As filed with the Securities and Exchange Commission on October 13, 2000
===============================================================================
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 August 31, 2000
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 October 13, 2000 are as follows:
Class of Securities Shares Outstanding
------------------- ------------------
Common Stock, $.0001 par value 36,561,922
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<PAGE>
TrackPower, Inc.
INDEX
PART I Financial Information
Item 1. Financial Statements (unaudited)
Balance Sheet........................................... 3
Statements of Operations and Comprehensive Loss......... 5
Statements of Cash Flows................................ 6
Notes to Financial Statements........................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation...... 9
PART II. Other Information
Item 1. Litigation.....................................................15
Item 2. Change in Securities and Use of Proceeds.......................15
Item 3. Defaults Upon Senior Securities................................15
Item 4. Submission of Matters to a Vote of Security Holders............15
Item 5. Other Information..............................................15
Item 6. Exhibits and Reports on Form 8-K...............................16
A) Exhibit Schedule
B) Reports Filed on Form 8-K
Signatures................................................................18
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
TrackPower, Inc.
Balance Sheet
(UNAUDITED)
August 31, 2000
ASSETS
Current Assets:
Cash $ 35,196
Accounts receivable 13,290
Notes receivable 10,764
Marketable securities 124,960
Other current assets 10,146
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Total current assets 194,356
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Property and equipment:
Property and equipment 172,629
Less: Accumulated depreciation 130,440)
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Net property and equipment 42,189
Other assets:
Distribution rights, net of accumulated amortization 92,300
Deposits 101,586
TrackPower trademarks and other intellectual property rights 348,610
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542,496
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TOTAL ASSETS $779,041
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See accompanying notes to financial statements.
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TrackPower, Inc.
Balance Sheet
(UNAUDITED)
August 31, 2000
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable (including $1,282 due from related parties) $ 955,871
Accrued interest 266,787
Other accrued expenses 128,863
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Total current liabilities 1,351,521
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Long term debt:
8% senior subordinated convertible debentures due
October 31, 2004 4,704,000
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Total liabilities 6,055,521
Shareholders' equity (deficit):
Convertible preferred stock, no par value, unlimited
shares authorized, 1,000,000
(liquidation value $1,000,000)
Common stock, $.0001 par value; unlimited
shares authorized, 3,656
36,561,922 shares, issued and outstanding
Additional paid in capital 12,443,746
Accumulated deficit (18,608,842)
Accumulated other comprehensive loss (115,040)
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Total shareholders' equity (deficit) (5,276,480)
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $779,041
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See accompanying notes to financial statements.
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<TABLE>
<CAPTION>
TrackPower, Inc.
Statements of Operations and Comprehensive (Loss)
(UNAUDITED)
Three Months Ended Six Months Ended
August 31, August 31,
2000 1999 2000 1999
---- ---- ---- ----
Revenue
<S> <C> <C> <C> <C>
Royalties from distribution rights 2,674 1,568 4,301 4,516
Net subscription revenue - 3,845 - 4,663
Wagering commissions 37,185 562 83,622 562
Other revenue 26,659 3,653 26,797 4,297
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Total revenue 66,518 9,628 114,720 14,038
Operating expenses:
Wages and consulting fees 186,536 79,812 363,658 167,324
Management fees - related party 75,000 75,000 150,000 150,000
Transponder fees 400,000 900,000 1,000,000 1,000,000
Advertising & marketing costs 3,008 137,394 26,896 150,004
Professional fees 164,159 108,307 367,076 108,307
General & administrative 130,309 132,130 287,303 191,774
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Total operating expenses 959,012 1,432,643 2,194,933 1,767,409
Loss from operations: (892,494) (1,423,015) (2,080,213) (1,753,371)
Other expenses:
Interest 96,578 28,617 197,830 45,875
Non-cash financing expense - 649,500 49,750 682,225
Realized gains on marketable securities - (34,794) - (28,463)
Depreciation and amortization 13,451 13,220 26,568 25,471
Write-off of non-refundable acquisition deposit 125,000 - 125,000 -
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Total other expenses 235,029 656,543 399,148 725,108
Net loss (1,127,523) (2,079,558) (2,479,361) (2,478,479)
Preferred dividends (17,500) - (35,832) (67,500)
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Net loss applicable to common shareholders (1,145,023) (2,079,558) (2,515,193) (2,545,979)
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Basic and diluted loss per share of common stock (0.03) (0.07) (0.07) (0.09)
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Weighted average number of common shares outstanding 36,317,233 28,772,312 35,599,139 27,592,381
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Comprehensive Loss
Net loss (1,127,523) (2,079,558) (2,479,361) (2,478,479)
Other comprehensive loss
Unrealized holding (loss) gain on marketable (115,040)) (10,549) (115,040) 17,574
securities
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Comprehensive loss (1,242,563) (2,090,107) (2,594,401) (2,460,905)
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</TABLE>
See accompanying notes to financial statements.
