00.] Web TV is a Microsoft network
service which allows Internet pages to be viewed on the television screen. The
DISHPlayer set top box has other superior features including replay and freeze
frame, which the Company believes will appeal to TrackPower subscribers.
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The TrackPower service was launched with simulcasting from Fair Grounds
Race Course, The Meadowlands and Santa Anita Park. In May 1999, the Company
began simulcasting from Penn National RaceCourse, Pocono Downs, and Charles Town
Races. In addition, Penn National has agreed to assist the Company in signing
other premier race tracks to simulcast agreements.
Stage II
Under the arrangements with Penn National, Penn National has agreed to
serve as the Company's exclusive wagering hub operator. Penn National will
process all wagers arising from TrackPower subscribers and will pay the Company
a fee on all such wagers. Penn National will also jointly market its account
wagering service with the TrackPower service. The TrackPower service will be
directly marketed to Penn National account holders. The subscribers will also be
entered into the Penn National player rewards system offering benefits for
wagering through Penn National's wagering hub.
Stage III and IV
During stages III and IV the Company intends to add data to the video
broadcast so that subscribers can view displays of real-time odds, pool
information and past race result on their TV screens. The Company also plans for
the system to enable the subscriber to use its remote control to set up wagers
on the TV screen, and transmit these wagers via a telephone connection to the
TrackPower system. The TrackPower system will act as a gateway to the Penn
National wagering hub. The Company will not accept or place any wagers. All
wagering activity will be delivered by the TrackPower system to Penn National
which will process all wagering transactions. A fee of up to 4.75% will be paid
by Penn National to the Company.
The Company has developed a demonstration version of the user interface
for interactively displaying data and setting up wagers on the TV screen, and a
software specification has been written. Although the Company believes that it
understands the technology for such interactivity, there can be no assurance
that the Company will be able to successfully implement interactivity to the
TrackPower system, as unforeseen difficulties may arise.
[The Company is in discussions with EchoStar with respect to the
Company's use of EchoStar's "Dishplayer" receiver. The Dishplayer, which has
just been released through EchoStar's retail distribution channels, is the first
satellite receiver on the market to incorporate Microsoft's WebTV service. It
combines the functions of a digital satellite receiver and a Web Browser
designed for TV viewing and the Company believes it represents a good platform
for TrackPower's interactivity plans. In addition, the Dishplayer has some
advanced features that are particularly relevant for TrackPower, including an
eight gbyte hard drive which will enable a subscriber to record and freeze-frame
replay of races, and a printer port which will enable subscribers to print
copies of race programs. As such discussions are only preliminary, there can be
no assurance that the Company will enter into a definitive agreement on
acceptable terms.]
According to the pilot project results account wagering increases
substantially when coupled with a video feed. In addition, the Company believes
that the ease of placing a wager interactively through the television is a major
benefit to the horseracing enthusiast and is expected to differentiate the
TrackPower service from many of its competitors.]
Marketing Plan
In order to penetrate the North American market both efficiently and
effectively, the TrackPower system will be marketed via direct mail, industry
publications and Internet resources.
Three significant target audiences exist for TrackPower:
o Horse industry participants (trainers, jockeys, drivers, owners,
breeders, veterinarians, etc.)
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o Existing fans and customers of racetracks and off-track
establishments, specifically those currently using telephone
account wagering without the ability to watch the races.
o Lapsed fans of horseracing that have stopped frequenting the
racetrack due to the inconvenience, deteriorating infrastructure
and services, or other reasons.
These groups will be identified through industry associations and
publications. The Company believes a focused marketing strategy will be
successful in acquiring subscribers.
Expansion Plans
Although the Company plans to fully launch the TrackPower business as a
horse racing service, the Company also intends to expand its business to other
wagering related sports, such as jai alai and dog racing. Both jai alai and dog
racing are established pari-mutuel sporting ventures that are popular in certain
regions of the United States.
In addition, the Company intends to eventually simulcast and process
wagering on other live sports events, such as football, baseball and basketball.
Wagering on these sports is currently only legal in the state of Nevada.
Management believes that Canada represents a significant TrackPower
market for horseracing. However, under current Canadian legislation, the Company
believes that landing the TrackPower video signal is not legal. The Company is
investigating alternative signal delivery options.
The Company believes that substantial growth in revenue is available by
accessing certain Central American markets such as Puerto Rico and Mexico.
Puerto Rico currently has a base of EchoStar subscribers, who already possess
the necessary set top box and dish to receive the TrackPower service and only
requires a call to EchoStar to become a subscriber.
Revenue Sources
The Company's revenues from the TrackPower service in the initial horse
racing form will be from a number of different sources.
Subscription Revenue
The Company will charge a monthly subscriber fee. [It is very difficult
to predict the number of subscribers TrackPower will be able to sign up over the
first few years. However, the target subscriber market is approximately 7
million in the United States. If the Company is successful in signing even a
small percentage of the target subscriber market, management believes that the
TrackPower business may achieve break even cash flow. This is in part due to the
modest break-even level established as a result of the competitive advantages of
the TrackPower systems design and architecture.] The TrackPower service
currently costs $19.95 per month. Under the terms of the TESC agreement 20% of
the subscription fee will be retained by EchoStar.
Wagering Revenue
Under pari-mutuel wagering, a state licensed wagering entity (Penn
National, in the Company's case) retains a flat percentage from each accepted
wager. The wagering entity pays all statutory taxes, and returns a portion to
horsemen (in the form of purses). After these payments, a fee is normally paid
to the simulcast signal originator and the remainder is retained by the wagering
entity.
With the TrackPower system, the wagering hub entity, Penn National, will
pay the Company a fee for each wager accepted. The amount of the fee will differ
depending on certain circumstances and contractual details. This fee can be up
to 4.75%.
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[It is very difficult to predict how much overall wagering revenue will
be earned, since it depends on many factors, including the specific rate of
individual wagering preferences in the aggregate. Based on patterns learned from
the OJC pilot, the Company's business plan is premised on conservative
assumptions. The OJC pilot yielded higher rates and amounts,
however for business planning purposes lower rates have been assumed.]
Hardware Sales
The Company's strategy is to out-source as many functional tasks as
possible. The hardware is available through the EchoStar network of dealers.
Currently there are approximately 20,000 EchoStar dealers. The dealers also
provide installation of the system.
Regulatory and Legal Issues
The federal statutory regime that applies to pari-mutuel wagering is
known as the Federal Wire Act. The Federal Wire Act prohibits the
interstate/international transmission of wagers, but does permit the
interstate/international transmission of "information assisting in the placing
of wagers" when betting on a particular event is legal at the transmission's
point of origin and terminus. The Company has taken the position that so long as
the account from which an individual places a wager is located at the site where
the wager is accepted, the telephone call that initiates the wager merely
transmits information assisting in the placement of the wager; the telephone
call does not constitute the wager itself. The Company believes that this
distinction places its proposed activity within the scope of conduct that is
permitted under the Federal Wire Act. The Department of Justice has taken no
formal position with regard to the telephone wagering on horse racing. This has
been broadly interpreted as approval by most racing organizations. The telephone
account wagering systems in operation are conducting business with the approval
and sanction of state racing commissions and their legal offices.
Within the United States, 42 states permit some form of pari-mutuel
wagering, eight specifically have legalized the practice and five of those
permit inter-state wagering.
The Kyl Bill, which is expected to be enacted by the Senate in late
1999, is designed to control wagering activity on the Internet. Its main targets
however are off-shore casinos taking bets over the Internet, and any Internet
service providers that facilitate this form of wagering. The Kyl Bill has
specific exemptions for horse race wagering, allowing for telephone account
wagering and simulcasting providing these are conducted between states where
these activities are legal and regulated.
In terms of satellite service regulations, the Company believes the
Federal Communications Commission ("FCC") regulations regime allows the Company
the opportunity to offer TrackPower to the North American market as a satellite
service from within the U.S. Use of a U.S. satellite could further subject the
business to the scope of the Federal Wire Act, subsection (d) of which requires
that common carriers terminate the services of any facility that may be
operating in violation of the Federal Wire Act upon written notice from a
federal, state or local law enforcement agency. Thus, distribution of, for
example, live horse racing coverage, with associated wagering, via a U.S.
satellite could be terminated upon demand by an appropriate law enforcement
agency. The Company is not aware that such demand has ever been made in similar
circumstances.
