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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 2000
Commission File No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. ___)
ESAT, INC.
(Name of small business issuer in its charter)
Nevada 7370 95-0344604
------------------------------ ---------------------------- -----------------------
(State or Jurisdiction of (Primary Standard Industrial (IRS Employer
Organization or Incorporation) Classification Code Number) Identification Number)
16520 Harbor Boulevard, Building G
Fountain Valley, California 92708
714-418-3200
(Address and telephone number of principal executive
offices and principal place of business)
Michael Palmer, President
eSat, Inc.
16520 Harbor Boulevard, Building G
Fountain Valley, California 92708
714-418-3200
(Name, address and telephone number of agent for service)
Copy to:
David R. Decker, Esq.
Arter & Hadden LLP
725 South Figueroa Street, 34th Floor
Los Angeles, California 90017
Approximate date of proposed sale to the public: AS SOON AS PRACTICAL AFTER THE
EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]_______________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_______________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_______________________
If delivery of the prospectus is expected to be made pursuant to rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed
Title of Each Class Proposed Maximum Maximum Amount of
of Securities to be Amount Offering Price Aggregate Registration
Registered to be Registered Per Share Offering Price Fee
-------------------- ---------------- ----------------- -------------- ------------
Common Stock, par value $.001
per share, Underlying Series A
12% Convertible Preferred Stock 1,000,000 $2.00 $2,000,000 $528.00(1)
Common Stock, par value $.001
per share, Underlying Series B
12% Convertible Preferred Stock 2,500,000 $2.00 $5,000,000 $1,320.00(1)
Common Stock, par value $.001
per share, Underlying Series C
6% Convertible Preferred Stock 2,457,143 $4.375 $10,750,000.00 $2,838.00(1)
Future Issuances of Common Stock,
par value $.001 per share, upon
Conversion of Preferred Stock
issuable pursuant to Equity Line
of Credit with Holder of Series C
Preferred Stock 6,303,980 $5.00 $31,519,900.00 $8,321.25(1)
Common Stock, par value $.001
per share, issuable upon
exercise of Warrants issued in
connection with the issuance
of Series C 6% Convertible
Preferred Stock 238,877 $4.617 $1,102,895.10 $291.16(1)
Common Stock, par value $.001
per share, for Selling
Shareholder 159,286 $ 6.00 $ 955,716.00 $252.31(2)
(1) Fee determined pursuant to Rule 457(g).
(2) Fee determined pursuant to Rule 457(c).
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Subject to Completion, Dated January __, 2000
Prospectus
_______________ Shares
eSAT, INC.
Common Stock
______________________
Selling stockholders are offering up to _______________ shares of our
common stock. We will not receive any proceeds from the sale of this common
stock. No shares are being sold by the company at this time.
The selling stockholders may sell these shares from time to time in the
over-the-counter market or otherwise.
Our common stock is traded on the OTC Electronic Bulletin Board under
the symbol "ASAT," and on the Deutsche Borse AG Xetra(TM) (Frankfurt, Germany)
under the symbol "ES8." On January 21, 2000, the last reported bid price of the
common stock on the OTC Electronic Bulletin Board was $5.25 per share.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
_______________, 2000
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You may rely only on the information contained in this prospectus. We
have not authorized anyone to provide information different from that contained
in this prospectus. Neither the delivery of this prospectus nor sale of shares
means that information contained in this prospectus is correct after the date of
this prospectus. This prospectus is not an offer to sell or solicitation of an
offer to buy these securities in any circumstances under which the offer or
solicitation is unlawful.
TABLE OF CONTENTS
Page
----
Prospectus summary...........................................................................1
Risk factors.................................................................................4
Use of proceeds.............................................................................12
Forward-looking statements..................................................................12
Price range of common stock.................................................................12
Dividend policy.............................................................................13
Capitalization..............................................................................13
Selected consolidated financial data........................................................14
Management's discussion and analysis of financial condition and results of operations.......16
Business....................................................................................18
Management..................................................................................27
Certain transactions........................................................................31
Principal stockholders......................................................................34
Selling stockholders........................................................................37
Description of securities...................................................................38
Shares eligible for future sale.............................................................43
Plan of distribution........................................................................44
Legal matters...............................................................................45
Experts ....................................................................................45
Additional information......................................................................46
Until _______________, 2000 (40 days after the date of this prospectus),
all dealers effecting transactions in the common stock may be required to
deliver a prospectus. This is in addition to the obligations of dealers to
deliver a prospectus when acting as underwriters.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the risks of investing in our common stock,
and our financial statements and notes to those statements appearing elsewhere
in this prospectus.
OUR BUSINESS
We were incorporated in the State of Nevada on June 23, 1995 under the
name U.S. Connect 1995, Inc. On October 8, 1998, we became the surviving
corporation in a merger with Technology Guardian, Inc., a California
corporation. As a part of that merger, we changed our name to Technology
Guardian, Inc. We changed our name to eSAT, Inc. on January 26, 1999. Our
principal executive offices are located at 16520 Harbor Boulevard, Building G,
Fountain Valley, California 92708, and our telephone and fax numbers are
714-418-3200 and 714-418-3220, respectively. Our Web site address is
www.esatinc.com. Information accessed on or through our Web site does NOT
constitute a part of this prospectus.
Our principal line of business consists of providing products and
services for satellite Internet access and data delivery. Our customers are
businesses, educational institutions and governmental agencies. In the future,
we may expand our services to the consumer market. Our Internet access product
line is based on our Global Satellite Internet ("GSI(TM)") gateway, our
Nexstream(TM) gateway and our ChannelCasting(TM) service all of which provide
existing single workplace computer networks (commonly known as local area
networks or LANs) with Internet access via a satellite based network. A
"gateway" is a specially designated computer which contains software that allows
LAN users to share an Internet access connection.
Our GSI(TM) product line utilizes our satellite network for
communications from the Internet to our customers and a telephone line for
outbound communications from our customers to the Internet. We expect to
actively commence sales of the Nexstream product line in the first half of 2000.
This product uses our satellite network for customer communications to and from
Internet web sites. The ChannelCasting(TM) service is currently being marketed.
This service is designed to provide the simultaneous broadcast of video and data
files to multiple destinations through use of our existing technology, as well
as technology which is under development. We plan to be a geographically diverse
provider of Internet services by establishing joint venture relationships in
several countries throughout the world.
In addition to our core business described above, we are in the process
of developing three other lines of business through our subsidiaries, Global
Media Technologies, SkyFrames, inc. (dba SkySP(TM)) and i-xposure, Inc. Global
Media Technologies, Inc. is focusing on the development of satellite-based
products which take advantage of our high-speed, high-quality video and data
delivery capabilities. SkySP(TM) is focusing on use of our satellite and
networking technology to provide cost-effective, uniform Internet delivery
platform through school systems without geographic limitations. Through
i.xposure, we are engaged in the development and marketing of a personal
interactive desktop organizer which includes a variety of personal productivity
programs, as well as serving as an Internet access portal when users are
on-line.
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THE OFFERING
Shares offered.............................. _______________ shares of common stock
Proceeds to us.............................. None. All sales will be for the benefit of
the selling stockholders
Common stock to be outstanding after the
offering.................................. _______________ shares
OTC Electronic Bulletin Board symbol........ ASAT
Deutsche Borse AG Xetra(TM) (Frankfurt,
Germany).................................. ES8
In addition to _______________ shares of common stock outstanding after
the offering, we may issue _______________ shares of common stock on the
conversion of outstanding convertible securities, _______________ shares of
common stock on exercise of outstanding warrants, and _______________ shares of
common stock on exercise of outstanding options.
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SUMMARY CONSOLIDATED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Unaudited
Year Ended nine months ended
December 31, September 30,
------------------------- -------------------------
1997 1998 1998 1999
------- ------- ------- -------
(in thousands except per share data)
Net revenue ................................ $ 1,201 $ 341 $ 238 $ 1,188
Gross profit ............................... 856 (344) (213) 421
Loss from operations ....................... (316) (2,696) (1,640) (6,363)
Net loss ................................... $ (454) $(2,727) $(1,408) $(6,323)
Basic and fully-diluted loss per share...... $ (0.04) $ (0.17) $ (0.12) $ (0.37)
The following table indicates a summary of our balance sheet as of
December 31, 1998 and September 30, 1999. The column labeled "as adjusted"
reflects our receipt of net proceeds from the sale of 50,000 shares of Series C
6% Convertible Preferred Stock at $100 per share in December 1999.
CONSOLIDATED BALANCE SHEET DATA
Unaudited
September 30, 1999
December 31, --------------------------
1998 Actual As adjusted
------------ ------- -----------
(in thousands)
Cash and cash equivalents .................. $ 2,568 $ 12 $ 4,461
Working capital ............................ 2,382 (1,154) 3,295
Total assets ............................... 3,261 1,450 5,899
Total stockholders' equity (deficit)........ 2,722 (149) 4,300
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RISK FACTORS
WE HAVE REPORTED LOSSES FOR OUR LAST TWO YEARS AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999, AND, IF WE DO NOT BECOME PROFITABLE, OUR BUSINESS COULD BE
ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT COULD DECLINE.
For the nine months ended September 30, 1999, we incurred a loss of
$6,323,336, including all research and development costs. For the fiscal year
ended December 31, 1998, we incurred a loss of $3,290,336 as compared to a loss
of $453,798 for the fiscal year ended December 31, 1997. The losses were
primarily due to: (i) employee compensation which increased because of
additional sales and operations staff hired in 1998 in anticipation of future
growth of our operations; (ii) expenses related to marketing; and (iii) lack of
product sales. In addition, we incurred significant research and development
costs associated with new products. There can be no assurance that we will be
able to generate sufficient revenues to operate profitably in the future or to
pay our debts as they become due. The Company is dependent upon successful
completion of future capital infusions to continue operations.
WE DEPEND ON SATELLITE TRANSMISSION. SATELLITE FAILURE COULD HAVE A SUBSTANTIAL
NEGATIVE AFFECT ON OUR BUSINESS OPERATIONS.
We currently use a single satellite to provide satellite Internet
services. There is risk associated with this dependence. There are two types of
possible failures to the satellite: a failure of the individual transponder that
is used and a failure of the entire satellite. If there is a failure of a
transponder, the satellite operator contractually obligated to move us to
another transponder. This would create a minimum interruption to customers,
likely less than 24 hours. If the satellite itself completely fails, we will
have to move our services to another satellite. Our transmissions conform to
industry standards so there are several possible alternative satellites. Our
current satellite provider engages in quarterly reviews of available
like-satellite space and is ready to contract for that space if needed. If the
entire satellite were to fail, a one to five day outage of services might occur
depending on the availability of other satellites. Additionally, a repointing of
the receiving dishes on the ground would likely be required. The repointing of
the receiving dishes on the ground would cost us approximately $300 per
customer. In the event of any service disruption due to satellite failure, our
customers would be credited for the dollar value of the amount of time they are
without the satellite Internet service. Based on a standard contract paying $495
per month for the use of our GSI(TM) equipment and related satellite Internet
service, this would be equal to $16.50 per day per customer. We intend to
install a second U.S. Network Operating Center ("NOC") in the first half of
fiscal 2000. This second NOC will be located in Orange County, California, and
will utilize a different satellite than the existing NOC. This second NOC and
satellite provides certain redundancies in the event of a failure. In the event
of a satellite failure, we could also be subject to loss-of-business claims, due
to the reliance by business customers on the satellite Internet services we
provide. A sustained disruption in satellite service could materially impact our
ability to continue operations.
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WE MIGHT NOT BE SUCCESSFUL IN IMPLEMENTING OUR DOMESTIC AND WORLDWIDE PROPOSED
EXPANSION WHICH WILL RESULT IN OUR BEING A SMALLER AND LESS COMPETITIVE COMPANY.
Over the next two years, we intend to expand our operations domestically
and internationally, and will seek to expand the range of our services and
penetrate new geographic markets.
However, we have no experience in effectuating rapid expansion or in
managing operations which are geographically dispersed. There can be no
assurance that our current management, personnel and other corporate
infrastructure will be adequate to manage our growth. Expansion internationally
will require joint venture partners outside the United States which will provide
capital and personnel to fund the operations internationally. As a company, we
have very limited experience in international joint venture transactions. We
have no joint venture partners at this time. There can be no assurance that we
will be able to successfully joint venture with entities in other parts of the
world, or that joint venture partners will be able to raise the capital and
employ the personnel required to successfully implement worldwide operations.
Accordingly, there is significant risk that we will not be able to meet our goal
of substantial domestic and international expansion within the next two years.
Failure to complete our intended expansion will result in our being a smaller
and less competitive company.
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. 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
and interactive media products and services. In addition, 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;
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- 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
product 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 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 might 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 MARKET, 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 to achieve or maintain market
acceptance.
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Any of these occurrences could have a material adverse effect on our
business, financial condition and operating results. Each of our products faces
intense competition from multiple competing vendors. Our principal competitors
include Loral, Inc., Hughes Network System and Spacenet. Many of our current and
potential competitors have:
- longer operating histories,
- greater name recognition,
- access to larger customer basis, 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 MAY HAVE INSUFFICIENT CAPITAL FOR FUTURE OPERATIONS WHICH WOULD DIMINISH THE
VALUE OF YOUR INVESTMENT.
Based on current proposed plans and assumptions relating to our
operations, we anticipate that current cash reserves, together with projected
cash flow from operations and the sale of additional securities, will be
sufficient to satisfy our contemplated cash requirements through fiscal 2000.
Thereafter, we will require substantial additional financial resources to fund
its operations. The expansion into new product areas will also require
substantial financial funding. The failure to acquire additional funding when
required will have a material adverse effect on our business prospects. Without
the proper financing of customer contracts by a finance company or additional
equity, we are likely to have difficulty in sustaining on-going operations.
OUR FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION.
The audit report accompanying our Financial Statements for the year
ended December 31, 1998 contains a qualification that certain conditions
indicate that we might 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 O to the financial statements indicates that recurring operating
losses, working capital deficiencies and significant bad debts from accounts
receivable account for this uncertainty. Many investment bankers and investors
view companies with a "going concern" qualification as less desirable for
investment. Accordingly, we might have a more difficult time raising equity
capital or borrowing capital at all or 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
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employment with us. Therefore, the "going concern" qualification can have severe
adverse consequences on us.
WE ARE DEPENDENT ON SUCCESSFUL NEW PRODUCTS AND PRODUCT ENHANCEMENT
INTRODUCTIONS AND MAY SUFFER PRODUCT DELAYS.
Our success in the Internet access business depends on, among other
things, the timely introduction of successful new products or enhancements of
existing products to replace declining revenues from older, less efficient
products. Consumer preferences for software products are difficult to predict,
and few consumer software products achieve sustained market acceptance. If
revenues from new products or enhancements do not replace declining revenues
from existing products, our business, operating results and financial condition
could be materially adversely affected. The process of developing Internet
access products such as ours is extremely complex and is expected to become more
complex. A significant delay in the introduction of one or more new products or
enhancements could have a material adverse effect on the ultimate success of
such products and on our business, operating results and financial condition.
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 growth depends
primarily upon market acceptance of our products and services. There can be no
assurance that our product development efforts will progress further with
respect to any potential new products or that they will be successfully
completed. In addition, there can be no assurance that our potential new
products will be capable of being produced in commercial quantities at
reasonable costs or that they will achieve customer acceptance.
There can be no assurance that our products and services will be
successfully marketed. In addition to our own direct sales force, we are
dependent on value-added resellers and distributors to market its products.
There is no assurance that any distributor or other reseller will be successful
in marketing our products.
Our success is dependent in part on our ability to sell our products and
services to governmental agencies, including public school districts, and large
business organizations. Selling to governmental agencies and larger companies
generally requires a long sales process, with multiple layers of review and
approval.
In sales to governmental agencies, nonbusiness factors often enter into
the purchase decision. Such factors include the residence and origin of the
supplier of the products, the nature of the supplier and the distributor, the
ethnic and gender characteristics of personnel and owners of the company selling
or distributing the products, political and other contacts, and other peculiar
factors. Accordingly, the success of selling to these potential customers is
uncertain.
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We do not have sufficient experience in marketing our products to
determine the optimum distribution methods. It is unclear whether marketing
through distributors or value-added resellers or mass retailers will result in
acceptable sales levels. Accordingly, as we learn more, we might have to revise
our sales, distribution, and marketing strategies and implementation.
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
the Company's 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
potential 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. Sometimes, such claims have been
successful against Internet service providers in the past. 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 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, Michael C. Palmer, and our Chairman of the Board,
Chester L. Noblett, Jr., 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. Palmer's and Mr. Noblett's
services are governed by agreements. 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
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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.
IF 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.
If our financial condition does not meet the above tests, then 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.
YOU COULD SUFFER DILUTION OF YOUR INVESTMENT IF CERTAIN WARRANTS ARE EXERCISED,
PREFERRED STOCK IS CONVERTED INTO COMMON STOCK, OR STOCK OPTIONS ARE EXERCISED
As of January 17, 2000, we have a total of 18,263,632 shares of common
stock outstanding. We have issued warrants to purchase 2,071,715 shares of
common stock at a weighted average price of $6.71 per share, as well as options
to purchase 7,578,528 shares of commons stock at a weighted average price of
$3.55 per share. Under a subscription agreement, we have sold but not issued
$7,000,000 of Series A and Series B Convertible Preferred Stock that, based on a
maximum conversion price of $2 per share, will convert into at least 3,500,000
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shares of common stock. We have issued $5,000,000 of Series C Convertible
Preferred Stock that, based on a maximum conversion price of $4.375 per share,
will convert into at least 1,142,857 shares of common stock. Issuance of any of
these shares will dilute your interest in our company.
In November 1998, we entered into a subscription agreement with a
private investor wherein he was to purchase 2,092,000 shares of common stock for
$1.30 per share which we determined was a reasonable price at that time. He was
not able to raise the funds to purchase the stock and we cancelled the
subscription agreement. He has now sued us to compel us to issue those shares to
him alleging that we breached the agreement. If his lawsuit is successful, we
will be required to issue up to an additional 2,092,000 shares of common stock
at a price substantially below the current market price which would dilute the
interest of our other common stockholders.
ISSUANCE OF OUR AUTHORIZED PREFERRED STOCK COULD DISCOURAGE A CHANGE IN CONTROL,
COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK AND COULD RESULT IN THE
HOLDERS OF PREFERRED STOCK BEING GRANTED VOTING RIGHTS THAT ARE SUPERIOR TO
THOSE OF THE HOLDERS OF COMMON STOCK
We have already committed to issue 3,550,000 shares of preferred stock
of which 50,000 shares have been issued. All have voting rights on all matters
decided by shareholders. The other 50,000 shares have the right to cast the
number of votes that those shares would convert into (1,142,857 as of this date)
on all matters on which stockholders may vote. We are authorized to issue an
additional 6,450,000 shares of preferred stock without obtaining the consent or
approval of our stockholders. The issuance of preferred stock could have the
effect of delaying, deferring, or preventing a change in control. We may also
grant superior voting rights to the holders of preferred stock. Any issuance of
preferred stock could materially and adversely affect the market price of the
commons stock and the voting rights of the holders of commons stock. The
issuance of preferred stock may also result in the loss of the voting control of
holders of common stock to the holders of preferred stock.
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 January 21, 2000, there are 18,263,632 shares of our common stock
outstanding which cannot be sold on the public market. Of these shares,
4,940,865 shares are held by directors, officers, or stockholders who have
beneficial ownership of 10% or more of the outstanding shares, including shares
subject to an option held by them. 13,574,620 shares are held by other
stockholders. These shares will become eligible for trading at various dates
commencing on February 12, 2000. In addition, shares of common stock which may
be acquired pursuant to outstanding convertible preferred stock or warrants will
be eligible for trading at
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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.
USE OF PROCEEDS
All of the shares of common stock offered by this prospectus are being
offered by the selling stockholders. We received money from the sale of shares
of convertible preferred stock that were converted, or are convertible, into the
shares of common stock offered in this prospectus. We also received, or will
receive, money from the exercise of warrants to purchase common stock which is
offered by this prospectus. This money was, or will be, used for working capital
and general corporate purposes. We will not receive any additional proceeds from
the sale of shares by the selling stockholders. For information about the
selling stockholders, see "Selling stockholders."
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.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Electronic Bulletin Board under
the trading symbol "ASAT" and on the Deutsche Borse AGXetra(TM) (Frankfurt,
Germany) under the trading symbol "ES8". The following table sets forth the high
and low bid prices for our common stock since the beginning of the fiscal year
1997 on the OTC Bulletin Board only. The quotations reflect inter-dealer prices,
with no retail mark-up, mark-down or commissions, and may not represent actual
transactions. The information presented has been derived from National Quotation
Bureau, Inc.
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1997 Fiscal year High Bid Low Bid
---------------- -------- -------
First quarter 25.00 6.25
Second quarter 12.50 1.56
Third quarter 12.50 1.56
Fourth quarter 12.50 1.00
1998 Fiscal year
----------------
First quarter 1.00 .05
Second quarter .05 .05
Third quarter 5.50 .625
Fourth quarter 16.00 5.00
1999 Fiscal year
----------------
First quarter 22.6875 10.50
Second quarter 14.25 7.876
Third quarter 9.3750 4.375
Fourth quarter 6.0625 1.1875
2000 Fiscal year
----------------
First Quarter through 1/24/00 7.375 3.50
On January 25, 2000, the last reported trade for our common stock was
$6.00.