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<TABLE>
<CAPTION>
TrackPower, Inc.
Statements of Cash Flows
(UNAUDITED)
Six Months Ended
August 31,
Increase (Decrease) in Cash
2000 1999
---- ----
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash used in operations
Net loss (2,479,361) (2,478,479)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 26,568 25,471
Non-cash financing expense incurred in
connection
with issuance of convertible debentures 49,750 -
Gain on sale of marketable securities - (28,463)
Warrants issued as a guarantee fee 649,500
Write-off of acquisition deposit 125,000 -
Changes in:
Accounts receivable 51,293 (20,617)
Prepaid transponder fee 200,000 -
Due to related parties - (76,694)
Inventory - (70,331)
Other current assets (2,646) (7,115)
Accounts payable 654,171 197,010
Accrued expenses (9,873) (99,251)
Accrued interest 184,827 -
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Net cash used in operating activities (1,200,271) (1,908,969)
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Cash flows from investing activities:
Proceeds from sale (purchase) of marketable (240,000) 652,599
securities
Deposits (57,072) 64,000
Deposit on acquisition (125,000) -
(Purchase) of fixed assets (16,690) (21,046)
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Net cash provided by (used in) investing activities (438,762) 695,553
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Cash flows from financing activities:
Proceeds from options exercised 846,633 235,500
Proceeds from sale of common stock, net - 313,421
Proceeds from warrants exercised 157,478 -
(Repayment) of notes payable (10,370) (752,461)
Proceeds on issuance of convertible debentures 429,000 1,500,000
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities: 1,422,741 1,296,460
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Increase (decrease) in cash (216,292) 83,044
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Cash, beginning of period 251,488 18,089
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Cash, end of period 35,196 101,133
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</TABLE>
See accompanying notes to financial statements.
6
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TrackPower, Inc.
Notes to Financial Statements
August 31, 2000
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").
Management is developing a business plan under which the Company will become a
diversified company with interests in a series of horseracing industry sectors.
Recent Developments
On June 28, 2000, the Company announced that it had entered into a
letter of intent with respect to a revised USA race wagering joint venture with
eBet Limited. The June 28, 2000 letter of intent superseded a March 6, 2000
letter of intent with Penn National Gaming Inc. and eBet which contemplated each
party either selling certain of their subsidiaries or contributing various
assets, technologies, business operations, contracts and management agreements
to the Company in exchange for shares of the Company's common stock. As of this
date, the Company has made the decision not to pursue either of these mergers
and plans instead to focus on other opportunities in the horseracing industry.
These other opportunities, if consummated, will result in transforming
TrackPower into a diversified holding company with interests in several
horseracing related sectors. Management believes that diversification of
interests should improve the financial condition of the Company in the future.