There can be no assurance that new federal or state statutes or
regulations, or new interpretations under existing statutes or regulations,
including the Federal Wire Act, will not have a material adverse effect in the
business, operations of prospects of the Company.
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Competition
There are several competitors either coming to market or in operation
that are attempting to address the shortcomings of the existing wagering
arrangements and secure advantageous market positions in this rapidly growing
market. Management believes that due to the size of their infrastructure, as
dictated by their models and delivery systems, competitors will be required to
attract substantially higher subscriber and revenue levels to achieve break even
results with heightened risks in terms of cost, strategy, execution, time-frames
and eventual return on investment.
YouBet.com
The YouBet model is a personal computer service, which conducts wagering
over a "virtual private network". Resembling a countrywide Intranet, YouBet
accepts wagers from customers computers. Through a partnership with Ladbrokes in
Pennsylvania, all of the wagering will occur through the Ladbrokes wagering hub.
YouBet earns a percentage of wagering for facilitating the transactions. YouBet
has developed a good customer interface and access to quality racing product.
[However, management believes this model has limited quality video as it uses
streaming technology over phone lines.] YouBet launched in July of 1998.
Television Games Network (TVG)
TVG is developing a cable and satellite television channel, The
Television Games Network (TVG), which will utilize a set top box for interactive
wagering over the television. The channel is focused on increasing the sports
awareness and developing new horse racing fans. TVG has content agreements with
many major tracks. TV does not show full card simulcasting, but rather picks and
chooses certain races. They are also limited to one channel, and must use a
rotating coverage format, much like NFL Today, and cannot maintain constant odds
coverage.
The Racing Network (TRN)
Management believes that the TRN service will be similar to the stage I
service of TrackPower. Management believes that TRN's intention is to launch a
four-channel network, which will include dog, thoroughbred and harness racing.
This system will use a dedicated set top box and will utilize a studio show to
switch between multiple tracks on one channel. The system will use a host to
comment on all of the carried tracks. The Company believes TRN has no plans for
interactivity, information or wagering services.
Management believes TRN is building a stand-alone system which will
involve the purchase and installation of Digital Video Compression (DVC) and
Conditional Access Systems (CAS), as well as a Ku-band uplink transmitter
system. In addition to these infrastructure systems TRN will have to purchase
set top boxes and antennas and put in place a method of distribution to their
subscribers. All of these aspects have been out-sourced by TrackPower, which
results in a much smaller infrastructure and, the Company believes, a reduced
risk of not reaching break even.
Off-Shore Betting
While numerous offshore web sites exist, they are focused on sports
betting other than horseracing. They are also generally unable to get a video
signal. It is illegal to wager through these systems in the United States.
Item 2. Description of Property
The Company has temporarily leased office space at 745 Fifth Avenue, New
York, NY 10151. Certain officers of the Company maintain offices at 580 Granite
Court, Pickering, Ontario, L1W 3Z4, Canada.
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Item 3. Legal Proceedings
The Company believes that it is not presently a party to any pending
litigation or any proceeding contemplated by a governmental authority, the
outcome of which could reasonably be expected to have a material adverse effect
on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of the security holders of the Company.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock trades in the over-the-counter market (symbol
ADCM) on the OTC Electronic Bulletin Board operated by the National Association
of Securities Dealers, Inc. The table below sets forth the high and low bid
quotations for the common stock for the fiscal years ended February 28, 1999 and
1998.
Fiscal Year Ended Fiscal Year Ended
2/28/99 2/28/98
------- -------
High Low High Low
---- --- ---- ---
First Quarter .375 .20 .156 .062
Second Quarter .28 .115 .297 .047
Third Quarter .175 .08 .391 .141
Fourth Quarter .36 .08 .406 .125
These quotations reflect only inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.
Shareholders
On May 21, 1999, the Company had approximately 200 shareholders of
record. The Company believes it has approximately 400 shareholders including
holders whose securities are held in street name or nominee accounts.
Dividends
The Company has never paid a cash dividend on its common stock and does
not expect to pay one in the foreseeable future. Payment of dividends in the
future will depend on the Company's earnings and its cash requirements at that
time.
Item 6. Management's Discussion and Analysis or Plan of Operation
Overview
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The business of the Company has been in transition from the sale and
distribution of Midland two radios and the operation of 220 mHz analog dispatch
licenses in fiscal year 1998 to the new TrackPower business initiative. The new
business initiative is the development of a satellite based in-home electronics
wagering system for horse racing content. The Company plans in the later stages
of development to add other sporting events. Revenues during fiscal year 1999
were nominal as a result of the launch of TrackPower during fiscal year 2000.
During fiscal 1999, management primarily focused on financing the launch
of TrackPower and negotiating key business relationships for the future.
Although the Company's new business initiative began in the first half of fiscal
year 2000, management anticipates continued operating losses until a break even
level of subscribers is reached. However, there can be no assurance that the
Company will reach such break-even levels.
Results of Operations
Year ending February 28, 1999
The Company had a comprehensive loss of $1,911,971 during the current
year. The loss consists of an unrealized holding loss on marketable securities
of $128,776 and a net loss from operations of $1,783,195. Dividends of $67,500
were paid to a related party on convertible preferred stock.
The Company recorded an unrealized holding loss on marketable securities
of $128,776 arising from holding Intek Global Corporation and Ventel Inc. common
stock during the year. The price per share of Intek Global fell from $2.67 on
February 28, 1998 to $2.313 on February 28, 1999 and the price per share of
Ventel Inc. fell from $0.069 on February 28, 1998 to $.066 on February 28, 1999.
The net loss from operations, during the current year, included a loss of
$128,238 from the disposition of 161,581 Intek Global Corporation shares and
997,446 Ventel Inc. shares.
The Company earned $11,375 in royalty revenue under a sub-license of
Midland distribution rights to certain territories in western Canada. As a
result of low royalty revenue during the 1999 fiscal year and the expectation
that royalties will remain at these lower levels, the Company wrote down the
distribution rights by $47,382.
General and administrative expenses were down 11% from $606,473 in 1998
to $541,367 in 1999. TrackPower expenses, which consisted primarily of
consulting costs attributable to the development of the new business, amounted
to $401,429.
The Company recorded amortization of $19,921 on the TrackPower trademark
and intellectual property rights during the current year.
The Company financed the pre-operating losses by borrowing amounts using
the Company's marketable securities as security. Two financing of notes payable
were completed during the current year totaling $850,000. The Company incurred
interest and other financing related costs totaling $319,542 under the notes.
The basic and diluted loss per share was $.07 during the current year.
Year ending February 28, 1998
Revenue from operations during the year was $2,758,689. Included in
revenue for the year ended February 28, 1998, was the sale of 22 of the
Company's 220 Mhz licenses at $2,638,219, representing a gain of $479,326.
Also included in the results was the sale of the international Midland
distribution rights for the territories of Mexico, South America, Pacific Rim,
Australia, New Zealand, Thailand and Southeast Asia, at a loss of $324,375.
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Total costs and expenses, excluding the cost of sale of the 220 Mhz
systems, were $1,840,179 in 1998. General and administrative expenses were
$606,473.
The basic and diluted loss per common share in 1998 was $0.05.
The Company is expected to experience material pre-operating losses
attributable to the implementation of the TrackPower business.
Financial Condition
During the year ended February 28, 1999, total assets decreased from
$1,842,798 to $1,238,666. The decrease is directly proportional to the drop in
marketable securities during the year. As a result of unrealized holding losses
and sales of securities, marketable securities decreased from $1,209,844 to
$616,880. The Company sold 161,581 Intek shares, 997,446 Ventel shares during
the year.