As of January 17, 2000, there were 624 holders of record of our common
stock.
DIVIDEND POLICY
We plan to retain all of our earnings, if any, to finance the expansion
of our business and for general corporate purposes. We have not declared or paid
any cash dividends on our common stock. We do not anticipate paying cash
dividends in the foreseeable future except possibly on preferred stock. The
terms of our outstanding preferred stock prohibit the payment of dividends on
our common stock unless all dividends accrued on the preferred stock have been
paid.
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
1998 and our unaudited capitalization as of September 30, 1999:
- on a historical basis, and
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- on an as adjusted basis, giving effect to the sale of $5,000,000
of preferred stock on December 29, 1999, after deducting selling commissions and
estimated offering expenses.
You should read this table together with "Management's discussion and
analysis of financial condition and result of operations," consolidated
financial statements and notes to consolidated financial statements appearing
elsewhere in this prospectus.
September 30, 1999
December 31, ----------------------------
1998 Actual As adjusted
------------ ------- -----------
(in thousands)
Stockholders' equity:
Preferred stock $0.001 par value;
10,000,000 shares authorized;
2,000,000 subscribed and
unissued at September 30, 1999;
as adjusted 2,000,000 shares
subscribed and unissued and
50,000 shares issued $ -- $ 4,000 $ 7,355
Common stock, $0.001 par value;
40,000,000 shares authorized;
18,234,566 shares issued and outstanding at
September 30, 1999 and 16,085,936 at
December 31, 1998 16 18 18
Additional paid-in capital 6,051 9,115 10,209
Treasury stock -- (364) (364)
Subscription receivable -- (3,250) (3,250)
Accumulated earnings (deficit) (3,345) (9,668) (9,668)
------- ------- -------
Total capitalization $(2,722) $ (149) $ 4,300
======= ======= =======
The information provided above excludes:
- 2,071,715 shares of common stock issuable upon exercise of
warrants,
- 7,578,528 shares of common stock issuable upon exercise of
outstanding options, and
- 4,642,857 shares issuable on conversion of outstanding preferred
stock.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements and the "Management's
discussion and analysis of financial condition and results of operations" and
other financial information included elsewhere in this prospectus. The
consolidated statements of operations data for the years ended December 31, 1997
and 1998 and the consolidated balance sheet data at December 31, 1997 and 1998
are derived from and
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qualified by reference to the audited consolidated financial statements included
elsewhere in this prospectus.
The consolidated statements of operations data for the nine months ended
September 30, 1998 and 1999 and the consolidated balance sheet data at September
30, 1999 have been derived from our unaudited consolidated financial statements
but have been prepared on the same basis as our audited consolidated financial
statements which are included in this prospectus. In our opinion, these
unaudited consolidated financial statements include all adjustments, consisting
of normally recurring adjustments, considered necessary for a fair presentation
of our consolidated financial position and result of operations for that period.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Unaudited
Year Ended nine months ended
December 31, September 30,
------------------------- -------------------------
1997 1998 1998 1999
------- ------- ------- -------
(in thousands except per share data)
Net revenue $ 1,201 $ 341 $ 238 $ 1,188
Gross profit 856 (344) (213) 421
Loss from operations (316) (316) (1,640) (6,363)
Net loss (454) (2,727) (1,408) (6,323)
Basic and fully-diluted loss per share (0.04) (0.17) (0.12) (0.37)
CONSOLIDATED BALANCE SHEET DATA:
Unaudited
December 31, September 30,
1997 1998 1999
------------ ------- -------------
(in thousands)
Cash and cash equivalents .......... $ (12) $ 2,568 $ 12
Working capital .................... (234) 2,382 (1,154)
Total assets ....................... 454 3,261 1,450
Total stockholders' equity ......... (238) 2,722 (149)
See note B of notes to consolidated financial statements for a
discussion regarding the computation and presentation of basic and diluted net
loss per share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT, AS WELL AS "RISK FACTORS."
RESULTS OF OPERATIONS
1998 AS COMPARED TO 1997
In fiscal 1998, revenue decreased by $860,000 or 72%, in comparison to
fiscal 1997. This revenue decline is directly attributable to our shift to
high-speed satellite Internet products and services and away from the sale of
networking and computing product and services. In the first quarter 1998, the
company stopped selling networking and computing products and services. In the
fourth quarter 1998, the company stopped selling its initial satellite Internet
products and services altogether, pending the completion of its GSI(TM)
products. During 1998, the company engaged in capital raising efforts and the
development of its GSI(TM) Internet related products and services along with
beta marketing and testing.
1999 AS COMPARED TO 1998
During fiscal years 1998 and 1999, we experienced difficulties selling
its products and collecting our accounts receivable. Our first product offering,
the unidirectional GSI(TM) product line, experienced technical difficulties due
to its reliance on outbound telephone lines and other Internet service providers
for its upstream connection to the Internet. During fiscal 1999, the we worked
on a solution to this technical problem with the GSI(TM) product line, as well
as working to develop and launch our bi-directional Nexstream product that
utilizes a satellite connection for both upstream and downstream connections to
the Internet.
For the first nine months of fiscal 1998, the we recorded revenue of
$237,758, however, we wrote off accounts receivable of $236,666. For the first
nine months of fiscal 1999, we recorded revenue of $1,187,770 and wrote off
accounts receivable totaling $1,064,986. We expect that shipments of new systems
will increase as a result of a solution for its GSI(TM) product line outbound
ISP difficulties and the launch the bi-directional Nexstream product.
For the nine-month periods ended September 30, 1999 and 1998, cost of
sales were $767,167 and $450,544, respectively. Cost of sales includes the cost
of hardware and software shipped to customers, satellite access time purchased
from a third party and inventory write-offs.
For the nine-month periods ended September 30, 1999 and 1998, operating
expenses were $5,718,146 and $1,190,420, respectively. The increase in operating
expenses for fiscal 1999 is due to higher levels of staffing and compensation,
increased marketing expenditures,
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increased research and development expenditures and higher levels of
professional fees paid to outside accountants and attorneys.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed primarily from the sale of preferred
and common stock in 1999 and 1998 and, to a lesser extent, capital equipment
lease arrangements. At September 30, 1999, the company had cash on hand of
$12,365 and negative working capital of $1,153,626, compared to cash of
$2,567,697 and positive working capital of $2,381,879 at December 31, 1998. As
discussed more fully below in this section, during the third and fourth quarters
of 1999, we entered into agreements to sell a total of $12.0 million of
convertible preferred stock and arranged for an equity credit line of $20.0
million.
Net cash used in operating activities of $4,260,519 and $1,630,350 for
the nine months ended September 30, 1999, and 1998, respectively, was primarily
attributable to operating losses.
Net cash used in investing activities was $543,971 and $96,339 for the
nine months ended September 30, 1999 and 1998, respectively. These expenditures
were for the purchase of fixed assets.
Net cash provided by financing activities of $2,249,069 and $1,826,329,
for the nine months ended September 30, 1999 and 1998, respectively, resulted
primarily from the net proceeds of the sale of preferred and common stock.
To the extent our revenues increase in the coming twelve months, we
anticipate significant increases in operating expenses, working capital and
capital expenditures. The cost to purchase additional fixed assets, primarily
satellite transmission and receiving equipment and to finance working capital
requirements is approximately $15,000,000. We also anticipate the need to
construct our own network of Network Operations Centers (NOCs). A NOC is the
location of the operations equipment, which receives and transmits data from and
to a satellite. The construction of a NOC costs approximately $2,000,000 per
location.
We have entered into an agreement with Vantage Capital, Inc. ("VCI") for
the purpose of raising capital. Pursuant to that agreement, a total of
$7,000,000 of preferred stock has been subscribed for with CFE subscribing for a
total of $5,000,000 of Series B 12% Convertible Preferred Stock and VCI
subscribing for $2,000,000 of Series A 12% Convertible Preferred Stock. Through
December 31,1999, we had received a total of $2,000,000.
The Series A and B Preferred Stock has a liquidation preference of $2.00
per share and accrues interest at a 12% annual rate, payable in common stock of
the company. The Series A and B Preferred Stock may be converted into shares of
common stock at the lower of $2.00 per share or 70% of the bid price of the
common stock on the date of a notice to convert as reported by the exchange or
the market on which the shares of Common Stock are traded. The Series A and B
Preferred Stock contains standard anti-dilution and price protection provisions
and standard registration rights. There is no firm written agreement in place
requiring the balance of
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the anticipated investment to be made; however the company expects that the full
amount of the anticipated investment will be made. Michael C. Palmer, our Chief
executive Officer, owns VCI.
On December 29, 1999, we entered into an agreement with a private
third-party investor that provides for the immediate purchase by the investor of
$5,000,000 of Series C Convertible Preferred Stock ("Series C Preferred") and
the establishment of a $20,000,000 equity line of credit ("Equity Line"). The
Series C Preferred is convertible into Common Stock at a price based on the
market price of the Common Stock at the time of conversion, subject to a maximum
price of $4.375 per share, and bears interest at 6 percent per annum. The Series
C Preferred is convertible at the investor's option, and becomes convertible in
three equal installments, commencing on the date of this prospectus and ending
90 days thereafter.
Under the terms of the $20,000,000 Equity Line, we have the right to
sell to the investor, and the investor has an obligation to buy from us, up to
an additional $20,000,000 of convertible preferred stock. The maximum amount of
each such individual sale of preferred stock will be determined by a formula
based on the dollar-volume of trading of the our common stock in the fifteen day
period immediately prior to each sale, subject to an overall maximum of
$2,500,000 per transaction. Furthermore, there must be at least 15 days between
sales and no sales are allowed while our common stock is trading below $3.00 per
share.
The company believes that the receipt of the net proceeds from the
preferred stock described above plus cash generated internally from sales will
be sufficient to satisfy its future operating, working capital and other cash
requirements for at least the next twelve months. The company believes that it
has sufficient resources to fund current operations, develop new or enhanced
products and/or services, to respond to competitive pressures and acquire
complementary products, businesses or technologies.
YEAR 2000 COMPLIANCE
We experienced no interruptions in our operations when the calendar year
changed to the year 2000. We believe that our products and services, and
products which we purchase from third party vendors, are designed to operate
continuously regardless of date changes.
BUSINESS
OVERVIEW
We provide a satellite Internet services and we develop satellite
Internet access equipment and services. Our customers are businesses,
educational institutions and governmental agencies. Our product line is based on
our Global Satellite Internet ("GSI(TM)") gateway, Nexstream gateway and
ChannelCasting(TM) services which all provide existing local area networks with
Internet access. A gateway is a specially designated computer which contains
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software that allows local area network ("LAN") users to shares an Internet
access connection. Nexstream uses very small aperture terminals, which allows
for data transfer to and from remote locations needing Internet access or a
private network. Our ChannelCasting(TM) services provides the simultaneous
broadcast of large video and data files to multiple destinations through the use
of our GSI(TM).
We plan to be a geographically diverse satellite Internet service
provider through the establishment of joint ventures in various countries. We
expect to finance the expansion either through financing provided by the parties
wishing to provide the service internationally, or through capital generated by
operations and/or issuing additional securities.
Through September 30, 1999, we have incurred significant losses totaling
over $9,6000,000. Furthermore, we anticipate incurring additional losses in the
foreseeable future as we grow and complete the development of our products. We
operate in a highly competitive market and our success of the business will
depend on our ability to compete in this marketplace. We have no assurance of
market acceptance of our products. and we have no assurance that our marketing
and distribution methods will be successful.
OUR STRATEGY
We expect growth in demand for Internet access on a worldwide basis. We
are positioning the company to help satisfy this market need for Internet access
through the use of our GSI(TM) and Nexstream products as a method of
communication and the ChannelCasting(TM) service as a means of broadcasting
data. Currently we provide products and services for satellite Internet access
and data delivery to include businesses, educational institutions, and
government agencies. At this time, we do not offer services to home users and we
have no immediate plans to do so. We developed our GSI(TM), and Nexstream
products, along with, ChannelCasting(TM) to help satisfy voids in the Internet
access and data delivery market.
Our strategy is based on the development and marketing our products and
services in five areas.
First, we plan to build a worldwide satellite network by installing
three or more network operation centers (NOC) placed in strategic locations
throughout the world. Each of these NOCs will serve as a means of connecting to
each other and each a different satellite supporting a specific region. When
completed, this worldwide satellite network will allow us to provide Internet
access to a much larger market in countries where there is little or no
telecommunications infrastructure. We have already begun to implement this
strategy by entering into a service agreement with Exodus Communications, Inc.
(EXDS). This service agreement allows us to establish a satellite uplink
facility at an Exodus Internet Data Center(TM) in Southern California. This
agreement will provide us with sufficient Internet capacity to service our
worldwide network business strategy and corresponding bandwidth requirements. In
conjunction with our present NOC in Raleigh, North Carolina, the completion of
the new satellite uplink facility will provide the security of redundant
operation centers. Once in place,
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this new facility will have the capability to reach Pacific Rim and Asia
customers via trans-Pacific satellites while our East Coast facility will
service the United States and Europe.
Second, we plan on marketing our products and services to the business
continuity market worldwide. Our products and services can provide an effective
means of back-up to any business which relies on Internet access or remote
Internet connections for mission critical applications.
Third, we plan on marketing our products and services to rural and urban
markets on a worldwide basis which currently cannot receive high-speed Internet
and network connectivity due to limited telecommunications infrastructure.
Additionally we plan on marketing our products and services as a single
source vendor to national and multi-national businesses interested in a uniform
platform for connectivity and Internet access.
Finally, we plan on utilizing our subsidiaries to identify new uses and
markets based on the company's core technology to support the company business
objectives.
Our international strategy is to form joint ventures with strategically
positioned partners in Asia, Europe, Latin America, the Middle East and Africa.
At this time, we are in negotiation with a number of these partners but have not
signed any definitive agreements for these joint ventures.
Our subsidiary i.xposure has entered into several additional marketing
and selling agreements for its products and services.
HISTORICAL SUMMARY OF THE COMPANY
We were incorporated on June 23, 1995, under Nevada laws, as "U. S.
Connect 1995, Inc.," for the purposes of marketing and servicing transaction
processing services, prepaid long distance cards, ATM machines and payment
systems to small-to-medium sized merchants. In October 1995, we made a public
offering of our common stock from which we derived gross proceeds of
approximately $100,000. Prior to October 1998, we had not commenced operations
and were seeking to establish a new business. On October 8, 1998, we were the
surviving company of a merger with Technology Guardian, Inc., a California
corporation ("TGI"). All the issued and outstanding shares of TGI were exchanged
for shares of our common stock. In connection with the merger, we changed our
name to Technology Guardian, Inc., and succeeded to the business of TGI which
was providing computer network installation services and the related sale of
personal computers and telecommunications equipment necessary for the
configuration of local area networks, and in research and development of the
products we currently offer. We changed our name to "eSAT, Inc." on January 26,
1999.
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Research and development began in late 1996 for the satellite Internet
access products and services. The development of the satellite Internet products
and services continued during 1997 and into the first quarter of 1998. In the
first quarter of 1998, we terminated our sales of network computer related
products and concentrated entirely on the completion of our satellite Internet
access products and services. In the second quarter of 1998, we started beta
sales and installation of our initial (first generation) satellite Internet
access products. Beta sales involves the sales of products and services which
have been developed in a laboratory setting but have not been tested in actual
use. Beta installation means the first installations in a commercial setting,
often at a discount or at no cost in order for us to obtain additional
information for improving and completing the products and services. Through the
end of 1998, we beta tested our first generation satellite Internet product and
services. Beta testing on the first generation of products was terminated in
December 1998, such testing having been completed to our satisfaction.
In the fourth quarter of 1998, we initiated development of a second
generation satellite Internet product and related satellite Internet service.
Development of the second generation of satellite Internet products and services
and beta testing of them was completed to our satisfaction in January 1999. They
were incorporated into our products known as the GSI(TM), and a number of them
have since been upgraded.
Finally, in the fourth quarter of 1998, we completed installation of our
equipment at our network operations center ("NOC") in Durham, North Carolina.
The NOC houses our computer equipment and software, and functions as a junction
point for all the Internet related data traffic from our customers and acts as
the uplink to the satellites. We contract with third parties for segments of
satellite time that we then resell to our customers. During the second quarter
of 1999, we launched our ChannelCasting(TM) technology followed by the initial
beta testing of the bi-directional Nexstream product in the third quarter of
1999.
PRODUCTS AND SERVICES
GLOBAL SATELLITE INTERNET ("GSI(TM)") INTERNET GATEWAY. Our flagship
products, the Global Satellite Internet ("GSI(TM)") gateway and Nexstream, uses
satellite technology to provide Internet access services at speeds that compete
with the fastest available from any other provider.
The GSI(TM) gateway system consists of a computer configured with
hardware and software, a satellite dish, and appropriate satellite dish mounting
equipment. We capitalize on the imbalance between the small amount of data sent
to access the Internet and the large amount returned. For example, a typical
request to an Internet server might require 25 characters, but the response
could include an entire web page, including text and graphics. For example, a
person accessing our web site asks his Internet service provider to connect him
to "www.esatinc.com." This requires 15 characters and the click of a mouse. The
connection delivers him to our web page which contains thousands of characters
of information plus some pictures. We can couple any type of computerized
information request method for the small amount of request data with our small
satellite dish for sending large amounts of response data and can provide
high-speed Internet access for an entire local area network. The user is still
required to pay the cost of an
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Internet connection for the request data. This cost should be factored in when
comparing the costs of our products and services with the cost of competing
services. The delivery system for all of our products, the GSI(TM), connects to
an existing local area network to provide Internet access to each workstation.
The GSI(TM) is delivered completely pre-configured as a plug and play module for
local area networks and is compatible with Microsoft Windows operating systems,
Apple's Macintosh operating systems and UNIX operating systems. The GSI(TM) is
designed to incorporate ease of installation and use with a plug and play
format, and quality high-speed Internet access. "Plug and play format" is a
format based on hardware and software standards designed to allow computers and
peripheral computer equipment peripheral to be plugged together with
standardized cables and the computer that is compatible with a variety of
networking hardware or software, with little effort by the user to configure the
computer peripheral to operate properly.
We currently offer a GSI(TM) gateway for local area networks with
contracts of up to a three year duration. The current standard price per month
for this service is $495 per installation. This price may change from time to
time depending on a number of market factors.
CHANNELCASTING(TM). Our ChannelCasting(TM) service permits the broadcast
of large data and video files to multiple locations simultaneously using our
GSI(TM) products. With standard delivery of data and video files over the
Internet, each destination point requires its own stream of data.
ChannelCasting(TM) uses the broadcast properties of satellite transmission to
send a single stream of files which is received at many locations, a multi-cast.
For example, if a large video file needs to be delivered to many schools, the
file would be transmitted to our ChannelCasting(TM) servers through the Internet
or a private network connection and then, at our NOC in North Carolina, it would
be sent as a single stream to a satellite, and then transmitted to the specified
multiple destinations simultaneously. Presently, we only lease broadcast
capacity on one satellite, but the satellite is capable of broadcasting the data
for reception to numerous locations from one location.
ChannelCasting(TM) is being designed to permit large corporations,
government agencies and learning centers to broadcast information to multiple
locations at the same time. We provide a conditioned satellite receiver computer
card and additional software installed in the GSI(TM) gateway. The conditioned
satellite computer card processes digital data to be sent over our system.
Customers may use the ChannelCasting(TM) service as a stand-alone feature or use
it as an additional enhancement with the satellite Internet access. We have
developed and tested ChannelCasting(TM) and released its beta version on April
30, 1999.
NEXSTREAM. Nexstream uses specially configured satellite dishes to
permit the user to receive data and transmit data through our satellite system.
The result is a secure, transportable, cost-effective and high-speed
communications system which provides significant benefits for organizations with
offices and facilities in remote geographic areas. The technology is especially
effective where privacy and security are a concern, or where mission-critical
applications dictate having a non-ground based system. Nexstream may also be
employed as an effective back up for
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ground based communication lines in case of a potential disaster, or as the
primary link to remote areas before and after a disaster.
NEW PRODUCT DEVELOPMENTS. In addition to our core business described
above, we are in the process of developing three other complimentary lines of
business through our subsidiaries, Global Media Technologies, Inc. (GMT),
SkyFrame, Inc. (dba SkySP(TM)), and i.xposure, Inc. GMT is focusing on the
development of satellite-based products which take advantage of our high-speed,
high-quality video and data delivery capabilities. We plan to partner with
companies that provide programs and other information in the education,
entertainment and business-to-business markets with the goal of becoming a major
provider of such materials via satellite. GMT has plans to offer a variety of
exciting and innovative products and services to educational, consumer and
business markets using our core satellite technologies.
SkySP(TM) was formed in July 1999 as a response to the needs expressed
by under-served rural Internet users and especially rural school districts.
