Esat 10-Q 2001 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q

(Mark One)
X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2001
	OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________________ to ____________________________

Commission File Number 000-26039
 
eSAT, INC.
(Exact name of registrant as specified in its charter)

NEVADA	88-0344604
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10 UNIVERSAL CITY PLAZA, SUITE 1130, UNIVERSAL CITY, CA 91608
(Address of principal executive offices, including zip code)
 
(818) 464-2670
(Registrant’s telephone number, 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 [   ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

PAR VALUE $.001	35,097,571
(Class of Common Stock)	(Outstanding at November 12, 2001)

TABLE OF CONTENTS

		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES

eSAT, INC. AND SUBSIDIARIES
 
TABLE OF CONTENTS

			PAGE
			NUMBER
PART I.	FINANCIAL INFORMATION
	ITEM 1.	FINANCIAL STATEMENTS.
		Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000		3
		Consolidated Statements of Operations for the three months and nine months ended September 30, 2001 and 2000		4
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000		5
		Notes to Consolidated Financial Statements		6
	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		10
PART II.	OTHER INFORMATION
	ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K		20
SIGNATURE				21

eSAT, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS

			SEPTEMBER 30,		DECEMBER 31,
			2001		2000
			(UNAUDITED)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	—	$	452,144
	Accounts receivable, net			612,507		787,428
	Inventory, net			8,335		176,495
	Deposits			—		159,850
	Other current assets			8,258		157,616
		Total current assets		629,100		1,733,533
PROPERTY AND EQUIPMENT, NET				1,006,285		1,358,072
OTHER ASSETS:
	Deposits			70,691		144,958
	Idle property			1,210,800		1,210,800
				1,281,491		1,355,758
			$	2,916,876	$	4,447,363

The accompanying notes are an integral part of the financial statements.

				SEPTEMBER 30,			DECEMBER 31,
				2001			2000
				(UNAUDITED)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
		Bank overdraft		$	12,292		$	—
		Note payable			1,425,903			—
		Accounts payable — trade			2,689,704			1,654,170
		Accounts payable — other			1,414,500			1,414,500
		Accrued expenses			377,245			395,464
		Unearned revenue			151,883			151,883
		Deferred revenue			44,696			316,398
		Current portion of obligations under capital lease			47,509			75,902
		Contracts payable			—			13,012
		Other current liabilities			22,047			23,048
		Notes payable stockholder			34,700			34,700
		Accrued loss contingencies			858,951			1,157,996
			Total current liabilities		7,079,430			5,237,073
LONG-TERM LIABILITIES:
		Obligations under capital lease			68,346			100,843
		Deferred revenue			96,980			324,700
					165,326			425,543
COMMITMENTS AND CONTINGENCIES					—			—
STOCKHOLDERS’ EQUITY:
	Preferred stock — Series C — cumulative, fully participating convertible, $0.001 par value Authorized — 50,000 shares, Issued and outstanding — 38,324 shares (Aggregate liquidation preference $3,832,362)				38			46
	Preferred stock — Series D, cumulative, fully participating, convertible, $0.001 par value Authorized — 75,000 shares, Issued and outstanding — 75,000 shares (Aggregate liquidation preference $7,499,925)				75			75
	Preferred stock — Series E, cumulative, fully participating, convertible, $0.001 par value Authorized — 30,000 shares, Issued and outstanding — 30,000 shares (Aggregate liquidation preference $2,999,970)				30			30
	Common stock — $0.001 par value				35,098			23,260
	Authorized — 100,000,000 shares Issued and outstanding — 35,097,571 shares at September 30, 2001
	Additional paid-in capital				32,413,416			32,431,554
	Retained deficit				(36,776,537	)		(33,670,218	)
			Total stockholders’ equity		(4,327,880	)		(1,215,253	)
				$	2,916,876		$	4,447,363

The accompanying notes are an integral part of the financial statements.