The Company's working capital ratio declined from 2.98 at the beginning
of the year to 0.38 at the end of the year. However, approximately $652,000 of
the current liabilities as at February 28, 1999 are owed to related parties. In
addition, subsequent to the end of the year, all $595,000 in notes payable were
either converted to common equity of the Company or were repaid from the
proceeds of a new private placement.
Shareholders equity decreased from $1,269,524 to a deficit of $493,547.
The decrease is attributable common stock and paid in capital increasing by
$183,395 as a result of issuing common stock from treasury but more than offset
by the accumulated deficit increasing by $1,783,195 and the accumulated holding
gain decreasing by $128,776.
Liquidity and Capital Resources
The development of the TrackPower business was financed during the
current year by issuing notes payable totaling $850,000 in two transactions of
$500,000 and $350,000. Security for the notes payable were the Company's
marketable securities. Prior to the end of the year, $255,000 of the notes were
repaid from proceeds of the sale of securities.
In addition, Simmonds Capital Limited, a related party, funded a portion
of operations of the Company during fiscal year ended February 28, 1999. On June
10, 1999, SCL committed to provide additional funding for the Company for one
year, in the event that the Company was unable to fully support the development
of the TrackPower initiative. Furthermore, SCL has guaranteed the obligations of
the Company under the TESC agreement.
1. Subsequent to the end of the year, the Company completed a private
placement of convertible notes totaling $1,250,000 with the proceeds being first
used to repay the existing notes payable. The notes are convertible into common
stock of the Company at $1.25 and warrants to purchase common stock of the
Company at $2.50 exercisable at any time over the next five years.
While the Company has commitments to fund the development of the
TrackPower initiative for the next twelve months, management believes that there
can be no assurance that the Company will generate sufficient revenues to fund
operations.
Year 2000
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.
11
<PAGE>
The incremental cost of Year 2000 compliance is not known at this time,
however, the Company is of the belief that due to the outsourcing philosophy of
the majority of the operating tasks, the cost will not be significant. If the
systems of the Company's business partners are not Year 2000 complaint at
December 31, 1999, the Company may be subject to material effects to its
financial condition and results from operations.
Inflation
The effect of inflation on the Company has not been significant during
the last two fiscal years.
As a development stage company, the Company's future operating results
are particularly dependent on its ability to develop, produce and market new and
innovative products using the latest technologies. There are numerous risks
inherent in this process, including the need for the Company to timely bring to
market new products and applications to meet customers' changing interests.
[The horse industry has traditionally attracted the "over 40" age
segments of the population, segments which tend to be less facile with using
computerized technology. Among the Company's goals are to continue to simplify
the use of its technology while educating existing potential users and marketing
the Company's products to attract wider segments of the population. The
Company's inability to achieve these goals could have an adverse effect on the
Company's operations and prospects.]
As a development stage company, the Company will require significant
additional capital over the next year in order to achieve its business plan.
Failure to obtain such capital could adversely impact the Company's operations
and prospects.
Any interruptions or breakdowns in the systems the Company uses to
operate its business, including, in particular, those telecommunications and
computerized processing services provided by third parties, could adversely
impact the Company's results of operations.
The Company may be adversely affected by the costs and other effects
associated with
1. legal and administrative cases and proceedings, whether
civil or criminal;
2. settlements, investigations, claims, and changes in those
items;
3. developments or assertions by or against the Company relating
to intellectual property rights and intellectual property licenses;
and
The Company's results of operations may also be affected by:
1. changes within the Company's organization, particularly at the
executive officer level, or in compensation and benefit plans; and
2. the amount, type and cost of the financing which the Company
maintains, and any changes to the financing.
The Company's operations may be adversely impacted by:
1. the effects of war or severe weather or other acts of God on
the Company's operations, including disruptions of the satellites that
transmit the horse races and an the horse racing facilities;
2. the effects of a disruption in the Company's communications
systems.
Item 7. Financial Statements and Supplementary Data
12
<PAGE>
The financial statements of the Company as of February 28, 1999 and 1998,
and for each of the years in the two-year period ended February 28, 1999 and
1998, are included as part of this report beginning on page F-1 hereof. An index
to the financial statements appears at page 17.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
(a) Effective March 12, 1998, the Company engaged the firm of Stark,
Tinter & Associates, LLC ("STA") as its independent auditors, and dismissed its
former accountants, Causey Demgen & Moore ("CDM").
None of the reports of CDM on the financial statements of the Company for
either of the two fiscal years ending February 28, 1996 and 1997, contained an
adverse opinion of a disclaimer or opinion, or was modified as to uncertainty,
audit scope or accounting principles. During the Company's two fiscal years
ending February 28, 1997 and 1996, and the subsequent interim period preceding
the termination of CDM, there were no disagreements with CDM on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures, which disagreement(s), if not resolved to the satisfaction
of CDM would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report. None of the reportable events
listed in Item 304(B) of the Company's two fiscal years ending February 28, 1996
and 1997, and the subsequent interim period preceding the termination of CDM.
The Company's decision to engage the firm of STA was ratified by the
Board of Directors.
The Board of Directors and the Audit Committee subsequently determined
that, in light of recent management changes it would be in the best interests of
the Company to maintain continuity by re-engaging CDM.
(b) The Company terminated the services of STA as independent auditors
for the Company on May 7, 1998.
None of the reports of STA on the financial statements of the Company for
either of the two fiscal years ending February 28, 1996 and 1997, contained an
adverse opinion or a disclaimer of opinion, or was modified as to uncertainty,
audit scope or accounting principles. During the Company's two fiscal years
ending February 28, 1996 and 1997, and the subsequent interim period preceding
the termination of STA, there were no disagreement(s) with STA on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope and procedures, which disagreement(s), if not resolved to the satisfaction
of STA would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report. None of the reportable events
listed in Item 304(B) of Regulation S-B occurred with respect to the Company
during the Company's two fiscal years ending February 28, 1996 and 1997, and the
subsequent interim period preceding the termination of STA. STA was only engaged
by the Company for a period of approximately two months and accordingly did not
perform an audit of the financial statements of the Company or issue a report
with respect thereto.
On May 7, 1998, the Company engaged Causey Demgen & Moore Inc. ("CDM") as
its independent auditors.
As noted above, CDM previously acted as independent accountants to audit
the financial statements of the Company. Subject to the foregoing, during the
Company's two most recent fiscal years and the subsequent interim period
preceding the engagement of CDM, neither the Company nor anyone on its behalf
consulted CDM regarding the application of accounting principles to a specific
completed or contemplated transaction, or the type of audit opinion that might
be rendered on the Company's financial statements, and no written or oral advice
concerning same was provided to the Company that was an important factor
considered by the Company in reaching a decision as to any accounting, auditing
or financial reporting issue.
The decision to terminate the services of STA and re-engage CDM was
recommended by the Audit Committee of the Board of Directors and was approved by
the Board of Directors on May 6, 1998.
13
<PAGE>
CDM was retained by the Company as independent accountants to audit the
financial statements of fiscal year ended February 28, 1999.
Part III
Item 9. Directors and Executive Officers of the Registrant
Information required by this Item will be set forth in either (I) the
Company's definitive proxy statement for the 1999 Annual Meeting of
Stockholders, or (ii) an amendment to this Report on Form 10-KSB/A, which in
either case will be filed with the Securities and Exchange Commission not later
than 120 days after February 28, 1999, and which information is incorporated
herein by reference.
Item 10. Executive Compensation
Information required by this Item will be set forth in either (I) the
Company's definitive proxy statement for the 1999 Annual Meeting of
Stockholders, or (ii) an amendment to this Report on Form 10-KSB/A, which in
either case will be filed with the Securities and Exchange Commission not later
than 120 days after February 28, 1999, and which information is incorporated
herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item will be set forth in either (I) the
Company's definitive proxy statement for the 1999 Annual Meeting of
Stockholders, or (ii) an amendment to this Report on Form 10-KSB/A, which in
either case will be filed with the Securities and Exchange Commission not later
than 120 days after February 28, 1999, and which information is incorporated
herein by reference.
