================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER 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 Quarterly Period Ended November 30, 1999
Commission file number 000-28506
TRACKPOWER, INC.
(Exact name of small business issuer as specified in its charter)
Wyoming 13-3411167
(State of Incorporation) (IRS. Employer ID No.)
67 Wall Street
Suite 2411, New York, NY 10005
(Address of Principal Executive Offices)
(212) 804-5704
(Registrant's Telephone No. including 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 December 17, 1999 are as follows:
Class of Securities Shares Outstanding
Common Stock, $.0001 par value 31,945,959
================================================================================
<PAGE>
TrackPower, Inc.
INDEX
PART I Financial Information
Item 1. Financial Statements (unaudited)
Balance Sheet.......................................... 3
Statements of Operations and Comprehensive Income...... 5
Statements of Cash Flows............................... 6
Notes to Financial Statements.......................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation..... 8
PART II. Other Information
Item 1. Litigation....................................................14
Item 2. Change in Securities and Use of Proceeds......................14
Item 3. Defaults Upon Senior Securities...............................14
Item 4. Submission of Matters to a Vote of Security Holders...........14
Item 5. Other Information.............................................14
Item 6. Exhibits and Reports on Form 8-K..............................14
A) Exhibit Schedule
B) Reports Filed on Form 8-K
Signatures...............................................................17
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
TrackPower, Inc.
Balance Sheet
(UNAUDITED)
ASSETS November 30, February 28,
1999 1999
------- --------
Current Assets:
Cash 41,690 18,089
Accounts receivable 40,081 --
Notes receivable 10,764 10,764
Inventory 70,928 --
Marketable securities 6,545 616,880
Other current assets 5,723 331
- -------------------------------------------------------------------------------
Total current assets 175,731 646,064
- -------------------------------------------------------------------------------
Property and equipment:
Property and equipment 190,815 167,137
Less: Accumulated depreciation (151,423) (146,519)
- -------------------------------------------------------------------------------
Net property and equipment 39,392 20,618
Other assets:
Distribution rights, net of accumulated
amortization 110,897 129,493
Deposit on satellite uplink services -- 64,000
TrackPower trademarks and other intellectual
property rights 363,550 378,491
- -------------------------------------------------------------------------------
474,447 571,984
- -------------------------------------------------------------------------------
TOTAL ASSETS 689,570 1,238,666
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
3
<PAGE>
TrackPower, Inc.
Balance Sheet
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY November 30, February 28,
1999 1999
---- ----
<S> <C> <C>
Current Liabilities:
Accounts payable 1,222,582 339,106
Accrued expenses 72,870 71,063
Accrued interest 58,261 75,242
Note payable -- 595,000
- --------------------------------------------------------------------------------------------------------------------
Total non-related party current liabilities 1,353,713 1,080,411
Accounts payable - related parties 332,379 407,319
Accrued interest - related parties -- 56,652
Notes payable - related parties 10,370 30,370
Current portion note payable - related party -- 157,461
- --------------------------------------------------------------------------------------------------------------------
Total related party current liabilities 342,749 651,802
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,696,462 1,732,213
Long term debt:
8% senior subordinated convertible debenture due June 10, 2004 1,250,000
8% senior subordinated convertible debenture due October 31, 2004 1,480,000 -
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 4,426,462 1,732,213
Shareholders' equity:
Convertible preferred stock, no par value, unlimited shares authorized, 1,000,000 1,000,000
(liquidation value $1,000,000)
Common stock, $.0001 par value; unlimited shares authorized, 2,934 2,516
29,340,401 shares, issued and outstanding on November 30, 1999 and 25,162,886
shares, issued and outstanding on February 28, 1999.
Additional paid in capital 7,813,954 7,169,700
Common stock subscribed 7,500 7,500
Warrants issued for guarantee 649,500 --
Accumulated deficit (13,239,937) (8,688,619)
Accumulated other comprehensive income 29,157 15,356
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (3,736,892) (493,547)
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 689,570 1,238,666
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
TrackPower, Inc.