On August 3, 2000, the Company announced that the Company would no
longer be broadcasting live horseracing on the DISH network and that the
satellite distribution services agreement had been terminated. The service had
become somewhat redundant to the other live horseracing services on DISH network
and the existing satellite service did not provide the necessary features to
support the unique system the Company required. The Company also announced that
it was close to announcing a new more economical distribution system that would
provide full interactive wagering capabilities to its subscribers.
On August 9, 2000, the Company announced it had entered into a Letter
of Intent with inetcable.com inc. (`Inetcable"), under the terms of which
Inetcable would become the primary satellite services provider to the Company.
Under the terms of the agreement Inetcable will become the exclusive interactive
horse wagering information and video service on Inetcables satellite to internet
broadcast service. Inetcable or its affiliates will provide technical operations
and management services to the Company including all necessary compression,
encoding, encrypting and related work necessary for uplinking the TrackPower
programming for redistribution by broadband internet service providers. In
exchange for the aforementioned
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services, which will include free satellite transponder bandwidth for one year,
Trackpower will issue to Inetcable common stock of the Company. In addition
TrackPower will make an equity investment in Inetcable. The letter of intent is
subject to standard conditions, including the completion of definitive
documentation. This agreement is expected to close shortly.
On October 2, 2000, the Company announced that Inetcable and BroadLogic
Network Technologies have signed an agreement to supply Inetcable with its
Satellite Express(TM) USB desktop satellite receiver. Inetcable will use
BroadLogic receivers to enable the delivery of streamed IP video and data to
TrackPower's subscribers across North America.
During the quarter ended August 31, 2000, management performed due
diligence on a potential acquisition of a horseracing related entity for which
eBet and the Company each placed a $125,000 non-refundable deposit into a newly
formed entity which, in turn, made a $250,000 non-refundable deposit on the
acquisition. Due diligence resulted in the decision to decline the acquisition,
which resulted in the forfeiture of the Company's $125,000 deposit.
The modified business plan includes: 1) a joint venture that is
expected to have two sources of revenue, one from on-track activities and the
other from in-home services, 2) the establishment of a wholly owned subsidiary
in the horseracing information services sector, 3) a 60% investment in a
web-site business related to a particular sector of the horse industry, and 4) a
joint venture involving the acquisition of a horseracing establishment. The
broadcast of the TrackPower service through Inetcable is currently contemplated
to be under the direction of the investment referred to in item 1 above.
Basis of presentation
The accompanying unaudited financial statements of TrackPower, Inc.
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
item 310 (b) of Regulation S-B. Accordingly they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months and six
months ended August 31, 2000 are not necessarily indicative of the results that
may be expected for the fiscal year ending February 28, 2001. For further
information, refer to the financial statements and footnotes thereto included in
the Company's annual report on Form 10-KSB for the fiscal year ended February
29, 2000.
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.
Transponder fees
In June 1999, the Company signed an agreement with Transponder
Encryption Services Corporation that provided for the broadcast of the
TrackPower services under the Echostar DISH
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network. The agreement entailed a base monthly fee of $400,000 for four channels
per month, plus a portion of revenues to be paid to Echostar for the four-year
term of the agreement. Effective January 2000 the number of channels was reduced
to two and the monthly fees under this agreement were reduced to $200,000.
Simmonds Capital Limited guaranteed the Company's obligations under this
agreement. Effective August 3, 2000 this agreement was terminated. The Company
and Echostar are in negotiations over amounts due. Management has provided for
an amount, in these financial statements, believed to be more than adequate for
the services provided.
Marketable securities
During the quarter ended May 31, 2000, the Company purchased 80,000
shares of common stock of a publicly traded entity. These securities are
considered "available for sale" and, accordingly, are recorded at market value
with unrealized gains or losses recorded as a separate component of
shareholders' equity (deficit). During the three months ended August 31, 2000
the closing market value of the securities dropped from $3.00 on May 31, 2000 to
$1.562 on August 31, 2000, resulting in an unrealized holding loss of $115,040.