Item 12. Certain Relationship and Related Transactions
Information required by this Item will be set forth in either (I) the
Company's definitive proxy statement for the 1999 Annual Meeting of
Stockholders, or (ii) an amendment to this Report on Form 10-KSB/A, which in
either case will be filed with the Securities and Exchange Commission not later
than 120 days after February 28, 1999, and which information is incorporated
herein by reference.
(Remainder of page left intentionally blank)
14
<PAGE>
Part IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Page No. Document
- -------- --------
1 Underwriting Agreement
1.1 Placement Agent Agreement, between Registrant and Pellinore
Securities Corporation ("Pellinore"), dated April 17, 1998
(incorporated by reference to Exhibit 1 of the Registrant's Form 8-K
dated May 7, 1998)
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession
2.01 Articles of Merger as filed with the New York Department of State on
February 11, 1994 (incorporated by reference to Exhibit 2.1 to
report on Form 8-K dated February 14, 1994)
2.02 Articles of Merger as filed with the Wyoming Secretary of State on
February 14, 1994 (incorporated by reference to Exhibit 2.2 to
report on Form 8-K dated February 14, 1994)
2.03 Agreement and Plan of Merger dated July 1, 1993 between the Company
and Mont Rouge Resources, Inc. (incorporated as Exhibit A to Exhibit
2.2)
3 Articles of Incorporation and Bylaws
3.01 Articles of Incorporation of Mont Rouge Resources, Inc. as filed
with the New York Department of State on March 19, 1987.
(incorporated by reference to Exhibit 3.1 to registration statement
on Form S-1, File No. 33-6343)
3.02 Articles of Incorporation of the Company, as filed with the Wyoming
Secretary of State on June 30, 1993 (incorporated by reference to
Exhibit 3.1 to report on Form 8-K dated July 14, 1993)
3.03 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
report on Form 8-K dated July 14, 1993)
4 Instruments Establishing Rights of Security Holders
4.01 Specimen Stock Certificate of the Company (incorporated by reference
to Exhibit 4.1 to report on Form 8-K dated July 14, 1993
4.02 Form of Warrant issued by Registrant to various investors, dated as
of April 17, 1998 (incorporated by reference to Exhibit 4.1 to
report on Form 8-K, dated May 7, 1998)
10 Material Contracts
10.01 1993 Incentive Stock Option Plan of the Company dated July 15, 1993
(incorporated by reference to Exhibit 10.1 to report on Form 8-K
dated July 14, 1993)
10.02 1993 Non-Statutory Stock Option Plan of the Company dated July 15,
1993 (incorporated by reference to Exhibit 10.2 to report in Form
8-K dated July 14, 1993)
10.03 1993 Employee Stock Compensation Plan of the Company dated July 15,
1993 (incorporated by reference to Exhibit 10.3 to report on Form
8-K dated July 14, 1993)
10.04 1993 Employee Stock Compensation Plan of the Company dated November
5, 1993 ( incorporated by reference to Exhibit 10.4 to report on
Form 8-K dated February 14, 1994)
15
<PAGE>
10.05 Asset purchase agreement dated November 8, 1996 for the sale of
certain licensing rights, distribution rights, and right to acquire
up to $1,000,000 in certain inventory by and between Simmonds
Capital Limited, SCL Distributors (Western) Ltd.,
10.06 Agreement, dated January 15, 1998, between Simmonds Capital Limited
and the Registrant (incorporated by reference to Exhibits 2 through
2.6 of the Registrant's Form 8-K, dated May 7, 1998)
10.07 Amended and Restated Global Secured Demand Promissory Note, dated
July 28, 1998, in the principal amount of $850,000, issued by the
Registrant in favour of Pellinore, for itself and as agent for
certain investors (incorporated by reference to Exhibit 10.1 of the
Registrant's Form 8-K dated September 10, 1998)
10.08 Amended and Restated Pledge Agreement, dated July 28, 1998, between
the Registrant and Pellinore, for itself and as agent for certain
investors (incorporated by reference to Exhibit 10.2 of the
Registrant's Form 8-K dated September 10, 1998)
Exhibit
Page No. Document
- -------- --------
10.09 Placement Agent Agreement, dated July 28, 1998 between the
Registrant and Pellinore, for itself and as agent for certain
investors (incorporated by reference to Exhibit 1 of the
Registrant's Form 8-K dated September 10, 1998)
16 Letter on Change in Certifying Accountants
16.01 Letter of Causey, Demgen & Moore, dated March 24, 1998 (incorporated
by reference to Exhibit xxx to the Registrant's report on Form 8-K,
dated April 13, 1998)
16.02 Letter of Stark Tinter & Associates, LLC, dated May 13, 1998
(incorporated by reference to Exhibit 16 to the Registrant's report
on Form 8-K, dated May 22, 1998)
*27 Financial Data Schedule
- -------------------
* Filed herewith.
(b) Reports on Form 8-K
1. Report on Form 8-K, dated March 12, 1998
Report on Form 8-K, dated May 7, 1998
Report on Form 8-K dated September 10, 1998
(Remainder of page left intentionally blank)
16
<PAGE>
Index to Financial Statements
Independent Auditors' Reports F-1
Financial Statements:
Balance Sheet F-2
Statement of Operations and Comprehensive Income F-4
Statement of Changes in Stockholders' Equity (Deficit) F-5
Statement of Cash Flows F-7
Notes to Financial Statements F-9
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
American Digital Communications, Inc.
New York, New York
We have audited the accompanying balance sheet of American Digital
Communications, Inc. (a development stage company) as of February 28, 1999
and 1998, and the related statements of operations and comprehensive income,
stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Digital
Communications, Inc. at February 28, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is a development stage company and has
suffered recurring losses and at February 28, 1999, the Company has a working
capital deficit of $1,086,149 and a stockholders' deficit of $493,547.
These conditions raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Denver, Colorado
May 27, 1999, except for
Note 11 as to which the
date is June 10, 1999 CAUSEY DEMGEN & MOORE INC.
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
BALANCE SHEET
February 28, 1999 and 1998
ASSETS
1999 1998
---- ----
Current assets:
Cash $ 18,089 $ 19,558
Notes receivable 10,764 8,548
Marketable securities (Notes 2 and 4) 616,880 1,209,844
Other current assets 331 -
--------- ----------
Total current assets 646,064 1,237,950
Property and equipment, at cost:
Office equipment 141,055 125,052
Furniture and fixtures 26,082 26,082
--------- ----------
167,137 151,134
Less accumulated depreciation 146,519 146,370
--------- ----------
Net property and equipment 20,618 4,764
Other assets:
Distribution rights, net of accumulated amortization
of $118,465 (1999) and $46,286 (1998) (Note 9) 129,493 201,672
Deposits on satelite uplink services 64,000 -
TrackPower trademarks and other intellectual property
rights, net of accumulated amortization of $19,921
(1999) (Notes 3 and 6) 378,491 398,412
---------- ----------
Total other assets 571,984 600,084
---------- ----------
$1,238,666 $1,842,798
========== ==========
See accompanying notes.
F-2
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
BALANCE SHEET
February 28, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1999 1998
---- ----
Current liabilities:
Accounts payable $ 339,106 $ 243,716
Accounts payable - related parties (Note 6) 407,319 36,289
Accrued expenses 71,063 59,193
Accrued interest 75,242 -
Accrued interest - related parties 56,652 40,294
Notes payable - related parties (Note 4) 30,370 30,370
Current portion of long-term note payable - related
party (Note 4) 157,461 -
Notes payable - individuals (Notes 4 and 11) 595,000 -
Current portion of capital lease obligations - 5,075
--------- ----------
Total current liabilities 1,732,213 414,937
Long-term debt:
Capital lease obligations - 876
Long-term note payable - related parties (Note 4) - 157,461
--------- ----------
Total long-term debt - 158,337
Commitments and contingencies (Notes 1, 3, 5, and 9)
Stockholders' equity (deficit)(Notes 3, 8 and 11):
Convertible preferred stock, no par value, unlimited
shares authorized, 1,000,000 shares to be issued
(liquidation value $1,000,000) 1,000,000 1,000,000
Common stock, $.0001 par value; unlimited shares
authorized, issued and outstanding, 25,162,886
shares (1999), 24,113,624 shares (1998) 2,516 2,412
Additional paid-in capital 7,169,700 6,986,409
Common stock subscribed, 50,000 shares (1999),
214,262 shares (1998) 7,500 41,995
Accumulated deficit (including $1,783,195 accumulated
during the development stage) (8,688,619)(6,905,424)
Accumulated other comprehensive income 15,356 144,132
---------- ----------
Total stockholders' equity (deficit) (493,547) 1,269,524
---------- ----------
Total liabilities and stockholders' equity
(deficit $1,238,666 $1,842,798
========== ==========
See accompanying notes.
