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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended December 31, 2000, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ___________
Commission file number 000 26039
ESAT, INC
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 95-0344604
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number
10 UNIVERSAL CITY PLAZA
UNIVERSAL CITY, CALIFORNIA 91608
(Address of Principal Executive Offices) (Zip code)
818-464-2670
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title Of Each Class Name Of Each Exchange On Which
To Be So Registered Each Class Is To Be Registered
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ( )
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of March 26, 2001, is $1,318,355.
The number of shares outstanding of the registrant's common stock, as of
March 26, 2001, is 25,977,718.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Historically, we have attempted to position the company as a single source
for long haul, or satellite, last mile, or wireless, broadband delivery and
turnkey Internet products and services including network management. The company
is currently operating with significantly constrained cash resources and is
assessing which, if any, of its business lines will remain as continuing
operations in the near term.
From inception, we have incurred significant losses totaling approximately
$34,000,000 through December 31, 2000. However, to reduce or eliminate those
losses, the company is reviewing all business lines to determine which, if any,
will serve as a viable basis of operations. We have no assurance of obtaining
adequate cash resources to conduct future operations.
OUR PRESENT STRATEGY
In February 2001, we announced our intention to discontinue all of our
unprofitable business lines, which include our Satellite Services and Wireless
Services businesses. Our ability to obtain significant financing to fund these
operations as well as our Managed Internet Services business is limited.
Furthermore, we anticipate that our Managed Internet Services will experience a
reduction in revenues in the second quarter of 2001 as compared to the first
quarter of 2001. Accordingly, our Board of Directors is currently assessing
alternatives to the plan announced in February 2001. We cannot determine with
certainty at this time which of the company's business lines will remain as
continuing operations in the near term.
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 became 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 conducting research and development of satellite-based
services. 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 involve 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 one-way satellite services.
Finally, in the fourth quarter of 1998, we completed installation of our
equipment at a leased network operations center ("NOC") in Raleigh, North
Carolina. The NOC houses our computer equipment and software, 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 bi-directional satellite
product.
On April 13, 2000, we acquired all of the outstanding common stock of
PacificNet Technologies, Inc. ("PacificNet"), a provider of software support and
managed Internet access to individuals and businesses, in a merger transaction.
At the same time, we also purchased all of the outstanding common stock of
PacificNet's sister company, InterWireless, Inc. ("InterWireless"), a wireless
Internet service provider that provides broadband wireless Internet access. We
continue to operate the businesses of PacificNet and InterWireless and have
moved our headquarters to their offices in Universal City, California. With the
acquisition of PacificNet and InterWireless, our business focus evolved further
to include ISP management services and last mile wireless Internet content
delivery services.
Due to our need to reduce or eliminate the drain on working capital caused
by our satellite and wireless Internet services business, in December 2000, we
adopted a plan to discontinue the operations of those two business. Since then,
our board of directors has decided to review that plan, and, as of March 26,
2001, it is no longer certain which of our businesses will be discontinued.
PRODUCTS AND SERVICES
Our products and services fall into three general categories: Managed
Internet Services, Satellite Services and Wireless Services. As noted above, we
are in the process of determining which of these business lines will survive as
continuing operations of the company.
MANAGED INTERNET SERVICES. Our PacificNet subsidiary offers a wide range of
services under the product name V-ISP or Virtual Internet Service Provider. The
V-ISP product is geared to companies who currently or wish to offer ISP services
without the burden of investing in and maintaining the "back office" portion of
an ISP business. The VISP product is completely customized to meet the
customers' branding requirements and is operated by PacificNet in its network
operations center. Services include user sign-up, billing, authentication,
email, news, technical support and access to more than 1,100 dial-up locations
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throughout the world. We are uncertain at this time whether this business line
will remain as a continuing operation of the company.
SATELLITE SERVICES. We currently operate a one-way and bi-directional
satellite Internet service which is primarily targeted to rural customers and
the business continuity (disaster recovery) market. The related Internet service
is provided through our Raleigh, North Carolina, network operations center. We
are uncertain at this time whether this business line will remain as a
continuing operation of the company.
WIRELESS SERVICES. We are able to address the problem of delivering
Internet content from a satellite receiving station to the end-user (the
so-called last mile) using wireless transmission technology. This product
offering has met limited success in the marketplace to date, due primarily to
technical equipment issues and limited availability of financial resources. We
are uncertain at this time whether this business line will remain as a
continuing operation of the company.
MARKETING AND SALES
MANAGED INTERNET SERVICES. We currently sell our Internet management
services to enterprise-size businesses, organizations and affinity groups
interested in outsourcing ISP, network management, co-location and data center
services which want to act independently as an ISP. Currently, we market
primarily through strategic partners and direct sales. We are uncertain at this
time whether this business line will remain as a continuing operation of the
company.
SATELLITE SERVICES. Our one-way and bi-directional satellite services are
sold directly to small to enterprise-size businesses and through a nationwide
network of value added resellers in a variety of markets including education,
hospitality, government, entertainment and law enforcement. In addition, these
services are marketed in the business continuity market to businesses with
mission-critical applications as a back up to terrestrial infrastructure. We are
uncertain at this time whether this business line will remain as a continuing
operation of the company.
WIRELESS SERVICES. We market our high-speed fixed wireless offering as an
internet access and data delivery solution to small, medium and enterprise-size
businesses in our service coverage areas. Our initial service launch was
targeted to local businesses in the West Los Angeles region. This product
offering has met limited success in the marketplace to date, due primarily to
technical equipment issues and limited availability of financial resources. We
are uncertain at this time whether this business line will remain as a
continuing operation of the company.
We employ a staff of four sales people dedicated to our managed internet
services and satellite services businesses. They focus their efforts on
organizing incoming leads, establishing contact with potential customers and the
closure of sales to a wide variety of businesses and consumers.
DIVERSIFICATION OF BUSINESS
The majority of our business focus lies in the products and services of our
PacificNet subsidiary. Approximately 54% of our consolidated revenue is
currently being derived from providing V-ISP services to Genuity, Inc.
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 a competitive position in our business. 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. Regarding our satellite business, we currently have filed two
pending patent applications. 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 from the holder of the patent
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. We are uncertain
at this time whether this business line will remain as a continuing operation of
the company.
Trademarks. We have applied for registration of all of our primary
trademarks in the United States, including "eSat," "Sibone," "VOS," and "Virtual
Onboard Switching." 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 telecommunications 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. Software has been developed for certain of our business lines
that 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, 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 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, such litigation could be time consuming and expensive to defend, and,
even if we were to prevail, could result in the diversion of our time and
attention, any of which could materially and adversely affect our result in
limitations on our ability to use such trademarks, patents and other
intellectual property unless we enter into arrangements with the appropriate
third parties, which may be unavailable on commercially reasonable terms.
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COMPETITION
We compete in the market for providing Internet access services to the
business, government, education and nonprofit sectors.
We anticipate competition from Internet service providers (ISPs) which
provide satellite downlink data transmission in the commercial/business,
government and education sectors. Our competitors also include the established
ISPs, which 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 provide capital resources and
customer marketing opportunities unavailable to us. At this time, we believe no
competitor has a dominant position in the worldwide ISP market segment.
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 may not be able to evaluate other customers'
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.
RESEARCH AND DEVELOPMENT
We do not plan to devote further resources to continued research and
development of various Internet related products and services.
EMPLOYEES
We currently have sixty-seven employees. Six employees are located at the
Company's Satellite Services business in Fountain Valley, California, sixty are
located at the headquarters, Managed Internet and Wireless Services facility in
Universal City, California, and one employee is located in Vienna, Austria.
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RISK FACTORS
WE WILL CEASE OPERATIONS AT OR AROUND MAY 15, 2001 UNLESS WE ARE SUCCESSFUL IN
OBTAINING ADDITIONAL CAPITAL OR IN PURSUING OTHER STRATEGIC ALTERNATIVES
Our current cash, cash equivalents and cash generated from operations will
only be sufficient to meet our anticipated cash needs to approximately May 15,
2001, although there can be no assurance in this regard. Accordingly, we will
require an additional substantial cash infusion to continue our operations. We
do not believe that additional capital will be available to us. We are
considering an asset sale or other comparable transaction as part of a financial
restructuring. If we are unsuccessful in completing a strategic transaction, we
will be required to cease operations, and our common stock will have no value.
In addition, potential investors in our securities should consider the risk
that, even if we are successful in completing a strategic transaction, our
common stock will nonetheless have minimal value.
AS A RESULT OF QUESTIONS CONCERNING OUR STATUS AS A GOING CONCERN, OUR CUSTOMERS
AND VENDORS MAY DECIDE NOT TO DO BUSINESS WITH US
Due to concerns regarding our ability to continue operations, customers and
vendors are likely to decide not to conduct business with us, or may conduct
business with us on terms that are less favorable than those customarily
extended by them. In that event, our net sales would further decrease, and our
business will suffer significantly.
OUR FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION.
The audit reports accompanying our financial statements for the years ended
December 31, 2000 and 1999 contain a qualification that certain conditions
indicate that we may not be able to continue as a going concern. The financial
statements do not contain any adjustments that might be necessary in such a
case. Note 2 to the financial statements indicates that substantial operating
losses account for this uncertainty. Many investment bankers and investors view
companies with a "going concern" qualification as less desirable for investment.
Accordingly, we will have a more difficult time raising equity capital or
borrowing capital at all on favorable terms. Our suppliers might be less willing
to extend credit. Our potential customers might be less willing to purchase our
products and services if they believe that we will not be viable enough to
provide service, support, back-up, and follow-on products when needed.
Furthermore, we might be disadvantaged in recruiting employees who might be
concerned about the stability of employment with us. Therefore, the "going
concern" qualification can have severe adverse consequences on us.
WE ARE DEFENDANTS IN TWO LAWSUITS WHICH, IF SUCCESSFUL, COULD FORCE US TO SEEK
PROTECTION FROM THE BANKRUPTCY COURT.
In December 2000, Michael C. Palmer, our former CEO, and Vantage Capital,
Inc.(controlled by Mr. Palmer), commenced an arbitration proceeding seeking
$325,000 in severance benefits he alleges were part of his contractual
arrangements with the company. In January 2001, i-xposure, Inc. filed a lawsuit
against us seeking approximately $351,000 plus interest and costs, allegedly due
from us under guaranties which were part of a bridge financing arrangement. Due
to our limited working capital position, if we cannot successfully defend either
of these actions, we may be forced to seek protection from the bankruptcy court.
That circumstance would likely have a material and negative impact on the value
of your investment.
WE ARE HIGHLY DEPENDENT ON THE UNINTERRUPTED OPERATION OF THE NETWORK OPERATIONS
CENTER AT OUR UNIVERSAL CITY, CALIFORNIA, SITE.
We currently have all of the equipment used for our PacificNet subsidiary's
network operations located in our Universal City facility. While it is protected
by standard protective devices such as redundant power supplies, multiple
internet connections, fire systems, climate control, and 24 hour security/access
control, we are at risk for catastrophic events that would require a backup
location. Failure of this equipment for any material length of time would
adversely affect our revenue generated from our managed internet services
business which presently accounts for a substantial portion of our revenue.
WE ARE CURRENTLY DEPENDENT ON A SINGLE CUSTOMER FOR APPROXIMATELY 54% OF OUR
REVENUE.
We provide and manage the actual connection to the Internet to the
subscriber base of a large national telephone dial-up Internet access provider.
Approximately sixty percent of our revenues are generated by our service to that
company. Loss of that account would have a material adverse effect on our
revenues, which could negatively affect the value of your investment.
Furthermore, we anticipate that revenues derived from this customer will
experience a reduction in the second quarter of 2001 as compared to the first
quarter of 2001.
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WE DEPEND ON SATELLITE TRANSMISSION. SATELLITE FAILURE COULD HAVE A SUBSTANTIAL
NEGATIVE EFFECT ON OUR BUSINESS OPERATIONS.
Pending the possible discontinuation of our satellite Internet services
business, we 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 is 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. Such credits would be between to $16.50 per day per
customer and $155.00 per day depending on the level of service subscribed. 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 and negatively impact the value of this portion of our business and
could force us to discontinue operations.
WE ARE CURRENTLY ASSESSING THE DISCONTINUATION OF CERTAIN OF OUR BUSINESS
LINES. THIS WILL RESULT IN OUR BEING A SMALLER COMPANY.
While a reorganization is expected to reduce our operating losses, it will
also reduce the size of our operations and reduce our visibility in the
satellite and/or Internet service provider community. Our reduced size could
result in our being less competitive. It could also reduce the value of your
investment.
WE HAVE A LIMITED OPERATING HISTORY.
We were incorporated in 1995, but did not commence operations until 1997.
Since then, our business has been substantially refocused and is currently
undergoing further assessment. Thus, we have a limited operating history upon
which an evaluation of us can be based. Our prospects are subject to the risks,
expenses and uncertainties frequently encountered by companies in the new and
rapidly evolving markets for Internet products and services. In addition, should
we survive as a going concern in the near term, we will be subject to all of the
risks, uncertainties, expenses, delays, problems and difficulties typically
encountered in the growth of an emerging business and the development and market
acceptance of new products and services. There can be no assurance that
unanticipated expenses, problems or technical difficulties will not occur which
would result in material delays in market acceptance of our products and
services or that our efforts will result in such market acceptance.
TIMING OF ORDERS FOR AND CONTINUED DEVELOPMENT OF OUR SERVICES AND PRODUCTS WILL
CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE AND CONSEQUENTLY YOU SHOULD NOT RELY ON
THE RESULTS OF ANY PERIOD AS AN INDICATION OF FUTURE PERFORMANCE.
We have experienced material period-to-period fluctuations in revenue and
operating results. We anticipate that these periodic fluctuations in revenue and
operating results will occur in the future. We attribute these fluctuations to a
variety of business conditions that include:
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- the volume and timing of orders we receive from quarter to quarter;
- the introduction and acceptance of our new services and products and
product enhancements by us;
- purchasing patterns of our customers and distributors; and
- market acceptance of services and products sold by our distributors.
As a result, we believe that quarterly revenue and operating results are
likely to vary significantly in the future and that quarter-to-quarter
comparisons of our operating results may not be meaningful. You should therefore
not rely on the results of one quarter as an indication of future performance.
OUR INTELLECTUAL PROPERTY MAY BE CHALLENGED.
As is the case with many technology companies, the rapid pace of change in
technology could cause our intellectual property to be challenged. These
challenges could come from stronger companies who believe that the use of our
technology interferes with their use or that they own all of the technology and
related rights. If any of these challenges were successful, our ability to sell
products based on our technology or intellectual property could be severely
impaired.
WE MUST DO BUSINESS IN A DEVELOPING MARKET AND FACE NEW ENTRANTS. FAILURE TO
MEET THE CHALLENGES OF NEW PRODUCTS AND SERVICES AND COMPETITORS WILL REDUCE OUR
MARKET SHARE AND THE VALUE OF YOUR INVESTMENT.
