As filed with the Securities and Exchange Commission on January 16, 2001
================================================================================
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, 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 2211, 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 classes of common
equity, as of January 3, 2001, is as follows:
Class of Securities Shares Outstanding
------------------- ------------------
Common Stock, $.0001 par value 42,141,313
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<PAGE>
TrackPower, Inc.
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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... 10
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)
November 30, 2000
ASSETS
Current Assets:
Cash $ 9,229
Accounts receivable 1,404
Notes receivable 10,764
Marketable securities 32,480
Other current assets 781
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Total current assets 54,658
--------------------------------------------------------------------------------
Property and equipment:
Property and equipment 190,166
Less: Accumulated depreciation (133,793)
--------------------------------------------------------------------------------
Net property and equipment 56,373
Other assets:
Distribution rights, net of accumulated amortization 86,101
Deposits 124,048
TrackPower trademarks and other intellectual property rights 343,630
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553,779
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TOTAL ASSETS $664,810
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See accompanying notes to financial statements.
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<PAGE>
TrackPower, Inc.
Balance Sheet
(UNAUDITED)
November 30, 2000
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable (including $41,371 due to related parties) $1,093,405
Accrued interest 227,110
Other accrued expenses 109,483
Note payable related party 65,104
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Total current liabilities 1,495,102
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Long term debt:
8% senior subordinated convertible debentures due October 31, 2004 2,936,500
8% senior subordinated convertible debentures due January 31, 2005 60,000
--------------------------------------------------------------------------------
Total liabilities 4,491,602
Shareholders' equity (deficit):
Convertible preferred stock, no par value, unlimited shares
authorized, (liquidation value $1,000,000) 1,000,000
Common stock, $.0001 par value; unlimited shares 4,041
authorized, 40,403,947 shares, issued and outstanding
Additional paid in capital 14,381,873
Accumulated deficit 19,105,186)
Accumulated other comprehensive loss (107,520)
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Total shareholders' equity (deficit) (3,826,792)
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $664,810
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See accompanying notes to financial statements.
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TrackPower, Inc.
Statements of Operations and Comprehensive (Loss)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
2000 1999 2000 1999
---- ---- ---- ----
Revenue
<S> <C> <C> <C> <C>
Royalties from distribution rights $ 3,482 $ 3,393 $ 7,783 $ 7,909
Net subscription revenue - 25,489 - 30,152
Wagering commissions - 8,750 83,622 9,312
Other revenue 299 133 27,096 4,430
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Total revenue 3,781 37,765 118,501 51,803
Operating expenses:
Wages and consulting fees 63,332 194,756 426,990 362,080
Management fees - related party 75,000 75,000 225,000 225,000
Transponder fees - 1,200,000 1,000,000 2,200,000
Advertising & marketing costs 3,930 300,421 30,826 450,425
Professional fees 33,298 86,123 400,374 194,430
General & administrative 108,605 139,800 395,908 331,574
---------------------------------------------------------------------------------------------------------------
Total operating expenses 284,165 1,996,100 2,479,098 3,763,509
Loss from operations: (280,384) (1,958,335) (2,360,597) (3,711,706)
Other (income) expenses:
Interest 83,927 34,034 281,757 79,909
Non-cash financing expense - - 49,750 682,225
Realized loss/(gains) on marketable securities 100,000 - 100,000 (28,463)
Depreciation and amortization 14,533 12,970 41,101 38,441
Write-off of non-refundable acquisition deposit - - 125,000 -
---------------------------------------------------------------------------------------------------------------
Total other expenses 198,460 47,004 597,608 772,112
Net loss (478,844) (2,005,339) (2,958,205) (4,483,818)
Preferred dividends (17,500) - (53,332) (67,500)
---------------------------------------------------------------------------------------------------------------
Net loss applicable to common shareholders $(496,344) $(2,005,339) $(3,011,537) $(4,551,318)
---------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share of common stock $ (0.01) $ (0.07) $ (0.08) $ (0.16)
---------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 37,228,926 29,199,151 36,142,042 28,133,203
---------------------------------------------------------------------------------------------------------------
Comprehensive Loss
Net loss $(478,844) $(2,005,339) $(2,958,205) $(4,483,818)
Other comprehensive loss
Unrealized holding (loss) gain on marketable 7,520 (3,773) (107,520) 13,801
securities
---------------------------------------------------------------------------------------------------------------
Comprehensive loss $(471,324) $(2,009,112) $(3,065,725) $(4,470,017)
---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
TrackPower, Inc.
Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
November 30,
Increase (Decrease) in Cash
2000 1999
---- ----
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash used in operations
Net loss $(2,958,205) $(4,483,818)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 41,101 38,441
Realized (Gain)/loss on marketable securities 100,000 (28,463)
Warrants issued as a guarantee fee 649,500
Non-cash financing expense incurred in
connection
with issuance of convertible debentures 49,750 32,725
Write-off of acquisition deposit 125,000 -
Changes in:
Accounts receivable 63,179 (40,081)
Prepaid transponder fee 200,000 -
Due to related parties 54,734 (466,513)
Inventory - (70,928)
Other current assets 6,719 (5,392)
Accounts payable 791,705 883,476
Accrued expenses (29,253) 1,807
Accrued interest 268,660 (16,981)
--------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,286,610) (3,506,227)
--------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale (purchase) of marketable (240,000) 652,598
securities
Deposits (79,534) 64,000
Deposit on acquisition (125,000) -
Purchase of fixed assets (34,227) (23,678)
--------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (478,761) 692,920
--------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from options exercised 866,570 263,751
Proceeds from sale of common stock, net - 280,696
Proceeds from warrants exercised 192,542 -
Repayment of notes payable - (437,539)
Proceeds on issuance of convertible debentures 464,000 2,730,000
--------------------------------------------------------------------------------------------------
Net cash provided by financing activities: 1,523,112 2,836,908
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Increase (decrease) in cash (242,259) 23,601
--------------------------------------------------------------------------------------------------
Cash, beginning of period 251,488 18,089
--------------------------------------------------------------------------------------------------
Cash, end of period $ 9,229 $ 41,690
--------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
TrackPower, Inc.
Notes to Financial Statements
November 30, 2000
Nature of business
The Company was organized on June 30, 1993 under the laws of Wyoming
and had intended to provide wireless two-way communications in the 220 mHz.
band. Prior to August 26, 1999, the Company operated under the name American
Digital Communications, Inc.
On January 15, 1998, the Company acquired the TrackPower trade name and
other intellectual property rights from Simmonds Capital Limited ("Simmonds
Capital"). Thereafter, the Company had been attempting to carry out a business
plan that involved the distribution of a live horseracing video signal first
through the SkyVista satellite service and later through EchoStar's DISH network
in return for subscription revenues and wagering commissions. Management has
since determined that it is in the best interest of the Company to terminate
that business plan and to instead move toward a more diversified approach to
operations, by making acquisitions and strategic investments in several
horseracing industry sectors. Management has identified a number of
complementary acquisitions, investments and alliances that it believes will
enable the Company to provide a complete turnkey service offering to racetracks
and gaming facilities.
Recent Developments
As previously announced, the Company is currently negotiating the terms
of the transactions with PlayandWin Inc. (PlayandWin). Various documents have
been executed. The final terms of this transaction may change from those
previously disclosed.
The Company signed the definitive documentation on the transaction with
Compurace, Inc. (Compurace) in December 2000. Under the terms of the agreement,
the Company is to acquire all of the outstanding shares of Compurace for three
hundred thousand dollars in cash ($300,000), approximately 1.4 million shares of
the Company's common stock (fully restricted for one year), and 450,000
five-year warrants with an exercise price of $0.50 per share. The managing
partners of Compurace agreed to a two-year contract to remain with the Company.
The final payment and share transaction is expected during January 2001. It is
anticipated that the operation of the Compurace business will be conducted
through PlayandWin.
The Company believes it will be successful in finalizing these
transactions on acceptable and favorable terms. The consummation of these
transactions is subject to the standard conditions, including the completion of
due diligence and the negotiation and execution of definitive documentation.