SkySP(TM) utilizes our GSI(TM) and Nextream technology to provide low cost
Internet services to rural Internet service providers and school districts that
otherwise do not have the means to efficiently offer Internet services.
According to Yankee Group, a research firm, it estimates that approximately 40%
of the United States will not be able to get any high-speed service to the
Internet. Using our core technologies, we are able to provide rural and urban
locations with high-speed Internet access with minimal capital investment at the
local level. Users can access the SkySP(TM) network through a local telephone
number which connects the user with our GSI(TM) gateway which in turn connects
them to our satellite uplink center. Information on the Internet is then relayed
back to the GSI(TM) gateway from the satellite and transmit it to the client
over telephone lines.
CORE TECHNOLOGY
Our technology relies on the monitoring and managing large segments of
satellite bandwidth and the ability to optimize these services for use in
business applications. Our current products and services consist of a
configuration of software and a satellite receiver card for a computer allowing
a user to obtain satellite access to the Internet or other remote locations by
splitting the messages sent out by the user over any conventional method, from
the information received buy the user via satellite. This hybrid technology
allows a user access to the Internet or network from local workstations. The
GSI(TM) connects to the Internet via any conventional method such as modem or
cable lines. High-speed retrieval of information from the Internet is achieved
via satellite and the GSI(TM) connected to a local network, which connects to
the desktop user. One portion of our technology manages the returning data by
directing it to be sent through a satellite uplink facility to an orbiting
satellite, which transmits the returning data from the satellite to the user.
The user receives this data through a small satellite dish which is linked to
the GSI(TM). Nexstream uses specialized satellite dishes to enable
bi-directional data communications from the satellite.
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Our GSI(TM) and Nexstream gateway systems includes a computer which is
pre-loaded with the software and preconfigured for use, a satellite receiver
card installed in the computer, and the satellite dish. The customer may
contract with a local installer for the installation of the satellite dish, or
we will deliver the GSI(TM) gateway in plug and play condition, requiring only
that the customer change its routing of data flows on the its workstations to
utilize our Internet gateway. Installation of the GSI(TM) gateway does not
require us to provide on-site personnel. Nexstream is currently being installed
by our personnel, since the installation requires greater technical know-how
than does installation of GSI(TM) gateway systems.
MARKETING AND SALES
We sell our products and services to: businesses, schools, libraries,
hotels, tract home developers, hospitals, medical facilities and government
agencies through our own sales persons, value-added resellers and other
independent sales organizations. Approximately 60% of our sales are to
businesses and governmental agencies and 40% to schools. There are no
consumer/home products or services at this time.
The company employs sales staff of __ people (__ located in the home
office and __ located in Washington, D.C.). They focus their sales activity on
the generation of leads, the establishment of contacts, and the closure of sales
to a variety of small, medium and large businesses. The Washington, D.C. sales
force also attempts to develop leads, contacts, and sales to Federal
governmental agencies and concentrate their sales activities businesses to the
Eastern and Midwest sections of the United States.
Additionally, we distribute our products through value-added resellers
("VARs") and independent sales organizations. These organizations allow us to
increase our visibility and sales of products and services by entering into
contracts for these organizations to undertake sales activities for a percentage
commission of any sale realized. Approximately half of our sales to date have
originated and been completed using these organizations. Currently, we have
approximately __ VAR and independent sales relationships, no single one of which
is material to our operations. Sales through the VAR channel have been modest,
with the majority of our sales having been realized on a direct sale basis. We
have re-focused on enhancing this distribution channel with traditional wide
area network VARs and systems integrators. The result of this effort has been a
significant increase in both quantity and size of contracts under negotiation.
We intend to enter into relationships with between one hundred to two hundred
VARs within the next twelve months. We expect to realize the majority of North
American revenues through this channel.
From time to time we employ a telemarketing team to initially identify
institutions that could potentially benefit from the company's products and
services. Telemarketing means unsolicited telephone calls are made to
institutions for purposes of business development. We also use public relations
activities as well as Internet and traditional advertising, including radio,
in-flight advertisements and print media.
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GOVERNMENT AGENCY MARKET
We are actively marketing our products to the Federal Government. The
contracting and sales cycle with government agencies can often require a year to
complete. We have completed an installation with the San Bernardino County,
California, Sheriff's Department and with the U.S. Department of Forestry in
Dubois, Idaho. The performance and reliability of these systems are currently
under evaluation. The sales of units to these agencies depends on their
favorable evaluation. There is no assurance that the company will make any
significant sales to government agencies.
THE EDUCATIONAL MARKET
The Federal Government's "E-RATE" program provides $1.8 billion of
federal funding for schools and libraries to be used exclusively for providing
Internet access to schools. Our marketing efforts are geared toward taking
advantage of the Federal E-RATE Program. The Federal Government allocates E-RATE
funds to the states in block grants, which must use the funds in a "fair and
equitable" format. The requirement means that educational sites throughout a
state must have uniform speeds and pricing. Once states receive funding, the
E-RATE Program has an anticipated duration of 18 months. We believe we meet all
government guidelines for providing Internet access to schools in the manner
required by the E-RATE program.
THE INTERNATIONAL MARKET
We plan for joint ventures with one or more parties headquartered in
various countries to be our international partners. We expect these joint
ventures to contribute significant revenue in the future. We have identified
major areas of the world capable of receiving transmissions from a
geo-stationary satellite. The planned joint ventures would establish our
satellite service in the international regions as follows: Asia North, Asia
South, Europe, Eastern Europe/Russia, India, Central America, Latin America, the
Middle East, and Africa. The initial funding for a joint venture is expected to
be provided by the partner in the headquartered country. We plan to focus on
Asia first so that we can be in a position to provide products and services to
the rapidly growing markets in the Pacific Rim basin including Hong Kong,
mainland China, Taiwan, Australia, New Zealand, Singapore, Malaysia, Thailand,
Philippines, Indonesia and others. At the present time, the Company does not
have any existing joint venture in the international market and has not entered
into any written agreement for international satellite service.
DIVERSIFICATION OF BUSINESS
We are not dependent on any one customer or group of customers. However,
our business plan calls for significant orders from governmental agencies and
large corporations.
BACKLOG OF ORDERS
We currently do not have a backlog of orders.
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INTELLECTUAL PROPERTY
We believe that our intellectual property is an important factor in
maintaining our competitive position in our core eSAT businesses, as well as
the businesses of Global Media Technologies and i-xposure. To protect our
proprietary rights, we rely generally on patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements with our employees,
consultants, vendors and corporate business partners. Despite these protections,
a third party could, without authorization, copy or otherwise obtain and use our
products or technology to develop similar technology. Moreover, our agreements
with employees, consultants and others who participate in product and service
development activities may be breached, we may not have adequate remedies for
any breach, and our trade secrets may become known or independently developed by
competitors.
Patents. At this time, we have no patents or pending patent
applications. However, we have identified a number of inventions for which we
anticipate filing patent applications. In addition, we are working to identify
additional potentially patentable inventions. Any patent applications may not be
granted, future patents may be challenged, invalidated or circumvented, and the
rights granted under a patent that may be issued may not provide competitive
advantages to us. Many of our current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has been issued or is
issued in the future, we would need either to obtain a license or to design
around the patent. We may not be able to obtain a required license on acceptable
terms, if at all, or to design around the patent.
Trademarks. We have applied for registration of all of our primary
trademarks in the United States, including "eSAT", "SatBone," "S-Bone,"
"i-Xposure" and "pid". We intend to continue to pursue the registration of
these and certain of our other trademarks in the United States and in other
countries; however, we cannot be sure that we can prevent all third-party use
of our trademarks. We have obtained the Internet domain name "esatinc.com" but
we are aware that an Irish telecom company has the same name ("ESAT") and the
Internet domain name "esat.com." We have not been asked to cease using the
name"eSAT."
Copyrights. We have developed software for our eSAT business, i-xposure
business and Global Media Technology business which is protected by copyright
law. There is no assurance that the steps we take will be adequate to protect
these rights or that we will be successful in preventing the illegal
duplication, distribution or other use of our software. Our failure to
adequately limit the unauthorized redistribution of our software could result
in litigation or liability, which could harm our business.
The laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States, and effective
patent, copyright, trademark and trade secret protection may not be available
in these jurisdictions.
We rely on technology and other proprietary matter that we license from
third parties, including software and images that are integrated with
internally developed software and used in our products and services.
Third-party licenses may not continue to be available to us on commercially
reasonable terms. The loss of any of these rights could harm our business.
Third parties may assert infringement claims against us. From time to
time we may be subject to claims in the ordinary course of our business,
including claims of alleged infringement of the trademarks, patents and other
intellectual property rights of third parties by us or our users. Any such
claims, or any resultant litigation, should it occur, could subject us to
significant liability for damages and could result in the invalidation of our
proprietary rights. In addition, even if we were to win any such litigation,
such litigation could be time-consuming and expensive to defend, and could
result in the diversion of our time and attention, any of which could
materially and adversely affect our business, results of operations and
financial condition. Any claims or litigation may also result in limitations on
our ability to use such trademarks, patents and other intellectual property
unless we enter into arrangement with such third parties, which may be
unavailable on commercially reasonable terms.
COMPETITION
We compete in the market for providing Internet access services to the
business, government, school, and nonprofit sectors. Our major competitors are
Loral Inc., Hughes Network Systems, and Spacenet.
We anticipate competition from Internet service providers which provide
satellite downlink data transmission in the commercial/business, government and
education sectors. Our competitors also include the established Internet service
providers offer a variety of connection features and speeds of access. Some use
telephone lines, some use television cable systems, and others offer satellite
focused services. There are numerous providers of these services and no one
provider dominates the market. Many service providers are affiliated with
telephone or cable television companies which provides capital resources and
customer marketing opportunities unavailable to us. At this time, we believe no
competitor has a dominant position.
We have not established a competitive position in the market place,
since we have only recently commenced the marketing and sales of our products.
As a result, potential customers are unable to evaluate other customer's
experiences in using our products. This lack of track record might dissuade some
customers from purchasing our products until there is a greater customer base
and a broader evaluation of the quality and effectiveness of our products and
services.
We compete principally on price, performance, and availability of
service. The service is available in any location, particularly remote
locations, due to the wide satellite broadcast footprint. We offer an easy to
use format, with each gateway delivered pre-configured for the customer's
geographic location, local connection to the Internet, and connection to a local
area network. Our pricing of products and services is subject to change in
accordance with market changes and competitive conditions.
The positive factors pertaining to our competitive position include
offering a product for a price of $495 per month, subject to change to meet
competitive circumstances, widespread availability, and an easy to use format.
The negative factors pertaining to our competitive position are lack of product
awareness and of brand recognition among potential customers, lack of widespread
user-base, and lack of customer track record.
RESEARCH AND DEVELOPMENT
We plan to devote significant resources to continued research and
development of various Internet related products and services.
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EMPLOYEES
We currently have __ employees. __ employees are located at the
Company's headquarters in Fountain Valley, California, and __ employees are
located in our Washington, D.C., office, and __ sales representatives are
located in Texas.
LEGAL PROCEEDINGS
The only material legal proceedings involve an action brought in the
United States District Court, Central District of California, on July 23, 1999,
by a private investor who entered into a subscription agreement in November
1998 to purchase 2,092,000 shares of our common stock for $1.30 per share. He
did not raise the funds to honor his subscription and we cancelled the
subscription agreement. The investor has sued to compel us to issue those
shares to him alleging that we breached the agreement. We believe his assertion
is without merit and are defending the case.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and positions of our directors
and executive officers:
Officer Name Age Position Since
------------ --- -------- -----
Michael C. Palmer 50 CEO, President, Secretary and Director 1999
Chester (Chet) L. Noblett, Jr. 55 COO, Chief Financial Officer and Director 1997
Salvatore A. Piraino 72 Director 1997
William C. Sarpalius 50 Director 1997
Gary Pan 53 Director 1998
Jeffrey Hecht 48 Vice President of Operations 1998
James Mack 27 Chief Technology Officer 1998
Terry F. Herbeck 52 Chief Operating Officer 1999
The directors are elected to hold office until the next annual meeting
of stockholders and until their respective successors have been elected and
qualified. Officers are elected annually by the board of directors and hold
office until their successors are elected and qualified.
The following sets forth biographical information concerning our
directors and executive officers for at least the past five years.
MICHAEL C. PALMER has been the Chief Executive Officer, President and
Secretary and a director of the company since April 1999. Mr. Palmer has held
the position of Chief Financial Officer from November 1998 to March 1999 and has
been affiliated with the company since December 1997. Since 1978, Mr. Palmer has
been a partner of Parks, Palmer, Turner and Yemenedjian, a firm of certified
public accountants. Mr. Palmer served as a director of Western Waste Industries
(NYSE: WW) from July 1995 to May 1996. He received a B.S. degree in Business
Administration in 1972 and an M.S. degree in Business Taxation in 1975 from the
University of Southern California.
CHESTER (CHET) L. NOBLETT, JR. is Chairman of the Board since April 1999
and a Director since June 1997. He was Chief Operating Officer from June 1997
until December 1999. He served briefly as interim Chief Financial Officer in
January 2000. From 1990 to 1996, Mr. Noblett was employed as the chief executive
officer for Tradom International, a subsidiary of an
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Asahi Shouian, Inc., an international food brokerage company. From 1975 to 1990,
he was chief executive officer of C. Noblett & Associates, a food brokerage
company. Mr. Noblett is also president and a director of Cyber Village Network,
a computer software company. Mr. Noblett received a B.S. degree in Business
Administration from the University of Southern California in 1971.
SALVATOR A. PIRAINO has been a director of the company since December
1997. From September 1992 to the present, Mr. Piraino has operated Management
and Technical Services, a management consultant firm providing management,
engineering and manufacturing expertise to a number of small companies. From
1974 to 1992, Mr. Piraino was employed as a director, program manager, product
line manager and assistant division manager for Hughes Aircraft Company. Mr.
Piraino received a B.E. degree in Engineering from Loyola University in 1950.
WILLIAM C. SARPALIUS has been a director of the company since December
1997. From 1995 to present, Mr. Sarpalius has served as president and chief
executive officer of Advantage Associates, Inc., a lobbying firm located in
Washington, D.C. Previously, Mr. Sarpalius served as a U.S. Congressman from
the State of Texas from 1989 to 1995. In 1995, Mr. Sarpalius received a
presidential appointment to the United States Department of Agriculture as
Western Regional Director. Mr. Sarpalius received a bachelors degree in
Agriculture Science from Texas Tech University in 1972 and a masters degree in
Agriculture Science from West Texas State in 1978.
GARY (GUO AN) PAN has been a director of the company since September
1998. From 1997 to present, Mr. Pan has served as the managing director for
United Asia Capital Partners, an investment management and financial services
firm. From 1993 to 1997, Mr. Pan served as president of Sunridge International,
Inc., and from 1992 to 1993, as senior vice president of the Great Wall Group.
Mr. Pan received a B.S. degree in Electrical Engineering from National Taiwan
University, a M.S. degree in Electrical Engineering from University of Waterloo,
and his Ph.D. in Management from the University of California at Los Angeles.
JEFFREY HECHT was appointed as the company's Vice President of
Operations in March 1998. From March 1997 to March 1998, Mr. Hecht was vice
president of operations for ACOM Computer Inc., a software development company
in Long Beach, California. From December 1993 to February 1997, Mr. Hecht served
as the vice president and chief information officer for Strategic Mortgage
Services, a financial services company. Mr. Hecht received a B.S. in Business
Administration from Arizona State University in 1976.
JAMES MACK was appointed as the company's Chief Technology Officer in
September 1998. From May 1997 to September 1998, Mr. Mack was the Senior Systems
Engineer for Versant, Inc., a manufacturer of object-oriented database
technologies. From February 1995 to May 1997, Mr. Mack was Object Technology
Specialist with IBM, working with such firms as Kodak and MCI. Mr. Mack studied
Computer Science and Aerospace Engineering at the University of Missouri-Rolla
in 1994.
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TERRY F. HERBECK has been the Chief Operating Officer since December
1999. From 1992 to 1999, he was the President of Herbeck Consulting Group, a
consulting firm advising on the development of new markets for existing and
future product lines in the medical and Internet fields. From 1984 to 1992, Mr.
Herbeck served as President of United Surgical Corporation. He received an A.A.
degree in business Administration from El Camino College in 1970 and attended
California State University Long Beach from 1970 to 1972.
EXECUTIVE COMPENSATION
Annual Compensation Long Term Compensation
------------------------------------------------------- -----------------------------------------
Awards
------------------------
Other Restricted Securities
Name and Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation Awards Options Compensation
- ------------------ ---- -------- ------- ------------ ---------- ---------- ------------
Michael C. Palmer(1) 1999 $455,913 $ $187,500 1,625,000
President, Chief 1998 10,780 100,000
Executive Officer 1997
and Secretary
Chester L. Noblett, Jr.(2) 1999 178,936 300,000
Chief Operating 1998 114,750 48,750 595,802
Officer 1997
Mark McMillan(3) 1999 87,500 500,000
1998
1997
James Mack(4) 1999 120,625
1998 18,750 35,000 300,000
1997
David Coulter(5) 1999 51,854 50,000 1,500,000
Former President 1998 166,407 56,250 3,535,890
1997
* Please see Certain transactions, below, and Note [K] to the Financial
Statements regarding the cancellation of Mr. Coulter's options in March,
1999.
(1) Mr. Palmer is an employee of Parks Palmer Turner & Yemenidjian, a firm
of certified public accountants. Effective November 1999, the company
pays VCI $25,000 per month for Mr. Palmer's services. Mr. Palmer is an
owner of VCI. In addition to the compensation reflected in the table,
VCI is paid a monthly consulting fee of $2,500 for assistance in finding
and negotiating acquisitions and financing opportunities for the
company. Pursuant to that consulting arrangement, VCI earned $80,000 in
connection with the issuance of the Series C Preferred Stock and
$100,000 in connection with arranging for the issuance of the Series A
and Series B Preferred Stock. In addition, VCI received warrants to
purchase 600,000 shares of common stock as part of the consulting
arrangement. Those warrants are not exercisable until after December 31,
2000. See "Certain transactions" for additional information.
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(2) Includes back pay of $55,417 earned in 1999 and paid in January 2000.
(3) Mr. McMillan joined us in May 1999. He earns a base salary of $150,000
per year. Additionally, he received a __ year mortgage loan of $250,000
from the company, bearing interest at __% per annum.
(4) Mr. Mack joined us in September 1998.
(5) Mr. Coulter left the company in May 1999. After leaving the company he
was paid $50,000. See "Certain transactions."
The company has entered into an employment agreement with Mr. Noblett
for a period of five years commencing September 25, 1997. Under the agreement,
Mr. Noblett receives a salary of $130,000 per year plus health insurance
benefits of $200 per month. The employment agreement includes a cost-of-living
increase, plus any other increase which may be determined from time to time in
the discretion of the company's board of directors. In addition, Mr. Noblett is
provided with a car on such lease terms to be determined by the company,
provided that the monthly operating costs (including lease payments) to be paid
by the company will not exceed $750.
OPTION GRANTS IN FISCAL YEAR 1999
Individual
Grants
Percent of
Total Potential Realizable Value
Options at Assumed Annual Rates of
Number of Granted to Market Stock Price Appreciation
Shares Employees Exercise of Price on for Option Term
Underlying in Fiscal Base Price Date of Expiration ---------------------------
Name Options Year ($/Sh) Grant Date 5%($) 10%($)
- ---- ---------- ---------- ----------- -------- ------------- ------- ---------
Michael C. Palmer 25,000 1.0% 4.00 4.00 Feb. 9, 2004 27,750 61,000
Michael C. Palmer 1,000,000 40.9% 3.00 3.00 Oct. 30, 2004 830,000 1,800,000
Chester L. Noblett, Jr. 300,000 12.3% 3.00 3.00 Feb. 9, 2004 249,000 540,000
Terry F. Herbeck 300,000 12.3% 3.50 3.50 Dec. 10, 2005 357,000 810,000
OPTIONS EXERCISED IN FISCAL YEAR 1999
Number of Value of unexercised
Shares unexercised options/SARs in-the-money options/SARs
acquired on Value at December 31, 1999(#) at December 31, 1999($)
Name exercise(#) Realized Exercisable/unexercisable Exercisable/unexercisable
- ---- ------------ -------- ------------------------- -------------------------
Michael C. Palmer -- -- 725,000/1,000,000 137,500/2,000,000
Chester L. Noblett, Jr. 159,547 757,848 1,245,802/ -- 3,301,634/ --
Jeffrey Hecht -- -- 252,912/ -- 569,553/ --
Mark McMillan -- -- / 500,000 --/ --
Terry F. Herbeck -- -- --/ 300,000 --/ 450,000
James Mack -- -- 100,000/ 200,000 200,000/ 400,000
DIRECTOR COMPENSATION
Each non-employee director receives a payment of $500 for each board
meeting attended and an annual option grant to purchase 20,000 shares at market
value. All directors are entitled to reimbursement for expenses of traveling to
and from board meetings, and any other out-of-pocket expenses incurred on behalf
of the company.