The market for Internet products and computer software is rapidly evolving
and is characterized by an increasing number of market entrants who have
introduced or developed products and services. The diverse segments of the
Internet market may not provide opportunities for more than one dominant
supplier of products and services similar to ours. If a single supplier other
than us dominates one or more market segments, our revenue is likely to decline
and we will become a less valuable company.
BECAUSE WE LACK THE NAME RECOGNITION, CUSTOMER BASE AND RESOURCES OF OTHER
COMPANIES PROVIDING INTERNET ACCESS AND OTHER INTERNET RELATED PRODUCTS AND
SERVICES, WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WHICH WOULD REDUCE OUR
REVENUE AND THE VALUE OF YOUR INVESTMENT.
The markets for our products are intensely competitive and are likely to
become even more competitive. Increased competition could result in:
- pricing pressures, resulting in reduced margins;
- decreased volume, resulting in reduced revenue; or
- the failure of our products and services to achieve or maintain market
acceptance.
Any of these occurrences could have a material adverse effect on our
business, financial condition and operating results. Our products and services
face intense competition from multiple competing vendors. Our principal
competitors in the Internet management business are IBM Corporation and TRW,
Inc. Our principal competitors in the satellite services business are Loral Inc.
and Hughes Network Systems. Many of our current and potential competitors have:
- longer operating histories,
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- greater name recognition,
- access to larger customer bases, or
- substantially greater resources than we have.
As a result, our principal competitors may respond more quickly than we can
to new or changing opportunities and technologies. For all of the reasons stated
above, we may be unable to compete successfully against our current and future
competitors.
WE HAVE NO ASSURANCE OF MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES. IF WE
ARE UNABLE TO RAISE MARKET AWARENESS OF OUR PRODUCTS AND SERVICES, WE MAY
EXPERIENCE DECLINING OPERATING RESULTS WHICH WOULD DIMINISH THE VALUE OF YOUR
INVESTMENT.
We are at an early stage of development and our earnings depend primarily
upon market acceptance of our products and services. There can be no assurance
that our development efforts will progress further with respect to any potential
new services or that they will be successfully completed. In addition, there can
be no assurance that our potential new services will achieve customer
acceptance.
There can be no assurance that our services will be successfully marketed.
In addition to our own direct sales force, we use value-added resellers and
distributors to market our satellite products and services. There is no
assurance that any distributor or other reseller will be successful in marketing
our products.
WE MIGHT BECOME SUBJECT TO FURTHER GOVERNMENT REGULATION WHICH COULD HARM OUR
PROSPECTS.
Except for a license from the Federal Communications Commission, we are not
currently subject to direct regulation by any government agency in the United
States, other than regulations applicable to businesses generally. There are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that laws and regulations may be adopted with respect
to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. Such laws or regulations
could limit the growth of the Internet, which could in turn decrease the demand
for our proposed products and services or increase our cost of doing business.
Any new legislation or regulation or the application of existing laws and
regulations to the Internet in unexpected ways could have an adverse effect on
our business and prospects.
WE MIGHT FACE LIABILITY FOR INFORMATION OBTAINED OR DISTRIBUTED THROUGH THE
PRODUCTS AND SERVICES WE PROVIDE.
Because materials may be downloaded by the Internet services which we
operate or facilitate and may be subsequently distributed to others, there is a
possibility that claims will be made against us for defamation, negligence,
copyright or trademark infringement, personal injury or other theories based on
the nature and content of such materials. Such claims have sometimes been
successful against Internet service providers. Our general liability insurance
might not cover potential claims of this type or might not be adequate to
indemnify us for all liability that may be imposed. Any imposition of liability
or legal defense expenses that are not covered by insurance or that are in
excess of insurance coverage could have a material adverse effect on our
business, operating results and financial condition.
LOSS OF KEY MEMBERS OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS
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AND PROSPECTS.
Our success will be dependent largely upon the personal efforts of our
Chief Executive Officer and Chairman of the Board, Chester L. Noblett, and David
Pennells, Senior Vice President of the company and President of PacificNet, as
well as other senior managers. The loss of their services could have a material
adverse effect on our business and prospects. We have no life insurance on any
of our officers. Mr. Noblett's and Mr. Pennells' services are governed by
contracts. Our success is also dependent upon our ability to hire and retain
additional qualified management, marketing, technical, financial and other
personnel. Competition for qualified personnel is intense and there can be no
assurance that we will be able to hire or retain qualified personnel. Any
inability to attract and retain qualified management and other personnel could
have a material adverse effect on us.
OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES. YOU MAY HAVE GREATER
DIFFICULTY SELLING YOUR SHARES.
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to
stock characterized as "penny stocks," and requires additional disclosure
relating to the market for penny stocks in connection with trades in any stock
defined as a penny stock. The Securities and Exchange Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
The exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has
- net tangible assets of at least $2,000,000, if the issuer has been in
continuous operation for at least three years;
- net tangible assets of at least $5,000,000, if the issuer has been in
continuous operation for less than three years; or
- average annual revenue of at least $6,000,000 for the last three years.
Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the associated risks.
Our financial condition does not meet the above tests. Thus, trading in the
common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9 promulgated
under the Securities Exchange Act. Under those rules, broker-dealers who
recommend such securities to persons other than their established customers and
institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker-dealers to trade in our common stock and thus would make
it more difficult for purchasers of common stock to sell their securities in the
secondary market. The market liquidity for the common stock could be severely
affected.
YOU COULD SUFFER DILUTION OF YOUR INVESTMENT IF SHARES ARE SOLD PURSUANT TO AN
EQUITY CREDIT ARRANGEMENT, CERTAIN WARRANTS ARE EXERCISED, PREFERRED STOCK IS
CONVERTED INTO COMMON STOCK, OR STOCK OPTIONS ARE EXERCISED.
As of March 26, 2001, we have a total of 25,977,718 shares of common stock
outstanding. We have issued warrants to purchase 10,098,665 shares of common
stock at a weighted average price of $4.078 per share, as well as options to
purchase 3,928,738 shares of common stock at a weighted average price of $3.661
per share. We have issued $5,000,000 of Series C Convertible Preferred Stock
that, based
10
12
on the current market price per share, will convert into approximately
118,000,000 shares of our common stock. We have $6,616,564 of Series D
Convertible Preferred Stock outstanding that, based on the current market price
per share, will convert into approximately 156,000,000 shares of our common
stock. We have issued $3,000,000 of Series E Convertible Preferred Stock that,
based on the current market price per share, will convert into approximately
71,000,000 shares of our common stock. We have entered into a $7,000,000 private
equity credit line agreement, that based on the current market price per share,
will convert into approximately 165,000,000 shares of our common stock. Issuance
of any of these shares will dilute your interest in our company. Based on the
current market price of our common stock, if all of our outstanding convertible
stock, warrants and options were converted or exercised to acquire common stock,
we would not have enough authorized shares to honor the conversions or
exercises.
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 issued 1,155,000 shares of preferred stock. 1,008,834 of these
shares have been converted into 4,673,210 shares of common stock. All preferred
shares have voting rights on all matters decided by shareholders. The
outstanding preferred shares have the right to cast an aggregate of 1,367,248
votes as of March 26, 2001, on all matters on which stockholders may vote. We
are authorized to issue an additional 9,845,000 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 common stock and the voting rights of the holders
of common 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 March 26, 2001, there are 5,873,831 shares of our common stock
outstanding which cannot be sold on the public market. Of these shares,
1,084,684 shares are held by directors, officers, or stockholders who have
beneficial ownership of 10% or more of the outstanding shares, excluding shares
subject to options held by them. 4,789,147 shares are held by other
stockholders. These shares will become eligible for trading at various dates in
2001. In addition, shares of common stock which may be acquired pursuant to
outstanding convertible preferred stock or warrants will be eligible for trading
at various dates after they are acquired. We are unable to predict the effect
that sales of such shares may have on the then prevailing market price of the
common stock. Nonetheless, the possibility exists that the sale of these shares
may have a depressive effect on the price of our common stock.
11
13
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.
ITEM 2. PROPERTIES.
We do not own any materially important physical properties. We lease our
headquarters in Universal City California, as well as our other facility in
Fountain Valley, California, pursuant to commercial leases which expire
September 30, 2004, and September 30, 2003, respectively. We could move our
headquarters without any material adverse affect on us. We lease space from
Microspace Corporation in Durham, North Carolina, which houses computer
equipment owned by us in connection with the uplink to the satellite network. We
could replace the Durham NOC without any material adverse effect on us.
ITEM 3. LEGAL PROCEEDINGS.
On January 24, 2001, i-xposure, Inc. brought an action in the Superior
Court for Orange, California, against the company seeking to enforce certain
guaranties made by the company as a part of a bridge financing transaction for
i-xposure. The complaint seeks to recover approximately $351,000 pursuant to the
guaranties, costs and other relief deemed proper by the court. If the company is
unable to successfully defend this action, it might be forced to seek protection
under the bankruptcy laws.
On December 12, 2000, Michael C. Palmer, the former Chief Executive Officer
of the company, and Vantage Capital, Inc. (controlled by Mr. Palmer), commenced
an arbitration proceeding against the company in Los Angeles, California, under
the rules of the American Arbitration Association, seeking $325,000 in
compensation he alleges is owed to him under his contractual arrangements with
the company. He has received a writ of attachment in the Superior Court of Los
Angeles County, California. If the company is unable to successfully settle this
action, it might be forced to seek protection under the bankruptcy laws.
In January, 2000, a claim was asserted against the Company by two
shareholders alleging fraud and material omission of fact as represented by a
former Chief Executive Officer of the Company. The claim alleges damages of
$434,000.
In March 2001, Richard Elliot and David Pennells, co-founders and
Presidents of the subsidiaries PacificNet and Interwireless, asserted certain
claims of non-performance against the Company. They have not filed a lawsuit,
nor have they sought any damages, as of yet. Due to uncertainty regarding the
claims, and the fact that nothing has been formally brought against the
Company, no accrual has been made in these financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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 as adjusted for the 1:50 reverse stock split.. 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.
PERIOD HIGH BID LOW BID
- ---------------- -------- -------
1999 FISCAL YEAR
FIRST QUARTER 22.6875 10.50
SECOND QUARTER 14.251 7.876
THIRD QUARTER 9.375 4.375
FOURTH QUARTER 6.0635 1.1875
2000 FISCAL YEAR
FIRST QUARTER 7.375 3.0625
SECOND QUARTER 4.3125 1.5625
THIRD QUARTER 2.0312 .500
FOURTH QUARTER .6875 .0312
First Quarter through 3-26-01 .2656 .0469
On March 26, 2001, the last reported trade for our common stock was $.0469.
As of March 26, 2000, there were 653 holders of record of our common stock.
ITEM 6. SELECTED FINANCIAL DATA.
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
------------ ------------- ------------
Net sales $ 5,663,113 $ 3,676,217 $ 2,474,617
Income (loss) from continuing operations $(11,105,046) $ 73,892,649 $(93,913,823)
Income (loss) from continuing operations
per share of common stock
Basic $ (0.51) $ 3.53 $ (4.99)
Diluted $ (0.51) $ 3.07 $ (4.99)
Total assets $ 4,447,363 $ 5,980,825 $ 3,973,771
Long-term obligations and redeemable preferred stock $ 425,692 $ 162,900 $ 268,508
Cash dividends declared per share of common stock $ 0.00 $ 0.00 $ 0.00
13
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
This Form 10-K includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. This Act provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact,
including statements regarding industry prospects and future results of
operations or financial position, made in this Form 10-K are forward looking. We
use words such as "anticipates," "believes," "expects," "future" and "intends"
and similar expressions to identify forward-looking statements. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. Our actual results may differ significantly from management's
expectations. This following discussion includes forward-looking statements
regarding expectations of future profitability of our Company's business. Actual
results could differ significantly for a variety of reasons, including the rate
of growth of the Internet, the amount that the Company invests in new business
opportunities and the timing of those investments, the mix of products sold to
customers, the mix of revenues derived from product sales as compared to
services, risks of inventory management, and risks of distribution and
productivity. These risks and uncertainties, as well as other risks and
uncertainties that could cause our actual results to differ significantly from
management's expectations, are described in greater detail in the section
entitled "Business--Risk Factors," which, along with the following discussion,
describes some, but not all, of the factors that could cause actual results to
differ significantly from management's expectations.
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
RESULTS OF OPERATIONS
2000 AS COMPARED TO 1999
Revenues totaled $5,663,113 and $3,676,217 for the years ended December 31,
2000 and 1999, respectively. The 2000 revenues increased primarily due to an
increase in subscriber levels at PacificNet, and to a lesser extent, the
inclusion of revenues of Interwireless subsequent to its acquisition by the
company in April, 2000.
For the year ended December 31, 2000 and 1999, cost of sales were
$6,108,653 and $3,598,786, respectively. Cost of sales increased in 2000 due
primarily to technical staffing increases at the company's network operations
center, increases in related hardware supplies and maintenance, start up cost
incurred in developing the company's fixed wireless network and an increase in
satellite access fees.
General and administrative expenses totaled $10,755,411 for the year ended
December 31, 2000 as compared to $8,162,188 in 1999. The increase in 2000
reflects the cost of business continuity marketing and corporate investor
relations programs, development costs relating to business lines subsequently
abandoned, staffing increases in the areas of technical development and legal
and accounting fees associated with the company becoming a full SEC reporting
company in late 1999.
The impairment loss $4,736,317 in 2000 reflects the write off of remaining
unamortized goodwill relating to the acquisition of Interwireless, as well as
valuation allowances on the fixed assets of Interwireless and the satellite
services businesses.
Other income in 2000 and 1999 reflects primarily a compensation adjustment
recognized under APB 25.
14
16
1999 AS COMPARED TO 1998
Revenues totaled $3,676,217 and $2,474,617 for the years ended December 31,
1999 and 1998, respectively. The growth in 1999 revenue reflects increases in
subscriber levels and development of related ancillary revenues at our
PacificNet subsidiary.
For the year ended December 31, 1999 and 1998, cost of sales were
$3,598,786 and $2,656,090, respectively. Cost of sales increased in 1999
primarily due to inventory write offs relating to the company's transition from
a provider of computer network products and services to that of satellite
internet services.
For the year ended December 31, 1999 and 1998, general and administrative
expenses were $8,162,188 and $2,942,041, respectively. The increase in expenses
for fiscal 1999 is due to higher levels of staffing and compensation, increased
marketing expenditures, increased research and development expenditures and
higher levels of professional fees paid to outside accountants and attorneys.
Other income in 1999 and 1998 reflects primarily a compensation adjustment
recognized under APB 25.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed primarily from the sale of preferred and
common stock in 2000 and 1999. At December 31, 2000, the company had cash and
cash equivalents on hand of $452,144 and working capital of $(3,503,540)
compared to cash and cash equivalents of $3,412,205 and working capital of
$1,993,158 at December 31, 1999.
Net cash used in operating activities of $8,373,801 for the year ended
December 31, 2000 reflects the company's net loss as offset by depreciation, a
reduction of working capital, non-cash impairment expenses and APB 25
compensation adjustments. Net cash used in operating activities in 1999 of
$6,395,155 was primarily attributable to the net loss as adjusted for
compensation expense recognized under APB 25.
