As filed with the Securities and Exchange Commission on July 15, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarter Ended May 31, 1999
Commission file number 000-28506
AMERICAN DIGITAL COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
Wyoming 13-3411167
(State of Incorporation) (IRS. Employer ID No.)
745 Fifth Avenue
Suite 900, New York, NY 10151
(Address of Principal Executive Offices) (Zip Code)
(212) 486-7424
(Registrant's Telephone No. incl. area
code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
The number of shares outstanding of each of the Registrant's class of common
equity, as of July 12, 1999 are as follows:
Class of Securities Shares Outstanding
------------------- ------------------
Common Stock, $.0001 par value 27,911,578
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American Digital Communications, Inc.
<PAGE>
INDEX
PART I Financial Information
Item 1. Financial Statements
Balance Sheet........................................... 3
Statements of Operations................................ 5
Statements of Cash Flows................................ 6
Notes to Financial Statements........................... 7
Item 2. Management's Discussion and Analysis or Plan of
Operations.............................................. 8
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K....................... 12
A) Exhibit 27 Financial Data Schedule
B) Form 8-K - None
Signatures.................................................... 13
2
<PAGE>
American Digital Communications, Inc.
Balance Sheet
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS May 31, February 28,
------- ------------
1999 1999
---- ----
<S> <C> <C>
Current Assets:
Cash 230,578 19,558
Accounts receivable 818 --
Notes receivable 10,764 10,764
Marketable securities 493,492 616,880
Other current assets 4,000 331
- ---------------------------------------------------------------------------------------------
Total current assets 739,652 646,064
- ---------------------------------------------------------------------------------------------
Property and equipment:
Office equipment 143,703 141,055
Furniture and fixtures 26,082 26,082
- ---------------------------------------------------------------------------------------------
169,785 167,137
Less: Accumulated depreciation (147,592) (146,519)
- ---------------------------------------------------------------------------------------------
Net property and equipment 22,193 20,618
Other assets:
Distribution rights, net of accumulated amortization 123,295 129,493
Deposit on satellite uplink services 150,000 64,000
TrackPower trademarks and other intellectual property rights 373,511 378,491
- ---------------------------------------------------------------------------------------------
646,806 571,984
TOTAL ASSETS 1,408,651 1,238,666
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
American Digital Communications, Inc.
Balance Sheet
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY May 31, February 28,
1999 1999
<S> <C> <C>
Current Liabilities:
Accounts payable 357,969 339,106
Accrued expenses 84,863 71,063
Accrued interest 78,049 75,242
Note payable 391,250 595,000
- ---------------------------------------------------------------------------------------------
Total non-related party current liabilities 912,131 1,080,411
Accounts payable - related parties 305,766 407,319
Accrued interest - related parties 49,046 56,652
Notes payable - related parties 10,370 30,370
Current portion note payable - related party 157,461 157,461
- ---------------------------------------------------------------------------------------------
Total related party current liabilities 522,643 651,802
- ---------------------------------------------------------------------------------------------
Total current liabilities 1,434,774 1,732,213
Long term convertible note payable 505,000 --
- ---------------------------------------------------------------------------------------------
Total liabilities 1,939,774 1,732,213
Shareholders' equity:
Convertible preferred stock, no par value, unlimited 1,000,000 1,000,000
shares authorized, (liquidation value $1,000,000)
Common stock, $.0001 par value; Unlimited shares 2,616 2,516
authorized, issued and outstanding 27,911,578 shares,
issued and outstanding
25,162,886 on February 28, 1999
Additional paid in capital 7,294,600 7,169,700
Common stock subscribed 283,222 7,500
Accumulated deficit (9,155,040) (8,688,619)
Accumulated other comprehensive income 43,479 15,356
- ---------------------------------------------------------------------------------------------
Total shareholders' equity (531,123) (493,547)
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,408,651 1,238,666
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
American Digital Communications, Inc.
Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended May 31,
1999 1998
---- ----
<S> <C> <C>
Revenue
Royalties from distribution rights 2,948 4,629
Subscription revenue 818 --
Other revenue 644 --
- ---------------------------------------------------------------------------------------------
Total revenue 4,410 4,629
Operating expenses:
TrackPower expenses - wages and consulting fees 87,512 --
TrackPower expenses - management fees related party 75,000 --
TrackPower expenses - transponder fees 100,000 --
Non-recurring Denver office costs -- 48,778
General and administrative expenses 72,253 313,097
- ---------------------------------------------------------------------------------------------
Total operating expenses 334,765 361,875
Loss from operations (330,355) (357,246)
Other expenses
Interest on preferred shares 67,500 --
Interest expense 17,258 145,985
Non-cash financing expense 32,725 --
Realized losses on marketable securities 6,331 --
Depreciation and amortization 12,252 20,854
- ---------------------------------------------------------------------------------------------
Total other expenses 136,066 166,839
- ---------------------------------------------------------------------------------------------
Net loss: (466,421) (524,085)
Other comprehensive income:
Unrealized holding gain on marketable securities 28,123 389,095
- ---------------------------------------------------------------------------------------------
Comprehensive loss (438,298) (134,990)
- ---------------------------------------------------------------------------------------------
Net loss per share of common stock (0.02) (0.02)
- ---------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 26,412,450 24,552,886
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
American Digital Communications, Inc.
Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended May 31,
Increase (Decrease) in Cash
1999 1998
---- ----
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash used in operations
Net loss (466,421) (524,085)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 12,252 20,854
Loss on sale of marketable securities 6,331 --
Issuance of stock for bridge financing -- 95,000
Changes in:
Accounts receivable (818) --
Due to related parties (129,159) (34,044)
Other current assets (3,669) --
Accounts payable 18,863 (70,675)
Accrued expenses 13,800 (58,797)
Other accrued liabilities 2,807 7,233
- ---------------------------------------------------------------------------------------------
Net cash used in operating activities (546,014) (564,514)
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 145,179 58,267
Deposits - payments (86,000) --
Purchase of fixed assets (2,648) (4,387)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 56,531 53,880
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from options exercised 125,000 --
Proceeds from stock subscriptions 275,722 --
Payment of notes payable (203,750) --
Proceeds from issuance of notes payable 505,000 500,000
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities: 701,972 500,000
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash 212,489 (10,634)
- ---------------------------------------------------------------------------------------------
Cash, beginning of period 18,089 19,558
- ---------------------------------------------------------------------------------------------
Cash, end of period 230,578 8,924
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
American Digital Communications, Inc.
Notes to Financial Statements
May 31, 1999
Summary of significant accounting policies
Basis of presentation:
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the financial position
as of May 31, 1999 and February 28, 1999, and the results of operations and cash
flows for the periods ended May 31, 1999 and 1998.
Nature of business
The Company was organized June 30, 1993 under the laws of Wyoming. The
Company was in the wireless telecommunications business and had intended to
provide two-way communications in the 220 mHz. Band. The Company held various
distribution rights for certain Midland brand commercial land mobile radios and
radio parts. The distribution rights were acquired in separate transactions over
the period 1995 and 1996. During fiscal year 1998 the Company sold, sub-licensed
or wrote off all remaining distribution rights. On January 15, 1998, the Company
acquired the TrackPower trade name and other intellectual property rights. The
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 the world wide web and television. The
Company will not accept or place any wagering transactions, but intends to
deliver the wager to a state licensed account wagering entity.
Certain matters discussed in this Quarterly Report may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") and as such may involve risks
and uncertainties. These forward-looking statements relate to, among other
things, expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market and
statements regarding the Company's goals. The Company's actual results,
performance, or achievements expressed or implied in such forward-looking
statements may differ. For discussion of the factors that might cause such a
difference, see Item 2 Management's Discussion and Analysis or Plan of
Operations.
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 the market value at the balance sheet date.
7
<PAGE>
Depreciation:
Office equipment, furniture and fixtures, including assets under capital
leases, are stated at cost. Depreciation is computed over the estimated useful
life of three years using the straight line method.
Amortization of intangibles:
The cost of the remaining Midland distribution rights, which have been
sub-licensed to a third party, are being amortized over 10 years. 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.
The TrackPower trademark and other intellectual property rights are
being amortized over 20 years, the period estimated by management to be
benefited.
Measurement of intangibles impairment:
The Company annually reviews the amount of the recorded intangible
assets for impairment. If the sum of expected cash flows from these assets is
less than the carrying amount of these assets, the Company will recognize an
impairment loss in such period.
Net loss per share:
Basic loss per common share is based on the weighted average number of
shares outstanding during each period presented. Options to purchase stock are
included as common stock equivalents when dilutive.
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
The business focus of the Company, during the first quarter, was the
initial launch of the TrackPower service. The Company is in the process of
implementing a multi-stage business plan which it believes will enable the
Company to achieve break even cash flow at achievable subscriber levels.