Mr. Piraino, who serves as the audit committee, receives a payment of
$500 per month for his services. This compensation commenced in September, 1998.
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Prior to the merger with Technology Guardian, Inc. ("TGI"), Mr. Piraino
was granted 25,000 shares of common stock as compensation for serving on the
board of directors.
CERTAIN TRANSACTIONS
In April 1997, in exchange for the issuance of 849,750 shares of TGI
common stock which were converted into company shares in the merger, TGI entered
into a settlement agreement among TGI, Cyber Village Network, Inc. ("CVN") and
Mr. Noblett in which CVN and Mr. Noblett agreed to release TGI from all
potential claims arising from: (i) an Option Agreement, dated August 6, 1997;
and, (ii) an agreement entered into among TGI, David Coulter, as TGI's then
President, CVN and Mr. Noblett as agent for CVN ("Commission Agreement").
The Option Agreement granted options to CVN to purchase shares equal to
10% of TGI's issued and outstanding shares in exchange for forgiveness of a
$100,000 promissory note held by CVN, as well as the option to purchase shares
equal to 30% of TGI's issued and outstanding shares in exchange for $1,200,000.
Further, the Option Agreement provided that David Coulter, TGI's former
president, had the right to repurchase shares from CVN equal to 15% of TGI's
common stock following the exercise of the option by CVN in exchange for
$1,200,000. Mr. Coulter offset his obligation to pay CVN $1,200,000 by the
$1,200,000 payable to TGI by CVN pursuant to its exercise of options. The
Commission Agreement provided that TGI and Mr. Coulter, TGI's then President,
would pay Mr. Noblett, as agent for CVN, an amount equal to 6% of the gross
proceeds received by TGI from any underwriting arranged by Andrew Glashow and
Joe Py, including bridge financing, and subsequently, Mr. Noblett would rebate
one-third of aforementioned fees to Mr. Coulter. The Option Agreement was
subsequently canceled and the parties released each other from all claims.
Prior to the issuance of the 1,030,000 shares of TGI's stock as a result
of the exercise of the Option Agreement by CVN and the 849,750 shares received
in consideration for the Settlement Agreement, for a total of 1,879,750 Shares,
Mr. Noblett, as agent for CVN, assigned 1,060,000 shares to certain persons as
consideration for loans made to CVN.
In March 1998 TGI completed payment to Mr. Noblett of a fee in the
amount of $100,000 for certain services provided in assisting TGI with obtaining
additional capital.
In May, 1998 Mr. Coulter transferred 379,250 shares of his stock to CVN.
Mr. Coulter then canceled 5,414,172 shares of common stock of TGI in connection
with the pending private placement of shares of TGI. Of these shares canceled,
TGI reissued 125,619 to him in August 1998, prior to completion of the merger
with U.S. Connect 1995.
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The cancellation of the Option Agreement was part of the over-all
consideration given in settling the disputes between Mr. Noblett and Mr.
Coulter. A dispute arose between Messrs. Noblett and Coulter with regard to Mr.
Noblett's right to purchase 30% of the outstanding stock of TGI. Due to what Mr.
Coulter perceived to be the increasing potential of TGI, he did not want TGI to
honor TGI's prior commitment to Mr. Noblett. The transactions had no impact on
the operations of the company. These transactions only resolved disputed issues
between Mr. Noblett and Mr. Coulter. At that point in time, there were fewer
than ten stockholders of the company, all of whom were closely associated with
the company. Accordingly, there were no public stockholders affected in any way
by these transactions.
In connection with the merger with U.S. Connect 1995, the company
assumed the obligations of TGI to issue options to purchase 2,000,000 shares of
TGI common stock on a pro rata basis to all TGI stockholders as of August 30,
1998, at an exercise price of $0.7168 per share, exercisable for five years from
date of grant. In addition, the company assumed the obligations of TGI for
options to purchase 1,500,000 shares of TGI common stock to Mr. Coulter,
then-President of TGI, and 500,000 shares of TGI common stock to Mr. Noblett,
the Vice President and Chief Operating Officer of TGI, at an exercise price of
$.7168 per share, exercisable for five years from date of grant. In October 1998
the board of directors of the company authorized the issuance of additional
options to purchase 1,000,000 shares of common stock to Mr. Coulter, and 333,333
shares of common stock to Mr. Noblett, at an exercise price of $3.00 per share,
exercisable for five years from date of grant subject to the company achieving
$30,000,000 in sales in 1999.
On March 22, 1999, Mr. Coulter resigned as a director and officer of the
company. Pursuant to a resignation agreement, Mr. Coulter agreed to cancel
1,767,769 shares of common stock, reducing the number of shares he holds to
3,000,000 shares of common stock. By contract, the 3,000,000 shares retained by
Mr. Coulter are nonvoting. In addition, Mr. Coulter agreed to cancel all options
held by him to purchase 3,410,885 shares of common stock. The canceled options
included options on 1,400,000 shares exercisable at $3.00 per share and options
on 2,010,885 shares at $0.7168 per share. Mr. Coulter agreed to accept in lieu
thereof options to purchase 1,500,000 shares of common stock, with an exercise
price of $3.00 per share, for five years from August 22, 1999. Mr. Coulter
agreed to the termination of his employment agreement. The company agreed to pay
Mr. Coulter a severance payment of $150,000, payable at the rate of $30,000 per
month from the time of resignation, and to pay Mr. Coulter for consulting with
the company at the rate of $10,000 per month for a total of 36 months,
commencing upon his resignation. The company and Mr. Coulter have entered into a
general mutual release of claims. As a result of an alleged breach of the
resignation agreement by Mr. Coulter, the company has suspended the payment of
$10,000 per month to Mr. Coulter.
CFE and VCI (the "Consultant") are working together as equal joint
venture partners pursuant to an exclusive Consulting Agreement entered into
between the Consultant and the Company, dated September 15, 1999, which will
terminate no earlier than September 15, 2002. Mr. Palmer, CEO of the company, is
also the owner and President of the Consultant.
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The Consulting Agreement states that the duties of the Consultant
include: (1) identifying, analyzing, structuring, negotiating and financing
business sales and/or acquisitions, including without limitation, merger
agreements, stock purchase agreements, and any agreements relating to financing
and/or the placement of debt or equity securities of the Company; (2) assisting
the Company in its corporate strategies; and (3) assisting the Company in the
implementation of its business plan, in each case as requested by the Company.
The Consultant shall receive as compensation as follows: (1) A
non-refundable monthly retainer of $5,000, payable in cash or restricted common
stock (at the company's option) at a price of $2.00 per share; (2) warrants to
purchase 1,200,000 shares of common stock (the "warrants"), with exercise prices
equal to (a) as to 300,000 warrants, $4.25, (b) as to 300,000 warrants, $5.25,
(c) as to 200,000 warrants, $6.25, and (d) as to 400,000 warrants, $8.50; (3)
fees equal to ten percent of the total aggregate consideration paid for any
acquisition or sale by the Company of any business, corporation or division (a
"Target"), or the sale, transfer or license of technology (collectively, a
"Transaction"), which fee shall be due upon closing of the Transaction; (4) a
financing fee equal to ten percent of any private or public placement of debt or
equity securities of or owned by the company; and (5) to the extent possible, a
share of any fees or commissions payable by third parties on any Transaction
contemplated by the Consulting Agreement. All compensation to be received by
Consultant under the Consulting Agreement is paid half to Corporate CFE and half
to VCI.
The company, at its option, may pay fees due under clause (3) and (4) of
the prior paragraph by issuance of restricted common stock or freely tradable,
registered common stock. Restricted common stock shall be issued at a rate equal
to the lesser of (i) 50% of the average bid price for the five trading days
prior to the closing date of a Transaction which entitles the Consultant to
receive such fees, or (ii) $5.00. Freely tradable, registered common stock,
pursuant to an effective and current registration statement, shall be issued at
the rate equal to the lesser of (i) 70% of the average bid price for the five
trading days prior to the closing date of a Transaction which entitles the
Consultant to receive such fees, or (ii) $7.50.
In the event of a conflict of interest which would prevent the
Consultant from acting due to Mr. Palmer's position with the company or if for
any reason Consultant is unable to continue performing the services as per the
terms of the Consulting Agreement, CFE will act in Consultant's stead. CFE has
no relationship with the company except as an investor. CFE will assume all the
duties and obligations set forth in the Consulting Agreement and shall be
entitled to receive all benefits related thereto. To date, on behalf of the
Company, the board has waived any conflict of interest that may arise from a
relationship between Mr. Palmer and any entity with which Consultant is
affiliated.
The company has agreed to issue 2,500,000 shares of Series B 12%
Convertible Preferred Stock to CFE for $2.00 per share, and 1,000,000 shares of
Series A 12% Convertible Preferred Stock to VCI for $2.00 per shares. The
purchase price is payable in monthly installments of $500,000. Each of those
series of the Preferred Stock has a liquidation preference of $2.00 per share,
bears cumulative 12% dividends, and may be converted immediately into common
stock
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at the lower of $2.00 per share or 70% of the bid price of the common stock on
the date of a notice to convert as reported by the exchange or the market on
which the shares of common stock are traded. At a closing bid price of $5.25 on
January 21, 2000, VCI would be entitled to convert the 1,000,000 shares of
preferred stock into 1,000,000 shares of common stock.
PRINCIPAL STOCKHOLDERS
COMMON STOCK
The following table sets forth, as of January 17, 2000, the ownership of
the company's common stock by
- each director and named executive officer of the company,
- all executive officers and directors of the Company as a group,
and
- all persons known by the company to beneficially own more than
5% of the company's common stock.
Amount and Percent of
Nature of Class of Total
Beneficial Shares and
Name and Address of Beneficial Owner Ownership(1) Options
------------------------------------ ------------ --------------
David B. Coulter(2) 3,750,000 18.97%
15555 Huntington Village Lane, #239
Building 9
Huntington Beach, CA 92647
Chester (Chet) L. Noblett Jr.(3) 2,541,986 13.03%
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Salvator Piraino(4) 161,103 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
William Sarpalius(5) 226,838 1.24%
908 Pennsylvania Avenue, S.E.
Washington, D.C. 20003
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Jeffrey Hecht(6) 382,912 2.07%
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Gary Pan(7) 45,000 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Michael C. Palmer(9) 735,000 3.87%
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
James Mack(8) 98,026 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Directors and Executive Officers as a group 4,190,685 22.63%
* Less than one percent.
(1) Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding
for the purpose of calculating the number and percentage owned by such
person, but are not deemed outstanding for the purpose of calculating
the percentage owned by each other person listed.
(2) Includes options to purchase: (i) 1,500,000 shares of the company's
common stock at $3.00 per share for a period of five years from August
22, 1998.
(3) Includes options to purchase; (i) 262,802 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 8, 1998); (ii) 633,333 shares of the company's common stock
at $3.00 per share for a period of five years from date of grant
(October 7, 1998); and (iii) 350,000 shares of our common stock at
$2.40 per share for a period of five years from the date of grant
(June 9, 1998).
(4) Includes options to purchase (i) 16,103 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 31, 1998); and, (ii) 20,000 shares of the company's common stock
at $5.50 per share for a period of five years from date of grant
(September 30, 1999); and (iii) 25,000 shares of the company's common
stock at $4.00 per share for a period of five years from date of grant
(February 9, 1999).
(5) Includes 30,000 shares owned by Carol Sarpalius, who is an employee of
the company and the wife of Mr. Sarpalius. Also includes options to
purchase: (i) 26,838 shares of the Company's common stock at $0.7168 per
share for a period of five years from date of
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grant (August 31, 1999); and, (ii) 20,000 shares of the Company's common
stock at $5.50 per share for a period of five years from date of grant
(September 30, 1999); and, (iii) 25,000 shares of the Company's common
stock at $4.00 per share for a period of five years from date of grant
(September 15, 1998)
(6) Includes options to purchase: (i) 27,912 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 31, 1998); and, (ii) 225,000 shares of the company's common
stock at $3.00 per share for a period of five years from date of grant
(September 15, 1998).
(7) Includes options to purchase (i) 20,000 shares of the company's common
stock at $17.41 per share for a period of five years from date of grant
(September 30, 1999), and (ii) 25,000 shares of the company's common
stock at $4.00 per share for a period of five years from the date of
grant (February 9,1999).
(8) Includes options to purchase: (i) 4,294 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 31, 1998); and, (ii) 250,000 shares of the company's common
stock at $3.00 per share for a period of five years from date of grant
(September 28, 1998).
(9) Includes options to purchase: (i) 100,000 shares of the company's common
stock at $9.25 per share for a period of five years from date of grant
(November 28, 1998); and (ii) 25,000 shares of the company's common
stock at $4.00 per share for a period of five years from date of grant
(February 9, 1999). Also included are warrants to purchase: (i) 150,000
shares of the company's common stock at $4.25 per share for a period of
five years from date of grant (November 1, 1999); (ii) 150,000 shares of
the company's common stock at $5.25 per share for a period of five years
from the date of grant (November 1, 1999); (iii) 100,000 shares of the
company's common stock at $6.25 per shares for a period of five years
from the date of grant (November 1,1999); and (iv) 200,000 shares of the
company's common stock at $8.25 per shares for a period of five years
from date of grant (November 1, 1999).
PREFERRED STOCK
The following table sets forth information regarding the beneficial
ownership of our voting preferred stock as of the date of this prospectus:
Name and Address Number of Shares Percent
Class of Beneficial Owner Beneficially Owned of Class
----- ------------------- ------------------ --------
Series A Vantage Capital, Inc. 1,000,000 100%
12% Convertible 1990 Bundy Drive, Suite 600
Preferred(1) Los Angeles, California 90025
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Series B Corporate Financial 2,500,000 100%
12% Convertible Enterprises, Inc.
Preferred(1) 2224 Main Street
Santa Monica, California 90405
Series C Wentworth LLC 50,000 100%
6% Convertible Corporate Center
Preferred(1) West Bay Road
Grand Cayman
(1) All of the above preferred stock is convertible into common
stock immediately. See "Description of securities" for details
on the conversion prices.
SELLING STOCKHOLDERS
All of the _______________ shares offered by this prospectus are being
registered for sale for the accounts of selling stockholders. As noted in the
following table, the selling stockholders have obtained or will obtain the
common stock offered under this prospectus by converting or exercising certain
of our convertible securities that they have held, now hold or have the right to
acquire. These selling stockholders hold shares of Series A 12% Convertible
Preferred Stock ("Series A Preferred"), Series B 12% Convertible Preferred Stock
("Series B Preferred"), Series C 6% Convertible Preferred Stock ("Series C
Preferred"), warrants to purchase common stock, which we issued to holders of
the Series C Preferred in connection with the issuance of the Series C
Preferred, and common stock acquired upon the exercise of certain warrants.
The table below includes, in the total number of shares offered, shares
of common stock that have been issued or are issuable upon conversion of shares
of Series A Preferred, Series B Preferred and Series C Preferred.
The table below also includes shares of common stock issuable upon
exercise of warrants issued to holder of Series C Preferred which are selling
stockholders, and shares of common stock acquired by a selling stockholder
pursuant to the exercise of certain warrants.
We will not receive any portion of the proceeds from the sale of shares
of common stock by the selling stockholders.
Based on the information supplied to us by each selling stockholder, the
following table sets forth certain information regarding the approximate number
of shares of common stock which each selling stockholder owns or has the right
to immediately acquire as of the date hereof, and as adjusted to reflect the
sale by the selling stockholders of the shares of common
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stock offered by this prospectus. No selling stockholder has held any office or
maintained any material relationship with us or any of our predecessors or
affiliates, over the past three years.
Shares Beneficially
Owned Prior to Shares Beneficially
Offering(1) Number of Owned After Offering(1)(2)
-------------------- Shares ---------- ------------
Name and Address Number Percent(3) Offered Number Percent
- ---------------- ---------- --------- --------- ---------- ------------
Vantage Capital, Inc.
1990 Bundy Drive, Suite 600
Los Angeles, CA 90025 1,000,000(4) % 1,000,000 0 0
Corporate Financial
Enterprises, Inc.
2224 Main St.
Santa Monica, CA 90025 2,500,000(5) % 2,500,000 0 0
Wentworth LLC
Corporate Center
West Bay Road
Grand Cayman 9,000,000(6)(8) % 9,000,000(9) 0 0
Grayson & Associates
One Tabor Center 159,286(7) * 159,286 0 0
1200 17th St., 16th Floor
Denver, CO 80202
- -------------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated, each
person possesses sole voting and investment power with respect to all of
the shares of common stock owned by such person, subject to community
property laws where applicable. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options and convertible
securities held by that person that are currently exercisable, or become
exercisable within 60 days of the date of this prospectus are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. The
information as to each person has been furnished by such person.
(2) Assumes that all shares of common stock offered in this prospectus will
be sold.
(3) Based on approximately _______________ shares of common stock issued and
outstanding as of _______________, 2000 which assumes that the shares
offered for sale are outstanding.
(4) Michael D. Palmer, President of VCI, is the individual who has voting
and investment decision authority over this investment.
(5) ___________, ___________ of CFE, is the individual who has voting and
investment decision authority over this investment.
(6) ___________, ___________ of Wentworth LLC, is the individual who has
voting and investment decision authority over this investment.
(7) Gerald Grayson, President of Grayson & Associates, is the individual who
has voting and investment decision authority over this investment.
(8) Includes _________ shares of common stock issuable upon exercise of the
Series C Preferred assuming a conversion price of $_______; _________
shares which might become issuable upon conversion of preferred stock to
be purchased pursuant to our Equity Line with Wentworth, LLC; _________
shares to protect against an increase in the number of shares issuable
due to a decline in the market price of our common stock; and 238,877
shares of common stock issuable upon exercise of warrants issued to
Wentworth LLC, in connection with the issuance of the Series C
Preferred.
(9) The actual number of shares to be offered will depend on the number of
shares acquired by Wentworth, LLC, upon conversion of the Series C
Preferred it holds and any new series of preferred stock it may acquire
pursuant to the Equity Line.
DESCRIPTION OF SECURITIES
The following summary description of our capital stock is not intended
to be complete and is subject to and qualified in its entirety by reference to
our Amended and Restated Articles of Incorporation, copies of each of which are
filed as exhibits to the registration statement of which this prospectus forms a
part.
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GENERAL
We have authorized capital stock consisting of 40,000,000 shares of
common stock, $0.001 par value, of which 18,263,632 common shares are issued and
outstanding, and 10,000,000 shares of preferred stock, $0.01 par value. We have
agreed to issue 3,550,000 preferred shares of which 50,000 are issued and
outstanding. There are _____ holders of record of our common stock.
We have reserved _______________ shares of common stock for issuance
pursuant to options; _______________ shares for issuance pursuant to outstanding
warrants; and _______________ shares for issuance pursuant to outstanding
convertible securities.
COMMON STOCK
The principal terms of our common stock are set forth below:
- number authorized: 40,000,000
- number outstanding: 18,263,632 exclusive of shares reflected in
this prospectus as being held for sale by the selling
stockholders
- dividend rate: see "Dividend policy"
- vote per share: one
- no preemptive rights or other rights to subscribe for unissued
or treasury shares or securities convertible into or exercisable
or exchangeable for shares of our common stock
- shares of common stock are duly authorized and validly issued,
fully paid and nonassessable
PREFERRED STOCK
Our board of directors has the authority to issue up to 10,000,000
shares of preferred stock in one or more series and to fix the powers,
designations, rights, preferences and restrictions thereof, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences and the number of shares constituting each such series, without any
further vote or action by our stockholders. The issuance of preferred stock in
certain circumstances may delay, deter or prevent a change in control of the
company, may discourage bids for our common stock at a premium over the market
price of the common stock, and may adversely affect the market price of, and the
voting and other rights of the holders of, our common stock. The principal terms
of our common stock are set forth below:
Series A 12% Convertible Preferred.
- number authorized: 2,000,000 shares
- number to be outstanding: 1,000,000 shares
- dividend rate: 12% payable in common stock
- per share liquidation preference: $2 (aggregate preference of
$2,000,000)
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- vote per share: one
- right to appoint directors: none
- when convertible: anytime
- conversion price: lesser of $2 per share or 70% of the closing
bid price on the day before conversion
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- redemption rights: redeemable only with consent of 70% or more
of the holders and either (i) all members of the board or (ii) a
majority of the board with no direct or indirect interest in the
redemption
- registration rights: may include the common stock underlying the
preferred stock in any of our registration statements to sell
securities
Series B 12% Convertible Preferred.