eSAT, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

			THREE MONTHS ENDED						NINE MONTHS ENDED
			SEPTEMBER 30,						SEPTEMBER 30,
			2001			2000			2001			2000
SALES			$	1,446,560		$	1,439,185		$	5,531,340		$	3,806,481
REVERSAL OF DEFERRED REVENUE				429,879			—			429,879			—
TOTAL REVENUE				1,876,439			1,439,185			5,961,219			3,806,481
COST OF SALES				1,877,459			1,618,468			5,767,437			4,240,657
REVERSAL OF DEFERRED COST OF SALES				215,740			—			215,740			—
		Total Cost of Sales		2,093,199			1,618,468			5,983,177			4,240,657
		Gross margin		(216,760	)		(179,283	)		(21,958	)		(434,176	)
GENERAL AND ADMINISTRATIVE EXPENSES				463,545			2,660,680			2,570,255			8,921,641
IMPAIRMENT LOSS				497,031			—			497,031			—
				960,576			2,660,680			3,067,286			8,921,641
		Loss from operations		(1,177,336	)		(2,839,963	)		(3,089,244	)		(9,355,817	)
OTHER INCOME (EXPENSE)
	Compensation adjustment recognized under APB 25			—			575,007			—			7,505,679
	Gain (loss) on sale of assets			—			—			44,696			25,000
	Interest income			—			2,703			—			30,966
	Other income (expense)			(2,963	)		(1,946	)		8,939			(1,651	)
	Interest (expense)			(36,015	)		(5,825	)		(70,710	)		(36,847	)
				(38,978	)		569,939			(17,075	)		7,523,147
		Income (loss) before income taxes and discontinued operations		(1,216,314	)		(2,270,024	)		(3,106,319	)		(1,832,670	)
PROVISION FOR INCOME TAXES				—			—			—			—
		Income (loss) before discontinued operations		(1,216,314	)		(2,270,024	)		(3,106,319	)		(1,832,670	)
DISCONTINUED OPERATIONS
	Loss from operations of discontinued subsidiary (less applicable income taxes of $-0-)			—			—			—			(1,184,404	)
	Loss on disposal of discontinued subsidiary including provision of $967,050 for operating losses during the phase out period (less applicable losses of $-0-)			—			—			—			(967,050	)
				—			—			—			(2,151,454	)
		Net loss	$	(1,216,314	)	$	(2,270,024	)	$	(3,106,319	)	$	(3,984,124	)
EARNINGS PER COMMON SHARE — BASIC AND DILUTED
	Loss before discontinued operations		$	(0.04	)	$	(0.10	)	$	(0.11	)	$	(0.09	)
	Discontinued operations		$	—		$	—		$	—		$	(0.10	)
	Net loss		$	(0.04	)	$	(0.10	)	$	(0.11	)	$	(0.19	)

The accompanying notes are an integral part of the financial statements.

eSAT, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

					NINE MONTHS ENDED
					SEPTEMBER 30,
					2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss				$	(3,106,319	)	$	(3,984,124	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Noncash items included in net income:
			Depreciation and amortization			347,787			719,170
			(Gain) loss on sale of assets			(44,696	)		(25,000	)
				Impairment loss		497,031			—
			Employee relocation expenses offset by note receivable reduction			—			182,500
			Compensation — stock options issued for services			—			919,249
			Compensation — stock issued for services			—			18,750
			Compensation adjustment recognized under APB 25			—			(7,505,679	)
			Bad debt expense			288,432			16,745
			Accrued interest			50,862			—
		Net change in operating assets and liabilities of discontinued operation				—			1,626,984
		Net change in operating assets and liabilities				316,393			1,073,982
				Net cash used in operating activities		(1,650,510	)		(6,957,423	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Payments for purchase of fixed assets					(189,768	)		(1,486,060	)
	Proceeds from sale of fixed assets					68,000			—
	Payments received on subscription receivable					—			558,510
	Accrued losses on discontinued operations					—			525,000
	Receipt of payments on note receivable related party					—			64,553
	Loan to discontinued operation					—			(832,119	)
	Purchase of Interwireless					—			(4,108,553	)
	Receipt of payment on note receivable					—			25,000
				Net cash used in investing activities		(121,768	)		(5,253,669	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Increase/(decrease) in notes payable					1,375,041			(250,347	)
	Decrease in capital lease obligation					(60,891	)		(48,966	)
	Payments on contracts payable					—			(54,025	)
	Payments on note payable related party					—			(66,235	)
	Member distributions					—			(111,423	)
	Preferred stock dividend paid					—			(86,667	)
	Proceeds from issuance of preferred stock					—			9,520,365
	Payments for capitalized equity-related costs					(6,308	)		—
				Net cash provided by financing activities		1,307,842			8,902,702
NET DECREASE IN CASH AND CASH EQUIVALENTS						(464,436	)		(3,308,390	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD						452,144			3,412,205
CASH AND CASH EQUIVALENTS (BANK OVERDRAFT), END OF PERIOD					$	(12,292	)	$	103,815