F-3
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the Years Ended February 28, 1999 and 1998
1999 1998
---- ----
Revenues:
Two-way radio sales (Note 10) $ - $ 76,480
220 MHz radio tower equipment sales (Note 2) - 2,638,219
Royalties received from distribution rights (Note 9) 11,375 43,990
Other revenue 851 -
---------- -----------
Total revenues 12,226 2,758,689
Costs and expenses:
Cost of two-way radio sales - 102,621
Write-down of two-way radio inventory - 12,414
Cost of 220 MHz radio tower equipment sales - 2,158,893
Loss on sale of distribution rights - 324,375
Impairment losses on distribution rights (Note 9) 47,382 476,865
TrackPower expenses (Note 3) 401,429 62,509
TrackPower expenses - related party (Note 6) 300,000 25,000
Realized losses on marketable securities 128,238 130,197
General and administrative 541,367 606,473
Depreciation and amortization 44,866 53,271
Interest expense 288,943 5,901
Interest expense - related parties 43,196 40,553
----------- -----------
Total costs and expenses 1,795,421 3,999,072
----------- -----------
Net loss (1,783,195) (1,240,383)
Preferred dividends (Note 3) (67,500) -
----------- -----------
Net loss applicable to common shareholders $(1,850,695) $(1,240,383)
=========== ===========
Basic and diluted net loss per share of common
stock $ (0.07) $ (0.05)
=========== ===========
Weighted average number of common shares outstanding 24,486,000 24,199,000
========== ==========
COMPREHENSIVE INCOME
Net loss $(1,783,195) $(1,240,383)
Other comprehensive income:
Unrealized holding gains (losses) Note 2) (128,776) 144,132
----------- -----------
Comprehensive income (loss) $(1,911,971) $(1,096,251)
=========== ===========
See accompanying notes.
F-4
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended February 28, 1999 and 1998
Preferred stock Common stock
Shares Amount Shares Amount
------ ------ ------ ------
Balance, February 28, 1997 - $ - 23,627,431 $ 2,363
Issuance of common stock for
subscriptions (Note 8) - - 436,193 44
Issuance of common stock to
employees for services (Note 8) - - 780,000 78
Exercise of stock options for cash - - 120,000 12
Return of the Company's common
stock on sale of radio tower
equipment (Note 2) - - (1,150,000) (115)
Issuance of common stock to
consultants for services (Note 8) - - 300,000 30
Stock subscriptions received for
cash (214,262 shares) (Note 8) - - - -
Convertible preferred stock to
be issued for trademarks
(Note 3) 1,000,000 1,000,000 - -
Net income (loss) for the year
ended February 28, 1998 - - - -
--------- --------- ---------- ------
Balance, February 28, 1998 1,000,000 1,000,000 24,113,624 2,412
Issuance of common stock for
subscriptions - - 164,262 16
Issuance of common stock in
conjunction with debt issuance
($.19 per share)(Note 4) - - 500,000 50
Issuance of common stock in
conjunction with debt issuance
($.14 per share)(Note 4) - - 385,000 38
Net loss for the year ended
February 28, 1999 - - - -
--------- --------- ---------- ------
Balance, February 28, 1999 1,000,000 $1,000,00 25,162,886 $2,516
========= ========= ========== ======
(Continued on following page)
See accompanying notes.
F-5
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the years Ended February 28, 1999 and 1999
(Continued from preceding page)
Additional Common Other
paid-in stock Accumulated comprehensive
capital subscribed deficit income
--------- ---------- ----------- -------------
Balance, February 28, 1997 $ 7,747,767 93,300 $(5,665,041) $ -
Issuance of common stock for
subscriptions (Note 8) 93,256 (93,300) - -
Issuance of common stock to
emloyees for services (Note 8) 77,922 - - -
Exercise of stock options for
cash 11,988 - - -
Return of the Company's common
stock on sale of radio tower
equipment (Note 8) (87,932) - - -
Issuance of common stock to
consultants for services
(Note 8) 44,970 - - -
Stock subscriptions received for
cash (214,262 shares) (Note 8) - 41,995 - -
Convertible preferred stock to be
issued for trademarks (Note 3) (901,562) - - -
Net income (loss) for the year
ended February 28, 1998 - - (1,240,383) 144,132
---------- ------- ----------- --------
Balance, February 28, 1998 6,986,409 41,995 (6,905,424) 144,132
Issuance of common stock for
subscription 34,479 (34,495) - -
Issuance of common stock in
conjunction with debt issuance
($.19 per share) (Note 4) 94,950 - - -
Issuance of common stock in
conjunction with debt issuance
($.14 per share)(Note 4) 53,862 - - -
Net loss for the year ended
February 28, 1999 - - (1,783,195) (128,776)
---------- ------ ----------- --------
Balance, February 28, 1999 $7,169,700 $7,500 $(8,688,619) $15,356
========== ====== =========== =======
See accompanying notes.
F-6
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
For the Years Ended February 28, 1999 and 1998
1999 1998
---- ----
Operating activities:
Net loss $(1,783,195) $(1,240,383)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 44,866 53,271
Impairment losses on distribution rights 47,382 476,865
Costs of licenses and distribution rights - 324,375
Gain on sale of radio tower equipment - (396,584)
Realized losses on marketable securities 128,238 130,197
Issuance of stock for interest expense 148,900 -
Issuance of common stock for debt issuance
costs - 123,000
Changes in:
Accounts receivable - 21,110
Inventories - 91,577
Other current assets (331) 3,888
Accounts payable 466,420 (179,010)
Accrued expenses 11,870 54,260
Accrued interest 91,600 29,918
---------- ---------
Net cash used in operating activities (844,250) (507,516)
Investing activities:
Purchase of office and equipment (16,002) -
Increase in deposits (64,000) -
Note receivable (2,216) -
Proceeds from sale of marketable securities 335,950 292,500
Proceeds from sale of fixed assets - 234,719
--------- --------
Net cash provided by investing activities 253,732 527,219
Financing activities:
Proceeds from sale of common stock, net - 12,000
Proceeds from stock subscriptions - 41,995
Payment of capital lease obligations (5,951) (5,841)
Payments of notes payable (255,000) (50,000)
Borrowings under notes payable 850,000 -
Borrowings from related parties - (30,000)
---------- --------
Net cash provided by (used in) financing
activities 589,049 (31,846)
---------- --------
Decrease in cash (1,469) (12,143)
Cash, beginning of period 19,558 31,701
---------- --------
Cash, end of period $ 18,089 $ 19,558
========== ========
(Continued on following page)
See accompanying notes.
F-7
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
For the Years Ended February 28, 1999 and 1998
(Continued from preceding page)
Supplemental disclosure of non-cash investing and financing activities:
During the year ended February 28, 1998, $377,838 of inventory was returned
for credit against the note payable.
During the year ended February 28, 1999, the Company issued common stock for
debt issuance costs of $148,900. During the year ended February 28, 1998, the
Company issued common stock for services valued at $123,000.
During the year ended February 28, 1998, the Company sold radio tower
equipment for:
Marketable securities $ 1,211,156
Common stock of the Company 88,047
Settlement of a note payable 756,077
Settlement of accrued interest on a note payable 248,468
Cash 219,472
-----------
$ 2,523,220
===========
During the year ended February 28, 1998, the Company purchased trademarks
for:
Preferred stock to be issued $ 98,438
Assumption of accounts payable 299,974
---------
$ 398,412
=========
Supplemental disclosure of cash flow information:
1999 1998
---- ----
Cash paid for interest $ 91,639 $ 1,564
======== =======
See accompanying notes.