- number authorized: 2,500,000 shares
- number to be outstanding: 2,500,000 shares
- dividend rate: 12% payable in common stock
- per share liquidation preference: $2 (aggregate preference of
$5,000,000)
- vote per share: one
- right to appoint directors: may appoint 40% of directors as long
as at least 500,000 shares are outstanding
- when convertible: anytime
- conversion price: lesser of $2 per share or 70% of the closing
bid price on the day before conversion
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- redemption rights: redeemable only with consent of 70% or more
of the holders and either (i) all members of the board or (ii) a
majority of the board with no direct or indirect interest in the
redemption and who have not been nominated by any holder whose
shares are being redeemed
- registration rights: may include the common stock underlying the
preferred stock in any of our registration statements to sell
securities
Series C 6% Convertible Preferred
- number authorized: 50,000 shares
- number outstanding: 50,000 shares
- dividend rate: 6% payable in either cash or common stock
- per share liquidation preference: $100 (aggregate preference of
$5,000,000)
- vote per share: one vote for each share of common stock into
which the preferred stock could be converted as of the record
date for the vote
- right to appoint directors: none
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- when convertible: 16,666 shares are convertible as of the date
of this prospectus; 16,666 shares are convertible 60 days after
the date of this prospectus; and the balance are convertible 90
days after the date of this prospectus; provided that not
more than 20% of the shares may be converted in any period of
five consecutive trading days. Further, no holder may convert
into common stock if, as a result of such conversion, that
holder would own more than 19.9% of the issued and outstanding
shares of our common stock (we are required to redeem any
excess). In addition, no holder may convert Series C Preferred
Stock if, after such conversion, the holder would be deemed a
beneficial owner of more than 4.99% of the then outstanding
shares of common stock of the company
- conversion price: the lesser of 125% of the closing bid price
of the common stock on December 28, 1999, or 85% of the average
price for the five trading days prior to the conversion notice
date ($4.375 AS OF JANUARY 21, 2000)
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- redemption rights: holders have no redemption rights. We may
redeem the stock at our election for cash at a price equal to
the economic benefit a holder would realize from converting the
stock to common stock and selling it if the market price is more
than $2 per share. If the market price is less than $2 per
share, we may redeem the stock by paying the liquidation
preference plus a premium up to __%
- registration rights: the common stock into which the Series C
Preferred may be converted is required to be registered with the
Securities and Exchange Commission
WARRANTS
Warrants to VCI and CFE
- number of warrants (VCI): 600,000
- number of warrants (CFE): 600,000
- when exercisable: anytime after December 31, 2000 and before the
close of business on September 15, 2009
- exercise price: for each of VCI and CFE, (a) as to 150,000
warrants, $4.25; (b) as to 150,000 warrants, $5.25; (c) as to
100,000 warrants, $6.25; and (d) as to 200,000 warrants, $8.50
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- registration rights: the common stock into which the Series C
Preferred may be converted is required to be registered with the
Securities and Exchange Commission
Warrants to Wentworth LLC
- number of warrants: 238,877
- when exercisable: exercisable at any time and from time to time;
provided, however, that in no event shall the holder be
entitled to exercise the warrant or shall the company have the
obligation to issue shares upon such exercise of all or any
portion of the warrant to the extent that, after such
conversion, the sum of (1) the number of shares of common stock
beneficially owned by the holder and its affiliates (other than
shares of common stock, which may be deemed beneficially owned
through the ownership of the unconverted portion of the
preferred stock or unexercised portion of the warrants), and (2)
the number of shares of common stock issuable upon the
conversion of the preferred stock or exercise of the warrants
with respect to which the determination of this proviso is being
made, would result in beneficial ownership by the holder and its
affiliates of more than 9.99% of the outstanding shares of
common stock (after taking into account the shares to be issued
to the holder upon such conversion or exercise).
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- exercise price: $4.617
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- registration rights: the common stock into which the Series C
Preferred may be converted is required to be registered with the
Securities and Exchange Commission
ANTI-TAKEOVER LAW
Acquisition of controlling interests. A corporation is subject to
Nevada's control share law if it has more than 200 stockholders, at least 100 of
whom are stockholders of record and residents of Nevada, and it does business
in Nevada or through an affiliated corporation.
The law focuses on the acquisition of a "controlling interest" which
means the ownership of outstanding voting shares sufficient, but for the
control share law, to enable the acquiring person to exercise the following
proportions of the voting power of the corporation in the election of
directors; (i) one-fifth or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority or more. The ability to
exercise such voting power may be direct or indirect, as well as individual or
in association with others.
The effect of the control share law is that the acquiring person, and
those acting in association with it, obtains only such voting rights in the
control shares as are conferred by a resolution of the stockholders of the
corporation, approved at a special or annual meeting of stockholders. The
control share law contemplates that voting rights will be considered only once
by the other stockholders. Thus, there is no authority to strip voting rights
from the control shares of an acquiring person once those rights have been
approved. If the stockholders do not grant voting rights to the control shares
acquired by an acquiring person, those shares do not become permanent
non-voting shares. The acquiring person is free to sell its shares to others.
If the buyers of those shares themselves do not acquire a controlling interest,
their shares do not become governed by the control share law.
If control shares are accorded full voting rights and the acquiring
person has acquired control shares with a majority or more of the voting power,
any stockholder of record, other than an acquiring person, who has not voted in
favor of approval of voting rights is entitled to demand fair value for such
stockholder's shares.
Nevada's control share law may have the effect of discouraging takeovers
of the corporation.
Business combination law. In addition to the above control share law,
Nevada has a business combination law which prohibits certain business
combinations between Nevada corporations and "interested stockholders" for three
years after the "interested stockholder" first becomes an "interested
stockholder" unless the corporation's board of directors approves the
combination in advance. For purposes of Nevada law, an "interested stockholder"
is any person who is (i) the beneficial owner, directly or indirectly, of ten
percent or more of the voting power of the outstanding voting shares of the
corporation, or (ii) an affiliate or associate of the corporation and at any
time within the three previous years was the beneficial owner, directly or
indirectly, of ten percent or more of the voting power of the then outstanding
shares of the corporation. The definition of the term "business combination" is
sufficiently broad to cover virtually any kind of transaction that would allow a
potential acquiror to use the corporation's assets to finance the acquisition or
otherwise to benefit its own interests rather than the interests of the
corporation and its other shareholders.
The effect of Nevada's business combination law is to potentially
discourage parties interested in taking control of the company from doing so if
it cannot obtain the approval of our board of directors.
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
Pursuant to the company's articles of incorporation, the personal
liability of a director or officer of the company to the company or a
shareholder for monetary damages for breach of a fiduciary duty is limited to
situations in which a director's or officer's acts or omissions involve
intentional misconduct, fraud or knowing violations of law.
The company's articles of incorporation and bylaws provide for the
indemnification of directors and officers of the company to the maximum extent
permitted by law. The bylaws provide generally for indemnification as to all
expenses incurred or imposed upon them as a result of actions, suits or
proceedings if they act in good faith and in a manner they reasonably believe to
be in or not opposed to the best interests of the company. These documents,
among other things, indemnify the company's employees, officers and directors
for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including any action by or in the right of the company, on account of services
as any employee, officer or director of the company or as an employee, officer
or director of any affiliate of the company. The company believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the company as to which indemnification is
being sought, and the company is not aware of any pending or threatened
litigation that may result in claims for indemnification by any director,
officer, employee or other agent.
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The company has purchased directors and officers liability insurance to
defend and indemnify directors and officers who are subject to claims made
against them for their actions and omissions as directors and officers of the
company. the insurance policy provides standard directors and officers liability
insurance in the amount of $5,000,000.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or controlling persons, pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this offering, assuming full conversion of our Series
C preferred stock at the current conversion price, we will have _______________
shares of common stock outstanding. Of the outstanding shares of common stock,
_______________ are freely tradable by persons other than executive officers,
directors and ten percent shareholders of the company as that term is defined
under the Securities Act, without restriction or further registration, and
_______________ would be deemed "restricted securities" within the meaning of
Rule 144 under the Securities Act. If presently unexercised warrants or options
were exercised to purchase common stock, or presently convertible preferred
stock (other than Series C preferred stock) was converted into common stock, we
would have an additional _______________ shares of "restricted securities"
outstanding for a total of _______________ shares. "Restricted securities" may
not be sold in the absence of registration unless an exemption from registration
is available, including the exemption contained in Rule 144. The presently
outstanding "restricted securities" become eligible for resale under Rule 144 at
various dates commencing on _______________, 2000, and all will be eligible for
resale under Rule 144 by _______________, 200_.
In general, under Rule 144, a stockholder who has beneficially owned
shares of common stock for at least one year is entitled to sell, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of one percent of the then outstanding shares of common stock or the
average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to sale limitations, notice
requirements and the availability of current public information about us. Rule
144(k) provides that a stockholder who is not deemed to be an "affiliate" and
who has beneficially owned shares of common stock for at least two years is
entitled to sell those shares at any time under Rule 144(k) without regard to
the limitations described above. In addition to the shares of common stock that
are currently outstanding, a total of _______________ shares of common stock are
reserved for issuance upon exercise of options granted to our directors,
executive officers and employees; _______________ shares are issuable upon
exercise of outstanding warrants; and, at current conversion prices,
_______________ shares are issuable upon conversion of Series A and Series B
preferred stock.
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We are unable to estimate the number of shares that may be sold in the
future by existing holders of shares of our common stock or holders of options
or warrants or convertible securities that are outstanding or the effect, if
any, that sales of shares of common stock by these persons will have on the
market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock by these persons could adversely affect the
then prevailing market prices of the common stock and warrants.
PLAN OF DISTRIBUTION
The shares offered by this prospectus may be sold from time to time by
selling stockholders, who consist of the persons named under "Selling
stockholders" above and those persons' pledgees, donees, transferees or other
successors in interest. The selling stockholders may sell the shares on the OTC
Bulletin Board or otherwise, at market prices or at negotiated prices. They may
sell shares by one or a combination of the following:
- a block trade in which a broker or dealer so engaged will
attempt to sell the shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by the
broker or dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which a
broker solicits purchasers;
- privately negotiated transactions;
- short sales;
- if such a sale qualifies, in accordance with Rule 144
promulgated under the Securities Act rather than pursuant to this prospectus;
and
- any other method permitted pursuant to applicable law.
In making sales, brokers or dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from selling stockholders in amounts to be
negotiated prior to the sale. The selling stockholders and any broker-dealers
that participate in the distribution may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act of 1933, and any proceeds or
commissions received by them, and any profits on the resale of shares sold by
broker-dealers, may be deemed to be underwriting discounts and commissions.
44
48
If any selling stockholder notifies us that a material arrangement has
been entered into with a broker-dealer for the sale of shares through a block
trade, special offering, exchange distribution or secondary distribution or a
purchase by a broker or dealer, we will file a prospectus supplement, if
required pursuant to Rule 424(c) under the Securities Act of 1933, setting
forth:
- the name of each of the participating broker-dealers,
- the number of shares involved,
- the price at which the shares were sold,
- the commissions paid or discounts or concessions allowed to the
broker-dealers, where applicable,
- a statement to the effect that the broker-dealers did not
conduct any investigation to verify the information set out or incorporated by
reference in this prospectus, and
- any other facts material to the transaction.
We are paying the expenses incurred in connection with preparing and
filing this prospectus and the registration statement to which it relates, other
than selling commissions. In addition, in the event the selling stockholders
sell short shares of common stock, this prospectus may be delivered in
connection with such short sales and the shares offered by this prospectus may
be used to cover such short sales. To the extent, if any, that the selling
stockholders may be considered "underwriters" within the meaning of the
Securities Act, the sale of the shares by them shall be covered by this
prospectus.
LEGAL MATTERS
Arter & Hadden LLP, Los Angeles, California, has advised us with respect
to the validity of the shares of common stock offered by this prospectus.
EXPERTS
Lichter & Company, independent auditors, have audited the consolidated
financial statements of the company for the years ended December 31, 1997 and
1998, as set forth in their report, which is included in this prospectus. The
company's consolidated financial statements are included in this prospectus in
reliance on their report, given their authority as experts in accounting and
auditing.
45
49
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The company has filed with the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, a registration statement on Form
SB-2 under the Securities Act with respect to the securities offered. As
permitted by SEC rules, this prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules to the
registration statement. For further information concerning the company and the
securities offered, we refer you to the registration statement and the exhibits
and schedules filed as a part of the registration statement.
Statements contained in this prospectus concerning the contents of any
contract or any other document are not necessarily complete. In each instance
where a copy of that contract or document has been filed as an exhibit to the
registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement is qualified in all respects by reference to
that exhibit. The registration statement, including its exhibits and schedules,
may be inspected without charge at the SEC's Public Reference Room, at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the SEC's regional
offices at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and 7 World Trade Center, New York New York 10048.
Copies of all or any part of those documents may be obtained from the SEC's
office after payment of the SEC's prescribed fees. You may call the SEC at
1-800-SEC-0330 for further information on the operation of the SEC's public
reference rooms. The SEC maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding companies that file electronically with the SEC.
We intend to provide our stockholders with annual reports containing
consolidated financial statements by an independent public accounting firm and
will make available to stockholders quarterly reports containing unaudited
consolidated financial data for the first three quarters of each year. We are
subject to the information and reporting requirements of the Securities Exchange
Act of 1934, as amended, and file periodic reports, proxy statements and other
information with the SEC.
46
50
ESAT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Lichter & Company, Independent Auditors............................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1998 and Condensed
Balance Sheets as of September 30, 1999 and December 31, 1998
(Unaudited)................................................................. F-2
Consolidated Statements of Income and Expense for the years ending December 31,
1997 and 1998 and the nine months ended September 30, 1999
(Unaudited)................................................................ F-4
Statements of Stockholders' Equity.............................................. F-6
Consolidated Statements of Cash Flows for the years ending December 31, 1997 and
1998 and the nine months ended September 30, 1999 (Unaudited)............... F-7
Notes to Financial Statements................................................... F-9
51
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
eSat, Inc. (Formerly Technology Guardian, Inc.)
Fountain Valley, California
Members of the Board:
We have audited the accompanying balance sheets of eSat, Inc. (Formerly
Technology Guardian, Inc.) ("the Company") as of December 31, 1998 and 1997, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eSat, Inc. (Formerly Technology
Guardian, Inc.) as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the period ended
December 31, 1998 and 1997 in conformity with generally accepted accounting
principles.
As discussed in Note Q to the financial statements, the Company has suffered
recurring losses, a decline in revenue and cash shortages. These issues raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note Q. The financial
statements do not include any adjustment that might result from the outcome of
this uncertainty.
As discussed in Note P to the financial statements, the Company's 1998
Additional Paid in Capital previously reported as $6,614,398 should have been
$6,051,234. This discovery was made subsequent to the issuance of the financial
statements. The financial statements have been restated to reflect this
correction.
February 23, 1999, except for Note P, as to which the date is June 14, 1999, and
Notes J, K and Q as to which the date is October 22, 1999 Los Angeles,
California.
/s/ LICHTER & COMPANY
F-1
52
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
----------- -----------
Current Assets
Cash $ 2,567,697 $ 0
Accounts Receivable 48,964 256,986
Inventories 289,260 148,479
Note Receivable 15,000 22,500
----------- -----------
Total Current Assets 2,920,921 427,965
----------- -----------
Fixed Assets (Net of accumulated depreciation of
$41,965 and $17,306, respectively) 293,251 23,928
----------- -----------
Total Fixed Assets 293,251 23,928
----------- -----------
Other Assets
Deposits 47,215 2,027
----------- -----------
Total Other Assets 47,215 2,027
----------- -----------
Total Assets $ 3,261,387 $ 453,920
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Cash $ 0 $ 11,827
Accounts Payable and Accrued Expenses 235,866 341,772
Sales Tax Payable 10,801 6,569
Payroll Taxes Payable 168,891 137,346
Deferred Revenue 117,070 0
Income Tax Payable 0 800
Short Term Debt (includes current portion
of long term debt) 6,414 164,093
----------- -----------
Total Current Liabilities 539,042 662,407
----------- -----------
Long Term Liabilities
Notes Payable (net of current portion) 0 119,265
----------- -----------
Total Long Term Liabilities 0 119,265
----------- -----------
Stockholders' Equity
Common Stock, Par Value $.001 Per Share,
Authorized 40,000,000 Shares Common
Stock, 10,000,000 Preferred Stock,
Issued and Outstanding 16,085,936
and 11,407,507 Common, respectively 16,086 11,408
Additional Paid in Capital 6,051,235 278,643
Retained (Deficits) (3,344,976) (617,803)
----------- -----------
Total Stockholders' Equity 2,722,345 (327,752)
----------- -----------
Total Liabilities and
Stockholders' Equity $ 3,261,387 $ 453,920
=========== ===========
Accountant's report and notes are an integral part of these financial
statements.
F-2
53
eSAT, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,276 $ 2,567,697
Accounts receivable 27,677 48,964
Inventories 389,269 289,260
Other current assets 40,094 15,000
----------- -----------
TOTAL CURRENT ASSETS 469,316 2,920,921
Property and equipment, net 704,023 293,251
Note receivable 250,000 --
Other assets, net 76,586 47,215
----------- -----------
$ 1,499,925 $ 3,261,387
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,455,551 $ 246,667
Payroll taxes payable 36,246 168,891
Deferred revenue 76,836 117,070
Notes payable and current portion on long term debt 54,309 6,414
----------- -----------
TOTAL CURRENT LIABILITIES 1,622,942 539,042
Note payable, net of current portion 26,405 --
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock,
10,000,000 shares authorized; 2,000,000 shares
subscribed and unissued at September 30, 1999 4,000,000 --
Common stock - $.001 par value,
40,000,000 shares authorized; 18,234,566 shares issued
and outstanding at September 30, 1999 and 16,085,936 at
December 31, 1998 18,235 16,086
Additional paid in capital 9,115,025 6,051,235
Treasury stock (364,370) --
Subscription receivable (3,250,000) --
Accumulated deficit (9,668,312) (3,344,976)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (149,422) 2,722,345
----------- -----------
$ 1,499,925 $ 3,261,387
=========== ===========
See accompanying notes.
F-3
54
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
STATEMENTS OF INCOME AND EXPENSE
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
Sales $ 341,047 $ 1,201,044
Cost of Goods Sold (net of inventory adjustment of
$140,780 and $140,000, respectively) 685,570 345,491
------------ ------------
Gross Profit (Loss) (344,523) 855,553
Selling, General and Administrative Expenses
Advertising 175,647 125,934
Auto expense 23,427 15,538
Commissions 46,753 115,921
Equipment rental 42,375 11,726
Freight and delivery 49,103 11,549
Insurance 35,537 11,193
Legal and accounting 157,955 92,936
Other operating 109,010 152,098
Payroll taxes 201,454 43,837
Rent 45,464 25,900
Repairs and maintenance 14,496 2,738
Travel and entertainment 165,173 45,652
Utilities 68,236 45,463
Wages and salaries 1,216,751 471,375
------------ ------------
2,351,382 1,171,860
------------ ------------
(Loss) from operations (2,695,905) (316,307)
Other Income and (Expense)
Interest expense (11,371) (19,145)
Depreciation (24,659) (12,546)
Bad debt (237,426) (105,000)
------------ ------------
(273,456) (136,691)
------------ ------------
(Loss) before extraordinary income and income taxes (2,969,362) (452,998)
Extraordinary income, net of income tax effect of $0 242,990 0
------------ ------------
(Loss) before income taxes (2,726,372) (452,998)
Income taxes 800 800
------------ ------------
Net (Loss) $ (2,727,172) $ (453,798)
============ ============
Net (Loss) Per Share (Basic and Diluted)
Basic $ (0.17) $ (0.04)
Diluted $ (0.17) $ (0.04)
Weighted Average Number of Shares
Basic 16,085,936 11,407,507
Diluted 16,085,936 11,407,507
Accountant's report and notes are an integral part of these financial
statements.
F-4
55
eSAT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
Revenue $ 20,711 $ (455,888) $ 1,187,770 $ 237,758
Cost of goods sales 259,197 76,688 767,167 450,545
----------- ----------- ----------- -----------
Gross profit (238,486) (532,576) 420,603 (212,787)
Selling, general and administrative expenses 1,739,565 403,403 5,718,146 1,190,420
Write off uncollectible accounts 96,264 236,666 1,064,986 236,666
----------- ----------- ----------- -----------
1,835,829 640,069 6,783,132 1,427,086
Operating loss (2,074,315) (1,172,645) (6,362,529) (1,639,873)
Interest (income) (3,038) -- (55,384)
Interest expense 8,601 897 16,191 11,397
----------- ----------- ----------- -----------
Net loss before extraordinary item (2,079,878) (1,173,542) (6,323,366) (1,651,270)
Extraordinary gain on extinguishment
of debt, net of tax effect -- 242,990 -- 242,990
----------- ----------- ----------- -----------
Net loss $(2,079,878) $ (930,552) $(6,323,336) $(1,408,280)
=========== =========== =========== ===========
Basic and fully-diluted loss per common share $ (0.12) $ (0.08) $ (0.37) $ (0.12)
=========== =========== =========== ===========
Shares used in computing net loss per share 17,902,396 12,361,747 17,296,909 12,043,667
=========== =========== =========== ===========
See accompanying notes.