Net cash used in investing activities was $5,751,642 and $793,303 for the
years ended December 31, 2000, and 1999, respectively. The increase in the 2000
balance reflects the purchase of Interwireless in April, 2000, as well as an
increase in the purchase of fixed assets.
Net cash provided by financing activities of $11,165,382 and $7,897,147,
for the years ended December 31, 2000, and 1999, respectively, resulted
primarily from the net proceeds of the sale of preferred and common stock.
Additionally, the 2000 balance reflects proceeds received under the company's
Private Equity Credit Agreement ("PECA").
In April 2000, all of the outstanding Series A preferred stock was
converted into 550,000 shares of common stock.
In April 2000, the company entered into an agreement with the holder of the
Series C preferred stock for the purpose of raising additional capital. Pursuant
to that agreement, a total of $7,500,000 of Series D 6% convertible preferred
stock was sold. In addition to the shares purchased, the agreement calls for the
issuance of warrants to purchase 1,283,422 shares of common stock at an initial
exercise price of $3.9844 per share.
15
17
In August, 2000 a total of $3,000,000 of Series E 6% convertible preferred
stock was sold. In addition to the shares sold, the agreement calls for the
issuance of warrants to purchase 666,075 shares of common stock at an exercise
price of $1.5225 per share. The company also modified the terms of its equity
line of credit with Wentworth, LLC including the establishment of a $7,000,000
credit limit on the facility under a PECA.
At September 30, 2000, the company did not have sufficient cash and cash
equivalents to fund its operations through December 31, 2000. In October, 2000,
the company received $2,000,000 under a modification to the PECA. In accordance
with the agreement, shares of the company's common stock are issuable to
Wentworth, LLC upon receipt of their call notice. A call notice on this
financing has not been received by the company to date. The PECA also calls for
the issuance of warrants to purchase shares of an amount equal to 15% (25% under
the October modification) of the shares issued from each put or call notice at a
price of 125% of the market price with respect to each funding under the PECA
including the $2,000,000 financing.
Under the terms of the PECA, the company is committed to use $3,000,000 of
the $5,000,000 currently unused portion of the credit line by August 2001.
However, the Company's ability to access funds from the credit line is highly
dependent upon (i) the Company's compliance with the conditions precedent to
additional financing under the PECA, including without limitation the
requirement of no material adverse change to the business or financial
condition of the Company, and (ii) Wentworth LLC's performance under the PECA.
In January, 2001 the company received funding of $325,000 through the
issuance of a secured note to Wentworth, LLC. The note bears interest at 8%, is
due on April 30, 2001 and is collateralized by all of the assets of the company.
Concurrent with this funding, the company entered into an agreement with
Wentworth, LLC whereby the $2,000,000 previously advanced under the PECA in
October, 2000 will be converted to a secured note also collateralized by the
assets of the company. The note is expected to be convertible to equity under
provisions substantially identical to those of the PECA.
Since November 15, 2000, we have stated that our cash, cash equivalents and
cash that may be generated from operations are not expected to be sufficient to
meet our operating needs. At this time, it appears that our current cash, cash
equivalents and cash generated from operations will only be sufficient to meet
our anticipated cash needs to approximately May 15, 2001, although there can be
no assurance in this regard. In order to continue operations beyond that date,
we would require an additional, substantial cash infusion. We do not believe
that additional capital will be available to us.
We are currently assessing strategic alternatives that may include an asset
sale or comparable transaction as part of a financial restructuring. However, in
the event that we are unsuccessful in completing one of these strategic
alternatives, we would be required to cease operations. In that case, our common
stock will have no value. In addition, potential investors in our securities
should consider the risk that, even if we are successful in completing a
strategic transaction as described above, our common stock will nonetheless have
no value.
16
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
[SPRAYBERRY, BARNES, MARIETTA & LUTTRELL LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
eSAT, Inc.
Universal City, California
We have audited the accompanying consolidated balance sheets of eSAT, Inc., and
subsidiaries, as of December 31, 2000 and 1999, and the related consolidated
statements of operations, 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 audits 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.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of eSAT, Inc.
as of December 31, 2000 and 1999 and the results of operations and cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern; however, the Company has
experienced losses from operations since inception, except for the reversal in
1999 of employee stock option compensation expense that was recognized in 1998
in accordance with APB 25, and substantial doubt exists as to its continuation
as a going concern. The Company's management estimates that its current cash,
cash equivalents and cash generated from operations will only be sufficient to
meet its anticipated cash needs through approximately May 15, 2001.
Accordingly, the Company will require a substantial additional cash infusion to
continue its operations. Management does not believe that additional capital
will be available. Management's plans in regard to those matters are described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Certain errors in applying APB 25 resulted in an understatement of previously
reported compensation expense for the year ended December 31, 1998. Accordingly,
the 1998 financial statements have been restated and an adjustment has been made
to compensation expense and retained earnings to correct the error.
SPRAYBERRY, BARNES, MARIETTA & LUTTRELL
Bakersfield, California
March 23, 2001
17
19
[LICHTER AND ASSOCIATES LETTERHEAD]
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 consolidated statement of operations and cash
flows of eSat, Inc. (Formerly Technology Guardian, Inc.) ("the Company") for the
year ended December 31, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
These 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 results of operations and cash flows of eSat, Inc.
(Formerly Technology Guardian, Inc.) for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company has suffered
recurring losses, a decline in revenue and cash shortages. These issues raise
substantial doubt about the 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 14 to the financial statements, the Company's 1998
Additional Paid in Capital previously reported as $8,614,398 should have been
$8,051,234. This discovery was made subsequent to the issuance of the financial
statements. The financial statements have been restated to reflect this
correction.
Also, certain errors in applying APB 25 resulted in an understatement of
previously reported compensation expense for the year ended December 31, 1998
and was discovered during the current year. Accordingly, the 1998 financial
statements have been restated and an adjustment has been made to compensation
expense and retained earnings to cover the error.
/s/ LICHTER AND ASSOCIATES
----------------------------------------
March 30, 2001, except for Note P, as to which the date is June 14, 1999, Notes
J, K and Q as to which the date is October 22, 1999 and above correction as to
which the date is March 29, 2000
Los Angeles, California
18
20
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 452,144 $ 3,412,205
Accounts receivable, net 787,428 471,899
Inventory, net 176,495 135,189
Deposits 159,850 420,747
Other current assets 157,616 17,866
Note receivable-related party -- 64,553
------------ ------------
Total current assets 1,733,533 4,522,459
------------ ------------
PROPERTY AND EQUIPMENT, NET 1,358,072 1,051,936
------------ ------------
OTHER ASSETS:
Note receivable -- 250,000
Deposits 144,958 132,523
Other assets -- 23,907
Idle property 1,210,800 --
------------ ------------
1,355,758 406,430
------------ ------------
$ 4,447,363 $ 5,980,825
============ ============
The accompanying notes are an integral part of the financial statements.
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21
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
------------ ------------
CURRENT LIABILITIES:
Accounts payable-trade $ 1,654,170 $ 837,065
Accounts payable-other 1,414,500 --
Accrued expenses 395,464 199,955
Unearned revenue 151,883 306,732
Deferred revenue 316,398 73,646
Current portion of obligations
under capital lease 75,902 76,049
Contracts payable 13,012 76,973
Net assets held for disposal -- 284,419
Other current liabilities 23,048 --
Notes payable stockholder 34,700 --
Accrued loss contingencies 1,157,996 --
Commission payable -- 160,000
Note payable related party -- 90,250
Severance pay payable -- 90,000
Current portion of long-term debt -- 250,346
Settlement payable -- 83,866
------------ ------------
Total current liabilities 5,237,073 2,529,301
------------ ------------
LONG-TERM LIABILITIES:
Obligations under capital lease 100,843 130,395
Deferred revenue 324,700 22,455
------------ ------------
425,543 152,850
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock - Series C -
cumulative, fully participating
convertible,$0.001 par value
Authorized-50,000 shares Issued and
outstanding - 50,000 shares (Aggregate
liquidation preference $4,999,500) 50 50
Preferred stock - Series A, cumulative,
fully participating, convertible,
$0.01 par value Authorized - 2,000,000
shares Issued and outstanding -
1,000,000 shares (Aggregate
liquidation preference $1,990,000) -- 10,000
Preferred stock - Series D, cumulative,
fully participating, convertible, $0.001
par value Authorized and Issued -
75,000 shares Outstanding - 69,050
shares (Aggregate liquidation
preference $6,904,931) 69 --
Preferred stock - Series E, cumulative,
fully participating, convertible,
$0.001 par value Authorized - 30,000
shares Issued and outstanding - 30,000
shares (Aggregate liquidation preference
$2,999,970) 30 --
Common stock - $0.001 par value
Authorized- 100,000,000 shares Issued
and outstanding -- 23,260,057 shares 23,260 21,095
Additional paid-in capital 32,431,556 25,762,647
Retained deficit (33,670,218) (20,936,608)
------------ ------------
(1,215,253) 4,857,184
Less: Subscriptions receivable -- (1,558,510)
------------ ------------
Total stockholders' equity (1,215,253) 3,298,674
----------- ------------
$ 4,447,363 $ 5,980,825
============ ============
The accompanying notes are an integral part of the financial statements.
20
22
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
RESTATED
2000 1999 1998
------------ ------------ ------------
SALES $ 5,663,113 $ 3,676,217 $ 2,474,617
COST OF SALES 6,108,653 3,598,786 2,656,090
------------ ------------ ------------
Gross margin (445,540) 77,431 (181,473)
------------ ------------ ------------
OPERATING EXPENSES:
General and administrative
expenses 10,755,411 8,162,188 2,942,041
Impairment loss 4,736,317 -- --
------------ ------------ ------------
15,491,728 8,162,188 2,942,041
------------ ------------ ------------
Loss from operations (15,937,268) (8,084,757) (3,123,514)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Compensation adjustment
recognized under APB 25 4,802,916 81,945,112 (90,754,014)
Interest income 39,123 57,170 --
Other income 3,538 165,684 15,000
Interest expense (38,355) (68,192) (27,009)
Gain (loss) on sale of assets 25,000 (122,368) (24,286)
------------ ------------ ------------
4,832,222 81,977,406 (90,790,309)
------------ ------------ ------------
Income (loss) before
income taxes,
discontinued operations
and extraordinary
income (11,105,046) 73,892,649 (93,913,823)
PROVISION FOR INCOME TAXES 4,800 5,400 4,600
------------ ------------ ------------
Income (loss) before
discontinued operations
and extraordinary
income (11,109,846) 73,887,249 (93,918,423)
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from operations of
discontinued subsidiary
(less applicable taxes
of $-0-) (1,184,404) (448,597) --
Loss on disposal of
discontinued subsidiary
(less applicable taxes
of $-0-) (240,242) -- --
------------ ------------ ------------
(1,424,646) (448,597) --
------------ ------------ ------------
Income (loss) before
extraordinary item (12,534,492) 73,438,652 (93,918,423)
EXTRAORDINARY INCOME, (less
applicable taxes of $-0-) -- -- 242,990
------------ ------------ ------------
Net income (loss) $(12,534,492) $ 73,438,652 $(93,675,433)
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
21
23
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
EARNINGS PER COMMON SHARE:
Income (loss) before
discontinued operations and
extraordinary income $ (0.51) $ 3.53 $ (4.99)
============ ============ ============
Discontinued operations $ (0.07) $ (0.02) $ --
============ ============ ============
Extraordinary income $ -- $ -- $ 0.01
============ ============ ============
Net income (loss) $ (0.57) $ 3.50 $ (4.97)
============ ============ ============
EARNINGS PER COMMON SHARE--
ASSUMING DILUTION:
Income (loss) before
discontinued operations and
extraordinary income $ (0.51) $ 3.07 $ (4.99)
============ ============ ============
Discontinued operations $ (0.07) $ (0.02) $ --
============ ============ ============
Extraordinary income $ -- $ -- $ 0.01
============ ============ ============
Net income (loss) $ (0.57) $ 3.05 $ (4.97)
============ ============ ============
The accompanying notes are an integral part of the financial statements.
