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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number 000-26039
eSAT, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 95-0344604
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 UNIVERSAL CITY PLAZA, SUITE 1130, UNIVERSAL CITY, CA 91608
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(Address of principal executive offices, including zip code)
(818) 464-2670
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
PAR VALUE $.001 27,274,020
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(Class of Common Stock) (Outstanding at May 11, 2001)
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eSAT, INC.
TABLE OF CONTENTS
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000 3
Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 20
SIGNATURE 21
3
eSAT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
---------- -----------
CURRENT ASSETS: (UNAUDITED)
Cash and cash equivalents $ 75,673 $ 452,144
Accounts receivable, net 1,211,598 787,428
Inventory, net 62,274 176,495
Deposits -- 159,850
Other current assets 355,343 157,616
---------- ----------
Total current assets 1,704,888 1,733,533
---------- ----------
PROPERTY AND EQUIPMENT, NET 1,377,423 1,358,072
---------- ----------
OTHER ASSETS:
Deferred charges 44,855 --
Deposits 160,898 144,958
Idle property 1,210,800 1,210,800
---------- ----------
1,416,553 1,355,758
---------- ----------
$4,498,864 $4,447,363
========== ==========
The accompanying notes are an integral part of the financial statements.
4
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
CURRENT LIABILITIES: (UNAUDITED)
Accounts payable - trade $ 2,083,343 $ 1,654,170
Accounts payable - other 1,414,500 1,414,500
Accrued expenses 453,982 395,464
Unearned revenue 151,883 151,883
Deferred revenue 686,749 316,398
Current portion of obligations
under capital lease 75,118 75,902
Contracts payable 13,012 13,012
Other current liabilities 22,047 23,048
Notes payable stockholder 34,700 34,700
Accrued loss contingencies 1,004,354 1,157,996
------------ ------------
Total current liabilities 5,939,688 5,237,073
------------ ------------
LONG-TERM LIABILITIES:
Note Payable 332,655 --
Obligations under capital lease 100,843 100,843
Deferred revenue 198,539 324,700
------------ ------------
632,037 425,543
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock - Series C -
cumulative, fully participating
convertible, $0.001 par value
Authorized - 50,000 shares Issued
and outstanding - 50,000 shares
(Aggregate liquidation preference
$4,999,500) 50 50
Preferred stock - Series D,
cumulative, fully participating,
convertible, $0.001 par value
Authorized and issued 75,000 shares
Outstanding - 66,166 shares
(Aggregate liquidation preference
$6,616,564) 66 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 30
Common stock - $0.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 25,977,718
shares at March 31, 2001 25,978 23,260
Additional paid-in capital 32,422,533 32,431,556
Retained deficit (34,521,518) (33,670,218)
------------ ------------
Total stockholders' equity (2,072,861) (1,215,253)
------------ ------------
$ 4,498,864 $ 4,447,363
============ ============
The accompanying notes are an integral part of the financial statements.
5
eSAT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2001 2000
----------- -----------
(UNAUDITED) (UNAUDITED)
SALES $ 2,211,886 $ 937,387
COST OF SALES 2,139,030 950,780
----------- -----------
Gross margin 72,856 (13,393)
GENERAL AND ADMINISTRATIVE
EXPENSES 965,196 2,653,624
----------- -----------
Loss from operations (892,340) (2,667,017)
----------- -----------
OTHER INCOME (EXPENSE)
Compensation adjustment recognized
under APB 25 -- 2,060,604
Other income 4,032 18,359
Gain on sale of assets 44,696 --
Interest expense (7,688) (20,396)
----------- -----------
41,040 2,058,567
----------- -----------
Loss before income taxes
and discontinued operations (851,300) (608,450)
PROVISION FOR INCOME TAXES -- --
----------- -----------
Loss before discontinued
operations (851,300) (608,450)
DISCONTINUED OPERATIONS:
Loss from operations of discontinued
subsidiary (less applicable taxes of $-0-) -- (180,262)
----------- -----------
Net loss $ (851,300) $ (788,712)
=========== ===========
EARNINGS PER COMMON SHARE -- BASIC AND DILUTED:
Discontinued operations $ -- $ (0.01)
=========== ===========
Net loss $ (0.03) $ (0.04)
=========== ===========
The accompanying notes are an integral part of the financial statements.