The accompanying notes are an integral part of the financial statements.

eSAT, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)

(1)	BASIS OF PRESENTATION
	In the opinion of management, the accompanying unaudited consolidated financial statements of eSAT, Inc. (the “Company”) include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly its financial position as of September 30, 2001, and the results of operations and stockholders’ equity for the three and nine months ended September 30, 2001 and 2000 and its cash flows for the nine months ended September 30, 2001 and 2000. The results of operations for the three and nine months ended September 30, 2001 and 2000, are not necessarily indicative of the results to be expected for the full year or for any future period. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. The consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
(2)	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
	Stock-Based Compensation
	The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of APB 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of SFAS 123, Accounting for Stock-Based Compensation. Under APB 25, compensation cost is recognized on fixed plans over the vesting period based on the difference, if any, on the date of grant between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock. For variable plans, APB 25 requires recognition of compensation cost over the vesting period based on the difference, if any, on the period-end date between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock. Forfeitures of variable plan options result in a reversal of previously recognized compensation cost.
	Due to the large number of variable plan options granted by the Company in 1998 and the significant difference between the exercise price of those options and the fair value of the Company’s stock at December 31, 1998, the Company recognized a substantial amount of non-cash compensation cost in 1998. Subsequently, a large number of forfeitures and the re-pricing to market of those options in 2000 caused a considerable reversal of the previously recognized non-cash compensation cost.

eSAT, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)

(2)	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
	Net Loss Per Share
	The following data show the amounts used in computing earnings per share. Basic and diluted earnings per share are the same because potentially dilutive securities would have an anti-dilutive effect. Such potentially dilutive securities include convertible preferred stock, options and warrants.

	THREE MONTHS ENDED SEPTEMBER 30,
	2001			2000
Income available to common stockholders before adjustments	$	(1,216,314	)	$	(2,270,024	)
Preferred stock dividend		—			—
Income available to common stockholders used in basic EPS	$	(1,216,314	)	$	(2,270,024	)
Weighted average number of common shares used in basic EPS		32,954,048			21,766,181

	NINE MONTHS ENDED SEPTEMBER 30,
	2001			2000
Income available to common stockholders before adjustments	$	(3,106,319	)	$	(3,984,124	)
Preferred stock dividend		—			(86,667	)
Income available to common stockholders used in basic EPS	$	(3,106,319	)	$	(4,070,791	)
Weighted average number of common shares used in basic EPS		28,560,941			21,528,155

Revenue Recognition

In accordance with SEC Staff Accounting Bulletin No. 101, the Company recognizes revenues from the sale of satellite access equipment over the life of the underlying access agreement, not upon the installation of the equipment. The unrecognized portion of the sales value of the equipment is recorded as deferred revenue and amortized using the straight-line method over the life of the satellite access contract.

During the quarter ended September 30, 2001, the Company phased out its VSAT satellite product line. Accordingly, all previously deferred revenue and cost of sales relating to the sales of satellite access equipment has been reversed in the Company’s financial statements.

eSAT, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)

GOING CONCERN

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern; however, the Company has sustained substantial operating losses in recent years. Additionally, the Company continues to experience negative cash flows. Due to its chronic cash shortages, the Company has failed to pay certain payroll taxes for certain officers and employees for several periods and failed to file certain required Forms 8-K reporting the departure of its Chief Financial Officer and the resignation of certain Board members. The Company continues to accrue compensation for certain officers and employees, may not have the cash required to pay such accrued compensation. The Company is attempting to sublease certain office space to defray costs, but has not located a suitable tenant. The Company is exploring possibilities of selling certain portions of its businesses, but no transactions have been completed or are eminent.

In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. The Company's management is unable to determine how long its cash flow will sustain its operations or whether certain creditors will initiate actions to collect amounts due. Accordingly, the Company will require either an increase in sales activity, or a substantial additional cash infusion to continue its operations. Management is not certain if additional capital will be available. Management is considering an asset sale or other comparable transaction as part of a financial restructuring. If the Company is not successful in completing a strategic transaction, it will be required to cease operations.