Compurace is headquartered in Los Alamitos, California, and operates a
video archiving and Internet broadcast service for racetracks. Its products are
available both on kiosks at racetracks and on its fully operating Internet site
www.compuraceinc.com. Compurace has both exclusive and non-exclusive replay and
live broadcast agreements with their racetrack clients, which include major
tracks from New York, California and Kentucky. Compurace also has
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replay video kiosks located in major Las Vegas casinos.
The PlayandWin transaction, if consummated, will serve as the public
vehicle to execute the turnkey broadcast and kiosk business component of the
modified business plan described above. PlayandWin will have a focused mission
and management team to fully execute the business strategy. The TrackPower kiosk
rollout and distribution opportunity is complementary to Racingo(R),
PlayandWin's proprietary wager.
PlayandWin holds the exclusive license to the Racingo(R) concept for
the Internet as well as North American on-track and off-track versions of
Racingo(R). Racingo(R) is a pari-mutuel, 'Bingo-type,' proprietary game with the
outcome based on a series of horse races, protected worldwide by trademarks and
patents. As in Bingo, Racingo(R) players bet to form a winning pattern on a
grid. In Racingo(R), the winning numbers are determined by the outcome of the
horse races.
On December 7, 2000 the Company announced that Standard and Poor's
Editorial Board had approved the Company for inclusion in the premier Market
Access Program. As part of the program, Standard and Poor's will also initiate
financial coverage for TrackPower on the Standard and Poor's Internet Site
www.advisorinsight.com as well as S&P MarketScope and the S&P Stock Guide
database. S&P's financial coverage program ensures broad dissemination of
company information to the financial community.
Basis of presentation
The accompanying unaudited financial statements of TrackPower, Inc.
have been prepared in accordance with accounting principles generally accepted
in the United States of America 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 nine months ended November 30, 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 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.
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<PAGE>
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 November 30, 2000
the closing market value of the securities (as reported on the OTCBB) dropped
from $1.562 on August 31, 2000 to $0.406 on November 30, 2000, resulting in an
unrealized holding loss of $92,480.
During the three month period ended November 30, 2000, the Company
recorded a $100,000 loss on the Vianet securities on the basis that a portion of
the unrealized loss was perceived to be an other than temporary impairment in
the share value.
Convertible debentures
During the three month and nine month periods ended November 30, 2000,
the Company raised $35,000 and $464,000, respectively, through the issuance of
additional 8% senior subordinated convertible debentures. In addition, during
the quarter ended November 30, 2000, debenture holders converted debentures
having a total face value of $1,742,500 plus accrued interest of $123,511 into
3,732,025 shares of the Company's common stock. Accordingly, the total face
value of convertible debentures has decreased to $2,996,500 at November 30,
2000.
On October 31, 2000, the Company did not make the scheduled interest
payment, totaling approximately $227,000 as contemplated in the convertible
debenture agreements. As a result the Company may not be in compliance with the
terms of these agreements. Management plans to rectify this matter by requesting
that debt holders covert amounts due and accrued interest thereon into common
stock. On December 15, 2000, approximately $868,000 of convertible debt and
accrued interest were converted into 1,735,506 shares of the Company's common
stock.
Wagering Commissions
The Company was a party to a "hub" agreement with Penn National Gaming,
Inc. Penn National asserted that because the Company no longer broadcasted under
the DISH network service, commissions were no longer payable to the Company
under the agreement, and ceased making payments as of August 2000. During the
month of January 2001, the Company and Penn National mutually agreed to
terminate the agreement.
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
9
<PAGE>
equivalents totaling 7,195,000 shares at November 30, 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 November 30, 2000, management began the
transformation of the Company into a diversified entity with holdings in several
horseracing-related interests. Operating losses have been reduced substantially
from fiscal 2000 to fiscal 2001. Operating expenses have been reduced; however,
certain revenue streams have also been reduced and will eventually cease. As the
Company implements its new business strategy the Company will record the
operating results of acquisitions either through consolidation or recognizing
its proportionate share of the income or loss of the target entity through the
equity method of accounting. Management is also in the process of reorganizing
the affairs of the corporate entity to minimize the fixed monthly cost.
Management is optimistic that the operating results of the Company will
improve; however, the Company will require incremental financing in order to
proceed with some of its new 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 November 30, 2000
Revenues for the three month period ended November 30, 2000 were $3,781
compared to $37,765 during the comparative period in the prior year.