6
eSAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2001 2000
--------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(851,300) $ (788,712)
Adjustments to reconcile loss to net cash used
in operating activities -
Noncash items included in net loss:
Depreciation and amortization 109,374 104,161
Gain on sale of assets (44,696) --
Compensation - stock issued for services -- 539,667
Compensation adjustment recognized under APB 25 -- (2,060,604)
Net change in assets & liabilities of discontinued operation -- 180,301
Bad debt expense 39,318 107,861
Accrued Interest 7,655 --
Net change in operating assets and liabilities 129,299 53,218
--------- -----------
Net cash used in operating activities (610,350) (1,864,108)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of fixed assets (152,029) (209,153)
Proceeds from sale of fixed assets 68,000 --
Increase in notes receivable -- (1,500)
--------- -----------
Net cash used in investing activities (84,029) (210,653)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase/(decrease) in notes payable 325,000 (90,162)
Decrease in capital lease obligations (784) (15,794)
Payments on contracts payable -- (18,915)
Loan to discontinued operation -- (212,429)
Member distributions -- (100,308)
Preferred stock dividend paid -- (11,666)
Payments for capitalized equity-related costs (6,308) --
--------- -----------
Net cash provided by (used in)
financing activities 317,908 (449,274)
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NET DECREASE IN CASH AND CASH
EQUIVALENTS (376,471) (2,524,035)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 452,144 3,412,205
--------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 75,673 $ 888,170
========= ===========
The accompanying notes are an integral part of the financial statements.
7
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2001 AND 2001 (UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of eSat, Inc. (the "Company") include all
adjustments (consisting only of normal recurring adjustments) considered
necessary to present fairly its financial position as of March 31, 2001
and 2000, and the results of operations, stockholders' equity and cash
flows for the three months ended March 31, 2001 and 2000. The results of
operations for the three months ended March 31, 2001 and 2000, are not
necessarily indicative of the results to be expected for the full year
or for any future period.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant inter-company transactions
and balances have been eliminated in consolidation. The consolidated
financial statements and notes included herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Stock-Based Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB 25,
Accounting for Stock Issued to Employees, and complies with the
disclosure provisions of SFAS 123, Accounting for Stock-Based
Compensation. Under APB 25, compensation cost is recognized on
fixed plans over the vesting period based on the difference, if
any, on the date of grant between the fair value of the
Company's stock and the amount an employee must pay to acquire
the stock. For variable plans, APB 25 requires recognition of
compensation cost over the vesting period based on the
difference, if any, on the period-end date between the fair
value of the Company's stock and the amount an employee must pay
to acquire the stock. Forfeitures of variable plan options
result in a reversal of previously recognized compensation cost.
Due to the large number of variable plan options granted by the
Company in 1998 and the significant difference between the
exercise price of those options and the fair value of the
Company's stock at December 31, 1998, the Company recognized a
substantial amount of non-cash compensation cost in 1998.
Subsequently, a large number of forfeitures and the re-pricing
to market of those options in 2000 caused a considerable
reversal of the previously recognized non-cash compensation
cost.
8
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2001 AND 2000 (UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Net Loss Per Share
The following data show the amounts used in computing earnings
per share. Basic and diluted earnings per share are the same
because potentially dilutive securities would have an
anti-dilutive effect.
2001 2000
------------ ------------
Income available to common stockholders before
adjustments $ (851,300) $ (788,712)
Adjustments -- (11,666)
------------ ------------
Income available to common stockholders used in
basic EPS $ (851,300) $ (800,378)
============ ============
Weighted average number of common
shares used in basic EPS 25,088,015 21,391,509
The following transactions occurred after March 31, 2001, which,
had they taken place during the first quarter, would have
changed the number of shares used in the computations of
earnings per share: (1) on April 16, 2001, 182 shares of
Preferred Series D Stock was converted into 1,296,302 shares of
common stock; (2) common stock warrants issuable in connection
with the funding of loan amounts under the Company's May 2001
secured note agreement with Wentworth, LLC.