22
24
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, AND 1999
Preferred Series A Preferred Series C
------------------------- -------------------------
Shares Amount Shares Amount
--------- --------- --------- ---------
Balance, December 31, 1998 -- $ -- -- $ --
Adjustment in connection
with pooling of
interests -- -- -- --
--------- --------- --------- ---------
Balance, December 31,
1998, as restated -- -- -- --
Net income -- -- -- --
Compensation adjustment
recognized under APB 25 -- -- -- --
Sale of common stock -- -- -- --
Issuance of common stock
for services -- -- -- --
Sale of preferred stock
series A 1,000,000 10,000 -- --
Sale of preferred stock
series C -- -- 50,000 50
Cancellation of common
stock in settlement -- -- -- --
--------- --------- --------- ---------
Balance, December 31, 1999 1,000,000 10,000 50,000 50
Net loss -- -- -- --
Compensation adjustment
recognized under FAS 123 -- -- -- --
Compensation adjustment
recognized under APB 25 -- -- -- --
Issuance of common stock
for services -- -- -- --
Stock accepted for payment
of note -- -- -- --
Sale of preferred stock
series D, net of expenses -- -- -- --
Conversion of series A
preferred stock (1,000,000) (10,000) -- --
Acquisition expenses -- -- -- --
Cashless exercise of common
stock options -- -- -- --
Cashless exercise of common
stock warrants -- -- -- --
Reversal of payable related
to cost of capital -- -- -- --
Payment of preferred stock
dividends -- -- -- --
Member distributions -- -- -- --
Treasury shares -- -- -- --
Payment of subscription -- -- -- --
Capitalized expenses -- -- -- --
Sale of preferred stock
series E, net of expenses -- -- -- --
Conversion of series D
preferred stock -- -- -- --
Proceeds from PECA, net
of expenses -- -- -- --
Elimination of subscription
receivable -- -- -- --
--------- --------- --------- ---------
Balance December 31, 2000 -- $ -- 50,000 $ 50
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
23
25
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, AND 1999
Preferred Series D Preferred Series E
------------------------- -------------------------
Shares Amount Shares Amount
--------- --------- --------- ---------
Balance, December 31, 1998 -- $ -- -- $ --
Adjustment in connection
with pooling of
interests -- -- -- --
--------- --------- --------- ---------
Balance, December 31,
1998, as restated -- -- -- --
Net income -- -- -- --
Compensation adjustment
recognized under APB 25 -- -- -- --
Sale of common stock -- -- -- --
Issuance of common stock
for services -- -- -- --
Sale of preferred stock
series A -- -- -- --
Sale of preferred stock
series C -- -- -- --
Cancellation of common
stock in settlement -- -- -- --
--------- --------- --------- ---------
Balance, December 31, 1999 -- -- -- --
Net loss -- -- -- --
Compensation adjustment
recognized under FAS 123 -- -- -- --
Compensation adjustment
recognized under APB 25 -- -- -- --
Issuance of common stock
for services -- -- -- --
Stock accepted for payment
of note -- -- -- --
Sale of preferred stock
series D, net of expenses 75,000 75 -- --
Conversion of series A
preferred stock -- -- -- --
Acquisition expenses -- -- -- --
Cashless exercise of common
stock options -- -- -- --
Cashless exercise of common
stock warrants -- -- -- --
Reversal of payable related
to cost of capital -- -- -- --
Payment of preferred stock
dividends -- -- -- --
Member distributions -- -- -- --
Treasury shares -- -- -- --
Payment of subscription -- -- -- --
Capitalized expenses -- -- -- --
Sale of preferred stock
series E, net of expenses -- -- 30,000 30
Conversion of series D
preferred stock (5,950) (6) -- --
Proceeds from PECA, net
of expenses -- -- -- --
Elimination of subscription
receivable -- -- -- --
--------- --------- --------- ---------
Balance December 31, 2000 69,050 $ 69 30,000 $ 30
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
24
26
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, AND 1999
Common Stock Additional
-------------------------------- Paid-In
Shares Amount Capital
------------ ------------ ------------
Balance, December 31, 1998 16,085,936 $ 16,086 $ 96,805,249
Adjustment in connection
with pooling of interests 2,750,000 2,750 (2,750)
------------ ------------ ------------
Balance, December 31, 1998,
as adjusted 18,835,936 18,836 96,802,499
Net income -- -- --
Compensation adjustment
recognized under APB 25 -- -- (81,945,112)
Member distributions -- -- --
Sale of common stock 3,848,577 3,848 3,278,365
Issuance of common stock
for services 178,470 179 1,161,945
Sale of preferred stock
series A -- -- 1,990,000
Sale of preferred stock
series C -- -- 4,474,950
Cancellation of common
stock in settlement (1,767,769) (1,768) --
------------ ------------ ------------
Balance, December 31, 1999 21,095,214 21,095 25,762,647
Net loss -- -- --
Compensation adjustment
recognized under FAS 123 -- -- 919,827
Compensation adjustment
recognized under APB 25 -- -- (4,802,916)
Issuance of common stock
for services 228,888 229 188,349
Stock accepted for payment
of note (24,988) (25) (50,731)
Sale of preferred stock
series D, net of expenses -- -- 6,984,925
Conversion of series A
preferred stock 550,000 550 9,450
Acquisition expenses -- -- (183,277)
Cashless exercise of common
stock options 75,642 76 (76)
Cashless exercise of common
stock warrants 36,509 36 (36)
Reversal of payable related
to cost of capital -- -- 160,000
Payment of preferred stock
dividends -- -- --
Member distributions -- -- --
Treasury shares (106,757) (107) 107
Payment of subscription -- -- --
Capitalized expenses -- -- (235,023)
Sale of preferred stock
series E, net of expenses -- -- 2,759,940
Conversion of series D
preferred stock 1,405,549 1,406 (1,400)
Proceeds from PECA, net
of expenses -- -- 1,819,770
Elimination of subscription
receivable -- -- (900,000)
------------ ------------ ------------
Balance December 31, 2000 23,260,057 $ 23,260 $ 32,431,556
============= ============= =============
The accompanying notes are an integral part of the financial statements.
25
27
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, AND 1999
Total
Retained Subscription Stockholders'
Deficit Receivable Equity
------------ ------------ ------------
Balance, December 31, 1998 $ (94,098,990) $ -- $ 2,722,345
Adjustment in connection
with pooling of interests (99,352) -- (99,352)
------------ ------------ ------------
Balance, December 31, 1998,
as adjusted (94,198,342) -- 2,622,993
Net income 73,438,652 -- 73,438,652
Compensation adjustment
recognized under APB 25 -- -- (81,945,112)
Member distributions (176,918) -- (176,918)
Sale of common stock -- (558,510) 2,723,703
Issuance of common stock
for services -- -- 1,162,124
Sale of preferred stock
series A -- (1,000,000) 1,000,000
Sale of preferred stock
series C -- -- 4,475,000
Cancellation of common
stock in settlement -- -- (1,768)
------------ ------------ ------------
Balance, December 31, 1999 (20,936,608) (1,558,510) 3,298,674
Net loss (12,534,492) -- (12,534,492)
Compensation adjustment
recognized under FAS 123 -- -- 919,827
Compensation adjustment
recognized under APB 25 -- -- (4,802,916)
Issuance of common stock
for services -- -- 188,578
Stock accepted for payment
of note -- -- (50,756)
Sale of preferred stock
series D, net of expenses -- -- 6,985,000
Conversion of series A
preferred stock -- -- --
Acquisition expenses -- -- (183,277)
Cashless exercise of common
stock options -- -- --
Cashless exercise of common
stock warrants -- -- --
Reversal of payable related
to cost of capital -- -- 160,000
Payment of preferred stock
dividends (86,667) -- (86,667)
Member distributions (112,451) -- (112,451)
Treasury shares -- -- --
Payment of subscription -- 558,510 558,510
Capitalized expenses -- -- (235,023)
Sale of preferred stock
series E, net of expenses -- -- 2,759,970
Conversion of series D
preferred stock -- -- --
Proceeds from PECA, net
of expenses -- -- 1,819,770
Elimination of subscription
receivable -- 1,000,000 100,000
------------ ------------ ------------
Balance December 31, 2000 $ (33,670,218) $ -- $ (1,215,253)
============= ============= =============
The accompanying notes are an integral part of the financial statements.
26
28
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
RESTATED
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $(12,534,492) $ 73,438,652 $(93,675,433)
Adjustments to reconcile
net loss to net cash used
in operating activities-
Noncash items included in net income:
Depreciation and
amortization 1,033,584 338,044 154,420
Impairment loss 4,736,318 -- --
Gain (loss) on
disposal of assets (25,000) 122,368 24,286
Loss on worthless stock -- 2,000 --
Compensation - stock
issued for services 188,578 1,162,477 --
Compensation adjustment
recognized under APB 25 (4,802,916) (81,945,112) 90,754,013
Compensation adjustment
recognized under FAS 123 919,827 -- --
Bad debt on notes
receivable 208,994 -- --
Net change in assets and
liabilities of
discontinued operation (284,419) 284,419 --
Net change in operating
assets and liabilities 2,185,725 201,997 66,249
------------ ------------ ------------
Net cash used in
operating activities (8,373,801) (6,395,155) (2,676,465)
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
(Increase) decrease
in amount due from
related party 64,553 (48,414) (18,113)
Increase in amount due
from members -- 2,376 (2,376)
Payments for purchase
of fixed assets (1,688,976) (582,545) (376,312)
Proceeds from sale
of fixed assets -- 70,280 --
Increase in notes receivable -- (235,000) --
Proceeds from the sale of
assets 25,000 -- --
Purchase of Interwireless
including related expenses (4,152,219) -- --
Purchase of stock -- -- (2,000)
------------ ------------ ------------
Net cash used in
investing activities (5,751,642) (793,303) (398,801)
------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
27
29
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
RESTATED
2000 1999 1998
--------- --------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase (decrease)in
contracts payable (63,961) 54,263 22,710
Payments of lease obligations (60,873) (33,777) (12,044)
Issuance of long-term debt -- -- 269,049
Payments of long-term debt (250,346) (95,713) --
Member distributions (112,451) (176,918) (78,500)
Payments on notes payable -- (47,283) --
Proceeds from issuance of
preferred stock 9,745,000 5,475,000 --
Proceeds from issuance of
common stock -- 2,721,575 5,673,132
Dividends paid (86,667) -- --
Receipt of subscription
receivable 558,510 -- --
Increase in note payable
stockholder 34,700 -- --
Proceeds from Private
Equity Credit Agreement 1,819,770 -- --
Payments for capitalized
equity-related costs (418,300) -- --
------------ ------------ ------------
Net cash provided by
financing activities 11,165,382 7,897,147 5,874,347
------------ ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS (2,960,061) 708,689 2,799,081
CASH (OVERDRAFT) AND CASH
EQUIVALENTS, BEGINNING 3,412,205 2,703,516 (95,565)
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 452,144 $ 3,412,205 $ 2,703,516
============ ============ ============
The accompanying notes are an integral part of the financial statements.
28
30
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies of eSAT, Inc., is presented to assist
in understanding the Company's financial statements. These accounting
policies conform to generally accepted accounting principles.
eSAT, Inc. ("the Company"), was originally incorporated under the laws of
the state of California on February 22, 1996 as Technology Guardian, Inc.
On October 8, 1998, the Company merged with U.S. Connect 1995, Inc., and on
January 26, 1999, changed its name to eSAT, Inc.
a) Nature of Operations
The Company provides a wide range of services under the product name
VISP or Virtual Internet Service Provider. The VISP product is geared
to companies who currently or wish to offer ISP services without the
burden of investing in and maintaining a "back office" portion of an
ISP business. The VISP product is completely customized to meet the
customers' branding requirements and is operated by the Company in its
network operations center. Services include user signup, billing,
authentication, email, news, technical support and access to more than
1,100 dialup locations throughout the world.
The Company also provides satellite Internet access services and
products to businesses, educational institutions, and government
agencies. The Company's satellite network enables it to provide data
delivery services without geographical constraints.
b) Revenue Recognition
The Company reports on the accrual basis for both financial statement
and income tax purposes. Revenue from product sales is recognized as
products are shipped. Revenue from services is recognized as the
service is provided. Deferred revenue consists of prepaid Internet and
satellite access fees, prepaid VISP contract services and deferred
start up fees. Deferred fee revenue is amortized using the
straight-line method over the estimated life of the contract. A
related liability, deferred revenue is recorded for the unearned
portion of service revenue recognized.
c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
d) Concentration of Credit Risk
The Company maintains its cash balances in various financial
institutions. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At various times throughout the
years ended December 31, 2000 and 1999, the Company has maintained
balances in excess of federally insured limits. The Company's
uninsured balances totaled $279,263 and $3,260,611 at December 31,
2000 and 1999, respectively.
29
31
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d) Concentration of Credit Risk (Continued)
The Company purchases satellite transponder time from one supplier.
The Company is currently behind in its payments to this supplier.
The Company had a single customer that accounted for 54 percent and 26
percent of its revenue during the years ended December 31, 2000 and
1999 respectively and 76 percent and 43 percent of net accounts
receivable at December 31, 2000 and 1999 respectively.
Subsequent to December 31, 2000 the Company was informed that its
major customer was discontinuing a product which had provided a
significant source of revenue to the Company. Revenue provided by this
source averaged $266,245 per month during the last quarter of 2000.
e) Principles of Consolidation
The consolidated financial statements include the accounts of eSAT,
Inc., and its wholly owned subsidiaries. Significant inter-company
transactions and amounts have been eliminated in consolidation.
f) Business Combinations
In October 1998, the Company completed a reverse acquisition with U.S.
Connect 1995 Inc. A total of 11,407,507 common shares were exchanged
in a 1:1 ratio. The transaction was a merger of a private operating
company into a non-operating public shell corporation with nominal
assets.
On April 13, 2000 the Company acquired InterWireless, Inc. in a
business combination accounted for as a purchase. The purchase price
of $4,152,219 exceeded the fair value of the net assets by $4,152,219,
which was recorded as goodwill and was to be amortized using the
straight-line method over 7 years. See Note 5 for further information
about the goodwill valuation. The results of operations of
InterWireless, Inc. are included with the results of the Company
beginning April 13, 2000.
On April 13, 2000, the Company acquired PacificNet Technologies, Inc.
in a business combination accounted for as a pooling of interests.
PacificNet Technologies, Inc. became a wholly owned subsidiary of the
Company through the exchange of 2,750,000 shares of the Company's
common stock for all the outstanding stock of PacificNet Technologies,
Inc. The accompanying financial statements for the years ended
December 31, 1999 and 1998 have been restated to give effect to this
combination.
Following is a reconciliation of the amounts of net sales and net
income previously reported with restated amounts:
RESTATED
1999 1998
------------ -------------
Sales:
As previously reported $ 313,640 $ 341,047
Acquired company 3,362,577 2,133,570
------------- -------------
As restated $ 3,676,217 $ 2,474,617
============= =============
30
32
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f) Business Combinations (Continued)
Net income (loss):
As previously reported $ 73,199,403 $ (93,481,186)
Acquired company 239,249 (194,247)
------------- -------------
As restated $ 73,438,652 $ (93,675,433)
============= =============
g) Cash and Cash Equivalents
The Company considers all investment instruments purchased with a
maturity of three months or less to be cash equivalents.
h) Accounts Receivable
The allowance for doubtful accounts is established through a provision
for bad debt charged to expense. Receivables are charged off against
the allowance when management believes that the collectibility of the
account is unlikely. Recoveries of amounts previously charged off are
credited to revenues. At December 31, 2000 and 1999, the allowance for
doubtful accounts was $305,450 and $127,434, respectively.
i) Inventory
Inventory consists of satellite dishes and related equipment and is
stated at the lower of cost or market. Cost is determined using the
weighted average method.
j) Property, Equipment and Depreciation
Property and equipment are initially recorded at cost. During 2000,
fixed assets used in the operations of the Interwireless subsidiary
and fixed assets related to satellite services were deemed to be
impaired and written down to their fair value. Fair value exceeded
their carrying value by $1,006,211. An impairment loss of that amount
(included in operating expenses) has been charged to operations in
2000. Depreciation of property and equipment is provided using the
straight-line method over the following estimated useful lives:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
Machinery and equipment 3-5 Years
Office equipment 3 Years
Furniture 5 Years
Leasehold improvements 3 Years
Expenditures for maintenance and repairs are charged to expense as
incurred.
31
33
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j) Property, Equipment and Depreciation (Continued)
Property and equipment consist of:
2000 1999
----------- ---------
Machinery and equipment $ 1,634,804 $ 790,065
Office equipment 325,753 267,918
Furniture 73,900 103,269
Leasehold improvements 35,187 35,440
----------- ----------
2,069,644 1,196,692
Less - Accumulated depreciation (925,833) (376,807)
----------- ----------
1,143,811 819,885
Leased property under capital
lease, net 214,261 232,051
----------- -----------
$ 1,358,072 $ 1,051,936
=========== ==========
k) Research and Development
Research and development costs are charged to operations when incurred
and are included in operating expenses. The amounts charged to
operations for the years ended December 31, 2000 and 1999 were
$199,885 and $500,134 respectively. For the year ended December 31,
1998 there were no expenditures for research and development.
l) Income Taxes
The Company files a consolidated federal income tax return. The
subsidiaries pay to or receive from eSAT, Inc., the parent company,
the amount of federal income taxes they would have paid or received
had the subsidiaries filed separate federal income tax returns.
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. The
Company has a deferred tax asset due to net operating loss
carryforwards for income tax purposes and the timing difference in the
recognition of compensation expense for financial statement purposes.