Statements of Operations and Comprehensive Income
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Royalties from distribution rights 3,393 2,378 7,909 10,125
Net subscription revenue 25,489 -- 30,152 --
Wagering commissions 8,750 -- 9,312 --
Other revenue 133 -- 4,430 --
- ---------------------------------------------------------------------------------------------------------------
Total revenue 37,765 2,378 51,803 10,125
Operating expenses:
TrackPower - wages and consulting fees 194,756 112,178 362,080 397,664
TrackPower - mgmt fees related party 75,000 75,000 225,000 225,000
TrackPower - transponder fees 1,200,000 -- 2,200,000 --
Non-recurring Denver office costs -- -- -- 48,778
Advertising & marketing costs 300,421 -- 450,425 --
General & administrative 225,923 48,385 526,004 284,058
- ---------------------------------------------------------------------------------------------------------------
Total operating expenses 1,996,100 235,563 3,763,509 955,500
Loss from operations: (1,958,335) (233,185) (3,711,706) (945,375)
Other expenses:
Interest on preferred shares -- -- 67,500 --
Interest 34,034 25,522 79,909 --
Non-cash financing expense -- -- 682,225 287,170
Realized gains on marketable securities -- (6,849) (28,463) (6,849)
Depreciation and amortization 12,970 20,850 38,441 62,554
- ---------------------------------------------------------------------------------------------------------------
Total other expenses 47,004 39,523 839,612 342,875
Net loss (2,005,339) (272,708) (4,551,318) (1,288,250)
Other comprehensive income:
Unrealized holding (loss) gain on marketable (3,773) 131,481 13,801 (390,159)
securities
- ---------------------------------------------------------------------------------------------------------------
Comprehensive loss (2,009,112) (141,227) (4,537,517) (1,678,409)
- ---------------------------------------------------------------------------------------------------------------
Net loss per share of common stock (0.07) (0.01) (0.16) (0.07)
- ---------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 29,199,151 25,127,886 28,133,203 24,897,330
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
TrackPower, Inc.
Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
Increase (Decrease) in Cash
1999 1998 1999 1998
---- ---- ---- ----
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash used in operations
Net loss (2,005,339) (272,708) (4,551,318) (1,288,250)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 12,970 20,850 38,441 62,554
Gain on sale of marketable securities -- (6,849) (28,463) (6,849)
Changes in:
Accounts receivable (19,464) -- (40,081) --
Due to related parties (25,852) (1,012) (466,513) (23,713)
Inventory (597) -- (70,928) --
Other current assets 1,723 300 (5,392) --
Accounts payable 686,466 195,713 883,476 183,525
Accrued expenses 1,255 706 1,807 (57,891)
Accrued interest 33,776 -- (16,981) --
Other accrued liabilities -- 25,500 -- 51,233
- -----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,315,062) (37,500) (4,255,952) (1,079,391)
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities -- 135,576 652,598 193,843
Deposits - recovery -- -- 64,000 --
Sale/(purchase) of fixed assets (2,632) -- (23,678) (4,387)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 639,021 135,576 692,920 189,456
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from options exercised 28,251 -- 263,751 --
Proceeds from sale of common stock, net -- -- 348,196 --
Warrants issued as guarantee fee -- -- 649,500 --
Non-cash financing expense -- -- 32,725 144,001
Proceeds/(repayment) of notes payable -- -- (437,539) 850,000
Proceeds on issuance of convertible debentures 1,230,000 -- 2,730,000 --
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities: 1,258,251 -- 3,586,633 994,001
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (59,443) 98,076 23,601 104,066
- -----------------------------------------------------------------------------------------------------------
Cash, beginning of period 101,133 25,548 18,089 19,558
- -----------------------------------------------------------------------------------------------------------
Cash, end of period 41,690 123,624 41,690 123,624
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
TrackPower, Inc.