(c) Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 101, the
company recognizes revenues from the sale of satellite access
equipment over the life of the underlying access agreement, not
upon the installation of the equipment. The unrecognized portion
of the sales value of the equipment is recorded as deferred
revenue and amortized using the straight-line method over the
life of the satellite access contract.
9
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2001 AND 2000 (UNAUDITED)
(3) 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 August 15,
2001. Accordingly, the Company will require either an increase in sales
activity, or a substantial additional cash infusion to continue its
operations. Management is not certain if additional capital will be
available. Management is considering an asset sale or other comparable
transaction as part of a financial restructuring. If the Company is not
successful in completing a strategic transaction, it will be required to
cease operations.
(4) NOTE PAYABLE
Note payable consists of a $325,000 secured note, plus accrued interest
to payable Wentworth, LLC. The note bears interest at 8% and was
originally due April 30, 2001. The note was subsequently refinanced; see
Note 5 for additional detail.
(5) SUBSEQUENT EVENTS
In May 2001, the Company issued a secured note payable to Wentworth, LLC
of up to $1,332,655. $325,000 of the note bears interest at 8% and
represents a refinancing of the previous note due April 30, 2001.
Amounts advanced in excess of $325,000 under the note bear interest at
prime plus 4%. The note is due April 30, 2003. Additionally, should the
Company receive funds as a result of the sale of stock or the sale of
all or substantially all of the assets of any of its subsidiaries, it
shall, after paying all reasonable expenses in connection with such
sale, immediately pay the balance thereof in reduction of the amounts
outstanding on the note. A total of $375,000 has been funded to the
Company under this facility.
10
eSAT, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues totaled $2,211,886 and $937,387 for the three months ended
March 31, 2001 and 2000, respectively. The 2001 revenue reflects an increase in
subscriber based revenues at the Company's managed internet services business
and to a lesser extent, increases in sales of the Company's satellite and
wireless services businesses. Approximately $90,000 of the revenue increase in
2001 is due to the inclusion of the results of the Company's wireless services
business, which was acquired in April, 2000.
For the three months ended March 31, 2001 and 2000, cost of sales
totaled $2,139,030 and $950,780, respectively. The 2001 cost of sales reflects
increases in staffing and operating costs at the Company's wireless and managed
internet services businesses as well as increases in installation and satellite
access fees at the satellite services business.
General and administrative expenses totaled $965,196 for the period
ended March 31, 2001 as compared to $2,653,624 for the prior year period. The
decrease is due to substantial cost reductions undertaken at the Company's
corporate offices, primarily in the area of business development. Cost
containment measures were also undertaken during the 2001 period at the
Company's satellite services business. The prior year balance also includes
approximately $540,000 of SFAS 123 expense relating to the issuance of common
stock warrants.
Other income for the period ended March 31, 2001 and 2000 totaled
$41,040 and $2,058,567, respectively. The 2001 balance includes a gain on the
sale of fixed assets, whereas the prior period balance represents primarily a
compensation adjustment recognized under APB 25.
The loss from operations of discontinued subsidiary of ($180,262)
recorded in the period ended March 31, 2000 represents the Company's interest in
the net loss of its i-xposure subsidiary. The Company sold the majority of its
interest in this subsidiary in October, 2000. The subsidiary is no longer in
operation.
11
eSAT, INC.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have historically been financed from the sale of
preferred and common stock. At March 31, 2001, the Company had cash and cash
equivalents on hand of $75,673 and working capital of ($4,234,800) as compared
to cash and cash equivalents of $452,144 and working capital of ($3,503,540) at
December 31, 2000.