The deferred tax asset is approximately $6.3 million and $2.8 million
at December 31, 2000 and 1999, respectively; however, due to the
ongoing nature of the losses and the potential inability of the
Company to ever realize the benefit, a valuation allowance has been
established for 100% of the deferred tax asset. At December 31, 2000
and 1999, the Company's available federal net operating loss carry
forwards totaled $24.9 million and $12.2 million, respectively, and
California net operating loss carry forwards totaled $18.6 million and
$12.2 million, respectively. The loss carry forwards will expire at
various dates through the year 2021.
32
34
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l) Income Taxes (Continued)
Prior to the pooling of interests on April 13, 2000, PacificNet
operated as a limited liability company. It was treated as a
partnership for federal income tax purposes. Consequently, federal
income taxes were not payable by, or provided for the subsidiary.
Members were taxed individually on their shares of the subsidiary's
earnings at the federal and state levels. The subsidiary was subject
to an annual California minimum franchise tax of $800 and the
California Limited Liability Company Fee, which is based on annual
gross sales. The subsidiary's net income or loss was allocated among
the members in accordance with the operating agreement of the
subsidiary. The accompanying financial statements, restated to give
effect to the pooling reflect the fact that had PacificNet been a
subsidiary in prior years, no additional tax would have been incurred
due to the parent company's net operational losses.
m) Stock-Based Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB 25, Accounting
for Stock Issued to Employees, and complies with the disclosure
provisions of SFAS 123, Accounting for Stock-Based Compensation. Under
APB 25, compensation cost is recognized on fixed plans over the
vesting period based on the difference, if any, on the date of grant
between the fair value of the Company's stock and the amount an
employee must pay to acquire the stock. For variable plans, APB 25
requires recognition of compensation cost over the vesting period
based on the difference, if any, on the period-end date between the
fair value of the Company's stock and the amount an employee must pay
to acquire the stock. Forfeitures of variable plan options result in a
reversal of previously recognized compensation cost.
Due to the large number of variable plan options granted by the
Company in 1998 and the significant difference between the exercise
price of those options and the fair value of the Company's stock at
December 31, 1998, the Company recognized a substantial amount of
non-cash compensation cost in 1998. Subsequently, a large number of
forfeitures and the re-pricing to market of those options in 1999
caused a considerable reversal of the previously recognized non-cash
compensation cost. The resulting net income for the year ended
December 31, 1999, should not be construed as profitable operations
during that year (See Note 2 for Going Concern disclosure).
n) Net Earnings or Loss Per Share
The following data show the amounts used in computing earnings per
share and the effect on income and the weighted average number of
shares of dilutive potential common stock for the year ended December
31, 1999:
Income available to common
stockholders before adjustments $ 73,438,652
Adjustments --
------------
Income available to common
stockholders used in basic EPS $ 73,438,652
============
33
35
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
n) Net Earnings or Loss Per Share (Continued)
Weighted average number of
common shares used in basic EPS 20,956,553
Effect of dilutive securities:
Common stock dividend on
preferred stock Series A (479)
Stock options 1,762,798
Warrants 1,270,949
Convertible preferred
stock Series A 97,691
Convertible preferred
stock Series C 11,022
------------
Weighted average number of
common shares and dilutive
potential common stock used
in dilutive EPS 24,098,534
============
Basic net loss per share is based on the weighted average number of
common shares outstanding of 21,900,103 and 18,835,936 for 2000 and
1998 respectively. The basic and diluted earnings per share
calculations are the same for 2000 and 1998 because potential dilutive
securities would have had an antidilutive effect for all periods
presented. Securities that were not included in the 2000 and 1998
earnings per share calculation because they were antidilutive consist
of the convertible preferred stock, warrants and stock options.
o) Advertising
The Company expenses advertising costs as they are incurred.
Advertising expenses for the years ended December 31, 2000, 1999, and
1998 were $903,952, $479,387 and $175,647 respectively.
(2) GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern; however, the Company has
sustained substantial operating losses in recent years. In view of this
matter, realization of a major portion of the assets in the accompanying
balance sheet is dependent upon continued operations of the Company, which
in turn is dependent upon the Company's ability to meet its financing
requirements, and the success of its future operations.
The Company's management estimates that its current cash, cash equivalents
and cash generated from operations will only be sufficient to meet its
anticipated cash needs through approximately May 15, 2001. Accordingly the
Company will require a substantial additional cash infusion to continue its
operations. Management does not believe that additional capital will be
available. Management is considering an asset sale or other comparable
transaction as part of a financial restructuring. If the Company is not
successful in completing a strategic transaction, it will be required to
cease operations.
34
36
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(3) NOTE RECEIVABLE - EMPLOYEE
Note receivable - employee at December 31, 1999 consisted of a note
receivable from an employee dated June 9, 2000, due in monthly payments of
$1,580, including interest at 6.5%, secured by personal property of the
employee. During the year ended December 31, 2000 the Company accepted
24,988 shares of its own stock in satisfaction of the note.
(4) LEASED PROPERTY UNDER CAPITAL LEASE
The Company leases office equipment under capital leases. The economic
substance of these lease agreements is that the Company is financing the
acquisition of the leased assets through the leases and, accordingly, they
are recorded in the Company's assets and liabilities. The following is an
analysis of the leased property under capital lease:
2000 1999
--------- -------------
Computer equipment $ 291,553 $ 159,579
Office equipment 36,910 137,081
Less accumulated depreciation (114,202) (64,609)
--------- -------------
$ 214,261 $ 232,051
========= =============
Net minimum lease payments $ 234,878 $ 245,949
Less - amount representing
interest (58,133) (39,505)
--------- -------------
Present value of net minimum
lease payments $ 176,745 $ 206,444
========= =============
The following is a schedule by years of future minimum lease payments
required under the leases:
Years ending December 31, 2001 $ 75,902
2002 46,785
2003 17,044
2004 17,490
2005 19,524
---------
$ 176,745
=========
35
37
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(5) GOODWILL
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at the date of acquisition. Amortization
expense charged to operations totaled $444,881 during the year ended
December 31, 2000. In December 2000, fixed assets used in the operations of
Interwireless were deemed to be impaired. See Note 1(j) for details
regarding the write down of such assets to their fair value. In addition,
goodwill with a carrying value of $3,707,338, which arose in connection
with the acquisition of Interwireless, has been written down to zero. The
write-off of goodwill is included in the 2000 income statement as part of
impairment loss.
(6) NOTES PAYABLE STOCKHOLDER
2000 1999
---- ----
Notes payable to stockholders, former
principals of Interwireless, due on
demand, unsecured. $ 34,700 $ --
========== =========
(7) NOTE PAYABLE - RELATED PARTY
2000 1999
---- ----
Note payable - Vantage Capital, Inc.,
due on demand, with interest at the
applicable Federal rates, unsecured.
Michael Palmer, former CEO of eSAT,
Inc., is the 100% shareholder of
Vantage Capital, Inc. AFR at
December 31, 1999 was 5.59% $ -- $ 90,250
========== =========
(8) COMMITMENTS AND CONTINGENCIES
a) Non-Cancelable Operating Lease
The Company leases various equipment and office facilities under a
non- cancelable operating leases. The leases have various terms,
ranging from two years to ten years which expire periodically through
2006.
The following is a schedule by years of future minimum lease payments
required under the leases:
Years ending December 31, 2001 $ 943,757
2002 857,265
2003 616,801
2004 479,916
2005 91,032
-----------
$ 2,988,771
===========
36
38
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(8) COMMITMENTS AND CONTINGENCIES (Continued)
b) Pending and Threatened Litigation
In December 2000, Michael C. Palmer, former CEO of the Company and
Vantage Capital, Inc. (controlled by Mr. Palmer), commenced an
arbitration proceeding seeking $325,000 in severance benefits alleged
to be part of his contract with the Company. In January 2001,
i-Xposure, Inc. filed a lawsuit against the Company seeking
approximately $351,000 plus interests and costs, allegedly due under
guaranties which were part of a bridge financing arrangement.
Although the Company intends to defend itself, it cannot be certain of
a favorable outcome. Liabilities have been accrued using estimates of
the Company's potential losses.
In January 2001, a claim was asserted against the Company by two
shareholders alleging fraud and material omission of fact as
represented by the current and a former Chief Executive Officer of the
Company. The claim alleges damages of $434,000. The Company believes
the claim to be without merit and intends to vigorously defend itself.
No accrual for a potential loss is reflected in the accompanying
financial statements.
In March 2001, Richard Elliot and David Pennells, co-founders and
Presidents of the subsidiaries PacificNet and Interwireless, asserted
certain claims of non-performance against the Company. They have not
filed a lawsuit, nor have they sought any damages, as of yet. Due to
uncertainty regarding the claims, and the fact that nothing has been
formally brought against the Company, no accrual has been made in
these financial statements.
c) Employment Agreements
The Company has entered into agreements with certain of its officers.
The agreements provide for a minimum annual salary and options to
purchase stock of the Company.
d) Purchase Obligations
In order to assure its supply of satellite transmission time when
needed, the Company has entered into Transponder Lease Agreements with
a supplier with available transponder capacity. The agreements expire
at various dates through November, 2002. The Company may terminate the
agreements only if there is a period of interruption of service
greater than 14 days or in the event the satellite the agreement
pertains to is taken out of service. The Company is required to make
minimum annual payments as follows, payable in monthly installments
whether or not it makes use of the time under the agreements:
Years ending December 31, 2001 $ 753,960
2002 72,000
----------
$ 825,960
==========
The Company is currently behind in these payments. In addition, at the
Company's option, for additional monthly fees, the Company may upgrade
service if additional capacity is needed. The Company is responsible
for the payment of all taxes, duties, user fees, and privilege or
excise taxes pertaining to the use of the suppliers' equipment. Fees
paid under these agreements totaled $889,960, $601,960 and $37,230 for
the years ended December 31, 2000, 1999 and 1998, respectively.
37
39
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(8) COMMITMENTS AND CONTINGENCIES (Continued)
d) Purchase Obligations (Continued)
In June 2000 the Company entered into an agreement with a supplier of
radio frequency equipment for use in its fixed wireless business line.
The agreement requires the Company to purchase specified quantities of
product through October 2003. The failure of the Company to meet the
stated purchase commitments could result in a liability to the
supplier of approximately $5,000,000. The equipment has not performed
as specified in the agreement in multiple material aspects.
Accordingly, the Company is seeking rescission of the contract, and
has not accrued the liability.
(9) STOCKHOLDERS' EQUITY
a) Common Stock and Warrants
At December 31, 2000, the Company had 100 million shares authorized
and 23,260,057 issued and outstanding. In addition, the Company had
outstanding at December 31, 2000 and 1999, 10,698,665 and 5,039,163
warrants convertible into common shares at various prices ranging from
$0.39 to $14.70, with expiration dates through December, 2004.
A summary of the warrants outstanding at December 31, 2000 is as
follows:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
-------------------- ------ ---------------- ----------------
$0.39 - $1.52 2,484,256 52 months $1.13
$2.40 - $3.31 3,065,110 26 months $2.90
$3.98 - $6.25 3,372,299 49 months $4.62
$8.00 - $8.50 900,000 53 months $8.22
$10.00 - $14.70 877,000 20 months $11.73
A summary of the warrants outstanding at December 31, 1999 is as
follows:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
-------------------- ------- ---------------- --------------
$0.72 - $1.37 225,000 50 months $0.86
$2.40 - $3.14 3,009,286 49 months $2.94
$4.25 - $6.25 1,038,877 58 months $5.02
$8.50 400,000 58 months $8.50
$14.00 - $14.70 366,000 45 months $14.13
38
40
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
b) Common Stock Reserved
At December 31, 2000, common stock was reserved for the following
reasons:
Exercise of common stock warrants 10,698,655
Conversion of preferred stock 5,815,014
Exercise of employee stock options 3,343,738
----------
19,857,407
==========
The holders of Preferred Stock series C, D and E can own no more than
4.99 percent of the outstanding common stock of the Company. The above
reserve for the conversion of preferred shares assumes that any
converted shares will be retained by the Preferred stock shareholders.
Had the Preferred shareholders converted to common stock at December
31, 2000 and sold it, a total of approximately 86,338,000 shares of
common stock would have been required. This amount combined with the
outstanding shares at December 31, 2000 exceeded the common shares
authorized.
At December 31, 1999, common stock was reserved for the following
reasons:
Exercise of common stock warrants 5,039,163
Conversion of preferred stock 847,037
Common stock dividends on preferred stock 5,129
Exercise of employee stock options 2,704,873
---------
8,596,202
=========
c) Preferred Stock
Preferred stock consists of the following:
Series A - $.01 par value, 2 million shares authorized, 1 million
shares issued and outstanding, pays dividends quarterly in the form of
common stock at an annual rate of 12 percent, cumulative and fully
participating, convertible to common stock at a rate of one share of
preferred stock for $2 of common stock, rounded to the nearest whole
common share. The Company is required to maintain a reserve of common
stock sufficient to effect conversion. Holders of Series A Preferred
Stock are entitled to one vote per share. In addition, the Company
must obtain the consent of the holders of not less than 50% of the
shares of outstanding Series A preferred stock on matters involving
declaration and payment of dividends on common stock, sale or issuance
of capital stock of the Company or options to acquire capital stock of
the Company other than Series A Preferred Stock, or changes in the
general character of the Company's business. All outstanding shares of
Series A preferred stock were held by Vantage Capital, Inc., a related
party. During the year ended December 31, 2000, all the outstanding
shares of Series A preferred stock were converted into common shares.
Series C - $.001 par value, 50,000 shares authorized, issued and
outstanding, pays dividends quarterly in the form of cash or common
stock at an annual rate of 6 percent, cumulative and fully
participating, redeemable and convertible to common stock. The number
of common shares to be issued upon conversion is determined by
multiplying the number of preferred shares to be converted by a
fraction. The numerator of the fraction is the purchase price of the
preferred shares. The denominator of the fraction is the conversion
price, calculated as the lesser of 125 percent of the closing bid
price of the common stock on the trading day immediately preceding the
issue date, or 85 percent of the five day average quoted price for the
five trading days immediately preceding the conversion notice date. At
December 31, 2000 dividends in arrears on the Series C Preferred stock
were $212,500 ($4.25 per share).
39
41
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
c) Preferred Stock (Continued)
Series D - $.001 par value, 75,000 shares authorized, 69,050 shares
issued and outstanding, pays dividends quarterly in the form of cash
or common stock at an annual rate of 6 percent, cumulative and fully
participating, redeemable and convertible to common stock. The number
of common shares to be issued upon conversion is determined by
multiplying the number of preferred shares to be converted by a
fraction. The numerator of the fraction is the purchase price of the
preferred shares. The denominator of the fraction is the conversion
price, calculated as the lesser of 125 percent of the closing bid
price of the common stock on the trading day immediately preceding the
issue date, or 85 percent of the five day average quoted price for the
five trading days immediately preceding the conversion notice date.
Holders of Series D Preferred Stock are entitled to one vote per
share. At December 31, 2000 dividends in arrears on the Series D
Preferred stock were $293,463 ($4.25 per share).