Wagering commissions were zero in the current period and $8,750 in the
prior year. Wagering commissions have decreased as a result of the Company's
decision to mutually agree to terminate the "hub" agreement with Penn National
effective August 2000.
The Company also received $3,482 during the three month period ended
November 30, 2000 ($3,393 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.
Until January 2000, the Company earned subscription revenue from its
video service. Subscription revenues during the three-month period ended
November 30, 1999 were $25,489, and zero in the current year.
Miscellaneous revenues were $299 during the three month period ended
November 30, 2000 and $133 during the comparative period in the prior year.
Miscellaneous revenues consist primarily of nominal interest income.
10
<PAGE>
Operating expenses totaled $284,165 during the three-month period ended
November 30, 2000 down from $1,996,100 in the comparable period in the prior
year. The decrease is the result of management's decision to cease operations of
the original business plan of providing live horseracing video to subscribers
homes under the DISH network service in return for wagering commissions, and
instead to seek to transform the Company into a diversified entity with
interests in a series of horseracing industry sectors, as described above.
The decrease in operating expenses of approximately $1,712,000 is
attributable primarily to a drop in transponder fees of $1,200,000 as a result
of the termination of the satellite distribution services agreement effective
August 3, 2000, a $296,000 decrease in advertising and marketing costs due to
ceasing marketing of the TrackPower video service, a $132,000 decrease in wages
and consulting costs through termination of administrative staff and consulting
agreements related to the TrackPower video service, and a $53,000 decrease in
professional fees, primarily legal fees. General and administrative expenses
were down approximately $31,000 in comparison to the prior year.
Other expenses/income totaled $198,460 during the three month period
ended November 30, 2000, and included a $100,000 loss on the Company's
marketable securities due to the perceived impairment in Vianet's share value,
$83,927 in interest expense ($34,034 in the comparative period in the prior
year) and $14,533 of depreciation of capital assets and amortization of
distribution rights and trademarks. The increased interest expense is a result
of the Company financing operating losses through the issuance of convertible
debt. During the quarter ended November 30, 2000, convertible debentures having
a total face value of $1,742,500 were converted to shares of the Company's
common stock. As a result, interest expense is expected to be reduced in the
fourth quarter.
The net loss during the three-month period ended November 30, 2000 was
$478,844 ($0.01 per share) compared to a net loss of $2,005,339 ($0.07 per
share) for the three month period ended November 30, 1999.
For the nine month period ended November 30, 2000
Revenues for the nine month period ended November 30, 2000 were
$118,501 compared to $51,803 during the comparative period in the prior year. As
described in the Overview section, although revenues were higher in the nine
month period ended November 30, 2000 compared to the prior year, many of the
Company's existing revenue streams will cease. These existing revenue streams
may be transferred to target acquisitions and could, therefore, be included in
the results of the Company's operations on either a consolidated basis or on a
proportionate ownership share basis.
Wagering commissions were $83,622 in the current period and $9,312 in
the prior year. The period increase is a result of comparatively more active
wagering accounts in the current period and the wagering hub agreement having
become effective on July 1, 1999. However, effective January 2001 the Company
made the decision to mutually agree to terminate the "hub" agreement with Penn
National effective August 2000. Therefore the Company will no longer accrue
wagering commissions.
The Company received $7,783 during the nine month period ended November
30, 2000 ($7,909 during the comparative period in the prior year), for royalties
under a sub-license
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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 nine month
period ended November 30, 1999 were $30,152, and zero in the current period.
Miscellaneous revenues were $27,096 during the nine month period ended
November 30, 2000 and $4,430 during the comparative period in the prior year.
Miscellaneous revenues during the nine month period ended November 30, 2000
consisted primarily of a sale of redundant set top box and dish equipment
previously written off by the Company.
Operating expenses totaled $2,479,098 during the nine month period
ended November 30, 2000 down from $3,763,509 in the prior period. The decrease
is the result of management's decision to cease operations of the original
business plan of providing live horseracing video to subscribers homes under the
DISH network service in return for wagering commissions, and instead to seek to
transform the Company into a diversified entity with interests in a series of
horseracing industry sectors, as described above.