Notes to Financial Statements
November 30, 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
of the Company as of November 30, 1999 and February 28, 1999 and the results of
operations and cash flows for the periods ended November 30, 1999 and November
30, 1998.
Nature of business
The Company was organized on June 30, 1993 under the laws of Wyoming.
Prior to August 26, 1999, the Company operated under the name American Digital
Communications, Inc. The Company had intended to provide wireless two-way
communications in the 220 mHz. band, and the Company held distribution rights
for various Midland brand commercial land mobile radios and radio parts acquired
in separate transactions during 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 from Simmonds Capital Limited ("Simmonds Capital").
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 will 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 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 "Management's
Discussion and Analysis or Plan of Operation" in this Quarterly Report.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
7
<PAGE>
Marketable securities
The Company's marketable securities consist of unrestricted common
stock of publicly traded companies. The securities are considered held for sale
and therefore are recorded at the market value of the securities at the balance
sheet date.
Depreciation
Office equipment, furniture and fixtures, including assets under
capital leases, are stated at cost. Depreciation is computed over the estimated
useful life of three years using the straight line method.
Advertising costs
The Company expenses advertising as incurred. Advertising expense
totaled approximately $450,425 in the nine month period ended November 30, 1999.
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, which is the period estimated by management to be
the useful life of such rights.
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 Company relaunched the TrackPower service on four channels under
the EchoStar DishNetwork service on July 1, 1999 with a subscription fee of
$19.99 per month or $125 per annum. During the three month period ended August
31, 1999, the Company also began earning wagering commissions under its
agreement with Penn National Gaming, Inc. ("Penn Gaming"). Subsequent to the end
of the quarter ended November 30, 1999 and effective January 10, 2000, the
Company reduced the number of channels to two and no longer charged a fee for
the service.
8
<PAGE>
The decision to reduce the number of channels and eliminate the
subscription fee was a significant step forward for the Company in response to
changes in the marketplace. The reduction in channels has reduced the satellite
transponder costs from $400,000 to $200,000 per month. Despite the reduction in
the number of channels, the Company will effectively double the capacity of the
previously-used four channel service by adding new switching and production
equipment. The Company will now focus on marketing the wagering opportunity to
horseracing fans. The free channels allow the Company access to a larger
audience. The Company will also focus more resources on marketing its
interactive WebTV(TM) and computer platforms expected to be available in
February 2000.
Television Games Network ("TVG"), a service similar to TrackPower which
is also free of charge, was launched in the fall of 1999 on EchoStar's
DishNetwork. TVG accepts wagering from three U.S. States. The Racing Network
("TRN"), also a similar service on EchoStar's DishNetwork, charges $24.99 and
does not offer any wagering services. TrackPower's free channels will allow
access to many of the TVG and TRN customers. TrackPower has launched an
extensive marketing campaign offering the wagering opportunity to this audience.
Management believes that the TrackPower service is oriented toward the
more serious core wagerer and therefore has made the decision to focus on
wagering by eliminating the subscription fee. Management is attempting to
attract more core wagerers to subscribe to the TrackPower service and begin
wagering through Penn Gaming, thereby increasing the amount of wagering
commissions earned by the Company.
The Company has also hired key spokespeople, such as D. Wayne Lukas, a
top thoroughbred trainer, and John Campbell, a top harness racing driver, to
promote the service and gain credibility with the horseracing fans. The Company
has also hired a top handicapper and a well-recognized wagering consultant to
assist in marketing the product to active heavy wagerers.
The decision to reduce to two channels from four has reduced monthly
fixed transponder fees from $400,000 to $200,000. Management is of the opinion
that if the Company succeeds in accelerating the sign up rate of wagering
account holders, a breakeven level of operations will occur sooner. In addition,
due to the reduced costs the risk of the Company being unable to raise
sufficient financing to fund interim operating losses has been reduced.