Convertible debentures
During the three month and six month periods ended August 31, 2000, the
Company raised $47,000 and $429,000, respectively, through the issuance of
additional 8% senior subordinated convertible debentures. Accordingly, the total
face value of convertible debentures has increased to $4,704,000 at August 31,
2000.
Net loss per share
Basic loss per common share is based on the weighted average number of
shares outstanding during each period presented. Convertible debentures, options
to purchase stock and warrants are included as common stock equivalents only
when dilutive. Potential common stock equivalents totaling 10,765,000 shares at
August 31, 2000 have been excluded, as the effects of such shares would have
been anti-dilutive.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Overview
During the quarter ended August 31, 2000, management made a series of
decisions that, if consummated, will effectively transform the Company into a
diversified entity with holdings in several horseracing related interests. Two
of the transactions pursued by the Company were declined and the broadcast of
the video service by EchoStar's DISH network was cancelled.
On June 28, 2000, the Company announced that it had entered into a
letter of intent with respect to a revised USA race wagering joint venture with
eBet Limited. The June 28, 2000 letter of intent superceded a March 6, 2000
letter of intent with Penn National Gaming Inc. and eBet which contemplated each
party either selling certain of their subsidiaries or contributing various
assets, technologies, business operations, contracts and management agreements
to the Company in exchange for shares of the Company's common stock. As of this
date the Company is no longer pursuing this merger because it was judged not to
be in the best interests of shareholders.
9
<PAGE>
During the quarter ended August 31, 2000, management performed due
diligence on a potential acquisition of a horseracing related entity for which
eBet and the Company each placed a $125,000 non-refundable deposit into a newly
formed entity which, in turn, made a $250,000 non-refundable deposit on the
acquisition. Due diligence resulted in the decision to decline the acquisition.
The primary reason for the decision was that the cost of the acquisition, which
was to be paid in cash, was substantial and the assets to be purchased were
determined not to be satisfactory.
On August 3, 2000, the Company announced that the Company would no
longer be broadcasting live horseracing on the DISH network and that the
satellite distribution services agreement had been terminated. The service had
become somewhat redundant to the other live horseracing services on DISH network
and the existing satellite service did not provide the necessary features to
support the unique system the Company required. The Company also announced that
it was close to announcing a new more economical distribution system that would
provide full interactive wagering capabilities to its subscribers. Under the
DISH network satellite distribution services agreement the Company was
responsible for $200,000 per month in transponder fees. The decision to cancel
the contract has effectively reduced fixed costs by $2.4 million per year.
The alternative distribution system was announced on August 9, 2000.
The Company announced it had entered into a letter of intent with Inetcable,
under the terms of which Inetcable would become the primary satellite services
provider to the Company. Under the terms of the agreement Inetcable will become
the exclusive interactive horse wagering information and video service on
Inetcables satellite to internet broadcast service. Inetcable or its affiliates
will provide technical operations and management services to the Company
including all necessary compression, encoding, encrypting and related work
necessary for uplinking the TrackPower programming for redistribution by
broadband internet service providers. The letter of intent is subject to
standard conditions, including the completion of definitive documentation.
Inetcable has agreed to provide free transponder bandwidth for one year.
Management has been developing a modified business plan for the Company
for several months. The plan involves transforming the Company from a business
that relies solely on wagering commissions under its wagering hub agreement with
Penn National Gaming Inc. to a diversified company with interests in several
horseracing related sectors. Management is of the opinion that diversification
is a critical success factor for the future. It became clear during the first
half of the current fiscal year that wagering revenue was not growing at a
sufficient rate to make continued broadcast of the video service by DISH network
viable.
The modified business plan includes: 1) a joint venture that is
expected to have two sources of revenue, one from on-track activities and the
other from in-home services, 2) the establishment of a wholly owned subsidiary
in the horseracing information services sector, 3) a 60% investment in a
web-site business related to a particular sector of the horse industry, and 4) a
joint venture involving the acquisition of a horseracing establishment. The
broadcast of the TrackPower service through Inetcable is currently contemplated
to be under the direction of the investment referred to in item 1 above.