The decrease in operating expenses of approximately $1,284,000 is
attributable to a drop in transponder fees of $1,200,000 as a result of the
termination of the satellite distribution services agreement effective August 3,
2000, and a $419,000 decrease in advertising and marketing costs due to ceasing
marketing of the TrackPower video service which was only partially offset by an
increase in professional fees of $206,000 due to certain transactions
contemplated earlier in the year, an increase in wages and consulting fees of
$65,000 due to various staffing and consulting increases put into place earlier
in the year and an increase in general and administrative expenses of $64,000.
General and administrative expenses were higher primarily due to increased
travel costs.
Other expenses/income totaled $597,608 during the nine month period
ended November 30, 2000, and included the write-off of a $125,000 acquisition
non-refundable deposit, $281,757 in interest expense ($79,909 in the comparative
period in the prior year), a $100,000 loss on the Company's marketable
securities due to perceived impairment in Vianet's share value, non-cash
financing expenses of $49,750 ($682,225 in the comparative period in the prior
year) and $41,101 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 nine month period ended
November 30, 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 nine month period ended November 30, 2000 was
$2,958,205 ($0.08 per share) compared to a net loss of $4,483,818 ($0.16 per
share) for the nine month period ended November 30, 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
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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 November 30, 2000, the market value
of the Company's investment in 80,000 common shares of Vianet Technologies Inc.
decreased from $124,960 on August 31, 2000 to $32,480 on November 30, 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 $92,480 for the quarter
ended November 30, 2000, offsetting by a reclassification of $100,000 of the
unrealized loss as a realized loss due to perceived permanent impairment in
Vianet's share value.
The Company made deposits of approximately $22,462 to Post Time
Technologies Inc. for the development of their products. Thus far the Company
has made deposits totaling $124,048 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 November 30, 2000, the Company had cash reserves of $9,229, an
investment in marketable securities valued at $32,480 and a working capital
deficit of $1,440,444. For the nine month period ended November 30, 2000, cash
used by operating activities amounted to $1,286,610, primarily as a result of
operating losses for the period which was offset by an increase in accounts
payable and accrued interest. Cash used by investing activities during the nine
month period ended November 30, 2000 amounted to $478,761 and consisted
primarily of $79,534 in deposits on the development of new interactive software
which could convert into an investment in the developer, a $125,000 acquisition
deposit, a $240,000 purchase of marketable securities and the purchase of
$34,227 in capital assets. Cash provided by financing activities during the nine
month period ended November 30, 2000 amounted to $1,523,112 and resulted from
the exercise of options of $866,570 and $192,542 in exercise of warrants and the
issuance of $464,000 in 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. During the three month period ended November 30,
2000 debenture holders converted debentures having a total face value of
$1,742,500 plus accrued interest of $123,511 into 3,732,025 shares of the
Company's common stock. At November 30, 2000, there were $2,996,500 outstanding
in convertible debentures. On October 31, 2000, the Company did not make the
scheduled interest payment, totaling approximately $227,000 as contemplated in
the convertible debenture agreements. As a result the Company may not be in
compliance with the terms of these
13
<PAGE>
agreements. Management plans to rectify this matter by requesting that debt
holders covert amounts due and accrued interest thereon into common stock. On
December 15, 2000, approximately $868,000 of convertible debt and accrued
interest were converted into 1,735,506 shares of the Company's common stock.
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.
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 $35,000 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 $0.20 per share. Upon
conversion a warrant is issued to purchase another common share exercisable at
$0.50 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. In addition, during the three month period ended
November 30, 2000 debenture holders converted debentures having a total face
value of $1,742,500 plus accrued interest of $123,511 into 3,732,025 shares of
the Company's common stock.
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.
15
<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
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).
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Exhibit Document
------- --------
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)
17
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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: JANUARY 16, 2001 BY: /s/ John G. Simmonds
----------------------------
John G. Simmonds
President / CEO / Director
(principal executive officer)
DATE: JANUARY 16, 2001 BY: /s/ Gary N. Hokkanen
----------------------------
Gary N. Hokkanen
Chief Financial Officer,
(principal financial officer)
18