In November 1999, management changed the marketing campaign to refocus
on attracting bettors to the TrackPower service rather than attracting mass
levels of satellite subscribers. The marketing campaign has a specific focus on
attracting heavy wagerers. Initial plans include offering a loyalty program and
running a large handicapping tournament, the TrackPower National Handicapping
Challenge with a total purse of $200,000. Management believes that the key
statistics that will measure the performance of the Company have shifted from
number of satellite subscribers to wagering revenue and the number of wagering
accounts, number of active account holders, and the amount wagered per active
account.
Results of operations
For the three month period ended November 30, 1999
Revenues for the three month period ended November 30, 1999 were
$37,765,
9
<PAGE>
representing Midland royalty revenue of $3,393, TrackPower net subscription
revenue of $25,489, wagering commissions of $8,750 and miscellaneous revenue of
$133.
Operating expenses totaled $1,996,100 during the three month period
ended November 30, 1999. Transponder fees were $1,200,000, advertising and
marketing costs were $300,421, general and administrative expenses were
$225,923, wages and consulting costs totaled $194,756 and management fees to
Simmonds Capital totaled $75,000. As described in the Overview section of this
Form 10-QSB transponder fees have been reduced to $200,000 per month effective
January 10, 2000.
Other expenses totaled $47,004 during the three month period ended
November 30, 1999, including interest of $34,034, depreciation of capital assets
and amortization of Midland distribution rights and TrackPower technology rights
of $12,970.
The Company recorded an unrealized holding loss on marketable
securities of $3,773 during the three month period ended November 30, 1999. The
loss is attributable to the decline in the market value, after adjusting for a
one for five share consolidation, of Fifty Plus Network (formerly Ventel Inc.)
shares from $0.67 to $0.425 during the quarter. The Company held 15,400 Fifty
Plus Network common shares at November 30, 1999.
The net loss during the three month period ended November 30, 1999
(prior to unrealized holding gains or losses on marketable securities) was
$2,005,339 and $2,009,112 after the unrealized holding loss on marketable
securities.
For the three month period ended November 30, 1998
During the three month period ended November 30, 1998, the Company
collected $2,378 on Midland distribution rights.
The Company sold 87,400 Intek shares during the three month period
ended November 30, 1998 at an average price of $1.47 for total proceeds of
$128,327 representing a gain of $5,421. The Company also sold 70,000 Fifty Plus
Network Inc. (formerly Ventel Inc.) shares at an average price of approximately
$0.10 for total proceeds of $7,250, representing a gain of $1,428.
Operating expenses for the three month period ended November 30, 1998
were $235,563 consisting of $112,178 in wages and consulting costs, $75,000 in
management fees to Simmonds Capital and $48,385 in general and administrative
costs.
Financing costs totaled $25,522 during the three month period ended
November 30, 1998, consisting primarily of interest.
The closing trading value of the Company's investment in Intek common
shares increased from $1.56 at August 31, 1998 to $1.84 at November 30, 1998 and
the trading value of Fifty Plus Network, Inc. common shares closed at $0.52.
Accordingly, the Company recorded an unrealized holding gain on marketable
securities of $131,481 during the three month period ended November 30, 1998.
10
<PAGE>
During the three month period ended November 30, 1998, the
comprehensive loss was $141,227 or $0.01 per share.
For the nine month period ended November 30, 1999
Revenues for the nine month period ended November 30, 1999 were
$51,803, comprised of net TrackPower subscription revenues of $30,152, Midland
distribution right royalties of $7,909, TrackPower wagering commissions of
$9,312 and miscellaneous revenues of $4,430.
Operating expenses for the nine month period ended November 30, 1999
were $3,763,509, comprised of $2,200,000 in EchoStar transponder fees, general
and administrative expenses of $526,004, advertising and marketing costs of
$450,425, wages and consulting costs of $362,080 and management fees paid to
Simmonds Capital of $225,000.
Other expenses for the nine month period ended November 30, 1999 were
$839,612, consisting of a one time $649,500 non cash guarantee fee, $147,409 of
interest on notes payable and preferred shares, non-cash financing costs of
$32,725, a net gain on sales of marketable securities of $28,463 and
depreciation of capital assets and amortization of Midland distribution rights
and TrackPower technology rights of $38,441.