Net cash used in operating activities of ($610,350) for the three months
ended March 31, 2001 is attributable primarily to the operating loss as adjusted
for depreciation and amortization. Net cash used in operating activities in the
prior period of ($1,864,108) includes the effect of a compensation expense
recognized under APB 25 and FAS 123.
Net cash used in investing activities of ($84,029) and ($210,653) for
the three months ended March 31, 2001 and 2000, respectively, is attributable to
the purchase and sale of fixed assets.
Net cash provided by financing activities of $317,908 for the three
months ended March 31, 2001 represents primarily the Company's issuance of a
note payable to an investor. Net cash used by financing activities of ($449,274)
in the prior year period reflects repayment of debt financing, loans made to a
discontinued subsidiary and distributions to the owners of the managed internet
services business prior to its acquisition by the Company in April, 2000.
In January, 2001 the company received funding of $325,000 through the
issuance of a secured note to Wentworth, LLC. The note bears interest at 8%, was
originally due on April 30, 2001 and is collateralized by all of the assets of
the Company. Concurrent with this funding, the company entered into an agreement
with Wentworth, LLC whereby the $2,000,000 previously advanced under the 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.
In May, 2001 the Company issued a note to Wentworth LLC of up to
$1,332,655. This note incorporates the balance and terms of the $325,000 note
issued in January, 2001, and is collateralized by all of the assets of the
Company. The remainder of the May, 2001 note bears interest at prime plus 4%.
The May, 2001 note is due April 30, 2003. A total of $375,000 has been advanced
under this note.
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 August 15, 2001, although there
can be no assurance in this regard. In order to continue operations beyond that
date, we would require an increase in sales activity or a substantial cash
infusion. Additional capital may not 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.
12
RISK FACTORS
WE WILL CEASE OPERATIONS AT OR AROUND AUGUST 15, 2001 UNLESS WE EXPERIENCE
INCREASED SALES ACTIVITY, OBTAIN ADDITIONAL CAPITAL OR PURSUE 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
August 15, 2001, although there can be no assurance in this regard. Accordingly,
we will require an increase in sales activity or an additional substantial cash
infusion to continue our operations. We do not believe that additional capital
will be available to us. We are also considering an asset sale or other
comparable transaction as part of a financial restructuring. If we are
unsuccessful in all of these measures, 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 A SIGNIFICANT PORTION OF OUR
REVENUE.
We provide and manage the actual connection to the Internet to the
subscriber base of a large national telephone dial-up Internet access provider.
Approximately seventy percent of our revenues in the first quarter of 2001 were
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.
13
WE DEPEND ON SATELLITE TRANSMISSION. SATELLITE FAILURE COULD HAVE A SUBSTANTIAL
NEGATIVE EFFECT ON OUR BUSINESS OPERATIONS.
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.
14
We have experienced material period-to-period fluctuations in revenue
and operating results. We anticipate that these periodic fluctuations in revenue
and operating results will occur in the future. We attribute these fluctuations
to a variety of business conditions that include:
- the volume and timing of orders we receive from quarter to
quarter;
- the introduction and acceptance of our new services and products
and product enhancements by us;
- purchasing patterns of our customers and distributors; and
- market acceptance of services and products sold by our
distributors.
As a result, we believe that quarterly revenue and operating results are
likely to vary significantly in the future and that quarter-to-quarter
comparisons of our operating results may not be meaningful. You should therefore
not rely on the results of one quarter as an indication of future performance.
OUR INTELLECTUAL PROPERTY MAY BE CHALLENGED.
As is the case with many technology companies, the rapid pace of change
in technology could cause our intellectual property to be challenged. These
challenges could come from stronger companies who believe that the use of our
technology interferes with their use or that they own all of the technology and
related rights. If any of these challenges were successful, our ability to sell
products based on our technology or intellectual property could be severely
impaired.
WE MUST DO BUSINESS IN A DEVELOPING MARKET AND FACE NEW ENTRANTS. FAILURE TO
MEET THE CHALLENGES OF NEW PRODUCTS AND SERVICES AND COMPETITORS WILL REDUCE OUR
MARKET SHARE AND THE VALUE OF YOUR INVESTMENT.