NOTE PAYABLE

Note payable consists of a $1,375,041 secured note, plus accrued interest to payable Wentworth, LLC. The note is secured by substantially all of the assets of the company. The note was originally in the amount of $325,000 in January, 2001 and was due April 30, 2001. In May 2001, the Company issued a secured note payable to Wentworth, LLC of up to $1,332,655. $325,000 of the note bears interest at 8% and represents a refinancing of the previous note due April 30, 2001. Amounts advanced in excess of $325,000 under the note bear interest at prime plus 4%. The note is due April 30, 2003. Additionally, should the Company receive funds as a result of the sale of stock or the sale of all or substantially all of the assets of any of its subsidiaries, it shall, after paying all reasonable expenses in connection with such sale, immediately pay the balance thereof in reduction of the amounts outstanding on the note.

COMMITMENTS AND CONTINGENCIES

The company has not made payments for several months under a lease obligation with a service provider. The service provider may take action ranging from termination of services to immediate demand of all amounts due under the lease through the end of the lease term. To date, no action has been taken by the service provider, however, the company cannot be certain as to the eventual outcome.

The Company is currently in default of its note payable. The creditor has the option of calling the note within five days notice. Such notice has not been received.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     RESULTS OF OPERATIONS

     Sales from continuing operations for the three months ended September 30, 2001 totaled $1,446,560 as compared to $1,439,185 in the prior year period. For the nine month period ended September 30, 2001, sales increased to $5,531,340 from $3,806,481 for the same period in the prior year. The 2001 revenue reflects an increase in subscriber based revenues at the Company’s managed internet services business in early 2001, and to a lesser extent, recognition of deferred revenues of the satellite services business. The reversal of deferred revenue of $429,879 represents the recognition of all remaining deferred revenue resulting from the phase out the VSAT product line of the Company's satellite services division in the current quarter.

     Cost of sales for the second quarter 2001 totaled $1,877,459 as compared to $1,618,468 in 2000. For the nine months ended September 30, 2001, cost of sales increased to $5,767,437 from $4,240,657 in the prior year period. The 2001 cost of sales reflects increases in staffing and operating costs at the Company’s wireless and managed internet services businesses during the first half of 2001, as well as increases in the recognition of previously deferred cost of sales at the satellite services business. Reversal of deferred cost of sales of $215,740 represents the recognition of all remaining deferred cost of sales resulting from the phase out the VSAT product line of the Company's satellite services division in the current quarter.

     General and administrative expenses decreased from $2,660,680 for the quarter ended September 30, 2000 to $463,545 in the current year period. For the nine month period ended September 30, 2001, general and administrative expenses totaled $2,570,255 as compared to $8,921,641 in the prior year period. The decrease is due to substantial personnel and other cost reductions undertaken at all of the Company’s corporate and operating divisions. The prior year balance also includes approximately $919,000 of SFAS 123 expense relating to the issuance of common stock warrants.

     The impairment loss of $497,031 recorded during the quarter ended September 30, 2001 represents the writedown to net realizable value of certain assets of the company's VSAT product line. This product line was phased out during the quarter ended September 30, 2001.

     Other income totaled ($38,978) and $(17,075), respectively, for the three and nine month periods ended September 30, 2001, as compared to $569,939 and $7,523,147, respectively, for the three and nine month periods ended September 30, 2000. The 2001 balance includes a gain on the sale of fixed assets as offset by interest expense, whereas the prior period balance represents primarily a compensation adjustment recognized under APB 25.

     For the nine month period ended September 30, 2000, the loss from the operations and disposal of the discontinued subsidiary total $1,184,404 and $967,050, respectively. These losses represent the Company’s interest in the net loss of its i-Xposure subsidiary. The Company sold the majority of its interest in this subsidiary in October 2000. The subsidiary is no longer in operation.

eSAT, INC. AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES

     Our operations have historically been financed from the sale of preferred and common stock. At September 30, 2001, the Company had cash and cash equivalents on hand of $(12,292) and working capital of ($6,450,330), as compared to cash and cash equivalents of $452,144 and working capital of ($3,503,540) at December 31, 2000.

     Net cash used in operating activities of ($1,650,510) for the nine months ended September 30, 2001 is attributable primarily to the operating loss as adjusted for non-cash charges and changes in the working capital of the company. Net cash used in operating activities in the prior period of ($6,957,423) includes the effect of a compensation expense recognized under APB 25 and FAS 123.

     Net cash used in investing activities of ($121,768) for the nine months ended September 30, 2001 is attributable to the purchase and sale of fixed assets. Net cash used in investing activities of ($5,253,669) for the nine months ended September 30, 2000 represents primarily the purchase of Interwireless as offset by the recognition of the disposal of the Company’s investment in the i-Xposure subsidiary.