Recent developments include the following:
On April 1, 1999, the Company launched the TrackPower service under the
"Sky Vista" service. This service is a joint venture between EchoStar Satellite
Communications Inc. and Loral SpaceCom Corporation.
On April 29, 1999, the Company entered into a binding letter of intent
with Penn National Gaming Inc. pursuant to which Penn National will serve as the
Company's exclusive wagering hub operator. 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.
On June 4, 1999, the Company entered into an agreement with Transponder
Encryption Services Corporation, a subsidiary of EchoStar Satellite
Communications Inc. to have the TrackPower service broadcast under the broader
coverage of the 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 TrackPower service was successfully
relaunched under the Dish Network on July 1, 1999.
8
<PAGE>
Although the Company was able to attract subscribers under the Sky Vista
service, management believes that the Company's prospects under the Dish Network
have improved. The Company is in the process of exchanging Dish Network hardware
for Sky Vista equipment. Therefore, subscription revenues were insignificant
during the three month period ended May 31, 1999. In addition, wagering revenue
did not accrue under the Penn National agreement because the definitive
agreement had not been legally executed during the first quarter. The Penn
National agreement was completed in July 1999.
Results of operations
For the three month period ended May 31, 1999
Revenues during the three month period ended May 31, 1999 were $4,410
representing royalties received under a Midland land mobile radio sub-license
distribution agreement, subscription revenue and other miscellaneous revenue.
Costs incurred during the quarter to directly operate the TrackPower
service totaled $262,512. The Company incurred $87,512 in wages, technical and
financial consulting fees, $75,000 in management fees to Simmonds Capital
Limited for the services of key senior corporate officers and $100,000 in
transponder fees.
General and administrative expenses were $72,253, representing the
administrative costs of the Company as opposed to expenses directly related to
the TrackPower business initiative.
The Company sold marketable securities at a loss of $6,331 during the
quarter. The Company sold 57,800 Intek Global Corporation shares at prices
between $2.03 and $2.61 for a book loss of $5,207 and 270,000 Ventel Inc. shares
at prices between $.059 and $.082 for a book loss of $1,124.
The Company recorded an unrealized holding gain $28,123 during the
quarter, due to the appreciation of the market value of Intek shares from $2.313
to $2.375 and the Ventel shares from $.066 to $.271 during the quarter.
The Company issued 429,963 shares of common stock of the Company, to
Simmonds Capital Limited ("SCL"), for payment of interest on the $1,000,000 in
preferred shares held by SCL. Interest at 6% is paid in shares and is calculated
using the closing share price each month.
Amortization and depreciation totaled $12,252, which represents normal
depreciation of capital assets and the amortization of the Midland distribution
rights and the TrackPower technology rights.
The loss from operations during the first quarter was $330,355 compared
to a loss of $357,246 during the comparative period last year. The net loss,
prior to unrealized holding gains on marketable securities, was $466,421 during
the first quarter compared to $524,085 last year. The comprehensive loss was
$438,298 compared to $134,990 last year. The net loss per common share, prior to
holding gains, was $.02.
The Company expects to post losses until break-even levels of
subscribers are achieved. Management believes that this will occur later during
fiscal year ended February 29, 2000.
For the three month period ended May 31, 1998
Revenues during the three month period ended May 31, 1998 were $4,629
representing royalty revenue from Midland distribution rights. General and
administrative expenses were $313,097 and consisted primarily of key consulting
and management services agreements required for the development of the
TrackPower business and the costs of operating a TrackPower MMDS test pilot in
Canada.
9
<PAGE>
Financing costs totaled $145,985, including interest, commitment fees
and legal costs.
The Company incurred $48,778 in travel, moving and rent costs related to
the shut down of the Company's previous corporate office in Denver, Colorado.
The Company recorded an unrealized holding gain on marketable securities
of $389,095 due primarily to the increase in market value of Intek shares from
$2.97 to $4.00 during the quarter.
The net loss (prior to unrealized holding gains) for the quarter was
$524,085 or a loss of $.02 per share.
Financial Condition
Total assets increased from $1,238,666 to $1,408,651 during the period
March 1 to May 31, 1999. The increase is primarily attributable to the rise in
the market value of the Company's marketable securities and cash received under
a subscription of new long term convertible notes.