The market for Internet products and computer software is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed products and services. The diverse segments of the
Internet market may not provide opportunities for more than one dominant
supplier of products and services similar to ours. If a single supplier other
than us dominates one or more market segments, our revenue is likely to decline
and we will become a less valuable company.
BECAUSE WE LACK THE NAME RECOGNITION, CUSTOMER BASE AND RESOURCES OF OTHER
COMPANIES PROVIDING INTERNET ACCESS AND OTHER INTERNET RELATED PRODUCTS AND
SERVICES, WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WHICH WOULD REDUCE OUR
REVENUE AND THE VALUE OF YOUR INVESTMENT.
The markets for our products are intensely competitive and are likely to
become even more competitive. Increased competition could result in:
- pricing pressures, resulting in reduced margins;
- decreased volume, resulting in reduced revenue; or
- the failure of our products and services to achieve or maintain
market acceptance.
Any of these occurrences could have a material adverse effect on our
business, financial condition and operating results. Our products and services
face intense competition from multiple competing vendors. Our principal
competitors in the Internet management business are IBM Corporation and TRW,
Inc. Our principal competitors in the satellite services business are Loral Inc.
15
and Hughes Network Systems. Many of our current and potential competitors have:
- longer operating histories,
- greater name recognition,
- access to larger customer bases, or
- substantially greater resources than we have.
As a result, our principal competitors may respond more quickly than we
can to new or changing opportunities and technologies. For all of the reasons
stated above, we may be unable to compete successfully against our current and
future competitors.
WE HAVE NO ASSURANCE OF MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES. IF WE
ARE UNABLE TO RAISE MARKET AWARENESS OF OUR PRODUCTS AND SERVICES, WE MAY
EXPERIENCE DECLINING OPERATING RESULTS WHICH WOULD DIMINISH THE VALUE OF YOUR
INVESTMENT.
We are at an early stage of development and our earnings depend
primarily upon market acceptance of our products and services. There can be no
assurance that our development efforts will progress further with respect to any
potential new services or that they will be successfully completed. In addition,
there can be no assurance that our potential new services will achieve customer
acceptance.
There can be no assurance that our services will be successfully
marketed. In addition to our own direct sales force, we use value-added
resellers and distributors to market our satellite products and services. There
is no assurance that any distributor or other reseller will be successful in
marketing our products.
WE MIGHT BECOME SUBJECT TO FURTHER GOVERNMENT REGULATION WHICH COULD HARM OUR
PROSPECTS.
Except for a license from the Federal Communications Commission, we are
not currently subject to direct regulation by any government agency in the
United States, other than regulations applicable to businesses generally. There
are currently few laws or regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, it is possible that laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. Such laws or regulations
could limit the growth of the Internet, which could in turn decrease the demand
for our proposed products and services or increase our cost of doing business.
Any new legislation or regulation or the application of existing laws and
regulations to the Internet in unexpected ways could have an adverse effect on
our business and prospects.
WE MIGHT FACE LIABILITY FOR INFORMATION OBTAINED OR DISTRIBUTED THROUGH THE
PRODUCTS AND SERVICES WE PROVIDE.
Because materials may be downloaded by the Internet services which we
operate or facilitate and may be subsequently distributed to others, there is a
possibility that claims will be made against us for defamation, negligence,
copyright or trademark infringement, personal injury or other theories based on
the nature and content of such materials. Such claims have sometimes been
successful against Internet service providers. Our general liability insurance
might not cover potential claims of this type or might not be adequate to
indemnify us for all liability that may be imposed. Any imposition of liability
or legal defense expenses that are not covered by insurance or that are in
excess of insurance coverage could have a material adverse effect on our
16
business, operating results and financial condition.
LOSS OF KEY MEMBERS OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS
AND PROSPECTS.