The one time non-cash guarantee fee represents the estimated value of a
guarantee provided by Simmonds Capital on the Company's obligations under a
satellite distribution services agreement with EchoStar.
During the six month period ended August 31, 1999, the Company sold
256,800 Intek common shares for net proceeds of $635,903 and 270,000 Fifty Plus
Network (formerly Ventel, Inc.) shares for net proceeds of $16,696. The net gain
of sales of Intek shares was $29,587 and the loss on sales of Fifty Plus Network
shares was $1,124.
The net loss for the nine month period ended November 30, 1999, prior
to unrealized holding gains or losses on marketable securities, was $4,551,318.
The Company recorded an unrealized holding gain on marketable
securities of $13,801 due to the appreciation in the market value of Fifty Plus
Network shares from $0.33 on February 28, 1999 to $0.425 on November 30, 1999.
The comprehensive loss for the nine month period November 30, 1999 was
$4,537,517 or $0.16 per share.
For the nine month period ended November 30, 1998:
Revenues during the nine-month period ended November 30, 1998 were
$10,125, consisting of Midland royalty revenues.
Operating expenses, for the nine month period ended November 30, 1998
were $955,500 consisting of $397,664 in wages and consulting costs, $225,000 in
management fees to Simmonds Capital, $284,058 in general and administrative
costs and $48,778 of nonrecurring costs to close down the former head office.
11
<PAGE>
Other expenses totaled $342,875, during the nine month period ended
November 30, 1998, and consisted of $287,170 in non-cash financing costs (common
shares issued in connection with notes payable for the purpose of funding the
operations of the company), a gain of $6,849 on the sale of marketable
securities and depreciation of capital assets and amortization of Midland
distribution rights totaling $65,554.
During the nine month period ended November 30, 1998, the Company
recorded an unrealized holding loss on marketable securities of $390,159 due to
the decline in value of the Company's Intek and Fifty Plus Network shares.
The comprehensive loss was $1,678,409, $0.07 per share, during the nine
month period ended November 30, 1998.
Financial Condition
Total assets decreased from $744,786 on August 31, 1999 to $689,570 on
November 30, 1999. The decrease is primarily the result of a $59,443 decrease in
cash offset by a $3,773 reduction in the value of the Company's marketable
securities.
The decrease in cash during the three month period ended November 30,
1999 was caused by $1,258,251 of new funding being insufficient to offset the
$1,315,062 used in operations and $2,632 in capital asset acquisitions.
The value of marketable securities, which consists of 15,400 Fifty Plus
Network common shares, decreased from $10,318 at August 31, 1999 to $6,545 at
November 30, 1999. At November 30, 1999 the Company's marketable securities
consisted of 15,400 shares of Fifty Plus Network valued at a market price of
$0.425 per share.
The working capital deficit, after adjusting for related party amounts,
increased from $411,607 at August 31, 1999 to $1,177,982 at November 30, 1999.
The change resulted from a significant increase in accounts payable relating to
transponder fees.
The Company's shareholders equity deficit increased from $1,756,031 at
August 31, 1999 to $3,736,892 at November 30, 1999. The increase in the deficit
during the current quarter is a result of $2.0 million comprehensive loss.
Management expects the deficit to continue to rise until a break-even level of
operations is achieved.
Options exercised to purchase common shares of the Company by
management during the three month period ended November 30, 1999 totaled 188,333
shares for an increase in stockholders capital of $28,251.
Liquidity and Capital Resources
The Company's ability to continue to fund losses arising from costs and
expenses exceeding revenue is connected to its ability to raise additional
financing prior to achieving a break even level of operating results. The
Company has and continues to raise funds primarily by issuing new convertible
debt.