Series E - $.001 par value, 30,000 shares authorized, issued and
outstanding, pays dividends quarterly in the form of cash or common
stock at an annual rate of 6 percent, cumulative and fully
participating, redeemable and convertible to common stock. The number
of common shares to be issued upon conversion is determined by
multiplying the number of preferred shares to be converted by a
fraction. The numerator of the fraction is the purchase price of the
preferred shares. The denominator of the fraction is the conversion
price, calculated as 10,000 shares of Series E preferred Stock
commencing on each of the 30th, 60th and 90th days after the first
issue date, provided that in no event shall any holder of Series E
Preferred stock convert more than 20 percent of such holder's shares
in any period of five consecutive trading days. Holders of Series D
Preferred Stock are entitled to one vote per share. At December 31,
2000 dividends in arrears on the Series E preferred stock were $70,510
($2.35 per share).
d) Stock Option Agreements
The Company has granted fixed employee stock-based compensation
options and variable employee stock-based compensation options. The
variable option agreements provide for exercise of options into a
number of shares of common stock, which is dependent on the market
value of the stock at the date of exercise. The fixed and variable
option agreements typically have a maximum term of 5 years and are
typically fully vested at the date of grant.
The fair value of each option granted is estimated on the grant date
using the Black-Scholes Model. The following assumptions were made in
estimating fair value:
FIXED VARIABLE
OPTIONS OPTIONS
------------- --------------
Dividend yield 0.00 % 0.00 %
Risk-free interest rate 6.56 % 6.56 %
Expected life 2.50 years 2.50
years
Expected volatility 64.32 % 64.32 %
40
42
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Agreements (Continued)
Had compensation cost been determined on the basis of fair value
pursuant to FASB Statement No. 123, net income and earnings per share
for the years ended December 31, 2000 and 1999 would have been reduced
as follows:
Year Ended December 31,
-----------------------
2000 1999
---- ----
Net income (loss):
As reported $ (12,534,492) $ 73,438,652
============== ==============
Pro forma $ (18,046,333) $ (11,714,410)
============== ==============
Basic earnings per share:
As reported $ (0.58) $ 3.50
============== ==============
Pro forma $ (0.82) $ (0.56)
============== ==============
Diluted earnings per share:
As reported $ (0.58) $ 3.05
============== ==============
Pro forma $ (0.82) $ (0.49)
============== ==============
The following is a schedule of the weighted average exercise price and
weighted average fair value in accordance with SFAS 123 at December
31, 2000:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE FAIR VALUE
-------------- ----------
Exercise price:
Exceeds market price $ 3.33 $ 0.00
Equals market price n/a n/a
Less than market price n/a n/a
The following is a schedule of the weighted average exercise price and
weighted average fair value in accordance with SFAS 123 at December
31, 1999:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE FAIR VALUE
-------------- ----------
Exercise price:
Exceeds market price $ 10.25 $ 0.60
Equals market price $ 3.26 $ 1.25
Less than market price $ 6.23 $ 1.03
41
43
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Agreements (Continued)
The Company applies APB Opinion 25 in accounting for its fixed and
variable stock compensation plans. Compensation cost charged to
operations in 2000 was $0 and $(4,802,916) for the fixed and variable
plans, respectively. Compensation cost charged to operations in 1999
was $2,522,340 and $(84,467,452) for the fixed and variable plans,
respectively. Compensation cost charged to operations in 1998 was $0
and $90,754,014 for the fixed and variable plans, respectively.
Following is a summary of the status of the variable plan during 1998,
1999 and 2000:
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
------ --------------
Outstanding at
December 31, 1997 -- $ --
Granted 6,752,236 1.98
Exercised -- --
Forfeited -- --
----------
Outstanding at
December 31, 1998 6,752,236 1.98
Granted -- --
Exercised (598,941) 0.95
Forfeited (4,564,422) 1.92
----------
Outstanding at December 31,
1999 1,588,873 2.56
Granted 1,290,000 3.75
Exercised (169,300) 1.39
Forfeited (962,668) 3.78
----------
Outstanding at December 31,
2000 1,746,905 $ 3.22
==========
Options exercisable at
December 31, 1998 6,752,236 $ 1.98
=========
Options exercisable at
December 31, 1999 1,588,873 $ 2.56
==========
Options exercisable at
December 31, 2000 1,382,599 $ 2.71
==========
42
44
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Agreements (Continued)
Following is a summary of the status of the fixed plan during 1999 and
2000:
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
------ --------------
Outstanding at
January 1, 1999 -- $ --
Granted 1,366,000 7.32
Exercised -- --
Forfeited -- --
-----------
Outstanding at
December 31, 1999
Granted 1,366,000 7.32
Exercised 4,386,712 3.68
Forfeited -- --
(4,155,879) 5.04
-----------
Outstanding at
December 31, 2000 1,596,833 $ 3.70
=========
Options exercisable
at December 31, 1999 1,116,000 $ 8.15
=========
Options exercisable
at December 31, 2000 397,902 $ 4.12
=========
Following is a summary of the status of variable options outstanding
at December 31, 1999:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
------------ ------ ---------------- --------------
$0.72 580,873 45 months $0.72
$3.00 908,000 45 months $3.00
$9.25 100,000 48 months $9.25
43
45
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Plan (Continued)
Following is a summary of the status of variable options outstanding
at December 31, 2000:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
------------ ------ ---------------- --------------
$0.72 288,905 32 months $0.72
$3.00-$4.19 1,458,000 35 months $3.43
Following is a summary of the status of fixed options outstanding at
December 31, 1999:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
------------ ------ ---------------- --------------
$3.00-$3.50 335,000 60 months $3.45
$4.00 460,000 55 months $4.00
$5.50 60,000 58 months $5.50
$10.25 11,000 54 months $10.25
$13.13 500,000 53 months $13.13
Following is a summary of the status of fixed options outstanding at
December 31, 2000:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
------------ ------ ---------------- --------------
$2.50-$3.00 665,000 41 months $2.99
$4.00-$5.69 931,833 42 months $4.21
e) Common Stock Issuance Settlement
During the years ended December 31, 1998 and 1999, Corporate Financial
Enterprises (CFE) was engaged to complete a private placement of
approximately 2 million shares. This private placement was to yield
proceeds of $1.5 million to the Company. A former officer of the
Company authorized the issuance of over 3.3 million shares under this
agreement. The Company received $1.5 million, but received no
consideration for the excess shares issued.
In settlement of the discrepancy, the Company entered into a Stock
Reconciliation Settlement Agreement with CFE effective December 31,
1999. Under the terms of the agreement the Company received $558,310
in cash as settlement for the unpaid stock, net of unpaid fees owed
CFE. The CFE agreement for future fees was canceled. Also, the Company
kept a $1 million deposit made by CFE in anticipation of purchasing
certain preferred shares. CFE waived all rights to receive any
preferred shares. Additionally, approximately 1.8 million shares owned
by the former officer were forfeited and canceled under a resignation
agreement.
44
46
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
f) Private Equity Credit Agreement ("PECA")
During the year ended December 31, 1999, the purchasers of the Series
C Preferred Stock committed to purchase up to $20,000,000 of common
stock at a price equal to 90 percent of the average of the five lowest
closing bid prices for the 10 days prior to each notice of sale. In
August 2000, the Company modified the terms of this equity line of
credit with Wentworth, LLC establishing a $7,000,000 credit limit. In
October 2000, the Company received $2,000,000 under a modification to
the PECA. In accordance with the agreement, shares of the Company's
common stock are issuable to Wentworth, LLC upon receipt of their call
notice. A call notice on this financing has not been received by the
Company to date. The PECA also calls for the issuance of warrant to
purchase shares of an amount equal to 25 percent of the shares issued
from each put or call notice at a price of 125 percent of the market
price with respect to each funding under the PECA including the
$2,000,000 financing. Management is uncertain whether Wentworth, LLC
will allow the Company to continue to receive funding under the PECA.
Subsequent to December 31, 2000, the Company received funding from
Wentworth, LLC and concurrently entered into an agreement whereby the
$2,000,000 received in October 2000 will be converted into a secured
note collateralized by all the assets of the Company. This note is
expected to be convertible into equity at the option of the holder.
(10) DISCONTINUED OPERATIONS
On June 30, 2000 the Company adopted a formal plan to dispose of its
subsidiary i-Xposure, Inc. On October 6, 2000 the Company completed a
transactions whereby the Company disposed of approximately 80 percent of
its interest in i-Xposure. As part of this transaction, the Company
guaranteed certain loans and revenue amounts. However, these amounts are
currently in dispute. See Note 8(b) for additional details.
Net sales and results of operations of i-Xposure through October 6, 2000
were $528,993 and $(1,782,118) respectively. These amounts are not included
in net sales or loss from operations in the accompanying statements of
operations.
(11) RELATED PARTY TRANSACTIONS
On September 17, 1999, the Company entered into a consulting agreement (the
"Agreement") with Vantage Capital, Inc., which is wholly owned by Michael
Palmer, former Chief Executive Officer of eSAT, Inc. The Agreement
stated 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 Agreement provided for compensation in the form of a
45
47
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(11) RELATED PARTY TRANSACTIONS (Continued)
monthly retainer of $5,000 in cash or stock, the issuance of 600,000
warrants exercisable at prices ranging from $4.25 to $8.50, a fee of 10% of
the total aggregate consideration paid for any acquisition or sale by the
Company of any business, corporation, or division, a fee equal to 10% of
any private or public placement of debt or equity securities of the
Company, and a share in any fees or commissions payable by third parties on
any transaction contemplated by the Agreement. In accordance with this
agreement, a $160,000 liability was accrued at December 31, 1999.
During the years ended December 31, 2000 and 1999, the Company paid
approximately $50,000 and $576,000 respectively to Parks, Palmer, Turner
and Yemenidjian, LLP, a public accounting firm in which Michael Palmer, the
Company's former CEO, was previously the managing partner. The payments
were compensation for the services of Michael Palmer and associates of the
firm.
(12) STATEMENTS OF CASH FLOWS
The net changes in operating assets and liabilities shown on the statements
of cash flows consist of the following:
RESTATED
2000 1999 1998
---------- --------- ---------
(Increase) Decrease:
Accounts receivable, net $ (315,529) $(350,999) $ 201,101
Inventory (41,306) 154,071 (92,820)
Other current assets (139,750) (431,827) 3,539
Other assets 23,907 (92,463) (39,746)
Deposits 248,462 -- --
Increase (Decrease):
Accounts payable 817,107 136,292 8,726
Accrued expenses 195,509 (14,371) 2,289
Unearned revenue (154,849) 189,662 117,070
Other current
liabilities 23,047 587,665 (153,447)
Deferred revenue 544,997 23,967 19,537
Severance payable (90,000) -- --
Settlement payable (83,866) -- --
Accrued loss
contingencies 1,157,996 -- --
----------- ---------- ----------
$2,185,725 $ 201,997 $ 66,249
=========== ========== ==========
Operating activities reflect:
Interest paid $ 38,355 $ 68,192 $ 27,009
========= ========= =========
Income taxes paid $ 8,390 $ 4,600 $ 4,600
========= ========= =========
46
48
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(12) STATEMENTS OF CASH FLOWS (Continued)
Non-cash investing and financing transactions:
Conversion of Series A
Preferred stock $ (10,000) $ -- $ --
Issuance of common stock 10,000 -- --
------------- ------------ ------------
$ -- $ -- $ --
============= ============ ============
Conversion of Series D
Preferred stock $ (1,406) $ -- $ --
Issuance of common stock 1,406 -- --
------------- ------------ ------------
$ -- $ -- $ --
============= ============ ============
Cancellation of note
receivable $ 50,756 $ -- $ --
Cancellation of common
stock received in
satisfaction of note (50,756) -- --
------------ ------------ ------------
$ -- $ -- $ --
============= ============ ============
Purchase of idle
assets under dispute $ (1,414,500) $ -- $ --
Accounts payable-non
trade 1,414,500 -- --
------------- ------------ ------------
$ -- $ -- $ --
============= ============ ============
Return of fixed assets
under capital lease $ 49,012 $ -- $ --
Cancellation of capital
lease obligation (49,012) -- --
------------- ------------ ------------
$ -- $ -- $ --
============= ============ ============
47
49
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(12) STATEMENTS OF CASH FLOWS (Continued)
Cancellation of
subscription receivable $ 1,000,000 $ -- $ --
Reduction of Series A
Preferred stock issued (900,000) -- --
Reduction of note
payable (100,000) -- --
------------- ------------ ------------
$ -- $ -- $ --
============= ============ ============
Subscription receivable $ -- $ (558,510) $ --
Issuance of common stock -- 558,510 --
------------- ------------ ------------
$ -- $ -- $ --
============= ============ ============
Subscription receivable $ -- $(2,000,000) $ --
Collection of
subscription receivable -- 1,000,000 --
Issuance of Series A
Preferred stock -- 2,000,000 --
------------- ------------ ------------
Cash received for the
issuance of Series A
Preferred stock $ -- $ 1,000,000 $ --
============= ============ ============
Purchase fixed assets $ (1,769,162) $ (828,795) $ (448,080)
Capital lease obligation 80,186 246,250 71,768
------------- ------------ ------------
Cash paid for fixed
assets $ (1,688,976) $ (582,545) $ (376,312)
============= ============ ============
(13) SUBSEQUENT EVENTS
Subsequent to December 31, 2000, the Company lost a significant source of
revenue. See Note 1d for additional details.
In January 2001, the Company received funding of $325,000 through the
percent, is due on April 20, 2001 and is collateralized by all the assets
of the Company. Concurrent with this funding, the Company entered into an
agreement with Wentworth, LLC whereby the $2,000,000 previously advanced
under the PECA in October 2000 will be converted to a secured note also
collateralized by the assets of the Company. The note is expected to be
convertible to equity under provisions substantially identical to those of
the PECA.
(14) PRIOR PERIOD ADJUSTMENT
The accompanying statement of operations and cash flows for 1998 have been
restated to correct an error in the application of APB 25, Accounting for
Stock Issued to Employees, made in 1998. The effect of the restatement was
to decrease net income for 1998 by $90,754,014 ($4.98 per share), net of
income tax.
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50
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(15) 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.
(16) SEGMENT REPORTING
During the year ended December 31, 2000, the Company had two reportable
segments: Virtual Internet Service Provider (VISP) and Satellite Services.
The VISP derives its revenue from providing virtual internet service
provider services to external customers. Satellite services provides
satellite Internet access services and products. The accounting policies
applied by each of the segments are the same as those described in the
summary of significant accounting policies. The Company's reportable
segments are strategic business units that offer different products and
services. They are managed separately because each segment requires
different technology and marketing strategies.