Our success will be dependent largely upon the personal efforts of our
Chief Executive Officer and Chairman of the Board, Chester L. Noblett, and David
Pennells, Senior Vice President of the company and President of PacificNet, as
well as other senior managers. The loss of their services could have a material
adverse effect on our business and prospects. We have no life insurance on any
of our officers. Mr. Noblett's and Mr. Pennells' services are governed by
contracts. Our success is also dependent upon our ability to hire and retain
additional qualified management, marketing, technical, financial and other
personnel. Competition for qualified personnel is intense and there can be no
assurance that we will be able to hire or retain qualified personnel. Any
inability to attract and retain qualified management and other personnel could
have a material adverse effect on us.
OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES. YOU MAY HAVE GREATER
DIFFICULTY SELLING YOUR SHARES.
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to
stock characterized as "penny stocks," and requires additional disclosure
relating to the market for penny stocks in connection with trades in any stock
defined as a penny stock. The Securities and Exchange Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
The exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has
- net tangible assets of at least $2,000,000, if the issuer has been in
continuous operation for at least three years;
- net tangible assets of at least $5,000,000, if the issuer has been in
continuous operation for less than three years; or
- average annual revenue of at least $6,000,000 for the last three
years.
Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the associated risks.
Our financial condition does not meet the above tests. Thus, trading in
the common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9
promulgated under the Securities Exchange Act. Under those rules, broker-dealers
who recommend such securities to persons other than their established customers
and institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker-dealers to trade in our common stock and thus would make
it more difficult for purchasers of common stock to sell their securities in the
secondary market. The market liquidity for the common stock could be severely
affected.
WE WILL PAY NO DIVIDENDS TO YOU.
We have not paid, and do not expect to pay, any dividends on common
stock in the foreseeable future.
MANY SHARES WILL BECOME ELIGIBLE FOR FUTURE SALE, WHICH MIGHT ADVERSELY AFFECT
17
THE MARKET PRICE FOR THE SHARES.
As of May 11, 2001, there are 6,063,171 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. 4,978,487 shares are held by other
stockholders. These shares will become eligible for trading at various dates in
2001. In addition, shares of common stock which may be acquired pursuant to
outstanding convertible preferred stock or warrants will be eligible for trading
at various dates after they are acquired. We are unable to predict the effect
that sales of such shares may have on the then prevailing market price of the
common stock. Nonetheless, the possibility exists that the sale of these shares
may have a depressive effect on the price of our common stock.
FORWARD-LOOKING STATEMENTS
YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS.
This prospectus contains forward-looking statements that involve risks
and uncertainties. Discussions containing forward-looking statements may be
found in the material set forth under "Prospectus summary," "Management's
discussion and analysis of financial condition and results of operations," and
"Business," as well as within this prospectus generally. In addition, when used
in this prospectus, the words "believes," "intends," "plans," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. Forward-looking statements are subject to a number of risks and
uncertainties. Actual results could differ materially from those described in
the forward-looking statements as a result of the risk factors set forth and the
information provided in this prospectus generally. We do not intend to update
any forward-looking statements.
18
eSAT, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Bridge Loan Financing Agreement and Form of
Warrant
10.2 Secured Note and Security Interest Provisions
(b) REPORTS ON FORM 8-K.
During the quarter ended March 31, 2001, the Company filed the following
documents:
(i) A current report on Form 8-K, dated March 28, 2001 reporting
that the Company's Board of Directors is currently assessing
alternatives to the formerly announced plan to discontinue all
of its unprofitable business lines and focus on the operations
of its wholly owned subsidiary, PacificNet Technologies, Inc.
(ii) A current report on Form 8-K, dated February 1, 2001 reporting
that the Company had commenced the implementation of a plan to
discontinue all unprofitable business lines and to consolidate
certain operations at its Universal City headquarters. The
Company also announced that it had received funding of $325,000
through the issuance of a secured note to Wentworth, LLC.
19
eSAT, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
eSAT, INC.
Date: May 15, 2001 By: /s/ Mark Basile
------------- -------------------------------------
Mark Basile
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Bridge Loan Financing Agreement and
Form of Warrant
10.2 Secured Note and Security Interest Provisions