Management is optimistic that the profitability of the Company will
improve; however the Company will require incremental financing in order to
proceed with many of these new
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initiatives. There can be no assurance that the Company will be able to obtain
such capital funds, or on terms acceptable to it. If additional funds are raised
through the issuance of common stock or securities convertible into or
exchangeable for common stock, the percentage ownership of our stockholders at
the time will decrease and they may experience additional dilution. In addition,
any convertible or exchangeable securities may have rights, preferences and
privileges more favorable than those of the common stock. If additional
financing is needed and is not available, our business, operating results and
financial condition will be materially and adversely affected.
Results of operations
For the three month period ended August 31, 2000
Revenues for the three month period ended August 31, 2000 were $66,518
compared to $9,628 during the comparative period in the prior year. Wagering
commissions were $37,185 in the current period and $562 in the prior year. The
year over year increase is a result of comparatively more active wagering
accounts in the current year and the wagering hub agreement only being in place
beginning July 1, 1999. Although the Company is no longer broadcasting under the
DISH network service and has not yet reestablished service under Inetcable, the
Company continues to earn wagering commissions from those individuals still
wagering under the Penn National Gaming hub agreement.
The Company also received $2,674 during the three month period ended
August 31, 2000 ($1,568 during the comparative period in the prior year), for
royalties under a sub-license agreement on Midland brand two-way radio sales in
certain territories of Canada.
Up until January 2000, the Company earned subscription revenue from its
video service. Subscription revenues during the three month period ended August
31, 1999 were $3,845, and zero in the current year.
Miscellaneous revenues were $26,659 during the three month period ended
August 31, 2000 and $3,653 during the comparative period in the prior year.
Miscellaneous revenues during the three month period ended August 31, 2000
consisted primarily of a sale of redundant set top box and dish equipment
previously written off by the Company.
Operating expenses totaled $959,012 during the three-month period ended
August 31, 2000 down from $1,432,643 in the comparative period in the prior
year. The decrease of approximately $474,000 is attributable primarily to a drop
in transponder fees of $500,000 as a result of the decision to reduce the number
of channels from four to two in January 2000 and the termination of the
satellite distribution services agreement effective August 3, 2000 and
secondarily a $134,000 decrease in advertising and marketing costs which was the
result of a corporate decision to reduce discretionary costs when substantial
numbers of active wagering accounts did not emerge. General and administrative
expenses were down approximately $2,000 in comparison to the prior year. The
aggregate operating expense decrease was partially offset by increases in the
following expense categories: wages and consulting fees $106,000, and
professional fees $56,000. Wage costs increased due to an increased number of
employees. Consulting fees were higher due to a series of consulting agreements
with various spokesmen. Professional fees increased due to the various mergers
and acquisitions the Company was pursuing and also due to the legal costs
incurred on behalf of the SB2 registration statement.
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Other expenses/income totaled $235,029 during the three month period
ended August 31, 2000, and included the write-off of the $125,000 acquisition
non-refundable deposit, $96,578 in interest expense ($28,617 in the comparative
period in the prior year) and $13,451 of depreciation of capital assets and
amortization of distribution rights and trademarks. Other expenses/income for
the comparative period last year amounted to $656,543 and included $649,500
non-cash financing expense related to the issuance of warrants to Simmonds
Capital Limited for their guarantee of the satellite distribution services
agreement. The increased interest expense is a result of the Company financing
operating losses through the issuance of convertible debt.
The net loss during the three month period ended August 31, 2000 was
$1,127,523 ($0.03 per share) compared to $2,079,558 ($0.07 per share) for the
three month period ended August 31, 1999.