F-8
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
1. Summary of significant accounting policies
Nature of business:
The Company was organized June 30, 1993 under the laws of Wyoming. The
Company was in the wireless telecommunications business and intended to
provide two-way communications in the 220 MHz band. The Company was the U.S.
distributor for 800 MHz LTR Midland products but has suspended distribution
of these products during the year ended February 28, 1998. The Company also
owns the rights to be a distributor in certain territories of Canada for
certain Midland brand commercial land mobile radios and radio parts. On
January 15, 1998, the Company acquired the TrackPower trade name and other
intellectual property rights. The technology is in use in the United States
to market a service whereby subscribers are able to watch live horseracing on
television via satellite distribution and place wagers through a state
licensed telephone account wagering entity. The Company plans to add
horseracing statistics and data to the service in later stages. The Company
is party to a hub wagering letter of intent under which a portion of the
wagering revenue will accrue to the Company. The Company is also planning, in
a later stage, to provide interactive wagering through the television to
subscribers. The Company will not accept or place any wagering transactions,
but will deliver the wager to a state licensed account wagering entity. The
TrackPower service was launched on April 1, 1999. Therefore no revenues,
from the TrackPower business, accrued to the Company during year ended
February 28, 1999. Effective March 1, 1998, the Company is considered to be
in the development stage as more fully defined in the Financial
Accounting Standards Board Statement No. 7.
Basis of presentation:
The financial statements have been prepared on a going concern basis which
contemplates the realization of assets and liquidation of liabilities in the
ordinary course of business. As shown in the accompanying financial
statements, the Company has incurred significant losses and at February 28,
1999, the Company has a working capital deficit of $1,086,149 and a
stockholders' deficit of $493,547. As a result, substantial doubt exists
about the Company's ability to continue to fund future operations using its
existing resources.
The Company plans to begin executing the TrackPower business plan during
fiscal year ended February 29, 2000. Many business agreements and strategic
relationships have been put in place and others are in various stages of
completion. A significant agreement was executed with Transponder Encryption
Services Corporation (a subsidiary of Echo Star Communications Inc.) on June
4, 1999. Pursuant to which the TrackPower Service will be broadcast effective
July 1, 1999, under EchoStar's main Dish Network service which has
approximately 2.5 million subscribers. The Company anticipates that the
subscriber take up rate will accelerate as a result of this agreement.
F-9
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
1. Summary of significant accounting policies (continued)
Subsequent to year end the outstanding notes payable - individuals were
either converted to common stock of the Company or repaid from the proceeds
of a private placement of new convertible notes. The marketable
securities previously held as security for the notes payable were freed up
for sale to generate cash to support operations. Net proceeds, from the
new private placement, after repaying the notes payable will also provide
additional cash for operations.
The Company has entered into letters of intent with companies to provide a
satellite uplink facility, a subscriber billing system and a wagering hub
operator. The Company launched the service on April 1, 1999 and expects to
generate revenues from operations sufficient to fund operations. Although
the Company is expects these revenue generating strategies to be
successful, there is no assurance that sufficient cash flows will be
generated to fund current operations.
The Company is also planning additional financing activities as and when cash
will be required. The Company is confident, based on past experience, that it
will be able to fund any additional working capital shortfalls as and when
required although there can be no assurances that this can be achieved. The
financial statements present the Company on a going concern basis and
do not include any adjustments that might be necessary should the Company
be unable to continue as a going concern.
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.
Marketable securities:
The Company's marketable securities consist of 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 and furniture and fixtures, are stated at cost. Depreciation
is computed over the estimated useful life of three years using the
straight-line method.
F-10
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
1. Summary of significant accounting policies (continued)
Amortization of distribution rights:
The cost of distribution rights are being amortized over 10 years, the period
estimated by management to be benefited. However, due to uncertainty
surrounding future revenues from the distribution rights, the Company uses
the cost recovery method if that method produces a greater amount of
amortization.
It is reasonably possible that revenues generated from the distribution of
products pursuant to the agreements will not be sufficient to recover these
capitalized costs.
Measurement of intangibles impairment:
The Company annually reviews the amount of recorded intangible assets for
impairment. If the sum of the expected cash flows from these assets is less
than the carrying amount of these assets, the Company will recognize an
impairment loss in such period.
Income taxes:
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("FASB No. 109"). Temporary differences are differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in
future years. The Company's temporary differences consist primarily of tax
operating loss carryforwards and start-up costs capitalized for tax purposes.
Fair value of financial instruments:
Cash, accounts payable, accrued liabilities and notes payable are carried
in the financial statements in amounts which approximate fair value because
of the short-term maturity of these instruments. Notes payable are carried
in the financial statements in amounts which approximate fair value because
interest rates have not changed significantly after the debt was incurred.
Advertising costs:
The Company expenses the costs of advertising as incurred.
F-11
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
1. Summary of significant accounting policies (continued)
Cash flows:
For purposes of the statement of cash flows, the Company considers cash and
all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash. The Company places its cash with
high quality financial institutions. At times during the year, the balance at
one financial institution exceeded insured limits.
Net loss per share:
Basic net loss per common share is based on the weighted average number of
shares outstanding during each period presented. Options to purchase
stock are included as common stock equivalents when dilutive.
Reclassifications:
Certain reclassifications have been made to the 1998 financial statements to
conform to the 1999 presentation.
2. Sale of radio tower equipment and related licenses and marketable securities
During the year ended February 28, 1998, the Company sold to Intek Global
Corporation (formerly Intek Diversified Corporation) (Intek), a company
majority owned by Securicor Radiocoms Ltd., most of the radio tower equipment
and related licenses held by the Company in exchange for cash of $75,000,
payment of the Company's note payable to Ventel, Inc. ($1,004,545 including
accrued interest), return of 1,150,000 shares of the Company's common stock
(valued at $88,047), 2,666,667 shares of Ventel, Inc's. common stock (a
Canadian public company, valued at $293,333), 418,381 shares of Intek's
common stock (a U.S. public company, valued at $917,823) and assumption of
$144,472 of accounts payable for total consideration of $2,523,220.
F-12
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
2. Sale of radio tower equipment and related licenses and marketable
securities (continued)
The marketable securities are considered available for sale and as such are
recorded at market value on the balance sheet at February 28, 1999 and 1998
with the net unrealized gain of $15,356 and $144,132, respectively, reflected
as a separate component of stockholders' equity. The gross unrealized gain on
these securities amounts to $30,623 and $199,254 and the gross unrealized
loss amounts to $15,267 and $55,122 at February 28, 1999 and 1998,
respectively.
3. Acquisition of TrackPower trademarks and other intellectual property rights
On January 15, 1998, the Company acquired the TrackPower trade name and other
intellectual property rights from Simmonds Capital Limited, a stockholder of
the Company. The Company (1) agreed to issue 1,000,000 shares of convertible
preferred stock which is convertible at the option of the holder into
1,000,000 shares of common stock (valued at $98,438) (2) assumed accounts
payable of $299,974 for total consideration of $398,412. In connection with
the transaction, the Company also agreed (1) to issue warrants to purchase an
additional 500,000 common shares of the Company exercisable at $2 per share
until January 31, 2001 and (2) to pay a royalty of 10% of the Company's
annual earnings before interest, taxes, depreciation and amortization (not to
exceed $1,500,000) commencing when the Company's retained earnings position
becomes positive. These items are considered contingent consideration. The
preferred stock is convertible into common stock of the Company at $1 per
share at any time, has a cumulative dividend rate of 6% for the first two
years and 7% thereafter, payable semi-annually in shares of the Company, is
redeemable by the Company at anytime for $1,000,000 and is not redeemable by
the holder. At February 28, 1999, undeclared cumulative dividends owed on the
preferred stock amounted to $67,500 which is payable in shares of the
Company's common stock (429,963 shares).