12
<PAGE>
At November 30, 1999 there were $2,730,000 outstanding in convertible
debentures. Debentures totaling $1,250,000 issued on June 10, 1999 which were
convertible into common shares of the Company at $1.25, were converted, on
December 17, 1999, by special resolution of the Board of Directors at $.50 per
share. At November 30, 1999 there was $1,480,000 face value in convertible
debentures outstanding with conversion privileges at $.60 per share, which were
also amended, by special resolution of the Board of Directors, to adjust the
conversion rate to $.50. Both special resolutions were approved to assist
management in raising sufficient financing to continue to fund the operating
losses.
As of January 14, 2000 the Company has received commitments for the
issuance of $5,000,000 in new convertible debentures, of which $3,626,000 has
been received by the Company.
Simmonds Capital has provided two guarantees to the Company: a general
guarantee of all the obligations of the Company until March 1, 2000 and a
guarantee of the Company's obligations under the Transponder Encryption Services
Corporation agreement. In exchange, during the quarter ended August 31, 1999,
Simmonds Capital received 1,000,000 warrants to purchase the Company's common
stock at $2.50, valued at $649,500, 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. Simmonds
Capital has funded and will continue to fund day-to-day operating cash flow
shortages.
13
<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 and Use of Proceeds.
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.
(a) Exhibit Schedule.
Exhibit Page No. Document
- ---------------- --------
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
the Company's 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 the Company's Report on Form
8-K dated July 14, 1993)
3.03 Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's
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
14
<PAGE>
by reference to Exhibit 4.1 to the Company's
Report on Form 8-K dated July 14, 1993)
4.02 Form of Warrant issued by the Company to
various investors, dated as of April 17,
1998 (incorporated by reference to Exhibit
4.1 to the Company's 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 the Company's
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 the Company's
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 the Company's
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 the
Company's Report on Form 8-K dated February
14, 1994)
10.05 Asset Purchase Agreement dated November 8,
1996 for the sale of certain licensing
rights, by and between Simmonds Capital
Limited, SCL Distributors (Western) Ltd.,
Midland International Corporation, and
American Digital Communications, Inc.
(incorporated by reference to Exhibit 10.41
of the Company's Form 10-KSB for the year
ended February 28, 1997)
10.06 Agreement, dated January 15, 1998, between
Simmonds Capital Limited and the Company
(incorporated by reference to Exhibits 2
through 2.6 of the Company'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
Company in favor of Pellinore, for itself
and as agent for certain investors
(incorporated by reference to Exhibit 10.1
of the Company's Report on 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)
10.09 Placement Agent Agreement, dated July 28,
1998 between
15
<PAGE>
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)
*27 Financial Data Schedule
99 Additional Exhibits
99.01 Press Release dated September 21, 1999
* Filed herewith.
(b) Reports Filed on Form 8-K
Report on Form 8-K dated July 21, 1999
16
<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: JANUARY 14, 2000 BY: /s/ John G. Simmonds
-----------------------------------
John G. Simmonds
President / CEO / Director
(principal executive officer)
DATE: JANUARY 14, 2000 BY: /s/ Gary N. Hokkanen
-----------------------------------
Gary N. Hokkanen
Chief Financial Officer,
(principal financial officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> NOV-30-1999
<CASH> 41,690
<SECURITIES> 6,545
<RECEIVABLES> 50,845
<ALLOWANCES> 0
<INVENTORY> 70,928
<CURRENT-ASSETS> 175,731
<PP&E> 190,815
<DEPRECIATION> 151,423
<TOTAL-ASSETS> 689,570
<CURRENT-LIABILITIES> 1,696,462
<BONDS> 2,730,000
0
1,000,000
<COMMON> 2,934
<OTHER-SE> (4,739,826)
<TOTAL-LIABILITY-AND-EQUITY> 689,570
<SALES> 39,464
<TOTAL-REVENUES> 51,803
<CGS> 0
<TOTAL-COSTS> 3,763,509
<OTHER-EXPENSES> 839,612
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,537,517)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,537,517)
<EPS-BASIC> (.16)
<EPS-DILUTED> (.16)
</TABLE>