F-5
56
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
Retained (Deficits)
Balance at beginning of year $ (617,803) $ (164,005)
Net (loss) (2,727,172) (453,798)
Dividends declared on common stock 0 0
------------ ------------
Balance at end of year (3,344,976) (617,803)
------------ ------------
Common Stock (Par Value $.001)
Balance at beginning of year 11,408 10,653
Common stock issued in reverse acquisition
(1,050,400 shares) 1,050 0
Common stock issued (3,628,029 shares and
755,350 respectively) 3,628 755
------------ ------------
Balance at end of year 16,086 11,408
------------ ------------
Additional Paid in Capital
Balance at beginning of year 278,643 278,643
Sale of common stock 5,772,592 0
------------ ------------
Balance at end of year 6,051,235 278,643
------------ ------------
Total Stockholders' Equity at end of year $ 2,722,345 $ (327,752)
============ ============
Common shares outstanding at end of year 16,085,936 11,407,507
Accountant's report and notes are an integral part of these financial
statements.
F-6
57
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
Cash Flows from Operating Activities:
Net (Loss) $(2,727,172) $ (453,798)
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 24,659 12,546
(Increase) decrease in accounts receivable 208,022 (241,405)
(Increase) decrease in inventories (92,820) (139,651)
(Increase) decrease in notes receivable 7,500 52,500
(Increase) decrease in deposits (45,188) 0
Increase (decrease) in payroll taxes payable (31,545) 137,346
Increase (decrease) in accounts payable (105,906) 127,989
Increase (decrease) in sales tax payable 4,232 6,569
Increase (decrease) in deferred revenue 117,070 0
Increase (decrease) in income tax payable (800) 800
Increase (decrease) in short term debt (157,679) 259,387
----------- -----------
Net Cash (Used in) Operations (2,799,627) (237,717)
----------- -----------
Cash Flows From Financing Activities
Sale of common stock (net cash) 5,673,131 253,363
----------- -----------
Net Cash Provided by
Financing Activities 5,673,131 253,363
----------- -----------
Cash Flows From Investing Activities:
Purchase of equipment (293,980) (6,539)
Purchase of stock 0 (12,000)
----------- -----------
Net Cash (Used in)
Investing Activities (293,980) (18,539)
----------- -----------
Net Increase (Decrease)
in Cash 2,579,524 (2,893)
----------- -----------
Cash - Beginning (11,827) (8,934)
----------- -----------
Cash - Ending $ 2,567,697 $ (11,827)
=========== ===========
Accountant's report and notes are an integral part of these financial
statements.
F-7
58
eSAT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1999 1998
------------ ------------
OPERATING ACTIVITIES
Net loss $(6,323,336) $(1,408,280)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 133,199 27,694
Issuance of stock options for services 1,226,800 --
Decrease in accounts receivable, net 21,287 208,435
(Increase) in inventory (100,009) (92,819)
(Increase) decrease in note receivable (250,000) 20,082
(Increase) in other current assets (25,094) (4,190)
(Increase) in other noncurrent assets (29,371) (48,508)
Increase (decrease) in other accounts payable
and accrued expenses 1,208,884 (298,604)
Increase (decrease) in deferred revenue (40,234) 91,951
Increase (decrease) in note payable and current
portion of debt 50,000 (281,533)
Increase (decrease) in payroll taxes payable (132,645) 155,422
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (4,260,519) (1,630,350)
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (543,971) (96,339)
----------- -----------
NET PROVIDED BY (CASH USED) IN INVESTING ACTIVITIES (543,971) (96,339)
----------- -----------
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 1,839,139 1,814,329
Net cash proceeds from issuance of preferred stock 750,000 --
Net cash used to acquire treasury stock (364,370) 12,000
Cash proceeds from notes payable 24,300 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,249,069 1,826,329
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,555,421) 99,640
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,567,697 (11,827)
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,276 $ 87,813
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 9,941 $ 10,500
=========== ===========
See accompanying notes.
F-8
59
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note A - Nature of Activities
Formed February 22, 1996, as a California Corporation, Technology
Guardian, Inc. (the Company) is a "C" Corporation as organized under the
Internal Revenue Code. Technology Guardian, Inc. is a technology company
whose primary purpose is to provide high-speed satellite Internet access
products and services. Its customers include businesses, educational
institutions, and government agencies.
The Company's product lines were developed to fill voids in the Internet
access arena, and have applications both domestically and
internationally. In the United States, businesses and organizations can
benefit from the Company's affordability, ease of use, and true
high-speed access. In many countries there is a lack of even marginal
communications infrastructure to support high-speed Internet access. The
Company's potential appears to be very positive in these markets.
The Company's three sales divisions are designed to address the Internet
access needs of the different segments of the marketplace. The Galactic
Satellite Internet (GSI) division targets businesses and governmental
sectors. Satellite Accessed Material for Schools (SAMS) was specifically
created to address the tremendous demand for educational access
solutions. SAMS brings quality high-speed access to our schools in a
managed educational environment.
In October 1998, the Company relocated to its new corporate headquarters
in Fountain Valley, California. This 11,000 square foot facility serves
as the Company's new headquarters and will provide additional office
space as well as a substantial R & D area. Later that same month, the
Company established its presence on the East Coast with the opening of a
1,864 square foot branch office in Washington, D.C.
A new Vice President of Business Development was brought in at the end
of 1998 to strengthen the Company's Partners Program. Through its VAR
network, the company has access to CompUSA's business customers and has
been approved for resale through Hewlett Packard's distribution
channels.
In late 1998, the Company introduced the DigiNXT product line, designed
specifically for sale to commercial customers at the retail level.
Retailers with a national presence will now have a high-speed Internet
product for their commercial business customers. CompUSA is leading the
way with plans to sell the DigiNXT nationwide.
F-9
60
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note B - Summary of Significant Accounting Policies
Revenue Recognition, Returns and Sales Incentives
Hardware and Software- The Company recognizes revenue from hardware and
software sales as products are shipped. The Company, subject to certain
limitations, permits its customers to exchange products or receive
credits against future purchases. The Company offers its customers
several sales incentive programs which, among others, include funds
available for cooperative promotion of product sales. Customers earn
credit under such programs based on the volume of purchases. The
allowance for sales returns and costs of customer incentive programs are
accrued concurrently with the recognition of revenue.
Internet Access- The Company also generates revenue by selling
high-speed internet access. This service is purchased by customers on
either a one, two or three year service subscription contract. Revenue
is recognized as the service is provided using the straight-line method
over the life of the contract. A related liability is recorded for the
unearned portion of service revenue received. Costs that are directly
related to the acquisition of the contract are deferred and charged to
expense also using the straight-line method over the life of the
contract.
The Company reports income and expenses on the accrual basis for both
financial and income tax reporting purposes.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things,
intense competition in the Internet industry in general and the
provisions of Internet access specifically, other risks associated with
the Internet industry, financing, liquidity requirements, rapidly
changing technology, limited operating history, year 2000 compliance and
the volatility of public markets.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and summations 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 due in the reporting period. Actual results could differ
from those estimates. Significant estimates include collectibility of
accounts receivable, inventory, accounts payable, sales returns and
recoverability of long-term assets.
F-10
61
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note B - Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 128. "Earnings per
Share" ("SFAS 128"), which is effective for financial statements issued
for periods ending after December 15, 1997. SFAS 128 simplifies the
previous standards for computing earnings per share ("EPS") and requires
the disclosure of basic and diluted earnings per share. The Company has
adopted SFAS 128 in presenting EPS disclosure for 1998 and 1997. Because
of the dilutive effect the Company's equity instruments have on EPS in
the years presented, basic and diluted EPS are both computed by dividing
the net loss by the weighted average number of shares outstanding.
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130, "Reporting for Comprehensive Income" ("SFAS 130"). SFAS 130
requires a statement of comprehensive income to be included in the
financial statements for fiscal years beginning after December 15, 1997.
The Company has determined that there are no implications or
modifications which would result from the implementation of the
Statement to their financial statements for the periods presented.
In addition, in June of 1997, the FASB issued Statement of Financial
Accounting Standard No. 131, "Disclosure about Segments of an Enterprise
and Related Information" ("SFAS 131"), which requires disclosure of
certain information about operating segments, geographic area in which
the Company operated, major customers and products and services. The
Company has determined that it falls below the threshold limit for full
implementation of this Statement. There is no effect to the financial
statements for the periods presented due to the adoption of this
Statement.
In addition, in February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132, "Employer's Disclosures about Pensions and
Other Post-retirement Benefits" (amendment of FASB Statements Nos., 87,
88, and 106), which standardizes the disclosure requirements for
pensions and other post retirement benefits to the extent practicable.
To the extent applicable the Company has adopted the disclosure
provisions of this Statement for the periods presented.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities, and is
effective for fiscal years beginning after June 15, 1999. The Company is
currently determining the additional disclosures, if any, that may be
required under this pronouncement.
F-11
62
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note B - Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed of Obtained for Internal Use." This
standard requires companies to capitalize qualifying computer software
costs, which are incurred during the application development stage and
amortize them over the software's estimated useful life. The Company is
currently evaluating the impact of SOP 98-1 on its financial statements
and related disclosures.
Allowance for Doubtful Accounts
All accounts are current and have been determined to be fully
collectible and no adjustment or allowance has been made for bad debts.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
The Company capitalizes all direct costs incurred in the construction of
facilities and the development and installation of new computer and
management systems. Such amounts include the costs of materials and
other direct construction costs, purchased computer hardware and
software, outside programming and consulting fees, direct employee
salaries and interest. Depreciation is provided on the straight-line
method over the estimated useful lives of the assets, as follows:
Furniture and Fixtures 3 to 10 years
Office Equipment 3 to 10 years
Leasehold Improvements Length of the lease at the time of installation
Automobiles 5 years
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
initial maturities of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market; cost is
determined on the weighted average method.
F-12
63
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note B - Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consist
primarily of cash equivalents and trade accounts receivable.
Concentration of credit risk with respect to trade accounts receivable
are generally diversified to the large number of entities comprising the
Company's customer base and their geographic dispersion. The Company
performs ongoing credit evaluations of its customers and maintains an
allowance for any potential credit losses. The Company actively
evaluates the creditworthiness of the financial institutions with which
it conducts business.
Advertising
Advertising costs are expensed in the year incurred.
Earnings Per Share
Earnings per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during each
period. Earnings per share is computed using the treasury stock method.
The options to purchase common shares are considered to be outstanding
for all periods presented but are not calculated as part of the earnings
per share.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and complies
with the disclosure provisions of Statement of Financial Accounting
Standards (SFAS) 123, "Accounting for Stock-Based Compensation." Under
APB 25, compensation cost is recognized 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.
Business Combinations
In October 1998, the Company completed a reverse acquisition with U.S.
Connect 1995, Inc. (reorganized as Technology Guardian, Inc., a Nevada
Corporation). A total of 11,407,507 common shares were exchanged in a
1:1 ratio. All issued and outstanding shares of the Technology Guardian,
Inc. were converted into the right to receive shares of US Connect 1995,
Inc. upon completion of the merger. The transaction has been accounted
for as a reverse acquisition. The transaction is a merger of a private
operating company (old TGI) into a non-operating public shell
corporation with nominal assets. The owners of old TGI obtained
operating control of the combined company after the transaction.
F-13
64
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note C - Cash
The Company maintains its cash balances at banks and a brokerage house
located in Los Angeles, and Costa Mesa, California. The bank balances
are insured by the Federal Deposit Insurance Corporation and
the brokerage accounts by the Securities Investor Protection Corporation
up to $100,000 and $10,000,000, respectively. As of December 31, 1998,
the uninsured portion of the balances held at the bank was $283,238.
Note D - Inventories
As of December 31, 1998 and 1997, inventories consisted of the following
classes of components:
1998 1997
-------- --------
Finished Goods $117,517 $148,479
Raw Materials 171,743 -0-
-------- --------
Total $289,260 $148,479
======== ========
Note E - Furniture and Equipment
Furniture, Equipment, and Automobiles consist of the following:
1998 1997
--------- ---------
Furniture and Fixtures $ 99,172 $ 16,199
Leasehold improvements 24,018 -0-
Equipment 192,700 16,910
Automobiles 19,326 8,125
--------- ---------
335,216 41,234
Accumulated Depreciation (41,965) (17,306)
--------- ---------
Total $ 293,251 $ 23,928
========= =========
Note F - Commitments and Contingencies
The Company leases certain of its facilities and equipment under
non-cancelable operating leases. Future minimum rental payments, under
leases that have initial or remaining non-cancelable lease terms in
excess of one year are $599,845 in 1999, $569,066 in 2000, $573,990 in
2001, $131,042 in 2002, and $102,660 thereafter. Certain of the leases
contain inflation escalation clauses and requirements for the payment of
property taxes, insurance and maintenance expenses. Rent expense for the
years ended December 31, 1998 and 1997 was $45,500 and $25,900,
respectively.
F-14
65
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note F - Commitments and Contingencies (continued)
In May 1996 the Company filed a lawsuit against Peripherals Plus, Inc.
(Defendant) for the recovery of damages due to breach of contract. The
Defendant cross-complained for breach of contract and related damages.
Both matters have been removed from the court's calendar and submitted
to binding arbitration. The matter has not been set for arbitration
hearing and is still pending. The Company intends to seek an
out-of-court settlement to resolve the matter. Please see Note J for the
outcome of this case.
In August 1998 Supercom, Inc. filed a lawsuit against the Company
seeking the recovery of goods sold to the Company in the amount of
$47,000. The Company has filed a cross-complaint against Supercom
seeking damages of $50,000 on the grounds that the goods delivered by
Supercom were defective and that Supercom failed to fulfill its service
and repair obligations. The case is set for trial in July 1999. The
Company intends to vigorously defend itself against Supercom's claims
and to prosecute its cross-complaint, but will not foreclose the
possibility of settlement. Please see Note J for the outcome of this
case.
In October 1998 Softbank Comdex, Inc. filed a lawsuit against the
Company seeking the recovery of $27,000 for alleged breach of contract.
The Company has denied the claim and intends to defend the case
vigorously based on its merits. It is expected that the case will be
assigned a trial date in the latter part of 1999. Due to the early stage
of the matter, a determination regarding the likelihood of a favorable
or unfavorable outcome cannot be made as of the date of issuance of this
report. There is not expected to be a material financial impact on the
Company in the event of an unfavorable settlement.
In June 1998, a former employee filed a complaint with the California
Department of Industrial Relations Division of Labor Enforcement against
the Company alleging breach of contract and asking for damages in the
amount of $90,000. Please see Note J for the outcome of this case.
The Company is involved in certain other legal proceedings arising from
the ordinary course of business, none of which is expected to have a
material impact on the financial condition or business of the Company.
F-15
66
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note G - Employee Stock Options and Benefit Plans
In December 1997, the Company's stockholders approved the Technology
Guardian 1997 Stock Option and Stock Bonus Plan ("the Stock Award and
Incentive Plan"). Under the Stock Award and Incentive Plan, incentive
non-qualified stock options may be granted to employees, directors, and
consultants. The options, option prices, vesting provisions, dates of
grant and number of shares granted under the plans are determined
primarily by the Board of Directors or the committee authorized by the
Board of Directors to administer such plans, although incentive stock
options must be granted which are no less than the fair market value of
the Company's Common Stock at the date of the grant. Outstanding options
have 3- to 5-year terms. The Stock Award and Incentive Plan also permits
payment for options exercised in shares of the Company's common stock
and the granting of incentive stock options.
The Company applies APB No. 25 and its related interpretations for its
plan. Accordingly, compensations cost has been recognized for the plan
in the amount of $525,000 for the year ended December 31, 1998, as
determined by the table below:
Grant Number of Exercise Fair Market APB 25
Date Shares Price Value Compensation
-------- --------- -------- ----------- ------------
08/28/98 1,035,885 0.72 0.72 $ 0
08/31/98 564,115 0.72 0.72 0
09/15/98 985,000 2.00 0.72 0
09/01/98 100,000 11.00 0.72 0
09/28/98 80,000 0.72 0.72 0
09/28/98 72,000 2.00 0.72 0
09/28/98 300,000 3.00 0.72 0
09/28/98 25,000 1.00 0.72 0
10/01/98 1,000,000 3.00 0.72 0
10/01/98 500,000 0.72 0.72 0
10/07/98 875,000 0.72 0.72 0
10/07/98 433,000 3.00 0.72 0
11/30/98 100,000 9.63 14.88 525,000
--------- ----------
6,070,000 $ 525,000
========= ==========
F-16
67
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note G - Employee Stock Options and Benefit Plans (continued)
In 1998, had the Company recorded a charge for the fair value of options
consistent with SFAS No. 123, net income would have been reduced by
$6,000,000 and basic net income per common share by $.50. The income on
net income per common share, assuming full dilution, is $.50 in 1998.
Prior to the completion of the Company's reverse acquisition, the fair
value of each option grant was determined on the date of grant using the
minimum value method. Subsequent to the offering, the fair value was
determined using the Black-Scholes model. The weighted average fair
market value of an option granted during 1998 and 1997 was $1.51 and
$.72, respectively. The following assumption were used to perform the
calculations:
Risk-free interest rate 5.4%
Expected option lives 4.8 years
Expected volatility 19.2%
Expected dividend yield 0.0%
Because additional stock options are expected to be granted each year,
the above pro forma disclosures are not representative of pro forma
effects on reported financial results for future years.
A summary of the status of the Company stock option plans at December
31, 1998 as follows:
Weighted Average
(thousands of shares) Shares Exercise Price
--------------------- ------ --------------
Outstanding at beginning of year -0- N/A
Granted 6,070 $1.51
Exercised -0- N/A
Canceled -0- N/A
------
Outstanding at year-end 6,070
======
Options exercisable at year-end 5,525
Weighted average fair value of options
granted during the year $ 1.51
The following table summarizes information about fixed stock options
outstanding at December 31, 1998.
Weighted Average
Number Remaining
Range of Outstanding Years of
Exercise Prices (thousands) Contractual Life
--------------- ----------- ----------------
$.71-2.99 3,937 4.7 years
3.00-5.00 2,133 5.0 years
------
$.71-5.00 6,070 4.8 years
F-17
68
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note H - Debt
The Company has entered into certain revolving debt instruments of a
short-term nature which, as of December 31, 1998, had an aggregate
outstanding amount of $6,400. Such revolving debt instruments provide
for interest at the rate of approximately 22.4% per annum and are
repayable in 48 monthly installments that commenced in February, 1996.
These instruments are not collateralized and are therefore subordinate
to all other liabilities of the Company, including trade payables.
The Company has failed to remit employee payroll taxes withheld and the
employers' portion of both State and Federal payroll taxes for a portion
of the year 1998. As of December 31, 1998 an unpaid tax liability in the
amount of $168,900 exists, including penalties and interest. Refer to
Note J - Subsequent Events.
Note I - Compensated Absences
Employees can earn annual vacation leave at the rate of five (5) days
per year for the first year. Upon completion of the first year of
employment, employees can earn annual vacation leave at the rate of ten
(10) days per year for years two through seven. Upon completion of the
eighth year of employment, employees can earn annual vacation leave at
the rate of fifteen (15) days per year. At termination, employees are
paid for any accumulated annual vacation leave. As of December 31, 1998
and 1997 the total vacation liability totaled $29,600 and $13,430,
respectively.
Note J - Subsequent Events
Subsequent to the year ended December 31, 1998, the Company completed a
change in name from Technology Guardian, Inc. to eSat, Inc. The NASDAQ
Bulletin Board trading symbol of the Company was likewise changed from
TEGI to ASAT.
Subsequent to the year ended December 31, 1998, the complaint filed by a
former employee of the Company alleging breach of contract was dismissed
in favor of the Company.
Subsequent to the year ended December 31, 1998, the Company remitted all
employee payroll taxes withheld and the employers' portion of both State
and Federal payroll taxes for a portion of the year 1998 which was
outstanding and unpaid as of the year end. As of the date of this report
no outstanding payroll tax liability exists for the prior year.
Subsequent to the year ended December 31, 1998, the former counsel of
the Company filed a lawsuit against the Company alleging nonpayment of
attorneys' fees in the amount of $80,000. The Company has filed
counter-claims against the firm, and third party claims against its
principal, for damages and rescission based on what the Company alleges
to have been the fraudulent inducement by the firm and its principal to
enter into a contract modification by which the firm received shares of
the Company's stock. The matter was settled in binding arbitration. The
Company made a payment to former counsel in the amount of $127,300.
F-18
69
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note J - Subsequent Events (continued)
Subsequent to the year ended December 31, 1998, the Company entered into
an agreement with an underwriting firm to raise an additional twelve
million dollars ($12,000,000) in operating capital through a private
placement of one million five hundred thousand (1,500,000) shares of
restricted Common Stock at eight dollars ($8.00) per share. Such shares
are restricted from public sale under Rule 144 of the Securities Act of
1993 for a period not less than one year from the date of issuance. The
offering is a firm commitment from the underwriter with an expiry for
complete funding of August 30, 1999. This agreement expired with no
funding as of August 30, 1999.
Subsequent to the year ended December 31, 1998, the Chairman, President
and Chief Executive Officer, Mr. David Coulter, resigned effective March
22, 1999. In conjunction with his resignation Mr. Coulter entered into a
consulting agreement with the Company for a term of thirty-six (36)
months at a pay rate of ten thousand ($10,000) dollars per month. In the
event the Company is sold, Mr. Coulter would be paid the difference
between three hundred sixty thousand dollars ($360,000) and the
cumulative amount of the consulting fees paid to the date of sale. In
conjunction with the termination of his prior employment agreement, Mr.