On February 28, 1998, the Company entered into a joint venture agreement with
the Ontario Jockey Club. The joint venture has been organized as a
corporation on April 1, 1998, with each entity acquiring a 50% interest for
nominal cash and an agreement for each entity to loan $1,000,000 (Canadian)
on a non-interest bearing basis to the joint venture. On July 15, 1998, the
joint venture was terminated and the Company acquired the remaining 50%
interest in the joint venture for nominal consideration.
The TrackPower trademark and intellectual property rights are in use in the
United States and the Company plans to add horseracing data and the ability
to interactively wager through a television in later stages of the business.
F-13
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
4. Notes payable
Short-term notes payable:
The Company's short-term notes payable consist of the following loans from
shareholders at February 28, 1999 and 1998:
9% note payable - shareholder, due on demand,
unsecured, in default $ 10,370
12% note payable - shareholder, due on demand,
unsecured, in default 20,000
--------
$ 30,370
========
During April and July 1998, the Company raised gross proceeds of $500,000 and
$350,000, respectively, in debt offerings. The notes are due on demand, bear
interest at 12% per annum and the marketable securities are pledged as
collateral. As part of the offering, the Company issued 850,000 shares of its
common stock to the note holders and warrants to purchase 850,000 shares of
its common stock exercisable at $.30 per share for a five-year period.
Offering expenses amounted to $66,425 in cash plus 35,000 shares of the
Company's common stock valued at $4,900. During the year ended February 28,
1999, the Company repaid $255,000 of the principal of the notes.
Of the total debt offering, $95,000 was issued to related parties and the
balance owed to related parties at February 28, 1999 was $66,500.
Long-term note payable consist of the following at February 28, 1999 and
1998:
1999 1998
---- ----
Note payable - SCL, a related company (Note 6),
payable on November 1, 1999 including interest
at 8% per annum, unsecure 157,461 157,461
Less current portion 157,461 -
-------- ---------
Amount due after one year $ - $157,461
======== ========
F-14
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
5. Lease commitments
In November 1996, the Company entered into a building lease for office space
in Englewood, Colorado. Minimum monthly rent is between $4,909 and $5,189 for
the three-year lease term. During 1998, the space was subleased for
substantially the same amount. The remaining commitment amounted to $62,271
at February 28, 1999.
On April 1, 1998, the Company entered into an agreement to lease office space
in New York, New York. The agreement is for one year and also included
certain corporate, investor relations, financial and administrative advisory
services. This agreement stipulates a fee of $8,000 per month and the Company
has estimated that rent represents $2,000 of this amount.
Rent expense for the years ended February 28, 1999 and 1998 amounted to
$24,000 and $103,322, respectively.
6. Related party transactions
For the years ended February 28, 1999 and 1998, the Company incurred legal
fees of $0 and $5,779 to a law firm owned by a former director/officer of the
Company of which $11,289 remained unpaid at February 28, 1998, which amount
was paid during the year ended February 28, 1999.
During the years ended February 28, 1997 and February 29, 1996, the Company
constructed and financed $241,823 and $806,077, respectively of 220 MHz radio
tower equipment through Ventel, Inc., affiliated with a major stockholder of
the Company. Upon the sale of certain of the radio tower sites, $241,823 of
the loans were assumed by the purchaser leaving a balance due of $806,077 at
February 28, 1997. During April 1997, $50,000 in principal was paid down on
the note upon the sale of one radio tower site. In November 1997, the Company
closed on the sale of its remaining radio tower sites and paid off the
$756,077 principal balance on the note plus $248,468 in accrued interest (see
Note 2).
On January 15, 1998, the Company purchased the TrackPower trade name and
other intellectual rights from Simmonds Capital Limited ("SCL" - a
significant shareholder of the Company) as described in Note 3 and entered
into a management agreement which calls for the payment of $25,000 per month
for services to be performed by certain employees of SCL. During the year
ended February 28, 1999 and 1998, $300,000 and $25,000, respectively, was
accrued under this agreement. During the year ending February 28, 1999,
$356,164 was received from and $408,390 was paid to affiliates of SCL,
$267,619 of expenses was paid by affiliates of SCL on behalf of the Company,
and $133,074 was advanced by the Company on behalf of affiliates of SCL,
leaving $407,319 balance due to related parties at February 28, 1999.
F-15
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
7. Income taxes
The book to tax temporary differences resulting in deferred tax assets and
liabilities are primarily net operating loss carryforwards of $7,496,000 and
start-up costs capitalized for income tax purposes of $1,623,000 (net of
amortization).
As of February 28, 1999 and 1998, total deferred tax assets, liabilities and
valuation allowances are as follows:
1999 1998
---- ----
Deferred tax assets $ 385,000 $ 605,000
Deferred tax assets resulting from loss
carryforward 2,797,000 1,914,000
Valuation allowanc (3,182,000)(2,519,000)
---------- ----------
$ - $ -
========== ==========
A 100% valuation allowance has been established against the deferred tax
assets, as utilization of the loss carryforwards and realization of other
deferred tax assets cannot be reasonable assured.
The Company's net operating losses are restricted as to the amount which may
be utilized in any one year. The Company's net operating loss carryforwards
expire as follows:
2004 $ 798,000
2009 92,000
2010 726,000
2011 1,795,000
2012 1,719,000
2013 2,366,000
----------
$7,496,000
==========
8. Stockholders' equity
During the year ended February 28, 1998, the Company issued 436,193 shares of
its common stock in exchange for cash of $93,300 received for subscriptions
during February 1997.
F-16
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
8. Stockholders' equity (continued)
During March 1997, the Company issued 780,000 shares of its common stock to
employees for services valued at $78,000 ($.10 per share).
During February 1998, the Company issued 300,000 shares of its common stock
to a consultant for services pursuant to a consulting agreement valued at
$45,000 ($.15 per share).
During February 1998, the Company received cash of $41,995 pursuant to a
subscription for 214,262 shares of common stock from SCL, a related company,
164,262 of the shares were issued in April 1998.
Stock options:
1993 Compensatory Stock Option Plan ("CSO")
The Company has established the CSO plan for employees, directors and
consultants or other advisors. The Company has reserved a maximum of
4,000,000 common shares to be issued upon the exercise of options granted
under the CSO plan. The purchase price of each share of stock under the CSO
will be determined by the Board of Directors or the Compensation Committee.
The CSO exercise term will not exceed five years. The options expire
beginning 1998 through 2004.
The following is a summary of stock option activity:
Weight
average
Option price exercised Number of
per share price shares
------------ --------- ---------
Balance February 28, 1997 $.23 to $1.75 $0.44 2,980,000
Canceled $.25 to $1.00 $0.85 (620,000)
Reissued $.10 to $ .35 $0.30 620,000
Granted $0.40 $0.40 1,100,000
Exercised $0.10 $0.10 (120,000)
----- ----- ---------
Balance February 28, 1998 and 1999$.23 to $1.75 $0.44 3,960,000
=========
F-17
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
8. Stockholders' equity (continued)
The following is additional information with respect to those options
outstanding at February 28, 1999:
Option price per share Weighted Weighted
average average
contractual exercise Number of
in years price shares
---------------------- ----------- -------- ---------
$0.10 2 $0.10 500,000
$.23 to $.35 2.7 $0.33 1,070,000
$.40 to $.65 1.3 $0.42 2,115,000
$1.00 4 $1.00 175,000
$1.75 9 $1.75 100,000
---------
3,960,000
=========
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation costs for the Company's stock option
plans been determined based on the fair value at the grant date for awards
during the fiscal years ended February 28, 1999 and 1998 in accordance with
the provisions of SFAS No. 123, the Company's net loss and loss per share
would have been reduced to the pro forma amounts indicated below:
1999 1998
---- ----
Net loss - as reported $ (1,701,507) $ (1,240,383)
Net loss - pro forma (1,701,507) (1,387,171)
Loss per share - as reported (0.07) (0.05)
Loss per share - pro forma (0.07) (0.06)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, dividend yield of 0%; expected
volatility of 225.35%, risk-free interest rate of 5.34%; and expected life of
3 years.