     Net cash provided by financing activities of $1,307,842 for the nine months ended September 30, 2001 represents primarily the Company’s issuance of a note payable to an investor. Net cash provided by financing activities of $8,902,702 in the prior year period primarily results from the issuance of preferred stock.

     In January, 2001 the Company received funding of $325,000 through the issuance of a secured note to Wentworth, LLC. The note bears interest at 8%, was originally due on April 30, 2001 and is collateralized by all of the assets of the Company. Concurrent with this funding, the company entered into an agreement with Wentworth, LLC whereby the $2,000,000 previously advanced under the Private Equity Credit Agreement in October, 2000 will be converted to a secured note also collateralized by the assets of the company. The note is expected to be convertible to equity under provisions substantially identical to those of the Private Equity Credit Agreement entered into by the Company in August, 2000.

     In May, 2001 the Company issued a note to Wentworth LLC of up to $1,332,655. This note incorporates the balance and terms of the $325,000 note issued in January, 2001, and is collateralized by all of the assets of the Company. The remainder of the May, 2001 note bears interest at prime plus 4%. The May, 2001 note is due April 30, 2003. A total of $1,375,041 has been advanced under this note.

     Since November 15, 2000, the Company has stated that its cash, cash equivalents and cash that may be generated from operations are not expected to be sufficient to meet its operating needs. The Company continues to experience negative cash flows. Due to its chronic cash shortages, the Company has failed to pay certain payroll taxes for certain officers and employees for several periods and failed to file certain required Forms 8-K reporting the departure of its Chief Financial Officer and the resignation of certain Board members. The Company continues to accrue compensation for certain officers and employees, but may not have the cash required to pay such accrued compensation. The Company is attempting to sublease certain office space to defray costs, but has not located a suitable tenant. The Company is exploring possibilities of selling certain portions of its businesses, but no transactions have been completed or are eminent.

     In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements, and the success of its future operations. The Company’s management is unable to determine how long its cash flow will sustain its operations or whether certain creditors will initiate actions to collect amounts due. Accordingly, the Company will require either an increase in sales activity, or a substantial additional cash infusion to continue its operations. Management is not certain if additional capital will be available. Management is considering an asset sale or other comparable transaction as part of a financial restructuring. If the Company is not successful in completing a strategic transaction, it will be required to cease operations.

     The Company is currently assessing strategic alternatives that may include an asset sale or comparable transaction as part of a financial restructuring. However, in the event that it is unsuccessful in completing one of these strategic alternatives, it would be required to cease operations. In that case, the Company’s common stock will have no value. In addition, potential investors in its securities should consider the risk that, even if the Company is successful in completing a strategic transaction as described above, its common stock will nonetheless have no value.

RISK FACTORS

WE WILL CEASE OPERATIONS UNLESS WE EXPERIENCE INCREASED SALES ACTIVITY, OBTAIN ADDITIONAL CAPITAL OR PURSUE OTHER STRATEGIC ALTERNATIVES

     The Company continues to experience negative cash flows. Due to its chronic cash shortages, the Company has failed to pay certain payroll taxes for certain officers and employees for several periods and failed to file certain required Forms 8-K reporting the departure of its Chief Financial Officer and the resignation of certain Board members. The Company continues to accrue compensation for certain officers and employees, but may not have the cash required to pay such accrued compensation. The Company is attempting to sublease certain office space to defray costs, but has not located a suitable tenant. The Company is exploring possibilities of selling certain portions of its businesses, but no transactions have been completed or are eminent.

     In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. The Company's management is unable to determine how long its cash flow will sustain its operations or whether certain creditors will initiate actions to collect amounts due. Accordingly, the Company will require either an increase in sales activity, or a substantial additional cash infusion to continue its operations. Management is not certain if additional capital will be available. Management is considering an asset sale or other comparable transaction as part of a financial restructuring. If the Company is not successful in completing a strategic transaction, it will be required to cease operations.

AS A RESULT OF QUESTIONS CONCERNING OUR STATUS AS A GOING CONCERN, OUR CUSTOMERS AND VENDORS MAY DECIDE NOT TO DO BUSINESS WITH US

     Due to concerns regarding our ability to continue operations, customers and vendors are likely to decide not to conduct business with us, or may conduct business with us on terms that are less favorable than those customarily extended by them. In that event, our net sales would further decrease, and our business will suffer significantly.