Coulter shall be paid one hundred fifty thousand dollars ($150,000) in
five equal installments, the first payment to be made upon the effective
date of his resignation. As of September 1999 the Company has ceased
making the required monthly payments under this agreement.
Mr. Coulter shall retain three million (3,000,000) shares of nonvoting
common stock. All other shares owned by Mr. Coulter as of the effective
date of resignation shall be canceled. Mr. Coulter shall retain warrants
to purchase 1,500,000 shares of common stock at three dollars ($3.00)
per share. All other warrants previously issued to Mr. Coulter are
canceled.
On July 23, 1999 the Company was named as a defendant in a lawsuit
alleging breach of contract and requesting general and specific damages
and costs of suit. In addition, the suit is requesting the Company issue
2,092,500 shares of common stock to the plaintiff, at $1.30 per share,
according to the original contract. No dollar amount for the general and
specific damages has been provided at this time. The Company intends to
vigorously defend itself against this claim and as such has not made any
provision for loss in the financial statements.
Subsequent to the year ended December 31, 1998 the Company sold products
to customers in the ordinary course of business. The Company wrote-off
uncollectible accounts receivable related to particular sales of
$118,722 in 1999 and created an allowance for bad debt of $850,000
related to the remaining accounts receivable as of June 30, 1999. The
allowance was based on the age of accounts receivable and managements'
determination of collectibility.
Subsequent to the year ended December 31, 1998 the Company wrote-off
$42,624 of inventory. Due to the redesign and upgrading of the product
line certain items held in the Company's inventory were determined to be
obsolete and were written-off.
F-19
70
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note J - Subsequent Events (continued)
Subsequent to the year ended December 31, 1998 the Company entered into
settlement agreements regarding Peripherals Plus, Inc., Supercom, Inc.
and Softbank Comdex, Inc. through binding arbitration. The Company made
a payments related to these matters in the amount of $43,700.
Subsequent to December 31, 1998 Corporate Financial Enterprises and
Vantage Capital, Inc. (the "Consultant") are working together as joint
venture partners pursuant to an exclusive Consulting Agreement entered
into between Vantage Capital, Inc., and eSat, Inc. (the "Company"),
dated September 17, 1999. The Consulting Agreement shall commence on
September 15, 1999 and shall terminate no earlier than September 15,
2002.
The Consulting Agreement states that the duties of the consultant
include: (1) identifying, analyzing, structuring, negotiating and
financing business sales and/or acquisitions, including without
limitation, merger agreements, stock purchase agreements, and any
agreements relating to financing and/or the placement of debt or equity
securities of the Company; (2) assist the Company in its corporate
strategies; and (3) assist the Company in the implementation of its
business plan, in each case as requested by the Company.
The Consultant shall receive as compensation as follows: (1) Retainer.
The company shall pay to Consultant a non-refundable monthly retainer of
$5,000, payable in cash, Restricted Common Stock, or Registered Common
Stock (at the Company's option) based on the terms of the Agreement (2)
Expenses. eSat, Inc., shall pay all such expenses reasonably incurred
during the consulting period by the Consultant. (3) Warrants. The
company shall issue to Consultant or its designees warrants to purchase
1,200,000 shares of Common Stock (the "Warrants"), with exercise prices
equal to (a) as to 300,000 warrants, $4.25, (b) as to 300,000 warrants,
$5.25, (c) as to 200,000 warrants, $6.25, and (d) as to 400,000
warrants, $8.50, and which may be exercised by Consultant at any time
through the payment of (i) cash, (ii) a promissory note bearing interest
at 6% per annum, or (iii) by tendering shares of Common Stock equal to
the aggregate exercise price divided by the last closing price of the
Common Stock. Such Warrants as are exercised shall vest immediately if
paid in cash or Common Stock, and on a pro rata basis in accordance with
receipt of cash or Common Stock in the event Warrant is exercised with a
promissory note. (4) Fees for Acquisition Opportunities. The Company
shall pay to the Consultant a fee equal to 10% of the total aggregate
consideration paid for any acquisition or sale by the Company of any
business, corporation or division (a "Target"), including, but not
limited to, acquisitions by stock purchase agreement, merger agreement,
plan of reorganization or asset purchase agreement, or any other
transaction involving the sale of assets out of the ordinary course
(measured by either magnitude or classification) or the sale, transfer
or license of technology (collectively, a "Transaction"), which fee
shall be due upon closing of the Transaction.
F-20
71
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note J - Subsequent Events (continued)
Further, Consultant shall also be entitled to a financing fee equal to
10% of any private or public placement of debt or equity securities of
the Company, including without limitation, promissory notes, debentures,
convertible debt, common stock or preferred stock, or any other
securities owned by the Company, including without limitation securities
of other corporations. (5) Third Party Commissions.
Consultant and/or its Affiliates shall be entitled to share in any fees
or commissions payable by third parties on any Transaction contemplated
by the Consulting Agreement, including, but not limited to, any fees
payable or Consultant by a third party lender, financing partner, or
other party, or a seller of a corporation or business, including,
without limitation, investment banking fees or commissions, business
brokerage fees or commissions, finders fees, or any other fee payable by
a third party to Consultant for any reason including the identification
of the Company as a potential purchaser or seller of such corporation or
business (a "Transaction Commission"). The Company hereby waives any
conflict of interest that may arise due to any Transaction wherein
Consultant receives such a Transaction Commission, including, but not
limited to, any conflict of interest which may arise as a result of the
dual representation by Consultant of the seller or purchaser of a
corporation or business on the one hand, and the Company on the other.
(6) Fees Paid in Common Stock. The Company, at its option, may pay fees
due in cash, or by issuance of Restricted Common Stock or freely
tradable, registered Common Stock. Restricted Common Stock shall be
issued at a rate equal to the lesser of (i) 50% of the average Bid Price
for the five trading days prior to the closing date of a Transaction
which entitles the Consultant to receive such fees, or (ii) $5.00.
Freely tradable, registered Common Stock, pursuant to an effective and
current registration statement, shall be issued at the rate equal to the
lesser of (i) 70% of the average Bid Price for the five trading days
prior to the closing date of a Transaction which entitles the Consultant
to receive such fees, or (ii) $7.50.
Michael Palmer, President of Vantage Capital, Inc., is also the Chief
Executive Officer and on the Board of Directors of eSat, Inc., and
therefore the possibility of conflict of interest exists. In the event
of a conflict arises and if for any reason Vantage is unable to continue
performing the services as per the terms of the Consulting Agreement,
Corporate Financial Enterprises shall act in Vantage Capital, Inc.'s
stead. Corporate Financial Enterprises will assume all the duties and
obligations set forth in the Consulting Agreement and shall be entitled
to receive the benefits related thereto. eSat, Inc. waives any conflict
of interest that may arise from a relationship between Consultant and
any entity which Consultant is affiliated with.
F-21
72
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note J - Subsequent Events (continued)
Subsequent to the year ended December 31, 1998, eSat, Inc. (the
"Company"), sold 2,000,000 shares of 12% Convertible Preferred Stock to
Corporate Financial Enterprises, Inc. and Vantage Capital, Inc. (the
"Purchasers"), in equal allotments of 1,000,000 shares each. Purchasers
purchased 2,000,000 shares of 12% Convertible Preferred Stock ("the
Preferred Stock") for the sum of $4,000,000, payable pursuant to a
promissory note providing for eight equal monthly payments of $500,000,
commencing on the Closing Date, and funding on the 17th of each month
thereafter. The Preferred Stock has a stated value and liquidation
preference of $2.00 per share, bears cumulative dividends at the rate of
12% per annum, and is convertible into shares of Common Stock of the
Company (the "Common Stock") at the lessor of (a) the rate of $2.00 per
share of Common Stock, or (b) 70% of the bid price of the Common Stock
on the date of a notice to convert, as reported by the exchange upon
which the Common Stock is then listed. The Preferred Stock contains
certain anti-dilution and price protection provisions, and has piggyback
registration rights.
Subsequent to December 31, 1998, a Warrant Agreement (the "Agreement")
was entered into on September 15, 1999 between eSat, Inc. (the
"Company") and Corporate Financial Enterprises, Inc. (the "Consultant").
The Company granted to Consultant Warrants to purchase 600,000 shares of
Common Stock equal to the Exercise Quantity, as may be adjusted from
time to time as set forth in the Agreement. The Warrant holder has the
right to exercise the warrants at any time and from time to time after
December 31, 2000 until September 1, 2009.
Note K - Related Party Transactions
Throughout the history of the Company, certain members of the Board of
Directors, members of the immediate family of management, and general
management have made loans to the Company to cover operating expenses or
operating deficiencies.
In April 1997, the Company entered into a settlement agreement between
Cyber Village Network, Inc.(CVN), a company controlled by an officer of
the corporation, and this same officer individually. Wherein both
parties agreed to release the Company from all potential claims arising
from a certain Option Agreement, and an agreement entered into by and
among the Company, the Company's President, CVN, and the aforementioned
officer of the Company, in exchange for the issuance of 849,750 shares
of the Company's Common Stock.
The aforementioned option agreement granted options to CVN to purchase
shares equal to 10% of the Company's outstanding shares in exchange for
the forgiveness of a $100,000 loan held by CVN. Additionally, CVN was
granted the option to purchase up to 30% of the outstanding shares of
the Company in exchange for $1,200,000. Further, this same option
agreement provided that the president of the Company had the right to
repurchase shares from CVN equal to 15% of the Company's common stock
following the exercise of the option by CVN in exchange for $1,200,000.
This Option Agreement was subsequently canceled and the parties released
each other from all claims.
F-22
73
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note K - Related Party Transactions (continued)
In October 1997, an officer of the Company who is also a member of the
Board of Directors received a commission in the amount of $100,000 for
the referral of an investment group related to a recapitalization of the
Company. This same officer is the controlling shareholder of a
corporation which had previously loaned the Company $100,000 and was
granted 849,750 shares of the Company Common Stock in settlement for the
release from potential claims arising from the aforementioned Option
Agreement. A fair market value of $.10 per share was used for purposes
of calculating the total amount of expense recorded related to the
settlement. This value was determined based on private purchases of the
Company's common stock made within a 10 day time period of the date of
settlement. Settlement expense in the amount of $84,975 was expensed in
the year 1998.
During the year 1998, the Company granted to the Company's then
president 3,935,885 options at strikes prices ranging from $.71 to
$3.00, expiring five years from the date of issuance. These options
contain strike prices and fair market values as determined by use of the
Black-Scholes model as follows:
Date of Option 10/1/98 8/24/98 8/10/98 9/15/98
Options granted 1,000,000 1,035,885 1,500,000 400,000
Strike price $3.00 $0.72 $0.72 $3.00
Fair Value per share $0.22 $0.46 $0.46 $0.22
During the year 1998, the Company granted to the Company's chief
operating officer 1,095,802 options at strike prices ranging from $.71
to $3.00, expiring five years from the date of issuance. These options
contain strike prices and fair market values as determined by use of the
Black-Scholes model as follows:
Date of Option 8/31/98 10/1/98 10/7/98
Options granted 262,802 500,000 333,000
Strike price $0.72 $0.72 $3.00
Fair Value per share $0.22 $0.46 $0.46
Subsequent to December 31, 1998 the Company entered into an Agreement
with Vantage Capital, Inc., which is wholly owned by Michael Palmer. Mr.
Palmer is Chief Executive Officer of eSat, Inc. and serves on its Board
of Directors. For details to this agreement see Note J.
F-23
74
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note L - Income Taxes
Total Federal and State income tax expense for the years ended December
31, 1998 and 1997 amounted to $800 in each year. These represent the
minimum annual tax liability under Federal and State tax code. No future
benefit for the realization of an operating loss carry forward, in the
form of an asset, has been recognized due to the ongoing nature of the
losses and the potential inability for the Company to ever realize their
benefit. For the years ended December 31, 1998 and 1997, there is no
difference between the federal statutory tax rate and the effective tax
rate. At years ended December 31, 1998 and 1997 the Company had
available net operating loss carry forwards of $2,926,600 and $199,500
respectively, after adjusting for limitation, to be offset against
future taxable income. The operating loss carry forwards will expire at
various dates through the year 2014.
Note M - Other Income and Expense
During the year ended December 31, 1998, the Company recorded a one-time
revenue write down of a contract with a foreign government in the amount
of $236,700.
Note N - Extraordinary Income
During the year ended December 31, 1998, the Company was released from a
liability to a factoring company. In accordance with SFAS 4 the Company
recorded extraordinary income in the amount of $242,990.
The agreement with the factoring organization called for factor to
purchase receivables at a price equal to 80% of the face value of
acceptable accounts from the Company. The Company therefore would
appropriately record the transaction as a sale of receivables with
proceeds of the sale reduced by the fair value of the recourse
obligation. Under the terms of the Agreement, factor earned a fee equal
to 14% of the face amount of the accounts purchased and such fee shall
be taken at the time of collection of an invoice. Factor shall reserve
and hold 2.5% of the face value of purchased accounts for bad debts.
Factor shall be entitled to immediate and full recourse against the
Company to demand payment with respect to a purchase account in the
event that the purchase account is not paid in full within 75 days.
During the course of the relationship with the factor, the Company's
largest client filed a Chapter 7 bankruptcy liquidation resulting in
more than $100,000 in purchased accounts going unpaid. In accordance
with the terms of the Agreement factor made demand upon the Company for
immediate payment plus accrued unpaid fees and interest through the date
of Company's payment.
The Company was released from its liability to the factoring
organization because during the year 1998 it was unable to make payment
under the terms of the agreement, which had been entered into. Upon
breach of the agreement, the liability was transferred to the individual
who had provided a personal guarantee, Mr. David Coulter. This
individual subsequently settled all outstanding obligations with the
factoring organization through the transfer of 25,000 shares of
restricted Rule 144 stock from his name into the name of the factoring
organization and the payment of $89,000 out of his personal account.
F-24
75
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note O - Other Matters
During the year ended December 31, 1998, the Company saw a substantial
decline in revenue due to a decision by management to terminate sales
until the new GSI could be tested and launched into the marketplace.
This decision was based on forecasts, which indicated that sales revenue
realized would be offset in future periods by upgrades of the new GSI.
Note P - Additional Paid in Capital Correction
The original audited balance of additional paid in capital was reduced
by $563,164. This amount represents the cost of raising capital that was
incurred during the year ended December 31,1998 and which was originally
expensed by the Company.
Note Q - Going Concern
The Company has suffered recurring losses, a decline in revenue, cash
shortages and has a net deficiency in Stockholders' Equity. These
issues, among others, raise substantial doubt about its ability to
continue as a going concern.
Management has prepared the following plan in order to address these,
and other operating, issues: On September 15, 1999 the Company entered
into an agreement with Vantage Capital, Inc. for an equity investment in
the amount of $4,000,000 through the sale of two million shares of 12%
Convertible Preferred Shares. Vantage has already delivered the first
$500,000 of the funding as of September, 1999, the remaining is to be
paid in installments over the next seven months.
In addition, management has temporarily reduced by forty percent its
workforce and made other operational cuts in order to reduce its
operating capital requirements.
The Company has deferred the construction of its own satellite uplink
facility until such time as it has sufficient investment capital and a
customer base that will yield and adequate utilization factor.
The Company feels that with the reduction in overhead, personnel,
operating expenses, and deferral of capital spending along with the
recent infusion of operating capital and an anticipated increase in
sales that they will be able to continue as a going concern.
F-25
76
eSAT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BACKGROUND
eSat, Inc. ("eSat" or "Company") was incorporated on June 23, 1995, pursuant
to the laws of the State of Nevada, as U.S. Connect 1995, Inc., for the
purposes of marketing and servicing transaction processing services, prepaid
long distance cards, ATM machines and payment systems to small-to-medium
sized merchants. In October 1995, the Company consummated a public offering
of its securities from which it derived gross proceeds of approximately
$100,000. Prior to October 1998, the Company had not commenced operations
and was seeking to establish a new business. On October 8, 1998, the Company
consummated an Agreement and Plan of Merger ("Merger") with Technology
Guardian, Inc., a California corporation ("TGI"), whereby all the issued and
outstanding shares of TGI were exchanged for shares of the Company's Common
Stock. In connection with the Merger, the Company changed its name to
Technology Guardian, Inc., and succeeded to the business of TGI immediately
prior to the Merger. Prior to the Merger, Technology Guardian had been
engaged in providing computer network installation services and the related
sale of personal computers and telecommunications equipment necessary for
the configuration of a local area network (LAN), and in research and
development of the products currently offered by eSat, Inc. The Company
amended its certificate of incorporation to change it's name to "eSat, Inc."
on January 26,1999.
eSat's principle line of business consists of providing satellite Internet
access equipment and services to businesses, educational institutions and
government agencies. The Company's Internet access product line is based on
its Global Satellite Internet(TM) ("GSI") gateway, Nexstream(TM) Internet
gateway and Nexstreams Channel Casting(TM) which all provide existing LANs
with Internet access via a satellite based network. A "gateway" is a
specialized server that allows LAN users to share an Internet connection.
The Company's GSI product line consists of an Internet gateway server that
utilizes the Company's satellite network for downstream communications and a
telephone connection for upstream communications. The Nexstream product
line, which the Company anticipates launching in the first half of fiscal
2000, consists of an Internet gateway server that utilizes the same
satellite network for both upstream and downstream communications. The
Company's ChannelCasting(TM) product, which is currently in development,
will provide the simultaneous broadcast of video and data files to multiple
destinations through the use of the Company's existing and planned future
Internet gateway technology. The Company plans to be a geographically
diverse satellite Internet Service Provider through the establishment of
joint venture partners in various countries. The Company expects to finance
the expansion either through capital provided by the parties wishing to
provide the service internationally, or through capital generated by
issuing additional securities.
F-26
77
eSAT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The interim financial information for the three and nine-month periods ended
September, 1999 and 1998 is unaudited but includes all adjustments
(consisting only of normal recurring entries) which the Company's management
believes to be necessary for the fair presentation of the financial
position, results of operations and cash flows for the periods presented.
The accompanying interim financial statements should be read in conjunction
with the financial statements and related notes included in the Company's
Form 10, as filed with the Securities and Exchange Commission on November 8,
1999. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to Securities
and Exchange Commission rules and regulations. Interim results of operations
for the three and nine-month periods ended September 30, 1999, are not
necessarily indicative of operating results to be expected for the full
year.
REVENUE AND EXPENSE RECOGNITION
The Company recognizes revenue from hardware and software sales as products
are shipped. The Company, subject to certain limitations, permits its
customers to exchange products or receive credits against future purchases.
Individual accounts receivable are written-off as they are deemed to be
uncollectible. To date, the Company has had a history of a high level of
write offs of uncollectible accounts. See Item II,"Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company also generates revenue by selling high-speed internet access.
This service is purchased by customers on either a one, two or three year
service subscription contract. Revenue is recognized as the service is
provided using the straight-line method over the life of the contract. A
related liability is recorded for the unearned portion of service revenue
received. Costs that are directly related to the acquisition of the contract
are deferred and charged to expense also using the straight-line method over
the life of the contract. The Company reports income and expenses on the
accrual basis for both financial and income tax reporting purposes.
NET LOSS PER SHARE
The Company applies the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic net income per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period increased to include, if dilutive, the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of outstanding
stock options, warrants and convertible securities is reflected in diluted
net income per share by application of the treasury stock method. On the
accompanying income statements, the
F-27
78
eSAT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
Company has excluded common equivalent shares from stock options, warrants
and convertible securities from the computation of diluted earnings per
share, as their effect would be antidilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year data to conform to
the current financial statement presentation.
3. 12% CONVERTIBLE PREFERRED STOCK
The Company has entered into an agreement with Vantage Capital for the
purpose of raising capital for the Company. Pursuant to this agreement,
Vantage Capital has arranged for the sale of 2.0 million shares of 12%
Convertible Preferred Stock (the "Series A and B Preferred Stock"), for a
total of $4.0 million, to itself and Corporate Financial Enterprises, in
equal subscriptions of $2.0 million apiece. The subscription is payable at
the rate of $500,000 per month. As of September 30, 1999, the Company had
received $750,000. Through December 21,1999, the Company had received a
total of $2,000,000.
The Series A and B Preferred Stock has a liquidation preference of $2.00 per
share and accrues interest at a 12% annual rate, payable in Common Stock of
the Company. The Series A and B Preferred Stock may be converted into shares
of Common Stock at the lower of $2.00 per share or 70% of the bid price of
the Common Stock on the date of a notice to convert as reported by the
exchange or the market on which the shares of Common Stock are traded. The
Series A and B Preferred Stock contains standard antidilution and price
protection provisions and standard piggy back rights. There is no firm
written agreement in place requiring the balance of the anticipated
investment to be made; however the Company expects that the full amount of
the anticipated investment will be made. Vantage Capital is owned by Michael
C. Palmer, the Chief Executive Officer of the Company.
4. SUBSEQUENT EVENTS
PRIVATE PLACEMENT OF PREFERRED STOCK AND EQUITY LINE OF CREDIT
On December 29, 1999, the Company entered into an agreement with a private
third-party investor that provides for the immediate purchase by the
investor of $5.0 million of Series C Convertible Preferred Stock ("Series C
Preferred") and the establishment of a $20.0 million equity line of credit
("Equity Line"). The Series C Preferred is convertible into Common Stock of
the Company at a price based on the market price of the Common Stock at the
time of conversion, subject to a maximum price of $4.30 per share, and bears
interest at 6% per annum. The Series C Preferred is convertible at the
investor's option, and becomes convertible in three equal installments,
commencing approximately 120 days after the purchase date and ending 90 days
thereafter.