1993 Employee Stock Compensation Plan ("ESC")
The Company has reserved a maximum of 2,000,000 common shares to be issued
upon the grant of awards for employees, directors and consultants or
advisors. No shares have been awarded under this plan.
F-18
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
8. Stockholders' equity (continued)
1993 Incentive Stock Option Plan ("ISO")
The Company has reserved a maximum of 2,000,000 common shares to be issued
upon the exercise of options granted under the ISO plan. Options will be
granted under the ISO plan at exercise prices at least equal to the fair
market value of the common stock on the date of grant. At February 28, 1999,
no options remained outstanding under the ISO plan.
1993 Non-Statutory Stock Option Plan ("NSO")
The Company has reserved a maximum of 2,000,000 common shares to be issued to
key employees upon the exercise of options granted under the NSO plan.
Options granted under the NSO plan will be at exercise prices to be
determined by the Board of Directors or other NSO plan administrator. At
February 28, 1999, no options have been granted under the NSO plan.
Warrants:
Warrants outstanding at February 28, 1999 consist of the following:
Exercisable Exercise Number
until price of shares
----------- -------- ---------
January 31, 2001 $2.00 500,000
April 17, 2003 $0.30 500,000
July 26, 2003 $0.30 350,000
July 26, 2003 $0.30 35,000
---------
1,385,000
=========
9. Commitments and contingencies
Sublicense of portions of the distribution rights in Canada:
On April 7, 1997, the Company entered into a letter of intent with SCL
Distributors (Pacific) Ltd. ("SCL Pacific") to sublicense a portion of the
distribution rights in Canada owned by the Company. The letter of intent
calls for SCL Pacific to pay the Company approximately $36,000 on signing of
a definitive agreement and a royalty of 4% of the gross sales price of all
products pursuant to the agreement. The agreement also contains a purchase
option of approximately $288,000 less all previous payments.
F-19
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
9. Commitments and contingencies (continued)
During the years ended February 28, 1998 and 1999, it was determined that
royalties from the Company's Canadian distribution rights had fallen below
initial projections. Impairment losses of $119,542 and $47,382, respectively,
were calculated using the reduced estimate of discounted cash flows estimated
to be received from the distribution rights.
U.S. distribution rights:
The U.S. distribution rights with a book value of $357,323 were written off
during the year ended February 28, 1998. The Company was not able to make the
necessary investment in product development and did not possess the required
working capital to ensure the commercial success of these rights.
10.Major customers
Customers who accounted for over 10% of the Company's gross revenues for the
years ended February 28, 1999 and 1998 are as follows:
1999 1998
Customer A - 82.7%
Customer B 93.0% -
11.Subsequent events
Stock options:
On March 18, 1999, options to purchase 2,335,000 shares of common stock at
prices ranging from $.23 to $1.75 per share were canceled. On the same date,
options for 2,350,000 shares of common stock were issued to different
individuals at a price of $.15 per share. Of those newly issued options,
50,000 shares expire January 31, 2000 with the remaining 2,300,000 shares
expiring November 30, 2003.
On March 26, 1999, options to purchase 250,000 shares at $.10 per share and
500,000 shares at $.15 per share were exercised. On March 31, 1999, options
to purchase 250,000 shares at $.10 per share were exercised. These exercises
of options resulted in net proceeds to the Company of $125,000 and was used
to help launch the TrackPower service on April 1, 1999.
F-20
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
11.Subsequent events (continued)
Conversion of notes payable to common stock:
An offer was made on March 31, 1999 to noteholders for their consent to allow
the sale of additional common stock and to change the form of the promissory
notes to make them convertible into shares of common stock at the holders
option. The offer was in the form of one share of common stock for every $4
of principal outstanding for a total of 148,746 shares of common stock.
On March 31, 1999, a portion of the note holders chose to convert their notes
to shares of common stock and additional warrants. Principal and interest
amounting to $125,497 was converted to common stock and warrants to purchase
an equal number of shares at $.15 per share expiring in one year were also
issued. A total of 836,644 shares of common stock and warrants to purchase
836,644 common share were issued to convert the debt.
Launch of TrackPower service:
On April 1, 1999, the Company launched the TrackPower service on the Sky
Vista service. Sky Vista is satellite service of Sky Direct which is a joint
venture between EchoStar Satellite Communications Inc. and Loral Skynet (a
subsidiary of Loral SpaceCom Corporation).
On June 4, 1999, the Company signed an agreement with Transponder Encryption
Services Corporation (a subsidiary of EchoStar communications Inc.) to move
the TrackPower service from the Sky Vista service to the Dish Network Service
which has substantially more existing subscribers. The Company plans to
relaunch the TrackPower service under the Dish Network Service on July
1, 1999. This agreement provides for a base monthly rent of $433,000 per
month plus a portion of revenues to be paid to EchoStar for the four-year
term of the agreement. Simmonds Capital Limited has guaranteed the Company's
obligation under this agreement.
Penn National Gaming letter of intent:
On April 29, 1999, the Company entered into a binding letter of intent with
Penn National Gaming Inc. under which Penn National will serve as the
Company's exclusive wagering hub operator for a five-year period. Penn
National will process all wagers arising from TrackPower subscribers. The
Company will receive a fee of up to 4.75% of all wagers delivered to Penn
National.
In Connection with the Penn National agreement, the Company issued warrants
to purchase 5,000,000 common shares of the Company. The warrants are
exercisable one million shares each year at (1) $1.58, (2) $1.82, (3) $2.05,
(4) $2.29, and (5) $2.53 and are exercisable for a five-year period. The
agreement contains one five-year renewal option.
F-21
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
11.Subsequent events (continued)
Private placements:
On March 12, 1999, the Company completed a private placement of 333,333
common stock with Simmonds Capital Limited at $.15 per share. Proceeds of the
private placement were used to help launch to TrackPower service.
On June 10, 1999, the Company completed a $1,250,000 private placement of
convertible notes. Proceeds of the private placement were used to repay the
remaining notes payable, after certain note holders converted to common stock
and for general corporate purposes. Interest on the notes at the rate of 8%
per annum is payable annually each June commencing in the year 2000 with the
principal due June 2004. The notes are convertible, at the option of the note
holder, into an aggregate of 1,000,000 shares of common stock of the Company
and 1,000,000 warrants to purchase common stock of the Company at $2.50, per
share for a period of three years from the date of conversion.
At the maturity date, the outstanding amount of the notes plus any accrued
interest is automatically converted into an equal number of shares of common
stock and warrants computed by dividing the total principal and interest
outstanding by $1.25.
F-22
<PAGE>
SIGNATURES
In accordance with sections 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereto duly authorized individual.
Date: June 28, 1999
AMERICAN DIGITAL COMMUNICATIONS, INC.
By:
/s/ John G. Simmonds
-----------------------------------------------
John G. Simmonds, Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ John G. Simmonds Chairman/President/CEO/Director June 28, 1999
- ---------------------------- (principal executive officer)
John G. Simmonds
/s/ Gary N. Hokkanen Chief Financial Officer June 28, 1999
- --------------------------- (principal financial officer)
Gary N. Hokkanen
/s/ Charles Cernansky Director June 28, 1999
- ---------------------------
Charles J. Cernansky
/s/ Ian MacDonald Director June 28, 1999
- ---------------------------
Ian MacDonald
/s/ Ken Adelberg Director June 28, 1999
- ---------------------------
Ken Adelberg
/s/ Harry Dunstan
- ---------------------------
18
<PAGE>
- ---------------------------
J. Harry Dunstan Director June 28, 1999
19
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<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
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0
1,000,000
<COMMON> 2,516
<OTHER-SE> (1,496,063)
<TOTAL-LIABILITY-AND-EQUITY> 1,238,666
<SALES> 0
<TOTAL-REVENUES> 12,226
<CGS> 0
<TOTAL-COSTS> 1,242,796
<OTHER-EXPENSES> 552,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 332,139
<INCOME-PRETAX> (1,783,195)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,783,195)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,783,195)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