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ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(16) SEGMENT REPORTING (Continued)
Satellite All
VISP Services Other Total
---------- ---------- ---------- ---------
Net sales $ 5,105,114 $ 331,654 $ 226,345 $ 5,663,113
Cost of sales (4,243,937) (1,233,157) (631,559) (6,108,653)
General and
administrative expenses (832,774) (9,699,011) (223,626) (10,755,411)
Impairment loss -- (4,375,819) (360,498) (4,736,317)
Interest expense (23,695) (14,645) (15) (38,355)
Compensation adjustment
under APB 25 -- 4,802,916 -- 4,802,916
Loss from discontinued
operations -- -- (1,424,646) (1,424,646)
Net income (loss) 18,754 (10,136,134) (2,417,112) (12,534,492)
Depreciation and
amortization (183,762) (803,721) (46,101) (1,033,584)
Total assets $ 2,038,982 $ 1,009,287 $1,399,094 $ 4,447,363
The 1999 segment information as restated to account for the pooling of
interests is as follows:
Satellite All
VISP Services Other Total
----------- ------------ ---------- ------------
Net sales $ 3,362,577 $ 313,640 $ -- $ 3,676,217
Cost of sales (2,371,923) (1,226,863) -- (3,598,786)
General and
administrative expenses (598,112) (7,564,076) -- (8,162,188)
Compensation adjustment
under APB 25 -- 81,945,112 -- 81,945,112
Interest expense (42,462) (25,730) -- (68,192)
Loss on discontinued
operations -- -- (448,597) (448,597)
Net income (loss) 239,249 73,648,000 (448,597) 73,438,652
Depreciation and
amortization (109,385) (228,659) -- (338,044)
Total assets $ 824,356 $ 5,441,418 $ (284,949) $ 5,980,825
The 1998 segment information as restated to account for the pooling of
interests is as follows:
Satellite All
VISP Services Other Total
----------- ------------ ---------- ------------
Net sales $ 2,133,570 $ 341,047 $ -- $ 2,474,617
Cost of sales (1,970,520) (685,570) -- (2,656,090)
General and
administrative expenses (328,573) (2,613,468) -- (2,942,041)
Compensation adjustment
under APB 25 -- (90,754,014) -- (90,754,014)
Interest expense (15,638) (11,371) -- (27,009)
Extraordinary income -- 242,990 -- 242,990
Net income (loss) (194,247) (93,481,186) -- (93,675,433)
Depreciation and
amortization $ (129,761) $ (24,659) $ -- $ (154,420)
(17) INCOME TAXES
The provision for income taxes consists of the following:
2000 1999 1998
------------ ------------ ------------
Current $ 4,800 $ 5,400 $ 4,600
Deferred -- -- --
------------ ------------ ------------
Provision for income taxes $ 4,800 $ 5,400 $ 4,600
============ ============ ============
The components of the Company's net deferred tax assets are as follows:
2000 1999 1998
------------ ------------ ------------
Allowance for doubtful accounts $ 69,000 $ 29,000 $ 10,290
Net operating loss 5,129,000 2,802,000 798,000
Asset impairment 1,066,000 -- --
------------ ------------ ------------
6,264,000 2,831,000 808,290
Valuation reserve (6,264,000) (2,831,000) (808,290)
------------ ------------ ------------
Net deferred tax asset $ -- $ -- $ --
============ ============ ============
A reconciliation of the provision for income taxes to the amount computed at
the federal statutory rate is as follows:
2000 1999 1998
------------ ------------ ------------
Federal income tax at statutory rate $ (2,819,181) $16,889,648 $(21,545,350)
State minimum tax 4,800 5,400 4,600
Change in valuation reserve 3,433,000 2,022,710 808,290
Permanent differences (613,819) (18,912,358) 20,737,060
------------ ------------ ------------
$ 4,800 $ 5,400 $ 4,600
============ ============ ============
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SCHEDULE 2
ESAT, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended December 31, 2000, 1999, and 1998
ADDITIONS
-------------------------
BALANCE CHARGED TO CHARGED TO BALANCE
AT BEGINNING COSTS AND OTHER AT END
OF YEAR EXPENSE ACCOUNTS DEDUCTIONS OF YEAR
------------ ---------- ---------- ---------- --------
Description
Year ended December 31, 1998
Allowance for doubtful accounts
(deducted from accounts receivable) $31,720 $14,162 $ -0- $ -0- $45,882
Allowance for obsolescence
(deducted from inventory) $ -0- $ -0- $ -0- $ -0- $ -0-
Allowance for valuation
(deducted from deferred tax asset) $ -0- $ -0- $808,290 $ -0- $808,290
Year ended December 31, 1999
Allowance for doubtful accounts $ 45,882 $ 81,552 $ -0- $ -0- $127,434
(deducted from accounts receivable)
Allowance for obsolescence $ -0- $ 56,025 $ -0- $ -0- $ 56,025
(deducted from inventory)
Allowance for valuation
(deducted from deferred tax asset) $808,290 $ -0- $2,022,710 $ -0- $2,831,000
Year ended December 31, 2000
Allowance for doubtful accounts
(deducted from accounts receivable) $127,434 $178,016 $ -0- $ -0- $305,450
Allowance for obsolescence
(deducted from inventory) $56,025 $ 48,552 $ -0- $ -0- $104,577
Allowance for valuation
(deducted from deferred tax asset) $2,831,000 $ -0- $3,433,000 $ -0- $6,264,000
51
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
We are incorporating by reference the disclosure set forth in our Form
8-K/A filed on December 17, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names and positions of our directors and
executive officers and key employees:
Officer Name Age Position Since
------------ --- -------- -----
Chester (Chet) L. Noblett, Jr. 56 Chairman of the Board and CEO 1997
Bruce Elbert 58 Executive Vice President and
President of Asia Operations 2000
David Pennells 44 Senior Vice President 2000
Steven A. Tulk 33 Chief Operating Officer, PacificNet Technologies, Inc. 2000
Leon Shpilsky 37 Senior Vice President, Managing Director -
Europe Operations 2000
Mark S. Basile 39 Chief Financial Officer 2000
Salvator A. Piraino 73 Director 1997
Edward Raymund 71 Director 2000
James E. Fuchs 72 Director 2000
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.
CHESTER (CHET) L. NOBLETT, JR. has been Chairman of the Board since April
1999 and a Director since June 1997 and CEO since September 2000. He was Chief
Operating Officer from June 1997 until December 1999. He served briefly as
interim Chief Financial Officer in January and February 2000. From 1990 to 1996,
Mr. Noblett was employed as the chief executive officer for Tradom
International, a subsidiary of 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.
BRUCE ELBERT became Executive President in July 2000. For the past 25
years, Mr. Elbert held several key management positions in various of the Hughes
Electronics and other Hughes companies. He holds a B.S. degree in Electrical
Engineering from City College of New York, an M.S. degree in electronics
engineering and computer science from the University of Maryland and a Masters
in Business Administration from Pepperdine University. Mr. Elbert provided
notice of resignation to the company in March, 2001, but will remain at his post
for ninety days pursuant to his employment contract.
DAVID PENNELLS became Senior Vice President of the company on May 1, 2000.
From 1995 to 1999, he was Vice President and co-founder (along with Mr. Elliot)
of PacificNet, LLC, the predecessor of PacificNet Technologies, Inc. He remains
the Vice President of PacificNet. In 1998, Mr. Pennells co-founded and became
Vice President of, InterWireless, Inc. He remains in that position.
STEVEN A. TULK was appointed Chief Operating Officer of PacificNet
Technologies, Inc. and InterWireless, Inc. in July 2000. Prior to that he served
as the company's Senior Vice President, Managing Director - Asia Operations from
January 2000 to July 2000. Mr. Tulk served as chief information officer of
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54
Vivendi Water's consumer and commercial division from December 1998 to
January 2000. From 1994 to 1998, Mr. Tulk operated Tulk Consulting Inc., a
software development and network engineering consulting firm. From 1992 to 1994
Mr. Tulk was director of management information systems for Pharmacia's
ophthalmic division. Mr. Tulk served as senior technical specialist for the J.
Paul Getty Trust from 1990 to 1992. Mr. Tulk received a B.S. in Business
Administration from the University of California at Riverside in 1990.
LEON SHPILSKY was appointed as the company's Senior Vice President,
Managing Director - Europe Operations in May 2000. From 1987 to May 2000, Mr.
Shpilsky held various positions with the certified public accounting firm of
Parks, Palmer, Turner and Yemenedjian, most recently serving as
principal/director of international practice. From 1984 to 1987, Mr. Shpilsky
was a certified public accountant with KPMG Peat Marwick, LLP, an international
accounting and consulting firm. Mr. Shpilsky received a B.S. in Business
Administration from the University of Southern California in 1984.
MARK S. BASILE was appointed as the company's Chief Financial Officer in
March 2000 and Secretary in September 2000. From March 1999 to March 2000, Mr.
Basile was chief financial officer of Superior Galleries, Inc., an auction
services firm in Beverly Hills, California. From 1996 through March 1999, Mr.
Basile served as director of management accounting and controller of the Hawaii
division of Young's Market Company. From 1989 to 1996, Mr. Basile was director
of internal audit at K2 Inc., a manufacturer of sporting goods and recreational
products. Prior to that, Mr. Basile was a certified public accountant at Ernst &
Young LLP, an international accounting and consulting firm. Mr. Basile received
a B.S. in Accounting from the University of Florida in 1983.
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.
EDWARD (ED) RAYMUND has been a director of the company since July 2000. Mr.
Raymund is founder and Chairman Emeritus of Tech Data Corp., a Fortune 500
company which he founded in 1973. Mr. Raymund serves as a director on Tech
Data's Board. He is also chairman of the University of Southern California
Supply Chain Management Board of Directors and is a member of the Advisory
Boards for Mission Hospital Regional Medical Center and the University of
Southern California Business School. In 1997, Mr. Raymund was named in initial
inductee in Computer Reseller New's Industry Hall of Fame. Mr. Raymund holds a
Bachelor's Degree in Business Administrating with an emphasis in Finance from
the University of Southern California.
JAMES E. FUCHS has been a director of the company since July 2000. Mr.
Fuchs is chairman and co-chief executive officer of the Consamer Group, Inc., a
corporation structured to utilize its marketing, sales, finance and consulting
expertise for various ventures. Mr. Fuchs is also chairman and chief executive
officer of Grenfox Group, Inc., a company involved in the development and
production of environmentally friendly inks and related coating products. Prior
to these posts, Mr. Fuchs was chairman and chief executive officer of Integrated
Human Solutions, an international human resources and consulting firm, and held
executive positions with the National Broadcasting Company, Curtis Publishing
Company, the Mutual Broadcasting Systems, Mutual Sports, Inc. and Culligan
Communications, Inc. Mr. Fuchs is a member of the board of directors of Fountain
Pharmaceuticals, Inc. and Alternate Care, Inc. Mr. Fuchs is a graduate of Yale
University.
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ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation we
paid to our Chief Executive Officer, each of the four most highly compensated
executive officers that earned more than $100,000 during 2000.
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) 2000 $ 210,833 $
Former President, CEO 1999 455,913 $ 87,500 1,625,000
and Secretary 1998 10,780 100,000
Chester L. Noblett, Jr.(2) 2000 230,042
Chief Executive Officer 1999 178,936 48,750 300,000
1998 114,750 1,095,802
Richard Elliot(3) 2000 127,500 3,482
Senior Vice President 1999 -
and Chief Technology Officer, 1998 -
Interwireless, Inc.
David Pennells(4) 2000 108,250 2,885
Senior Vice President 1999 -
and President, PacificNet 1998 -
Technologies, Inc.
Steven A. Tulk(5) 2000 145,250 50,000 115,007 350,000
Chief Operating Officer, 1999 -
PacificNet Technologies, Inc. 1998 -
Bruce Elbert(6) 2000 75,029 300,000
Executive Vice President 1999 -
1998 -
* Please see Certain transactions, below, and Note 8(e) to the Financial
Statements regarding the cancellation of Mr. Coulter's options in March,
1999.
(1) In 1999, Mr. Palmer was an employee of Parks Palmer Business Services, a
subsidiary of Century Business Services. The amount denoted as salary
includes all amounts paid to Parks Palmer Business Services through October
1999, including payments for services other than those provided by Mr.
Palmer. Effective November 1999, the company paid Vantage Capital, Inc.
("VCI") $25,000 per month for Mr. Palmer's services pursuant to a
consulting agreement. Mr. Palmer is the sole owner of VCI. In addition, VCI
received warrants to purchase 600,000 shares of common stock as part of the
consulting arrangement. See "Certain transactions" for additional
information. Mr. Palmer ceased being an officer of the company in September
2000. All of Mr. Palmer's options issued in 1998 and 1,000,000 of his
options issued in 1999 were cancelled pursuant to their terms in 2000.
(2) Includes back pay of $57,417 earned in 1999 and paid in January 2000.
(3) Mr. Elliot joined us in April 2000, with a base salary of $180,000. Mr.
Elliot left the company in January 2001.
(4) Mr. Pennells joined us in April 2000, and earns a current base salary
of $180,000
(5) Mr. Tulk joined us in January 2000, with a base salary of $150,000. Other
compensation includes amounts paid to Mr. Tulk for relocation of his home.
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56
(6) Mr. Elbert joined us in July 2000, with a base salary of $175,000. Mr.
Elbert has providing resignation notice to the company and will be leaving his
post in June 2001.
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 $225,000 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 our Board of Directors. In addition, Mr. Noblett is provided with
a car on lease terms determined by the company, provided that the monthly
operating costs (including lease payments) to be paid by the company will not
exceed $750.
We have entered into an employment agreement with Mr. Tulk for a period of
five years, commencing January 1, 2000. Under the terms of this agreement, Mr.
Tulk receives a minimum base salary of $150,000 per year, and is eligible to
earn a performance bonus of up to 100% of his base salary. In addition to
receiving a signing bonus of $50,000, Mr. Tulk is also entitled to reimbursement
of his relocation expenses, as well as his business-related expenses, under the
employment agreement. Further, Mr. Tulk received stock options for 350,000
shares of our stock by the terms of his stock option agreement.
The company entered into an employment agreement with Richard Elliot for a
period of three years, commencing May 1, 2000. He resigned as an officer of the
company in January 2001. By the terms of the agreement, Mr. Elliot received a
base salary of $180,000 per year. The employment agreement included company
health insurance coverage and reimbursement of normal business-related expenses.
In addition, Mr. Elliot was entitled to receive paid vacation and sick time, as
well as paid time during which he may attend professional conferences or
seminars. The agreement also provided an automobile allowance of $1400 per month
that includes payment of associated automobile insurance.
The company has entered into an employment agreement with David Pennells
for a period of three years, commencing May 1, 2000. The agreement will
automatically renew for successive one year periods unless either party chooses
not to renew the contract. Mr. Pennells, by the terms of the agreement, receives
a base salary of $180,000 per year, and is eligible to receive performance-based
bonus compensation. Under the agreement, Mr. Pennells' salary will be reviewed
on an annual basis (or more frequently) by our Board of Directors. The
employment agreement includes company health insurance coverage and
reimbursement of normal business-related expenses. In addition, Mr. Pennells is
entitled to receive paid vacation and sick time, as well as paid time during
which he may attend professional conferences or seminars. The agreement also
provides an automobile allowance of $1400 per month that includes payment of
associated automobile insurance. Further, Mr. Pennells' employment agreement
allows him to be eligible to receive an aggregate of 1,000,000 options to
purchase shares of our stock for allocation to a pool of PacificNet and
InterWireless employees. 850,000 of these options have already been allocated to
certain employees of those two subsidiaries.