For the six month period ended August 31, 2000
Revenues for the six month period ended August 31, 2000 were $114,720
compared to $14,038 during the comparative period in the prior year. Wagering
commissions were $83,622 in the current period and $562 in the prior year. The
year over year increase is a result of comparatively more active wagering
accounts in the current year and the wagering hub agreement only being in place
beginning July 1, 1999. Although the Company is no longer broadcasting under the
DISH network service and has not yet reestablished service under Inetcable, the
Company continues to earn wagering commissions from those individuals still
wagering under the Penn National Gaming hub agreement.
The Company received $4,301 during the six month period ended August
31, 2000 ($4,516 during the comparative period in the prior year), for royalties
under a sub-license agreement on Midland brand two-way radio sales in certain
territories of Canada.
Up until January 2000, the Company was also earning subscription
revenue from its video service. Subscription revenues during the six month
period ended August 31, 1999 were $4,663, and zero in the current year.
Miscellaneous revenues were $26,797 during the six month period ended
August 31, 2000 and $4,297 during the comparative period in the prior year.
Miscellaneous revenues during the six month period ended August 31, 2000
consisted primarily of a sale of redundant set top box and dish equipment
previously written off by the Company.
Operating expenses totaled $2,194,933 during the six month period ended
August 31, 2000 up from $1,767,409 in the prior period. The increase of
approximately $428,000 is attributable to an increase in professional fees of
$259,000, an increase in wages and consulting fees of $197,000 and an increase
in general and administrative expenses of $95,000 partially offset by a $123,000
decrease in advertising and marketing costs. Professional fees increased due to
the various mergers and acquisitions the Company was pursuing and also due to
the legal costs incurred on behalf of the SB2 registration statement. Wage costs
increased due to an increased number of employees. Consulting fees were higher
due to a series of consulting agreements with various spokesmen. General and
administrative expenses were higher primarily due to increased travel costs and
additional insurance requirements.
Other expenses/income totaled $399,148 during the six month period
ended August 31,
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2000, and included the write-off of the $125,000 acquisition non-refundable
deposit, $197,830 in interest expense ($45,875 in the comparative period in the
prior year), non-cash financing expenses of $49,750 ($682,225 in the comparative
period in the prior year) and $26,568 of depreciation of capital assets and
amortization of distribution rights and trademarks. The increase in interest
expense is a result of the Company financing operating losses through the
issuance of convertible debt. The non-cash financing expenses, during the six
month period ended August 31, 2000 relate to commissions and finders fees
incurred in issuing convertible debentures. The $682,225 non-cash financing
expense for the prior period was primarily the result of issuing warrants to
Simmonds Capital Limited for their guarantee of the satellite distribution
services agreement.
The net loss during the six month period ended August 31, 2000 was
$2,479,361 ($0.07 per share) compared to $2,478,479 ($0.09 per share) for the
six month period ended August 31, 1999.
Financial Condition
The accompanying financial statements have been prepared on a going
concern basis. The significant losses incurred by the Company under the initial
business plan have called into question its ability to continue as a going
concern. The Company is modifying its business plan to diversify operations.
Rather than relying solely on wagering commissions earned under the Penn
National Gaming hub agreement, the modified business plan calls for the
transformation of the Company into an entity with interests in several
horseracing related sectors. The initiatives contemplated in the modified
business plan will require additional financing. Since inception, the Company
has supported operations through the issuance of common stock and convertible
debt and other securities. Management hopes that the new business initiatives
will be successful and will provide higher levels of operating cash flow.
During the three month period ended August 31, 2000, the market value
of the Company's investment in 80,000 common shares of Vianet Technologies Inc.
decreased from $240,000 on May 31, 2000 to $124,960 on August 31, 2000. Vianet
common shares trade under the symbol "VNTK" on the OTCBB. The Company also holds
120,000 warrants to purchase common shares of Vianet Technologies at $4.50 at
any time over the next three years. The Company made the investment based on the
compression technology held by Vianet, which could be used in the streaming of,
live horseracing video signals over the Internet. The drop in market value
resulted in an unrealized holding loss of $115,040.