OUR FINANCIAL STATEMENTS CONTAIN A “GOING CONCERN” QUALIFICATION.

     The audit reports accompanying our financial statements for the years ended December 31, 2000 and 1999 contain a qualification that certain conditions indicate that we may not be able to continue as a going concern. The financial statements do not contain any adjustments that might be necessary in such a case. Note 2 to the financial statements indicates that substantial operating losses account for this uncertainty. Many investment bankers and investors view companies with a “going concern” qualification as less desirable for investment. Accordingly, we will have a more difficult time raising equity capital or borrowing capital at all on favorable terms. Our suppliers might be less willing to extend credit. Our potential customers might be less willing to purchase our products and services if they believe that we will not be viable enough to provide service, support, back-up, and follow-on products when needed. Furthermore, we might be disadvantaged in recruiting employees who might be concerned about the stability of employment with us. Therefore, the “going concern” qualification can have severe adverse consequences on us.

WE ARE DEFENDANTS IN TWO LAWSUITS WHICH, IF SUCCESSFUL, COULD FORCE US TO SEEK PROTECTION FROM THE BANKRUPTCY COURT.

     In January 2001, a claim was asserted against the Company by two shareholders alleging fraud and material omission of fact as represented by the current and a former Chief Executive Officer of the Company. The claim alleges damages of $434,000. The Company believes the claim to be without merit and intends to vigorously defend itself. No accrual for a potential loss is reflected in the accompanying financial statements.

     In January 2001, i-xposure, Inc. filed a lawsuit against us seeking approximately $351,000 plus interest and costs, allegedly due from us under guaranties which were part of a bridge financing arrangement. Due to our limited working capital position, if we cannot successfully defend either of these actions, we may be forced to seek protection from the bankruptcy court. That circumstance would likely have a material and negative impact on the value of your investment.

statements. Due to our limited working capital position, if we cannot successfully defend either of these actions, we may be forced to seek protection from the bankruptcy court. That circumstance would likely have a material and negative impact on the value of your investment.

WE ARE HIGHLY DEPENDENT ON THE UNINTERRUPTED OPERATION OF THE NETWORK OPERATIONS CENTER AT OUR UNIVERSAL CITY, CALIFORNIA, SITE.

     We currently have all of the equipment used for our PacificNet subsidiary’s network operations located in our Universal City facility. While it is protected by standard protective devices such as redundant power supplies, multiple internet connections, fire systems, climate control, and 24 hour security/access control, we are at risk for catastrophic events that would require a backup location. Failure of this equipment for any material length of time would adversely affect our revenue generated from our managed internet services business which presently accounts for a substantial portion of our revenue.

WE ARE CURRENTLY DEPENDENT ON A SINGLE CUSTOMER FOR A SIGNIFICANT PORTION OF OUR REVENUE.

     We provide and manage the actual connection to the Internet to the subscriber base of a large national telephone dial-up Internet access provider. Approximately 55 percent of our revenues in the third quarter of 2001 were generated by our service to that company. Furthermore, the Company anticipates that this account will terminate its contract with the company in the near term. Loss of this account will have a material adverse effect on our revenues, which could negatively affect the value of your investment.

WE ARE CURRENTLY ASSESSING THE DISCONTINUATION OF CERTAIN OF OUR BUSINESS LINES. THIS WILL RESULT IN OUR BEING A SMALLER COMPANY.

     While a reorganization is expected to reduce our operating losses, it will also reduce the size of our operations and reduce our visibility in the satellite and/or Internet service provider community. Our reduced size could result in our being less competitive. It could also reduce the value of your investment.

WE HAVE A LIMITED OPERATING HISTORY.

     We were incorporated in 1995, but did not commence operations until 1997. Since then, our business has been substantially refocused and is currently undergoing further assessment. Thus, we have a limited operating history upon which an evaluation of us can be based. Our prospects are subject to the risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for Internet products and services. In addition, should we survive as a going concern in the near term, we will be subject to all of the risks, uncertainties, expenses, delays, problems and difficulties typically encountered in the growth of an emerging business and the development and market acceptance of new products and services. There can be no assurance that unanticipated expenses, problems or technical difficulties will not occur which would result in material delays in market acceptance of our products and services or that our efforts will result in such market acceptance.