Under the terms of the $20.0 million Equity Line, the Company has a right to
sell to the investor, and the investor has an obligation to buy from the
Company, up to an additional $20.0 million of convertible preferred stock.
The maximum amount of each such individual sale of preferred stock will be
determined by a formula based on the dollar-volume of trading of the
Company's Common Stock at the time of the sale, subject to an overall
maximum of $2.5 million per transaction. There must be at least 15 days
between such sales and no sales are allowed while the Company's Common Stock
is trading below $3.00 per share.
SALE OF I-XPOSURE COMMON STOCK
As of September 30, 1999, the Company's wholly owned subsidiary i-Xposure,
Inc. ("i-Xposure") was engaged in the development of a highly customizable
personal interactive desktop ("pid"). The pid includes a variety of personal
productivity modules (calendar, planner, contact list, etc.) as well as
serving as an Internet portal when users are online. Users of the pid can
download the software for free from sites that have licensed the pid from
i-Xposure. The pid allows licensees to include images, links to other web
sites and a variety of other interactive features on the users' desktops.
i-Xposure derives revenue from licensees when users download the pid and
also on other measures of Internet based activity.
F-28
79
eSAT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
In order to fund i-Xposure's development without placing a burden on eSat's
limited financial resources, the Company has initiated a private placement
of up to 1.5 million shares of i-Xposure Common Stock at $2.00 per share. As
of December 22, 1999, the private placement had raised $240,000, before
selling commissions and other fees and expenses, from the sale of 120,000
shares of i-Xposure Common Stock. eSat will retain 4.0 million shares of
i-Xposure Common Stock. After sufficient funds have been received, i-Xposure
will operate as a separate, stand alone entity and maintain its own books
and records.
5. INVENTORIES
Inventories, net, are summarized as follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Finished goods $157,046 $117,517
Raw materials and components 232,223 171,743
-------- --------
$389,269 $289,260
======== ========
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80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Pursuant to the company's articles of incorporation, the personal
liability of a director or officer of the company to the company or a
shareholder for monetary damages for breach of a fiduciary duty is limited to
situations in which a director's or officer's acts or omissions involve
intentional misconduct, fraud or knowing violations of law.
The company's articles of incorporation and bylaws provide for the
indemnification of directors and officers of the company to the maximum extent
permitted by law. The bylaws provide generally for indemnification as to all
expenses incurred or imposed upon them as a result of actions, suits or
proceedings if they act in good faith and in a manner they reasonably believe to
be in or not opposed to the best interests of the company. These documents,
among other things, indemnify the company's employees, officers and directors
for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including any action by or in the right of the company, on account of services
as any employee, officer or director of the company or as an employee, officer
or director of any affiliate of the company. The company believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the company as to which indemnification is
being sought, and the company is not aware of any pending or threatened
litigation that may result in claims for indemnification by any director,
officer, employee or other agent.
The company has purchased directors and officers liability insurance to
defend and indemnify directors and officers who are subject to claims made
against them for their actions and omissions as directors and officers of the
company. the insurance policy provides standard directors and officers liability
insurance in the amount of $5,000,000.
Item 25. Other Expenses of Issuance and Distribution
Description Amount
----------- ---------
Registration Fee $13,550.72
NASD Filing Fee NA
Legal Fees and Expenses (including Blue Sky) *
Accounting Fees and Expenses *
Transfer Agent Fees and Expenses *
Printing Expenses *
Miscellaneous *
---------
$ *.(1)
=========
* To be included by amendment.
II-1
81
(1) While all shares registered for sale are being sold by selling
shareholders, all expenses of issuance and distribution are
being paid by registrant per contractual agreements.
Item 26. Recent Sales of Unregistered Securities
Technology Guardian, Inc., a California corporation, which was merged
into the company, entered into an Agreement with Pacific Capital Group Ltd.
("Pacific Capital"), to sell shares pursuant to the terms of a Confidential
Offering Memorandum dated July 2, 1998 ("Pacific Capital Offering"). Pacific
Capital arranged the sale of 2,092,500 shares at $0.7168 per share for a total
of $1,500,000, of which 754,045 shares were sold under Rule 504 of Regulation D,
and the remaining 1,338,455 under Regulation S.
In connection with the merger, the company assumed the obligations of
TGI to honor options to purchase 2,000,000 shares of TGI common stock, $.001 par
value per share, on a pro rata basis to all TGI shareholders as of August 30,
1998, at an exercise price of $.7168 per share, exercisable for five (5) years
from date of grant. In addition, the company assumed the obligations of TGI
wherein TGI issued options to purchase 1,500,000 shares of TGI common stock,
$.001 par value per share, to David B. Coulter, President of TGI, and 500,000
shares of TGI common stock, $.001 par value per share, to Chester L. Noblett,
the Vice President and COO of TGI, at an exercise price of $.7168 per share,
exercisable for five (5) years from date of grant. On October 13, 1998 the board
of directors authorized the issuance of additional options to purchase 1,000,000
shares of common stock to Mr. Coulter, and 333,333 shares of common stock to Mr.
Noblett, at an exercise price of $3.00 per share, exercisable for five (5) years
from date of grant.
The merger was consummated on October 8, 1998. Under Rule 145
promulgated by the Securities and Exchange Commission, the shares of the company
received by the shareholders of TGI in connection with the merger are deemed
newly issued shares. Of the shares of the company outstanding after the merger,
1,050,400 shares are attributed to the original shareholders of U.S. Connect
1995, and 9,315,000 shares were issued to shareholders of TGI. Of these shares,
1,338,455 shares were issued under Regulation S, and 7,976,545 shares were
issued under Regulation D.
After the merger the company issued 2,092,500 shares of common stock
under Regulation S according to its agreement with Corporate Financial
Enterprises, Inc. at $0.7168 per share. These shares were issued to investors in
Europe.
On October 28, 1998, the company commenced a private placement for
2,000,000 shares of common stock under Rule 506, at $2.40 per share (the
"October '98 Offering"). The company completed this offering in January 1999,
with gross proceeds of $4,800,000. Tradeway Securities Group, Inc. acted as
placement agent and received commissions of $480,000, plus a $144,000
nonaccountable expense allowance, warrants to purchase 500,000 shares of common
stock at $2.64 per share exercisable through January, 2004.
II-2
82
Pursuant to the October '98 Offering, the company has agreed to issue
Loyalty Options to acquire up to 500,000 shares of the company's common stock to
be granted to those shareholders who retain ownership of the shares purchased in
the October '98 Offering, for two years from the date of purchase (the Loyalty
period). The options will be issued on the basis of one option for each 25
shares purchased. The options are exercisable at an exercise price of $4.80 per
share for a period of three years from the date of issue. No Loyalty Options
have been issued at this time.
In January, 1999, David B. Coulter transferred warrants to purchase
650,000 shares at $0.7168 per share to Corporate Financial Enterprises, Inc.,
which then exercised the option. The shares were issued pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
In the period of November, 1998, through July 22, 1999, seven holders of
warrants exercised their warrants in a cashless exercise with respect to 754,683
shares of common stock. These warrant holders included Tim Shulburn as to 8,033
shares, Chuck Wolf as to 7,949 shares, Tom Jandt as to 10,350 shares, Andrew
Glashow as to 6,143 shares, Lawrence C. Early as to 28,837 shares, and Corporate
Financial Enterprises, Inc. as to 339,093 shares. These shares were issued
pursuant to Section 4(2) of the Securities Act of 1933, as amended. Mr. Early is
a former CFO of the company.
On February 8, 1999, a shareholder, Claude E. Lamb, exercised options to
purchase 25,000 shares at an exercise price of $0.7168. The company received
proceeds of $17,920. These shares were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
Pursuant to an agreement of September, 1998, the company issued 33,482
shares to the Pacific Capital Group for proceeds of $24,000. These shares were
issued pursuant to Regulation S.
In February, 1999, the company issued 205,000 shares under Regulation S
to 16 investors residing in Asia.
On January 4, 1999, the company issued one share to an investor, Andrea
Marti, for $15.50. This share was issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
In December 1998 as partial compensation for work installing and
configuring telephone systems for the company, the company issued 1,000 shares
to Mr. David Gallie at a discount to the market. The company issued these 1,000
shares at $0.85 per share for total proceeds of $850 on December 18, 1998. These
shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
In January and February, 1999, the company issued 18,487 shares of
common stock to 15 Asian investors pursuant to Regulation S. The shares were
sold for $2.45 per share, with the company retaining net proceeds of $1.55 per
share, and paying a commission of $0.90 per share to Corporate Financial
Enterprises, Inc., pursuant to an agreement executed by David B. Coulter, a
former CEO of the company, and Corporate Financial Enterprises, Inc. on October
15, 1998.
II-3
83
The gross proceeds to the company amounted to $45,293 and the net proceeds
amounted to $28,654.85. Corporate Financial Enterprises Inc. received $16,638.15
in commissions.
The company has agreed to issue 2,500,000 shares of Series B 12%
Convertible Preferred Stock to Corporate Financial Enterprises, Inc. and
1,000,000 shares of Series A 12% Convertible Preferred Stock to Vantage Capital,
Inc.. The purchase price is payable in monthly installments of $500,000. The
preferred stock has a liquidation preference of $2.00 per share, bears
cumulative 12% dividends, and may be converted into common stock at the lower of
$2.00 per share or 70% of the bid price of the common stock on the date of a
notice to convert as reported by the exchange or the market on which the shares
of common stock are traded. The shares were issued pursuant to Regulation D,
Rule 506 and Section 4(2) of the Securities Act of 1933, as amended.
In October 1999, the company issued 5,800 shares of common stock to
Richard Singer in connection with a services contract entered into between
Richard Singer and the company. The shares were issued pursuant to Rule 504 of
Regulation D.
In December 1999, the company issued 50,000 shares of its Series C 6%
Convertible Preferred Stock to Wentworth LLC for a total of $5,000,000. The
Preferred Stock has a liquidation preference of $100 per share, bears cumulative
dividends at 6% per annum payable in cash or common stock, and is convertible
into common stock at the lesser of $4.30 or 85% of the average closing price for
the five trading days immediately prior to the conversion. The shares were
issued to accredited investors pursuant to Regulation D, Rule 506 and Section
4(2) of the Securities Act of 1933, as amended.
Item 27. Exhibits
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger between Technology Guardian, Inc. and U.S. Connect 1995, Inc., dated September 15,
1998, filed September 15, 1998 with the Nevada Secretary of State(1)
2.2 Articles of Merger of Technology Guardian, Inc. and Technology Guardian, Inc. (formerly U.S. Connect 1995, Inc.),
filed October 8, 1998 with the Nevada Secretary of State(1)
3.1 Certificate of Amended and Restated Articles of Incorporation of Technology Guardian, Inc., filed September 28,
1995 with the Nevada Secretary of State(1)
3.2 Certificate of Amendment to Articles of Incorporation of Technology Guardian, Inc., filed February 4, 1999
with the Nevada Secretary of State(1)
II-4
84
3.3 Bylaws of US Connect 1995, Inc.(1)
3.4 Certificate of Designations of Series A 12% Convertible Preferred Stock of Registrant, filed January __, 2000 with
the Nevada Secretary of State
3.5 Certificate of Designations of Series B 12% Convertible Preferred Stock of Registrant, filed January __, 2000 with
the Nevada Secretary of State
3.6 Certificate of Designations of Series C 6% Convertible Preferred Stock of Registrant, filed December 29, 1999 with
the Nevada Secretary of State
5 Arter & Hadden LLP Opinion re: legality
10.1 Stock Option Agreement between Registrant and William Sarpalius, dated September 1, 1999(1)
10.2 Stock Option Agreements between Registrant and Lori Walker, dated September 1, 1999(1)
10.3 Stock Option Agreements between Registrant and Carol Sarpalius, dated September 1, 1999(1)
10.4 Employment Agreement between Registrant and Chester Noblett, Jr., dated June 15, 1998(1)
10.5 Stock Option Agreement between Registrant and Chet Noblett, dated September 15, 1999(1)
10.6 Warrant Agreement between Registrant and Corporate Financial Enterprises, Inc., dated as of September 17, 1999
10.7 Warrant Agreement between Registrant and Vantage Capital, Inc., dated as of September 17, 1999
10.8 Common Stock Purchase Warrant by and between Registrant and Wentworth LLC, dated as of December 29, 1999
10.9 Registration Rights Agreement by and among Registrant, Vantage Capital, Inc., Corporate Financial Enterprises,
Inc., and American Equities, LLC, dated as of November 22, 1999
10.10 Stock Purchase Agreement by and among Registrant and Vantage Capital, Inc., dated as of November 22, 1999
II-5
85
10.11 Stock Purchase Agreement by and among Registrant and Corporate Financial Enterprises, Inc. and American Equities,
LLC, dated as of November 22, 1999
10.12 Securities Purchase Agreement by and between Registrant and Wentworth LLC, dated December 29, 1999
10.13 Registration Rights Agreement by and between Registrant and Wentworth LLC, dated December 29, 1999
10.14 Side Letter Agreement, dated December 29, 1999, between the Registrant and Wentworth LLC
10.15 Resignation Agreement between Registrant and David Coulter, dated March 22, 1999
10.16 Master Services Agreement between Registrant and Exodus Communications, Inc., dated December 30, 1999
10.17 Letter Agreement between Registrant and Parks, Palmer, Turner and Yemenidjian, LLP for the services of Michael Palmer,
dated November 10, 1998
10.18 Settlement Agreement and Mutual Release by and between Cyber Village Network, Inc., Chet Noblett, and Technology
Guardian, Inc. and David Coulter, dated October 17, 1997
10.19 Consulting Agreement between Registrant and Vantage Capital, Inc., dated September 17, 1999(2)
10.20 Loan Out Agreement between Registrant and Vantage Capital Corp. for the services of Michael Palmer, dated
November 1, 1999
10.21 Employment Agreement between Global Media Technology, Inc. and Barry B. Sandrew, dated October 7, 1999
10.22 Co-Employment Agreement between Registrant and Employers Resource Management Company, Inc.,
for the services of executive officers, dated September 29, 1998
10.23 Consulting Agreement between Registrant and Herbeck Consulting Group, Inc., dated December 6, 1999
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86
21 List of Subsidiaries
23.1 Consent of Independent Auditors
23.2 Consent of Counsel (See Exhibit 5)
24 Power of Attorney (see signature page of Registration Statement)
99 Federal Communications Commission Radio Station Authorization, dated August 25, 1999
(1) Filed as part of Registrant's Form 10 dated March 16, 1999, and
incorporated herein by reference.
(2) Filed as part of Registrant's Form 10 dated November 8, 1999, and
incorporated herein by reference.
(3) Filed as a part of Registrant's Form 10 dated May 11, 1999, and
incorporated herein by reference.
Item 28. Undertakings
(a) Rule 415 Offering. Registrant will:
(1) File, during any period in which it offers or
sells securities, a post-effective amendment to this Registration Statements to:
(i) Include any prospectus required by section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or
events which, individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) (Section 230.424(b) of this chapter) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities
Act, each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities being registered that remain unsold at the
end of the offering.
(e) Request for acceleration of effective date. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 (the
"Act") may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions,
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87
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In the event that claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of competent jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fountain Valley, State of California, on January 26,
2000.
ESAT, INC.
By /s/ Michael C. Palmer
-----------------------------
Michael C. Palmer,
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears appoints each of Michael Palmer and
Chester Noblett, his agent and attorney-in-fact, with full power of substitution
to execute for him and in his name, in any and all capacities, all amendments
(including post-effective amendments) to the Registration Statement to which
this power of attorney is attached.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chief Executive Officer
President
/s/ Michael C. Palmer Secretary January 26, 2000
- --------------------------------------- Director
Michael C. Palmer
Chairman of the Board
Chief Financial Officer
/s/ Chester (Chet) L. Noblett, Jr. Principal Accounting Officer January 26, 2000
- --------------------------------------- Assistant Secretary
Chester (Chet) L. Noblett, Jr.
/s/ Gary Pan Director January 26, 2000
- ---------------------------------------
Gary Pan
/s/ Salvator A. Piraino Director January 26, 2000
- ---------------------------------------
Salvator A. Piraino
II-9
89
EXHIBIT INDEX
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger between Technology Guardian, Inc. and U.S. Connect 1995, Inc., dated September 15,
1998, filed September 15, 1998 with the Nevada Secretary of State(1)
2.2 Articles of Merger of Technology Guardian, Inc. and Technology Guardian, Inc. (formerly U.S. Connect 1995, Inc.),
filed October 8, 1998 with the Nevada Secretary of State(1)
3.1 Certificate of Amended and Restated Articles of Incorporation of Technology Guardian, Inc., filed September 28,
1995 with the Nevada Secretary of State(1)
3.2 Certificate of Amendment to Articles of Incorporation of Technology Guardian, Inc., filed February 4, 1999
with the Nevada Secretary of State(1)
3.3 Bylaws of US Connect 1995, Inc.(1)
3.4 Certificate of Designations of Series A 12% Convertible Preferred Stock of Registrant, filed January __, 2000 with
the Nevada Secretary of State
3.5 Certificate of Designations of Series B 12% Convertible Preferred Stock of Registrant, filed January __, 2000 with
the Nevada Secretary of State
3.6 Certificate of Designations of Series C 6% Convertible Preferred Stock of Registrant, filed December 29, 1999 with
the Nevada Secretary of State
5 Arter & Hadden LLP Opinion re: legality
10.1 Stock Option Agreement between Registrant and William Sarpalius, dated September 1, 1999(1)
10.2 Stock Option Agreements between Registrant and Lori Walker, dated September 1, 1999(1)
10.3 Stock Option Agreements between Registrant and Carol Sarpalius, dated September 1, 1999(1)
10.4 Employment Agreement between Registrant and Chester Noblett, Jr., dated June 15, 1998(1)
90
10.5 Stock Option Agreement between Registrant and Chet Noblett, dated September 15, 1999(1)
10.6 Warrant Agreement between Registrant and Corporate Financial Enterprises, Inc., dated as of September 17, 1999
10.7 Warrant Agreement between Registrant and Vantage Capital, Inc., dated as of September 17, 1999
10.8 Common Stock Purchase Warrant by and between Registrant and Wentworth LLC, dated as of December 29, 1999
10.9 Registration Rights Agreement by and among Registrant, Vantage Capital, Inc., Corporate Financial Enterprises,
Inc., and American Equities, LLC, dated as of November 22, 1999
10.10 Stock Purchase Agreement by and among Registrant and Vantage Capital, Inc., dated as of November 22, 1999
10.11 Stock Purchase Agreement by and among Registrant and Corporate Financial Enterprises, Inc. and American Equities,
LLC, dated as of November 22, 1999
10.12 Securities Purchase Agreement by and between Registrant and Wentworth LLC, dated December 29, 1999
10.13 Registration Rights Agreement by and between Registrant and Wentworth LLC, dated December 29, 1999
10.14 Side Letter Agreement, dated December 29, 1999, between the Registrant and Wentworth LLC
10.15 Resignation Agreement between Registrant and David Coulter, dated March 22, 1999
10.16 Master Services Agreement between Registrant and Exodus Communications, Inc., dated December 30, 1999
10.17 Letter Agreement between Registrant and Parks, Palmer, Turner and Yemenidjian, LLP for the services of Michael Palmer,
dated November 10, 1998
10.18 Settlement Agreement and Mutual Release by and between Cyber Village Network, Inc., Chet Noblett, and Technology
Guardian, Inc. and David Coulter, dated October 17, 1997
10.19 Consulting Agreement between Registrant and Vantage Capital, Inc., dated September 17, 1999(2)
10.20 Loan Out Agreement between Registrant and Vantage Capital Corp. for the services of Michael Palmer, dated
November 1, 1999
10.21 Employment Agreement between Global Media Technology, Inc. and Barry B. Sandrew, dated October 7, 1999
10.22 Co-Employment Agreement between Registrant and Employers Resource Management Company, Inc.,
for the services of executive officers, dated September 29, 1998
10.23 Consulting Agreement between Registrant and Herbeck Consulting Group, Inc., dated December 6, 1999
91
21 List of Subsidiaries
23.1 Consent of Independent Auditors
23.2 Consent of Counsel (See Exhibit 5)
24 Power of Attorney (see signature page of Registration Statement)
99 Federal Communications Commission Radio Station Authorization, dated August 25, 1999
(1) Filed as part of Registrant's Form 10 dated March 16, 1999, and
incorporated herein by reference.
(2) Filed as part of Registrant's Form 10 dated November 8, 1999, and
incorporated herein by reference.
(3) Filed as a part of Registrant's Form 10 dated May 11, 1999, and
incorporated herein by reference.