The Company made deposits of approximately $36,380 on the development
of a new product that will deliver video archives of recent horse races via the
web-site. Thus far the Company has made deposits totaling $101,586 to this
entity. This entity represents one of the investments contemplated in the
modified business plan. If the investment is consummated the deposits will
become part of the Company's investment in the investee.
Liquidity and Capital Resources
As of August 31, 2000, the Company had cash reserves of $35,196, an
investment in marketable securities valued at $124,960 and a working capital
deficit of $1,157,165. For the six month period ended August 31, 2000, cash used
by operating activities amounted to $1,200,271, primarily as a result of
operating losses for the period. Cash used by investing activities during the
six month period ended August 31, 2000 amounted to $438,762 and consisted
primarily of
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$57,000 in deposits on the development of new interactive software which could
convert into an investment in the developer, a $125,000 acquisition deposit and
$240,000 of purchased marketable securities. Cash provided by financing
activities during the six month period ended August 31, 2000 amounted to
$1,422,741 and resulted from the exercise of options and warrants and the
issuance of new convertible debentures.
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. The Company continues to raise funds primarily by issuing common
stock and convertible debt. At August 31, 2000, there were $4,704,000
outstanding in convertible debentures. Management believes that the
implementation of the modified business plan will require incremental financing.
Although discussions are proceeding, there can be no assurance that the
transactions contained in the modified business plan will in fact be concluded
on the terms contemplated.
The Company has taken steps to reduce monthly operating costs to lessen
the burden on raising further funds. In August 2000, the Company terminated the
DISH network satellite distribution services agreement effectively reducing
operating costs by $2.4 million per annum. Although the Company is no longer
broadcasting under the DISH network service and has not yet reestablished
service under Inetcable, the Company continues to earn wagering commissions from
those individuals still wagering under the Penn National Gaming hub agreement.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This document contains a number of forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as it may be amended
from time to time, and Section 21E of the Securities Exchange Act of 1934, as it
may be amended from time to time. Specifically, all statements other than
statements of historical facts included in this document, or incorporated by
reference in this document, regarding our financial position, business strategy
and plans and objectives of management for future operations are forward-looking
statements. These forward-looking statements are based on the beliefs of
management, as well as assumptions made by and information currently available
to management. When used in herein, including the information incorporated by
reference, the words anticipate, believe, estimate, expect, may, will, continue
and intend, and words or phrases of similar import, as they relate to our
financial position, business strategy and plans, or objectives of management,
are intended to identify forward-looking statements. These cautionary statements
reflect our current view regarding future events and are subject to risks,
uncertainties and assumptions related to various factors.
14
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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.
During the three month period covered by this report, the Company
issued $47,000 in convertible debentures in transactions exempt from
registration under the Securities Act of 1933, as amended. These debentures are
five year senior subordinated 8% notes, that are convertible at the option of
the note holder into common shares of the Company at $0.50 per share. Upon
conversion a warrant is issued to purchase another common share exercisable at
$0.75 per share at any time over the next five years. All debentures
automatically convert to common shares at maturity. The Company has the option
to repay in cash at any time.
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.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 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 above).
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 Amendment of American Digital Communications, Inc. as
filed with the Wyoming Secretary of State on September 7, 1999.
3.03 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).
3.04 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).
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., Midland
International Corporation, and American Digital Communications,
Inc. (incorporated by reference to Exhibit 10.41
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Exhibit Document
------- --------
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 favor 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).
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 [____] 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
None
(Remainder of page left intentionally blank)
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SIGNATURES
Pursuant to the registration requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
DATE: OCTOBER 13, 2000 BY: /s/ John G. Simmonds
----------------------------
John G. Simmonds
President / CEO / Director
(principal executive officer)
DATE: OCTOBER 13, 2000 BY: /s/ Gary N. Hokkanen
----------------------------
Gary N. Hokkanen
Chief Financial Officer,
(principal financial officer)
18