We have entered into an employment agreement with Leon Shpilsky for a
period of three years, commencing May 8, 2000. The agreement will automatically
renew for successive one year periods, provided neither party chooses not to
renew the contract. Mr. Shpilsky, by the terms of the agreement, receives a base
salary of $125,000 per year, and is eligible to receive performance-based
compensation. Under the agreement, Mr. Shpilsky may also receive a salary
adjustment under certain conditions while he is based in Western Europe. The
employment agreement includes company health insurance coverage and
reimbursement of normal business-related expenses. In addition, Mr. Shpilsky is
entitled to receive paid vacation and sick time, as well as paid time during
which he may attend professional conferences or seminars. The agreement also
provides a monthly automobile expense allowance that includes payment of
automobile insurance and associated expenses. Further, Mr. Shpilsky is entitled
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57
to receive compensation for relocation expenses. The employment agreement also
grants to Mr. Shpilsky 300,000 stock options for shares of our company's common
stock.
We have entered into an employment agreement with Bruce Elbert for a period
of three years, commencing July 21, 2000. The agreement will automatically renew
for successive one year periods, provided neither party chooses not to renew the
contract. Mr. Elbert, by the terms of the agreement, receives a base salary of
$175,000 per year, and is eligible to earn performance-based compensation. The
employment agreement includes company health insurance coverage and
reimbursement of normal business-related expenses. In addition, Mr. Elbert is
entitled to receive paid vacation and sick time. Under the employment agreement,
Mr. Elbert is granted 300,000 stock options for shares of our company's common
stock.
OPTION GRANTS IN FISCAL YEAR 2000
Individual
Grants
Percent
of Total
Options Market Potential Realizable Value at
Number of Granted to Exercise Assumed Annual Rates of Stock
Shares Employees of Base Price on Price Appreciation for Option Term
Underlying in Fiscal Price Date of Expiration ----------------------------------
Name Options Year ($/Sh) Grant Date 5%($) 10%($)
- ---- ---------- ---------- --------- -------- ---------- ---------------- -------------
Michael C. Palmer
Chester L. Noblett
Richard Elliot
David Pennells
Steven A. Tulk 350,000 7.1% $4.00 $4.00 2/1/04 301,709 649,740
Bruce Elbert 300,000 6.1% $4.00 $1.75 7/21/04 258,608 556,920
No options were exercised by any of the above named persons in 2000.
DIRECTOR COMPENSATION
Each non-employee director receives a payment of $1,000 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 chairman, receives a payment
of $500 per month for his services.
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
COMMON STOCK
The following table sets forth, as of March 26, 2001, the ownership of the
company's common stock by
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58
- each director and named executive officer of the company,
- all named 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
Nature of of Total
Beneficial Shares and
Beneficial Owner Ownership(1) Options
------------------------------------ ------------ --------------
David B. Coulter(2)
15555 Huntington Village Lane, #239 1,500,000 5.46%
Building 9
Huntington Beach, CA 92647
Chester (Chet) L. Noblett Jr.(3) 2,737,097 10.05%
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Salvator Piraino(4) 161,103 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
James E. Fuchs 2,500 *
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Michael C. Palmer(5) 628,660 2.36%
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Richard Elliot 2,062,500 7.94%
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Steven A. Tulk(6) 233,333 *
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Ed Raymund -- *
10 Universal City Plaza, Suite 1130
Universal City, California 91608
David Pennells 687,500 2.65%
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Directors and Named Executive Officers 8,187,193 27.48%
as a group
* 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.
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59
(2) Includes options to purchase 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) 333,000 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); (iii) 300,000 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);
and (iv) warrants to purchase 350,000 shares of the company's common stock
at $2.40 per share for a period of five years from 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); (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 options to purchase (i) 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); and (ii) 100,000 shares of the company's common stock
at $6.25 per share, 150,000 shares at $4.25 per share, 150,000 shares at
$5.25 per share and 200,000 shares at $8.50 per share for a period of five
years from date of grant (November 1, 1999).
6) Includes options to purchase 233,000 shares of the company's common stock
at $4.00 per share for a period of five years from date of grant (January
1, 2000).
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 C Wentworth, LLC 50,000 100%
6% Convertible Corporate Center
Preferred Stock(1) West Bay Road
Grand Cayman
Series D Wentworth, LLC 66,166 100%
6% Convertible Preferred Corporate Center
Stock(1) West Bay Road
Grand Cayman
Series E Wentworth, LLC 30,000 100%
6% Convertible Corporate Center
Preferred Stock(1) West Bay Road
Grand Cayman
(1) All of the above preferred stock is convertible into common stock
immediately; provided however, that no conversion may occur if, after
conversion, the holder would be deemed beneficial owner of more than
4.99% of the company's then outstanding common stock.
See "Description of securities" for details on the conversion prices.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 the
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 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 the shares canceled, TGI
reissued 125,619 shares to him in August 1998, prior to completion of the merger
with U.S. Connect 1995.
The cancellation of the Option Agreement was part of the overall
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 its 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, we 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 1,910,885 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
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Directors authorized the issuance of additional options to purchase 1,500,000
shares of common stock to Mr. Coulter, and 333,000 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. We did not achieve this level of sales in 1999, and therefore the
additional options issued to Mr. Coulter (1,500,000) and Mr. Noblett (333,000)
lapsed.
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 1,500,000 shares exercisable at $3.00 per share and options
on 1,910,885 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 also
agreed to the termination of his employment agreement. We 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
us at the rate of $10,000 per month for a total of 36 months, commencing upon
his resignation. We have entered into a general mutual release of claims with
Mr. Coulter. As a result of an alleged breach of the resignation agreement by
Mr. Coulter, we suspended the payment of $10,000 per month to Mr. Coulter. On
February 23, 2000, we entered into a settlement agreement and general release
with Mr. Coulter, pursuant to which Mr. Coulter released all claims for
compensation under the resignation agreement of March 22, 1999, and agreed to
transfer certain domain names to us. In return, we agreed to pay Mr. Coulter
$90,000 and to grant him piggy back registration rights with respect to shares
he acquires in the exercise of his stock options.
CFE and VCI (the "Consultant") worked 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 was to terminate no
earlier than September 15, 2002. Mr. Palmer, CEO of the company, is also the
owner and President of the Consultant.
Pursuant to the consulting agreement, we 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 share.
The consulting agreement and the issued and outstanding Series B Preferred
Stock were canceled by mutual agreement of the parties in March 2000. As part of
the settlement, we agreed with CFE to settle a dispute about the number of
common shares issued to CFE and its clients and the amount we received in
payment for those shares. CFE paid us $558,510 and we entered into a mutual
release with CFE for all claims. In addition, CFE agreed to put the shares of
common stock which CFE would receive upon conversion of its warrants into a
voting trust if requested by NASDAQ in order to facilitate a listing on NASDAQ.
Furthermore, all of the outstanding Series A Preferred Stock were converted into
550,000 shares of common stock in April 2000. The warrants issued to the former
holders of Series A Preferred Stock and Series B Preferred Stock remain
outstanding.
In 2000, the company entered into a consulting agreement with a company
controlled by Salvator A. Piraino, one of our directors. Such company agreed to
provide sales strategy and other business strategy services for a flat fee of
$1,500 per month. The agreement is cancellable by either party at will.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1. Financial Statements for the year ended December 31, 2000, 1999,
and 1998.
2. Index to Financial Statement Schedules:
A. Financial Data Schedule
3. Index to 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)
2.3 Agreement and Plan of Merger and Reorganization by and among
Registrant, PN Acquisition Co. and PacificNet Technologies, Inc.,
dated as of April 13, 2000(4)
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 U.S. Connect 1995, Inc.(1)
3.4 Certificate of Designations of Series A 12% Convertible Preferred
Stock of Registrant, filed January 26, 2000 with the Nevada
Secretary of State(6)
3.5 Certificate of Designations of Series B 12% Convertible Preferred
Stock of Registrant, filed January 26, 2000 with the Nevada
Secretary of State(6)
3.6 Certificate of Designations of Series C 6% Convertible Preferred
Stock of Registrant, filed December 29, 1999 with the Nevada
Secretary of State(6)
3.7 Certificate of Designations of Series D 6% Convertible Preferred
Stock of Registrant, filed April 19, 2000 with the Nevada
Secretary of State(4)
3.8 Amended and Restated Certificate of Designations of Series C 6%
Convertible Preferred Stock of Registrant(4)
3.9 Amended and Restated Certificate of Designations of Series D 6%
Convertible Preferred Stock(10)
3.10 Certificate of Designations of Series E 6% Convertible Preferred
Stock of Registrant, filed August 8, 2000 with the Nevada
Secretary of State(10)
3.11 Amended Series C 6% Convertible Preferred Stock Certificate of
Designations (11)
3.12 Amended Series D 6% Convertible Preferred Stock Certificate of
Designations (11)
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4.11 Same as Exhibit 3.11 (11)
4.12 Same as Exhibit 3.12 (11)
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(6)
10.7 Warrant Agreement between Registrant and Vantage Capital, Inc.,
dated as of September 17, 1999(6)
10.8 Common Stock Purchase Warrant by and between Registrant and
Wentworth, LLC, dated as of December 29, 1999(6)
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(6)
10.10 Stock Purchase Agreement by and among Registrant and Vantage
Capital, Inc., dated as of November 22, 1999(6)
10.11 Stock Purchase Agreement by and among Registrant, Corporate
Financial Enterprises, Inc. and American Equities, LLC, dated as
of November 22, 1999(6)
10.12 Securities Purchase Agreement by and between Registrant and
Wentworth, LLC, dated December 29, 1999(6)
10.13 Registration Rights Agreement by and between Registrant and
Wentworth, LLC, dated December 29, 1999(6)
10.14 Side Letter Agreement, dated December 29, 1999, between
Registrant and Wentworth, LLC(6)
10.15 Resignation Agreement between Registrant and David Coulter, dated
March 22, 1999(3)
10.16 Master Services Agreement between Registrant and Exodus
Communications, Inc., dated December 30, 1999(6)
10.17 Letter Agreement between Registrant and Parks, Palmer, Turner and
Yemenidjian, LLP for the services of Michael Palmer, dated
November 10, 1998(6)
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(6)
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(6)
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10.21 Employment Agreement between Global Media Technology, Inc. and
Barry B. Sandrew, dated October 7, 1999(6)
10.22 Co-Employment Agreement between Registrant and Employers Resource
Management Company, Inc., for the services of executive officers,
dated September 29, 1998(6)
10.23 Consulting Agreement between Registrant and Herbeck Consulting
Group, Inc., dated December 6, 1999(6)
10.24 Stock Purchase Agreement by and among Registrant, InterWireless,
Inc. and the shareholders of InterWireless, Inc., dated April 13,
2000(4)
10.25 Securities Purchase Agreement by and between Registrant and
Wentworth, LLC, dated April 13, 2000(4)
10.26 Registration Rights Agreement by and between Registrant and
Wentworth, LLC, dated April 13, 2000(4)
10.27 Employment Agreement between Registrant and Steve Tulk, dated
March 15, 2000(7)
10.28 Stock Option Agreement between Registrant and Mark Basile, dated
March 15, 2000(7)
10.29 Stock Option Agreement between Registrant and Steven A. Tulk,
dated January 1, 2000(7)
10.30 Stock Reconciliation Settlement Agreement between Registrant and
Corporate Financial Enterprises, Inc., dated March 28, 2000(5)
10.31 Registrant's 1997 Stock Option and Stock Bonus Plan(7)
10.32 Employment Agreement between Registrant and Richard Elliot, dated
April 13, 2000(7)
10.33 Employment Agreement between Registrant and David Pennells, dated
April 13, 2000(7)
10.34 Settlement Agreement and General Release by and between
Registrant and David Coulter, dated February 23, 2000(8)
10.35 Employment Agreement between Registrant and Leon Shpilsky, dated
May 11, 2000(8)
10.36 Common Stock Purchase Warrant by and between Registrant and
Wentworth, LLC, dated as of April 30, 2000(8)
10.37 Amendment to Side Letter Agreement between Registrant and
Wentworth, LLC (Exhibit 10.14), dated April 13, 2000(9)
10.38 Private Equity Credit Agreement by and between Registrant and
Wentworth, LLC, dated August 9, 2000(10)
10.39 Registration Rights Agreement by and between Registrant and
Wentworth, LLC, dated August 9, 2000(10)
10.40 Modification Agreement to Side Letter Agreement between
Registrant and Wentworth, LLC (Exhibit 10.14), dated August 9,
2000(10)
10.41 Employment Agreement between Registrant and Bruce Elbert, dated
July 21, 2000(13)
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10.42 Modification Agreement between Wentworth, LLC and the company
dated October 6, 2000 (11)
10.43 Note in the amount of $325,000 and Security Interest Provisions
(attachments excluded), dated January 24, 2001 (12)
10.44 Side Letter dated January 24, 2001 (12)
10.45 Settlement Agreement and Release, dated January 24, 2001 (12)
21 List of Subsidiaries(7)
24 Power of Attorney (see signature page)
27 Financial Data Schedule
99 Federal Communications Commission Radio Station Authorization,
dated August 25, 1999(6)
(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 1, 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.
(4) Filed as part of Registrant's Form 8-K dated April 19, 2000, and
incorporated herein by reference.
(6) Filed as part of Registrant's Form SB-2 (File No. 333-95451), converted to
Form S-1, dated January 26, 2000, and incorporated herein by reference.
(7) Filed as part of Amendment No. 1 to Registrant's Registration Statement
File No. 333-95451 on May 5, 2000, and incorporated herein by reference.
(8) Filed as part of Amendment No. 2 to Registrant's Registration Statement
File No. 333-95451 on May 24, 2000, and incorporated herein by reference.
(9) Filed as part of Amendment No. 3 to Registrant's Registration Statement
File No. 333-95451 on June 16, 2000, and incorporated herein by reference.
(10) Filed as part of Registrant's Form 10-Q for the period ended June 30, 2000,
filed on August 14, 2000 and incorporated herein by reference.
(11) Filed as an Exhibit to the company's Form 10-Q for the period ended
September 30, 2000 and incorporated herein by reference.
(12) Filed as an Exhibit to the company's Form 8-K dated February 1, 2001 and
incorporated herein by this reference.
(13) Filed as part of Registrant's Form S-1 dated August 21, 2000, and
incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ESAT, INC.
(Registrant)
By /s/ Chester L. Noblett, Jr.
--------------------------------------
Chester L. Noblett, Jr., Chief Executive
Officer and Chairman of the Board of
Directors
April 2, 2001
Pursuant to the requirements of the Securities Exchange Act or 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Chester L. Noblett, Jr.
----------------------------------------------
Chester L. Noblett, Jr., Chief Executive
Officer and Chairman of the Board of Directors
/s/ Salvator A. Piraino
----------------------------------------------
Salvator A. Piraino, Director
/s/ Mark Basile
---------------------------------------------
Mark Basile, Chief Financial Officer
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