TIMING OF ORDERS FOR AND CONTINUED DEVELOPMENT OF OUR SERVICES AND PRODUCTS WILL CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE AND CONSEQUENTLY YOU SHOULD NOT RELY ON THE RESULTS OF ANY PERIOD AS AN INDICATION OF FUTURE PERFORMANCE.

     We have experienced material period-to-period fluctuations in revenue and operating results. We anticipate that these periodic fluctuations in revenue and operating results will occur in the future. We attribute these fluctuations to a variety of business conditions that include:

the volume and timing of orders we receive from quarter to quarter;
the introduction and acceptance of our new services and products and product enhancements by us;
purchasing patterns of our customers and distributors; and
market acceptance of services and products sold by our distributors.

     As a result, we believe that quarterly revenue and operating results are likely to vary significantly in the future and that quarter-to-quarter comparisons of our operating results may not be meaningful. You should therefore not rely on the results of one quarter as an indication of future performance.

OUR INTELLECTUAL PROPERTY MAY BE CHALLENGED.

     As is the case with many technology companies, the rapid pace of change in technology could cause our intellectual property to be challenged. These challenges could come from stronger companies who believe that the use of our technology interferes with their use or that they own all of the technology and related rights. If any of these challenges were successful, our ability to sell products based on our technology or intellectual property could be severely impaired.

WE MUST DO BUSINESS IN A DEVELOPING MARKET AND FACE NEW ENTRANTS. FAILURE TO MEET THE CHALLENGES OF NEW PRODUCTS AND SERVICES AND COMPETITORS WILL REDUCE OUR MARKET SHARE AND THE VALUE OF YOUR INVESTMENT.

     The market for Internet products and computer software is rapidly evolving and is characterized by an increasing number of market entrants who have introduced or developed products and services. The diverse segments of the Internet market may not provide opportunities for more than one dominant supplier of products and services similar to ours. If a single supplier other than us dominates one or more market segments, our revenue is likely to decline and we will become a less valuable company.

BECAUSE WE LACK THE NAME RECOGNITION, CUSTOMER BASE AND RESOURCES OF OTHER COMPANIES PROVIDING INTERNET ACCESS AND OTHER INTERNET RELATED PRODUCTS AND SERVICES, WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WHICH WOULD REDUCE OUR REVENUE AND THE VALUE OF YOUR INVESTMENT.

     The markets for our products are intensely competitive and are likely to become even more competitive. Increased competition could result in:

pricing pressures, resulting in reduced margins;
decreased volume, resulting in reduced revenue; or
the failure of our products and services to achieve or maintain market acceptance.

     Any of these occurrences could have a material adverse effect on our business, financial condition and operating results. Our products and services face intense competition from multiple competing vendors. Our principal competitors in the Internet management business are IBM Corporation and TRW, Inc. Our principal competitors in the satellite services business are Loral Inc. and Hughes Network Systems. Many of our current and potential competitors have:

longer operating histories,
greater name recognition,
access to larger customer bases, or
substantially greater resources than we have.

     As a result, our principal competitors may respond more quickly than we can to new or changing opportunities and technologies. For all of the reasons stated above, we may be

unable to compete successfully against our current and future competitors.

WE HAVE NO ASSURANCE OF MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES. IF WE ARE UNABLE TO RAISE MARKET AWARENESS OF OUR PRODUCTS AND SERVICES, WE MAY EXPERIENCE DECLINING OPERATING RESULTS WHICH WOULD DIMINISH THE VALUE OF YOUR INVESTMENT.

     We are at an early stage of development and our earnings depend primarily upon market acceptance of our products and services. There can be no assurance that our development efforts will progress further with respect to any potential new services or that they will be successfully completed. In addition, there can be no assurance that our potential new services will achieve customer acceptance.

     There can be no assurance that our services will be successfully marketed. In addition to our own direct sales force, we use value-added resellers and distributors to market our satellite products and services. There is no assurance that any distributor or other reseller will be successful in marketing our products.

WE MIGHT BECOME SUBJECT TO FURTHER GOVERNMENT REGULATION WHICH COULD HARM OUR PROSPECTS.

     Except for a license from the Federal Communications Commission, we are not currently subject to direct regulation by any government agency in the United States, other than regulations applicable to businesses generally. There are currently few laws or regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, it is possible that laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, pricing and characteristics and quality of products and services. Such laws or regulations could limit the growth of the Internet, which could in turn decrease the demand for our proposed products and services or increase our cost of doing business. Any new legislation or regulation or the application of existing laws and regulations to the Internet in unexpected ways could have an adverse effect on our business and prospects.