The Company disposed of 57,800 Intek Global Corporation shares for net
proceeds of approximately $128,500 and 270,000 Ventel Inc. shares for net
proceeds of approximately $16,700. On May 31, 1999 the Company held 199,000
Intek Global Corporation shares and 76,999 Ventel Inc. shares, for a total book
value of $493,492. The Company recorded an unrealized holding gain of $12,338
and $15,785 on Intek and Ventel shares respectively. All of the remaining Intek
shares were sold during the second quarter.
The Company increased it's security deposit to Loral from $64,000 to
$150,000. Concurrent with the EchoStar Dish Network relaunch this security
deposit will no longer be necessary.
During the quarter ended May 31, 1999, the Company's working capital
ratio increased from .37:1 to .51:1. The increase is primarily the result of a
subscription of new long term convertible notes and certain other notes payable
holders opting to convert their debt into common equity. A substantial portion
of the remaining current liabilities are to related parties. The working capital
ratio, after adjusting for related party current liabilities, increased from
.6:1 to .8:1.
The Company's shareholders equity deficit increased from $493,547 at
February 28, 1999 to $531,123 at May 31, 1999. Management expects the deficit to
continue to rise until break even levels of subscribers are achieved.
Liquidity and Capital Resources
The Company's ability to fund losses arising from costs and expenses
exceeding revenue is connected to its ability to raise additional financing
prior to achieving break even levels of subscribers. Thus far the Company has
been successful in financing its growth. Initially the Company borrowed amounts
by way of short term notes payable secured by the Company's marketable
securities and secondarily through an issue of new long term convertible notes.
In order to launch the business in April, individuals close to the Company
exercised stock options in order to provide the necessary funding to make the
satellite facility deposit.
SCL has provided two guarantees to the Company; the first being a
general guarantee of all the obligations of the Company until March 1, 2000 and
the second being the Company's obligations under the Transponder Encryption
Services Corporation agreement. In exchange, SCL received 1,000,000
10
<PAGE>
warrants to purchase the Company's common stock at $2.50 and also received the
option to convert the $1.5 million earnout, received in the January 1998
transaction, into 750,000 shares. The earnout was based on 10% of annual EBITDA
up to a maximum of $1,500,000, after the Company's retained earnings become
positive. SCL has funded and will continue to fund day to day operating cash
flow shortages.
The Company approved an issue of $1,250,000 of new convertible long term
notes during the first quarter. The notes are for a term of 5 years, pay
interest at 8% and are convertible into common equity at $1.25. Prior to end of
the first quarter $505,000 was received under these new notes. SCL agreed to
convert $250,000 of its existing debt into new notes. As of July 13, 1999 the
Company has received $1,200,000 in subscriptions of the new convertible notes.
Subsequent to the end of the quarter, the Company sold its remaining
Intek shares. Proceeds of approximately $500,000 were used to repay the
remaining $391,250 in old notes payable and other working capital purposes.
Approximately $111,000 in old notes payable were converted to common
equity at $.15 per share during the quarter.
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.
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 compliant at
December 31, 1999, the Company may be subject to material effects to its
financial condition and results from operations.
11
<PAGE>
PART II. Other Information
Item 1. Litigation
The Company believes that it is not presently a party to any pending
litigation or any proceeding contemplated by a government authority, the outcome
of which could reasonably be expected to have a material adverse effect on its
financial condition or results of operations.
Item 2. Change in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits. None.
EX-27 Financial Data Schedule
Form 8-K None.
12
<PAGE>
SIGNATURES
Pursuant to the registration requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
DATE: JULY 15, 1999 BY:
/s/ John G. Simmonds
------------------------------------------
John G. Simmonds
President / CEO / Director
(principal executive officer)
DATE: JULY 15, 1999 BY:
/s/ Gary N. Hokkanen
------------------------------------------
Gary N. Hokkanen
Chief Financial Officer,
(principal financial officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> MAY-31-1999
<CASH> 230,578
<SECURITIES> 493,492
<RECEIVABLES> 11,582
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 739,652
<PP&E> 169,785
<DEPRECIATION> 147,592
<TOTAL-ASSETS> 1,408,651
<CURRENT-LIABILITIES> 1,434,774
<BONDS> 505,000
0
1,000,000
<COMMON> 2,616
<OTHER-SE> (1,533,739)
<TOTAL-LIABILITY-AND-EQUITY> 1,408,651
<SALES> 818
<TOTAL-REVENUES> 4,410
<CGS> 0
<TOTAL-COSTS> 334,765
<OTHER-EXPENSES> 136,066
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (438,298)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (438,298)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