WE MIGHT FACE LIABILITY FOR INFORMATION OBTAINED OR DISTRIBUTED THROUGH THE PRODUCTS AND SERVICES WE PROVIDE.

     Because materials may be downloaded by the Internet services which we operate or facilitate and may be subsequently distributed to others, there is a possibility that claims will be made against us for defamation, negligence, copyright or trademark infringement, personal injury or other theories based on the nature and content of such materials. Such claims have sometimes been successful against Internet service providers. Our general liability insurance might not cover potential claims of this type or might not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability or legal defense expenses that are not covered by insurance or that are in excess of insurance coverage could have a material adverse effect on our business, operating results and financial condition.

LOSS OF KEY MEMBERS OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS AND PROSPECTS.

     Our success will be dependent largely upon the personal efforts of our Chief Executive Officer and Chairman of the Board, Chester L. Noblett, and David Pennells, Senior Vice President of the company and President of PacificNet, as well as other senior managers. The loss of their services could have a material adverse effect on our business and prospects. We have no life insurance on any of our officers. Mr. Noblett’s and Mr. Pennells’ services are governed by contracts. Our success is also dependent upon our ability to hire and retain additional qualified management, marketing, technical, financial and other personnel. Competition for qualified personnel is intense and there can be no assurance that we will be able to hire or retain qualified personnel. Any inability to attract and retain qualified management and other personnel could have a material adverse effect on us.

OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES. YOU MAY HAVE GREATER DIFFICULTY SELLING YOUR SHARES.

     The Securities Enforcement and Penny Stock Reform Act of 1990 applies to stock characterized as “penny stocks,” and requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Securities and Exchange Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. The exceptions include exchange-listed equity securities and any equity security issued by an issuer that has

net tangible assets of at least $2,000,000, if the issuer has been in continuous operation for at least three years;
net tangible assets of at least $5,000,000, if the issuer has been in continuous operation for less than three years; or
average annual revenue of at least $6,000,000 for the last three years.

     Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks.

     Our financial condition does not meet the above tests. Thus, trading in the common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9 promulgated under the Securities Exchange Act. Under those rules, broker-dealers who recommend such securities to persons other than their established customers and institutional accredited investors must make a special written suitability determination for the purchaser and must have received the purchaser’s written agreement to a transaction prior to sale. These regulations would likely limit the ability of broker-dealers to trade in our common stock and thus would make it more difficult for purchasers of common stock to sell their securities in the secondary market. The market liquidity for the common stock could be severely affected.

WE WILL PAY NO DIVIDENDS TO YOU.

     We have not paid, and do not expect to pay, any dividends on common stock in the foreseeable future.

MANY SHARES WILL BECOME ELIGIBLE FOR FUTURE SALE, WHICH MIGHT ADVERSELY AFFECT THE MARKET PRICE FOR THE SHARES.

     As of November 10, 2001, there are 4,896,211 shares of our common stock outstanding which cannot be sold on the public market. Of these shares, 277,184 shares are held by directors, officers, or stockholders who have beneficial ownership of 10% or more of the outstanding shares, excluding shares subject to options held by them. 4,619,027 shares are held by other stockholders. These shares will become eligible for trading at various dates in 2001. In addition, shares of common stock which may be acquired pursuant to outstanding convertible preferred stock or warrants will be eligible for trading at various dates after they are acquired. We are unable to predict the effect that sales of such shares may have on the then prevailing market price of the common stock. Nonetheless, the possibility exists that the sale of these shares may have a depressive effect on the price of our common stock.

FORWARD-LOOKING STATEMENTS

YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS.

     This prospectus contains forward-looking statements that involve risks and uncertainties. Discussions containing forward-looking statements may be found in the material set forth under “Prospectus summary,” “Management’s discussion and analysis of financial condition and results of operations,” and “Business,” as well as within this

prospectus generally. In addition, when used in this prospectus, the words “believes,” “intends,” “plans,” “anticipates,” “expects,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements as a result of the risk factors set forth and the information provided in this prospectus generally. We do not intend to update any forward-looking statements.

eSAT, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION

     ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

                      (a)     EXHIBITS

                                none

                      (b) ��   REPORTS ON FORM 8-K.

                                none

eSAT, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized.

	eSAT, INC.
Date: November 14, 2001	By:	/s/ Chet Noblett
		Chet Noblett Acting Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)